This blog was co-authored by: Kristen de Wet, Candidate Attorney
The 31 May 2022 publication of FSCA CRA Notice 2 of 2022 (Exemption Notice) by the Financial Sector Conduct Authority (FSCA) has determined that the exemption for certain regulated persons, as set out in the FSCA CRA Notice 3 of 2020 (Provisional Exemption), is finalised in respect of South African banks. The FSCA has essentially broadened the scope of credit rating agencies from which banks may obtain its credit assessments for compliance purposes to include approved institutions.
The Provisional Exemption excluded certain regulated persons from the requirements in terms of section 4(1) of the Credit Rating Services Act, 2012 (CRS Act), which exemption expired on 31 May 2022.
In terms of section 85(A) of the Banks Act, 1990, a South African bank is required to use credit assessments in the calculation of its prescribed minimum capital and reserve funds, which may be obtained only from credit rating agencies that are approved as eligible external credit assessment institutions (Eligible Institutions) by the FSCA. In practice, the banks rely on the ratings that are publicly available on the websites of the Eligible Institutions, irrespective of its location or whether it is subject to a particular regulatory regime.
Prior to the Provisional Exemption, South African banks were subject to section 4(1) of the CRS Act. In terms of section 4(1) of the CRS Act, a South African bank was required to only use published credit ratings for regulatory purposes, provided such credit ratings were issued or endorsed by:
- a registered credit rating agency, or
- an approved external credit rating agency.
The Prudential Authority, together with the FSCA, noted that the approval of a credit rating agency as an ‘Eligible Institution’ under the Banks Act is given to the parent company, regardless of location and not the specific branch registered in South Africa. Consequently, many Eligible Institutions from which banks were obtaining its credit assessments were not approved by the FSCA under the CRS Act. As such, banks were complying with section 85A of the Banks Act, but were not following section 4(1) of the CRS Act.
The Exemption Notice exempts South African banks from the requirements of section 4(1) of the CRS Act to the extent that:
- A South African Bank has exposure to institutions domiciled outside of South Africa; and
- A South African Bank relies on credit assessments provided by credit rating agencies that are approved as eligible external assessment institutions under section 85A(1) of the Banks Act for the purpose of calculating their prescribed minimum amount of required capital and reserve funds.
Accordingly, a South African bank is not required to acquire its credit assessments for compliance purposes from credit rating agencies that are registered and approved by the FSCA under the CRS Act, provided the assessment agency is an Eligible Institution under the Banks Act.