Financial Services Risk and Regulation Being better informed€¦ · Financial Services Risk and...

Being better informedFS regulatory, accounting and audit bulletin

Financial Services Risk and Regulation

PwC FS Risk and Regulation Centre of Excellence

May 2016

In this edition:

• Turning around investment banking• Retirement reform in South Africa• New rules for securities financing• A snapshot of our observations of the SAM

comprehensive parallel run• IMF considers virtual currencies and blockchain• New PwC illustrative IFRS financial statements

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http://www.pwc.co.za/beingbetterinformed

ContactsGlossaryAccounting updatesTaxation OtherCross-sector announcements

Turning around investment banking

Executive summary

Being better informed – May 2016 PwC • 2

Executive summary

Irwin Lim Ah Tock Banking and Capital Markets – Regulatory Practice Leader

note which outlined the ‘top of mind’ issues for discussions with bank boards during the year.

From an insurance perspective, with full Solvency Assessment and Management (SAM) implementation having now been moved out to 1 January 2017, insurers have an additional year to improve and embed the calculation and reporting process within the business-as-usual environment. In this edition, we set out some of our insights on key considerations for insurers as a result of this.

The scale of regulatory change facing the banking industry is sizeable, with many commentators now openly using the term ‘Basel IV’ as a useful short-hand to aggregate the wave of new regulatory proposals even if the term is yet to gain official acknowledgement.

Banks are facing significantly more disclosure requirements under the new Pillar 3 framework. The Basel Committee published a second consultation in March 2016 on various additions and revisions to the Pillar 3 disclosure rules, including introducing new disclosures in some areas, such as total loss-absorbing capacity (TLAC) and global systemically important bank (G-SIB) indicators. Elsewhere in the

Executive summary

Welcome to the first edition of Being better informed for 2016, our quarterly FS regulatory, accounting and audit bulletin. This publication aims to keep you up to speed with significant developments and their implications across all financial services sectors.

The start of the new year is traditionally busy for the financial services sector as firms, regulators and standard-setters sharpen their focus on key activities for the year ahead. This year has been no different. The Minister of Finance set out his tax plans in the annual national budget in February 2016, while the South African Reserve Bank issued an annual guidance

prudential space, the Basel Committee has been extremely busy, issuing its second consultation on a standardised measurement approach for calculating operational risk capital. This is in response to concerns that previous proposals would have had a disproportionate impact on certain business models. As in the first consultation, the Committee maintained its proposal for scrapping the advanced models approach and is now proposing banks use ten years of historical operational loss data in their calculations.

At the same time, a second consultation was issued in March 2016 by the Basel Committee on the revised standardised approach for credit risk. The key change introduced in the new proposal is the reintroduction of external credit ratings into the credit risk measurement framework for regulatory capital. However, taken together with other revisions and changes introduced in the consultation, the new proposals will have a significant impact on banks from an operational perspective, as a key feature of the new proposals – a ‘due diligence’ and enhanced ‘operational’ requirements – will mean banks will have to take a hard look at the robustness of their current credit risk management processes and controls.

The changes and new proposals do not stop there. In early April 2016, the Basel Committee proposed new revisions to the leverage ratio framework, building on the initial framework issued in January 2016. Here too, we think that the impact for banks could be sizeable, as the intersection between accounting, risk management and operational processes will continue to be critical in navigating the extensive number of changes to the regulatory framework on the horizon.

We trust you will continue to find our latest edition of Being better informed to be an insightful read. Any thoughts or comments you may have on how we can continue to enhance the publication are welcomed.

Irwin Lim Ah Tock Banking and Capital Markets Regulatory Practice Leader PwC South Africa



Executive summary


How to read this bulletin?

Review the Table of Contents in the relevant Sector sections to identify the news of interest. We recommend you go directly to the topic/article of interest by clicking on the active links within the table of contents.

Contents

Executive summary 2

Contents 3

Turning around investment banking 4

Cross-sector announcements 6

Banking and capital markets 6

Asset management and market-based financing 14

Insurance 15

Taxation 17

Accounting updates 21

Other 25

Contacts 32



Executive summary


Turning around investment bankingAn agenda for reviving profitable and sustainable growth Investment banks have faced a series of challenges over the last several years. The new regulations that followed the financial crisis have changed the industry in a number of ways, making it difficult to profit from many traditional lines of business by creating onerous capital, funding, and liquidity requirements and increased costs and operational complexity. At the same time, advances in technology have upended client interaction models, execution platforms, and operational processes.

In the post-crisis environment, global banks — investment banking divisions, in particular — have experienced significant financial challenges. In our most recent annual study of bank performance at the global level, we estimated that in 2014 the 29 global systemically important banks (G-SIBs) collectively missed their cost-of-equity thresholds by about three per cent, thereby incurring an aggregate economic loss of about US$90 billion.

Though the best strategy for growth will, of course, differ from one bank to another, all investment banks will likely need to consider the restructuring and

repositioning of their businesses if they are to achieve sustainable growth and profitability in the current environment. Our global strategy consulting thought leadership discusses five key areas of transformational change that we believe are critical to all investment banks:

• Building strategic coherence

• Progressing from technical to strategic optimisation

• Rethinking client profitability

• Accelerating operational efficiency and organisational change, and

• Focusing on change execution.

Banks need to invest significantly in the strategic optimisation of their business portfolios. Doing so requires identifying the most effective ways to boost performance in each line of business and across the group, taking account all performance factors. These factors include franchise and operational synergies as well as financial and other costs and constraints, while retaining or, ideally, enhancing the coherence of business models.


Years of high returns during the pre-crisis years masked banks’ lack of attention to which clients were the main contributors to profitability and which weren’t, as well as the inefficiencies in their approach to client segmentation and coverage. Capital market players have typically been less focused than purely consumer-oriented companies on analysing the profitability of their customers and using client segmentation to determine which activities are creating or eroding value. However, a client-centric approach to profitability — understanding economic performance at the client level — is the best way to assess the effect of the external macroforces, including changes in market structure, changes in counterparty behaviour, and regulatory pressure, all of which have been squeezing revenues and increasing business costs.

Client segmentation has traditionally been driven by three core dimensions: industry, geography, and historical revenues. Although these dimensions are important overlays, we believe that client segmentation should be ‘value-driven’. This means considering the client’s

current value, potential value, and, finally, behaviour as related to interaction with the bank.

Outsized and unprofitable cost bases in many businesses are one of the legacies of the pre-crisis era, when profit margins were much higher, banks were expanding, and insufficient attention was paid to costs. Going forward, banks must improve their operational efficiency by aligning and transforming their existing infrastructure and technology platforms to fit the requirements of the businesses with which they choose to compete. In many cases, a fundamental transformation of the operating model may be required.



Executive summary


An illustrative view of the ‘new’ investment banking target operating model (TOM)

The new TOM for capital markets requires a centralised database for underlying engines such as valuation, risk management, and profit and loss (P&L) substantiation, supported by the introduction of a governance structure with direct accountability. External technologies should be combined with industry utilities. Depending on the state of the institution’s technology, internal platforms can be combined and outsourced. In many organisations, years of consolidating businesses and underinvesting in IT have created technology platforms that are fundamentally misaligned, and a more transformational or ‘greenfield’ approach is often best served.

Over the past several years our global team has published a series of reports on the challenges facing capital market participants. Recent reports include Banking industry reform — a new equilibrium, De-leverage take 2: Making a virtue of necessity, Capital Markets 2020: Will it change for good?, and Post-trade services in financial markets: Moving from backstage to center stage. In recent months, based on our analyses of market conditions, regulatory initiatives, and discussions with clients, it has become clear that the challenges confronting the industry have increased in severity. We believe that banking organisations need to change in ways that are more structured and more complex than at any time in the past, and we have reached several conclusions about the transformation imperatives for 2016 and beyond.

For the full report: http://www.strategyand.pwc.com/reports/turning-around-investment-banking


http://www.strategyand.pwc.com/reports/turning-around-investment-banking



Executive summary


Cross-sector announcements

Cross-sector announcements Banking and capital markets

Capital and liquidity

Basel Committee reconsiders credit risk

The Basel Committee published a consultative document, Revisions to the Standardised Approach for credit risk, on 10 December 2015. The original proposals removed all reference to external credit ratings and assigned risk weights based on a limited number of alternative risk drivers. Feedback indicated that removing ratings completely was unnecessary and undesirable. The revised proposals reintroduce the use of ratings for banks and corporate exposures, but with a due diligence override that could result in higher risk weights. The proposals also include alternative approaches for jurisdictions that do not allow the use of external ratings for regulatory purposes, and modify the risk weights for real estate loans with the loan-to-value ratio being the main risk driver for risk weighting purposes, together with the use of a three-category classification hierarchy. While the revised proposals no longer include the debt service coverage ratio as the main risk driver, the assessment of a borrower’s ability to pay is required

and urge the addition of macro-prudential tools to the policy toolkit. The Basel Committee identifies three areas for ongoing reforms:

• Enhancing the risk sensitivity and robustness of standardised approaches

• Reviewing the role of internal models in the capital framework, and

• Finalising the design and calibration of the leverage ratio and risk-weighted capital floors. It plans to issue final standards covering the outstanding revisions to the regulatory framework by the end of 2016. The Basel Committee expects to consult soon on a package of reforms to enhance the comparability of risk-weighted assets calculated using internal ratings-based approaches for credit risk. Around the end of the year it expects to finalise the revised market risk framework, which includes greater standardisation of traded market risk model requirements.

track to meet the Basel standards. All Basel Committee members had implemented risk-based capital regulations by the end of 2013, and all but two members had published final regulations to implement the liquidity coverage requirements. Of the 27 Committee members as at the end of September 2015, 23 had issued final or draft rules on or for the leverage ratio, with 25 issuing final or draft rules for their global or domestic SIB framework. Only four had issued final rules for NSFR. The report found substantial progress in non-Basel Committee jurisdictions’ adoption of Basel III standards and concludes that regulations are more consistent with the Basel III framework because of the Committee’s efforts to monitor and assess implementation. The annex to the report contains an assessment of the consistency of capital regulations in the EU, Hong Kong, Saudi Arabia, South Africa and the US.

Basel Committee reports on reform

On 13 November 2015, the Basel Committee published Finalising post-crisis reforms: an update – A report to G20 Leaders. Describing the post-crisis financial reforms, it covers efforts to increase the quality and level of capital, enhance risk capture, limit leverage and concentration,

and is a key underwriting criterion. The proposals also address exposures to multilateral development banks, retail and off-balance sheet items. The approach to the treatment of sovereign, central bank and public sector entity exposures is not within the scope of these proposals. The Basel Committee is considering these exposures as part of a broader and more holistic review of sovereign-related risks. The Committee intends to conduct an impact study in 2016 and will review the calibrations in the proposals against the results of that study. Whilst the Basel Committee aims to balance risk sensitivity and complexity, it recognises that there could be a lack of comparability between jurisdictions that use ratings for regulatory purposes and those that do not. The Committee intends to finalise the revised standard by the end of 2016.

Good implementation of Basel III

The Basel Committee published Implementation of Basel standards – a report to G20 leaders on the implementation of the Basel III regulatory reforms – on 13 November 2015. It found that implementation of the Basel III capital and liquidity standards has been timely in general. Quantitative monitoring of Basel III regulations shows that banks are on



Executive summary


Significant revisions to market risk capital

The Basel Committee issued an exploratory note on the revised minimum capital requirements for market risk on 14 January 2016. The framework will come into effect on 1 January 2019. The reforms address issues not resolved in Basel 2.5, such as an inadequate regulatory boundary between the banking and trading book, and weaknesses in the value-at-risk framework. The Basel Committee believes this incentivised banks to arbitrage their capital requirements between the banking book and the trading book, and take on ‘tail risks’ (the risk of loss due to rare events). The Basel Committee confirmed which instruments can be included in the trading book and set strict limits for any deviation. It also proposed a limit on moving instruments between trading and banking books. Banks will pay a fixed capital charge for any reduction in capital charge due to moving the instruments. The proposal replaces normal and stressed value at risk, with a single expected shortfall metric for both standardised and internal models approaches. Banks should calibrate it to a period of significant market stress and consider varying liquidity horizons. These changes aim to address both tail risk and market illiquidity risk. Bank supervisors are able to review the use of internal models for each trading desk, in

contrast to the current framework, where this is only possible at a firm-wide level. This makes it easier for supervisors to take decisions on disallowing the use of internal models where necessary.

More capital to cover market risk

On 18 November 2015, the Basel Committee published Fundamental review of the trading book – interim impact analysis. It looked at 44 banks and calculated that total non-securitisation market risk capital charges would be equivalent to a 4.7% share of the overall Basel III minimum capital requirement under the revised market risk framework. The change is reduced to 2.3% on excluding the bank with the largest value of market RWAs. The Basel Committee expects the proposed market risk framework to result in a weighted average increase of 74% in aggregate market risk capital charges. The increase in capital requirements is estimated at 54% for internally modelled approaches and 128% for the standardised approach. Based on a sample of 16 banks, 88% pass the P&L attribution measure at bank level, but the pass rates were much lower at the more granular trading desk level. The Basel Committee expects to publish the results of the fundamental review of the trading book by the end of the year.

Capital requirements for securitisations

The Basel Committee consulted on capital treatment for ‘simple, transparent and comparable’ (STC) securitisations on 10 November 2015. The EC had proposed broadly similar regulations on the structuring and capital requirements for such securitisations in September 2015. The Basel Committee recommends equalising the total capital required for a securitisation with that required for the underlying assets, justifying this on the basis that STC transactions have reduced structural risk. Its approach is similar to the EC’s, but stricter:

• The Committee requires investors to independently validate originator compliance with STC criteria, whereas the EC places compliance responsibility with issuers (which means an investor would be required to make the determination before applying alternative capital treatment independently of the originator’s certification under the Committee’s approach).

• The Committee would exclude asset-backed commercial paper from its proposed capital benefits, whereas the

EC includes such products, subject to some additional requirements.

• The EC allows synthetic securitisations to apply more favourable risk weights in certain circumstances when backed by a pool of loans to SMEs, while such an approach is not available under the Committee’s framework.

• The Basel Committee recommended that regulators reduce the risk weight floor for senior tranches of STC securitisations to between 10%–12%, from the current 15% requirement. This is in line with the EC’s proposals, where the floor for senior tranches is reduced to 10% and a 15% floor is retained for mezzanine tranches in light of their increased risk.

• Both the Basel Committee and EC propose permitting STC securitisations to apply the same risk weights that they would enjoy for internal ratings-based approaches to external approaches.

The consultation period closes on 5 February 2016.




Executive summary


Higher capital requirements for SFTs

• On 5 November 2015, BCBS consulted on setting higher capital requirements for securities financing transactions (SFTs) that impose haircuts below the proposed haircut floors. BCBS is exploring this approach to incentivise banks to set collateral haircuts above the floors instead of simply holding more capital. BCBS emphasised the floors are intended to serve only as a ‘backstop’ and should not replace thoughtful self-assessments. It suggests the higher capital requirements would only apply to non-centrally cleared transactions, with a number of other carve-outs to limit their scope being proposed (e.g. when the transaction references government securities or is with a central bank). The proposed haircut levels for securitised products involve the following:

• 1% for debt securities and floating rate notes with a maturity of less than or equal to one year

• 4% for debt securities with a maturity between more than one year and equal to or less than five years

• 6% for debt securities with a maturity between more than five years and less than or equal to ten-year debt securities, and

• 7% for debt securities with a maturity of more than ten years.

The consultation closes to comments on 5 January 2016.

with different timelines based on the respective disclosure requirements. The phase two proposals include:

• The addition of a ‘dashboard’ of key metrics

• Disclosure of hypothetical risk-weighted assets calculated based on the basel framework’s standardised approaches, and

• Enhanced granularity for disclosure of prudent valuation adjustments.

The proposals also incorporate additions to the Pillar 3 framework to reflect ongoing reforms to the regulatory framework. These include disclosure requirements for:

• The total loss-absorbing capacity (tlac) regime for global systemically important banks

• The proposed operational risk framework, and

• The final standard for market risk.

The comment period closes on 10 June 2016.

Circular 8 of 2015: Implementation of Countercyclical Buffer

The purpose of the circular is to provide information in respect of matters related to phasing in the implementation of the countercyclical capital buffer (CCB) in South Africa. It provides some details with regard to how the rates are determined as well as details of the disclosure of key information.

Leverage ratios ‘mutually reinforcing’

On 27 November 2015, the ECB published The impact of the Basel III leverage ratio on risk-taking and bank stability. The report states that the leverage ratio requirement will lead to a limited increase in risk taking which is more than offset by the benefits of increasing loss-absorbing capacity – thus resulting in more stable banks. It further suggests that any increase in banks’ risk taking (which may be caused by the non-risk-based leverage ratio) should be minimal as long as the risk weights approach is also adopted and calibrated at an appropriate level. Use of both measures ensures banks have an incentive to limit their risk taking while operating with reasonable levels of leverage. The Basel III leverage ratio is expected to become a minimum international requirement on 1 January 2018.

Revised Pillar 3 framework

On 11 March 2016, the BCBS published the second phase of the revised Pillar 3 framework, Pillar 3 disclosure requirements – enhanced and consolidated framework. The proposed enhancements issued in the latest consultation document build on revisions to the Pillar 3 disclosure requirements that the Committee finalised in January 2015, which the SARB endorsed in December 2015 through Directive 11/2015. Taken together with the Committee’s 2015 proposals, the latest set of proposals forms the consolidated and enhanced Pillar 3 framework that banks will need to comply with – albeit

Rates

• The CCB add-on rate will be set in a range of between 0 per cent and 2,5 per cent of risk-weighted assets (RWA). The add-on rate:

• Will be calculated as the weighted average of the buffers in effect in the jurisdictions to which banks have private sector credit exposures; and

• Will apply to bank-wide total rwa (including credit, market, and operational risk) as used in the calculation of all risk-based capital ratios, consistent with it being an extension of the capital conservation buffer.

• The credit-to-GDP gap will be the main indicator informing the activation of the countercyclical capital buffer in South Africa, though other indicators may be used together with the credit-to-GDP gap.

• A sectoral CCB may be set if this is deemed appropriate.

• Private sector credit exposures is defined as exposures to private sector counterparties which attract a credit risk capital requirement in the banking book, and the risk-weighted equivalent trading book capital requirement for specific risk, the incremental risk requirement, and securitisation. In this regard, interbank exposures and exposures to the public sector are excluded, but non-bank financial sector exposures are included.




Executive summary


Reporting and disclosure requirements

• The CCB must be reported on form BA 700. Furthermore, a different percentage should be reported in form BA 610, which is based on that particular entity’s weighted average of the CCB rates that apply in the jurisdiction where the relevant private sector credit exposures are located.

• The CCB must therefore be applied on a consolidated, bank-solo and foreign entity level.

• A geographic breakdown must be provided of the private sector credit exposures they have used in the calculation of the CCB.

• Banks are required to maintain a list of the location of all their credit exposures, setting out CCBs in place in the various jurisdictions and private sector credit exposures to those jurisdictions that do not operate and publish buffer add-ons.

The CCB becomes effective in South Africa as from 1 January 2016. However, the rate is set at 0% until further notice from the SARB.

Circular 9 of 2015: Postponement of the effective date of the amended regulations

The circular indicates that the effective date of the amended Banks Act regulations, originally scheduled for 1 January 2016, has been postponed to 1 April 2016.

Circular 2 of 2016: Clarification of interpretive matters with respect to the liquidity coverage ratio calculation (LCR)

The SARB issued Circular 2 of 2016 on 9 February 2016 to clarify certain interpretive matters with regard to LCR as follows:

a. Investments in foreign currency-denominated HQLA to cover domestic currency cash outflows will be limited to 5% of the total ZAR HQLA and subject to an 8% haircut. Furthermore, the circular clarifies that the SARB will allow foreign currency inflow limited to 75% of the foreign currency outflow to be included in the combined currency calculation.

b. The SARB accepts the fact that the daily LCR reported on the BA 325 at month end may differ from the monthly BA 300 return, provided such difference is ‘immaterial’. The circular, however, does not define ‘immaterial’.

c. Banks should use the daily average rules specified in Regulation 8.

d. In the calculation of the consolidated LCR for the group, banks should limit

the recognition of HQLA from banks in foreign jurisdictions to the prescribed limit during the phase-in period (70% of net inflows in 2017), unless the excess HQLA above this limit can be proven to meet minimum transferability and fungibility criteria. This clarifies a major issue in the industry where certain banks were not limiting their HQLA to the phase-in limits, while others were.

e. Clarification is given that the NSFR should not be subject to the regulatory audit until such time as an amended NSFR form has been adopted by the SARB.

The circular is effective immediately.

SARB Directive 10 of 2015

Directive 10 of 2015 was issued on 30 November 2015 and covers matters related to changes to the AMA operational risk management and measurement system used for the calculation of required capital for operational risk. The directive sets out the requirements for the approval and notification of changes to AMA banks’ existing operational risk management and measurement system. It requires banks to classify changes to the AMA operational risk management and measurement system under three categories (based on established criteria) and prescribes how to interact with the Registrar’s office on each of the three classes. These three classes are described in more detail below.




Executive summary


Material changes (including extensions)

Material changes or extensions (be they quantitative or qualitative) require prior written approval from the Registrar’s Office. From a qualitative perspective these can be either material changes to the AMA operational risk management and measurement system (e.g. changes to how insurance contracts are recognised within the model, changes to the measurement system – including how the four data elements are combined or change the capital allocation drivers within the group, changes in the organisational and operational structure of the independent risk management function for operational risk which reduce the ability of the operational risk management function to oversee and inform the decision-making processes, etc.) or extensions to the AMA operational risk management and measurement system (e.g. first-time adoption of elements such as the introduction of operational risk mitigation techniques (for example insurance), the introduction of recognition of correlations, etc.).

From a quantitative perspective, the directive defines a material change as a change (including extensions) that results in an increase or decrease in capital of 10% or more of the AMA operational risk model at the various levels, including bank, bank-consolidated or controlling company-consolidated levels. In making the above

assessment, the impact on the capital must refer only to the impact of the change on the AMA operational risk model; that is, the impact of the change should be isolated. Therefore, the operational risk profile must be assumed to remain constant.

All other changes (including extensions) that are not classified as material when assessed based on the above criteria must be classified as non-material changes.

Non-material changes requiring prior notification

These are defined as being changes of lesser materiality but which still, due to their degree of materiality, require notification to the Registrar’s Office at least 15 days before their implementation. Examples include changes to the way the operational risk management and measurement system is integrated into the day-to-day management process; changes in the organisational and operational structure of the independent risk management function for operational risk; changes to validation processes; internal review changes to the standards relating to internal data, scenario analysis and business environment, and internal control factors; etc.

Non-material changes requiring post-notification

These are defined as changes with a low level of materiality. These changes only need to be brought to the attention of the Registrar’s Office at regular intervals, after their implementation. They must be reported to the Registrar on a bi-annual basis, aligned with the Model Descriptive Statistics submissions for June and December.

This directive requires banks to seek written approval for any material extension or change for which approval was obtained but which the bank has decided not to implement. The directive also requires banks to notify the Registrar when there are delays in the implementation of approved changes or extensions.

SARB Directive 10 of 2015 also sets out the documentation that has to accompany a notification by a bank to the Registrar’s office for material and non-material changes or extensions to the AMA operational risk management and measurement system used for the calculation of required capital for operational risk.

Structural reform and other prudential rules

Valuing derivative liabilities in resolution

The EBA published the final draft RTS on the methodology for the valuation of derivative liabilities for the purposes of bail-in resolutions on 17 December 2015. Through the methodology, the EBA aims to provide EU resolution authorities with a means of valuing the derivative liabilities of credit institutions placed under resolution. BRRD gives resolution authorities write-down and bail-in powers in relation to a credit institution’s liabilities, including liabilities from derivatives contracts. Under the draft RTS, derivative counterparties are given the chance to provide evidence of commercially reasonable replacement trades within a given time period. If they fail to exercise this option, resolution authorities will apply a statutory methodology supported by observable market data or other relevant information. For centrally cleared derivatives, the draft RTS takes into account the EMIR framework and provides for a process that leans on the CCP default and valuation procedure. The draft RTS has been submitted to the EC for endorsement. It will also be subject to scrutiny from the EP and the Council before being published in the official journal.




Executive summary


Tweaking TLAC

The FSB published an overview of the post-consultation revisions to the TLAC Principles and Term Sheet on 9 November 2015. It sets out the changes it made to its TLAC term sheet as a result of comments received from its 2014 consultation. These changes include an adjustment where the sum of TLAC requirements for the multiple-point-of-entry resolution entities is more than would be the case for the hypothetical minimum requirement under a single-point-of-entry resolution strategy.

The new term sheet has adopted the concept of a material sub-group rather than a material entity in relation to internal TLAC. It also provides for a small allowance for firms pursuing structural subordination where the presence of liabilities in holding companies which rank equivalent or junior to TLAC will be unavoidable. This allowance is not permitted to exceed 5% of the resolution entity’s external TLAC. There is an allowance of 2.5% of RWAs for liabilities that could count as external TLAC, which will rise to 3.5% of RWAs in 2022. The FSB maintained its expectation that 33% of TLAC must be met by long-term debt in the final term sheet and structured notes’ ineligibility to be held for TLAC. The internal TLAC requirement of 75%–90% also remains unchanged. Finally, the FSB introduced a new disclosure requirement for entities that are part of a material subgroup and issue internal TLAC to a

resolution entity to disclose liabilities which rank equivalently with or junior to its internal TLAC.

Holding other banks’ TLAC

On 9 November 2015, in parallel with its paper on TLAC term sheets, the Basel Committee released TLAC Holdings – consultative document. It sets out the proposed approach for the deduction treatment of banks’ investments in TLAC, and proposals on the extent to which instruments that rank equivalently to TLAC should be subject to the same deduction treatment. The proposals are intended to limit the effects of contagion through banks holding the TLAC of other banks. The Basel Committee proposes that all internationally active banks, not just G-SIBs, should be required to deduct their net TLAC holdings, where these do not qualify as Basel III capital, from their own tier 2 capital. This is the same approach adopted under the Basel III framework for banks’ investments in the tier 2 capital of other banks. The term ‘TLAC holdings’ is defined by the Basel Committee and may include those instruments that would otherwise have counted as TLAC but don’t because they have less than one year until maturity, and also subordinated instruments that rank pari passu with TLAC instruments but never qualified as TLAC. The Basel Committee further suggests that instruments eligible for an exemption from the subordination requirements, which rank equivalently

with excluded liabilities, must have an original maturity of more than one year to qualify as TLAC. The approach is proposed to come into effect on 1 January 2019 (at the same time as the TLAC regime). The consultation closes for comments on 12 February 2016.

Subordination challenge for TLAC

On 9 November the FSB summarised Findings from the TLAC Impact Assessment Studies. Its work included:

• A quantitative impact assessment

• An economic impact assessment

• A market survey, and

• A verification of historical losses and recapitalisation needs.

The FSB found that market participants (including G-SIBs, other market participants such as asset managers and CRAs) expect the TLAC requirements to cause bond spreads to rise by 30 basis points from their current levels. On average, they expected G-SIBs to hold a TLAC buffer equivalent to 1.8% of RWAs above the minimum TLAC requirement. In their responses, G-SIBs most frequently cited subordination as a challenge in meeting the TLAC requirements. A significant number of market participants considered that market conditions were currently attractive for G-SIBs as issuers, due to unconventional monetary policies prompting a search for yield by investors.

TLAC: Good for the economy

On 9 November 2015, BIS published Assessing the economic costs and benefits of TLAC implementation. BIS found that TLAC benefits in terms of GDP were in the range of 45 to 60 basis points and were significantly higher than the implementation costs for firms. Benefits are expected to arise from enhanced market discipline, leading G-SIBs to reduce risk taking. It is also expected to improve the resilience of the financial system and reduce the probability of systemic crises. The costs were calculated by assuming that increased funding costs for G-SIBs translate to higher lending costs for firms, and estimating the effect of higher costs of credit to clients on GDP. Depending on the calibration of TLAC chosen, this was expected to lead to a 1.9 to 5.3 basis point drag on GDP resulting from increased lending interest rates of between 5 and 15 basis points. Spill-overs transmitted via trade, financial and commodity price linkages are expected to account for a quarter of the output loss.




Executive summary


FSB finalises TLAC

On 9 November 2015, the FSB released Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution and TLAC Term Sheet. The foremost policy objective for TLAC is that G-SIBs should have sufficient loss-absorbing and recapitalisation capacity to ensure an orderly resolution in the event of failure. It also aims to minimise the impact on financial stability, ensure the continuity of critical functions and avoid exposing tax payers to loss.

The TLAC principles concern the following:

• Calibration of tlac

• Availability of tlac to facilitate the resolution of cross-border groups

• Determination of instruments eligible to meet tlac requirements

• Interaction with regulatory requirements and consequences of breaching tlac

• Disclosure of information

• Limitation of contagion

• The need for a review over the medium term to ensure consistent implementation, and

• Any further modifications to the term sheet.

The term sheet has remained consistent following the November 2014 consultation, adopting a phasing-in approach for implementation and setting the minimum requirement at 16% of RWAs and 6% of the Basel III leverage ratio denominator (LRE minimum) from 1 January 2019. This will increase to 18% of RWAs from 1 January 2022 and 6.75% of the LRE minimum from 1 January 2022. For G-SIBs in emerging market economies (EMEs), the lower requirement applies from 1 January 2025 and the higher threshold must be met by 1 January 2028. But this can be accelerated if the amount of an EME G-SIB’s outstanding financial and non-financial corporate debt securities or bonds exceeds 55% of its home jurisdiction GDP. As these are minimum standards, local regulators can still set a firm’s TLAC to be higher than the requirements (which we’ve already seen in prior announcements from the Swiss authorities and US Fed). Capital used to satisfy minimum regulatory capital requirements can also count towards TLAC – subject to certain conditions. But CET1 contributing to minimum TLAC should not be used to meet regulatory buffers. The FSB intends to conduct a review of the technical implementation of the TLAC standard by the end of 2019, which coincides with a review that the EU authorities will be undertaking of the MREL.

Taking stock of resolvability obstacles

On 9 November 2015, the FSB released Removing Remaining Obstacles to Resolvability: Report to the G20 on progress in resolution. The report found that resolution planning within CMGs for GSIBs has advanced significantly but that substantial work remains to remove obstacles to resolvability and make resolution strategies and plans operational. It also found that only a subset of FSB jurisdictions, mostly G-SIB home jurisdictions, have a resolution regime with powers in line with the key attributes. The powers most commonly lacking are bail-in powers and the power to impose a temporary stay on early termination rights. Impediments that are yet to be addressed for G-SIBs include:

• Funding and liquidity needs

• Availability of unencumbered assets in resolution

• Continuity of shared services that are necessary to maintain the provision of a firm’s critical functions in resolution

• Continued access to payment, settlement and clearing services

• Capabilities to generate accurate and timely information in resolution

• Implementation of the new tlac standard making bail-in operational, and

• Cross-border effectiveness of resolution actions.

The FSB plans to undertake further work in the coming year on maintaining continuity of access to FMIs, addressing the legal and operational complexities in relation to bail-in, and developing implementation guidance with relation to TLAC – particularly internal TLAC. The FSB also expects to perform more work on CCP resolution planning, as reforms to resolution regimes and resolution planning are less advanced for insurers and FMIs than for banks.

Conduct

Reducing misconduct risk

On 6 November 2015, the FSB published a progress report on the work it is co-ordinating to address misconduct in the financial industry. The report sets out the actions the FSB and international standard setters are taking in this regard. In looking at the role of incentives in reducing misconduct, the FSB states that it will further examine the effectiveness of mechanisms like malus and clawback to determine their impact as deterrents to conduct risks. It will also establish a working group to exchange national good practices on the use of governance frameworks to address misconduct risks. In relation to the international coordination of conduct in FICC markets, the FSB notes that work is underway in a number of national jurisdictions to address the gaps in standards of market practice. IOSCO established a task force on market




Executive summary


conduct in October 2015, which will publish its final report in June 2016. The FSB will also publish a monitoring report at this time on progress in implementing its work plan on interest rate benchmarks. In May 2017, the BIS Markets Committee is due to finalise its FX code of conduct standards and principles. On coordinating the application of conduct regulation, senior officials from prudential and conduct financial authorities will share information on their respective powers and approaches to supervision and enforcement of conduct rules on an ongoing basis. This will include ensuring enforcement action as a credible deterrent.

Progress on compensation practices

The FSB published Implementing the FSB Principles for Sound Compensation Practices and their Implementation Standards (fourth progress report) on 10 November 2015. The standards were developed following a 2011 G20 request, and it published the last progress report in November 2014. The FSB notes that since 2014, nearly all countries have implemented the practices and standards, but significant implementation gaps still remain in a number of other countries due to local legal and other restraints. Most regulators now include compensation structures within their ongoing supervision of firms and report that most firms have implemented the practices and standards – though typically,

fewer compensation rules exist for insurers than banks. But the FSB expects this to change in 2016 (in the EU) with Solvency II implementation.

Other

Using AML/CFT data effectively

The FATF released guidance on AML/CFT-related data and statistics on 27 November 2015. The guidance provides options for collecting, maintaining and presenting AML/CFT-related statistics, advice on how to analyse the statistics, and concrete examples of how statistics may be used to assess the effectiveness of AML/CFT systems under the methodology.

FATF identifies eleven immediate outcomes that are central to a robust AML/CFT system, as follows:

• Understand money laundering and terrorist financing risks and, where appropriate, coordinate actions domestically to combat money laundering and the financing of terrorism, and the proliferation thereof.

• Obtain information, financial intelligence, and evidence about and facilitate action against criminals and their assets through international co-operation.

• Competent authorities use financial intelligence and all other relevant information appropriately for money laundering and terrorist financing investigations.

• Investigate money laundering offences and activities, and prosecute offenders and subject them to effective, proportionate and dissuasive sanctions.

• Prevent terrorists, terrorist organisations and terrorist financiers from raising, moving and using funds.

This FAFT guidance document notes that statistics may be a complement to the qualitative data.

More guidance for effective banking supervision

On 21 December 2015, the Basel Committee consulted on Guidance on the application of the core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion. The consultation builds on the Committee’s previous work to expand guidance on applying its core principles for effective banking supervision. The paper examines the risks posed by financial institutions working to reach unserved and underserved customers, who are categorised as individuals without an account at a formal financial institution.

The guidance aims to support supervisors with their regulatory and supervisory approach to changes and innovation in products, services and delivery channels of institutions approaching these customers. It also addresses issues relating to consumer protection, AML and CTF. The Committee sets out additional guidance for 19 of its core principles, which is required when applying the principles to the supervision of institutions engaging with unserved and underserved customers. The Committee doesn’t create any new principles or exclude the applicability of any core principle to developments relating to financial inclusion. The consultation closes on 31 March 2016.




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Mitigating systemic risks of shadow banking

The Basel Committee published a consultation on Identification and measurement of step-in risk on 17 December 2015, proposing a conceptual framework to mitigate systemic risks of the shadow banking system and their impact on banks. Step-in risk is the risk that a bank will provide financial support beyond its contractual obligations to another entity that experiences financial stress. The proposed framework focuses on identifying entities that are outside of the regulatory scope of group consolidation, but to which a bank may provide financial support to protect itself from reputational risk arising from its connection to the entities. Step-in risk indicators that help determine the relationship between the bank and the shadow banking entity may include criteria such as capital ties, sponsorship, decision-making or operational ties. Supervisors and banks may also consider other secondary indicators in their final assessment. The Basel Committee sets out possible approaches to address step-in risks through prudential measures, including:

• A conversation approach, imposing quantitative requirements on the bank where the entity that poses step-in risk remains unconsolidated, and

• A consolidation approach, so that the entity would be included in the scope of regulatory consolidation. The Basel Committee will conduct a QIS in the first half of 2016 to collect data on the nature and extent of step-in risks which, together with consultation responses, will inform its deliberations on the final framework. The consultation closes on 17 March 2016.

Implementing risk data aggregation principles

The Basel Committee published Progress in adopting the Principles for effective risk data aggregation and risk reporting on 16 December 2015, its third report since the principles were published in January 2013. It concludes that although banks have made progress towards implementation, important challenges remain and it is expected that some banks will not meet the principles on time. It made recommendations, including that national supervisors should conduct more in-depth and specialised examinations to evaluate weaknesses and that banks’ compliance should be subject to independent evaluation in early 2016. Banks designated as G-SIBs were required to implement the principles in full by 2016.

The Basel Committee also recommended that national supervisors apply the principles to banks identified as D-SIBs within three years of their designation.

Asset management and market-based financing

New rules for securities financing

On 12 November, the FSB published Transforming Shadow Banking into Resilient Market-based Finance: An Overview of Progress and its Global Shadow Banking Monitoring Report 2015. The FSB provided an update on its framework for monitoring shadow banking and its development of policies to strengthen oversight and the regulation of shadow banking. Using a narrow definition of shadow banking, it found that credit intermediation associated with investment vehicles has grown more than 10% on average over the past four years, while the level of securitisation-based credit intermediation has fallen. The FSB’s broad measure of shadow banking activity found that the assets of other financial intermediaries, pension funds and insurance companies grew by 9% to $137 trillion over the past year. The FSB also published a regulatory framework for haircuts on non-centrally cleared securities financing transactions. The framework provides quantitative and qualitative standards for calculating haircuts on collateral for non-centrally cleared securities financing transactions. It sets numerical haircut floors for non-bank to non-bank transactions. The framework provides an exemption from the numerical haircut floors for cash-

collateralised securities lending, but expects that collateral upgrades will be included unless certain conditions are met. The FSB recommends that the Basel Committee incorporate the numerical haircut floors into capital requirements for securities financing transactions under the Basel frameworks by the end of 2015. Jurisdictions with a large volume of securities financing transactions are advised to apply the floors using market regulation by the end of 2018, which represents a delay of one year compared to the October 2014 framework document.




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Insurance

A snapshot of our observations of the SAM comprehensive parallel run

With full SAM implementation having now been moved out to 1 January 2017, insurers have an additional year to improve and embed the calculation and reporting process within the business-as-usual environment. From an audit perspective, the Financial Services Board will require the SAM balance sheet, the solvency capital requirement (SCR), the minimum capital requirement (MCR) as well as other key disclosures such as the analysis of surplus (AoS) to be audited post-implementation. However, the Financial Services Board will also require insurers to carry out the comprehensive parallel run (CPR) in 2016 until the implementation of SAM. The 2016 CPR will be subject to external audit.

As a result of the external audit questionnaire issued as part of the 2015 CPR and in anticipation of the audit requirements, a number of insurers have obtained an independent review of the calculations and reporting process so as to gain comfort on indicative figures reported to risk and audit committees over 2015. PwC has performed a number of CPR reviews, at various levels of detail, to assist insurers in gauging readiness for the post-implementation audit requirements. These reviews have allowed us to identify some

of the key challenges facing the industry, as shared below:

• Data: Whilst insurers are comfortable that the data is generally of good quality and sufficiently detailed, limited documentation and controls exist around data management to evidence/support this view.

• Software: The majority of insurers are making use of the CPR submission spreadsheets and manual excel spreadsheets. Governance and controls in respect of these models are limited, resulting in a number of ‘finger’ and/or unintentional errors not being picked up.

• Automation: Insurers are finding that there is a need to automate more of the regulatory reporting processes to reduce the time it takes to report, reduce manual errors, increase controls and ensure the process is scalable.

• Use of expert judgment: Various elements of the return require the use of ‘expert judgment’. These subjective judgments may materially impact the solvency margin; however, the level of governance and controls in respect of these judgments is not commensurate with the associated risk.

• Documentation: Documentation of the valuation process is limited. This increases key man risk and reduces the level of transparency.

• Interpretation of the principles: To a large extent, the proposed requirements are principles-based as opposed to rules-orientated. Thus a common question asked is, ‘Does my interpretation align to yours/our auditor’s and/or that of the rest of the market?’ We have found numerous instances where different interpretations apply across different insurers.

• Allowance for loss absorbency of deferred taxes: The allowance for the loss absorbency of a deferred tax asset following an SCR event can significantly reduce the SCR. However, insurers are grappling with the appropriate process, approach and assumptions to be used – to a large extent, insurers have ignored some key considerations related to the potential deferred tax adjustment and hence the appropriate adjustment.

• Principle of proportionality/materiality: Most insurers have applied the principle of proportionality/materiality for some elements of the submission, including areas where simplifications/approximations are applied. However, some insurers were not able to demonstrate consistent understanding and application of materiality/proportionality across all elements of the submission, as no central policy was in place to guide users.

Client assets/Client money

IOSCO published its final report standards for the custody of CIS’ assets on 10 November 2015. It updates the original 1996 standards to reflect market changes and align with other IOSCO activities. In particular, IOSCO focuses on the increased activities in stock lending, putting more pressure on the custody of assets that are reused to generate additional returns.

The updated standards focus on:

• Establishing a regulatory regime for CIS custodial arrangements

• Segregating cis assets from a custodian’s other assets

• Requiring custodians to be functionally independent from the asset owner/manager

• Disclosing custody arrangements to investors

• Selection criteria for appointing a custodian, and

• Ongoing monitoring of the custodian’s activities.

No changes should be necessary in the EU, given the recent AIFMD implementation and forthcoming UCITS V implementation (in March 2016). But outside the EU, existing practices might need revision.




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• Asset templates: The volume of asset information that is required in the templates is onerous, and insurers are still spending a large part of their SAM projects ensuring the quality of this data.

• Ownership of the reporting process: There has been debate at a number of insurers about the ownership of the reporting template and the reporting process. A number of insurers have assigned a regulatory reporting manager as the owner of the reporting template and the reporting process; however, it is evident that the reporting requirements require increased collaboration between risk, financial and actuarial teams and a coordinated delivery.

The diagram illustrates our view of industry readiness for audit, taking into account the findings we have noted across various reviews conducted in the past year.

Maturity of SAM implementation

QRT Status

Technical provisions – Non-life

SCR – Non-life

Technical provisions – Life

SCR – Life

Assets

Own funds

General preparation

Audit ready, with audit differences not expected tobesignificant Audit ready, but may not be able to rely on controls Not audit ready

The above challenges perhaps reflect the maturity of SAM implementation in the industry. However, with a year to go before final implementation and the Financial Services Board indicating audit requirements for the 2016 CPR submissions, limited time remains for refining and improving the process, especially given the limited involvement of external audit to date.

General insurance illustrative accounts 2015

Our publication Proforma-Gen Limited Annual Report 31 December 2015 includes illustrative UK GAAP financial statements for a fictitious UK general insurance group, Proforma-Gen Limited, for the year ended 31 December 2015.

They reflect the requirements of new UK GAAP, including FRS 102 – The Financial Reporting Standard, applicable in the UK and Republic of Ireland and FRS 103 – Insurance Contracts (including its implementation guidance) and include example disclosures on the transition to new UK GAAP.

Updated G-SIIs list

The FSB published the 2015 update of its list of global systemically important insurers (GSIIs) on 3 November 2015. It comprises a total of nine insurers (same as 2014), but one new insurer, Aegon, has been added and Generali has been removed. The updated list was compiled using 2014 data and the methodology published by the IAIS in July 2013. At present, only primary insurers are included on the list. The FSB plans to publish an updated list in November 2016. But by then the list might change fundamentally, because the IAIS published two related consultations on 25 November 2015:

• Global Systemically Important Insurers: Proposed Updated Assessment Methodology, and

• Non-traditional non-insurance (NTNI) Activities and Products.

It proposes to revise the assessment methodology for identifying GSIIs, including:

• Use of a five-phase assessment approach, including both quantitative and qualitative elements

• Adjustments to certain indicators to address issues related to indicator responsiveness, normalisation and data quality (including reliability) across both insurers and jurisdictions

• Adoption of absolute reference values for certain indicators to allow the methodology to be more responsive to changes in the insurance industry’s systemic profile in certain areas, and

• Establishment of specific procedures for an insurer’s entry and exit from the G-SII list.

The methodology proposed in this consultation is meant to be used to identify G-SIIs from 2016, and we would expect to see reinsurers included in the list alongside primary insurers for the first time. The second consultation considers how NTNI activities and products are treated in the assessment methodology and their use in determining the Basic Capital Requirement and Higher Loss Absorbency requirement for G-SIIs. In particular, the IAIS wants feedback on an analytical framework to classify insurance products and activities as non-traditional based on contractual features. The consultations close on 25 January 2016.




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Taxation

Taxation

Retirement reform in South Africa

Background

The South African retirement fund industry is notoriously complex with complicated products and retirement savings solutions, all with varying tax treatments. Furthermore, saving for retirement is not compulsory. This results in relatively expensive retirement income solutions and a large portion of the South African population not enjoying the benefits of the system.

The intention behind government’s retirement reform proposals is to create a simpler, more cost-effective social security environment that provides retirement income protection to the entire South African population. National Treasury is the main driving force behind these proposals.

A range of proposals and changes has been formulated in legislation and draft bills. Additional discussion documents also provide insight into potential changes in future. These changes can be summarised as follows:

Targeted implementation date

Changes

1 March 2016 Alignment of tax treatment of contributions to pension, provident and retirement annuity funds

1 March 2018 Expected compulsory annuitisation of retirementbenefitsfrom provident funds

Expected in the next two years

Requirement for funds to provide default investment strategies, default preservation options and default retirement solutions

2018 or later Compulsory preservation of pre-retirementbenefits

Simplifying the industry from 1 March 2016

The changes that were implemented with effect from 1 March 2016 align the tax treatment of contributions to pension funds, provident funds and retirement annuities. Previously, different limits on tax deductible contributions applied to the different savings vehicles, adding to the complexity of these benefits.

From 1 March 2016, all employer contributions to retirement funds are taxable as a fringe benefit and are in effect treated the same as member contributions to such funds. Individuals are able to claim a tax deduction on all contributions (member and employer) of up to 27.5% of the higher of taxable income and remuneration, subject to an overall annual limit of R350 000.

The changes to the tax treatment of contributions should result in most individuals not paying any more tax on retirement savings contributions than they currently are. That said, some high-income earners who exceed the R350 000 annual contributions cap are now paying tax on contributions in excess of this limit.

In addition to these simplifying changes, the de minimis amount has also been increased to R247 500 from 1 March 2016. This means the retirement benefits from pension funds and retirement annuity funds may be taken entirely in cash if they are less than R247 500. (Benefits from provident funds may currently be taken fully in cash, irrespective of the benefit amount. See the next section for developments on this front.)

Changes from 1 March 2018

A big attraction of provident funds is the ability to take the entire retirement benefit in cash. Despite a relatively penal tax scale, this option is taken up by a large proportion of provident fund retirees. In contrast, members of pension funds and retirement annuities have to use at least two thirds of their retirement benefit to purchase an annuity-providing income in retirement (subject to the de minimis rule).

In order to align the treatment of pension and provident funds, the annuitisation requirement was to apply to provident funds as well from 1 March 2016, but it was postponed for two years to allow proper consultation with all stakeholders.



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We can therefore expect to see this change implemented from 1 March 2018.

It is important to note that the existing rights of provident fund members will be protected and they will be able to take their accrued savings at implementation date, plus the return thereon, in cash at retirement. The requirement to use two thirds to purchase a pension at retirement will only apply to savings after 1 March 2018, and then only to members younger than 55 at this date.

Default regulations

In the latter part of last year, National Treasury released draft regulations on ‘defaults’ to be provided by retirement funds. These defaults apply to the investment strategies, in-fund preservation options and retirement income solutions of retirement funds. The default options will automatically be exercised for members who do not make a decision; for example, a member who does not make a decision at retirement will automatically be invested in the default retirement strategy of the fund.

The intention is to improve the retirement outcomes of members of retirement funds by encouraging the appropriate (cost-effective) investment of their savings during their working lifetime and at retirement. Members who are overwhelmed by the important decision

they are faced with will have an option available which is suitable based on their circumstances.

The industry has submitted comments on the draft regulations to National Treasury and are waiting for further developments on this front.

Likely future developments

Treasury recognises the devastating impact of non-preservation of retirement benefits when members change jobs, and has hinted at limiting the amount that members can take in cash before retirement. Compulsory preservation and possible mandatory participation in a retirement fund are contentious issues, and given the social impact, extensive consultation is required. We are therefore unlikely to see significant further developments on these topics in the next two years.

Conclusion

Significant changes are required to ensure a better retirement outcome for all South Africans and to reform an entire industry to progressively improve the financial security of all. The current changes to the industry are a step in the right direction.

Deemed disposal for long-term insurers on 29 February 2016 [Section 29B]

Changes to legislation

During the 2016 budget speech held on 24 February 2016, the Minister of Finance announced an increase in the capital gains tax (CGT) inclusion rates for both individuals (33.3% to 40%) and companies (66.6% to 80%).

The CGT inclusion rates for an insurer, in respect of each policyholder fund, are as follows:

Previous inclusion rates

New inclusion rates

IPF 33.3% 40%

UPF 0% 0%

CPF 66.6% 80%

RPF 66.6% 80%

This amendment is deemed to come into effect on 1 March 2016 and is applicable in respect of years of assessment ending on or after that date.

Deemed disposal

The amendment to the CGT rates has resulted in another deemed disposal event for long-term insurers in terms of section 29B of the Income Tax Act No. 58 of 1962 (‘the Act’). This is similar to 2012, when the CGT rates were increased and section 29B of the Act was introduced. Section

29B provides relief to policyholders on unrealised gains that exist, by locking in these gains at the ‘old’ CGT rates and deeming all policyholder assets (with certain exclusions) to be disposed of at the ‘old’ CGT rates.

Section 29B will be amended to state that an insurer is deemed to have disposed of each asset held in respect of all its policyholder funds (excluding certain asset types) on 29 February 2016, for an amount equal to the market value on that date. The insurer is then deemed to have immediately reacquired those assets at an expenditure equal to this market value.

The phase-in period of this resulting realised gain will be amended to be a period of three years, instead of the four-year period as currently provided for in section 29B.

Taxation



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Interaction between REITs and section 9C

It is proposed that a provision be added to the Act that section 9C(5) does not apply to shares in REITs. This proposal is made to resolve the anomaly whereby dividends received from REITs are taxable, but the expenditure incurred to produce these taxable dividends is effectively non-deductible.

Hybrid debt instruments [Section 8F]: Tax base protection

Effective 24 February 2016, government will implement measures to eliminate mismatches associated with hybrid debt instruments where the issuer is not a South African resident taxpayer. As interest payments on debt and dividend payments on equity are treated differently for tax purposes, these situations potentially result in double taxation.

Currently, existing rules reclassify an interest payment as a dividend payment for tax purposes; however, it is only possible to deny interest deductions for a South African resident that issues a debt instrument. This results in a mismatch in tax treatment between two countries, as the South African rules apply a low or zero tax rate to the reclassified dividend payment.

Hybrid debt instruments [Section 8F]: Debt instrument subject to subordination agreement

If a debt instrument becomes subject to a subordination agreement as a result of the issuer being in financial distress, that instrument (in terms of section 8F) may be regarded as a hybrid debt instrument.

It is proposed that a concession be made to exclude such instruments from being regarded as section 8F hybrid debt instruments.

Tax implications of securities lending arrangements [Section 10(1)(k)(i)(ff)]

Tax relief on the transfer of collateral in securities lending arrangements was granted in 2015. This relief resulted in no income tax and securities transfer tax implications if a listed share is transferred as collateral in a securities lending arrangement for a limited period of 12 months.

Concerns have been raised that the 12-month limitation rule is too restrictive. Therefore, this condition will be reviewed, along with taking into account corporate actions undertaken during the term of the securities lending agreement.

Budget 2016 – The effect on certain financial services tax provisions in a nutshell

During the 2016 budget speech held on 24 February 2016, the Minister of Finance announced certain tax proposals, summarised below.

Transitional tax issues resulting from regulation of hedge funds [Section 25BA]

The tax relief for amalgamation and asset-for-share transactions creates scenarios where the tax relief provided to assist the hedge fund industry’s transition to a new regulated tax regime is limited and inapplicable to certain hedge funds’ trust structures. It is proposed that provisions be made to address these scenarios.

Taxation of real estate investment trusts (REITs) [Section 25BB]

Qualifying distribution rule

It is proposed that the provisions relating to the qualifying distribution rule in section 25BB of the Act be reviewed to remove the anomaly caused whereby recoupments such as building allowances previously claimed are being included in gross income (as per the definition of section 1), which could affect the 75 per cent rental income analysis used to determine the applicability of the qualifying distribution provisions.

Taxation



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Refinement of third party-backed share provisions [Section 8EA]

Pre-2012 legitimate transactions

In 2012, government introduced new rules to deal with avoidance concerns involving preference shares with dividend yields backed by third parties. Under the new rules, these dividend yields are treated as ordinary revenue. As these rules may affect some legitimate transactions, government will consider relaxing them, but only in respect of transactions entered into before 2012.

Addressing circumvention of anti-avoidance measures

Schemes have been identified where investors structure their transactions to circumvent third-party anti-avoidance rules, i.e. the formation of trust-holding mechanisms whereby investors acquire participation rights in trusts and the underlying investments of those trusts are preference shares. This effectively bypasses the anti-avoidance provisions, but achieves the same result that the anti-avoidance provisions were trying to curtail.

It is proposed that additional measures be considered to stop the circumvention of these anti-avoidance measures.

FATCA/CRS

South African financial institutions will already be aware of FATCA and its requirements. The landscape of international taxation information reporting has developed further with South Africa becoming a signatory to the Common Reporting Standard (CRS) of the Organisation for Economic Development (OECD) – a global taxation information sharing agreement – on 23 October 2014.

Largely similar to FATCA, financial institutions must report taxpayer information to the South African Revenue Service in order to curb tax evasion by hiding taxable income offshore. The largest difference between the two is that FATCA applies only to the United States, whereas the CRS applies to the foreign ‘competent authorities’ of any signatory jurisdictions – a truly global undertaking.

The necessary amendments to the primary South African legislation, the Tax Administration Act No. 28 of 2011 (for the implementation of the CRS in South Africa), have been in place since January 2016. The regulations to the Tax Administration Act were promulgated on 2 March 2016.

Taxation

ContactsAccounting updatesTaxation OtherCross-sector announcements


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Glossary

Accounting updatesIFRS news

The December 2015/January 2016 issue of our publication IFRS News covers:

• Revenue – TRG discusses optionalpurchases, licences and other topics

• Financial instruments – News from theTRG for impairment

• Definition of a business – FASB exposuredraft

• Update: IFRS in the US

• Year-end reminders.

IFRS 9 – Getting governance right

Governance processes and controls are an essential part of any bank’s control environment. They will be particularly critical for banks implementing IFRS 9 – Expected Credit Loss (ECL) and making key decisions on accounting policies and how practically to implement the new impairment requirements. The importance of strong governance is further reinforced by the Basel Committee’s draft Guidance on accounting for ECL, which emphasises the need for robust and high-quality implementation.

Our In depth publication outlines some of the key governance challenges we have seen in practice when making IFRS 9 ECL accounting policy and implementation decisions, and how best to respond. Although primarily focused on banks, many of the areas discussed will also be relevant to other financial institutions implementing IFRS 9 ECL. Although not covered in this publication, banks will also need to consider many other aspects of governance during their IFRS 9 implementation projects and beyond. These include data governance, model governance, and governance and controls over the ongoing ‘business as usual’ IFRS 9 reporting process.

New PwC illustrative IFRS financial statements

Illustrative IFRS financial statements 2015 – Investment funds is based on the requirements of IFRS standards and interpretations for the financial year beginning on 1 January 2015. There were no new standards or amendments effective for annual periods beginning on 1 January 2015 which had an impact on the example fund. As a result, our 2015 edition is largely consistent with that for 2014. The main update to the publication this year is the inclusion of a new appendix

which provides illustrative disclosure for circumstances where a fund’s prospectus requires net asset value for share transaction purposes to be calculated in a manner that may be different from IFRS.

Illustrative IFRS consolidated financial statements 2015 – Investment property provides an illustrative set of consolidated financial statements, prepared in accordance with IFRS, for a fictional investment property group (IP Group). The Group prepares its consolidated financial statements in accordance with IFRS as issued by the IASB (that is, it does not prepare the consolidated financial statements in accordance with IFRS as adopted by the EU). IP Group is an existing preparer of IFRS consolidated financial statements; IFRS 1, First-time adoption of International Financial Reporting Standards is not applicable. Guidance on financial statements for first-time adopters of IFRS is available at http://www.pwc.com/ifrs. This publication is based on the requirements of IFRS standards and interpretations for financial years beginning on or after 1 January 2015. The Group did not opt for the early adoption of any standard or interpretation.

New appendix Illustrative disclosures – IFRS 9 Financial Instruments is nowavailable. This appendix, which relates to the illustrative IFRS consolidated financial statements for 2015 year ends for IFRS 9, sets out the types of disclosures that would be required if a fictitious company were to decide to adopt IFRS 9 for its reporting period ending 31 December 2015. Supporting commentary is also provided.

Accounting updates



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Insurance contracts project update

At its meeting on 18 November 2015, the IASB compared the general model and the variable fee approach and decided to keep the differences. This means changes in financial guarantees in the contractual service margin (CSM) under the variable fee approach and in the statement of comprehensive income (SCI) under the general model need to be recognised. In addition, interest accretion on the CSM would use current rates under the variable fee approach and locked-in rates under the general model. The IASB also voted to permit valuations at fair value for certain assets underlying contracts which have direct participation features, and to apply simplified transition rules for measuring the CSM for contracts following the variable fee approach. In addition, it decided that the option to recognise changes in the value of a hedged guarantee embedded in an insurance contract in profit or loss under the variable fee approach should be applied prospectively from the date the new insurance contract standard applies.

Annual improvements 2014–2016

The IASB published ED Annual improvements to IFRS’s 2014–2016 cycle on 19 November 2015. It covers proposed amendments to IFRS 1, First-time adoption of IFRS; IFRS 12, Disclosure of interest in other entities; and IAS 28, Investments in associates and joint ventures. Comments are due by 17 February 2016.

Impairment disclosures for banks

Our publication In Brief – EDTF recommends IFRS 9 impairment disclosures for banks considers the implications of the report of the Enhanced Disclosure Task Force (EDTF) titled Impact of expected credit loss approaches on bank risk disclosures, published in November 2015. The EDTF recommends disclosures in banks’ annual reports to help the market understand an expected credit loss approach to provisioning for impairment, such as that introduced in IFRS 9, Financial instruments. The EDTF highlights that disclosures are needed both before and after the adoption of the new IFRS 9 impairment requirements, starting with 31 December 2015 annual reports.

Insurance contracts project update

The IASB met on 19 and 20 January 2016 to discuss the level of aggregation of contracts for allocation of the contractual service margin and losses from onerous contracts. They also discussed the definition of discretion in the context of participating contracts that follow the general model. See our Insurance alert – IASB meeting on 19-20 January 2016 for further details.

Additional cash-flow statement disclosure

The IASB issued an amendment to IAS 7, Statement of cash-flows, introducing an additional disclosure to enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendment is effective from 1 January 2017, subject to EU endorsement.

Changes to new revenue standard

Our publication The new revenue standard – changes on the horizon considers changesproposed by the FASB and IASB to the new revenue standard issued in May 2014. It considers the impact of the proposals and areas where the FASB and IASB have taken different approaches.

Amendments to IAS 12, Income taxes

The IASB has issued amendments effective from 1 January 2017 to clarify the requirements for recognising deferred tax assets on unrealised losses, in particular the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset’s tax base. See our publication In Brief – IASB issues narrow scope amendments to IAS 12, Income taxes for details.

Illustrative financial statements 2016

In our series of illustrative financial statements, we have published:

• Illustrative IFRS financial statements2015 – Private equity funds. The 2015edition is largely consistent with our2013 publication. The main changeis the updated appendix providing anoverview of the key relevant newlyeffective and forthcoming standardsand amendments to existing standards.

• Illustrative condensed interim financialstatements 2016. This illustrates theinterim financial reports of a fictionallisted company.

Hyperinflationary economies

Our publication In brief – Hyperinflationary economies at 31 December 2015 considers the application of IAS 29, Financial Reporting in Hyperinflationary Economies and lists economies that were hyperinflationary at 31 December 2015.

Venezuela is a hyperinflationary economy and the government maintains a regime of strict currency controls. Our publication In brief – Accounting considerations for Venezuelan subsidiaries looks at accounting considerations for Venezuelan subsidiaries for reporting periods starting after 15 December 2015.

Accounting updates



Executive summary


Associates and joint ventures changes postponed

The IASB postponed the date when entities must change some aspects of how they account for transactions between investors and associates or joint ventures on 17 December 2015. The postponement applies to changes introduced by the IASB in 2014 through narrow-scope amendments to IFRS 10, Consolidated financial statements and IAS 28, Investments in associates and joint ventures. Those changes affect how an entity should determine any gain or loss it recognises when assets are sold or contributed between the entity and an associate or a joint venture in which it invests. The changes do not affect other aspects of how entities account for their investments in associates and joint ventures. The amendment no longer applies.

Impairment implementation issues debate concludes

Our publication Transition Resource Group debates IFRS 9 impairment implementation issues. ITG holds its third meeting of 2015 summarises the Transition Resource Group for Impairment of Financial Instruments (ITG) meeting of 11 December 2015 and our observations. The main topics discussed were:

• Incorporating forward-looking economic scenarios

• Determining the appropriate period to measure expected credit losses for revolving credit facilities

• The inclusion of expected cash flows from credit enhancements, and

• Sales on the default of a loan in the measurement of expected credit losses.

There was a general consensus on all the issues presented at the meeting, and no further action is expected in respect of these issues.

EDTF considers expected credit loss disclosures

The EDTF published a report on the impact of expected credit loss approaches on bank risk disclosures on 7 December 2015. The FSB asked the EDTF to consider the disclosures by banks that may help the market to understand forthcoming accounting changes concerning the expected credit loss (ECL) approaches to the recognition of impairment losses arising from the application of the below:

• IFRS 9: Financial Instruments – takes effect for accounting periods beginning on or after 1 January 2018, and

• Proposed Accounting Standard Update, Financial Instruments – Credit Losses, published on 12 December 2015 by the FASB.

• The EDTF also issued 2015 Progress Report on Implementation of the EDTF Principles and Recommendations on 7 December 2015, its third since the original report in October 2012.

The EDTF concluded that ECL disclosures will be most usefully served by a gradual and phased approach. It considers this gives clearer insights into the likely impacts of the new standards as implementations progress and, over time, also will provide increasingly useful comparisons between banks. The guidance includes additional considerations on the application of the ECL framework to existing EDTF recommendations in the 2012 report. It identifies temporary considerations which will cease to apply after the ECL framework is adopted and permanent considerations which will continue to apply after the new accounting standards are adopted. The EDTF encouraged banks to take the considerations into account for 2015 annual reports and in subsequent years.

Accounting updates



Executive summary


Accounting for expected credit losses

The BCBS published its Guidance on credit risk and accounting for expected credit risk losses on 18 December 2015, setting out supervisory guidance on sound credit risk practices for banks that apply an expected credit loss (ECL) accounting framework. It replaces BCBS’s previous guidance contained in Sound credit risk assessment and valuation for loans published in 2006, which addressed provisioning concepts and the use of data and processes in credit risk assessment for accounting and regulatory capital purposes. The guidance focuses on lending exposures, i.e. loans, loan commitments and financial guarantee contracts. Guidance is structured around 11 principles, presenting the CBS’s view on the appropriate treatment of ECL accounting standards and how they should fit in with a bank’s credit risk practices and regulatory framework. But it does not cover regulatory capital requirements on expected loss provisioning under the Basel capital framework.

Accounting updates



Executive summary


OtherThe Financial Intelligence Centre Amendment Bill 2015

The Financial Intelligence Centre Act (38 of 2001) (FICA) was introduced to combat money laundering and terrorist financing activities, and came into effect on 1 July 2003.

FICA has undergone several amendments in order to bring South Africa in line with similar legislation globally. The most recent proposed amendment, referred to as the Financial Intelligence Centre Amendment Bill 2015, was published with the primary objective being to:

• establish a stronger AML and CFT regulatory framework, by enhancing the customer due diligence requirements

• provide for the adoption of a risk-based approach in the identification and assessment of AML and CFT risks

• provide for the implementation of the United Nations Security Council Resolutions relating to the freezing of assets and dissolve the Counter-Money Laundering Advisory Council (CMLAC), and

The Protection of Personal Information Act, No. 4 of 2013 (POPI)

The Protection of Personal Information Act, No. 4 of 2013 (POPI) was drafted to promote the protection of personal information by public and private entities.

The President signed a proclamation declaring some sections of the Act effective from 11 April 2014. The section in question refers to the appointment of an information regulator. On 11 November 2015, the Portfolio Committee on Justice and Correctional Services met to discuss the appointment of an information regulator.

The members of the Committee requested that another workshop be held with the relevant stakeholders to discuss the importance of POPI and how it interacts with PAIA (Promotion of Access to Information Act) and the Protection of State Information Act. Members also wish to discuss whether the provisions of the Act extend protection to all businesses and citizens, including children and citizens in rural areas.

As a result of this request the effective date of all sections of the Act has yet to be decided upon.

• extend the functions of the FIC in relation to suspicious transactions, enhance the supervisory powers of accountable institutions, and enhance certain administrative and enforcement mechanisms.

The Bill was envisioned to be enacted in the latter part of 2015, but is still in draft. The regulator has not provided any updates as of yet on the enactment of the Bill.

IMF considers virtual currencies and blockchain

The IMF released staff discussion paper SDN/16/03, Virtual Currencies and Beyond: Initial Considerations on 20 January 2016. The IMF explains the benefits of virtual currencies (VCs) and blockchain technology, including enhanced speed and efficiency in payments and the scope for greater financial inclusion. The technology behind blockchain also offers a decentralised means of keeping track of transactions in a large network. But there are concerns about the expanded use of VCs and blockchain because of the opacity of transactions and its potential use for money laundering, terrorist financing, tax evasion and fraud. Consumer protection issues, due to the complexity of the

technology and potential disruption to systems, have also been identified. The IMF acknowledges the difficulty in determining a regime for this rapidly expanding technology, which is already being trialled in the financial services sector. It explains the need for regulatory co-ordination on a cross-agency and cross-border scale to mitigate risks without stifling innovation.

Other



Executive summary


Financial stability

Identifying a G-SIB

The Basel Committee published Global systemically important banks: Assessment methodology and the additional loss absorbency requirement on 12 January 2016. A sample of banks are required to report a set of indicators to national authorities, which are then aggregated and used to score banks. Banks above a certain cut-off score will be identified as G-SIBs and then put in buckets to determine their higher loss absorbency requirement. The methodology includes reporting templates, year-end and annual average exchange rates, denominators used to calculate sample banks’ scores, bucketing information (which was fixed at the end of 2012) and individual G-SIB disclosures.

Supervision

ECB’s 2016 supervisory priorities

On 6 January 2016, the ECB published ECB Banking Supervision: SSM priorities 2016, identifying five priorities to guide its approach to supervision. The key risk that it identified was business model and profitability risk due to a high level of asset impairments and a long period of low interest rates. It also discussed credit risk, capital adequacy, risk governance, and data quality and liquidity risk. The list is not exhaustive.

The ECB intends to conduct various thematic reviews covering three areas. The first is banks’ profitability drivers at firm level and across business models with the aim of identifying banks with structurally low profitability (e.g. banks overly reliant on weakening credit standards or short-term funding, or experiencing an increase in risk exposure not commensurate with the bank’s stated risk appetite). Second, it expects to look into the potential impact of IFRS 9 on banks’ provisioning practices and banks’ preparations for it. Third, it will look at banks’ compliance with the Basel Committee’s principles for effective risk data aggregation and risk reporting, including IT risks. As part of its supervision the ECB expects to use the SSM to analyse:

• Banks with high npls, particularly those with high exposure to real estate and loans of deteriorating credit quality

• The quality and composition of banks’ capital

• The quality and consistency of banks’ icaap

• Banks’ preparation for rel/tlac

• Banks’ internal models through a targeted review, and

• The reliability of banks’ ilaap.

In addition, it plans to use the SSM to clarify its expectations to banks’ boards in 2016.

Analysing shadow banking exposures

On 15 December 2015, the EBA published a report on firms’ exposures to shadow banking. Firms supplying information were asked to report exposures to individual shadow banking entities with a focus on individual exposures with an exposure value, after exemptions and credit risk mitigation, of at least 0.25% of the firm’s eligible capital. The EBA found that around 25% of the exposures reported by institutions were classified as securitisation-based credit intermediation and funding of financial entities. Another 25% had counterparties such as hedge funds, private equity funds, real estate funds, fixed income funds, and other funds (i.e. investment funds other than MMF). It found banks’ average aggregate exposure per reporting institution, measured in terms of their eligible capital, was higher for investment funds (other than MMFs) and for securitisation-based credit intermediations. These types of counterparties also represented the higher exposure values in EUR. The EBG also discovered that most exposures to shadow banking entities (80%) are held by banks with balance sheets above EUR 3 billion. Investment firms reported much smaller exposures to shadow banking entities than credit institutions, only slightly above 0%.

Other



Executive summary


IOSCO highlights crowdfunding risks

IOSCO published a statement on the regulation of crowdfunding on 21 December 2015. Drawing on the findings of a survey of its members’ approaches to regulating crowdfunding, IOSCO highlighted a number of risks which it believes regulators should pay attention to. These include the high risk of default or failure associated with start-up businesses, fraud and money laundering risks, platform failure, illiquidity and suitability. IOSCO did not propose a common international supervisory approach at this stage because most regulatory regimes for crowdfunding have only recently been implemented. But it suggested regulators note the following measures that other supervisory bodies have taken to mitigate the risks inherent in the market:

• Customising entry or registration requirements for funding portals

• Setting disclosure requirements for issuers and funding portals

• Limiting the services that can be provided by crowdfunding platforms

• Requiring investors to sign a statement acknowledging their understanding of the risks

• Limiting the size of the investments made by an individual in each offering and in a given timeframe, and

• Requiring the appointment of a third-party custodian to hold investor assets.

IOSCO added that because crowdfunding often operates on web- or mobile-based platforms, regulators should take into account possible cross-border implications. To mitigate cross-border risks, crowdfunding regimes often restrict cross-border fundraising by requiring that the issuer or the managers running the funding portal be incorporated locally. Some jurisdictions have also considered exploring coordinated approaches in managing the risks and opportunities related to the cross-border aspect of crowdfunding.

Operational resilience

Cybersecurity directive nears adoption

On 18 December 2015, the final text of the Security of Network & Information Systems Directive, known as the Cybersecurity Directive, agreed by the EP and the Council, was released (ahead of formal publication in the official journal).

The directive aims to:

• Improve the national cybersecurity capabilities of member states

• Improve cooperation among member states through the creation of a network of computer security incident response teams

• Increase security measures and data breach notifications for essential services operators and key digital services such as search engines and cloud computing, and

• Ensure that essential services operators across the eu increase cybersecurity measures and meet minimum standards in network and information security. Essential services operators include financial services businesses such as credit institutions, trading venues and central counterparties. The directive will require them to implement greater cybersecurity measures to prevent cyber-attacks on critical infrastructures, as well as requiring mandatory data breach notifications to the appropriate authorities in relation to these essential services. Member states will have 21 months to transpose the directive into national law and six additional months to identify operators of essential services. Firms should note how individual member states implement it, as local differences may emerge.

Making sound credit assessments

IOSCO published Sound Practices at Large Intermediaries Relating to the Assessment of Creditworthiness and the Use of External Credit Ratings on 22 December 2015. IOSCO recommends 12 sound practices that regulators should consider as part of their oversight of market intermediaries. It also considers that large market intermediaries may find the practices useful in the development and implementation of methods other than the use of credit ratings for assessing credit worthiness. IOSCO was prompted to act by concerns about possible over-reliance of market participants such as broker-dealers on credit ratings following the global financial crisis. This report follows a consultation it published in May 2015. IOSCO developed the sound practices using a survey of and roundtable discussions with market intermediaries in IOSCO jurisdictions.

Other



Executive summary


Business continuity for market infrastructure

IOSCO released a report, Mechanisms for trading venues to effectively manage electronic trading risks and plans for business continuity, on 22 December 2015. It considered the measures trading venues took to ensure their proper functioning and secure access, as well as their business continuity plans. It also looked at regulatory tools to manage risks in electronic trading and ensure that trading venues’ systems and business continuity plans are robust. IOSCO recommended that regulators require trading venues to have mechanisms in place to help their critical systems be resilient and reliable, and have integrity. It also recommended requiring trading venues to establish, maintain and implement business continuity plans, and outlined a number of sound practices for trading venues.

At the same time, IOSCO published a report titled Market intermediary business continuity and recovery planning, setting out the findings from a study of intermediaries and regulators that looked at potential disruptions and deficiencies in intermediaries’ business continuity plans and recovery strategies. Here, IOSCO expects regulators to make sure market intermediaries create and maintain written business continuity plans. But it wants these plans to be updated when there is a material change to a market intermediary’s operations, structure, business or location

(whereas for trading venues, the plans are to be maintained ‘as appropriate’). It also outlined a number of sound practices for market intermediaries. An accompanying press release summarised the standards and sound practices.

Cyber resilience for FMIs

The Committee for Payments and Market Infrastructure (CPMI) and IOSCO consulted on Guidance on cyber resilience for FMIs on 24 November 2015. FMIs need to enhance their cyber resilience capabilities in line with the Principles for Financial Market Infrastructures (PFMIs) in order to limit the escalating risks that cyber threats pose to financial stability. The guidance supplements existing principles in the context of governance, a framework for the comprehensive management of risks, settlement finality, operational risk and FMI links.

IOSCO identified three overarching components for a FMI cyber resilience framework: testing, situational awareness, and learning and evolving. It also outlined what it expected of FMIs in five primary risk management categories:

• Governance – a clear and comprehensive cyber framework

• Identification – designating critical business functions and supporting information assets

• Protection – maintaining confidentiality, integrity and availability of its assets and services

• Detection – flagging anomalies and events indicating a potential cyber incident, and

• Response and recovery – designing and testing systems and processes to enable critical operations to resume safely within two hours.

FMIs should consider jointly investing in measures to address the primary risk management categories and meet their resilience objectives. Comments on the report will be accepted until 23 February 2016.

Reporting

FSB reviews transaction reporting

The FSB published a thematic review assessing the success of the global implementation of transaction reporting frameworks as part of OTC derivatives reform on 4 November 2015. While noting that many of the larger markets had imposed comprehensive reporting regulations, the FSB observed that important work still needs to be done around:

• Removing any state and bank secrecy rules that prevent the inclusion of counterparty data in transaction reports

• Removing any domestic restrictions,

such as blocking statutes, that would prevent counterparties from fulfilling their foreign reporting obligations when subject to extraterritorial application of rules

• Facilitating standing consent agreements whereby parties can voluntary report trade party and transaction information

• Ensuring that all foreign and domestic authorities with regulatory mandates monitor transaction reporting can have (ideally direct) access to the necessary trs

• Improving data validation techniques to address incomplete data fields and inconsistent data formatting, and

• Progressing with domestic and international regimes for the production of product and transaction identifiers.

The FSB’s focus on the cross-border impediments to accurate transaction reporting and monitoring underscores that the data challenges posed by transaction reporting regimes are just as much about international aggregation and oversight as they are about digesting and understanding transactional volume.

Other



Executive summary


FATF reports to G20

FATF released Terrorist Financing: FATF report to G20 leaders on 16 November 2015. The report outlines how key CTF measures, such as criminalising terrorist financing and using targeted sanctions to freeze terrorists’ or their financiers’ assets, have been implemented in FATF’s network. 194 jurisdictions from FATF’s network took part in the initiative behind the report, with almost all jurisdictions having criminalized terrorist financing and 33 having obtained convictions. FATF found that jurisdictions are too slow to implement UN-targeted financial sanctions, which hinders efforts to stop asset flight; and two-thirds of them do not make practical use of targeted financial sanctions. FAFT plans to help jurisdictions plug the gap in legal frameworks to eradicate safe havens for CTF.

Financial stability

FSB views on G20 reform

On 9 November 2015, the FSB reported to G20 leaders on the implementation and effects of the G20 financial regulatory reforms. The FSB found that the reform agenda increased the resilience of the financial system while maintaining its open and integrated character, unlike in past financial crises. The overall provision of credit has also been maintained, supported by accommodative monetary policy. It noted that contagion risk, unsound products (such as complex securitisation) and unsustainable business practices (like overreliance on leverage) had been reduced. But it suggests that cross-border cooperation is still needed to overcome barriers to the smooth implementation of reforms in OTC derivatives and resolution regimes.

The FSB reports that emerging markets have faced challenges in implementing reforms due to the size and development of their financial systems. Some have also been affected by spill-overs from reforms implemented in the home jurisdictions of global financial institutions, such as structural bank reform and requirements to meet the regulatory equivalence of major financial centres in derivatives. The FSB concludes the full effect of the reforms will not be known until they are implemented. They will also need to be assessed over a full financial cycle.

Questions surround the effect of a reduction in liquidity on financial stability. The FSB continues to analyse the causes and consequences of changes in the level of liquidity to identify vulnerabilities, although it does not regard the ‘unsustainable’ levels of liquidity prior to the crisis as a benchmark. It suggests the broader question of the interaction of reforms with structural changes in markets should be monitored.

Consumer issues

Assessing climate risks

The FSB proposed the establishment of a disclosure task force on climate-related risks on 9 November 2015. This follows the FSB’s September meeting where climate-related risks were discussed and attendees agreed that a new task force should be established to develop consistent climate-related disclosures. This should help investors to understand the risk to their investments of climate-related issues. The task force’s terms of reference still need to be finalised, but the FSB has set out some potential objectives that include:

• Key characteristics for effective disclosures

• Identifying the key target audience for the disclosures

• Usefulness of the disclosures for financial stability analysis, and

• The types of firms in scope of the disclosures (including financial and non-financial firms).

The FSB suggests the task force might need a year to deliver outputs and should consist of disclosure experts alongside climate specialists.

Other



Executive summary


GlossaryAIFMD Alternative Investment Fund Managers Directive

AMA Advanced Measurement Approach

AML Anti-Money Laundering

AoS analysis of surplus (AoS)

BCBS Basel Committee on Banking Supervision

CCB countercyclical capital buffer

CGT capital gains tax

CIS Collective Investment scheme

CPMI The Committee for Payments and Market Infrastructure (CPMI)

CPR comprehensive parallel run (CPR

CRS Common Reporting Standard

CSM contractual service margin

D-SIBs Domestic Systemically Important Bank

EBA European Banking Authority

ECB European Central Bank

ECL expected credit loss

EU European Union

FATCA Foreign Account Tax Compliance Act

FATF Financial Action Task Force on Money Laundering

FS Financial Services

FSB Financial Stability Board

GAAP Generally Accepted Accounting Practices

GDP Gross domestic Product

G-SIB global systemically important bank (G-SIB)

G-SII Global Systemically Important Insurers

HQLA High quality liquid assets

IASB International Accounting Standards Board

ICAAP Internal Capital Adequacy Assessment Process

IFRS International Financial Reporting Standards

IMF International Monetary Fund

IOSCO Organization of Securities Commissions

ITG Impairment of Financial Instruments

LCR liquidity coverage ratio calculation (LCR)

LRE leverage ratio denominator

MCR the minimum capital requirement (MCR)

NSFR Net stable funding ratio

NTNI Non-traditional non-insurance

OECD Organisation for Economic Development

P&L profit and loss

PAIA Promotion of Access to Information Act

PFMIs Principles for Financial Market Infrastructures

POPI The Protection of Personal Information Act, No. 4 of 2013 (POPI)

Glossary



Executive summary


REITs Taxation of real estate investment

RWA risk-weighted assets (RWA).

SAM Solvency Assessment and Management

SARB South African Reserve Bank

SCI statement of comprehensive income

SCR solvency capital requirement (SCR),

SFTs securities financing transactions

STC simple, transparent and comparable

TLAC total loss-absorbing capacity

TOM target operating model (TOM)

VCs virtual currencies (VCs)

NSFR net stable funding ratio

ORSA own risk and solvency assessment

OTC over the counter

PBCIS participation bond collective investments schemes

PRA Prudential Regulation Authority

QIHF qualified investor hedge fund

QRT quantitative reporting template

RHF retails hedge fund

RPF risk policy fund

RRP recovery and resolution planning

RSR regulatory supervisory report

SA-CCR standardised approach for measuring counterparty credit risk

SAM solvency assessment and management

SARB South African Reserve Bank

SME small and medium-sized enterprise

SPI special purpose institution

SREP supervisory review and evaluation process

STI short-term insurance

STP straight-through processing

STT securities transfer tax

TBTF too big to fail

UCITS undertakings for the collective investment in transferable securities

UTI unique trade identifier

Glossary



Executive summary


Contacts

Contacts

Editorial team

Irwin Lim Ah Tock, Rivaan Roopnarain, Nicki Burley, Catherine Ensor, Bronwyn Stromsoe, Susan de Klerk

©2016PricewaterhouseCoopers(“PwC”),theSouthAfricanfirm.Allrightsreserved.Inthisdocument,“PwC”referstoPricewaterhouseCoopersinSouthAfrica,whichisamemberfirmofPricewaterhouseCoopersInternationalLimited(PwCIL),eachmemberfirmofwhichisaseparatelegalentityanddoesnotactasanagentofPwCIL. (16-18761)

Irwin Lim Ah Tock

Banking and Capital Markets – Regulatory Practice Leader [email protected]

Julanie Basson

Director – Financial Services Assurance Services [email protected] +27 (11) 797 5391

Stephen Owuyo

Associate Director [email protected] +27 (11) 797 4275

Niel Gerryts

Associate Director – Actuarial Risk & Quants [email protected] +27 (21) 529 2189

Roy Melnick (CAMS)

Associate Director – Anti-Money Laundering [email protected] +27 (11) 797 4064

Junaid Khan

Associate Director – Actuarial Risk & Quants [email protected] +27 (11) 797 5525

Lindy Riphagen

Associate Director [email protected] +27 (11) 797 5227

Financial Services Risk and Regulation Being better informed€¦ · Financial Services Risk and...

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