Integrated Annual Report 2015

Compliance

Over the last year the pace of regulatory change in the financial sector has shown little signs of abating, and the pressure the industry has faced to implement various regulatory initiatives has continued to be resource intensive. In addition, the scale and frequency of regulatory fines and redress orders continues to impact firms’ balance sheets with the regulators’ intensive and intrusive approach to supervision expected to continue for the foreseeable future.

Global regulators have continued to focus on promoting stability and resilience in financial markets, with increasing emphasis on recovery and resolution plans and structural reforms to the banking sector as well as customer and market conduct related reforms.

Investec remains focused on complying with the highest levels of compliance professional standards and integrity in each of our jurisdictions. Our culture is a major component of our compliance framework and is supported by robust policies, processes and talented professionals who ensure that the interests of our customers and shareholders remain at the forefront of everything we do.

Investec plc – year in review

Conduct risk

The FCA continues to focus on advancing its three operational objectives: securing an appropriate degree of protection for consumers; protecting and enhancing the integrity of the UK financial system; and promoting effective competition in the interests of consumers. The FCA’s aim is to ensure that clients’ interests are at the forefront of firms’ agendas and that their needs are placed at the heart of the firms’ strategy. Firms are also expected to behave appropriately in the wholesale markets in which they operate.

Investec has focused over the period on delivering good customer outcomes and effectively managing conduct risk throughout our business. This has included continued and ongoing investment in and enhancement of the conduct risk and compliance frameworks in place throughout the group.

Consumer protection

The FCA has vigorously pursued its consumer protection objective since taking over from the FSA. This has included several strategic thematic reviews into most areas of consumer activity. These reviews have included: firms’ complaint handling, conflict management arrangements, manufacturing and distribution of structured products, affordability assessment and forbearance policies in consumer credit and mortgage lending, as well as the way firms incentivise front line sales staff and protect client assets.

Market integrity

The FCA has adopted a markedly different approach to supervising conduct in the wholesale markets to its predecessor, the FSA. The FCA is now adopting a more interventionist and assertive approach in identifying and addressing risks arising from wholesale conduct and scrutinising these markets more broadly than before. It is driven by the recognition that poor conduct in wholesale markets can result in detriment to retail customers and erode trust and confidence in the integrity of UK markets. This has become apparent in FCA’s more pronounced focus on the wholesale markets and outcomes for clients irrespective of their categorization as either retail or professional.

Specific wholesale conduct areas of regulatory focus over the past 12 months have included: conflicts of interests management; best execution and benchmark regulation.

Competition

On 1 April 2015, the FCA gained additional competition powers alongside the Competition and Markets Authority (the CMA), including investigation of breaches and enforcement of competition laws. The FCA has made use of these powers to carry out a number of competition market studies in areas such as: cash savings, credit cards and SME banking. The FCA is also planning further market studies into the investment and corporate banking sector, mortgage markets and investor charges in the asset management sector.

Investment services reform

European Regulators are in the process of reforming the rulebooks for Investment Services in the EU Markets, via enhancements to the Markets in Financial Instruments Directive (MiFID). This reform package, known as MiFID II, will form the legal framework governing the requirements applicable to investment firms, trading venues, data reporting service providers and third-country firms providing investment services or activities in the EU.

These reforms will drive change across Investec Bank plc, Investec Asset Management and Investec Wealth & Investment, with the majority of these reforms required to be implemented by January 2017.

Segregation of client assets and funds

Following the failures of Lehman Brothers and MF Global, the FCA has proposed fundamental changes to the Client Assets Protection Regime (CASS). These changes are designed to ensure that client assets and client money are segregated at all times and capable of being returned to clients swiftly in the event of a firm failure.

These new rules will require operational changes across Investec Bank plc, Investec Asset Management and Investec Wealth & Investment. This will include the manner in which firms segregate and manage client money and assets – through customer relationships, outsourcing arrangements, operations, IT systems and related policies and procedures.

These new CASS rules come into force in stages between December 2014 and 1 June 2015.

Senior managers and certified persons regime

The FCA and PRA are putting in place a new regulatory framework for individuals working in the UK banking sector. The incoming regime will consist of three key components:

I. A new Senior Managers Regime which will clarify the lines of responsibility at the top of banks, enhance the regulators’ ability to hold senior individuals in banks to account and require banks to regularly vet their senior managers for fitness and propriety.
II. A Certification Regime requiring firms to assess fitness and propriety of staff in positions where the decisions they make could pose significant harm to the bank or any of its customers; and
III. A new set of Conduct Rules, which take the form of brief statements of high level principles setting out the standards of behaviour for bank employees.


The new regime will come into force on 7 March 2016.

Structural banking reform

The Banking Reform Act received Royal Assent on 18 December 2013 and gave the UK authorities the powers to implement key recommendations of the Independent Commission on Banking (ICB) on banking reform, including ring-fencing of UK retail banking activities of a universal bank into a legally distinct, operationally separate and economically independent entity within the same group.

Ring-fencing was a key area of strategic focus during the period for the largest UK banks. The Banking Reform Act contains a de minimis exemption from the requirement to ring-fence, which is relevant to all but the largest UK deposit takers. Investec falls within this de minimis exemption and is therefore out of scope from the ring-fencing requirement.

Changes to regulatory landscape in the UK

On 1 April 2014 the FCA took over the regulation and supervision of consumer credit from the Office of Fair Trading. At the same time the newly established Competition and Markets Authority assumed responsibility for wider consumer protection and promotion of competition.

The Payment Systems Regulator was created on 1 April 2014 and became fully operational on 1 April 2015. The PSR is a competition-focused, economic regulator for domestic retail payment systems in the UK. It aims to promote innovation and ensure that payment systems are operated and developed in a way that promotes the interests of all the businesses and consumers that utilise them.

Financial crime

Financial crime continues to be a regulatory focus with regulators globally encouraging firms to adopt a dynamic approach to the management of risk and to increase efforts around systems and controls to combat both money laundering and bribery and corruption. In particular, the UK government published its first UK National Anti-Corruption Plan in December 2014, thereby indicating its intent to tie in anti-corruption with its efforts to strengthen the governance of banks and conduct in financial markets. The last year also saw the advent of a new type of targeted international sanctions in the midst of the Ukraine crisis. The sectoral sanctions imposed by the US and the EU on the Russian financial, energy and defence sectors will continue to be a challenge for firms as they attempt to comply with increasingly complex rules and expanding lists of banned individuals and businesses. This, together with developments around the EU fourth money laundering directive, will become a focus for Investec Bank plc.

Tax reporting

To combat tax evasion by US tax residents using offshore accounts and investments, the US has enacted the Foreign Account Tax Compliance Act (FATCA) which has a global impact on firms. Under FATCA, financial institutions outside the US are required to report specific information on their US customers to the US tax authorities, the Internal Revenue Service (IRS). Failure to meet the reporting obligations under FATCA would result in a 30% withholding tax on financial institutions. The UK, along with a number of other countries, has entered into an intergovernmental agreement with the US whereby the information will be passed over to the UK tax authorities who will then deal with the IRS.

Investec Limited – year in review

Changes to regulatory landscape in South Africa

The rapid pace of regulatory developments has continued from last year.

A second draft of the Financial Sector Regulation Bill, which was vastly different from the first draft, was released for comments in December 2014. The Bill creates the two new regulatory peaks within the financial services sector, i.e. the Bank Supervision Department of the SARB will transform into the Prudential Authority (PA), and the Financial Services Board (FSB) will transform into the Financial Sector Conduct Authority (FSCA). Both new authorities will have wider jurisdiction than the existing regulatory authorities, e.g. the PA’s jurisdiction will extend beyond banks (to insurance companies for instance), and the FSCA’s jurisdiction will also extend to the market conduct activities of banks; and both authorities will have wider law-making powers. The Bill also introduces consultation and co-ordination between the financial sector regulators and other regulators that have an impact on and oversight of activities of financial institutions, e.g. the National Credit Regulator.

The Financial Sector Regulatory Bill also proposes to amend the existing market conduct related legislation into an overarching ‘Conduct of Financial Institutions Act’ within the next two years. This will supersede existing industry-specific legislation in terms of the Banks Act, Long Term Insurance Act, Short Term Insurance Act and the Financial Advisory and Intermediary Services (FAIS).

Simultaneously, National Treasury (NT) published the Market Conduct Policy Framework for comment. This document outlined NT’s policy approach to market conduct, and will form the basis for their development of the market conduct regulatory framework and legislation. The Treating Customers Fairly regime will form part of this new framework.

The FSB released the Retail Distribution Review paper for comment in November 2014. The paper proposes a more proactive and interventionist regulatory framework for distributing retail financial products to customers.

The amendments to the National Credit Act and the Regulations came into effect on 13 March 2015. The amendments include the introduction of affordability assessment regulations.

Draft regulations in respect of over-the-counter derivatives were published for comment in the course of 2014.

Conduct risk (consumer protection)

Conduct risk remains a key area of concern for the regulators. While the regulatory framework is changing to create a dedicated regulator to supervise the conduct of financial institutions, the existing regulatory and legislative framework continues to be utilised to ensure that financial institutions take heed of conduct risk and that they have measures in place to mitigate or avoid such risks. Some examples include the SARB incorporating market conduct as a flavour of the year topic in 2014, the NCR amending the National Credit Act to include affordability assessment regulations, and the FSB amending the General Code of Conduct for Authorised Financial Services Providers to prohibit sign-on bonuses. The affected businesses continue to assess the impact of the regulatory requirements and implement changes where necessary.

Although the effective date for the Protection of Personal Information Act (POPI) has not yet been published, work continues on data protection and information management.

Financial crime

Financial crime continues to be a regulatory focus with amendments to governing legislation proposed for later this year. All accountable institutions are further effected by the Financial Intelligence Centre’s intended move to a new automated solution for registration and reporting, also scheduled for later this year.

Tax reporting

The intergovernmental agreement for South Africa has been ratified in parliament and is effective as of 28 October 2014. This allows South Africa to be treated as a participating country and thus avoid withholding tax on South African financial institutions. Investec is engaged in projects to ensure that operationally we are able to identify our US clients and that we comply with FATCA.

In addition to FATCA, there is also an OECD Common Reporting Standard proposal, aiming for an internationally accepted single global tax reporting standard and automatic exchange of information.

Mauritius has signed a Tax Information Exchange Agreement as well as an inter-governmental agreement with the IRS and therefore will also be treated as a participating country.

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