Prudential Authority Issues Draft Directives on FLAC Debt Investments

Posted 20 August 2026 Written by Acts Online
Category Banking & Financial Services

Brought to you by SA Legal Academy: The Prudential Authority has released two draft directives for public comment governing the regulatory and capital treatment of investments in unsecured subordinated debt (First-Loss Absorbing Capacity or FLAC) and similar loss-absorbing instruments.

Published under the regulatory powers established in terms of the Financial Sector Regulation Act, No. 9 of 2017, read together with the Banks Act, No. 94 of 1990 and the Mutual Banks Act, No. 124 of 1993, the proposed directives establish standardised rules for holding and deducting loss-absorbing capacity instruments across the banking sector.

Scope of the Draft Directives

The Prudential Authority has published two separate draft regulatory instruments covering distinct institutional categories:

  • Mutual Banks Directive: Prescribes the prudential treatment of investments in unsecured subordinated debt and FLAC instruments for mutual banks and establishes specific verification and reporting responsibilities for their appointed auditors.
  • Banks and Foreign Branches Directive: Imposes regulatory capital requirements and deduction frameworks on registered local banks, bank controlling companies, their external auditors, and the South African branches of foreign banking institutions holding FLAC-eligible instruments.

Stakeholders and regulated institutions are invited to submit written comments on both draft directives by no later than 23 September 2026.

What this means for you, your business, or your clients

  • For yourself: Banking, regulatory, and audit professionals must review the proposed capital deduction rules and reporting requirements to prepare for future compliance assessments.
  • For your business: Regulated banks, mutual banks, and bank controlling companies must assess their investment portfolios, quantify the capital impact of holding third-party FLAC instruments, and prepare submissions prior to the 23 September 2026 deadline.
  • For your clients: Institutional investor and corporate banking clients issuing or investing in unsecured subordinated debt must evaluate how these capital deduction rules may influence banking-sector demand and pricing for FLAC debt issuances.

Originally published at https://legalacademy.co.za/news/read/financial-sector-draft-flac-related-directives-out-for-comment

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