Financial Sector Regulation Bill [B-34B-2015] by Deputy Minister of Finance
6 December 2016
First, I would like to thank the Standing Committee on Finance for an extraordinary effort in processing the Bill. The Committee sat for many many hours, convened subcommittee hearings, examined international best practice, and rigorously debated all aspects of the reform. In particular the Committee Chair, Yunus Carrim, should be praised for his detailed and close attention to all aspects of the Bill, his strong work ethic, and his sense of humour throughout the process. All members of the committee made a substantial contribution, as is shown by the Committee report.
The financial services sector touches the life of each and every South African. It enables economic growth, job creation, the building of vital infrastructure and sustainable development for South Africa and her people. It is, therefore, crucial that the sector is well-regulated and stable.
A strong financial sector ensures resilience during periods of market volatility. In its statement on our ratings last week, Standard and Poor's noted in particular the strength of the banking system, highlighting that the sector is strong and resilient.
The financial sector is also crucial for a country with a low savings rate like South Africa. Our current account deficit means we must access foreign savings to finance investment. On an annual basis we need to borrow around R150 billion to meet the fiscal deficit. This money is borrowed largely from the domestic financial services sector. Reducing the fiscal deficit will allow us to reduce our reliance on borrowing.
In 2011, Government announced an overhaul of the financial regulatory system. This vision was set out in A safer financial sector to serve South Africa better, which has become known as the "Red Book". The intention was bring to the fore the goals of market conduct, financial inclusion and combatting of financial crime.
This Bill implements the Twin Peaks system. It will greatly strengthen the approach for market conduct; make it easier to understand financial products; allow us to take decisive action to protect consumers; streamline the ombuds system to make it easier for ordinary South Africans to take their financial services providers to task and to ensure that they get the best value for money. Importantly it will also improve co-ordination between our various regulators. It will help them work together better.
Stability is not the only policy objective for the financial sector. We should not strive for the stability of the graveyard. We need a financial services sector that is growth-oriented, innovative, dynamic, and serves the needs of South Africa.
The sector should be the servant of the real economy; it should facilitate economic growth, it should help job creation and it should contribute to a better life for all.
The sector has has grown by 4 per cent on average over the past decade, and added more than 500 000 jobs. Financial sector assets are more than 3 times the size of GDP. The broader sector (including insurance and real estate) contributes 33 per cent to total companies' tax revenue.
That said, the sector can be doing more. It is characterised by high and opaque fees, and needs to be more transparent, competitive and cost effective. Too many South Africans fall prey to unscrupulous financial services firms. Moreover, many South Africans do not have appropriate access to banking, insurance and savings products. This inhibits economic growth, and keeps our people trapped in poverty.
The sector needs to do more on the transformation front. A sector that reflects the modern South Africa is critical to support our vision of an inclusive society. Transformation is not just about ownership, but also about lending - who do banks lend to? Do they overcharge? Do they have appropriate cheap products for ordinary South Africans? This Bill will certainly help achieve these objectives.
Those that argue that the Bill will substantially increase regulatory costs do not recognize that the costs of a financial failure can be enormous. Also, the costs to consumers of bad products are substantial. For example, throughout their lives, ordinary workers contribute to their pensions. What happens if they retire and discover that the money is missing? Our regulators need to be appropriately resourced to ensure that does not happen. A Money Bill will be formally introduced next year that will set out the costs in detail. That Bill ensures that the operational independence of our regulators is protected, by providing them with some flexibility. However, spending of taxpayers money should always be subject to some Parliamentary oversight.
This Bill carefully balances operational independence with the role of Parliament in our regulatory system. Parliament has a critical role in providing oversight. But Parliament should not necessarily get involved in detailed decisions, and the Committee has thought carefully about this issue. In addition, the Bill ensures proper accountability for directors. The wording clause strikes the right balance between accountability and the need to find the right people to run financial institutions.
Twin Peaks is a major reform. The Bill substantially improves the coordination between regulators, particularly between the National Credit Regulator and the new Financial Sector Conduct Authority. Integrating the National Credit Regulator into the new conduct authority will prove too complex at this point, and improving coordination is a better way forward.
It is critical that we remain on track to implement international best practice in financial regulation. If we do not, then our banks will face sanctions, South Africa will lose business, and the consequences will be severe. Our banking system is a strength that we should be proud of.
Detailed plans have been drawn up to ensure an effective and smooth transition. Shadow entities have already been set up, and all is on track for moving across resources between the existing institutions. The Bill provides for substantial flexibility in designing a transition plan.
This Bill is only one Bill in a series of Bills to strengthen the system. Our regulatory system is the envy of the world, and a key strength. We remain committed to steps to enhance growth and development, and as part of that, to ensuring that we build a safe financial sector that serves South Africa better.
ANNEXURE: Question and Answers (possible statements by Members during the debate)
The Bill does not do enough for transformation
- Agree that more needs to be done about the transformation of the financial sector
- Transformation is an objective of this Act, but this Act is not the main tool for achieving transformation.
- Main tool is the Financial Sector Code for Broad-Based Black Economic Empowerment issued in terms of the Broad-Based Black Economic Empowerment Act.
- Going forward, improved alignment between the objectives of the Bill and the Code will be important for delivering the transformed sector we all desire.
Financial services firms, e.g. HSBC, are complicit in transferring wealth out of Africa, through money laundering, corruption, transfer pricing etc.
- For this very reason, we need to regulate the financial sector in an improved way. The Bill takes important steps to strengthen the fight against financial crime. The main tool for this is the Financial Centre Intelligence Act, however,
The National Credit Regulator should be part of the Twin Peaks system
- Twin Peaks is a major reform. There are multiple moving parts, and integrating the NCR into the new conduct authority may prove too complex
- That said, Bill substantially improves the coordination between regulators; creating new mechanisms for them to work better together
The Bill will substantially increase regulatory costs, and these will be passed onto consumers
- The costs of a financial failure can be enormous, and it is justified that there should be some costs related to creating an effective and efficient supervisory regime.
- Cost modelling by National Treasury shows that the direct costs to the industry will not be substantially increased. Indirect costs may rise as firms will be required to become more consumer focused.
- A short Money Bill will follow this bill, and this will set out the costs in more detail. Extensive consultation is expected on that Bill.
- Largely the poor and vulnerable groups of our society stand to benefit more from a better regulated financial system in general and in particular, from the work of the Financial Sector Conduct Authority whose main purpose is to promote fair treatment of financial customers by financial institutions.
- The social and economic benefits of a stable, better regulated financial system that delivers fair outcomes for financial customers outweigh the cost of such regulation.
This is a big reform, and will it be implemented? (Transitional issues)
- Detailed plans have been drawn up to ensure an effective and smooth transition. Shadow entities have already been set up, and all is on track for moving across resources between the existing institutions. The Bill provides for substantial flexibility in designing a transition plan.
The Bill constrains operational independence, e.g. by not allowing regulators to determine their own budgets
- A balance needs to be struck between entities determining their own budgets, and there being some oversight by Parliament or government
- The proposed Money Bill gives the regulators some flexibility but fundamentally they are spending the money of the industry, which in turn comes from customers. For this reason there should be oversight.
Commissioner and others should be appointed by Parliament
- Parliament plays a very important oversight role, but to give it the responsibility to appoint heads of organizations should be carefully thought through
- E.g. the appointment of the Public Protector is correctly a Parliamentary function, but that is because it is a Chapter 9 institution
- The regulators report through the Minister to Parliament, and so it is better to have the executive appoint rather than Parliament
The clauses imposing directors' liability should be deleted as it will make finding directors difficult
- This clause is very important to create proper accountability for directors that do not ensure that proper procedures are in place to combat financial crime and wrongdoing
- The clause strikes the right balance between accountability and the need to find the right people to run financial institutions
How the Bill addresses the issue of competition in the financial sector
- The Bill makes provision that imposes a responsibility on both the Prudential Authority and the Financial Sector Conduct Authority to support sustainable competition in the provision of financial products and financial services.
This will of course be done through co-operating and collaborating with the Competition Commission.
Government recognizes the critical role played by the sector in our economy, and we have renewed our focus on maintaining financial stability, strengthening consumer protection and ensuring that financial services are appropriate, accessible and affordable.
The Twin Peaks reforms in context
Over the past five years, we have undertaken a number of reforms to achieve vision set out in the "Red Book":
- In 2012, this House passed the Financial Markets Act, which ensured that our regulatory system for financial markets is world-class.
- In 2013, you voted on the Banks Amendment Act, which introduced Basel 3. Our regulatory system for banking is rated amongst the best in the world.
- Another Banks Amendment Act went through in 2015. This Act facilitated the safe resolution of African Bank. We are almost unique in the world in that no taxpayers was lost during the resolution. Indeed, African Bank has already announced a profit, and we look forward to a successful listing of the Bank in the near future.
- And in 2016, this House approved the Financial Intelligence Centre Amendment Bill. This Bill gives powers to our regulators to diligently, effectively and fearlessly fight financial crime, particularly strengthening the fight against money laundering, crime and corruption.
Today, however, is the Big Bill. Today, this House has before it the Financial Sector Regulation Bill, which is the most comprehensive reform of the financial regulatory system in the post-Apartheid era.
The Bill reorganizes our regulatory system in a number of important ways. It implements a "Twin Peaks system", which is shorthand for saying that there are two new main regulators:
- The Prudential Authority will focus on the safety and soundness of financial institutions, particularly banks and insurers.
- The Financial Sector Conduct Authority will focus on how financial institutions conduct their business: how they interact with their customers, what they disclose to the them, and how they sell them financial services.
At the same time, we are taking important complementary steps:
- Safeguarding financial stability by giving new powers to the South African Reserve Bank to.
- Improving coordination between various complementary regulators, such as the National Credit Regulator and Financial Intelligence Centre.
- Making it easier to complain by strengthen the financial ombuds system. There will be a new Chief Ombud, and over time we will move to a single Ombuds system.
This is only one Bill in a series of Bills to strengthen the system. The next Bill will be the Insurance Bill, which introduces Solvency Assessment and Management; which will ensure the solvency and soundness of insurers. After that, a new framework for protecting financial customers, known as the Conduct of Financial Institutions Bill will be introduced.