Tax Administration Bill [B11-2011]: SA Revenue Service response to public submissions; National Treasury briefing on a safer financial sector

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Finance Standing Committee

20 September 2011
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Committee received a comprehensive report back from the South African Revenue Services (SARS) in response to public submissions made on the Tax Administration Bill (the Bill). SARS set out the recommendations, and indicated whether it disagreed or agreed with the need for amendment. Many commentators proposed that professional privilege enjoyed by lawyers should be extended to tax practitioners, but SARS cautioned that this could be abused in isolation and recommended that the issue be considered for inclusion in the forthcoming Regulation of Tax Practitioners Bill. Many submissions supported the need for SARS to have the power to search and seize without a warrant, but had questioned whether the current formulation would pass Constitutional muster, although SARS had taken an opinion and believed it would. SARS agreed with submissions on the Tax Ombud and noted that secondment of SARS staff would be a practical approach, but that the Tax Ombud must drive the selection process “in consultation” with the Commissioner. Reporting requirements of the Tax Ombud would be expanded, and the Minister must table the Tax Ombud’s Annual Report in Parliament. The need to retain records would be notified to a person who was being audited. SARS would be allowed to inspect premises, but only business premises. Interviews would be held, but only with taxpayers, and third parties could not be summoned to attend. Assessments could be done in advance where tax collection might be in jeopardy but stricter rules would apply, and SARS would bear the burden of proving jeopardy. Third parties who were held liable for tax debts would be able to made representations, and this would now be explicitly stated. The Bill brought percentage-based penalties into a framework consistent with administrative penalties, but the ability to waive the penalty should not be capped. The “substantial understatement” provisions would be reworded to clarify that this would apply only to large taxpayers, and waiver would be allowed only if very strict conditions were fulfilled. The Voluntary Disclosure Programme (VDP) would be restructured to incentivise disclosure. Members raised concerns about the independence and autonomy of the Ombud as funding would come through SARS and that it was proposed that Staff be seconded from SARS. A DA member was concerned with the checks and balances in the provisions for warrantless search and seizure and also its constitutional implications. Members sought clarity on the protection of whisteblowers within SARS, the definition of a senior SARS official, the obligation on SARS to act 'reasonably', limited inspections and the mandate of the Ombud. SARS emphasised the fact that taxpayer confidentiality was paramount and that the integrity of SARS should not be compromised. The Chairperson cautioned that they should ensure the constitutionality of the Bill to avoid it being tested at the level of the Constitutional Court.

The National Treasury gave a summary presentation of its document "A safer financial sector to serve South Africa better", which was also up on the website as “the Red Book”. It outlined the major proposals to strengthen the financial regulatory system in South Africa, based on four pillars of financial stability, consumer protection, access to financial services and combating financial crime. Some initiatives were taken even before the global financial crisis, after the Fidentia problem. It was noted that when banks collapsed, everything went down with them. The Reserve Bank now had a Financial Quality Committee in addition to its Monetary Policy Committee, to guard against such risks. There was a need to adopt a counter-cyclical approach and identify the risk factors. Macro-prudential supervision was needed in addition to micro-supervision over institutions, with stronger regulation in banking and insurance, as well as smaller and unregulated sectors, such as funeral policies. All financial service providers would have to be registered and regulators should be allowed to operate independently and objectively. State of emergency powers would also be needed, but this would be subject to Parliamentary oversight. A “twin peak” model was proposed, in terms of which one regulator would deal with all prudential matters, and the Financial Service Board would become a market conduct regulator, dealing with consumer protection and working closely with the National Credit Regulator. Equal weight would be attached to both types of regulation. The Reserve Bank, Financial Service Board and National Treasury had set up a Financial Stability Oversight Committee to consider the matters, and would develop an Ombud system and Council of Financial Regulators. There was a need also to combat crime. Cabinet had approved the shift to the "twin peaks" model and principles and there was a three year legislative programme that would be followed, although some emergency provisions would need to be put in place in the meantime. Members welcomed the proposals, but called for more details on the role of Parliament and the emergency measures. They discussed the reasons behind attacks on the Financial Services Board and noted that action needed to be taken to address the issues.

Meeting report

Tax Administration Bill (the Bill): South African Revenue Service response to submissions
Mr Oupa Magashula, Commissioner, South African Revenue Service, presented the response of the South African Revenue Service (SARS) to the submissions on the Tax Administration Bill (the Bill). He noted that the Bill had been put through a rigorous process, including the release of two drafts for public comment, workshops with internal and external stakeholders and government departments. This period of consolidation extended over a period of two years. Cabinet approved the Bill in September 2010 and the Bill was introduced in the National Assembly in June 2011. SARS had formally briefed the Standing Committee on the 2 August 2011 in Pretoria. Public responses and opinions by independent counsel on the constitutionality of the Bill were presented at the hearings on the 16 and 17 August 2011.

Many commentators expressed their appreciation for the extensive consultation that SARS had engaged upon in the drafting of the Bill. However, some of the presenters at the hearings had raised concerns, which with SARS had strongly disagreed, and which would be explained later in the presentation. The consultation process and the public hearings had resulted in significant changes. These included the introduction of a Tax Ombud, the removal of advance notice of leaving South Africa, and matters concerning the limitation of information request to available records, reasonable specificity limitation on information requests, protection of legal professional privilege during seizure, the right to claim damages arising from search and seizure. A reportable arrangement failure was no longer an offence. SARS would bear the burden of proof in the case of estimated assessments. There was now allowance for interest 'neutrality' and remittance of interest, security for 'audited' refund, and the permanent Voluntary Disclosure Programme (VDP) rather than a 'once off' disclosure programme. In respect of the VDP, the remittance scale of percentages was changed to make people more willing to disclose voluntarily than they might have been under the original programme. Mr Magashula noted that SARS's response to the public comment over the two year period had been comprehensive, and was reflected in the concessions and accommodation it had made.

Mr Magashula expanded on suggested amendments from the public consultation process. The first was to do with 'legal professional privilege'. Many commentators, particularly accountants’ representative bodies, proposed that the Bill should extend the statutory legal privilege to tax practitioners who were not lawyers. SARS recommended that the comment be held over for consideration together with the forthcoming Regulation of Tax Practitioners Bill. Tax Practitioners who were not lawyers were not currently regulated by law, in the sense that they were not legal professionals with legal privilege, and were not regulated by a professional body. Many could be described as “fly by night” and Mr Magashula suggested that giving professional privilege might promote rogue practitioners. If the controls and regulations in the forthcoming Tax Practitioners Bill were equivalent to regulations for the legal profession, then it would be more acceptable to consider extension of legal privilege by way of this Bill. Internationally, many concerns had been raised about extending legal privilege to non-lawyers, and he cited suggestions in Australia about the potential for delay and abuse, the 'floodgate' argument for other professionals, and the potential for difficulties in the international and inter-agency context. He emphasised that there had to be consistency because of exchange of tax information and the exchange of tax practices across the world

SARS had noted that it needed the power to search and seize without a warrant. Most of the commentators recognised that SARS needed this power and without exception, had noted the need for it, but queried whether it would, as contained in the Bill, pass the test for constitutionality.  They proposed additional checks and balances, including a suggestion that only the Commissioner could give prior approval for such a process ,and that there should be subsequent approval by a judge, before SARS could use the information seized in a search and seizure without warrant. However, the Committee had also heard from two of the most recognised and respected Constitutional experts in the country, who expressed the opinion that the provision in the Bill would pass Constitutional muster, and that no additional checks and balances were required to render it more Constitutional. The Cape Town Bar thought that subsequent approval by a judge would be unnecessary, since an aggrieved taxpayer had immediate access to a higher court to contest the warrant-less search and seizure, if he or she alleged it was unconstitutional.
Mr Magashula then noted areas where SARS was in agreement with suggestions made by commentators to improve the Bill, and presented the concessions that it would propose.

With respect to the Tax Ombud staff, SARS agreed with commentators that the secondment of SARS staff to the Tax Ombud's office was a practical matter. It would be necessary to ensure that the staff were knowledgeable about tax and SARS's internal processes, and would simplify the administrative processes around the secrecy of taxpayers’ affairs. SARS had recommended that, for practical efficiency, the staff of the Ombud should come from within SARS. The complaints to the Ombud would be about the administrative failure of SARS. If people did not understand the administrative processes of SARS, it would take them some time before they were fully competent and efficient in doing their job. Some commentators agreed with that, but it was recommended that the appointment of such staff should be at the instance of the Tax Ombud and that he/she would do that in consultation with the Commissioner of SARS. Currently the Bill proposed that the Commissioner appointed staff “after consultation” with the Ombud. The changes proposed would make it clear that the Tax Ombud, who was independent from SARS, would drive the selection process “in consultation” (not “after consultation”) with the Commissioner.

Another recommendation relating to the Tax Ombud concerned reporting. The annual report currently only required a summary of at least ten of the most serious issues encountered by taxpayers by the Tax Ombud. The Tax Ombud also had the mandate to identify systemic and emerging issues related to service matters and service failures. It was therefore recommended that the Tax Ombud's Annual Report should include these issues as well as the ten most serious issues, in order to improve the oversight of the Committee and Parliament on the Tax Ombud. It SARS recommended that the Minister of Finance should table the Tax Ombud's Annual Report officially in Parliament, and to the Committee for deliberation, to enhance Parliamentary oversight over the administration of tax by SARS.

Mr Franz Tomasek, Group Executive: Legislative Research and Development, SARS, continued with the recommendations to be considered by the Committee. He noted that commentators had expressed concern about the prescription that the retention of records would be extended if an audit was in progress. SARS now proposed that the person had to be made aware of the audit in progress, in order to know that records should be retained for a longer period.

There had been a concern about SARS's ability to inspect premises. SARS recommended that this be retained, but that it be limited to business premises only and not include the person's home.

There were concerns about interviews at SARS offices, and why a third party should be called to a SARS office to talk about a taxpayer’s specific affairs. The provisions about calling in a third party would be removed from the Bill, so that interviews could be requested with the taxpayer personally. Questions were raised about the practicalities, such as how far a person would have to travel. The suggestion from SARS was that the taxpayer could decline to come in for an interview, based on the travel distance and it was proposed that the Commissioner set up some parameters. The bigger the case, the more likely and reasonable it would be to travel a significant distance. In the case of smaller amounts, a shorter distance would be reasonable.

Concerns were raised about jeopardy assessments and Mr Tomasek noted that it was an unusual power but developed powers that existed in the Income Tax Act. It would apply to cases where tax collection was considered to be in jeopardy. Here, assessments would be done in advance of when they were normally issued. It was recommended that the Commissioner must approve the issuing of a jeopardy assessment be issued. Concerns were also raised about who would prove that a jeopardy assessment was necessary in advance of the normal date, and here, it was suggested that the burden of proof would be on SARS.

In the case where a third party was held liable for a tax debt, concerns were raised as to whether that third party would have an opportunity to make representations to SARS to persuade SARS that the third party should not be liable. SARS recommended that a third party should be granted this opportunity. However, he cautioned that sometimes this might involve “hardcore” non-compliant people, such as so-called “phoenix” companies who would be created to get refunds, would close, and then be reopened to do the same again. The recommendation by SARS was that a person should be allowed to make representation as soon as practically possible, and it should be clarified that the third party could, just as the original taxpayer, contest. SARS had thought that it was already implicit, but was now recommending that it be explicitly stated.

The Bill also brought percentage-based penalties into a consistent framework with administrative penalties. One side effect of this was that a cap of R2,000 was placed on the remittance. A percentage-based penalty, by its nature, did not have a cap, but an administrative penalty did. SARS recommended that the ability to waive the penalty also not have a cap.

SARS noted that the way in which the “substantial understatement” penalty was currently worded made it applicable also to small taxpayers. SARS wanted to clarify that it should only apply to large taxpayers, where the understatement was in excess of R1 million or 5% of the tax properly chargeable. A question was raised whether a taxpayer taking a reasonable position would face a substantial understatement penalty, and here SARS conceded that although it would make sense in some circumstances to waive the penalty, this would only be done under very strict conditions, as this related to the largest taxpayers and very large amounts. It was recommended that the penalty only be waived if there was full disclosure to SARS and if there was a well founded opinion held by the taxpayer, that it was more likely than not to succeed.

Mr Tomasek referred to the Voluntary Disclosure Programme (VDP) and the accompanying table of the penalties that would be imposed (see page 61 of Response Document). He noted that SARS encouraged people to come forward under the VDP, but the way the table was currently structured made it applicable only for substantial understatements for which there would be no penalties. SARS proposed a revision of the table for voluntary disclosure before an audit commenced, so that, excepting in the most serious cases, there would be no penalties when people disclosed voluntarily. Even in the most serious cases, penalties after voluntary disclosure would be relatively low, such as 5% or 10%. This would make the VDP more attractive to people who wished to come clean before SARS uncovered their wrongdoing.

Ms Catinka Smit, Specialist Tax and Legal Advisor, SARS, proposed that SARS should incorporate the proposed amendments in a separate document, and, if the Committee agreed with them, a new version of the Bill would be drafted.

Mr D van Rooyen (ANC) noted that the Commissioner had stated that, at the instance of the Ombud, the selection of SARS officials would be conducted for appointment to the Ombud's office. He thought that meant that when the Ombud thought it necessary, officials from SARS would be co-opted to serve in the Ombud's office. He contested the assumption by the Commissioner that only people who were in the employ of SARS were conversant with tax matters. He thought the assumption was inappropriately premised. He felt it was not correct to impose this condition on the Ombud and disagreed that only SARS officials should be appointed. The Ombud should be at liberty to make a determination on the selection of the staff for his office.

Ms Z Dlamini-Dubazana (ANC) wanted clarity on the selection and secondment of officials to the Ombud's office from SARS, asking at what level and categories these secondments would be made, and whether they would be senior officials.

Ms Dlamini-Dubazana agreed that the recommendation made on legal professional privilege should be held back for further consideration in the Tax Practitioners Bill.

Dr D George (DA) noted that this was a comprehensive Bill. The Committee had not had much time to scrutinise the responses by SARS carefully. He observed that the “public hysteria” on aspects of the Bill was unwarranted. He was, however, concerned about the constitutionality of the search and seizure without a warrant. He noted that the Committee had received feedback from advocates on the constitutionality, and that it had been useful. However there had been discussion about the balance that was needed. If there was a search and seizure on a regular basis then there would be some way to establish if something untoward was happening. He was not sure how this balance would be achieved.

Dr George said that he was aware of the fact that information had to be protected, and that taxpayers’ information was confidential and secret. There were, however, instances where a staff member within SARS might need to blow the whistle on SARS, and this should be made possible. SARS must ensure that there was good and rigorous governance.

Dr George was pleased to note the change in the consultation requirements for the Ombud, which would reinforce the independence. He was concerned about the financing of the Ombud's office. If it did not have sufficient money, it could not run, and he urged that the finances should not be compromised in any way.

Dr George noted that whistleblowers could report to SARS on irregular matters, or if tax was not being paid, but he asked what would happen thereafter. Whilst the Committee did not want to know the details of individual cases, it was important to know that action had been taken, and this level of accountability needed to be thought through.

Mr E Mthethwa (ANC) asked what would happen if SARS received information about a business operating from premises that was not in an area identified as a business area, and whether, in this case, it would still be able to conduct an inspection despite the fact that this was not “business premises”.

Mr N Koornhof (COPE) agreed with Dr George that this was a comprehensive piece of legislation and asked if SARS was requesting that Parliament pass the legislation in the current year.

Mr Koornhof referred to the request from commentators for the inclusion of an obligation for SARS to act reasonably (as set out in page 3 of the Response Document). SARS had said that this Bill must be read together with the Promotion of Administrative Justice Act (PAJA), and if this was done, many of the issues would fall away. However, he said that legislation should be drafted in a way that could more easily be understood by the public, and he wondered what the objection would be to simply inserting a reference to “reasonable”, if it was, in any event, already implied.

Dr Koornhof  was also concerned as to why SARS declined to define more clearly what was meant by a “senior SARS official”, as recommended by commentators. He was particularly concerned with the statement of SARS, on page 7 of the Response Document, to the effect that the fact that a delegated senior SARS official was not suitably experienced and appropriately skilled was not in itself a ground for review, and reiterated that he could see no reason why SARS should not simply clearly define what it meant.

Dr Koornhof noted, in relation to the Tax Ombud, that SARS claimed to be in line with international best practice. The Committee did not know that this was so and could not simply be expected to “rubber-stamp” on this basis.

Mr Magashula responded to Mr Koornhof's query as to whether SARS was in a hurry to pass the Bill in the current year. About 90% of these provisions were already contained in Acts that SARS was already regulating. This Bill was basically a consolidation of those provisions, with some extra provisions to ensure that SARS could execute its mandate. It was in the interest of SARS to finalise the Bill as soon as possible so that it could continue to do its work, and so it was hoped that the Bill could be passed this year, to promote compliance. The Bill was very comprehensive, but SARS would unleash whatever resources were necessary, to enable the Committee to process the Bill as soon as possible.

In response to the question raised by Mr Van Rooyen, Mr Magashula noted that there were limitations to the Tax Ombud’s mandate and authority. The Tax Ombud would not adjudicate on tax disputes. Its mandate was to ensure that the administrative provisions in all the Acts were followed, that SARS treated taxpayers in the correct manner, and that taxpayers’ complaints were addressed expeditiously. The mandate of the Tax Ombud was set out in the Bill, and it was restricted to administrative issues. The Ombud would have powers that extended beyond those currently vested in the existing SARS Service Monitoring Office (SSMO). The SMMO had a contact centre that the public could access, and SARS anticipated that the Ombud would similarly have a contact centre that would field all the complaints that SARS had dealt with, or failed to deal with.

This tied in with the points raised on the staffing of this office. Whoever worked in the contact centre of the Ombud's office would need to understand the escalation process and how the tax products in SARS were administered. These were not matters that were learned at university, as they were administrative operational processes within SARS, including the escalation process and how many days it took to resolve a query, the guidelines for an assessment, the procedures to be followed in case selection and the rights and duties of a SARS official. For practical reasons, and so that the Ombud could be operational from day one, it was recommended that the people who already understood the operational processes of SARS should be seconded. If there were other people who could familiarise themselves with these processes to resolve taxpayers’ problems expeditiously, then the Ombud was independent enough to recruit those people. SARS was making a recommendation, based on global practice.

Mr Kosie Louw, Chief Legal Officer, SARS added to Mr Magashula’s remarks on the mandate of the Ombud. The main part of the Ombud's mandate was that of resolving matters through the concepts of mediation and conciliation. Therefore it was not always specifically people with tax skills that should work in the Ombud's office. Other people who were experienced and understood the systems were needed, as well as people who were skilled in resolving conflict and mediating in disputes. SARS had also offered a lot of training to its own staff, and had, for a number of years, been running alternative dispute mechanisms and mediation training.

In terms of international benchmarking, the comprehensive response document referenced what was happening in Canada, the USA, and the UK. The South African model was a hybrid of the UK model and the Canadian Model. SARS would prepare a comparative briefing note on the concept of the Ombud, the background and give further input on the benchmarking.

Mr Magashula dealt with questions about the financing of the Ombud, as raised by Dr George. The Tax Ombud's budget would be appropriated via the National Treasury vote. The Ombud would report to the Committee if it was having financial difficulties. There were guidelines for every budget appropriation and SARS had a strategic plan that was approved by the Committee, setting out objectives and outcomes that had to be financed appropriately. It would not be in the interest of SARS to have an ineffective Ombud, and the existence of the Ombud would create the necessary tension for SARS to improve its own functioning. SARS and the Ombud would share technology to empower the Ombud's office to do its operations.

Mr Magashula noted the approval of the Committee to deferring a decision on extension of the legal professional privilege.

Mr Magashula said that an analysis was still needed on the constitutionality and balance in search and seizure. SARS would establish what the compliance environment entailed and would explain it again. It would look at trends, where they occurred, what types of search and seizures were conducted, what documents were seized, and the people involved, and would report back to Parliament. SARS reported back on enforcement issues, such as seizure of cigarettes and drugs, and this report back would be similar. He assumed that Dr George was saying that there should be an intelligent analysis of exactly what the trends were, and SARS would take heed of that and report accordingly.

Mr Kosie Louw added that an official should act on reasonable grounds at all times. Before search and seizure, there had to be an imminent danger that documents would be removed, to the extent that SARS would need to be sure that it would have been successful if it had applied for a warrant, and that any delay would have defeated the purpose. SARS had tried to build in a number of other tests. About 17 other pieces of legislation contained a similar provision. SARS also had a briefing note on this particular topic, where it had listed all the provisions in the different laws and the arguments for their inclusion. There was also international benchmarking on the issue and revenue authorities such as New Zealand and Australia had similar provisions.

Mr Louw expanded further on this in relation to Mr Koornhof’s question on “reasonableness”. In fact, these matters involved a taxpayer’s right to fair administrative justice, and this went much wider than the test for  reasonableness. More tests that could be found in PAJA and the case law, and these included concepts such as that officials should not act in a way that was biased or unfair, should not have any alternate or ulterior purposes in mind, and not act in bad faith or capriciously. If the tax laws attempted to define “fair administrative justice” they could run the risk of being in conflict with the provisions of PAJA. He stressed that any government official must comply with the overall concepts and the Constitutional requirement of fair administrative justice.

Mr Magashula noted that on average, SARS would receive about 60 000 tip-offs from the public, anonymously. These were strictly categorised, and a strict selection process was embarked upon. This was, firstly, based on the level of non-compliance in that particular segment of taxpayers, such as high net worth taxpayers. SARS would not investigate each and every tip-off, because it did not have the capacity to do so. It was only able do 3% of deep audits, (compared to a world-wide comparison of about 1%) out of the 12 million assessments that it must do. In 2010 SARS managed to do about 160 000 deep audits, assessing individuals’ tax records in depth.  and they had 12 million assessments to do. There were also different categories in the case of high level individuals and some in the super-rich category were seriously non-compliant.

Mr Magashula noted that section 4 of the Income Tax Act made it clear that SARS could not report to Parliament on a tax-related investigation of an individual. Taxpayer confidentiality was paramount and it was not possible to run a tax administration system without such taxpayer confidentiality, because if taxpayers ever believed that their information was not in credible hands and that it was used for any other reason, then the levels of non-compliance would increase. The committee should help SARS maintain this principle, and ensure that it was not compromised. Nowhere in the world did a tax administration give feedback on taxpayers.

Mr Tomasek noted that there was specific legislation dealing with the protection of whistleblowers. SARS had an internal structure to deal with reporting of problems and potential corruption. SARS took these issues seriously where they occurred internally, and there was national legislation on this.

Mr Tomasek responded to the question about limited inspections, by saying that inspections were limited to checking the identity of the person, and if that person was a registered taxpayer and was keeping the records that were required. It was not so much an investigation as a check. If someone was running an unauthorised business operation that needed to be audited, then SARS could conduct a search and seizure with a warrant, and arrive, unannounced, to do an audit.

Mr Tomasek noted that there was a broad scope of SARS officials, and an official could be a senior SARS official for the purposes of legislation and certain areas of dispute resolution, but not a senior SARS official for the purpose of audits. Given the broad range of roles in SARS, it would be difficult to provide specific criteria in the law. He pointed out that the SARS Response Document indicated that SARS intended to publish the names and designations of people appointed as senior SARS officials for various purposes. Taxpayers would thus be able to track who the responsible officials were and this would provide checks and balances. SARS officials who went out into the field were issued with identity cards, which SARS was currently making tamper-resistant, so that people could make sure that they were dealing with a legitimate SARS official.

The Chairperson agreed that the Bill was an involved piece of legislation and noted that, in addition to the existing documentation, Mr Louw would provide further information. He emphasised that the Bill consolidated other legislation and sought to regulate tax administration, and so it was important that the Committee should attempt to approve something that did not hamstring the operations of SARS in its good work.

The Chairperson noted that Mr Louw would provide more information on the role of the Ombud, which would assist the Committee, although he said that Mr van Rooyen had raised some very valid points. South Africa should create institutions that were relevant and focused on the purpose for which they were created and the issue of the selection of staff was thus important. Parliament could express its views but it was important that once a principle was set, it should be followed.

The Chairperson commented, in relation to the search and seizure without a warrant, that some legislation was stricter, and SARS confirmed that this would apply only in very narrow circumstances. Although the Committee had heard from Constitutional experts, this would not, of course, replace the role of the Constitutional Court if somebody wanted to raise a challenge at that level. He said that the Constitutional Court was being used to test all manner of legislation, but it was preferable that the Committee should ensure that any Bills passed would pass constitutional muster, and try to avoid challenges to the President or Parliament by citizens.

The Chairperson said that trends in compliance were also important, and he thought that South Africans were becoming more compliant and responsible. If a few selected cases of non-compliance were apparent, it was not necessary to pass laws that created the impression that there was a crisis. It was necessary to strike a balance, as South Africans wanting be part of the new democracy should play their role as taxpayers. Even if stricter regulations were needed, this had to be done within the Constitutional framework of the country's democracy. Whatever was put in place had to enhance positive developments in South Africa.

The Chairperson said that a clearer definition of senior SARS official was an important matter, as it took only one legal challenge to cast doubt on a very good institution. He thanked members of SARS for this engagement.

National Treasury Presentation on "A safer financial sector to serve South Africa better"
The Chairperson noted that the Committee would not be able to engage fully with the presentation, owing to time constraints.

Mr Ismail Momoniat, Deputy Director General, National Treasury, noted that the presentation was a summary of the document that had been published with the 2011 National Budget. It was commonly referred to as “The Red Book” and was available on the National Treasury Website. This document aimed to make the financial sector safer by tightening the prudential regulations. He said that “prudential” referred to the soundness of a financial institution; for example, people would want to know that the pension fund or bank to which they were paying their money would still be in existence in 30 or 50 years time. The major shifts to ensure better prudential regulations adopted a “twin peak” model which would, firstly, allow for macroprudential supervision, and secondly would strengthen market conduct, and how businesses such as banks and pension funds conducted their businesses and offered consumer protection.

Mr Momoniat commented broadly on the context for the present initiatives. Given the country's level of development and the aim of broadening access to the financial sector, National Treasury had also published Regulation 28 Gazette on Budget Day 2011, which regulated the investment framework for pension funds. National Treasury had also published two papers. The first dealt with the prudential regulation of foreign exposure, which was important to understand fluctuations in the value of the rand, especially for financial institutions. The second dealt with the framework for cross-border direct investment. In South Africa, there was a plethora of provisions that applied to those wanting to invest in the country. On the one hand, there was a perception that foreign investment was positive, and few controls were exercised on this, but more recently there had also been a realisation that this involved strategic interests and regulatory issues. For instance, someone wanting to buy a mine had to follow the mining regulatory framework and approach the Department of Mineral Resources. Similarly, a person wanting to set up a bank had to get regulatory approval.

The main issue was to harmonise and simplify the investment framework. This would assist in dealing with issues such as Walmart entering South Africa. Mr Momoniat observed that, fortunately, the paper had been published before Walmart came into the country, and that the Paper had been drafted after taking public comment into account. There were urgent issues in the financial sector that needed to be put addressed. Some were covered in the Tax Law Amendment Bill whilst others would be addressed in coming months.

Mr Momoniat noted that the global financial crisis of 2007/2008 was not over yet, as the events of the past few months had shown. He observed that when the crisis had emerged, the attendance at G20 meetings was stepped up from the level of Ministers of Finance, to Heads of State and Presidents, and these meetings were being held twice a year at least. Many commitments had been made in such forums to try to make the financial sector safer. The Basel lll resulted in the adoption of norms and safety measures called buffers, which were capital reserves that banks had to hold, and these had since been increased. The G20 also converted what used to be called the Financial Stability Forum into the Financial Stability Board. This body consisted of G20 members as well as big financial centres like Singapore, Hong Kong and Switzerland. They met twice a year and had many committees which looked at issues such as financial vulnerability. South Africa held one seat on this Board and was hoping for a second seat. The advanced economies and BRIC countries had three seats. These countries normally sent representatives from their Reserve Banks, Regulators and Treasuries. Mr Momoniat had personally attended the meetings.

Mr Momoniat noted that South Africa's attempt to make the financial sector safer had pre-empted the global crisis and had started with a roundtable set up by the former Minister of Finance, Mr Trevor Manuel, in the wake of the Fidentia problem. When charges were laid, the then-Minister had convened a round-table of all financial sector regulators, to discuss the main issues, including the need to have a “fit and proper” requirement to enter the financial sector, and the question whether there could be a more harmonised system. People would not simply have a constitutional right to enter the sector and provide financial services, without being properly licensed to do so. There was a particular need for care in the pension sector, which was, by its very nature, a long-term transaction business.

Mr Momoniat indicated other pressures that motivated the drive to address problems in the financial sector. The financial sector markets were concentrated and had been very opaque in the past about their fee structure, although there was now a global move towards greater transparency. The issue of access was important, given South Africa's developmental needs, but there was a need to clarify what the broadening of access meant. A coordinated approach was also needed to tackle financial crime, and here he emphasised that this was a huge consideration, since those who dabbled in crime not only stole a lot, but had huge financial resources to defend any claims against them, and waged a coordinated and vicious campaign against prosecution.

Mr Momoniat outlined the four priority areas elaborated on in the Red Book. These were financial stability, consumer protection, access to financial services and combating financial crime. The National Treasury had established a Financial Stability Oversight Committee, and the Council for Financial Regulators. One of the lessons learned from the financial crisis was that many regulators lacked coordination and did not share information, and this was not only prevalent in South Africa, but was a critical challenge in other countries. Large companies such as ABSA or Old Mutual tended to have a footprint in other countries, and they often had a controlling shareholder in another country, which meant that the home regulator might be in the UK and the host regulator in South Africa, and coordination between the two would be complicated.

Mr Momoniat noted that the biggest issue emerging from the financial crisis was the need to take a macroprudential or system-wide approach to risk. In the past, institutions were examined individually, but it was seen during the recent financial crisis that when one bank was liquidated, this posed a systemic risk to everybody else. If one of South Africa's major banks fell, all of them would fall, as there was a lot of interconnectedness. The fall of Lehmans in September 2008 affected the banking system globally, spreading rapidly to South Africa, where one million jobs were lost, proportionally more than in any other G20 economy, although South Africa did not suffer quite the same kind of financial crisis. A systems-wide approach was thus needed. The Minister had given the responsibility for financial stability to the Governor of the Reserve Bank two years earlier.

In order to strengthen financial stability, it was necessary to analyse the impact of economic imbalances, asset price bubbles and rapid credit growth. Mr Momoniat alluded to Ireland, where the property market imploded and banks were exposed when the bubble burst, as also to the unresolved Eurozone debt crisis, where many European banks were exposed to Greek debt. He emphasised that when banks went down, everything went down. The Reserve Bank now had a Financial Quality Committee in addition to its Monetary Policy Committee, to guard against such risks. Mr Momoniat stated that there was a need to adopt a counter-cyclical approach and identify the risk factors. The key lesson was macro-prudential supervision, in addition to micro-supervision over institutions. There was a need for stronger prudential requirements in banking and insurance, and the Regulators were attending to that.

Mr Momoniat noted that National Treasury proposed a set of principles important for the financial sector (see attached summary). All financial service providers should be appropriately licensed or regulated. Regulation and supervision had to be transparent and sufficiently intense, intrusive and effective. Problems had arisen because the sector had been too lightly regulated, and regulation was now being tightened across the world. Regulators should also be allowed to operate objectively, with integrity, and should be operationally independent. They had to be able to determine who was “fit and proper” to run a bank, and decide on how much they wished to invest in something like low-cost housing, which, although a political priority, still carried risk to the system. The regulations also had to be universally applicable. 

Mr Momoniat noted that many State pension funds did not fall under the Pension Funds Act. It was necessary to consider whether the Postbank should have lesser conditions than applied to other banks. State of Emergency powers were needed, because ordinary bankruptcy provisions should not apply when a bank was in serious trouble. The Banks Act even allowed competition legislation to be bypassed in a financial crisis, and National Treasury would be asking for these powers to be given to supervisors when there was a problem.

Mr Momoniat expanded on the “twin-peak model”, saying that one regulator should deal with all prudential matters. The UK had a uniform regulatory model, where the financial services authority was responsible for both prudential and market conduct. However, South Africa felt that there was a risk that market conduct was neglected. The banking sector had a prudential regulator, but no-one looking at bank charges or market conduct. The Financial Services Board (FSB) looked at the non-banking sector. National Treasury suggested that the single prudential regulator should be situated at the South African Reserve Bank (SARB), and the FSB should become the market conduct regulator. This would mean that many prudential aspects of insurance, for instance, as well as banking supervision, would move to the SARB, whilst the FSB would deal with consumer protection. SARB would thus deal with financial stability issues, whilst the FSB, being responsible for financial services, would work closely with the National Credit Regulator.

The SARB, FSB and National Treasury were currently setting up a Financial Stability Oversight Committee, which would be chaired jointly by the Governor of SARB and the Minister of Finance. It would meet on a quarterly basis or more often, given the current financial climate. Mr Momoniat reiterated that market conduct could not be considered separately from prudential, and the twin peaks model aimed to give equal weight to prudential and market conduct regulation. An Ombud system would be developed and a Council of Financial regulators would be established. There would be a clarification of roles and responsibilities. Regulatory bodies would be streamlined to promote greater coordination and information sharing. Their scope would be increased to include financial services that were not currently regulated, or were too lightly regulated.

In this regard, Mr Momoniat indicated that banking market conduct was unregulated, but this would be addressed if FSB became the market conduct regulator, as it could develop principles around fee-setting, and fair treatment of customers, including interventions. Consumer financial education would also be addressed. Financial products were extremely complex, and there was a need to support activist consumer bodies that educated the public. It was also important to safeguard pensioners and encourage and incentivise South Africans to save. Another critical issue was getting the poor into the financial sector. Initiatives here included Mzanzi accounts, small business finance, housing finance and the role played by the Financial Sector Charter. National Treasury had recently produced a paper on micro-insurance, such as the funeral insurance industry, which was presently unregulated, and it would be proposing legislation to give effect to these policies while protecting consumers.

Coupled with all these initiatives was the need to combating crime, in order to ensure that any progress was not undermined by sophisticated crime, including money laundering. Currently, the cases were lengthy, with numerous procedural challenges.

Mr Momoniat concluded by stating that progress was being made in the implementation of financial regulations. A Financial Regulatory Reform Steering Committee, comprising of SARB, National Treasury and the FSB, had been set up and other regulators would be included. There were currently five working groups, who dealt with Prudential regulatory supervision, resolution policy, market conduct regulation, impact of economics, organisational design and the legislative and institutional frameworks. Cabinet had approved the “twin peaks” model and the broad agenda, and public comments had been received. Although the legislation was likely only to be introduced in 2012, some temporary measures would be introduced. He noted that the Financial Markets Bill, the Credit Ratings Agency Bill, the Financial Services General Amendment Bill and the Banks Amendment Bill were likely to be introduced.

Ms Dlamini-Dubazana noted the Committee would need time to familiarise itself with all the proposals.

Mr Momoniat responded that the legislative process would take about three years, but it was important to achieve a smooth transition from the current to new system. It was also important to ensure morale of staff, and ensure that they would not fear the loss of their jobs.

Dr George welcomed financial sector regulation, saying that consumers were not currently properly protected in the financial sector. He noted Mr Momoniat's comments about attacks on the FSB, but thought that one of the main reasons for this was the problem in the curatorship model, which had been raised before, and which needed attention.

Mr Van Rooyen alluded to a recent court ruling in Germany on the role of Parliament in making emergency arrangements in a financial crisis. He asked about the role of Parliamentarians when financial regulators needed emergency powers, saying that measures to address the problem needed to be thought through so that there was adequate preparation in advance for a crisis.

Mr Momoniat said that National Treasury had a detailed plan and it required a lot of research. Referring to Basel 111 and its impact, he noted there were questions about liquidity and how this impacted on South African banks. Legislation on emergency powers would be brought to the Committee, and he noted that some may seem quite draconian, but it was necessary to bear in mind that these would not be general powers, but would be used only when there was systemic risk. Power to make decisions would be given, but people must be accountable, and Parliament would retain an oversight role. The legislation would be based on international best practice.

Mr Momoniat said that if a crisis were to occur immediately, there were some tools available in the current legislation, including fiscus stimulus and austerity measures. Other specific measures could include pumping money into banks. The Public Finance Management Act (PFMA) had emergency provisions, with subsequent reporting to be made to Parliament. The Minister, the Governor and the Regulators would have to enforce legislation, but the Committee would have an oversight role.

On the issue of timing, and the concerns for the World economic outlook, Mr Momoniat noted that the International Monetary Fund (IMF) released documents twice a year, such as the Global Financial Stability Report. There were growth projections, and without a high growth scenario there were serious challenges for countries in recession, as Greece had been for the past two years. Three factors had to be constantly monitored in any country, namely, the state of the banks, sovereign debt and the growth and economic outlook. All of these were interlinked. Mr Momoniat alluded to the problems in the Eurozone and cautioned that if the recession spread to Italy and Spain, it would affect South Africa.      

Mr Roy Havemann, Director: Financial Stability, National Treasury, emphasised that National Treasury was trying to strengthen the financial sector, by tightening the regulations on the banking system, and simultaneously getting the economy to grow. There was a trade-off in the short term between tightening the regulations and economic growth. The Red Book went into some detail on the types of trade-offs to be made by government, in order to move forward. National Treasury was currently evaluating the economic impact of all the financial regulation initiatives and was trying to ensure that all the steps being taken would benefit the economy in the long term.

Mr Havemann commented that South Africa was taking as many lessons as possible from the global financial crisis to benefit itself, but the situation in other countries caused concern. South Africa was monitoring other countries and implementing the appropriate measures in a consistent and carefully thought-out way.

Mr Momoniat referred to the recent Vickers Report in UK, which highlighted risks in investment banking and the damage caused by rogue traders, and observed that this affected South Africa because Barclays held a majority share in ABSA, and this must be taken into account when legislating.

Mr Momoniat agreed with Dr George’s comments on the orchestrated attacks on the FSB. He agreed that these were to do with curators, but added that there were also other issues about liquidators, saying that there were “perverse consequences” around selection from a small pool of liquidators, their delays, and high charges. He thought that it would be useful for the South African Law Reform Commission to look at incentives to try to improve the system.

The Chairperson indicated that the process being undertaken in the financial sector was not just about transformation, but also about rationalisation. He agreed that there were too many institutions and that they had not been sufficiently focused, lacking a common centre of management. He requested that the Committee, after working through this document, should engage again with National Treasury and make an input prior to the legislation being drafted. He agreed that the global financial crisis was an extraordinary challenge that had to be addressed. The Chairperson welcomed the work done, and noted that National Treasury was working on a comprehensive process going far beyond anything done previously, which would transform the regulation of banking and other financial matters. He agreed with Dr George's comments about the attack on the FSB, and said that Parliament's voice should be heard in the defence of the institution. The image of a credible institution should not be tarnished.

The meeting was adjourned.

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