Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B10-2012], Financial Markets Bill [B12-2012], Credit Rating Services Bill [B8-2012]: National Treasury briefing

Meeting report

Introduction
Mr D van Rooyen (ANC), in the absence of Mr T Mufamadi (ANC), was elected Acting Chairperson. This was the formal introduction of three critical Bills – the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B10-2012], the Financial Markets Bill [B12-2012], and the Credit Rating Services Bill [B8-2012]. Among other things, the Committee would consider how National Treasury intended to regulate the financial markets, subject to due parliamentary process, and to regulate the fixing of rates of normal tax and amendment of customs and excise tax. Also these Bills would provide clarity on the registration of credit agencies and the regulation of certain activities conducted by these agencies. These were a key concern amid the anxiety around unsecured lending currently prevalent in South Africa's economic system.

Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B10-2012] briefing
Mr Ismail Momoniat, National Treasury Deputy Director-General: Tax and Financial Sector Policy, said that it was the first time in his career he had presented three Bills at once. The tax issues were quite specific. It was not Treasury's wish to make too many tax proposals or sudden changes since it sought to have certainty and, as far as possible, give only positive surprises, so that nobody complained that he or she was not consulted. In this year, however, National Treasury had made many significant proposals. Today was the first opportunity to talk in detail. In most years there was one legislative round – the Tax Laws Amendment Bills -, and sometimes two – the Revenue Laws Amendment Bills. This year National Treasury had the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B10-2012]. National Treasury tried to focus only on the rate changes; if the tax proposals were too complicated then the Tax Laws Amendment Bills process took a long time, and some of these rate changes took place quite late. For example, when the Minister announced changes to the personal income tax margins, companies already began to implement them, before Parliament formally approved the new rates. He referred to Chapter 4 of the Budget Review in which National Treasury dealt with the revenue proposals for the 2012 budget.

Mr Momoniat gave an overview (slide 3). The proposals largely tried to support a sustainable fiscal framework over the medium term, and, in the process, facilitate economic growth in a more competitive economy by providing incentives. This year National Treasury had introduced a number of important proposals to improve the fairness of the system. It had also introduced such proposals the previous year. For example, National Treasury sought to ensure that income from capital was taxed more appropriately. In order to meet South Africa's developmental challenges, one required sufficient revenue to fund key expenditure priorities. At the same time it was necessary to ensure that public debt and public debt servicing were sustainable. On the other hand, one wanted to avoid overburdening taxpayers. Finding the right balance was always difficult, while ensuring the preservation of tax morality by achieving efficiency in public expenditure. This was important to maintain this compact with society.

This Bill dealt only with changes to tax rates and monetary thresholds, and some urgent issues. Because there had been amendments to the capital gains rates, it had been necessary to make some adjustments. Most of the substantive and technical tax amendments would be included in the Taxation Laws Amendment Bill 2012 that would be processed later in the year.

Mr Momoniat gave a sense of gross national tax revenue (excluding Unemployment Insurance Fund (UIF) and Road Accident Fund (RAF) in relation to gross domestic product (GDP) (graph, slide 4). He noted that it was not rising very rapidly. This year it was 24.8%, which was quite far from the high point just before the financial crisis.

In the graph, slide 5, the blue line at the top indicated, as a percentage of GDP, the Personal Income Tax (PIT) ratio which reached a high point in the late 1990s, then dropped, and had since been on a mildly increasing trend. In the following table it reached 8.4% of GDP. The second biggest revenue collection tax was Value Added Tax (VAT), the one with the red dots, which had been roughly stagnant in the past few years and sat at around 6.4% of GDP. The third was Corporate Income Tax (CIT) which was the most volatile and had fluctuated much in the last 20 years, reaching a high point of about 7.2% in 2006/07. Currently it was 5.1% after dropping to 4.8%. This volatility was important, because, with movement into a recession, there was a lag, and corporate income tax started to fall, and it was still in the recovery phase, as could be seen from the graph. The Minister had announced on 01 April that the revenue collected last year was broadly on target, even slightly above expectations.

The next important tax was the fuel levy, which had been almost static since 2006/07. It fell from a high of 1.8% of GDP in 1983 to about 1.2% of GDP in 2011/12 (table, slide 6).

The other taxes were specific excise and customs duties, and, of course, Secondary Tax on Companies (STC), which had now been phased out.

However, all in all, the tax to GDP was 24.8% in 2011/12 (table, slide 6). Of that, the budget ratio to GDP was, as a percentage, 24.6%, a slight difference.

As a portion of total budget revenue, taxes made up 96%. The big three taxes (PIT, VAT and CIT) made up 80.3%. PIT was a third of all national revenue, followed by VAT which was a quarter, and CIT, which was about a fifth. (Table, slide 7).

Mr Cecil Morden, Chief Director: Tax and Financial Sector Policy, explained how this year's tax proposals would impact on overall 2012/3 revenue (slide 8). This slide was an extract from the Budget Review, table 4.4 and gave a summary of the estimated changes in revenue as a result of the tax changes. The adjustments to personal income tax were about R9.5 billion. The adjustments to monetary thresholds, which were very difficult to estimate, were just over R1 billion (a loss). The increases in the capital gains and the dividend tax, from the side of individuals, was R800 million and R5.5 billion respectively. However, when one looked at the business tax side, the capital gains tax change was estimated R1.2? (a gain). There was also small business relief. Very importantly, the abolition of the Secondary Tax on Companies (STC) resulted in a loss of about R7.4 billion. As to the indirect taxes, the fuel levy increase would yield an estimated R4.5 billion. The increases in tobacco and the electricity levy would yield effectively just under R2 billion. The net impact of these changes was a decrease in revenue of about R2 billion.

Mr Momoniat noted that one of the immediate big deductions were the Southern African Customs Union (SACU) payments of R42 billion. These were almost double those of last year. When customs revenue increased, this revenue was largely dedicated to the SACU Agreement. It was quite a sizeable portion, al most 5%.

Mr Morden gave specific information on personal income tax rate and bracket adjustments 2011/12 to 2012/13, which were mostly upward (table, slide 9). distribution of individual taxpayers, taxable income, income tax payable 24% of the personal income tax.

Mr Morden explained medical scheme contributions and other medical expenses – past reforms (slide 11). From this year deductions were converted into medical tax credits to give a more equitable benefit to all. More reforms were envisaged. Some of these details might change.

Mr Morden explained medical tax credits 2012/13 (slide 12).

Proposals for medical tax credits for 2014/15 were not in this Bill (slide 13).

Mr Morden explained deductions versus credit – illustration of the higher 'subsidy' for individuals with higher marginal rate under the deduction regime – based on the 2011/12 (table, slide 14).

Mr Morden explained Dividends Withholding Tax (slide 15) and headline corporate income tax rates (CIT) and dividend tax rates (table, slide16). Certain entities would be tax exempt and would be in a better position. The Secondary Tax on Companies (STC), now phased out, had been introduced to reduce the corporate headline rate. A rate of 15 % was reasonable historically.

Prof Keith Engel, Chief Director: Tax Legal Design, explained collateral amendments as a result of the implementation of the new dividends withholding tax (slide 17). There would be a subsequent Bill that would be more technical.

Mr Morden explained Capital Gains Tax (slides 18-19). There were certain exemptions.

Prof Keith Engel explained further (slides 20-21).

Mr Morden explained the tax relief for small business corporations (slides 22-23) and other monetary thresholds (table, slide 24). There was an amendment in respect of public benefit activities - low cost housing (slide 25).

Mr Morden explained the fuel taxes by way of regulations (table, slide 26), in particular, the fuel levy - petrol (slide 27), fuel levy as a percentage of budget revenue (see slide 28, and graph, slide 29), fuel levy as a percentage of the GDP (graph, slide 30), fuel sales, litres – million (graph, slide 31), real GDP and fuel sales (table, slide 32), fuel - litres per real GDP (graph slide 33), fuel prices and estimated volumes (table, slide 34), electricity levy by way of regulations (slide 35), specific excise duties: tobacco products and alcoholic beverages (slide 36), and specific excise duties (table, slide 37).

Mr Momoniat said that these taxes went into effect as soon as Minister announced them. On the other tax proposals National Treasury liked to have longer consultation processes. It was committed to deep consultations processes. The gambling tax would come as a separate piece of legislation. There would be a more detailed proposal as to how it would work. It should take effect in 2013. (See National Treasury website). There were processes with retirement policies and harmonising tax treatment. These were important reforms. It would be good if Parliament invited National Treasury to present these proposals.

Discussion
Mr N Koornhof (COPE) asked if public hearings were to be held on this Bill. If not, Members would have to engage in detailed discussion now.

The Acting Chairperson said that the Chairperson had advertised for public comment on all three Bills, and asked National Treasury if it was prepared for hearings.

Mr Momoniat replied that it was. However, it was hard to consult on rates of taxation. No one consulted Christmas turkeys. 'We all have to pay our taxes.'

Prof Engel did not expect to see much comment from tax accountants and lawyers on the rates themselves.

Mr Momoniat observed that tax accountants and lawyers would make their presence felt in hearings on the subsequent bills. However, it was still important to go through the process of hearings.

The Acting Chairperson ruled that there would be no 'robust discussion' at this time, since hearings would be held. Only questions of clarity would be entertained.

Mr Koornhof asked (slide 20) if the capital gains tax for long term insurance, which was not part of this Bill, was announced in the budget. If not, was this an attempt not to surprise the public?

Mr E Mthethwa (ANC) noted the fuel levy as a percentage of budget revenue (slide 29). Where did the actual money go? In slide 27 the figures were given in rands. The fuel levy was 8.5% of budget revenue in 1994. Now it had dropped to 5.0%. Yet the actual price in the market was higher than before. What exactly was happening here? Where did the balance go? People were paying higher prices for petrol.

Mr T Harris (DA) appreciated the figures for the fuel levy and asked how they compared to other benchmarks. Did South Africa impose higher or lower taxes on fuel than comparable economies?

Mr Momoniat replied that the figures showed that it dropped as a percentage of total revenue. However, it was important to note that it had also dropped in terms of GDP. Also, the fuel tax in South Africa was modest compared to fuel taxes in Europe, where fuel was about R5 to R7 more per litre because of taxes. On the other hand, in the USA fuel was cheap resulting in over consumption, which led to price increases. In some Asian and Latin American economies there even used to be a fuel subsidy but countries had removed that. Given that there was not enough oil, it was important to have a tax for environmental as well as revenue reasons. The fuel levy went to general revenue, except for a small, ring-fenced component which went to the Road Accident Fund (RAF).

Mr Morden said that the nominal fuel tax had increased more steeply in the last four years than previously. However, in real terms, that tax had been flat. Although people perceived that they had paid more, in real terms it had decreased for a number of years. Also because the economy became more fuel efficient, the volume of fuel consumed as a ratio decreased. This resulted in the fuel tax not being a buoyant source of revenue. As fuel consumption flattened, the revenue yielded decreased. Furthermore, some of the other taxes might have increased at a faster rate. South Africa's fuel tax as a percentage of the retail price was about 27% (slide 26). In Europe it was close to 50%. In America it was probably 10%. South Africa was on a par with many Latin American and some Asian countries. 

Mr Harris suggested tacking the lack of saving with wholesale reform of taxation. There should be exemptions for savings.

Mr Momoniat agreed that a more aggressive approach was required. Hence National Treasury had released a document last week which gave an overview. National Treasury had also talked about introducing certain tax incentivised savings products. It would be good, on a later occasion, to have a discussion.

Mr Momoniat said that when one contributed to a pension fund, one received a tax deduction. For some, the growth was not taxed. With regard to the dividend tax, retirement savings were not taxed. At the time of paying out, there might or might not be a form of taxation, depending on the type of policy. This was one of the big issues of the harmonisation of taxation on different savings products, which National Treasury had announced last week. He would ask Ms Cindy August, Parliamentary Liaison Officer, Ministry of Finance, National Treasury, and SARS, to circulate the paper to Members.

Mr Harris asked for clarity on the disconnection between the law of the land (the Income Tax Act, which set the tax on dividends at 10%) and the 15% rate announced in the budget.

Mr Momoniat replied, with regards to the dividends income tax, that last year National Treasury had legislated for it. This year National Treasury was just announcing an increase. As with personal income tax, the rates that applied were last year's rates, until Parliament had passed this Bill. However, everyone moved to implement the changes beforehand in anticipation that Parliament would approve the changes. It was similar with the dividends tax. National Treasury had increased the rate. This Bill would give the increase legal effect.

Ms J Tshabala (ANC) sought clarity on dividends. She noted that already people were declaring them. What had been the outcome of the changes?

Mr Morden said that the dividend tax came into effect on 01 April 2012. 'The changeover [was] higher than that.' The revenue for the first month was quite high, as people declared dividends, and that was expected. During April, R8 billion was collected in 'STC', which was a flow-over, whereas normally R2 billion a month was collected. Despite the increase in the rate, a net loss was expected of about R2 billion. The main reason for that loss was that pension funds would receive their dividends tax-free. Also the treaties provided for lower rates.

Mr Harris was worried about the fragility of the revenue base. In general he accepted SARS' approach but he thought that South Africa was getting to the point where business owners and those with high incomes would be overtaxed relative to other markets, and might move away. South Africa's income tax regime did not recognise the internationally mobile.

Mr Momoniat replied that the middle class paid a sizeable amount. Whether one had reached the limit really depended on the expenditure side, the benefits there were, and what value for money taxpayers perceived.

Mr Harris questioned the proposed tax incentives for the special economic zones. These seemed very weak, and were not even close to competitive.

Mr Morden replied that the National Treasury was in discussion with the Department of Trade and Industry (DTI). In the budget review it had flagged three possible options. None of the Bills dealt with this matter. The Minister would make an announcement in the budget speech of 2013. The incentive would probably be more generous than what Mr Harris had heard from the DTI.

Dr Z Luyenge (ANC) asked whether the capital gains tax which related to long term insurance was affecting the 'majority' values of policies or if it referred to all the payouts made, including the pension payouts. National Treasury had said that retirement annuities were not untaxable. However, in relation to pension payouts, were these taxable? He asked if the small business tax generally referred also to personal tax income up to R300 000. Was the 10% that was actually taxed applicable to incomes up to R300 000 or from R300 000 upward?

Mr Morden replied that the issue of CIT and long term insurance was implicit. The increase had been announced. The only discussion was on implementation and design.

Prof Engel said that the only issue was timing. It was the insurers who had come forward. in discussions, the industry had suggested a better way to tax capital gains. The present arrangement was a compromise and somewhat on its insistence. It was not something being imposed on the industry.

Prof Engel referred back to the dividends tax and said that every year there were adjustments to rates. Those adjustments had been coming down. Adjustments were effective from the date when the Minister announced them, with parliamentary post-ratification. This meant that one could stimulate the economy from 01 March. One of the purposes of the Bill was to accelerate the entry of Parliament into the process. National Treasury had hoped to have this Bill before Members in March. Indeed, it was ready by the end of February, but if one wanted to do better on these issues, there should be a rates and thresholds Bill presented in March. However, the parliamentary schedule did not allow it.

Prof Engel explained that pensions were not taxed on the build-up. So pensions were not affected by this proposal. All the growth was tax-free. There was no capital gain. When the money came out of the pension, there was this lump sum formula and there was income. At that point it was ordinary revenue and much of it in a lump sum came out in a formula which gave that R300 000 plus exemption, or it came out as an annuity which was taxed annually. None of this was affected by the proposal here.

Mr Morden made a last comment on the long term insurance. When a person bought a policy, not a pension fund, he or she was always told that the money would be tax free when taken out. This was true, but the build up was taxed. So it was important to have the complete picture when taking out a policy.

Mr Morden replied on small business that one had to be a company, a 'CC' or a 'Pty Limited' to qualify for this regime. Individuals were taxed as per the individual thresholds. It had been attempted to bring the first bracket into line with the thresholds for individuals. The second threshold, however, had nothing to do with individuals, and was for small business corporations. So if one was a small business and unincorporated, one did not qualify, and one was taxed as an individual.

Ms Tshabala asked what the status quo of the electricity levy was, given that the net impact of electricity tariffs was to be neutral (slide 35).

Mr Morden replied that the net impact would be that it would not result in an increase because there was a built-in charge in the Eskom tariffs. National Treasury had converted this to an explicit levy.

Ms Z Dlamini-Dubazana (ANC) asked if all the tax proposals were included in this Bill. If not, was that done deliberately?

Mr Momoniat replied that not all the tax proposals were in this Bill. The Tax Laws Amendment Bill would carry most of the proposals. There would also be a Bill dedicated to gambling tax.

Ms Dlamini-Dubazana referred to Part I of the Ninth Schedule to the Income Act and the proposed amendment, Clause 12(1)(a). She was concerned that the majority of public servants, especially the teachers, the police and the nurses, would be excluded from this benefit. She referred to Clause 5(1) the amendment of Section 23H of the Income Tax Act 1962. Was it proposed to shift from R80 000 to R100 000? She asked about estimated revenue impact (table, slide 8).

Mr Morden replied that this increase in this monthly income was really a Department of Human Settlements criterion. This Department determined that the housing subsidy was linked to income. There was an exemption in the Income Tax Act for public benefit organisations operating in this market. National Treasury was working on some incentive for developers to provide housing in the gap market on the supply side. This would come to the Committee next year.

Prof Engel said that if a person made an upfront payment of a ten-year rental, he or she was supposed to obtain a deduction in line with accrual, which meant spreading the deduction over a number of years. It was to do with spreading business expense deductions in line with the economic benefit. However, it was complicated to do that. So Section 23H said that one did not have to do that if the amount was small. This provision really would not affect individuals very much.

Ms Dlamini-Dubazana asked where did National Treasury get the R78 billion, which was the difference between tax revenue (after tax proposals) and budget revenue (after tax proposals) (slide 8)?

Mr Morden replied that the 904.83 billion figure included revenues received by state owned entities and provinces.

The Acting Chairperson allowed no follow-ups. Members would have ample opportunity at next week's public hearings and in the subsequent Committee deliberations.

Financial Markets Bill [B12-2012] briefing
Mr Momoniat explained the context of a number of changes in approach to regulation to ensure a safer financial sector to serve South Africa better(slide 4). It was important that financial services firms must be held to a higher standard as people's savings and livelihoods were at risk, as was the entire financial system. The 'twin peak' (prudential peak and market conduct peak) approach aimed to give equal weight to prudential and market conduct regulation (slide 5). The role of the capital markets was critical in converting savings into growth (slide 6).

Mr Roy Havemann, Acting Chief Director: Financial Stability and Markets, noted that South African capital markets were particularly deep and liquid (chart, slide 9) and that the South African regulatory framework was amongst the best in the world (table, slide 10). Key players in financial market were the providers of market infrastructure – the Johannesburg Stock Exchange (JSE) and the state, and the users of market infrastructure – the issuers, the stockbrokers (authorised users, participants) and investors. It was important that all players were appropriately regulated (slide 11).

Mr Havemann explained that the Bill repealed and replaced the Securities Services Act (No. 36 of 2004)as amended. It was intended to provide alignment with international developments, including the Group of 20 (G20) commitments following the global financial crisis, the recommendations of the Financial Stability Board, international best practice (International Organisation of Securities Commissioners), and the International Monetary Fund (IMF) and World Bank international assessments. It was also intended to reflect changes in principles and laws, for example, the UNIDROIT Convention and international regulatory practices, and accommodate some technical and functional issues. (Slide 13).

There had been a substantial period of engagement before National Treasury had tabled the revised Bill to Parliament (slide 14).

Mr Havemann explained the objects of the Bill: to increase confidence in the South African financial markets, to promote the protection of regulated persons and clients, reduce systemic risk, and promote competitiveness of securities services in South Africa. The Bill would achieve this through establishing a framework for efficient and effective supervision, financial stability and mitigating systemic risk, and investor/client protection, taking into account protection against market abuse (slide 15).

The structure of the Bill followed those objectives. (slide 16). Mr Havemann noted that the JSE was a self-regulatory organisation with market infrastructure. The Bill also made provision for strengthening the regulation of derivatives (slide 17). The Bill defined the roles of various players and the powers of the Minister (slide 19), also the powers of the registrar (slide 20). He noted that the registrar was the Financial Services Board (FSB). On the advice of the International Monetary Fund (IMF) there would be a business rescue plan and changes in the Companies Act. Contraventions would be referred to the Enforcement Committee.

The powers and role of the Governor of the Reserve Bank in ensuring efficient and effective supervision were outlined (slide 21). The introduction of the Reserve Bank into the Financial Markets Bill was described (slide 22).

The role of the self- regulatory organisations was indicated (slides 23-25). The Twin Peaks was a priority policy. A self-regulating organisation (SRO) should not be both a referee and a player. Conflicts of interest should be dealt with. Governance requirements for directors and senior managers were to be strengthened. There was increased need for cooperation (slide 26).

The Bill addressed financial stability and the 'twin peaks' issues (slides 28-30). There was need for reform. Over the counter (OTC) derivative instruments must be regulated. There must be explicit insolvency provisions under securities registration.

There was to be a new framework for derivatives (slide 31). The Bill strengthened client protection by clearer segregation of securities and balancing and reconciliation (slide 33). The Bill took steps to combat market manipulation and abuse (slide 34) and also strengthened insider-trading provisions (slide 35).

Mr Havemann explained additional policy issues, including liability and accounting standards (slides 37-38), some additional technical and functional issues (slide 40), and other provisions aimed to the financial markets legislative framework (slide 41).

Credit Rating Services Bill [B8-2012] briefing
Mr Momoniat said that the Bill provided a legal framework for regulating credit rating agencies (CRAs). He explained the purpose of the Bill as providing for the registration of such agencies, their control, conditions for the issuance of credit ratings, and rules on the organisation and conduct of CRAs. Reference points were the financial crisis and G20 outcomes, the International Organisation of Securities Commissions (IOSCO) 'Statement of principles regarding the activities of credit rating agencies', other jurisdictions – the European Union (EU), the United States of America (USA), and Australia, and EU equivalency requirements. (Slide 3). He noted that there were very few credit rating agencies in the country.

Mr Momoniat explained their particular role: CRAs assigned ratings to securities (usually debt instruments). Credit ratings were a measure of the ability of an issuer to repay. For example, an AAA rating meant that there was almost no change that an issuer would default, whereas a C rating suggested that an issuer was almost completely unable to pay. (Slide 4)

There was a need to regulate credit rating agencies, as they were considered to have failed, firstly to reflect early enough in their credit ratings the worsening market conditions, and secondly, to adjust their credit ratings in time following the deepening market crisis. The users of credit ratings should not relay blindly on them but should take utmost care to perform their own analysis and conduct appropriate due diligence at all times. (Slide 5).

The activities of credit rating agencies were currently unregulated. Credit rating agencies played a central role in the global financial crisis. Until close to its collapse Lehman Brothers was AAA-rated. Credit rating agencies had played a role in exacerbating the current Eurozone debt crisis. The pro-cyclicality of credit ratings and potential conflicts of interest were a concern. The G20 had committed itself to create a globally consistent regulatory framework for agencies and reduce the reliance on ratings in legislation. (Slide 6).

Mr Havemann said that regulation was a rapidly developing area. There was much discussion in Europe on how new legislation was be introduced. Canada had also published regulations. There was a need to balance legal certainty with flexibility. (Slide 7)

Credit rating agencies operated globally. The three main agencies in South Africa operated as true multinationals with different services provided in different jurisdictions. (Slide 9)

Legislation needed to have teeth domestically, but without extra-territorial powers (slide 10).

Mr Momoniat said that South Africa's proposed legislation followed the EU approach and allowed endorsement. The concept of endorsement was explained. Most of these agencies were of an international nature and one could not require a CRA to perform all its activities in South Africa. The Bill proposed that agencies could 'endorse' ratings undertaken in another jurisdiction. (Slide 11).

Mr Havemann said that the approach to liability entrenched common law, as unbiased legal opinion was that common law liability provisions were the most appropriate. (Slide 12)

The Bill aimed to promote investor protection. He explained how (slide 14).

The Bill aimed to promote integrity and independence (slides 15-16) and transparency, with requirements that records be kept for five years, and that agencies publish an annual report (slide 17).

Discussion
Mr Koornhof asked if National Treasury could show what it was replacing in the Securities Services Act with the Financial Markets Bill, and what would remain.

Mr Koornhof said that Moody's Investors Service had written to the Chairperson to say that the Credit Rating Services Bill had a number of disincentives to CRAs to endorse credit ratings into South Africa. If the CRA's decision was not to endorse these credit ratings, the range of debt instruments available to South African investors who used credit ratings for regulatory purposes would be materially limited. Was that the case? What was the comment on that? It was unfair to blame the credit rating agencies for not downgrading Lehman Brothers. Just imagine if they had done so, how rapid the downfall would have been. It was also unfair to judge credit rating agencies now post 2008. We must be aware that we should not want to come down on them with a hammer. Why were they so important? Their importance was slipping away. People were not taking them so seriously any more. People were starting to fight back. Perhaps Members should have more information on what was happening in the rest of the world. Were other countries going so far? One should know. He did not want an over reaction. Investors were doing their own research more and more after 2008.

The acting Chairperson felt that this kind of question could be better answered in the public hearings.

Mr Harris asked, with reference to the Financial Markets Bill, about the twin peaks model, and coordination with the Group of 20 (G20). Was it not better to determine how the twin peak model would work out before legislating? Was there not a danger of being out of sync with the rest of the G20? Was the FSB's new responsibility under the Bill consistent with the twin peaks? Should one not complete the process first, before legislating? He asked what the clearinghouse requirements were. the Bill was silent on that. he asked if there was a conflict of interest with the credit rating services. National Treasury issued much debt, which was rated by credit rating agencies. As national treasury was drafting the legislation to regulate them, this was a red warning sign. The Americans simply allowed the domestic rating agency to be registered, and then annexed a list of their associated group entities. This was a neater way of achieving the same objective. this Bill did not recognise the potential competition in the rating agency space. South Africa should try to make it a lot easier for small agencies to grow and comply.

Dr Luyenge said that the regulation of the credit rating agencies had long been outstanding. However, he digressed and entered a plea that the indebted, underprivileged masses of South Africa be considered. Why did the national treasury not consider an indemnity for them, because the blacklisted could not get credit even if they improved their financial status? Children were blacklisted because their parents owed the fees to educational institutions. There was no precise and legitimate process for blacklisting a person. One was blacklisted because one had a judgement that was taken in Pretoria, while one might never have entered that province but had remained in the Eastern Cape.

Mr Koornhof interrupted and said Dr Luyenge's question was outside the ambit of the agenda and the Bill.

Dr Luyenge thanked the acting chairperson for protection, and said that credit rating was a culmination of indebtedness. One could not separate that, especially in the case of the poor. Members were representing the poor, and one could not isolate issues. The broad and real issue was that it came from the listing, in a manner that was not humane, of people who were indebted.

the acting chairperson said that Mr Koornhof had noted the difference between the credit rating agencies (which assigned ratings to securities Mr Koornhof s – debt instruments like government bonds and equities) and the credit regulator provisions (which affected individuals and those who loaned money to individuals). this Bill dealt with the credit rating agencies. However, it was useful to throw a line between the two.

Mr Momoniat confirmed that this Bill did not deal with credit judgements against individuals but with 'the big boys and girls' like companies and countries. it was national credit regulator who dealt with the credit records of individuals and their blacklisting. When there was a crisis in the world, it was important not to shoot the bearer of bad news. Credit rating agencies played a big role. They should have spotted Lehman brothers long before. it was possible that if the problem had been identified earlier, the bubble would not have become so big. on the other hand, one did not want to make credit rating agencies liable for everything. Investors must use their own judgement too. The financial crisis had demonstrated the need for regulating these agencies. The safest assets would be sub-prime loans, and the next crisis would not come from these but from something else that one now considered safe. Ideally, legislative changes would be made after establishing the twin peaks system. However, that was a process, and there were issues on which one had to move, such as OTC derivatives. At the same time, decisions by big players, as in EU directives, often left South Africa with little choice but to comply. After establishing twin peaks, there would be amendments to the financial markets legislation. Credit rating agencies were not very different from auditing firms in that there was likely to be conflicts of interest, and this aspect needed to be regulated. However, regulation would be by the FSB, not by the national treasury. so those who sold bonds should not be able to influence how the FSB operated.

Ms Jeannine Bednar-Giyose, Director: Financial Sector Regulation and Legislation, referred Members to the Financial Markets Bill Explanatory Memorandum at the back of the Bill.

Mr Momoniat said that National Treasury was moving away from the style of legislation with very detailed rules. It was instead desirable to give powers to the regulators and work through directives or regulations. Increasingly, if one depended too much on hard legislation, it was too inflexible, and the industry could move around it quickly. It was important to allow much more discretion to the regulator (not the Treasury, but the supervisory institution, like the FSB or the prudential authority that would be there in the Reserve Bank).

Mr Havemann replied that possible disincentives for endorsements would be dealt with in the hearings. He was surprised by Moody's interpretation of Clause 19. The rating agencies had been at the forefront of encouraging National Treasury to introduce regulation. The reason for this was that no one could trust an unregulated agency. It was important to ensure investors were protected.

Mr Momoniat indicated that National Treasury would prefer to have a yearly financial services laws amendment bill, like the Tax Laws Amendment Bill, to avoid an accumulation of pending legislation and to avoid radical changes. It would also hold the regulators themselves more accountable. This was the kind of approach in the twin peaks – operational independence but accountability.

The Acting Chairperson advised that 29 and 30 May, were the dates for the public hearings. National Treasury would respond on 05 June, and the Committee would deliberate on 06 June.

Mr Harris asked that the Committee Secretary confirm the dates by email.

The Acting Chairperson agreed, and adjourned the meeting.