Twin Peaks legislation, retirement reform: National Treasury briefings, Davis Tax Committee report postponed

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Finance Standing Committee

25 November 2014
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The National Treasury briefed the Committee on the proposals for Twin Peaks legislation, and gave the background and a summary of the main issues leading to the financial crisis of 2008, South Africa’s response and policy strategy, the concept of holistic reform, and the process to be followed. going forward. After identification of the problems, the G-20 leaders pulled together to improve the global system of financial regulation, guided by the Financial Stability Board, of which South Africa had become a member. The reform process of the G-20 agreed to fix fault lines that caused the crisis, end the Too-Big-To-Fail (TBTF) approach in the banking sector, adjust the focus to evolving risks, and build trust and cooperation. An international assessment of domestic financial systems was initiated, under the auspices of the International Monetary Fund, and it had endorsed the twin peaks and financial markets act reforms. In 2011, the South African Minister of Finance, later endorsed by Cabinet, proposed a comprehensive programme to reform the South African financial regulatory system, by focussing on three areas of addressing the institutional architecture of regulation on the basis of twin peaks, strengthening the existing approach to prudential regulation, and strengthening the existing approach to market conduct. The twin peaks essentially recognised that the financial sector should be working in the interests of financial customers and support balanced and sustainable economic growth. Customers should be protected through prudential regulation and supervision that would address the soundness of an individual financial institution and its running, and by market conduct regulation, which looked to how individual firms behaved towards their customers and  conducted themselves in the market. Although South Africa's financial sector was well-developed it was complex and inter-connected and the twin peaks would now enable commonality of regulation and more stable frameworks, a dedicated and strong market conduct authority, and a new focus on financial groups. The single system encompassing the twin peaks would shift away from the previous fragmented systems, eliminate forum-shopping and harmonise licensing, supervision, enforcement, appeals and customer complaints and education. Public comments had been obtained on the first draft of the Bill, a second draft was being prepared and was likely to be tabled to Parliament in May 2015.

Members sought clarity on how National Treasury could address criminal syndicates, expressing the view that the current criminal justice system was failing the people, asked about the interventions of the Reserve Bank to date, asked about shadow banking, and the causes and implications of the sub-prime crisis in September 2008. Members noted that other countries had adopted a twin peaks approach and asked what their experiences had been, and commented with approval on the existing South African regulations. National Treasury stressed that recovery depended not so much on the financial resources available, but on a sound approach by regulators, and sharing of information. Members were not altogether happy with the information provided and felt that further expansion was needed, asking that National Treasury return for a comprehensive briefing on the crisis, and noted that the Committee would be taking other briefings on the proposals also to assist it in coming to a more informed view of the proposals.

National Treasury then briefed the Committee on retirement reform proposals, although time did not permit an extensive description. The key problems were identified as lack of preservation, costs, governance, lack of annuitisation, lack of good coverage, too many funds, getting the right defaults, and  tax and benefit simplicity, and amendments were being drafted to the Pension Funds Act and Taxation Laws Act to address these. National Treasury was essentially trying, through the reforms, to encourage household savings and ensure that people had sufficient set by to support themselves in retirement. A major problem was the over-indebtedness of many households and National Treasury was still concerned about non-secured loans and vulnerability of people to moneylenders who engaged in reckless lending. Members welcomed the idea behind the reforms, but questioned why they had taken so long. They also stressed that government needed to engage in substantial public awareness and education campaigns on public money and the value of retirement funds, and thought given to incentives to invest in retirement schemes. They asked if people investing would have discretion in the way the funds were invested, whether asset management of funds was being looked into, and withdrawals from funds. Members also asked how the present retirement fund sector contributed to GDP, and what would be done to protect the unemployed, as well as proposals on social security reform.

National Treasury was due to brief the Committee on the Davis Tax Committee but noted that the report had not been finalised, and National Treasury thus felt that it would be premature to make any comment. The Committee stressed that its Members wanted to see the reports and receive a full briefing.

The Chairperson noted that draft Committee reports had been circulated, but suggested that these had to be amended, and asked Members to read them in preparation for the next meeting. The Parliamentary Budget Office had been asked to make written submissions to support its proposals on matters to be incorporated, and the reports were not likely to be adopted before January 2015.

Meeting report

“Twin Peaks” legislation:  Briefing by National Treasury
Mr Ismail Momoniat, Deputy Director General: Tax and Finance Sector Policy: National Treasury, said that he would, in his presentation, focus on the lessons learned from the global financial crisis, South Africa’s response and policy strategy, the proposals for Twin Peaks legislation, and the process to be followed.

Mr Momoniat noted that the September 2008 sub-prime crisis led to Lehman’s failure and a global financial crisis. It began by affecting North America and later spilled over into real crisis, which culminated in recession around the world. However, he said that South Africa did not have a financial crisis in the same way and it had not felt the economic effects such as loss of jobs or fall in global demand so severely.

Mr Momoniat noted that the G-20 leaders pulled together to improve the global system of financial regulation. The G-20 had been guided by the Financial Stability Board (FSB), an international body of national financial authorities and international standard setting bodies. South Africa had become a member of this body. He noted that the G20 was under a reform process, consisting of four steps, which were agreeing measures to fix fault lines that caused the crisis, ending the Too-Big-To-Fail (TBTF) theory in the banking sector, adjusting of focus to evolving risks and building trust and cooperation. There was also an international assessment of domestic financial systems which was initiated by the G-20 as one of the steps to recovery from the financial crisis. This assessment was to be conducted by the International Monetary Fund (IMF) Financial Sector Assessment Programme (FSAP) every five years, and by G-20’s Financial Stability Board Peer Reviewers (FSB) every two and a half years. As a response to its findings of key negatives, it endorsed “Twin Peaks” and “Financial Markets Act" reforms.

Mr Momoniat stated that South Africa’s strategic response to the financial crisis was formulated in 2011, when the Minister of Finance, in his 2011 Budget Speech, proposed a comprehensive programme to reform the South African financial regulatory system in order to ensure a safe financial sector that would serve South Africa better. The Minister's proposal was later approved by Cabinet. The reform of the financial regulatory system focussed on three priority areas; namely, institutional architecture of regulation on the basis of twin peaks, strengthening the existing approach to prudential regulation, and strengthening the existing approach to market conduct.

Mr Momoniat stated that a financial system should work in the interests of financial customers and support balanced and sustainable economic growth. All households and companies should be able to transact, borrow, save, and manage their day-to-day risks, in a safe, effective and efficient manner. Financial sector regulations were centred on three main categories: stability, prudent authority and market conduct authority. This would protect customers in two main ways:

  • Prudential regulation and supervision, which was concerned with the safety and soundness of an individual firm and aimed to ensure the financial firm was run prudently
  • Market conduct regulation, which was concerned with how individual firms behaved towards customers and how they conducted themselves in the market.

In December 2013, Cabinet approved the "Twin Peaks" as a way of simplifying the South African financial system. He stressed that the Twin Peaks presented an opportunity for better regulation. Although South Africa’s financial sector was well developed, it was also complex, interconnected, and concentrated. Twin peaks would therefore provide for:

  • A common system of regulation, which would build deep overarching market conduct, prudential and stability frameworks;
  • Dedicated and strong market conduct authority, which would mitigate tensions between prudential or conduct regulation; and
  • An introduction of new focus on financial groups.

The Twin Peaks, as a single system, would present a decisive shift away from the previous fragmented regulatory approach, in order to reduce and eliminate the possibility of regulatory arbitrage or forum shopping. The Twin Peaks also focussed on the entire product and regulatory cycle, and thus aimed to harmonise systems of:

  • Licencing
  • Supervision
  • Enforcement
  • Customer complaints
  • Appeal mechanisms
  • Consumer education

Mr Momoniat noted that there were 300 pages of public comments that had been compiled in relation to the Bill approved by the Cabinet. Based on these comments, the second draft of the Bill was about to be finalised and would be released for further public comment. It was expected to be tabled before the Committee in May 2015.

Mr Momoniat noted that the Banking Association of South Africa (BASA) should be called to brief the Committee because it was an independent body that assessed the South African financial sector. He further noted that he would be sending the G-20 report, with a summary of the assessment, to the Committee.


Mr D Ross (DA) appreciated the proposed regulations to address key challenges in the financial sector. He stated that people were concerned with the analysis also in relation to proper costs. He sought clarity on what the National Treasury could do to deal with property criminal syndicates, given that the criminal justice system was, in his words, "failing South Africans". Referring to the Reserve Bank as the prudential regulator, he sought clarity on its minimum intervention, especially the National Treasury’s view on the Reserve Bank’s intervention with regard to the African Bank. He commented that the intervention was premature. 

Mr D Rooyen (ANC) welcomed the presentation and sought clarity on how “shadow banking” worked in South Africa.

The Chairperson sought clarity on the view of the National Treasury concerning the September 2008 sub-prime crisis and asked what actually happened, and what the implications were. He questioned how South Africa could manage the situation better. He thought that Mr Momoniat’s explanation would be clear to an ordinary person in the street. He commented that Britain had the same “Twin Peaks” approach, and sought clarity on whether it had resolved the crisis better, and also asked whether there were criticisms or negatives to the Twin Peaks.  He remarked that the he was very proud that South Africa had developed financial sector regulations, in which North American and European countries were showing an interest in emulating. He asked whether the regulations were developed as a result of the transition that took place in 1994. He also sought clarity of what "shadow banking" was.

Mr Momoniat confirmed that the Twin Peaks legislation helped Australia, Canada, and Switzerland to respond to the financial crisis better than others. It did not matter what resources a country had, but recovery rather depended heavily on the culture of regulators and the nature of the financial sector legislation and regulations, as well as how the regulators shared information, and other similar considerations.  In the case of South Africa, it was possible to have one financial body for different sectors - for example, one for insurance, one for financial services, and another for credit services, but South Africa's National Treasury had urged all institutions to talk to each other. He said that the challenge had to do with how to break the silence and how to organise and coordinate activities, and the approach to be adopted. Some institutions wanted to focus on insurance, but, at the end of the day, their financial services were cross cutting. In sum, the type of the system had less to do with the success than the stance. In South Africa, market conduct had actually been neglected, with many customers having been treated poorly, and some actually having been cheated. Traditionally, it was not the duty of the regulators to focus on the market conduct, but now it was more typical for prudential regulators to look at companies’ behaviour towards their customers. He stressed that the success would depend on the culture and the system a country adopted.

Mr Roy Havemann, Chief Director: Financial Market and Stability: National Treasury, stated that the answers to the questions around the September 2008 crisis could be found on page 9 of the Red Book that had been submitted to the Committee. Chapter 2 explained in detail the issues that caused the financial crisis, and further information could also be found on the National Treasury’s official website. The underlying cause was business transactions between the banks of the USA and China, and the crisis derived from lending and savings. Lending was later securitised and the banks were stuck by the securitisation mechanisms, leading to some deals that led in turn to the collapse of the economy. In effect, banks were lending money for the purchase of property, for instance, when there was not income to pay the loans. Securitisation caused stress not only in the banking system but also in the non-banking system, such as pension funds. Securitisation mechanisms were introduced by the financial institutions outside the USA such as firms in Germany.  

Mr Havemann stated that the reports submitted to the Committee talked about the issues of securitisation. The legislation was being introduced to ensure that financial sector would be safer.

Mr Momoniat added that the question around the underlying causes of the financial crisis was a difficult one, since it was not possible to name one thing that triggered the crisis. He could state that the problems were deep-seated and interconnected. A small problem could expand to a huge one, and that was why it was necessary to have checks on the quality of legislation. He referred the Committee to the African Bank matter, and said that there was a provision in the system that was too optimistic, and this became worse when the law was changed. One problematic issues had to do with the writing off  loans. The underlying problem was based on reckless lending to poor and unemployed people. There should be a deliverable mechanism in the context of eradicating the Too-Big-To-Fail (TBTF) philosophy in the banking sector. The integrity of the system was important and money-laundering should be alleviated. Financial inclusion was very important for economic growth.

The Chairperson appreciated that the reasons that caused financial crisis were too complicated, but said that the Committee needed a clear understanding of what happened and what it could do about it within the confines of democracy. There were other structural and systemic issues that Mr Momoniat was not addressing. The Committee needed to know what could be done to protect the consumers, how banks could be protected from financial risks, and what role this Committee could play to ensure that the situation did not deteriorate into crisis. Even if Mr Momoniat had no answers today, the Committee would need to know the answers to these questions at some stage. He suggested that a further briefing by National Treasury be arranged to deal with these issue and give the Committee a clearer understanding.

The Chairperson stated that the Committee's Content Advisor would also brief the Committee and  outline other stances on the Twin Peaks legislation,after January 2015.  Parliament could not simply rely on the executive decision and briefing but had to be put in a position where it could come to its own independent conclusions concerning the proposed Bill.

Mr Momoniat said that the major problem was incentives in the banking system. He said that it was no possible to "prioritise the profit and socialise the losses". The banks at some stage thought that they could take the risk but the question was what would happen if things went wrong; one view was that in this case, the State would be under an obligation to come in and bail them out. It did not matter whether there was a legislative mandate or not. When the loss was socialised, other financial institutions were also affected and eventually the economy was affected too. Banking was in a sense political, because it was the government that decided about the tax.

Mr Havemann explained that the National Treasury invested in a lot of work, including awareness workshop, into ensuring that South Africa’s economy would not experience stock market crushes, economic bubbles and economic crises. The National Treasury work dealt with the symptoms, but not the causes.

With regards to capital and liquidity, he stated that the banks should be required to lend to a customer with a certain capital, not merely lend to anyone. Additional requirements for lending would be introduced to ensure a level of good financial stability. The assessment of liquidity depended on the asset that the bank was able to hold.

Mr Havemann explained that shadow banking referred to a person or institution who acted, behaved and operated like a bank but did not necessarily have a bank licence. The legislation specified that an entity would be regarded as a bank if it was taking deposits. Domestically and internationally, there were credit institutions who did not have a banking licence, and these institutions had made requests to be incorporated in the financial banking framework.

Mr Havemann further explained that the National Credit Regulator (NCR) dealt with how people lent, and not with the financial system. Many of the regulated institutions were internationally-based. They should adapt to how the financial system worked in South Africa. South Africa was conservative in its approach.

Retirement reform proposals: Briefing by National Treasury
Mr Olano Makhubela, Chief Director: Financial Investment and Savings, National Treasury took the Committee through the presentation (see attached document for full details) focussing on key and urgent problems in the retirement system, and an update and progress on retirement reform proposals. The Chairperson noted the time constraints and asked that Mr Makhubela summarise the main points briefly.

Mr Makhubela noted that the key and urgent problems in the retirement system were lack of preservation, costs, governance, lack of annuitisation, lack of good coverage, too many funds, getting the right defaults, and  tax and benefit simplicity. In response to the identified problems, amendments were being proposed to the Pension Funds Act and Taxation Laws Act . Moreover, the Tax Free Savings Accounts regulations were drafted and were published for public comment on 14 November 2014.

Mr Makhubela noted that the primary aim of the proposed reforms was to encourage household savings and ensure that individuals were not vulnerable to poverty while working and in retirement. The key policy proposals were intended to:

·         Encourage preservation and portability, especially during job changes;

·         Enhance governance of funds;

·         Encourage annuitising at retirement;

·         Simplify the taxation of retirement contributions;

·         Encourage non-retirement saving through tax free savings plans;

·         Encourage good value retirement products and services, by reviewing costs.

Mr Makhubela briefly explained each of these proposals or policy priorities.

Mr Makhubela noted that a key problem that had to be addressed was the over-indebtedness of many households. In South Africa, 45% of the million credit active consumers had impaired records, which meant that they were three or more months in arrears, or had adverse listings,  judgements or administration orders against them. Rapid increase in household indebtedness was accompanied by a poor market. Regulations were proposed to assist over-indebted households and to minimise future household over-indebtedness (see attachment for more details).

Mr Momoniat stated that the issue of indebtedness was a major concern, especially when coupled with non-compliance with garnishee orders and administrative orders. Non-compliance led to the involvement of lawyers, who charged steep fees that compounded the problem. Another problem was non-security loans. The government should figure out how to prevent these problems in the future. It should find ways to deal with people who lent money to the vulnerable people who had no income to repay the debt. He suggested that the National Treasury needed to brief the Committee on the issue of reckless lending alone. The National Treasury had spoken to the Department of Justice and Constitutional Development, raising concerns about money-lenders who abused the system, and how they might be held criminally liable. 


Ms T Tobias ANC) said that the issue of retirement regulations was closer to her heart. She asked the question whether, in principle, it was correct for a community to vandalise, for instance, a library, because of resentments around other services, such as buses that did not arrive on time. The members of the community might argue that it was their tax that allowed the investment in the library, and therefore they had a right to do what they liked to that library funded with their money. Clearly, however, this could not be correct; the library was public property that should be taken care of by government and there should be engagement between the government and the people to make people understand the value of the property. She wished that there could be auto-enrolment contributions in South Africa.

Ms Tobias said that there were people who had never been employed, but when they spoke about taxes, they were implying that they had indeed made a direct contribution. They were not held accountable for making some demands. She suggested that the postponement of the taxation amendments should be subject to public consultation, and the government should be educating people on what the government wanted to achieve. The burden on the fiscus would be huge if the people did not invest for their retirement. People should be responsible and use systems wisely. The retirement contributions could be incentivised, and she pointed out that incentives may not always mean money being paid out, since there could be other forms of incentives considered, such as, for example, granting a tax rebate. She suggested that there should be education around the essence of investing in retirement. She did not believe that anybody wanted to be forced, once they got older, to live in their children's houses, unable to feed themselves, when they had worked for their entire lives.

Dr D George (DA) remarked that the retirement reforms had been on the table for a long time. The reform process needed to be brought to an end soon. He acknowledged that people should be assisted to save as much as possible, because they were going to get older and needed to be able to look after themselves. He expressed concern about the asset management of the funds. When people invested their monies they believed that they would get a good return with some benefits. He sought clarity on whether people would have any discretion on whether and how their money could be invested, and whether there had been any discussion on asset management of the funds. 

The Chairperson sought clarity on whether the National Treasury had thought about the issues of inequality and poverty. He said that there should be a balance between ownership and investment of a retirement saving. People could not be allowed to take out retirement savings as they pleased, simply because it was their money.

Mr Momoniat agreed that the retirement reform issue had been on the table for a while because the National Treasury had to convince some stakeholders, such as the labour constituency, on the issues. Many of the proposals that were made were good, but there was also some danger that on other proposals, the only people who would benefit were those who were imposing higher charges, and that would be detrimental to some individuals. These were some of the implications behind the reforms of what was in the existing retirement system. The problems identified could be significantly improved with the new proposals.

Referring to education, Mr Momoniat replied that National Treasury had held about 30 workshops or meetings in which the National Treasury met with workers, had explained the issue fully and met with  enormous support from workers and shop-stewards. When workers spoke, they were clear on the point that government should not touch their money.  They preferred a system in which they would feel that they had control of their retirement funds. The system was designed that they would get maximum amount of growth accruing to their benefit.

Mr Momoniat said that, in regard to asset management, there was substantial debate. The charges were going to be high. There would a huge benefit if the money was kept for 20 or 30 years. Defaults would be introduced, but it would be left to the trustees to deal with those issues. He confirmed that there were many umbrella funds where members had no power to make changes. In South Africa, the retirement system actually contributed to the economic growth of the country. The problem was how to deal with people who worked in an informal economy. This was one of the main challenges that the government was facing.

He said that disclosure was somehow a problem, because people were shocked by learning how much they had in their retirement accounts. If a disclosure system was introduced, it was necessary to indicate strongly that a customer would be taxed more if s/he were to touch the retirement funds before maturity, and conversely that s/he would be rewarded by allowing the retirement funds to grow. The offering of information without those caveats and warnings could be dangerous. Individuals should always be urged to seek advice from financial advisors on how they should use their money.

Mr D Ross (DA) asked for clarity on how retirement funds in South Africa contributed to GDP growth, and on how South Africa was able to offer the biggest gross savings rate, what were strategies to protect funds and restrict people from withdrawing money unnecessarily, and what the contingency reserve should be. He noted that South Africa had 46% unemployment and sought clarity on what should happen to the unemployed constituency.

The Chairperson sought clarity on the social security reform.

Mr Momoniat said that the issue of the social security was very complex and it was a matter that needed a careful approach.

The Chairperson asked that all questions should be responded to in writing.

Davis Tax Committee (DTC)

Mr Momoniat stated that although the agenda had suggested that National Treasury should brief the Committee on the Davis Tax Committee, its report had not been finalised, and National Treasury thus felt that it would be premature to make any comment. He noted that Judge Dennis Davis could be asked to brief the Committee on his work once the reports were completed and finalised.

The Chairperson expressed his unhappiness about the postponement. He indicated that the National Treasury initially referred the Committee to its website for information. The Committee had disagreed on that, and instead requested to be briefed on the matter. The Committee needed to see the reports submitted, because the different political parties wanted to comment on them.

The Chairperson said that the Committee would be in touch with the National Treasury's Parliamentary Liaison Officer to set another date for a briefing to the Committee.

Committee Reports
The Chairperson noted that draft reports had been distributed to Members, but could not be considered at this meeting. They were not compliant with the Committee's requirements that they be clear and concise, and did not set out the Committee’s decisions, comments or views on some matters. These missing details had to be inserted in before they could be tabled for consideration and adoption by Members. He asked the Committee Secretary to ensure that the shortcomings were corrected.

The Chairperson, having consulted with Members, confirmed that the Committee should meet on the following Wednesday to adopt the reports, and asked that Members study the reports in advance of the meeting and send through comments by e-mail.

The Chairperson added that the Parliamentary Budget Office (PBO) had written to the Committee and notified it of five proposals that it suggested should be considered and incorporated into the report, and he had asked the PBO to submit a draft, setting out the proposals in clear and concise terms. As yet, that had not been received. It was obvious that the reports would not be able to be tabled to Parliament in 2014, and so they would be tabled in January. The first meeting was scheduled for 23 January 2015.

The Chairperson said he had also informed the PBO that he had communicated with relevant departments with regard to the Money Bills legislation, which would be discussed by the Committee and it would be looked at holistically.

The meeting was adjourned.



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