The 2008 global financial crisis proved that big benefits were associated with the financial sector, but also big risks. Financial sector regulation had to be intrusive, intensive and effective to make the financial sector safer. South Africa had opted for the Twin Peaks model to shift from a banking and non-banking prudential regulatory system, to a focus on prudential and market conduct objectives for both. Prudential regulation was concerned with the soundness of individual firms, and market conduct regulation with how a firm conducted itself in the market. In the current South African approach there were ±15 regulators. The question was how regulators coordinated their activities. The proposed regulatory architecture in the revised draft Financial Sector Regulation Bill consisted of prudential and market conduct authorities, known as the Prudential Authority (PA) and the Financial Services Conduct Authority (FSCA). The content of each chapter of the Bill was explained. The Bill proposed the establishment of an Ombud Council as a statutory body. It also established a Financial Services Tribunal to hear and determine reviews. Treasury submitted that the Finance Standing Committee had a role to play with regard to conceptual, strategic, policy and organisational aspects of the Bill. The critical question was whether the Bill went far enough to deal with a fragmented regulatory system.
In the discussion, Members were concerned about what was termed a plethora of regulators. Treasury had asked in the briefing that the Finance Standing Committee concern itself with whether the Bill could address regulatory fragmentation, and several Members were skeptical about that. A Member asked if the State Legal Advisers had picked up on constitutional issues. Treasury was asked what it meant by using the analogy of nuclear energy regulation, with reference to financial sector regulation. There were questions about levies, Libor, cost effectiveness and implications of the legislation for cooperatives; the role of asset managers in relation to trustees; and separate sets of principles for prudential and market conduct regulation was called for.
Briefing by the National Treasury on the Financial Sector Regulation Bill
The briefing was presented by Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy; Mr Roy Havemann, Chief Director: Market Conducts, and Ms Cathy Gibson, International Team.
The key lesson learnt from the 2008 global financial crisis was that the financial sector is typified by big benefits, but also big risks. Financial sector regulation had to be intrusive, intensive and effective to make the financial sector safer. South Africa opted for the “Twin Peaks” model to shift from a banking and non-banking prudential regulatory system, to a focus on both prudential and market conduct objectives for both banking and non-banking. Regulators had to be able to identify and manage risks within the sector. Customers of financial services needed special protection, as they were often at a disadvantage compared to sellers, advisers and agents. Prudential regulation was concerned with the safety and soundness of individual firms, and market conduct regulation with how a firm conducted itself in the market. In the current South African approach there were ±15 regulators. The question was how regulators coordinated their activities. The failure of African Bank Limited (ABIL) pointed out the need for a stronger system of financial regulation, especially of conglomerates with subsidiary companies. The revised draft Financial Sector Regulation Bill expressly recognised the importance of the National Credit Regulator (NCR) in a regulatory system. The financial stability oversight role was firmly placed with the Governor of the South African Reserve Bank (SARB). The SARB could operate speedily to deal with rapidly emerging risks. The Governor could designate systemically important financial institutions (SIFIs) for better management and monitoring. The Bill allowed the Minister to designate new financial products.
The Committee was presented with the content of the Bill, with reference to the activities and structure of the prudential and market conduct authorities, known as the Prudential Authority (PA) and the Financial Services Conduct Authority (FSCA). Accountability of these authorities had to be strengthened, including annual reports to be tabled in Parliament. The FSCA and PA had an obligation to cooperate with all key regulators. Authorities would be empowered through standards to impose requirements to fulfill their mandates. The Bill would not change existing licensing requirements. New licences could be issued for newly designated products and services. The Bill proposed the establishment of an Ombud Council as a statutory body that would establish a single point of entry into the ombud system. The Bill established a Financial Services Tribunal, to hear and determine reviews in terms of a financial sector law.
National Treasury submitted that the Finance Standing Committee could attend to questions around conceptual, strategic, policy and organisational issues. The critical question was whether the Bill went far enough in dealing with a fragmented regulatory system.
Mr A Lees (DA) asked if the Twin Peaks legislation could prevent Libor. He asked if there was a connection between the Libor example cited and the Twin Peaks legislation.
Ms Gibson replied that the situation in South Africa was not as dangerous as in the UK. The question was how things would be shifted. Going forward, the market conduct authority had to be looking out to see where risks would come up, and respond. The crucial questions to ask would be whether an authority had jurisdiction, and if so, what kind of intervention was needed.
Mr Momoniat added that there had to be benchmarks and regulators to look at market conduct to see if business was conducted ethically.
Mr Lees referred to the determination of levies. He asked if there were safeguards with regard to nuclear energy. The top executive of the Financial Services Board (FSB) earned six or seven times what he earned as a Member of Parliament. He asked if levying would be subject to oversight by Parliament.
Mr Lees remarked that the plethora of regulators referred to would not disappear under the Twin Peaks system. It would merely be gathered under a single structure. It had to be made more cost effective.
Mr Momoniat replied that cost effectiveness was an accountability issue. There were regulators who thought that they had to have their own budget and pay themselves. On some issues South Africa differed from the international standards. One institution could hold three different opinions, prompted by fiduciary responsibilities.
Mr D Maynier (DA) noted that the Bill had been with the State Legal Advisers. He asked about key factors raised by them, and whether there were any constitutional issues. He asked about financial implications for the State, and levies on financial institutions.
Mr Havemann replied that the state legal advisers had said that there were constitutional implications related to how all relevant institutions would be levied. There would have to be an additional bill, which would be a money bill, to regulate the amount allocated to institutions through the levy. There would be no surprises with regard to levying. There would not be many financial implications for the State in the first year or two. More transparency would be brought to the funding framework. There would be a clear process to follow. The difference between South Africa and the UK was that in South Africa rates were determined by the Johannesburg Stock Exchange (JSE), which was bound to regulatory requirements under the Financial Markets Act. Hence rates were already calculated within a regulatory framework. In the UK, rates were determined by the Banking Association. The integrity of the South African process was better, with safeguards against abuses.
Dr B Khoza (ANC) remarked that the definitions of the current and the proposed regulatory architecture were not yet clear. Except for the super-tribunal, things remained the same.
Mr Momoniat responded that SARB looked at financial stability more explicitly. It was not just one single creature. The Prudential Authority was a separate juridical entity within SARB. There was a financial surveillance department to oversee payment systems. In Australia the prudential authority was not in the central bank, under its Twin Peaks system. In the UK it had been brought back. Regulators were not necessarily purely prudential or restricted to market conduct. Even pensions had a prudential element. In the UK, the Bank of England did prudential oversight. The FSCA looked at market conduct and low risk prudential issues. Regulators had to have a risk-based approach. Banking in the old way mostly referred to money, but there were other products involved. Regulators had to talk to each other. Regulation of market conduct was being expanded. There would be change in depth. It was important to know what the financial regulator was thinking. People knew that the world was changing. The concerns of the UK Twin Peaks system was more at the micro level. Levies increased because of expansion. It would not do to first do costing and then decide on regulation. There had to be regulation. Basel 3 imperatives were more costly. Levying had to be transparent. Regulators were not to talk against each other. It was unacceptable for vindictive regulators to be punitive. Regulators were not God. It was expected that it would be asked why regulators could not see failure coming. Hard questions still had to be asked about what could have been done better. Regulators had to be accountable to Parliament, lest they bury their own mistakes. He did not agree with Mr Lees that regulatory executives were paid five times as much as MPs.
Dr Khoza asked what would happen to cooperatives. She asked if it would no longer resort under prudential.
Mr Momoniat replied that cooperatives would be dealt with under regulations.
Dr Khoza asked for clarity about how pension funds were to be regulated.
Dr Khoza referred to the analogy of nuclear energy as a risk issue. It might be necessary to engage with other parliamentary committees on the matter. Inherent risk had to be determined. Nuclear risk could not be dealt with in an offhand manner. This risk was a widely discussed issue and had to receive serious attention. South Africa was being placed in a different light. The IMF had raised the issue.
The Chairperson remarked that there could be difficulties with the Bill with regard to how financial institutions were regulated. The National Credit Act was under the Department of Trade and Industry (DTI). Treasury had to go through the Bill with the DTI, to see if there was agreement among the two departments about holding regulators to account. Procurement issues related to nuclear energy had been raised with the Chairperson of the Energy Portfolio Committee, and had to be raised again. The Committee could meet with that Committee, and possibly Public Enterprises. The financial implications of nuclear energy had to be known. The Energy Portfolio Committee had to call a meeting with the Finance Standing Committee and the Public Enterprises Portfolio Committee.
Mr Maynier called on Treasury to present an assessment of nuclear issues.
Mr Momoniat replied that the nuclear analogy had been in use for some years. Financial sector regulation was compared to nuclear energy regulation because both were associated with big benefits and big risks. Nuclear energy had to be kept safe. There was a nuclear regulator responsible for adhering to safety practices. It was not a comment on nuclear energy as such, but rather on systemic risks. Regulators also had to reduce risks relevant to flying planes. There had been a real meltdown in 2008, with enormous implications. The importance of looking at systemic risks had emerged from that. From a regulatory perspective risks were controllable. Not only regulation was needed, but also supervision. The lesson to be learnt from the 2008 global crisis was that the financial sector could cause meltdown. When there were problems, it had to be asked why it was there. With regard to the failure of African Bank, it could be asked what regulators could have done better. But regulators were not God. They could not prevent bank failure.
Dr Khoza remarked that more attention had to be paid to asset managers. It was not proper for asset managers to deal with pension funds. Asset managers had to make decisions about what to invest in. Trustees were not financial managers. It had to be decided where asset managers fitted in, in the scheme of things.
Mr Momoniat replied that the Twin Peaks legislation dealt with asset managers. It was probably a market conduct issue. Trustees did not know how to deal with retirement funds, and had to depend on asset managers. It had to be asked how trustees did their jobs, especially when they represented workers. It was not good practice to give a blank cheque to asset managers. Trustees could and had to play a role. It was asset managers who convened trustee functions. Regulators had to have governing powers. Resolutions had to be in place. Government had to intervene when necessary. A way had to be found to make asset managers accountable to the Executive and to Parliament. Ombuds were getting numerous complaints because asset managers were not doing their work. It could not be sorted out by internal mechanisms. Feedback mechanisms had to be considered. A regulator who acted punitively, out of vindictiveness, had to be fined or even put in jail.
Dr Khoza urged that Treasury provide a set of principles to govern prudential and market conduct regulation. Although there was overlap, there had to be separate sets of principles.
Mr Maynier noted that the Bill had been referred back to Treasury by the state law advisors. He asked if the only constitutional issue was around levies.
Mr Momoniat responded that it was not as yet a formal issue. There had to be standards. In a democracy all legislation moved through Parliament. The question was whether there was transparency. Regulators had the power of law. The question was how they handled issues. They would be granted quite draconian powers, but it had to be exercised in accord with the Constitution. There was a process for standards. It was similar to that of legislation. Regulators could not just issue decrees.
Mr Maynier again asked if the state law advisers had indeed raised constitutional issues, and if so, what this was.
Mr Havemann replied that there were no constitutional issues. There was merely advice on how to deal with levies. The Bill had been certified, which meant that there were no significant constitutional issues. Treasury would take advice on constitutional issues.
The Chairperson agreed with Mr Havemann that the Bill had been certified, hence there could not be constitutional issues. If anything was henceforth found to be unconstitutional, it could be dealt with in due course.
Mr D Van Rooyen (ANC) asked about cooperation between the NCR and other regulators.
Mr Momoniat replied that financial inclusion was one of the key objectives of the legislation. There were political disagreements between constituencies, and conflicts of interest. Yet there was a healthy tension in the system. Treasury had to ensure that people hear each other, and that there was fair practice. With regard to market conduct, all regulators were not effective. People had to understand broader reforms. Many did not see the bigger picture. There was much ill-feeling among regulators in the UK, but in Australia it was different. Regulators had to be able to see one face of government.
The Chairperson concluded that there would be further engagement with National Treasury
The Chairperson adjourned the meeting.