The Committee held a workshop to discuss the Twin Peaks Bill, that is, the Financial Sector Regulation Bill. National Treasury gave a broad overview of the 17 chapters of the Bill. Discussions only reached chapter three of the Bill.
In response to a query on Twin Peaks concept, Treasury said there were many different models across the world. South Africa’s model was closest to the Netherlands and UK models. However it was not so much the system that was chosen that was important, but that good people should be running the agencies.
More and more there was a realisation that there needed to be a focus on the market conduct of banks. Internationally, there was a centralising of regulatory powers so that regulation could be system wide and Twin Peaks was just one of many systems that sought to centralise regulatory powers. The aim of the Twin Peaks regulation model was to increase regulatory coverage of the financial sector. It also wanted to centralise this because most entities faced multiple regulatory bodies with different requirements and this caused problems.
The Bill was based on some critical definitions found in Chapter 1, amongst which were the definitions of: financial customer; financial institution; financial products and financial service. The Bill would impact on SARB and the Financial Services Board in a big way and on regulators like the National Credit Regulator and the National Consumer Commission.
Members asked to locate the Bill in terms of models looked at overseas and where the Bill differed from the UK version; noted the need to clearly identify the main objectives of the Twin Peaks legislation; complained the principles appeared banal and would have preferred the presentation to identify the major risk factors emerging from the global financial crisis that Treasury wanted to address through the Bill and then present the South African model and how it would address these risks; noted the constitutional role of SARB and asked if the powers and functions of SARB identified in the Bill were ordinarily fulfilled by all central banks; asked about the Myburgh Report on the standard of corporate governance in the five largest banks.
Chapter 2 of the Bill outlined the mandate, role and powers of South African Reserve Bank (SARB) in relation to financial stability and these included:
- Monitoring of financial system for potential systemic risks (clause 12)
- If a systemic event occurs or imminent, must inform the Minister and propose actions and can give directions to other authorities like Financial Sector Conduct Authority (FSCA) and National Credit Regulator.
- Can designate Systemically Important Financial Institutions (SIFIs) according to a clearly set out process (clause 29)
- In consultation with the Prudential Authority (PA), it can set enhanced prudential standards for SIFIs, to be supervised by the PA (clause 30)
- Provisions related to winding up of SIFIs set out (clause 31)
- Produces an annual Financial Stability Review (clause 13).
Chapter 3 of the Bill covered the creation of a Prudential Authority (PA) and its governance framework and the creation of a Prudential Committee which includes Governance Committee(s) that are mainly established by PA (clause 45). The Governance Committee(s) are essentially responsible for remuneration, risk and audit. The responsibilities may also be performed by the corresponding committee of the Reserve Bank. The Chief Executive Officer is appointed by the Governor with the concurrence of the Minister (clause 26). The Prudential Committee would be responsible for overseeing the management of the PA as clearly stated in clause 42.
Members highlighted that the Bill should speak on ways to address the challenges that had been experienced in African Bank and how to ensure that the financial institutions are able to be held accountable in the prevention of financial crisis; indicated the need to pay special attention to clause 42 which is focused on the responsibility of Prudential Committee in overseeing the management of the PA.
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, Treasury, said several presentations on the Twin Peaks legislation had been presented to the Committee before. He gave a brief overview of the development of the Bill and said the Twin Peaks Bill had been to Cabinet several times. The second draft had been approved by Cabinet in December 2014 and the starting point for anything controversial in the Bill had been what Cabinet had approved. There was a fair degree of consensus from the Executive, the departments and Nedlac on the Bill. The Bill would impact on the SARB and the Financial Services Board in a big way and on regulators like the National Credit Regulator and the National Consumer Commission.
Mr Roy Havemann, Chief Director: Financial Stability and Markets, Treasury, gave an overview of the Bill covering the content of the various chapters of the Bill:
Chapter 1 - covered the definitions, especially that of financial products and financial services;
Chapter 2 - dealt with the SARB;
Chapter 3 - covered creation of a Prudential Authority and its governance framework;
Chapter 4 - covered creation of financial sector Market Conduct Authority and its governance framework;
Chapter 5 - dealt with co-operation and co-ordination;
Chapter 6 - covered the promotion of regulations;
Chapter 7 - covered regulatory instruments;
Chapter 8 - covered the licensing framework;
Chapter 9 - showed how regulations could request information or start investigations;
Chapter 10 - covered law enforcement and remediation;
Chapter 11 - covered significant owners;
Chapter 12 - covered the problems of conglomerates;
Chapter 13 - covered penalties and levies;
Chapter 14 - covered the Ombud;
Chapter 15 - covered the Financial Services Tribunal;
Chapter 16 - covered fees and levies;
Chapter 17 - covered miscellaneous items.
Mr D Maynier (DA) said he assumed the Bill was based on the UK model and asked how South Africa’s version diverged from the UK model.
Mr Momoniat said there were many different models across the world. The system chosen was not so important as the fact that good people should be running the agencies. Historically, in South Africa the focus had been on the prudential market which had not been an issue. The 2008 Jali Report found that banks were healthy but SARB was not focussing on bank charges. There was a realisation that there needed to be a focus on the market conduct of banks. Given that the banking sector was an oligopoly, there was a need to have one tool for each objective rather than one tool to attain all objectives and therefore it would help to have a dedicated market conduct regulator.
Apart from the UK model, Treasury had looked at the Australian and Canadian models also. The UK model did have Twin Peaks because it was in need of it. Treasury had decided to wait and see the reforms implemented by the UK because Treasury had the leeway not to act as immediately as the UK needed to. The UK and the Netherlands were the closest to the South African model. A question that remained was whether one should have a board to oversee the regulator. The answer was in the affirmative with some countries having boards and some having commissions. South Africa wanted to have a situation where the commissions sat together to make a collective decision. his experience of being on a board was that the board was making the right decisions. The Prudential Committee would have sub committees and Parliament should check whether the accountability mechanism was strong enough. The US system was too fragmented, which arose as a function of its politics.
The Chairperson asked about models used in developing countries.
Mr Momoniat said Treasury did look at the BRICS countries and Mexico. The problem was that all developing countries were dictated to by what was happening in the UK. Two South African banks had its controlling shareholders and headquarters in the UK. The question was then, was Treasury dealing with the vulnerabilities of the Financial Sector Assessment Program (FSAP) analysis? Treasury did not want an MTN scenario with other authorities. South Africa had to meet global standards if it wanted to operate in the global environment. The primary regulator in India was the central bank which did everything and there was no focus on market conduct.
Mr Havemann said Chile and Belgium were going the Twin Peaks route. Countries were all moving to a centralising role in different ways.
Ms Katherine Gibson, Chief Director: Financial Sector Conduct, National Treasury, said that what was being seen internationally was the centralising of regulatory powers so that regulation could be system wide. Twin Peaks was just one of many systems that sought to centralise regulatory powers.
Mr Momoniat said there were different approaches, but the world was coming to a realisation that one could not focus only on the prudential aspect, one had to look at market conduct too.
Ms T Tobias (ANC) said there was a need to clearly identify the main objectives of the Twin Peaks legislation. There was a need to define the South African approach which should inform the intervention of the Bill.
Mr Havemann said the aim of the Twin Peaks regulations model was to increase regulatory coverage of the only. It also wanted to centralise it because most regulated entities faced multiple regulatory bodies with different requirements which caused problems. Originally, a set of principles were set out for what it wanted to achieve (see presentation for the set of principles).
Mr Momoniat said these principles were developed in 2011. The banking and pension sector was all about trust and confidence in the institution. The normal generic consumer machinery was not geared to deal with a complaint which might come in 50 years time as for example with a pension, when a product or service was redeemed.
Regarding principle 5a, Mr Maynier said the term ‘independent’ was qualified, that the regulators were operationally independent, which was apparently a limited independence. Could the test of operational independence be explained as opposed to full institutional independence? Why was a lower threshold of independence chosen?
Mr B Topham (DA) said that while there was independence, he could not see who reported to what? Did both the authorities report to SARB and who did SARB report to? The FSB previously reported to the Minister and SARB reported to the Minister who, in turn, reported to Parliament.
The Chairperson said the principles appeared banal. He noted that in principle 15, the second last sentence spoke about a case where, if there were any contradictions, consideration had to be given to applying international standards taking into account local conditions. Did this make sense, because the sentence contained reference to both the terms ‘principles’ and ‘standards’ as if principles and standards were the same thing, yet later on they appeared to be different things. He would have preferred if the presentation had included five or six factors emerging from the global financial crisis that Treasury wanted to address through the Bill and then present the South African model and how it would address these five or six points.
Mr Momoniat said that the principles might sound banal but there was a lot of thought behind them because one was dealing with people who had felt superior and that they could take risks, where ‘profits were privatised and losses were socialised’. ‘the financial sector did not want the consumer to understand the products, even the person selling pension products had no clue about the charges’ which was why a tough market conduct regulator was needed.
Treasury did not want regulatory authorities that were totally independent. They had to operate within a framework. Policy was set by government and one could not have the regulator ‘going’ for a bank and imposing a $5.2b fine which would cause a run on the bank and ultimately the taxpayer would have to foot the bill. Hence the Regulator’s independence had to be defined within a transparent framework.
Each of the standards were defined by different regulators. Independence could not be unfettered so there were contradictions. The issue of the accountability of the Regulator was very important. The Regulator decided on licences independently, however there had to be accountability to the Minister and in the case of SARB, accountability to Parliament.
On the question of independence, if it was regarding licensing, then the answer was yes, so it was a nuanced independence. SARB and the FSB would be making representations to the Committee also. The Bill was dealing with governance issues in a different way. A big worry was that regulators should not be influenced by big finance inside and outside the country. Treasury’s concern was about undue influence and also that the regulators should not become tsars ruling unilaterally. Hence the appointment process was important. In the financial sector, directors had to be fit and proper and similarly regulators had to be fit and proper. The best plans could be undermined if the worst person was appointed.
Mr Topham said the Prudential Authority was not a public body, it was getting funds from SARB and not reporting to a minister or to a parliamentary committee. There was no source of funding for it except from levies.
On the funding of the Prudential Authority, Mr Havemann said that the transfer of assets was in an accompanying money bill on the levying of fees. This had to be a separate Bill because it was a money bill. The existing laws were under Twin Peaks. All the regulators would go under the Prudential Authority.
Mr Maynier asked where the National Credit Regulator would reside. His understanding was that it would continue to be under the dti and how did that situation arise?
Mr Momoniat said that the Market Conduct Regulator was mainly for credit and did not do prudential. In some countries the Market Conduct Regulator was incorporated with the Prudential Regulator. In South Africa, it would remain separate but with strong coordination mechanisms. There were many other market conduct regulators and the more fragmented it was the more difficult it became to regulate. Systemically Important Financial Institutions (SIFIs) required more coordination. Financial Sector Assessment Program did not tell you what to do, it would only imply that there was risk. all regulators should be more tougher.
Ms Tobias asked if regulators could be influenced by foreign regulators.
The discussion then veered to the issue of payday loan sharks.
Ms Tobias said there was a campaign against loan sharks and if one came across an incident, a case should be opened.
Mr Momoniat said the campaign was about indebtedness and garnishee orders. Access to credit was central in this case and it was not just banks that loaned money, furniture stores also did so. The indebtedness was a form of slavery because there were no insolvency laws for debtors. Currently the law only benefited creditors. The test in all cases was what to do to close any vulnerabilities.
Mr Maynier said the advantage of the principle was that the Committee needed to establish a legal test of independence. The test of independence would be the function of the appointment mechanism and the powers and function of the institution.
Coming back to the topic under discussion, Mr Havemann said that the Bill up to page 112, was in plain English which the members could follow. From page 114 it dealt with amendments and consequential amendments which were difficult to follow.
Chapter 1 Interpretation, Object and Administration of Act
Turning to clause 1 Definitions, Mr Momomiat said the most important definitions were the definitions of a 'financial product' and that of a 'financial service'.
Mr Momoniat said these were critical definitions because they defined the scope of the Act and Treasury wanted to ensure that no players got around these definitions.
Ms Gibson said the whole Bill was based on some critical definitions, amongst which were the definitions of: 'financial customer'; 'financial institution'; 'financial product' and 'financial service'.
Currently there were sectoral laws which gave very narrow definitions of what a product was and who was covered by the regulatory framework. However financial activity had blossomed and a lot of the activity fell outside the current narrow financial law definitions. Treasury had relooked at it and was now not looking from a sectoral perspective but looking at whether the activity was a financial activity irrespective of the sector it fell in.
'Financial Product' talked to the commitment by an agency to a customer regarding the product. Therefore the financial institution had to be sustainable to make good on a product, to customer 50 years down the line. This was prudential oversight. The Prudential Authority was responsible for financial institutions that provided financial products.
'Financial Service' was concerned with how the product was delivered. Was it being delivered and was it being distributed in the right way? This was the responsibility of the Market Conduct Authority.
The objectives of the Market Conduct Authority was concern over the customer relationship whereas the Prudential Authority was concerned about the financial institution and its products.
The Bill included a designation clause for financial products in clause 2(1)(a)-(j) which gave designation powers by listing a set of financial products. This was likewise for financial service activities in clause 3(1)(a)-(f). This allowed for defining an activity and scoping these activities into the regulatory net. An example would be property syndicates which currently did not fall under the regulatory net. The Bill needed to have the potential to bring activities such as this into the net.
'Financial institution' was an entity or person that provides a financial product or financial service and the person who accepted these products or services was a 'financial customer'.
Ms P Kekana (ANC) said retailers like Pick and Pay were offering financial services.
Mr Topham said stokvels were not exempted in the Bill but were exempt under the Banks Act. Similarly, the case of cooperatives who were also not regulated. It might be that an exclusion for stokvels and cooperatives were necessary.
Ms Gibson said that if the entities were not listed in clauses 2(1) and 3(1), then they were not in the net.
Mr Havemann said stokvels fell under the Banks Act where it had an exemption. This was also why the Banks Act was not replaced. Retailers were slowly becoming financial service providers but did not have to comply with credit requirements and this was unfair.
Ms Tobias said people in rural areas used the supermarket retailers to transfer or receive monies. They were effective in doing this and they should not be put in the same basket as banks. She added that there were no education for stokvel members and this should be provided to them.
The Chairperson said that Parliament needed to fund the appearances of small community structures like stokvels at Parliament to present their views.
Mr Momoniat said the aim was to cover any financial service or product. Many retailers piggy-backed on a bank’s licence. Treasury did not want the Bill to expand the regulator framework incrementally. It wanted to put out a policy paper on financial inclusion. The Bill allowed the Minister to designate a new financial service or product.
Mr Havemann said the Minister may designate a new financial service or product and an example of that would be property syndicates.
On clause 4 Financial Stability, financial stability was like oxygen, you knew you did not have it when you did not have it. He then read clause 7 Objectives of the Act.
Chapter 2 Financial Stability
This dealt with the South African Reserve Bank and it sets out its mandate, role and powers in relation to financial stability. SARB had to monitor the financial system for potential systemic risk as set out in clause 12. Clauses 14-19 indicates that if a systemic event occurs or is imminent, SARB had to inform the Minister and propose actions, and it can give directions to other authorities such as the Financial Sector Conduct Authority (FSCA) and the National Credit Regulator (NCR). It had the power in a crisis to act quickly and independently to tighten regulations and implement resolution plans. In clause 29, SARB is allowed to designate Systemically Important Financial Institutions (SIFIs) in accordance with a clearly set out process. In consultation with the Prudential Authority (PA), SARB can set enhanced prudential standards for SIFIs, to be supervised by the PA (clause 30). SARB is also allowed to make provisions related to the winding up of SIFIs as set out in clause 31 and produce an annual Financial Stability Review.
Mr Momoniat said it was an important chapter from a macro perspective because SARB could act quicker than government departments could. It would be good to hear the SARB Governor's comments on the Bill.
Mr Havemann said that the role of the Finance Stability Oversight Committee (FSOC) is to play an advisory role to SARB to support in The Bill also provides for conglomerate (group) supervision and allows authorities to regulate and supervise groups in their entirety, rather than only at holding company level (chapter 12).
Mr Havemann said that a Financial Stability Oversight Committee (FSOC) was created in the Bill and this committee already existed and had met but did not as yet have a statutory role. This FSOC provided an advisory role or oversight function to the system in support of the SARB fulfilling its stability mandate (clause 20-24) and it would coordinate the regulators to allow SARB to meet its financial stability objectives. There was also the Financial Sector Contingency Forum which had been meeting for decade. The Bill provides for conglomerate (group) supervision and allows authorities to regulate and supervise groups in their entirety, rather than only at holding company level (chapter 12). It was a collection of people concerned with financial sector collapse. It had run simulations and scenarios. Currently it did not have statutory functions so it had been included as a statutory body. The SARB Act was also amended.
Ms Gibson said the section on SARB covered monitoring and mitigating financial risks to financial stability as opposed to when actually in a systemic event. If there was a systemic event, a different set of powers for the SARB needed to kick in because the SARB would need a draconian and extensive set of powers in such an eventuality to be able to respond immediately, completely and fully. However Treasury was cognisant of getting the balance of these powers right across the regulators.
Mr Havemann said clauses 20 to 24 were about the Financial Stability Oversight Committee. Clause 25 dealt with the Financial Sector Contingency Forum. Clause 26 dealt with Co-operation among Reserve Bank and financial sector regulators in relation to financial stability. Clause 29 talked about designating systemically important financial institutions and the important thing to note was clause 29(3) which indicated what SARB should think about when designating such an institution: the size, the complexity and how interconnected the institution was domestically and internationally.
Mr Maynier said SARB was an institution provided for in the Constitution and could not therefore act beyond what was provided for in the Constitution. Was it true that these powers and functions of SARB in the Bill were ordinarily fulfilled by all central banks?
Mr Momoniat replied it was not just what was in the Constitution but also what was in the Act of Parliament, the SARB Act. He affirmed that the powers were the normal functions of central banks even under Twin Peaks where things were split up. The Financial Stability Oversight Committee was sometimes chaired by the Governor or the Minister. In the USA it was co chaired by the Minister and the Governor. Treasury’s view was that given that SARB was the Prudential Regulator, it was preferable that the powers be given to SARB but with consultation. If the central bank did not have these powers, the country would be asking for trouble.
Ms Tobias asked what point Mr Maynier was trying to make.
Mr Maynier explained he had asked his question out of concern that there might be a constitutional issue and secondly to understand whether this was a new function given to the Reserve Bank and if so was this consistent with the Constitution and legislation.
Mr Momoniat replied that financial stability had not been focused on prior to 2008 but SARB had published the public Financial Stability Review since 2004. This Bill gave SARB clearer powers.
Mr Unathi Kamlana, SARB: Head of Prudential Policy, said that the SARB Act already gave SARB powers for emergency liquidity assistance which was a specific intervention to mitigate systemic instability. The Bill would just more formalise the financial stability mandate of SARB. He would not categorise it as a totally new function. In addition the Constitution said the Bank should also do whatever else an Act of Parliament required it to do.
Mr Topham asked if there was an example where it had been applied in the past, because it was like a state of emergency for the banking sector. He noted that the Governor ‘may’ consult and make the determination alone.
Mr Maynier asked what were the obligations, in terms of the Act, on the Prudential Authority and the Governor to deal with Parliament in the event of a systemic risk or in the midst of a systemic event.
Mr Momoniat said there were reporting obligations on SARB and nothing stopped Parliament from calling in SARB if there was an issue. However one had to take into account that too much transparency might be a problem. For example, as in the African Bank case, one wanted the central bank to deal with the case quietly. The timing of the release of information would be important. Post event accountability however would remain important.
The Chairperson asked about the Myburgh Report.
Mr Momoniat said the report was confidential up till a certain point where the Registrar had to consult with the Minister. The Minister and Registrar wanted to release the report but there might still be market based information taken into account. In addition if the report was released too early people might take the government to court. So a lot of accountability comes into play. regulators from other countries would be visiting South Africa soon and it would be good for the these regulators to peer review the Bill and provide input to the Committee. The question was whether a central bank had the luxury of time. The Myburgh Report belonged to the Registrar not the Governor and its release was at the judgement of the Registrar not the Governor. While it contained market sensitive information, the report also dealt with issues of individuals and certain processes had to be followed where individuals had to be given time to respond. The Registrar should be asked when the report would be released.
Chapter 3 Prudential Authority
This covered the key characteristics of the Prudential Authority (PA) as established in clause 32. The Prudential Committee include Governance Committee(s) which are established by it (clause 45) and which are essentially responsible for remuneration, risk and audit. The responsibilities may be performed by the corresponding committee of the Reserve Bank. The Chief Executive Officer is appointed by the Governor with the concurrence of the Minister (clause 36). The PA CEO is responsible for the day-to-day management and administration of the PA. The Prudential Committee for the PA consists of the Governor, PA CEO of PA and other Deputy Governor as set out in clause 41. The Prudential Committee is responsible for overseeing the management of the PA as clearly stated in clause 42.
The Chairperson commented that the Bill should speak on ways to address the challenges that had been experienced in African Bank and how to ensure that the financial institutions are able to be held accountable to prevent a financial crisis.
Mr Momoniat added that the Bill was also focused on market sensitivity and other measures that could be implemented to enhance the responsibility of the regulators. It was becoming evident that the regulators always pretend as if they had not anticipated a crisis like the one that had happened in African Bank.
The Chairperson indicated that the Committee would need to pay a special attention to clause 42 which is focused on the responsibility of the Prudential Committee in overseeing the management of the PA.
The Committee would discuss the remaining chapters on the Bill in the next meeting. The Committee Report on the Tax Bill should be completed by 16 November 2015.
In response to Mr Maynier asking what had happened to the Division of Revenue Bill as it was supposed to have been passed by Parliament, the Chairperson said that the Bill would be done on 17 November 2015.
Mr Maynier maintained that the Bill could not be done on 17 November 2015 as the Standing Committee on Appropriations could not begin work until the Bill had been passed by the House and this was likely to push the Medium Term Budget Policy Statement (MTBPS) into the week of 23-27 November.
The Chairperson said that the Committee would be dealing with public hearings in the week of 23-27 November and these would be all-day public hearings.
Mr Maynier maintained that this was going to be difficult as the outstanding Budget Review and Recommendations Report (BRRR) would also have to be pushed to the week of 23-27 November due to the ongoing disruptions in Parliament.
The Chairperson promised that he would negotiate with the House Chairperson so the Committee could be exempted from plenary sittings to deal with all the outstanding matters.
The Chairperson adjourned the meeting.