The meeting began with a submission from the Voluntary Ombud Schemes collectively. They indicated that they welcomed the Bill, but felt that several sections from the draft bill introduced in 2014 ought to be reintroduced, particularly those dealing with the suspension of recognition of an Ombud scheme, rules made by the Ombud Regulatory Council and the equity principles which ought to inform the work of Ombud schemes.
Members raised concerns mainly about the independence of the Ombud schemes, given that they were funded by the industry and were not strictly speaking statutory bodies answerable to government. The Banking Services Ombudsman responded that the Ombuds were independent in an analogous way to judges, because they had security of tenure and were answerable only to independent boards. Members also raised the poor perception the public had of the services offered by the Ombuds Schemes, which was met by information that public outreach was a major project with the Ombuds Schemes and that generally their turnaround times were reduced to between 70 and 80 days on average.
National Treasury indicated that the Bill did not intend to deal with all the complexities such as whether the Voluntary Ombuds Schemes should be fully statutory and was rather a stepping stone, aimed at creating a best in breed Ombuds and make coordination easier with the introduction of the Ombud Regulatory Council.
A submission was made by COSATU, which indicated that supported the Bill as a progressive measure aimed at protecting consumers and improving regulation of the financial sector. It identified areas of particular support such as the indication that lessons had been learnt from the 2008 financial crisis and the African Bank collapse. However, it felt areas could be strengthened including: the missed opportunity to incentivise savings and to deal with the concentration of capital in a few banks.
A submission was received from the Financial Sector Campaign Coalition, which indicated support for much of the Bill. However, it noted that it did not deal with certain things such as the ownership of the Reserve Bank. The Committee should be wary that the high standards set in the Bill could exclude potential players from participation in the financial sector.
Members discussion mainly saw issues around the ownership of the Reserve Bank and ancillary matters from the submissions spoken about.
The Chairperson said the aim of the present public hearings was to give a broader range of participants an opportunity to make representations on the Financial Sector Regulation Bill (the Bill or the FSRB). The Committee specifically requested NGOs and Trade Unions, because it was mainly the industry that had a vested interest in the Bill that had made submissions previously and they were shaping the discourse unduly.
Public Submission by the Voluntary Ombudsman Schemes
Mr Nicky Mohan, Credit Ombud, said the schemes were the Ombudsman for Short Term Insurance (OSTI), Ombudsman for the Long Term Insurance (OLTI), the Ombudsman for Banking Service (Banking Ombud) and the Credit Ombud. The Voluntary Ombuds Schemes (VOS or Ombuds Schemes) resolved complaints by investigating and if the matter was not resolved through negotiation, a recommendation may be made which was not binding or a determination that was binding on members of the scheme. All were accredited by the Financial Services Ombud Schemes Council in terms of the Financial Services Ombud Schemes Act (FSOSA). They had independent boards, comprising of non-executive independent representatives in the majority and industry representatives in the minority. These boards appointed the Ombudspersons and were accountable to the boards. The schemes were funded by industry levies and are non-statutory schemes with participation determined by the respective industry codes. All services are offered free of charge to consumers and the principles of fairness, independence, accountability and accessibility and impartiality are central to dispute resolution. The Ombuds all enjoy equity jurisdiction, meaning they can make determinations based on fairness rather than legal principles.
Mr Mohan moved on to what each Ombud does. The OLTI was established in 1985, had jurisdiction over complaints against subscribing members regarding long term insurance policies and dealt with a total of 4535 cases in 2015. The OSTI was established in 1989, dealt with cases regarding short term insurance policies such as household or motor and in 2015 closed about 10000 cases. The Banking Ombud was established in 1997, handles cases dealing with customer complaints against banks and closed 4899 cases in 2015. The Credit Ombud was established in 2004 and served two industries: credit bureaus and non-bank credit such as retail finance, micro lending, non-bank motor and home financiers. They have the jurisdiction to assist businesses or consumers negatively affected by credit bureau information or consumers’ disputes with their credit providers. In 2015 the Credit Ombud closed 5074 cases.
Mr Mohan commented on the FSRB, indicating that the Ombuds Schemes fully support the proposals in the Bill. The schemes felt that certain provisions contained in the 2014 Draft Bill should not have been retained going into the present Bill. Part of the preamble to Bill reads: “to require financial product and financial service providers to members of, or to be covered by appropriate Ombud schemes”, however no section gives effect to this purpose. The definition of ‘industry Ombuds scheme’ should exclude internal complaints resolution arrangements established by financial institutions. Many institutions have internal complaints mechanisms and are colloquially referred to as internal Ombuds, but these should be excluded.
The following sections from the 2014 Draft Bill should be retained, the wording of which was contained in the presentation: 190 (1), 190 (2)(b), 192 (2),195 (1), 195 (2), 195 (5). Section 190(1): sets out the jurisdiction of the different Ombuds. Under section 190 (2)(b) an obligation is placed on an ombudsman office to send complaints that fall within the jurisdiction of another Ombuds office to that office. Section 192 (2) states that the rights of complainant to seek legal redress are not affected by the Bill. Section 195 (1) and (2) read together provide that financial institutions cannot participate in ombudsman schemes that are not recognised and that such participation would be null and void. Section 195 (5) prohibits financial institutions from using terminology for in-house complaints handling arrangements that give the impression that it is an ombudsman scheme.
On section 194 determination of applications, subsection (2)(a) reads “the Ombud Regulatory Council must not recognise an industry Ombud scheme unless satisfied that a significant number of relevant financial institutions are or shall, on the industry Ombud scheme’s being recognised, be members of the industry ombud scheme”. The VOS “a significant number of relevant financial institutions” is vague and recommend the reference be to “a significant number of relevant financial institutions, based on asset value, gross income or financial customer base (as the Ombud Regulatory Council (ORC) may determine in general or in a particular instance) in a particular category of financial institutions are or shall”. Further, (2)(b)(ii) should read “make adequate and appropriate provision for consumers to lodge complaints”, instead of “making complaints”. It may be that the references to committees in section 194(2)(b)(vi) and (vii) ought to be to ‘governing body’. Further, the only members of an ombuds scheme were companies and the prohibition of companies from being on ombuds governing bodies in section 194(2)(b)(vi) was misplaced. Lastly, section 194 (3) deems a non-response from the Ombuds Regulatory Council after 3 months as a refusal to recognise and this offends against administrative justice principles.
On section 196 suspension of recognition, section 196(1)(c) over-broadly refers to “significant number of financial” and the provision is inappropriate, because the ombuds schemes could be held responsible for financial institutions’ actions through withdrawal of recognition of the scheme.
On section 199, any rule made by the Ombud Regulatory Council should be made in consultation with the relevant ombud or scheme. Section 199 (4) provides that no rule of the Ombud Regulatory Council may interfere with the independence of the Ombuds. However, section 199(2)(e)/ allows the ORC to make rules in relation to “dispute resolution processes” which may allow it to prescribe how a complaint should be resolved which impinges on the independence of an ombud.
Mr Mohan noted incorrect references in section 200, where “financial sector ombud scheme” an undefined term should read “industry ombud scheme”. Cross-referencing of the various sections quoted in section 26 are not correct referring to inappropriate sections. Section 10(1)(e)(iv) of FSOSA requires an industry scheme to apply principles of equity. The Ombuds Schemes did not regard sections 174 and 199(1) of the current Bill as giving sufficient recognition to this principle. Lastly, the penalties and sentences for any offence should be appropriate – the proposed fines and sentences seem excessive and should be reconsidered.
Mr Mohan turned to current objectives and initiative undertaken by the Ombuds Schemes. The various ombuds embarked on initiatives to bring the schemes in line with International trends and best practices, including targeted consumer education through radio/television interviews, seminars, press releases and publications; interaction with Industry to improve complaints handling and practices; and identification of systemic issues. Each Ombud publishes clear details about their powers and procedures, including website reference, promotional leaflets and other publications, telephonic advice to consumers and annual reports. Submission of complaints efforts included all four Ombuds having established a referral protocol, a centralised helpline – 0860 662837 (OMBUDS), The Ombuds are establishing a standardised complaints submission process and introducing a single portal/point of entry for all financial complaints.
The Chairperson said these were statutory bodies and government ought to engage them, allowing many of these issues to be sorted out outside of Parliament. Only if the statutory bodies could not do so should the Members intervene, because it did not have the technical expertise. The National Treasury team should sort these things out and he felt the Committee should engage towards providing a framework for the parties. Neither party ought to wilt and then the law must come to the Committee for a decision. Meanwhile, too many issues should have been resolved.
Mr Ismail Momoniat, Deputy Director General: Financial Sector Regulation and Tax Policy, National Treasury, said he did not think the parties were too far apart. The ombuds played a critical role and had more or less done a good job. However, there were too many VOS and it was confusing. There were the statutory ombuds which were the FIAS Ombud and the Pension Funds Adjudicator. He could not recall the last time the VOS had been to Parliament to talk about their work. The point was that there was a consumer who did not have as much power as a financial institution and where there is a problem hopefully the company will have an internal complaints mechanism, which is part of market conduct. If the company did not, the consumer can still go to the ombud for an alternative adjudication process. The idea is for it to be a quick, cheap way to resolve the problem, although they retain their right to approach the court. These are very important institutions for the consumer and the issues of independence come in in degrees. He did not believe the ombuds were overly independent with the current structure. He had previously raised issue with the Ombud Schemes, where he had felt that when ombuds get too troublesome they may not be reappointed given the significant role played by industry on the boards. It was about having a path towards more coordination, rather than have the FSRB deal with this comprehensively. The difficulty for many people is that they are responding to the Bill as tabled in 2015, which is all they can go by. The Committee had met with Treasury since and until a formal redraft was produced they would not know the technical amendments or corrections which have been done.
Ms Katherine Gibson, Chief Director, National Treasury, said most of the concerns raised were technical corrections, as opposed to principled objections to the ORC which would set standardised requirements, which was really the heart of what Treasury was doing with the Bill. The technical corrections had been integrated as NT worked through what the revised Bill should look like. For example, there were a couple of issues which were nuanced such as requiring membership to an ombuds scheme and those had been taken on board, but that was where a suitable scheme exists for the product. A principled issue was raised through correspondence and there was not complete agreement between the stakeholders, which is the extent of standardisation across ombuds schemes. An issue raised by the VOS was rules regarding the way the ombuds schemes operate. There was a bit of a contradiction in the submission, where on one hand it argued that such rules would inhibit independence, but at the same time stated the schemes were working towards consolidation. Broadly speaking, Treasury was working towards a standardisation of approach and whether the Bill did this the best way could be worked on. The Bill was really a stepping stone and a lot of the engagement was not about what to do with the FSRB, but rather where the ombuds scheme was set to go over the medium to long term.
The Chairperson said the Ombud Schemes were established in terms of the FSOSA and were funded by the industry, but were independent. Would they be regarded as statutory bodies? They were established by an Act, but were not really statutory bodies. Therefore, his argument that Treasury and these bodies ought to have sorted out matters before coming to the Committee was diluted. What has to be determined is how independent they are in practice, because the ultimate test is how they deal with consumer complaints.
Ms P Kekana (ANC) agreed with the initial input made by the Chairperson, because the Ombuds Schemes and Treasury should be able to engage and find each other. There was information which the VOS did not have and it did not help for everyone to meet, yet some participants were working off outdated information. Nothing stopped Treasury from relaying the information, because receiving input regarding a Bill from 2014 was problematic. Although not really a matter for the present, the VOS spoke to advocacy and marketing. There were many financial challenges for people and the Ombuds Schemes could have assisted with financial education, but Members did not hear the voice of the VOS. All four ombuds could assist the people to move out of the challenges. She was concerned about the VOS all speaking with one voice in the submission.
Mr S Buthelezi (ANC) agreed that there should be more engagement between the ombuds and NT, to reduce the load to be dealt with by the Committee. He asked what role and powers Parliament had over the VOS?
Ms T Tobias (ANC) said she disagreed with the Ombuds Schemes that they advertised themselves properly, because she had had a problem with an insurance company. If it were not for a friend who worked for an insurance company who advised her of the OSTI. She suggested using different methodologies to ensure the ombuds reached the different sectors of society. On the accountability lines, between the Ombuds Schemes there should be a solid relationship with government. Ombuds Schemes should be viewed as statutory bodies, having been established by an Act of Parliament. It did not necessarily have to be a Chapter 21 institution for it to be a statutory body and part of its accountability should be with government. She believed it would be clarified through further engagements between the Ombuds Schemes and NT on how to harmonise policy perspectives. She asked for clarity on a few matters raised by the VOS. Mr Mohan had referred to section 174 not giving adequate expression to the principle in section 10 of FSOSA. On section 196’s definition being inappropriate, could this be expanded upon? On section 199, the VOS wanted rules to be made in consultation with the Ombuds Schemes and what is meant by that. Lastly, what needs to be corrected in section 26?
Mr A Lees (DA) asked if VOS had any idea of the number of transactions the industry dealt with and the number that the Ombuds handled. He was also somewhat sceptical of the independence claimed by the Ombuds boards, given that they were constituted by the industry. While the VOS said the costs were paid by the industry, no industry was going to absorb that cost and they were in fact paid for by the consumer, although at point of application there was no additional fee. It was a bit of a misnomer that the service was free. He felt NT was open to a discussion on those points
Mr B Topham (DA) was also confused about the cross referencing, because it seemed fine to him, but perhaps his version had been updated. He understood what was said about the fines being high, but the provision stated “up to”, which meant it may not necessarily reach that amount. In his understanding, there was not really going to be a reduction in the number of ombudspersons. There would be a chief ombud, who would head the ORC and recognise the industry scheme ombuds. As the VOS was basically a voluntary association, perhaps that negated the argument about independence, because they were meant to be an arbitration mechanism accepted by the industry. The presentation indicated that the right of a complainant to approach the court not being affected by the Bill was not spelt out enough and VOS want that to be reintroduced. He wanted to check if his understanding of ombuds schemes as being meant to be a stop gap measure was correct. Perhaps this would be a good omission to put back into the Bill for clarity’s sake, because sometimes overkill is more useful than leaving something up in the air.
The Chairperson said his tentative feeling about this would be that Treasury should answer on whether the VOSs should not be a statutory ombud, given the way the Bill was going. Perhaps a crude analogy could be drawn with the Sector Education and Training Authorities, because their funding came from an industry levy and they answered to Parliament. A broader issue was to whom were the Ombuds answerable to and should they not in some form be answerable to Parliament. The FSRB was presented as a way to deal with the fragmentation in the financial sector and while the ombuds dealt with different matters, were so many ombuds really necessary and should they not be rationalised. The National Credit Regulator had informally submitted that it was concerned about how Treasury was dealing with matters falling within the Department of Trade and Industry’s portfolio. The argument presented then was not very strong, but was something Members should apply their minds to. Parliament would return around the first week of August 2016 and was allocating a whole month where the Committee will only look at this Bill.
Mr Mohan said that when the VOS made the submission, the intention was to be technical and make the Bill better law. In principle the VOS did not have an objection and in the interest of good law making made the technical proposals.
Add Deanne Wood, Ombudsman for Short-Term Insurance, said it was important to differentiate between all speaking with one voice and the use of the word all repeatedly throughout the presentation, in relation to the presentation and in relation to dealing with individual complaints. In that regard the VOS did not speak with one voice, because the various ombuds had no idea about the complaints the others received. The OSTI dealt with its specific industry and did not discuss complaints. The VOS was trying to rationalise the way they presented themselves to consumers. So that the consumer has a simplified means to approach the VOS, with one model to approach. On dealing with the public and spreading the word, a number of initiatives were undertaken, but she would agree that these are not done in an accessible way and most of the publications would not be read by consumers who required the assistance. Discussions were had around how the ombuds schemes could do that together. There were an enormous number of radio interviews and television broadcasts, but that was not necessarily sufficient.
Adv Clive Pillay, Ombudsman for Banking Services, on the independence of the Banking Ombud, said he was appointed by an independent board of directors. It had a majority of non-executive, independent directors and a minority of industry board members. The independent non-executive, directors could not be outvoted by the industry. He was not accountable to the industry and did not report to the industry. He was accountable and reported to the board only. He enjoyed security of tenure and could not be fired by the industry or consumer bodies if they were unhappy with a ruling. One of the functions of his board would be to guarantee his independence and deal with any attempts at interference. Another function of the board was to ensure that his office was adequately resourced. He heard many Members arguing that the ombuds could not claim independence, because they were paid by the industry. Was that the correct question, because his independence should be judged by the calibre of the work produced, not the source of payment. Judges were paid by the state, but he did not think anyone would therefore claim that judges were not independent. Therefore, the source of funding was not conclusive of one’s independence and it should rather be judged by the calibre of the work produced.
The Chairperson said Adv Pillay had said the non-executive, independent board members were the majority, but who appointed these directors. The concerns were not about Adv Pillay’s person; it was about the right of politicians. Given what has happened in the most established democracies, in similar situations where the industry is paying for something, even with the safeguards mentioned, there was a reasonable suspicion at times that decisions were affected. He agreed with what Adv Pillay said, but that did not detract from the validity of Members’ points. All of the safeguards could be in place, but people in Adv Pillay’s position could still not be fully independent. Further, he did not think it was correct to say that it was the quality of decision making which should be used as the yardstick for independence, because Members were not able to judge that. It was fair for Members to ask whether ombuds schemes should not be statutory and were not saying that the Ombuds should not be funded by the industry. The crux was: what was the problem, given the destructive effects of the post 2008 financial crisis, in the state having a say in the appointment of ombudspersons and them answering to Parliament.
Adv Pillay said the existing board Members appoint the future board members, but he could not say who appointed the original directors. The board tried to have a mix of board members representing various constituencies, for example consumer bodies. Where there is a vacancy on the board, it would make this known and names would be advanced.
Ms Tobias said listening to Adv Pillay; it became difficult to ignore what Ms Kekana was saying about the public perception of the role of ombuds. When she had interacted with the OSTI, it took a year to resolve the case and that was thorough consultation with the insurance companies, despite overwhelming evidence that the companies were at fault. This suggested an element of bias in favour of the industry. She did not want to try to test whether the Ombuds Schemes had since inception ruled in the best interest of the consumer, but the Committee should be concerned to be in a position to assure the public that there is an element of independence. Without discounting the fact that Members should not present it as if they have not been independent, as she had not yet formed a view. The Committee should look at gaps in how FSOSA governs these institutions and needs to make a policy decision around harmonisation of the interactions between government and the Ombuds Schemes.
Ms Jennifer Preiss, Deputy Long Term Insurance Ombud, said it was a bit of a philosophical question whether to have a legislative or a voluntary ombuds framework. In South Africa there are both types. There are benefits and disadvantages to both and before the Committee decides to go the statutory route, it should have a close look at these. On the Ombuds Schemes’ impartiality, one of the principles of an ombud scheme is impartiality and they have to allow both sides to put their cases before the ombud. Sometimes it does take a long time, with information being passed between parties. However, when one compares the South African schemes to best practice, their turnaround times stand up to scrutiny. She was unsure about the specifics of the case mentioned by Ms Tobias, but the OLTI always makes a provisional determination to ensure timeous satisfaction for the parties. The parties then have 30 days to challenge the provisional determination, then they have a right of appeal; none of which removes the complainants right to go to court. Surveys among the complainants are done every two years and every three years the OLTI is independently audited every three years. A lot done by the Ombuds Schemes to ensure they are complying with their mission and statement. She wanted to make it clear that the Ombud Schemes are there to resolve disputes, they raised awareness about the offices, but do not have an education role with consumers. Consumer financial education is not the Ombuds Schemes’ main focus and were the VOS to take on an education role they would have to be careful not to infringe on existing efforts. The VOS all agree that there needs to be more awareness of the schemes. Through legislation, now whenever a claim by an insurer is turned down, they have to advise the client and every policy issued must have their details.
Mr Momoniat said the issue of ombuds is complex and he wanted to remind Members of the architecture of the system the Bill intends to deal with. The intent is to deal with market conduct and it is important to know who did what in the chain. For example, Treasury wants in the first instance for every company in the financial sector to operate according to certain standards and must treat their customer fairly. Every company is going to have complaints and what should their complaints resolution mechanism look like. The regulators should look at the quality of the complaints mechanism. The Ombud Schemes did different things and the OLTI will have fewer transactions than the Credit Ombud. There are also different types of complaints and the first thing is that the company should have a relatively independent internal process. Then the customer went to the ombud, which will check if the company handled it properly. There has been an ombud in the past who was seen as a consumer activist and that was a disaster, because if the ombud is not seen as fair between the parties it is not efficient. If the industry is not happy with the rulings, then it will take the matters to court and that should be avoided. The pro of voluntary or industry ombuds is that generally the industry accepts their rulings. When there is a statutory ombud, the industry tends to oppose the rulings and going to court meant the customer had to wait even longer for resolution. Looking at the draft framework document produced by Treasury when it introduced the Bill, there was a chapter on the ombuds. When looking at the role of the ombud in the context of legislation the scope is narrow, but perhaps it would be good to have an open discussion about what the ombuds did, what the different models were and how best to fund them. Whatever was meant by independence, it is also that the ombuds are seen to be independent, because when a ruling goes against a party they would say the ombud is not independent. These are complex issues and there are products which are unregulated and the Financial Services Regulation Board has been trying to increase coverage. All the questions raised by Members around rationalisation and whether the ombuds should be statutory will not be dealt with in the Bill, because it is already trying to do too much. A basis is being laid for better coordination and standardisation. Once the twin peaks framework is set, a discussion on the way forward can be had. Currently the process worked reasonably well, but down the line the difficult decisions will have to be made. Treasury would like to come back to the matter, but perhaps the Bill is not the right place.
Ms Gibson said there is an evolving conduct framework and the Bill is seen as a stepping stone towards harmonisation. The Bill intends creating a best of breed ombud, even though there are more than one. Then once it is agreed how consolidation will happen, ombuds will already be standardised. Further, that Treasury is looking towards having a single market conduct act, because that will inform how ombuds are to respond to conduct issues.
Mr Mohan in response to Mr Lees, said the various credit bureaus received 105129 enquiries or disputes. A complainant cannot go to the Credit Ombud, before going to a bureau or credit provider and many complaints are resolved at that stage. Of the total complaints, the Credit Ombud received about 20000 calls and of those opened 5000 cases. Ombuds are different to a court of law, in that the ombud will look at the law and will also look at equity, such as how badly the consumer was harmed. The Credit Ombud has an equity clause in all its determinations. There is a specific provision in FSOSA, which requires applying principles of equity in resolving a dispute. This is beneficial for the consumer and the VOS is asking to have this principle incorporated.
The Chairperson said listening to Mr Momoniat, he understood why an Ombud cannot be seen as a consumer activist. They have to be impartial, so that the industry accepts the rulings. Further, if it is a statutory ombud, the industry tends to oppose these matters in court, whereas if it is a voluntary ombud they tend to accept the rulings. From being a Member he had dealt with a few cases which went to either the OSTI or Credit Ombud and the perception he found was that the VOS are ineffective. When he pursued a matter as a constituency Member, he did not have a good experience and the ombud was not very responsive.
Ms Woods said in the last three or four years there had been a drastic drive to deal with turnaround times and in the early 2000s matters were taking months if not years, but now most Ombuds Schemes can brag of an average turnaround of around 70-80 days.
Public Submission by the Congress of South African Trade Unions (COSATU)
Mr Matthew Parks, Parliamentary Coordinator COSATU, said COSATU supported the Bill, because it was a progressive Bill to help consumers through greater oversight over the financial sector. COSATU did not have areas of dispute, but had areas which ought to be strengthened in this or other Bills.
COSATU supported the Bill because it shows lessons from the 2008 economic crisis had been learnt. Lessons were also being learnt from the African Bank fiasco. COSATU has an affiliate union called SASBO, which represents a majority of banking workers and appreciates government’s efforts to ensure no jobs were lost during the African Bank debacle. The attempt to expand the oversight role of the South African Reserve Bank (SARB or Reserve Bank) is supported. COSATU cannot but agree with promoting greater transparency, accountability and oversight in this area. It is hopeful that the aims of promoting greater consumer protection, rights and standards comes through. Also supports and hopes that the opaque banking charges and abuse in the industry will be reduced and lastly that crime prevention efforts are strengthened.
Mr Parks said the areas to be strengthened, not necessarily to do with this Bill, which are important for the sector, include the concentration of capital in a few banks, if the intention is financial stability. Secondly, the lack of significant transformation in the banking sector ranging from ownership to the investment of profits and funds. The Bill gives SARB a role to play and this could be expanded to job protection and creation. Similar to the way the SARB intervened with African Bank. COSATU believes the Reserve Bank should be nationalised and should belong to the state, rather than private shareholders like a private bank. Major concerns for COSATU members were the excessive bank charges and interest they are charged. It hoped the Bill will not be used by the banking sector as an excuse to take away support lower income earners and SMMEs. In the present economic climate further economic stimulus is required and further support for low income earners and SMMEs. There is a contradiction in the banking sector’s theoretical perspective, the higher risk a client is the higher the interest rate charged, which means that an ordinary worker who is desperate for a loan pays a higher interest rate than someone who is rich. This does not make textbook sense, but at present COSATU are in a situation where the poor subsidise the rich, which is a gross moral contradiction. Treasury has spent a lot of energy trying to encourage workers to save and COSATU would have thought that the opportunity to incentivise savings would have been seized. Which worker is going to save, where the interest rate they are given is less than inflation? So COSATU urges squeezing the banks as opposed to the workers. It supports Bills aims of financial education and empowerment, but this cannot be limited to sectoral standards. There is an inherent contradiction to expect banks to give consumers a full, unbiased education to consumers and this should be done by a neutral party. Leaving this to the financial sector’s call centres, will leave consumers short changed. The ombuds are still quite far removed from the ordinary consumer. A major problem for workers is that they fall behind on payments for their houses or cars and banks repossess these and auction them off. Often stories are heard where banking employees are doing this in a corrupt way. The Bill should be looking to strengthen controls and minimise abuse. A person who has their home repossessed will not get another home loan and that means that family is forever condemned to homelessness and paying excessive rent.
The Chairperson said there was a court decision on banks auctioning off homes, without negotiating. He asked for a report from the Committee Support staff to be submitted to the Committee, because it may be necessary to look into legislation at some stage.
Mr Parks said in a similar spirit the Western Cape High Court handed down a good judgement on micro-lending and garnishee orders the previous year and COSATU knew that the Department of Justice and Constitutional Development was bringing two progressive Bills in this regard. COSATU supported the role of the National Credit Regulator, but if there are issues from the NCR’s side there should be engagements. COSATU knows that loan sharks are largely dealt with by the National Credit Act, but perhaps there could be an opportunity to push industry more here. Lastly, there should be a further role for organised labour and civil society.
Mr Parks said in conclusion that COSATU supported the Bill, but it could be made stronger in certain respects. It is a useful tool to empower government and consumers, which should be passed as a matter of urgency.
Public Submission by the Financial Sector Campaign Coalition (FSCC)
Mr Tebello Radebe, FSCC National Coordinator, said the FSCC is a coalition formed in 2002 made up, then out of around 80 progressive civil society formations representing tens of thousands of members in the political, religious, labour, community, and cooperatives sectors to drive issues aimed at the need for the transformation of the financial sector and the pursuit of a people focused economy in South Africa.
Mr Radebe commended the process thus far, with extensive changes following due consideration of relevant public comments. He trusted the process will continue to ensure meaningful participation of the general public in the processes of the formulation of legislation as part of the dictates of the Constitution. The FSCC appreciated the extent to which the Bill provided for the independence and added potential effectiveness of the NCR within the envisaged Twin Peaks model. However, while the Bill correctly seeks to empower the Minister with wide and far reaching powers for the further regulation of the financial sector, most of this is to be done through the same “Reserve Bank which continues to be an entity saddled with opaque private investors, some of whom are foreigners that include one powerful European family which owns shares in over 100 other central banks around the world and, in the FSCC’s view, is a major player in the globe with regard to thought control”. The Bill seems to skirt around tampering with the pending review of the Banks Act and Payment Systems Act, which the FSCC views as causes of slow transformation in the sector.
Mr Radebe said the purpose of the Bill is to regulate, supervise and stabilise the financial sector institutions. One may argue that this is to allow them to continue making large profits. The Bill fell short of elevating the intrinsic interests of the poor, for example it does not provide for any mechanisms for meaningfully transforming the slow savings culture in South Africa. Further, it does not mention how the poor will afford the court order which is to enforce the recovery of losses due to the behaviour of any rogue institution. It is very well to say that at a certain point courts can be approached, but one must be very wealthy to afford basic justice. However, the Bill clearly enhances bailout measures for failing or even errant financial institutions.
Mr Radebe said the Bill sets high standards, which must be balanced with the real conditions prevailing in the country, including, the low literacy rate as well as the widespread absence of financial literacy. These stringent bars “tend to feed the un-intended proliferation of, for instance, questionable funeral parlour operators who exist in large numbers, precisely because they serve a dire need”. Further, both the Ombuds Schemes and the Financial Sector Tribunal have to be supported by measures that will provide for affordability as well as the widest possible accessibility by the poorest of the poor to ensure economic justice which is currently denied. The FSCC is encouraged by reference to a leniency agreement approach with cooperative persons who are willing to assist the authorities to investigate those entities whose operations may be found to be outside specific financial sector laws. The long overdue action against all conglomerates is highly welcome as it will lead to the unravelling of tendencies to evade tax and channel profits into tax havens.
Mr Radebe said in conclusion the Bill has numerous merits and the FSCC eagerly await its regulations which it hopes will provide it will real teeth.
Ms Tobias asked for clarity on the concept of thought control and was interested in Mr Radebe’s understanding of how it related to the financial sector.
Mr Lees asked for the name of the powerful European family mentioned by the FSCC and asked which European country they are citizens in. Secondly, what did the FSCC mean by somewhat opaque shareholders in the SARB.
The Chairperson asked for the FSCC to expand on the Bill regulating, stabilising and supervising the financial sector, to perhaps allow them to make even larger profits. Secondly, he wanted an explanation of the statement that the Bill fell short on elevating the intrinsic interests of the poor. Thirdly, he sought an explanation of the claim that the Bill facilitates bailouts for ailing or even errant financial institutions. Lastly, how would the Bill open up the door for questionable funeral parlour operators. COSATU called for greater participation of civil society and organised labour and would it want this included in sections where consultation is required. When the public is consulted, it is usually inclusive. Is there a specific case to be made or specific provision which ought to be amended to include organised labour? Some Members of the Committee noted their concerns that four banks have over 80% of the market share in the country. He felt the Bill overall was reasonably pro-poor and pro-consumer, as opposed to the big fish. It is not about the individuals, but after 2008 who can say that the financial sector is credible.
Mr Buthelezi said whenever a bank falls; everyone around it will say that it was properly regulated. This happened with the crisis in 2008, so did the FSRB have proper checks and balances? With the collapse of the financial sector in the US a problem identified was the revolving door between the private sector and the regulators and this is a consideration in properly regulating the industry. Lastly, both speakers raised the issue of the ownership of the Reserve Bank. That statement is often made, without speaking to the problems with the status quo.
Mr Parks on the role of organised labour, said the thinking was that the council of financial regulators has working groups which could be a good platform for organised labour. Particularly, with organised labour in the financial sector or consumer organisations. The motivation is similar with other oversight authorities in government, where there could be a specific role allocated to civil society. It is also useful to specify that consultation should be geared towards civil society.
To Mr Buthelezi, COSATU believed there are sufficient checks and balances. The Reserve Bank currently is largely geared towards dealing with inflation, because this can be least afforded by the poor. The mandate is being expanded by the FSRB, but it should be expanded to the saving and creation of jobs. The Reserve Bank is a national asset and should be owned by the public at large. It is a contradiction in principle to have private shareholders in a public asset.
Mr Radebe on the ownership of the Reserve Bank, it is the Rothchilds family from Germany and one had to ask oneself what the big issue is with owning shares in a central bank, if not thought control. On thought control, the Rothchilds family also owned one of the largest news agencies in the world, in Reuters. They decide what is news and what we should and should not know. In South Africa many people say they did not know what was happening during apartheid, in the townships, because the news they received was selected to influence how they thought. The question has to be asked, in whose interest are the activities being done. If the purpose is to advance the process of ensuring certain private companies continue to make profit, it is in that context where the interests of the poor come last. On what is meant by regulating so that companies can make big profits and providing for bailouts, the basic intention has always been to say that South Africa has a well-regulated financial system. However, there is another way of looking at it. Since the legislation was passed for cooperative banks only about three have been registered. This is not an accident, because when high standards and requirements are put in place, certain players are left out of the economy. The reference to questionable practices of funeral parlours, is in the context of saying the requirements for providing insurance speak to a fit and proper person requirement. This requirement in itself is such that many people find themselves unable to meet the standard. They would rather act unlawfully, because people come to them for services. However, that is just one example and there are many such practices, beyond funeral parlours.
Ms Tobias said she subscribed to a particular theoretical outlook, which she did not necessarily present in Parliament. However, she carried the responsibility for creating a balance in society, as a public representative. She wanted to pursue Mr Radebe, because she wanted to understand the position of thought control in what is being discussed.
Mr Radebe said when he speaks about thought control in relation to the Bill and the financial sector, he means we are made to view things according to a certain paradigm and thought outside that paradigm is deemed wrong and should be rejected. With the financial sector, the FSCC raised the point years ago with the need for banks to extend home loans to what is today called the gap market. The reaction was that it would be expensive and risky. Our thoughts are then channelled in that direction and the likelihood is that this viewpoint will be accepted. Through the Financial Services Charter Council, the banks then accepted extending loans to the gap market, in return for BEE points. Evidence is emerging that the loans given to the gap market in that way are as good as any other and seem to be making good business. However, we are made to think in the paradigm that loans to low income earners are inherently risky and therefore must come with higher interest rates, because otherwise the banking system will collapse. We are made to think in a certain paradigm and the first source of this is the media.
Mr Momoniat on the Reserve Bank, said the SARB has specific provisions relating to it in the Constitution which outline what it does and in whose interests it acts. He found it incredible that anyone would say that the SARB does not act in the public interest. The fact that it has a shareholding structure, is a factor of is establishment years ago. Legislation was put in a while ago because there were a couple of troublesome shareholders and wild conspiracy theories. However, the fact is that they have absolutely no impact on the policy of the Reserve Bank. Given where we were to move towards full ownership will cost the state a large amount. He could say with full confidence that no shareholder has any influence on the policy or approach taken by the SARB. To the extent that it is involved in bank regulation, it is as a prudential regulator. However, there is also the conduct regulator and both are coming into operation. To state that the Reserve Bank has opaque shareholders, there are areas where confidentiality is required and it does not help to make vague statements like that. There may be areas which are opaque, but they should be pointed out specifically. However, the Bill does not deal with the SARB or its establishment. He reminded Members that a panel was introduced to ensure there are fit and proper directors of the Reserve Bank. The issue of bank failures has been dealt with in the Committee and with the failure of African Bank; there were amendments to the Banks Amendment Act. One thing realised is that there is great moral hazard with banks, but regulators will always need to do their best. Some bank failures should be allowed to happen; however, some institutions are systemically important financial institutions. Where there is a failure the regulators need to be held accountable and where there is a failure an independent investigation needs to be conducted. On lending to the poor, we are in a mixed economy and there is a prevalent paradigm. Banking is like the nuclear industry, it is highly regulated and almost everything around it is regulated. If it is not properly regulated, there are consequences from international regulators and local institutions face fines as the South African regulators would do with foreign institutions coming into the system. He did not think the poor should be getting loans which they cannot afford, which is why the NCR has issued new regulations on reckless lending. These are issues which need to be looked at carefully and the last thing we want is for poorer people to borrow for consumption. This is not to say that there are not market conduct issues, such as who gets the loans. However, the studies must be done. The FSCC raised the gap market in housing, but the industry could as easily point towards government, because dealing with housing there are many failures and the entire picture should be looked at honestly. The FSRB just lays the basis towards ensuring customers are treated fairly. A policy paper will be coming forward later in 2016 dealing with financial inclusion and it deals with whether there are sectors which are structurally excluded from the system. In the early 1990s there was redlining done by the banks, where a proverbially line was drawn and people in certain areas were deemed high risk. This has been sorted out to a large extent, but there are on-going problems to be monitored. On the revolving door, this is important to consider. However, given the pay levels it is rare that people leave the private to go to the regulators and generally the traffic is the other way. It is important to ensure that the regulators are not captured and are always intensive, intrusive and effective. While issues are resolved around the NCR, whenever there are different regulators there is scope for arbitrage. An ideological standpoint is not necessarily helpful and at all stages we need to understand whether the regulatory system as effective as it should be. One should look at these things objectively and consider the evidence as it arises. On funeral policies, these are the highest volume short term insurance products and this is where there are big abuses including the value for money provided.
Mr Jonathan, Deputy Registrar of Short and Long Term Insurance National Treasury, said these are important issues being looked at, that would be dealt with specifically in the Insurance Bill. This was tabled in January and aims to bring in a micro-insurance framework and provide for ways to deal with informal funeral parlour operators. Further to find ways of dealing with the disincentives to formalisation. The Bill will also be dealing with credit life, together with colleagues from Department of Trade and Industry and the NCR.
The Chairperson said the Committee wanted to note the written submission from the Association for Savings and Investments South Africa, Johannesburg Stock Exchange and the South African Communist Party. Phase one of the submissions is ending, but if necessary later on a further round would be allowed. He proposed that National Treasury’s responses be postponed until the Committee returns in August 2016.
Mr Momoniat said what Treasury does not like to do is to meet with specific parties and give only them the agreed changes to the Bill. An updated Bill has been produced which accommodates much of the changes. Treasury is aware that the Bill is with Parliament, but it could publish a revised Bill, which contains the proposed changes. That allows Treasury to have a more meaningful consultation with stakeholders, meaning that when the Committee returns in August meaningful proposals could be made. What has been given out today could be treated as reading material for Members.
The Chairperson agreed and it should be done by Treasury, but it should be careful of opening up another round of public submissions. The submissions should be sent to Treasury and Parliament simultaneously. Then Treasury could respond, unless Members feel there needs to be a hearing.
He then declared the meeting closed.
- Financial Sector Campaign Coalition (FSCC) submission
- Association for Savings and Investment South Africa (ASISA) submission
- Voluntary Ombudsman Schemes submission
- Johannesburg Stock Exchange (JSE) submission
- Financial Sector Campaign Coalition submission
- Congress of South African Trade Unions (COSATU) presentation
- Congress of South African Trade Unions (COSATU) submission