The National Treasury briefed the Committee on the Twin Peaks: The Financial Sector Regulation (FSR) Bill. It noted that the shift to twin peaks started in 2011, when “a safer financial sector to serve South African better” policy paper was approved by the Cabinet. In 2013, the road map of implementing a twin peaks model of financial regulation in South Africa was established and the first and second draft of the FSR Bill was published and consulted on. In 2015, the Bill was tabled in Parliament and was expected to come into legal force in 2017. The financial sector had been put under review, both in South Africa and globally, because it should work in the interests of financial customers and support balanced and sustainable economic growth. All households and companies should be able to transact, borrow, save and manage their day to day risks efficiently and effectively. Factors triggering the shift towards the twin peaks model included fraud, the Competition Commission Banking Enquiry, a review on gaps and weaknesses in the financial regulatory system, over-indebtedness of households, and African Bank curatorship. It was also triggered by the international assessment made by the G20 and the IMF, which underscored weaknesses in South Africa’s regulatory system, including, for example, poor coordination and deep inter-connection within the financial sector without a consolidated approach to supervision. The Twin Peaks approach would ensure that the financial institutions could meet their obligations, by adopting both prudential regulation and supervision and market conduct regulation.
The Twin Peaks was therefore necessary to ensure that the financial institution could meet its obligations. And this could be done on basis of prudential regulation and supervision, which governed how the financial firm was run prudently, and market conduct regulation that governed how customers were treated. The two phases would be implemented by 2018. A summary of the fifteen principles behind the reform of the financial sector were outlined.
Members welcomed the FSR Bill and expressed their concerns over the possibility of over regulating the financial sector and with how the new changes in the regulations would contribute to improvement of lives of the poor majority. Members sought clarity on what changes the Bill would introduce, what the phrase “poor inter-agency coordination and regulatory structure” meant, what was wrong with existing market structure, if the Bill sought to promote and enhance it, what were the inter-agency co-ordination of financial stability issues, why the South African financial system should be compared to developed countries such as United Kingdom, and how the Bill would assist the poor to have more access to financial sector.
Chairperson's opening remarks
The Chairperson stated that this was a special meeting in which the National Treasury would brief the Committee on the Financial Sector Regulation (FSR) Bill. On Monday 29 August 2016, the Committee would go to Mexico to see how the Mexican Parliament was regulating its financial sector. For 25 years, there had been a moral appeal for transformation in financial services sector. There ought to be a fundamental change. A fundamental change was a global trend and South Africa was no exception. Many countries underwent a review of their financial laws. This was inevitable because of the economic crises in the 1930s and 2008. The National Treasury had proposed the Twins Peaks approach based on diverse countries' experience, including Mexico, United Kingdom, United States, Netherlands and Australia. The new approach would create two separate regulatory systems: the market conduct authority and the prudential authority. The former would focus on how financial services distributed products and the former would focus on financial strengths of an individual financial service.
Financial Sector Regulation Bill: National Treasury briefing
Mr Roy Havemann, Chief Director: Financial Markets and Stability took the Committee through the presentation on the Financial Sector Regulation Bill (the Bill) with a particular focus on “twin peaks”. He noted that the shift to twin peaks started in 2011, when a policy paper on the “safer financial sector to serve South African better” was approved by the Cabinet. In 2013, the road map of implementing a twin peaks model of financial regulation in South Africa was established and the first and second draft of the FSR Bill was published and consulted on. In 2015, the Bill was tabled in Parliament and was expected to come into legal force in 2017.
The financial sector was being regulated because a financial system should work in the interests of financial customers, and support balanced and sustainable economic growth. All households and companies should be able to transact, borrow, save and manage their day to day risks efficiently and effectively. The shift towards the twin peaks model was triggered by a number of factors including fraud, the Competition Commission Banking Enquiry panel report, a review done on gaps and weaknesses in the financial regulatory system, over-indebtedness of households, and African Bank curatorship.
Mr Havemann noted that the international assessment by the G20 and the IMF also highlighted some weaknesses in South Africa’s regulatory system, including, for example, poor coordination and deep interconnection within the financial sector without a consolidated approach to supervision.
Ms Petula Sihlali, Director: Financial Markets and Competitiveness, NT, noted that the Twin Peaks was necessary to ensure that a financial institution could meet its obligations on basis of prudential regulation and supervision and market conduct regulation. Prudential regulation and supervision was concerned with the safety and soundness of an individual firm and aims to ensure the financial firm was run prudently whereas the market conduct regulation was concerned with how the individual firm behaves in treating its customers. The Twin Peaks system was founded on the prudential oversight, the conduct oversight and the systemic stability oversight.
Ms Sihlali noted that there would be a Financial Services Tribunal and Enforcement body which would hear and decide appeals and reviews. She underlined the existing laws under Twin Peaks and noted that the FSR Bill would also provide financial authorities with some powers and duties in addition to those in current law, to plug the gaps. The FSR Bill proposed establishment of the Ombud Council as a statutory body that would establish a single point of entry into the ombud system.
Mr Havemann stated that the FSR had two phases of implementation and these two phases would be implemented by 2018. The reform of the financial sector was guided by a set of 15 principles, which he tabled (see attachment for full details).
Mr T Motlashuping (ANC, North West) commented that there should be reasons and purposes behind the regulations which ought to meet the constitutional demands to improve the lives of ordinary people. He sought clarity on how the shift in financial regulation system through the twin peaks would contribute to an improvement of the lives of the people. What were actually new methods that were introduced?
Mr F Essack (DA, Mpumalanga) commented that he could understand the financial dynamics and the reasons for regulating the financial sector. However, he could not understand what the phrase “poor inter-agency coordination and regulatory structure” meant. What was wrong with the existing market structure, if the Bill sought to promote and enhance it? What were the inter-agency co-ordination or financial stability issues?
The Chairperson reminded Members that there was a G20 meeting in which South Africa participated. In this meeting, some financial agreements were reached and they must be given effect to in South Africa.
Mr S Mohai (ANC, Free State) commented that the Bill was very interesting regulation. He noted that Members would visiting certain countries for the sake of a comparative study. However, policy-makers should always understand that regulations should work to improve the conditions of the people in their own country. South Africa was different to United Kingdom and United States, which had highly advanced economies, so he asked why the South African financial system should be compared to developed countries such as these?
Mr L Gaehler (UDM, Eastern Cape) remarked that the majority of South Africans were very poor and then asked how the Bill would assist the poor to have more access to financial sector, if they had nothing currently.
Mr O Terblanche (DA, Western Cape) remarked that the regulation was always important but there was also an obligation to guard against over-regulation, which might harm the normal businesses.
The Chairperson noted Mr Terblanche’s comment. He stated that when the President met with the business community, the possibility of over regulating the financial system was put on table by private financial services. It was a complaint that the government needed to address.
Mr Havemann responded that the Bill would speak to various frustrations. Previously, the financial laws had focussed on keeping financial firms safe and the question of treating customers fairly was not given attention. The Bill would, for instance, introduce the need for customer education programmes. There was nothing in existing laws requiring financial institutions to educate the people about financial systems. The National Treasury ideally wanted ATM machines to tell customers how much a customer would be charged if they utilised that machine; this system was followed to alert customers to the different charges at different places, for instance in China and Australia. Customers could choose to refrain from using certain ATMs because charges were so high.
Mr Havemann noted that there was a global trend of reviewing and regulating domestic financial system. As a result of the financial crisis, the financial systems collapsed. The whole system was being reviewed, to be aligned with the G20 resolutions.
He explained the phrase “poor inter-agency coordination and regulatory structure”, by pointing out that there was a banking regulator – the Reserve Bank, which was a regulator for banks only. The Financial Services Board was responsible for the non-banking financial services. The regulators were quite different.
Mr Havemann explained that market infrastructure included stock exchange and buying and selling shares. If the South Africa stock exchange collapsed, this would have an impact on the South African economy. The Bill would introduce a mechanism to check whether the stock exchange was well equipped, well-staffed and well-functioning.
Mr Havemann stated that there were no viable mechanisms to guarantee the financial sustainability. In the report of economic impact, the National Treasury had underlined that should the banking system collapse, it would cost South Africa a lot of money. The NT had to put in place a guarantee of R7 billion, which was deposited in African Bank. This was small change compared to what other countries were reserving for saving their banks. The Reserve Bank had the responsibility to ensure financial sustainability and in so doing, must ensure that financial institutions were compliant with international standards. South African banks were operating around the world.
Mr Havemann responded that one of the problems in financialisation was that it was highly likely that financial institutions could collapse, and if they did, this would make financial services more expensive and would affect manufacturing industry and real economy. One could learn from the UK how to mitigate the financial risks or other threats that could posed against the financial system.
Answering the concerns about over-regulating the financial sector, Mr Havemann responded that there was a need to balance the existing laws with the need to guard against the real threats posed to the financial system. The regulatory system of the financial sector ought to be simplified.
The Chairperson stated that the key question was how the financial institutions could be held accountable and how the Committee could help in assisting through the passage of a law to assist financial institutions to become more accountable.
The meeting was adjourned.
Download as PDF
You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.
See detailed instructions for your browser here.