Transformation of the Financial Sector: Committee Report

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Finance Standing Committee

06 September 2017
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Standing Committee on Finance and the Portfolio Committee on Trade and Industry, together with National Treasury, deliberated on the Transformation of the Financial Sector Draft Committee Report. The draft report was work in progress and would be sent to the participants for feedback before being finalised. Many of the Committees’ recommendations were tentative and, if necessary, would be reviewed following responses to the report from stakeholders. Also, there were some issues on which the Committees needed further information and discussion, including with relevant stakeholders, before any decisive recommendations could be made.

It was well understood that the Committees had to find a balance between covering a sufficient number and range of issues and avoiding a long ‘shopping list’ of recommendations without taking into account what was reasonably practicable in the period ahead. The need to find the necessary balance to ensure that transformation benefits all strata of society, but mainly the poor, was also well understood. The participants in the transformation of the financial sector hearings were more polarized than was usually the case during hearings, with stakeholders who presented themselves as representing financially marginalized constituencies expressing huge frustration and anger at what they saw as the failures of the financial sector. The pace of transformation, they insisted, was far too slow, and they blamed not only the dominant players in the financial sector, but the government significantly responsible for this. It seemed that there was a sense in which every frustration these participants had with the effects of the significant slowdown in economic growth and increasing unemployment became concentrated on the financial sector. It was almost as if they were holding the financial sector responsible for every ill in the economy. Given the crucial role that the financial sector plays in the country’s economy and in economic growth, this was perhaps understandable.

The Committees’ overall view was that the financial sector had certainly transformed since 1994, but there needs to be more and more effective transformation consistent with the country’s developmental needs. The banks and other sections of the financial sector were crucial to the economic growth and development goals of the country, and the transformation of the financial sector needed to be directed towards ensuring that the sector contributes effectively to this, both in its own and the country’s interests. The Committees believed that there had been more transformation in the financial sector than had been made out by most stakeholders critical of the big players, even if less transformation than the big players made out. Members were clear that transformation did not mean a reckless populism that would ultimately undermine the interests of the poor and disadvantaged. Deracialisation was obviously a crucial aspect of transformation, but transformation was about much more than that. Transformation must serve all classes and strata of the population, but primarily the poor and lower income earners. It should serve, crucially, to reduce the huge, unsustainable inequalities in the country, and not increase them. Transformation must also lead to inclusive economic growth that benefits the marginalized in society by bringing them into the mainstream of the economy. The majority of Members believed that the current perilous economic and political climate both reduces the prospects of a major transformation of the financial sector and, at the same time, made it ever more necessary.

National Treasury said it needed clarity on some areas but believed, by and large, the Committees were on solid ground. Transformation was a shared responsibility for both government and the private sector. It was encouraging to note the renewed focus from the financial sector; with CEOs from major companies continually approaching it to discuss transformation. Financial sub-sectors were also coming forward and appreciated the need for a relook of the Financial Sector Charter (FSC) as buy-in from key subsectors would lay a strong foundation. Also, NEDLAC stakeholders were engaging to see how the process could be sped up as progress had been slow. The need for a sanctions regime for non-compliance was well accepted by the stakeholders. Treasury emphasised the need to differentiate between major and small players within the financial sector. The major concern was the concentrated nature in the economy, not in the financial sector alone. However, recognising the challenges did not mean finding solutions was easy. Bringing in new smaller players had its challenges especially within the banking space as it was characterised by big risks. The reality was also that there were few potential bank owners with unencumbered capital. There were numerous hard questions stakeholders would need to grapple with. The need for renewed focus and ongoing discussions was crucial as challenges and solutions were not straightforward.

Members suggested that specific timeframes be stipulated for the Committees’ recommendations. This would ensure measurability of the recommendations and commitments. Also, a specific date must be set for the NEDLAC process to convene the Financial Sector Summit- stakeholders had to meet in earnest.

The Chairperson asked Members to submit suggestions in writing, to be considered for the final report. The report would be tightened and be sent out to stakeholders as an interim report. Stakeholders would be given two to three weeks to analyse it and provide feedback. Voting on the report would take place after Parliament reconvenes, early October.

 

Meeting report

Transformation of the Financial Sector: Committee Report
The Chairperson took the Committees through the Transformation of the Financial Sector draft interim report. The draft report was work in progress and would be sent to the participants for feedback before being finalised. Many of the Committees’ recommendations were tentative and, if necessary, would be reviewed following responses to the report from stakeholders and further discussions in the Committees. Also, there were some issues on which the Committees needed further information and discussion, including with relevant stakeholders, before any decisive recommendations could be made.

The Committees had to find a balance between covering a sufficient number and range of issues and avoiding a long ‘shopping list’ of recommendations without taking into account what was reasonably practicable in the period ahead. Moreover, the Committees were concerned to avoid making endless recommendations that remain no more than words on paper and that they would be unable to effectively monitor progress on and ensure outcomes on. The need to find the necessary balances to ensure that transformation benefits all strata of society, but mainly the poor was well understood. The participants in the transformation of the financial sector hearings were more polarized than was usually the case during hearings, with stakeholders who presented themselves as representing financially marginalized constituencies expressing huge frustration and anger at what they saw as the failures of the financial sector. The pace of transformation, they insisted, was far too slow, and they blamed not only the dominant players in the financial sector, but the government significantly responsible for this. It seemed that there was a sense in which every frustration these participants had with the effects of the significant slowdown in economic growth and increasing unemployment became concentrated on the financial sector. It was almost as if they were holding the financial sector responsible for every ill in the economy. Given the crucial role that the financial sector plays in the country’s economy and in economic growth, this was perhaps understandable.

The Committees believed that more reliable statistics were necessary in order to assess the extent to which the financial sector has transformed. The Committees were concerned by the lack of coherent and consistent data on the implementation of the Financial Sector Charter (FSC) and broader transformation in the financial sector. The Committees express their serious concern about the low levels of participation by the financial sector in the annual FSC Council reviews. The sector was poorly monitored and evaluated. The 2013 Review Report of the FSC Council noted that only 70 out of 1423 financial institutions to whom the FSC targets are applicable responded to the call to submit annual results- a mere 4.92%. This was abysmal and thus, the Committees recommended that there should be an active campaign to make stakeholders and the public aware of the FSC. The Committees further strongly recommended that the industry be compelled to provide the necessary information to the FSC Council, the newly established Black Economic Empowerment Commission (BEEC) and any other relevant state structure. The draft FSC being considered had to address this effectively. There should be sanctions for non-compliance set out in the FSC and the Broad-Based Black Economic Empowerment (B-BBEE) generic codes. Also, the FSC Council and BEEC needed to investigate whether the statistics provided are accurate.

The lack of adequate and reliable statistics and the widely differing statistics provided by different stakeholders and the very divergent interpretations of them had provided challenges to the Committees in deciding on its recommendations. The Committees believed there were very sweeping statements by several of the stakeholders on both sides of the divide, and while these statements were obviously inaccurate, they conveyed the depth of feelings of the participants and, in cases, their constituencies, and suggested how challenging it was going to be to arrive at a measure of consensus on further transformation of the financial sector. The dominant players in the financial sector insisted that there has been significant transformation even if they did not achieve several of the FSC and Generic Code transformation targets. Most other stakeholders insisted that there had been very little or no transformation in the sector and many of them did not believe statistics that suggested otherwise, often suggesting that these statistics had been manipulated or were simply false. It was clear that a significant number of stakeholders distrust and are even suspicious of the dominant corporates in the financial sector, and the Committees believed that these dominant players needed to reach out more to those stakeholders, their own customers and the general public to explain what they had done to transform the financial sector. There needed to be more dialogue among the stakeholders directed towards more effective transformation of the sector. The aim of these engagements would be to arrive at least at a minimum degree of consensus on what needed to be done. As far as possible, the transformation needed to be negotiated through various forums and informal engagements. Where there was no prospect of agreement on issues, Government and Parliament would have to take decisions after consultation with all the relevant stakeholders.

The Committees’ overall view was that the financial sector had certainly transformed since 1994, but there needs to be more and more effective transformation consistent with the country’s developmental needs. The banks and other sections of the financial sector were crucial to the economic growth and development goals of the country, and the transformation of the financial sector needs to be directed towards ensuring that the sector contributes effectively to this, both in its own and the country’s interests. The Committees believed that there has been more transformation in the financial sector than has been made out by most stakeholders critical of the big players, even if less transformation than the big players made out. Members were clear that transformation did not mean a reckless populism that would ultimately undermine the interests of the poor and disadvantaged. Deracialisation was obviously a crucial aspect of transformation, but transformation was about much more than that. Transformation must serve all classes and strata of the population, but primarily the poor and lower income earners. It should serve, crucially, to reduce the huge, unsustainable inequalities in the country, and not increase them. Transformation must also lead to inclusive economic growth that benefits the marginalized in society by bringing them into the mainstream of the economy. The majority of Members believed that the current perilous economic and political climate both reduces the prospects of a major transformation of the financial sector and, at the same time, made it ever more necessary. He emphasised that the Committees were not calling for an overnight overhaul but the sector needed to transform more and more effectively and sustainably, within reasonable timelines, otherwise it would contribute to the social explosion looming in the country.

The Committees noted the progress in finalising a new version of the FSC Charter and the pending Financial Sector Summit to be convened by the National Economic Development and Labour Council (NEDLAC) and recommended that the targets in the revised FSC Charter be made compulsory. Consideration needed to be given to putting this in regulations. The available data indicated that there has been a regression in transformation in the financial sector, especially in ownership, management control and skills development. The Committees believed there was a need for a consistent approach to FSC target definitions, measurement and reporting, and recommended that failure of the corporates to achieve these targets should lead to effective sanctions. On financial sector market concentration and monopolization and ownership, the Committees agreed with Treasury on the need for a ‘more objective process and common framework to determine ownership data,’ and supported its proposal on the publication of an annual ownership monitor to ‘track ownership levels and also effect policies to aid transformation.’

The Committees felt strongly on repossessions by banks. They unequivocally condemned cases of banks auctioning houses and cars unnecessarily below their market value when they repossess them, and then at times re-selling them at much higher prices again. The Committees understood that some of the malpractices were carried out by companies that banks outsource to and the sheriffs, and noted that the banks say they were attending to some of these excesses. However, Members believed that there should be an inquiry into financial malpractices relating to the repossession of houses and cars, including their auctioning way below market value.

In conclusion, the Committees did not expect that all its recommendations would be implemented immediately. There needs to be a phased approach with immediate, short-term and long-term aims. They were not calling for an overnight overhaul of the financial sector, but were clear that further transformation could not take place at a snail’s pace either. As far as possible, the nature and pace of the transformation had to be negotiated with all the relevant stakeholders, but where there was no prospect of significant consensus on irreconcilable interests, government and Parliament had to take decisions.

National Treasury input
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, said Treasury needed clarity on some areas but believed, by and large, the Committees were on solid ground. Transformation was a shared responsibility for both government and the private sector. It was encouraging to note the renewed focus from the financial sector; with CEOs from major companies continually approaching Treasury to discuss transformation. Financial sub-sectors were also coming forward and well understood the need for a relook of the Financial Sector Charter (FSC) as buy-in from key subsectors lays a strong foundation. Also, NEDLAC stakeholders were engaging to see how the process could be sped up as progress had been slow. The need for a sanctions regime for non-compliance was well accepted by the stakeholders.

Mr Momoniat emphasised the need to differentiate between major and small players within the financial sector. The major concern was the concentrated nature in the economy, not in the financial sector alone. However, recognising the challenges did not mean finding solutions was easy. Bringing in new smaller players had its challenges especially within the banking space as it was characterised by big risks. The reality was also that there were few potential bank owners with unencumbered capital. Treasury felt everyone must have the right to apply for a banking licence, but must also be able to meet the criteria and requirements. Pressure must not be put on regulators to issue licences. On the other hand, the criteria and requirements for issuing bank licences might need to be discussed to identify the real impediments. Also, ‘the once empowered always empowered’ might need to be relooked into as any model overly dependent on doing business with government was not sustainable especially with all the challenges within state-owned enterprises.

There were numerous hard questions stakeholders would need to grapple with. The need for renewed focus and ongoing discussions was crucial as challenges and solutions were not straightforward. Also, extensive research on capital savings and investment had been conducted, which might further inform the Committees’ recommendations.

Discussion
Ms T Tobias (ANC) suggested that specific timeframes be stipulated for the Committees’ recommendations. This would ensure measurability of the recommendations and commitments. Also, a specific date must be set for the NEDLAC process to convene the Financial Sector Summit- stakeholders had to meet in earnest. On the Committees’ recommendation that ‘an audit of specialist professions in the financial sector, such as actuaries, auditors, accountants, lawyers, hedge fund managers, asset managers, brokers, analysts and others, be conducted with the aim of putting measures in place, through the FSC, to encourage transformation and mentorship’, she suggested that a line be added that would articulate and amplify how this should be facilitated.
She added that some suggestions would be raised during a party study group meeting.

The Chairperson indicated that the EFF’s position was that the FSC must be legislated. Some ANC Members were sympathetic to that suggestion as well, but believed there was need for more discussions. In addition, government should be seen to be playing a greater and more proactive role to improve access to the market for small and medium-sized players. He urged the Portfolio Committee on Trade and Industry to look into it, and pointed out the need for both political muscle and social weight to drive transformation. The financial sector was not going to transform on its own.

In closing, the Chairperson asked Members to submit suggestions in writing, to be considered for the final report. The report would be tightened and be sent out to stakeholders as an interim report. Stakeholders would be given two to three weeks to analyse it and provide feedback. Voting on the report would take place after Parliament reconvenes, early October.

The meeting was adjourned.

 

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