Capitalise SAA using s16 of PFMA: legal opinion; Committee Resolutions on GEPF, PIC & trade unions; Financial Sector Transformation Hearings Report

Meeting report

Parliamentary Legal Unit advice on the use of Section 16 of the PFMA to capitalise SAA
The Chairperson stated that following the recent transfer of funds to South African Airways (SAA), the Democratic Alliance (DA) had requested that the Committee get legal advice on whether the Minister’s decision was legitimate or not. 

Adv. Frank Jenkins, Parliamentary Legal Advisor, advised the Committee on the legality of using section 16 of the Public Finance Management Act (PFMA) to capitalise SAA. Reading section 16 with the object of the PFMA which states: “The Minister may authorise the use of funds from the National Revenue Fund to defray expenditure of an exceptional nature which is currently not provided for and which cannot, without serious prejudice to the public interest, be postponed to a future parliamentary appropriation of funds.” It appeared that section 16 was intended for use where good financial planning and management could not avert the need for unusual expenditure. In his view, it appears that the expenditure was foreseeable and as such, not unusual or atypical. It would not have been the first time such expenditure had to be affected. Notice must be taken of the requirement that the amount authorised in terms of section 16 must also be referred to the Auditor-General (AGSA) within 14 days. It would be for the AGSA to make a finding whether the allocation was in compliance with section 16 of the PFMA.
The Chairperson sought clarity as to whether the implication was that the Minister’s action was unlawful.

Adv. Jenkins clarified that he viewed the bailout as irregular rather than unlawful.

The Chairperson said contrary to what was being claimed by the DA, the legal opinion did not conclude that the Minister’s decision was definitely unlawful. It says it may be so, but it was for the Auditor-General’s Office to decide on this. The Committee would refer the legal opinion to the Standing Committee on Appropriations to process it further.

Committee resolutions following the briefing by the Government Employees Pension Fund (GEPF), Public Investment Corporation (PIC) and the trade unions
The Chairperson took the Committee through resolutions following the briefing by the Public Investment Corporation (PIC), Government Employees Pension Fund (GEPF) and trade unions.

The 17 October briefing was to be followed up with a further briefing before the end of November by the National Treasury, the GEPF and PIC, with the attendance of the PIC Chairperson, Deputy Minister Sfiso Buthelezi. It is after that briefing that the Committee will take its final decision. However, for now there was agreement among all parties in the Committee on the following:

There should be appropriate representation of the trade unions of the GEPF members on the PIC board; consideration needed to be given to amending the Public Investment Corporation Act, 2004 to provide for this; the PIC should consider investing in projects that promote inclusive economic growth, job-creation, infrastructure development, the reduction of social inequalities, and the interests of mainly the poor and lower-income strata; projects that serve the developmental needs of the country.

The trade unions were correct that investing in projects that promote inclusive economic growth should not include investing in ailing SOEs (State-Owned Enterprises) that are badly governed, mismanage their resources, serve the narrow interests of an elite, do not advance the country’s developmental needs and will not provide an adequate return on investment for the members of the GEPF.

The PIC should seriously consider the trade unions proposals on an appropriate housing loan scheme for public sector employees who do not qualify for a loan from the commercial banks; unions and the relevant pensioner organisations should consider engaging effectively with the PIC and the Minister and Deputy Minister of Finance to raise their concerns and proposals.
 
The Committee recommended that the Minister meet with the public sector unions and relevant pensioner organisations to address their concerns and proposals as soon as possible after presenting the MTBPS to Parliament

From what the Committee can tell, the PIC has performed well, including through securing above-inflation returns on investment; receiving unqualified audit opinions over many years, including the Auditor-General Award for clean audit in 2017; contributing to socio-economic transformation, including through deracialisation, even if it should do more for transformation; and receiving numerous awards for its performance. It was not clear to the Committee why the Minister wants a forensic investigation of the PIC’s investment decisions and believed he needed to consult the trade unions on this. If he insists that he wants such an investigation, he will need to show that it is in the interest of the members of the GEPF and the public and provide rationale for and the Terms of Reference of the investigation to the Committee; the board of the PIC needs to carry out a thorough inquiry into who was behind the allegations against its CEO (chief executive officer) and report back to Parliament on progress on this within two months.
 
In terms of the PIC Memorandum of Incorporation, it was not required that the board chairperson be the Deputy Minister of Finance. The Committee noted that all the trade unions are opposed to a Deputy Minister of Finance chairing the PIC board. They acknowledge, however, that the Minister and Deputy Minister have to have a relationship with the PIC for a variety of reasons, including the fact that the pension of public sector workers is in the form of “defined benefit pension fund”. The Committee proposed that the Minister and Deputy Minister engage with the trade unions on their proposals in this regard. The Committee will take this issue further at the November briefing.

Furthermore, the Committee needed to prepare notes for legislative amendments to give effect to the relevant decisions it takes. This should be done through working with Parliament’s Legal Services Unit and a draft Bill should be prepared before the end of this year. Consideration should be given to engaging with the National Treasury on the processing of the legislative amendments. The Committee will review its decisions if there is a need to do so and take further decisions after the November briefing on these matters.

Transformation of the Financial Sector Report deliberations: Joint sitting; Standing Committee on Finance and Portfolio Committee on Trade and Industry
The Chairperson pointed out that the Report was silent about what changes the Committees would want to see within the financial sector 15 to 20 years from now. He asked Members to make brief written submissions to this effect, to be considered for the final report. Overall, the majority would want to see a diversified and all-inclusive financial sector.

Mr A Williams (ANC) said the Committee would want to see much more diversification and equitable ownership within the financial sector. The form and scale of ownership must be transformed.

Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, said Treasury would want to see a sector that is better able to service the needs of customers; not just the rich. Financial inclusion with much more diversified players was also key. However, ownership and membership should not be differentiated, lest there be double counting. He emphasised the need to review and refine targets to reflect the obtaining realities. It would be of no use to set targets that would not be met. It was important to strike a balance, and not be single-minded in the pursuit of certain thresholds and quotas. The need for transformation was well understood. However, there was also need to attract foreign capital and maintain financial sector stability, which is a necessary condition for growth and employment creation. The country does need foreign investment through globalised capitalism channels as the obtaining reality was that few individuals had enough unencumbered capital to meet the requirements to acquire banking licences. He stressed the need to review and refine targets, and to encourage foreign capital to come in rather than scare it off. 
 
Mr Williams commented on Treasury’s input. The risk of economic instability in the country would be far greater if there was no meaningful transformation. To argue that transformation was going to cause problems of economic growth was off the mark.

The Chairperson took the Joint Committee through a stakeholder comments matrix on the transformation of the financial sector report. There was a recommendation that a fund be dedicated to new black entrants in the financial services sector. In written response, the Banking Association of South Africa (BASA) noted an assertion in the Report about “funding for start-up companies being biased towards other sectors such as construction, mining, wholesale and manufacturing, with the new entrants into the financial sector being neglected.” It said the wording in the report implied that there is some degree of adverse selection in the decisions about financing of new businesses. BASA did not agree with this view. If there is truth to the assertion that start-ups in these sectors are more likely to access finance than those in the financial sector, this may simply be a function of barriers to entry in the different sectors, many of which are regulatory in nature rather than a deliberate bias against start-ups in the financial services sector. It is important that the problem is correctly diagnosed to avoid prescribing incorrect solutions and creating wrong perceptions.

The Chairperson disagreed with the submission. The Committees stood by their position on the need to facilitate the entry of previously disadvantaged groups into the financial sector. 
The Report commented on monopolisation, lack of competition and market concentration within the financial sector. BASA, Nedbank, South African Insurance Association (SAIA) and the Association for Savings and Investment South Africa (ASISA) disagreed that there is monopolisation and lack of competition in the banking and insurance sectors respectively. ABSA submitted that the high levels of concentration in the banking sector were not unique to South Africa, and contributes to the financial stability of our sector. Similar market constructs exist in Australia, Canada and the UK. Concentration makes banks more resilient, as they are well capitalised.

The Chairperson felt the Committees had to disagree with industry’s positions. He asked the Standing Committee on Finance Researchers to further look into other country case studies such as the German and Indian cooperative banking models.

Mr Momoniat said identifying the problems bedevilling the financial sector did not mean it was easy to derive solutions. In as much as more competition was desirable and could be brought about through issuing out more insurance and licenses, very few eligible people were willing to take up the banking business. Members had to be mindful of the inherent complexities within the financial sector space.

As part of its recommendations, the Committees had pointed out the need for less stringent requirements for the licensing of certain categories of new entrants in the banking space while ensuring that depositors’ interests are protected. The South African Reserve Bank (SARB) said it does not accept a dual regulatory framework for incumbents and new entrants. One regulatory framework must be applied to govern the financial system. A dual system could potentially create financial instability within different regulatory and supervisory tools used to assess the same levels of risk. It advised, furthermore, that the potential will then exist for the SARB to be subject to legal challenges from incumbents for creating less onerous regulatory requirements for new entrants.

Dr Zakhele Hlophe, Committee Content Advisor, said the Committees’ positions had been misinterpreted. The Committees had referred to a tiered not a dual system. Looking into the stringent requirements in an effort to level the playing field did not mean that people must not comply with the existing requirements.    

The Chairperson noted that Members had recommended the linking of Financial Sector Charter Council (FSC Council) targets with new licensing. A majority black, particularly African, ownership, with adequate ownership by women, should be required in the case of new licenses being issued.
In response, BASA cautioned against making transformation targets part of the licensing requirements. The rationale being that banks are required to hold in reserve certain amount of capital to meet unanticipated losses. This is important given that banks have higher levels of debt relative to share capital. It is part of the prudential requirements that shareholders of banks should have debt-free capital, which makes individual ownership of a bank almost impossible. For this reason, banks in many jurisdictions are owned by institutions, and making direct black ownership a licensing requirement would simply limit new entrants into the banking industry as very few entrants would meet the capital requirements. SARB added that licensing must not be used as a blunt instrument to enforce transformation. The efforts to create effective and meaningful transformation of financial sector must be done in a manner that recognises the existing property rights of license holders; the impact on the stability of the financial system as a result of altering license conditions and the imperative of continued protection of depositors and policy holders. The role of a prudential regulator is to promote and enhance the safety and soundness of a financial institution, in order to protect financial customers against the risk that a financial institution may fail to meet its obligations.

SARB expressed its support of the progressive realisation of an ownership structure of the banking sector that reflects the demographic composition of South Africa. However, the concept of shareholder equity in a bank is impacted by regulatory capital requirements imposed on a bank. Thus, as a starting point, any shareholder equity must be financed through unencumbered capital. In developing an approach to ownership transformation of the banking sector, cognisance must be taken for the changing nature of global finance. Banks raise capital from international capital markets. Regardless of the ownership profile of a bank, access to global capital markets was an imperative. As such, none of the big global banks have a controlling shareholder, and the major South African banks were no exception to this ownership trend. Failure to appreciate this will result in existing banks or future black owned banks restricted from growing to become significant players in global markets due to their inability to access global finance, This would have negative implications for the banking sector’s role in providing capital and lending to support South Africa’s growth and development.

ASISA said linking licensing to FSC targets will be detrimental for millions of policyholders who would be seriously compromised should their insurers have their licenses suspended or revoked.  It said it is categorically ill-advised to reserve new insurance licenses for companies that are majority individual and community based black-owned.
Ms Busisiwe Dlamini, Chief Operating Officer: Financial Sector Charter Council, said the Broad-Based Black Economic Empowerment (B-BBEE) Commission believed that Section 10 (1) of the B-BBEE Act already makes linking licensing to transformation compliance obligatory. All regulatory entities are required to integrate and require B-BBEE compliance for any authorisation or licensing process. The Act stipulated that all regulatory entities that are public entities or organs of state must implement the requirements of section 10(1) with immediate effect. The reality was that the industry was not willing to transform on its own, thus the need for legislative interventions to reduce barriers to entry. 

Ms J Fubbs (ANC) said the Members should be clear on whether they were in support of the piece of legislation (B-BBEE Act). She was under the impression that Members were willing to support the Act. Thus there should not be dispute on the application of the Act among stakeholders.
 
The Chairperson said discussions on licensing were a big issue that was not going to be easily resolved given the polarity of views. The Committees had to agree that the law had to be fully applied. While the B-BBEE Act was clear, what was the rationale behind SARB and BASA’s arguments in this regard, knowing that relevant laws exist? He asked if there had been any legal challenge against the application of the B-BBEE Act. The overarching challenges around ownership and licensing had to be dealt with.

Mr Momoniat said the legislative instruments were not as blunt as was being suggested. This had been a continual debate even during the deliberations on the Twin Peaks legislation. Stakeholders had to ask if the transformation targets were tough enough, given the unique nature of the banking sector at the moment.

Ms Dlamini, in response to the Chairperson, said legal challenges came about as a result of institutions implementing the Act without following due process through the Department of Trade and Industry (DTI). This had resulted in a number of institutions being taken to court.

Mr Macdonald Netshitenzhe, Acting DDG: Department of Trade and Industry, pointed out that the B-BBEE Act was a general application law such that any law that sets targets below those prescribed by the Act would be trumped. The Act set out minimum targets that industry must adhere to.

Ms Fubbs said there had been extensive consultation on the matter. The DTI had even committed itself to reviewing the financial sector charter to bring it into line with the B-BEE Act. There might be certain challenges that were being dealt with. The thinking around the B-BBEE Act was that it would be put in place but sector specific codes would also apply. The problem was some players within the financial sector were not making efforts at implementing the Act; some of them actually ignore it totally.

Mr Momoniat commented that the financial sector charter preceded the B-BBEE Act. Stakeholders had to clearly articulate what they meant by saying that banks were not transforming. In any setting, banks are owned by the rich regardless of race and colour. The point industry was making was that bank licensing criteria could not be linked with transformation thresholds but the licensing authority would take into account of financial sector charter prescripts. There was a whole host of measures other than licensing that could be used to spearhead transformation.

The Chairperson asked SARB and the B-BBEE Commission to submit brief opinion papers to clarify their positions.

On management control, FSC Council submitted that management control targets, as outlined in the Draft Amended FS Code, are fully aligned to the targets in the Generic Code.
The Chairperson indicated that the Finance Committee and the Minister had reached an understanding that the yet to be gazetted and convened financial sector charter and summit would also incorporate inputs by Members as outlined in the transformation of the financial sector report.
Mr Momoniat said the Executive and the Committees’ processes on the financial sector charter and report respectively had to be separated. Whatever the recommendations the Committees would come up with would not affect the charter. There was no contradiction and both processes could run in parallel.

Mr A Lees (ANC) felt the Committee should continue with its work regardless of the progress by the Executive in implementing its charter and convening a summit. The pace of the Committees’ work should not be determined by the Executive processes.

Ms Fubbs believed it would be valuable for the executive to take into account of the Committees report before gazetting the charter. That would be the more constructive.

Ms Catherine Gibson, Senior Advisor: Market Conduct and Inclusion: National Treasury, said significant progress on the charter had been made. However, the concern was that waiting for the finalisation of the report to integrate it with the charter would take another six months, which would mean financial institutions had to still operate using old standards and would miss the opportunity to move forward.

The Chairperson said he would have discussions with the Portfolio Committee on Trade and Industry chairperson and the two Ministers on the concerns raised outside the Committee process. 

The Committees had recommended that Treasury and SARB develop a discussion paper on Fintech ranging from deposit-taking, transactional banking, lending, investments and the new virtual currencies. SAIA commented that an enabling regulatory environment for the use of Fintech by insurers should also be developed as it could have a positive impact on financial inclusion.
The Chairperson agreed with SAIA’s proposal.

On debt relief measures, Nedbank, in its submission, advised the Committees to exercise caution and pragmatism in respect of the extent to which they sought to legislate and impose debt relief interventions. Such actions would directly impact bank funding costs in response to increasing risk to bank income statements as well as curtail further lending to those borrowers that benefit from unfunded and forced permanent write-offs from credit providers

Mr Williams explained that most big banks perennially expressed concern about extending debt relief to some of their customers. Their concerns were well understood. The Portfolio Committee on Trade was grappling with this challenge to make debt relief least expensive and to ensure that the most benefit would go to communities that are over indebted. A Bill that would assist the over indebted within society was also work in progress.

The Committees believed that consideration needs to be given to proposals that insurance companies should reimburse homeowners the instalments they have paid if they end up losing their homes after all efforts to save them have failed. In response, SAIA said that it did not support the suggestion that insurance companies should reimburse homeowners the instalments they have paid if they end up losing their homes after all efforts to save them have failed.

Ms Caroline Da Silva, Insurance Registrar: Financial Services Board (FSB), said the reasoning behind SAIA’s comment was the basic fundamental tenets of insurance law, which state that insurance must be fortuitous, accidental and not be liable to manipulation. She guessed that might have been the rationale of their argument.

The Chairperson said Members were not narrow populists; they wanted to be as practical and pragmatic as possible. Members were not prescribing any policy but sought to give guidance as to what should happen.
Nevertheless, the political decisions were to be made by Members.

Ms Fubbs said stakeholder concerns about the proposal that insurance companies should consider reimbursing homeowners were understood but would not want to penalise genuine victims of a particular economic situation beyond victims’ control. The recommendation was not in any way prescriptive, it was asking to stakeholders to give some consideration mindful of obtaining realities.

The Chairperson suggested that Treasury strike a compromise between its propositions and Members’ stance. The Chairpersons would then look into the outcomes and come back to the Committees with an amendment to the section.   

The Report made reference to several complaints to the Standing Committee on Finance in recent months from black entrepreneurs about the negative effects of tightening legislation and regulations through the introduction of the new ‘Twin Peaks’ model to transform the financial sector. Consequently, the Committees believed that the Bills giving effect to the new ‘Twin Peaks’ had to take this into account, but also needs to balance the need to create more space for black entrepreneurs and the need to protect the interests of financial customers.

In response, the Financial Intermediaries Association of Southern Africa, submitted that the Financial Sector Regulation Act (Twin Peaks) was clearly driving up the cost of financial sector regulation (and compliance with same); but this was not the only concern. Of greater concern in the intermediary sector, where many SMEs play, was the impact that Retail Distribution Review (RDR) and related regulations would have on earnings etc. The Committees should note that these ‘barriers to entry’ are as onerous for black entrepreneurs as they are for white entrepreneurs.
Members wanted to know what RDR was.

Ms da Silva said RDR would essentially deal with conflicts of interest in payment of commissions by brokers so that they do not treat customers unfairly. It was yet to be implemented. It had three phases and would look at where incentives are driving misleading sales by brokers and would seek to make sure that brokerage advice is independent and sustainable in the long term.

The Chairperson said a paragraph would be inserted into the Report calling for the expeditious implementation of RDR. 

The Committees recommended that Treasury, the FSB, and insurance associations should investigate the concerns that were raised by the Black Insurance Advisors Council in relation to the ‘conflict of interest’ rule, ‘binder agreements’, ‘premium collection’ and other regulatory barriers.

In response, the Financial Intermediaries Association (FIA) stated that it has worked with industry stakeholders such as SAIA and ASISA to propose a regulatory framework in respect of Retail Distribution Review (RDR) phase one which has resulted in a more sustainable outcome for intermediaries. Pro-active engagement would continue with the regulator and business to ensure the sustainability of intermediaries.
Ms da Silva said FSB had dealt with most of the regulatory concerns and had tried to put a set of standards in place. The importance of dealing with governance and oversight to ensure the survival and sustainability of insurers was well understood.

On the Preferred Insurance Service Provider System” and the “Motor Manufacture Factory Approved System. The Committees believed that consideration needs to be given to the proposal made by the DTI that the panel system be phased out.
In response, SA Auto Repairers and Salvage Association agreed with the recommendation by DTI on the phasing-out of the panel system. This process, however, requires very careful consideration of those structural imbalances that systematically prevent black-owned business to compete for procurement. The panel system has across the last decade or more directed billions of Rands of procurement to large white-owned businesses. This access to procurement allowed white-owned businesses to develop very strong infrastructure and build massive monopolies. A simple abolishment of the panel system would allow such monopolies to dominate the industry even further. There is a real necessity for a planned phasing-out process that allows black-owned businesses unfettered access to enterprise development, affordable capital and redirected procurement spend.
The Chairperson said Members was very sympathetic to the concerns raised by the Auto Repairers. He expressed his broad support but felt they had some strong sense of entitlement. He had not received any briefing but there was talk about the Auto Repairers being taken to court. He sought clarity from Treasury.
Mr Momoniat stated that Treasury had been engaging with the Auto Repairers in relation to their eligibility to qualify on the panel system. Treasury was in discussions with the industry about the need to also empower small players. However, it had to be acknowledged that there was no way of shaping customer preferences- panel beaters are service providers and there was no way of compelling customers to only seek the services of a particular earmarked group. There clearly was a need to broaden the approach.
SAIA submitted that the panel system greatly enhanced the efficiency of short-term insurance procurement and therefore reduces premiums for policyholders. It did not support the proposal to phase out panel systems as this would inevitably increase premiums for policyholders which will impact negatively on financial inclusion. In any event, panels would assist in directing work to black panel beaters.
Mr Momoniat said the Auto Repairers had been in continual engagements with the Ministry of Finance and the Office of the Deputy President. He would consult with the Chief Procurement Officer on the progress in this regard.

The Chairperson felt the SAIA argument was being brought up as leverage to stifle transformation efforts.
The Report recommended that the Draft FSC targets should be reviewed to facilitate improved access to markets for small and medium sized black suppliers such as tow-truck operators and panel-beaters. Members further recommended that black suppliers in this subsector should get more work from the government garage and the SOEs. They also supported a proposal made by DTI that procurement from black suppliers be increased to 50% by 2021.
Ms Dlamini expressed the FS Charter Council’s support of the DTI’s proposal that procurement from black suppliers be increased to 50% by 2021. This would be further addressed during the review and summit processes. Procurement targets in the sector will also be reviewed to improve areas that require transformation, such as black stockbrokers and panel-beaters. The FS Charter Council acknowledged that the current and Draft Amended FS Code include a specialised entities scorecard that endeavours to ensure that preferential procurement is addressed by all members of the sector. Further, for retirement funds a voluntary scorecard has been included which it recommended should be made compulsory.
The Committees had noted that a few large firms, through vertical integration, owned the full distribution channel and value chain from administration, risk management, employee benefits, wealth management, linked investment services, life insurance, collective schemes, stockbroking, and asset management. The lack of competition created barriers to entry and access to business for black asset managers, stockbrokers and others in the value chain. The Committees recommended that appropriate targets must be set in the new FSC for asset managers and asset consultants.
The Association of Black Securities and Investment Professionals (ssociation of Black Securities and Investment Professionals Association of Black Securities and Investment ProfessionalsABSIP), in response, said that the recommendations on asset management did not go far enough in their current form to bring about the desired level of transformation required in the asset management industry. It said that currently there is no accountability or disclosure process to which asset consultants submit themselves to in respect of their advisory role. Asset consultants should form part of the “specialist professions” annual audit and state and corporate retirements funds should enforce this audit as compulsory to all service providers they engage.
The Chairperson said the comment was reasonably consistent with the Committees’ intended objectives.
The Co-operative Banks Development Agency (CBDA) submitted that the following needed to be politically driven imperatives: the formation of a National Co-operative Bank as well as a Co-operative bank for Government Employees and Members of Parliament; access to the National Payment System. Also, the collaboration between Postbank and the CBDA needed to be endorsed at a political level as the two entities have a similar mandate of financial inclusion. Otherwise there is going to be unnecessary overlap and competition between the two entities and in the process wastage of resources. Financial Sector Code needs to be clear and specific in terms of support towards Financial Co-operatives.
The Chairperson felt the comment by CBDA complemented the position of the Committees.

Mr Momoniat said the need for cooperative banks was well understood. However, applicants for cooperative bank licenses would have to go through the requisite processes. He stressed the need for proper processes and properly constituted boards to ensure that they do not bring systemic risks into the banking space. They should not be a conduit for looting. All niceties had to be critically examined.

The Chairperson was agreeable. He outlined the processes on the Report going forward. The chairpersons would work on the Report assisted by Committee researchers. It is expected that it would be finalised by 1 November. This was one of two reports. The second would be finalised by the end of April 2018.

The meeting was adjourned.