Amended Financial Services Sector: DTI briefing; Transformation of the Financial Sector Transformation Committee Report & Proposed Fiscal Policy Framework: finalisation

This premium content has been made freely available

Finance Standing Committee

15 November 2017
Chairperson: Mr Y Carrim (ANC) and Ms J Fubbs (ANC)
Share this page:

Meeting Summary

The Standing Committee on Finance and Portfolio Committee on Trade and Industry together with the Department of Trade and Industry met for further discussions on the Transformation of the Financial Sector Report. This was report one of two, the second report would be discussed in 2018.

The Department of Trade and Industry (DTI) took the joint committee through a presentation on the amended Financial Services Sector Codes (FSC). On the rationale for the development of the Sector Codes, in terms of Section 9(1) (e) of the Broad-Based Black Economic Empowerment Amendment Act (No. 46 of 2013), B-BBEE Sector Codes are a means to address sector specific issues and peculiarities especially those that hinder transformation within a specific sector. Sector Codes should not and were not a means to undermine the Generic Codes.

On the FSC Scorecard, the FSC has three different scorecards for entities: a scorecard for Banks and Life Offices, for Short-term Insurers and for other Financial Institutions. Banks and Life Offices have, over and above the Generic Codes elements, two sector specific elements; these being empowerment financing and access to financial services. Short-term insurers have one additional element- access to financial services; whereas other financial institutions’ have the same elements on their scorecards as the Generic Codes. Also, small enterprises are given an option to be verified should they volunteer to, and this differs from the Generic Codes where they only required to obtain a Sworn Affidavit.

Furthermore, the need for empowerment financing was well-understood and this element is unique to the financial sector. Empowerment financing includes aspects such as: Transformational Infrastructure Financing (emphasis being on funding of previously neglected areas such as townships and rural areas); Black Agriculture Funding necessary to assist with the land reform process; Low-Cost Housing Funding; and Black Business Growth (including SME) Funding or B-BBEE Transaction Funding. Targets were to be revised from time-to-time. Financial inclusion was also critical to the broader transformation of the economy. Efforts to improve access to financial services includes aspects such as: inclusive banking; access to affordable and understandable long-term insurance risk cover; and access to affordable and understandable short-term insurance risk cover.

In conclusion, the FSC remained an important sector code of the South African economy. The FSC built from the Generic Codes and has incorporated elements and targets that are unique to the financial sector. The sector had also agreed that within twelve months of gazette, the Sector Code shall be reviewed.

Members commented that the amended codes seemed reasonable and wondered why some stakeholders were vehemently opposed to their implementation. The Codes had to ensure greater inclusivity, transformation and participation by emerging businesses. Also, the joint committee would have to recommend the review of the ‘once empowered always empowered’ policy’. Access to financial services and female representation at managerial level also had to be reviewed. They felt there was need for sterner measures beyond the said Competition Tribunal in dealing with bank collusion on currency trading.

Mr D Maynier (DA) commented on process issues. He viewed the public hearing process on financial sector transformation as a lost opportunity. The scope of the hearings was not properly canvassed. There was need to traverse further issues such as the vision for the financial sector; how to invest and generate growth and what the constraints were in terms of financial inclusion and employment creation. Also, there were contentious statements in the report that could reignite debates around ownership of the South African Reserve Bank (SARB) among other issues. He suggested that the report be kept as an interim report and a consolidated one be produced after comprehensive and properly canvassed public hearings. The ANC registered its dissatisfaction about Mr Maynier’s sentiments. DA Members were either not in attendance or exhibited some form of laxity during meetings to discuss the scope of the financial sector transformation public hearings. It was not reasonable for him to bring up such issues at this stage. The joint committee had extensively canvassed on the scope of the hearings. Nothing had stopped Mr Maynier from raising the issues during the initial stages as that was exactly what was being done by Members. This was not a final report and the scope could be extended in the second report. Also, it was reasonable to presume that when it came to discussions on transformation, DA Members were not keen to partake in such discussions. 

The Transformation of the Financial Sector Report was adopted with amendments and the DA reserved its position. The Chairpersons said coming up with the Report had been a herculean effort and thanked everyone for their input, and stakeholders such as Treasury and SARB in particular for their forbearance.

Lastly, the Standing Committee on Finance met separately to vote on the Proposed Fiscal Policy Framework. The consolidated fiscal framework report had been split into two, the revised and proposed fiscal policy frameworks, as per the DA’s concerns raised during a previous engagement. The Proposed Fiscal Policy Framework Report was adopted and the Committee will monitor its implementation in terms of the statutory provisions.

Meeting report

Mr Carrim welcomed everyone and noted that the Financial Services Sector Codes (FSC) had been recently adopted by Cabinet and would be gazetted shortly. He noted that the Generic Codes should have cross-cutting applicability unless arguments regarding sector specificity were presented. On the Financial Sector Transformation Report, there were some issues which the joint committee would want to engage in further negotiations on, therefore this was report one of two.

Department of Trade and Industry Input

Mr Jacob Maphutha, Director: Department of Trade and Industry (DTI), explained that the Financial Services Sector comprises of more than 30 banks, mutual banks, and a number of foreign bank branches and offices. It also includes non-banking financial institutions (including state-owned development finance institutions (DFIs), short-term and long term insurance companies, smaller financial intermediaries and the Johannesburg Stock Exchange. The financial sector in South Africa manages over R8 trillion assets, contributing 21.6% of the gross domestic product of the economy annually. The sector employs more than 250 000 employees.

On the rationale for the development of Sector Codes, in terms of Section 9(1) (e) of the Broad-Based Black Economic Empowerment Amendment Act (No. 46 of 2013), B-BBEE Sector Codes are a means to address sector specific issues and peculiarities especially those that hinder transformation within a specific sector. Sector Codes should not and were not a means to undermine the Generic Codes.

On the FSC Scorecard, the FSC has three different scorecards for entities: a scorecard for Banks and Life Offices, for Short-term Insurers and for other Financial Institutions. Banks and Life Offices have, over and above the Generic Codes elements, two sector specific elements; these being empowerment financing and access to financial services. Short-term insurers have one additional element- access to financial services; whereas other financial institutions’ have the same elements on their scorecards as the Generic Codes. Also, small enterprises are given an option to be verified should they volunteer to, and this differs from the Generic Codes where they only required to obtain a sworn affidavit.

The Ownership scorecard for the FSC is different from the Generic scorecard because the sector is highly regulated, through the BASEL III framework. The overall ownership target is 25% and local branches of foreign banks can do an equity equivalent of 25% of value in South Africa. Standalone asset managers and other industry players (companies not subject to regulated capital requirements) will be subject to the Generic Code rules on exit of Empowerment Shareholders. Also, Shareholders in Banks, Life Officers and Short-term Insurers have practical funding options on exit of empowerment partners. Ownership exit rules, in combination with Empowerment Financing rules would create a significant potential catalyst for black business growth, with R100 billion in potential funding.

On management control, targets were aligned to the Generic Codes, and specifically target African people as opposed to using the employee assistance programme formula. This was meant to address the historical challenges within the sector. On skills development, the FSC has tiered targets ranging from a lower target of 2% for higher levels of management to 8% for non-management staff. Training spend is weighted towards the lower levels of the organisation; that is unskilled and semi-skilled, and junior management, and lesser for higher levels of the organisation. This was meant to facilitate progression and benefit the majority of staff members.

The enterprise and supplier development (ESD) scorecard had been deliberately designed to cater to the core business of the sector and seeks to address the transformation of the entire financial sector value-chain. ESD Funding and procurement targets would be phased in over a period of three years in the Amended FSC. Specific procurement policy spend targets had been set to increase access to market for black-owned intermediaries (stock brokers, fund managers and others). Specific ESD contribution targets have also been set for funding and growth support of black-owned intermediaries.

On the socio-economic development aspects, the ESD element in the FSC differed slightly from the Generic Codes in that it contains a component of consumer education. The full value of socio-economic development contribution made to beneficiaries is recognisable if at least 75% of the value directly benefits black people.

In recognition of the current challenges faced in the funding of higher education in SA, the sector has also incentivised support of the innovative Fundisa program in the form of a grant.

Furthermore, the need for empowerment financing was well-understood and this element is unique to the financial sector. Empowerment financing includes aspects such as: Transformational Infrastructure Financing (emphasis being on funding of previously neglected areas such as townships and rural areas); Black Agriculture Funding necessary to assist with the land reform process; Low-Cost Housing Funding; and Black Business Growth (including SME) Funding or BEE Transaction Funding. Targets were to be revised from time-to-time. Financial inclusion was also critical to the broader transformation of the economy. Efforts to improve access to financial services include: inclusive banking; access to affordable and understandable long-term insurance risk cover; and access to affordable and understandable short-term insurance risk cover.

In conclusion, the FSC remained an important sector code of the South African economy. The FSC built from the Generic Codes and has incorporated elements and targets that are unique to the financial sector. The sector had also agreed that within twelve months of gazette, the Sector Code shall be reviewed.

Discussion

Ms Fubbs commented that the amended codes seemed reasonable and wondered why some stakeholders were vehemently opposed to their implementation.

Ms T Tobias (ANC) commented on financial sector access especially by poor communities. There was need to encourage and stimulate greater access and to change the perceptions around market composition. Consumer education targets had to be strengthened to prevent consumer exploitation within the financial sector. The financial services sector was in the habit of luring consumers by not reflecting the actuality of the various schemes and packages on offer. She expressed concern about the very low proliferation of banking facilities in townships due to a high risk perception. There was need to explore the possibility of incentivising businesses such that they bring service provision facilities closer to the people.

Ms P Mantashe (ANC) appreciated the presentation as it dealt with various concerns raised during previous discussions. She felt the 30% management control target for female representation at managerial level was too low. Female representation had to be pegged at 50%, consistent with ANC policy.

Mr D Maynier (DA) asked if any impact assessment had been conducted during the compilation of the codes. Were the possible impacts of the codes on employment and growth explored? What was the Code’s status in law and who had the discretion to amend the Code? Once the FS Code was gazetted, there had to be a host of technical annexures to assist stakeholders interpret the Code. When were these going to be finalised?

Mr Maphutha replied that the B-BBEE Act gave the Minister of Trade and Industry power to implement the Codes. The Codes would affect various sectors of the economy and once they are gazetted, they would have the same status as the code of good practice. The Act gives effect to the Codes in terms of Section 9(1) of the Act. The Minister of Trade and Industry was also responsible for the drafting of the Codes. Before any sector code is gazetted, it had to be endorsed by the line Minister. He noted the concerns expressed by Members on female representation and access to financial services by poor communities. The proposals would be further canvassed. 

Mr Carrim was impressed by the narrowing of gaps between the DTI and finance families. There seemed to be deep polarisation during the public hearings and the gaps were now reasonable. The Financial Sector Transformation Report would be updated to incorporate the amended Codes. The Codes had to ensure greater inclusivity, transformation and participation by emerging businesses. Also, the joint committee would have to recommend the review of the ‘once empowered always empowered’ policy. Access to financial services and female representation at managerial level also had to be reviewed as suggested by Members. More thought had to be given on the recommendations around the management of foreign banks and foreign investors. He asked Members to make suggestions on same. 

Mr Maphutha replied that the Codes did not discriminate between foreign and domestic owned banks. However, in terms of ownership, equity equivalence applied in the case of foreign banks. That was the only area where a special dispensation was given to foreign-owned banks.

Draft Transformation of the Financial Sector Report discussions

Mr Carrim reiterated that this was the first of two reports. The second would be produced in 2018 where further issues would be addressed. He took the joint committee through amendments made since the last discussions. To deal with bank collusion on currency trading, the joint committee unequivocally condemned any bank collusion on the manipulation of currency trading. It welcomed the decision in February this year to refer allegations of bank collusion to the Competition Tribunal for prosecution. If there has been wrongdoing, not just the banks, but the individuals responsible should be acted against. It also notes the strong action taken elsewhere in the world, not least the UK and US, when similar actions of wrongdoing were proved. It was said in the hearings that cartel conduct and collusion by banks suggests that there are ‘flaws in banking supervision and that there is limited reach of competition law, as penalties for collusive conduct are capped at 10% by the country’s competition laws’. Cartels fight-off new entrants into the market. The joint committee proposed that the findings emanating from the Competition Commission’s investigations and prosecutions should be used to ‘open up regulation’ as is done in such countries as the UK and the US.

Ms Tobias felt there was need for sterner measures beyond the said Competition Tribunal in dealing with bank collusion on currency trading. Also, the 10% cap on penalties for collusive conduct was rather low.

Ms P Kekana (ANC) asked how stakeholders could ensure that the penalty burden was not transferred to consumers. That was a possibility.

Mr Carrim said the joint committee was acutely aware of the challenges pointed out by Members and suggested that the Committee Content Advisors come up with additional recommendations to deal with same. He urged the DTI to “calm down” as there was nothing outlandish about the proposals and recommendations.

The joint committee also noted that the linking of B-BBEE transformation with licencing is a requirement of Section 10(1) of the B-BBEE Amendment Act and every organ of state and public entity has to apply any relevant code of good practise in terms of the Act in licensing and other decision-making. It also urged stakeholders to do so as Parliament would hold them to account for this.

Mr Carrim suggested the joint committee vote on the report as is, and incorporate changes in the interim.

Mr Maynier commented on process issues. He viewed the public hearing process on financial sector transformation as a lost opportunity. The scope of the hearings was not properly canvassed. There was need to traverse further issues such as the vision for the financial sector; how to invest and generate growth and what the constraints were in terms of financial inclusion and employment creation. The need to deal with the fin-tech revolution also had to be discussed. A new bold vision for the financial sector was what was needed and these were all significant lost opportunities. Also, there were contentious statements in the report that could reignite debates around ownership of the SARB among other issues. Would the joint committee want to do that? He suggested that the report be kept as an interim report and a consolidated one be produced after comprehensive and properly canvassed public hearings.

Ms Tobias registered her dissatisfaction about Mr Maynier’s sentiments. Mr Maynier was being “dishonest”. DA Members were either not in attendance or exhibited some form of laxity during meetings to discuss the scope of the financial sector transformation public hearings. It was not reasonable for him to bring up such issues at this stage. The joint committee was clear that it would not want to bring down the financial sector but at the same time, transformation was non-negotiable and the majority Members would not budge. The DA wanted to create an impression that transformation would lead to the collapse of the sector and that had to be rejected with the utmost contempt it deserves.

Mr Maynier replied that he was being misrepresented.

Mr Carrim largely agreed with Ms Tobias’ sentiments. The joint committee had extensively canvassed on the scope of the hearings even beyond the report discussions. Nothing had stopped Mr Maynier from raising the issues during the initial stages as that was exactly what was being done by Members. This was not a final report and the scope could be extended in the second report. Also, it was reasonable to presume that when it came to discussions on transformation, DA Members were not keen to attend such meetings. 

The joint committee agreed to adopt the Transformation of the Financial Sector Report as is and the final copy would be dispatched by 20 November. If there were to be any material amendments, the joint committee could meet on a later date.

The Transformation of the Financial Sector Report was adopted with amendments and the DA reserved its position.

Mr Carrim said coming up with the Report had been a herculean effort and thanked everyone for their input, and stakeholders such as Treasury and SARB in particular for their forbearance.

Standing Committee on Finance discussions on the Proposed Fiscal Policy Framework

The Chairperson stated that the consolidated fiscal framework report had been split into two- the revised and proposed fiscal policy frameworks, as per the DA’s concerns raised during a previous engagement.

The Committee adopted the Proposed Fiscal Policy Framework Report. The Committee will monitor is implementation in terms of the statutory provisions.

 

The meeting was adjourned. 

Share this page: