Committee Report on Financial Sector Transformation Report: Treasury, SARB and NEDLAC response

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Finance Standing Committee

21 November 2018
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee met with the National Treasury to hear its responses to aspects of the Committee’s Financial Sector Transformation Report, including on digital financing. NEDLAC also gave an update on its preparations for the Second National Financial Sector Summit.

National Treasury said Treasury’s 2011 policy paper “A safer financial sector to serve South Africa better” indicated that new technologies and innovative approaches that reduce costs and broaden access to financial services have benefitted and could continue to benefit previously unbanked and underserved South Africans. Therefore, any South African fintech policy should appropriately enable financial inclusion and be underpinned by financial inclusion as a key policy objective. An Intergovernmental Fintech Working Group (IFWG) comprising representatives of National Treasury, South African Reserve Bank, the Financial Sector Conduct Authority, the Financial Intelligence Centre amongst others, was considering a coordinated and harmonized policy response to fintech and innovation in the South African financial sector.  A dedicated session on financial inclusion was part of the programme during the inaugural workshop of the IFWG held in April 2018. Fintech holds the potential to deliver benefits to consumers through improved access to financial products, greater flexibility, speed of delivery and service, and more competitive prices. Policymakers and regulators need to understand how to approach fintech innovations so that the innovations do not create un-level playing fields or negatively affect competition. Consideration needs to be given to how customers understand and interact with innovative financial products and platforms, and what customer protection principles do and should apply in these circumstances. There was need for a coordinated policy response to fintech as a means of spearheading financial inclusion. Policymakers must carefully balance the risks and benefits that innovations can bring. Regulation needs to be appropriate, proportionate, adaptable and co-ordinated across different regulators in order not to hinder innovation. The Prudential Authority was granting three new bank licenses (Bank Zero, Discovery and Tyme Digital) –the new entrants increase the potential of increased competition. The SARB’s Fintech Programme had three focus areas in 2018: policy and regulatory implications; fintech data collection to inform policy positions; and innovation facilitation and collaboration. The Financial Sector Conduct Authority (FSCA) was primarily focused on ensuring regulatory oversight that ensures fair customer outcomes. Pursuant to this, an Innovation Hub and Fintech unit was recently established and was currently being capacitated. Technology will present new innovations and efficiencies, but there will also be new risks and fintech strategy will strive to create a balance between risk and innovation to achieve its objectives. This may require a blend of existing regulations subject to certain amendments, supplemented by new regulations where necessary. Any regulatory interventions will be principle based, activity centred and technology neutral.

Members hoped the three newly established banks would make a change and penetrate markets within townships to ensure people do not have to travel long distances to make transactions. They emphasised the need for businesses to grasp consumer behaviour especially within low-income communities. They pointed out that some of the identified risks and potential concerns in sustainable financial inclusion were actually opportunities and problem areas that fintech could resolve. Fintech needed to be communicated as something that could bring about financial inclusion for the poor. There was nothing inherently good or bad about fintech- it is the humans behind these innovations that make decisions about what should be done. Some of the externalities associated with use of fintechs were positive and unaccounted for. Therefore, regulations should be tailored is such a way that they do not prevent or infringe upon further innovation. The Chairperson said de-racialisation is a fundamental component of the transformation project. He asked for an indication on the demographic composition of the shareholders in the three new digital banks now entering the space. He emphasised the need for extensive engagements on financial inclusion involving experts within the fintech space. The Committee, at some stage, would want Treasury to give an outline of how it was enabling emerging entrepreneurs to enter the existing market. There was need for the Committee to do a lot more in this area and set the foundation for the next Committee.

NEDLAC, in submission, highlighted progress since its last engagement with the Committee. NEDLAC Working Committees had concluded engagements in September 2018 and produced a high level summary of agreements by the Committees. The details of the agreements were in a report format which will be signed-off by the Summit in March 2019. The social partners agreed to: monitor implementation of financial education; ensure access to funding for new entrants in the financial sector in order to facilitate growth and development in emerging enterprises; address and eradicate barriers to entry and anti-competitive conduct in the financial sector, through amending or repealing any legislations, regulations and/or directives that inhibit the transformation in the financial sector; play a role in ensuring that large financial institutions at all levels reflect demographics of the country in levels of broad ownership, control and management; revise, and/or amend relevant legislations so that they are consistent with the objectives and goals of the transformation of the financial sector; and facilitate and ensure compliance with the Financial Sector Code. The National Financial Sector Summit would be held on 14 March 2019. Participants would consist of 60 delegates from each of the four NEDLAC constituencies (Business, Community, Government and Labour) and guests.

Members said there should be a determination about whether NEDLAC took the Committee’s resolutions in relation to financial sector transformation into consideration. The Committee would have to check its resolutions against those of NEDLAC. She hoped Parliament would be regarded as a constituency too within the 60 delegates who would be participants during the summit as there was no way the Financial Sector Transformation Report could be discussed in the absence of Members. The Chairperson said based on the last Committee engagement with NEDLAC and his discussions with its representatives, NEDLAC has been using the Committee’s Financial Sector Transformation (FST) Report as a guide. However, judging from the presentation, NEDLAC seems to have moved on. The Committee had also communicated with Treasury that it would want responses to all its recommendations on the FST report before Parliament rises. This could not be done overnight but the Committee would want to assist the next Parliament in mapping the way forward. He asked if, from NEDLAC’s perspective, the financial sector was showing some willingness to change. Were the big concentrated companies responsive to the Committee report? It did not appear as if big industries and established monopolies were taking the report very seriously.

Meeting report

The Chairperson welcomed everyone and indicated the Committee would like to hear first phase responses to its recommendations espoused in the Financial Sector Transformation Report.

Mr F Shivambu (EFF) wanted to know about the processes towards finalisation of the Banks Amendment Bill. This was not spoken to during the previous meeting. Members would want some clear guidance following the engagements on the Bill. He believed finalisation of the Bill was part of this week’s agenda as per the notifications sent to Members prior.

The Chairperson said neither the Committee Secretary nor himself could find any draft programme that proposed that the Committee would vote or finalise the Banks Bill this week as suggested by Mr Shivambu. Parties would still need to further engage as study groups and parliamentary structures following the briefing on the Banks Bill the previous day. Therefore, voting at this stage did not seem feasible. At the moment, Treasury had failed to deliver its Banks Bill on time thus the Committee failed to hold hearings yesterday. On when the Private Member Banks Bill from Mr Shivambu would be finalised, the view was there was nothing stopping the Committee from looking at it and even strengthen it but right now the focus was on the Carbon Tax Bill which had to be finalised. Mr Shivambu was mistaken to believe that finalisation of the Banks Bill was slated for today.

Ms T Tobias (ANC) said the Banks Bill could not be finalised at this stage as the requisite parliamentary procedures preceding finalisation had not yet been done. In any case, as per the Committee programme, the Bill was not meant to be finalised this week. There should be valid reasons for reprioritisation if need be. The Banks Bill had not yet been delayed by any chance.    

Ms G Ngwenya (DA) said engagements on the Banks Bill, so far, had been cursory at best. There had not been proper responses to questions raised during previous meetings, particularly from the DA. Also, the level of public consultations on the Bill was too low and the Committee might need to give consideration to this. As the Banks Bill was from a Private Member there should really be an opportunity to engage on it comprehensively. 

The Chairperson said the Carbon Tax Bill was priority number one for the Committee, followed by the Banks Bill from Mr Shivambu. These two would be finalised during the first week of 2019. There was no way they would not be completed by the end of the parliamentary term. The aim was never to vote on them now- there was no slot as there is a lot of administrative work that should be done in these last two week. He then invited NEDLAC to update the Committee on its preparations for the financial sector transformation Summit. The Committee would want to hear about the negotiations NEDLAC has had with the powers that be in Treasury and the presidency about the date of the summit. What was the response to the Financial Sector Transformation Report within NEDLAC thus far?

NEDLAC presentation

Mr Vuyisa Tafa, Coordinator: Public Finance and Monetary Policy Chamber, NEDLAC, said NEDLAC convened the Transformation of the Financial Sector Workshop in April 2018. The purpose of the workshop was to propose and agree on recommendations and declaration for consideration by the 2nd Summit. The following topics were discussed by the workshop: market concentration; support for emerging enterprise and black businesses through procurement and supplier development; the role of state owned entities, the Financial Sector Charter Council and regulatory bodies in transformation of the financial sector. The workshop welcomed the Standing Committee on Finance and Portfolio Committee on Trade and Industry’s first Report on the Transformation of the Financial Sector. The workshop agreed with most of the recommendations in the Report. The outstanding recommendations which were not agreed by the workshop were further discussed by the four working committees at NEDLAC. The committees were: Market concentration, monopolization, ownership and licensing; support for emerging enterprise and black businesses through procurement and supplier development; the role of development finance institutions and state owned entities in transformation of the financial sector; and the role of Financial Sector Charter Council and regulatory bodies.

On progress since the last engagement with the Committee, NEDLAC Working Committees concluded engagements in September 2018 and produced a high level summary of agreements by the Committees. The details of the agreements were in a report format which will be signed-off by the Summit in March 2019. The social partners agreed to: monitor implementation of financial education; ensure access to funding for new entrants in the financial sector in order to facilitate growth and development in emerging enterprises; address and eradicate barriers to entry and anti-competitive conduct in the financial sector, through amending or repealing any legislations, regulations and/or directives that inhibit the transformation in the financial sector; play a role in ensuring that large financial institutions at all levels reflect demographics of the country in levels of broad ownership, control and management; revise, and/or amend relevant legislations so that they are consistent with the objectives and goals of the transformation of the financial sector; and facilitate and ensure compliance with the Financial Sector Code.

On support for SMMEs and Black-Owned Businesses, the social partners agreed to: engage on the low participation or exclusion of previously disadvantaged service providers in the supply chain within the entire financial sector (including exclusion of financial services advisors from developmental targets and certain agreements in the insurance industry); and review empowerment financing targets to give more weight to funding black SMMEs, rural and township entrepreneurs; review procurement laws such as the Public Finance Management Act, Preferential Procurement Policy Framework Act, and the Municipal Finance Management Act in order to achieve transformation objectives; review empowerment financing targets to give more weight to funding of black SMEs, rural and township entrepreneurs; and provide SMMEs and Black owned entities which have the potential of creating jobs; with grants, equity funding, and loans with preferential interest rates.

On the role of development finance institutions, the social partners agreed to: identify the hurdles in relation to licensing of the Postbank to become a State Owned Bank so as to provide affordable banking services and expand financial inclusion, in neglected rural areas and townships; review the governance, mandates and structures of DFIs; consider realigning and consolidation and set targets in line with national imperatives such as job creation; and ensure the availability of appropriate funding mechanisms for DFIs so as to execute their mandate; ensure that DFIs report on transformation to the Financial Sector Charter Council and to the BEE Commission. On the role of Financial Sector Charter Council and Regulatory Bodies, social partners agreed to: the review of FSC Codes implementation guidelines to ensure relevance and ease of implementation; review and expand the power of the Council so as to be able to ensure punitive actions for non-compliance with the FS Codes, or for lack of timeous and accurate reporting of information from financial institutions; and the need of clearly defining the roles of other regulatory bodies in supporting the council in driving transformation.

Mr Tafa indicated the National Financial Sector Summit would be held on 14 March 2019. Participants would consist of 60 delegates from each of the four NEDLAC constituencies (Business, Community, Government and Labour) and guests.

Discussion

Ms Tobias said there should be a determination about whether NEDLAC took the Committee’s resolutions in relation to financial sector transformation into consideration. The Committee would have to check its resolutions against those of NEDLAC. She hoped Parliament would be regarded as a constituency too within the 60 delegates who would be participants during the summit as there was no way the Financial Sector Transformation Report could be discussed in the absence of Members. There had to be a multi-party delegation at the summit. She noted relative progress within NEDLAC, foremost being the setting of the date for the summit.

The Chairperson said based on the last Committee engagement with NEDLAC and his discussions with its representatives, NEDLAC has been using the Committee’s Financial Sector Transformation (FST) Report as a guide. However, judging from the presentation, NEDLAC seems to have moved on. The Committee had also communicated with Treasury that it would want responses to all its recommendations on the FST report before Parliament rises. This could not be done overnight but the Committee would want to assist the next Parliament in mapping the way forward. He asked if, from NEDLAC’s perspective, the financial sector was showing some willingness to change. Were the big concentrated companies responsive to the Committee report? It did not appear as if big industries and established monopolies were taking the report very seriously.

Ms Ngwenya noted that NEDLAC social partners had agreed that large financial institutions at all levels should reflect the demographics of the country. She wanted to know what this meant. Did this mean racial diversity?

Mr Tafa said he would convey the message that the Committee should be invited to the coordinators. The financial sector appeared willing to change as indicated by its active participation during working committee workshops- most companies were sending in senior people during NEDLAC discussions. On the question of demographic representation, he asked that NEDLAC be allowed to respond in writing as he would not want to say something that was out of line.

The Chairperson noted a BASA representative and asked for an indication on the extent to which the financial sector was contributing towards transformation and issues that confront them as a sector.

Mr Abdul Patel, CEO, Ethicore, said he did not have a mandate to speak but pointed out that BASA was participative in the preparations for the financial sector transformation summit; which was indicative of its commitment.  

The Chairperson invited Treasury to give its presentation. The Committee wanted to hear about how financial technology could contribute towards creating space for new entrepreneurs. Members also wanted an update on the extent to which the financial sector was being de-racialised.

National Treasury presentation on financial technologies (fintechs)

Ms Olaotse Matshane, Chief Director: Market Conduct and Financial Inclusion, National Treasury, said Treasury’s 2011 policy paper “A safer financial sector to serve South Africa better” indicated that new technologies and innovative approaches that reduce costs and broaden access to financial services have benefitted and could continue to benefit previously unbanked and underserved South Africans. Therefore, any South African fintech policy should appropriately enable financial inclusion and be underpinned by financial inclusion as a key policy objective. An Intergovernmental Fintech Working Group (IFWG) comprising representatives of National Treasury, South African Reserve Bank, the Financial Sector Conduct Authority, the Financial Intelligence Centre amongst others, was considering a coordinated and harmonized policy response to fintech and innovation in the South African financial sector.  A dedicated session on financial inclusion was part of the programme during the inaugural workshop of the IFWG held in April 2018. Fintech holds the potential to deliver benefits to consumers through improved access to financial products, greater flexibility, speed of delivery and service, and more competitive prices. Policymakers and regulators need to understand how to approach fintech innovations so that the innovations do not create un-level playing fields or negatively affect competition. Consideration needs to be given to how customers understand and interact with innovative financial products and platforms, and what customer protection principles do and should apply in these circumstances. There was need for a coordinated policy response to fintech as a means of spearheading financial inclusion. Policymakers must carefully balance the risks and benefits that innovations can bring. Regulation needs to be appropriate, proportionate, adaptable and co-ordinated across different regulators in order not to hinder innovation.

Ms Kershia Singh, Director: Market Conduct, National Treasury, took the Committee through findings of the Treasury report: The impact of the 4th industrial revolution on the South African financial services market. The accompanying research found that the country’s significant potential for digital innovation must be considered alongside concerns of whether this will be exclusionary, and whether the transformation will enhance or diminish domestic value creation. Digital products and services have to compete with the high dependence on cash as a payments instrument, driven by the preferences and behaviour of low-income consumers. Currently, digital and fintech innovation in South Africa largely caters to a niche, relatively affluent and financially-savvy consumer market. Although there is rising adoption of smartphones and an incoming generation of millennials more familiar with digital technology, translating this into the use of more sophisticated financial services is constrained by the state of South Africa’s digital ecosystem and the relatively low levels of financial literacy.

The aforesaid Treasury report also found that, on the supply side, South Africa’s funding environment is not well suited to supporting high-risk start-ups, and fintechs may struggle to attract international investment. A shortage of entrepreneurial skills generally within the country, combined with a lack of deep financial sector knowledge and experience among fintech start-ups, creates issues of credibility when looking for funding and partnerships. Also, lack of clarity and guidance on how fintechs fit into existing [financial sector] regulation meant South Africa’s comprehensive regulatory environment is daunting for fintech start-ups and generates significant compliance risks. Some fintech innovations that could support financial inclusion would include the following: open architecture, artificial intelligence and data analytics, alternative credit scoring, and digital identity. However, while innovation could bring down costs and broaden access, fintech should not be seen as a ‘quick fix’ solution to financial inclusion. Particular considerations for fintech and inclusion would include the digital gap; digital literacy; cost of the innovations to users that in some instances may in itself present a barrier to participation; appropriateness such that innovations may not be aimed at meeting the needs of those who are excluded/underserved; many aimed at improving efficiency and simplicity for those already participating. To ensure that the benefits of fintech innovations are properly leveraged for sustainable financial inclusion in an economy, the following policy considerations are important: effective consumer protection oversight; consumer education for a digital age; and the role of regulation.

South African Reserve Bank and fintech

Ms Janet Terblanche, Divisional Head of Policy: Prudential Authority, South African Reserve Bank, said the Prudential Authority was granting three new bank licenses (Bank Zero, Discovery and Tyme Digital) –the new entrants increases the potential of increased competition. The SARB’s Fintech Programme had three focus areas in 2018: policy and regulatory implications; fintech data collection to inform policy positions; and innovation facilitation and collaboration. The Financial Sector Conduct Authority (FSCA) was primarily focused on ensuring regulatory oversight that ensures fair customer outcomes. Pursuant to this, an Innovation Hub and Fintech unit was recently established and was currently being capacitated. Technology will present new innovations and efficiencies, but there will also be new risks and fintech strategy will strive to create a balance between risk and innovation to achieve its objectives. This may require a blend of existing regulations subject to certain amendments, supplemented by new regulations where necessary. Any regulatory interventions will be principle based, activity centred and technology neutral.

The intended strategic outcomes for the said unit were summarised as follows: active participation in the IFWG; establishment of Fintech Unit and innovation hub; finalisation and establishment of an Innovation Hub protocol with other financial sector regulators through the IFWG; establishment of a Regulatory Sandbox, or participation in multi-regulator sandboxing with other financial sector regulators through the IFWG; co-hosting, with IFWG members, of engagement conferences with the FinTech sector; co-hosting of hackathons with IFWG members; development and implementation of the FSCA data strategy; and recruitment of necessary specialist skills.

Discussion

Ms Tobias hoped the three newly established banks would make a change and penetrate markets within townships to ensure people do not have to travel long distances to make transactions. She emphasised the need for businesses to grasp consumer behaviour especially within low-income communities. She added digital migration was in such a way that technological solutions should address challenges within society.

Ms Ngwenya pointed out that some of the identified risks and potential concerns in sustainable financial inclusion were actually opportunities and problem areas that fintech could resolve. Fintech needed to be communicated as something that could bring about financial inclusion for the poor. There was nothing inherently good or bad about fintech- it is the humans behind these innovations that make decisions about what should be done. Some of the externalities associated with use of fintechs were positive and unaccounted for. Therefore, regulations should be tailored is such a way that they do not prevent or infringe upon further innovation. Over-regulating runs the risk of completely missing the point by shifting the very nature of what makes particular innovations successful.

Ms N Ntantiso (ANC) asked how it could be ensured that communities are exposed to fintech. Were there any timeframes attached to the implementation of these identified interventions. How could low levels of financial literacy within communities be dealt with?  

The Chairperson said de-racialisation is a fundamental component of the transformation project. He asked for an indication on the demographic composition of the shareholders in the three new digital banks now entering the space. He emphasised the need for extensive engagements on financial inclusion involving experts within the fintech space. The Committee, at some stage, would want Treasury to give an outline of how it was enabling emerging entrepreneurs to enter the existing market. There was need for the Committee to do a lot more in this area and set the foundation for the next Committee.

Mr N Nhleko (ANC) emphasised the need for a thoroughgoing discussion on the rate and pace of transformation in the financial sector. From an administrative point of view, there is need for a summation of the nature of the problems so that these are part of broader discussions during the financial sector transformation summit. 

Ms Matshane, in response, said although many people now have bank accounts, the usage was very low and dormancy very high. There were continual discussions on fixing the blockages in the payment ecosystem within communities. She agreed that fintech was largely exclusionary in remote communities and generally unappealing to the older generation. Consumer education is crucial for consumer behaviour thus the need for vigilance in spearheading financial literacy.

Ms Terblanche said the fintech regulatory playing field should be level and applicable. Regulators were establishing fintech units and looking specifically at financial innovation to make sure benefits are leveraged as much as possible to enable positive consumer and economic outcomes. A coordinated approach in spearheading financial inclusion would be important. On the shareholding of the three newly established digital banks, she would get back to the Committee as she did not have the information at hand. 

The Chairperson said Treasury and the Reserve Bank should mull over this and let the Committee know at some stage how Treasury and government as a whole was using fintech to create space for emerging previously marginalised entrepreneurs. He had received a letter from an emerging businessperson expressing concern that there was not enough regulatory space for middle-tire banks- whereas the requirements for acquiring a commercial banking license were too onerous, the operations of mutual banks were too limited. The Committee would want to hear some ideas on this? The financial sector ought to be expeditiously diversified, and the Committee must do a lot more in this area. He thanked everyone for the engagements.

The meeting was adjourned.

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