Transformation in the Financial Sector: stakeholder engagement

Meeting report

The Chairperson welcomed members and guests. He reminded the Committee that the meeting was in continuation of a topic that had already been addressed. Meetings were held by the Standing Committee on Finance and the Portfolio Committee on Trade & Industry in the fifth Parliament and a report was compiled on transformation of the financial sector in November 2017.

The Chairperson wanted to see the progress since that point. All stakeholders were present except NEDLAC.

The Chairperson noted his disapproval at NEDLAC’s absence.

National Treasury Presentation

Mr Ismail Momoniat, Head of Tax & Financial Sector Policy, National Treasury, said he had not had the benefit of briefing the Committee on the regulatory framework applying to financial services, and progress on transformation had not been forthcoming since the 2017 hearings.

Mr Momoniat used the 2017 report as a point of departure: in order to achieve real transformation, all players in the financial sector had to be involved. The committees had felt that there should thus be a financial sector summit on the issue.

Mr Momoniat expressed his concern over NEDLAC’s absence, given that the financial sector summit had not occurred. The Financial Sector Transformation Council (FSTC) was present and was working on the issue.

The financial sector was relatively unique, and should be held to higher standards in terms of transformation. The question was whether the financial sector codes were strong enough. Slow economic growth in the preceding two years had had a detrimental effect on transformation, as had the period of state capture. It was clear that some of the questions asked in 2017 were still relevant. The key issue was: why had current transformation initiatives not been successful? A mass-based, sustainable transformation had been a target of the National Treasury. Tax policy reflected this. Treasury wanted the South African financial sector to be for all South Africans. Creating asset wealth, especially net asset wealth, for South Africans was vital. The current BEE framework had to be updated. There were weaknesses within the framework, and what was meant by transformation had to be clarified. These challenges could not be seen as an excuse for low transformation in finance – finance was a unique sector that had to be held to higher standards than others. Treasury supported interventions in the sector for transformation.

The 2011 document: A safer financial sector to serve SA better outlined Treasury’s policy. Financial stability was important, but access was equally important. Financial safety had to be ensured. The Twin Peaks system introduced 2 regulators: the Prudential Authority and the Financial Sector Conduct Authority. The Prudential Authority was designed to ensure that financial institutions were in a position to deliver on their obligations. Over and above the Prudential Authority, Treasury had tried to ensure the protection of customers and that financial institutions served customers correctly. The largest issues had been bank charges and household debt. Market development was also key to the transformation strategy, as were financial inclusion interventions. Riskier and less profitable sectors were vital to including more South Africans in the financial sector.

There was a potential for conflict in the differing objectives of stability and inclusion. One of the defining factors for the financial sector was the 2008 global financial crisis, which saw the introduction of a very strict regulatory regime in the sector. Banks had to know their customers according to the law.

How did the sector support real economic activity? Current sector codes have obliged the sector to do very little in the way of transformation. The sector housed savings and facilitated access to credit. In a South African context, access to financial services were key to socioeconomic transformation. Financial institutions did not own the money under their management, they were merely custodians. The amount of money involved in the sector was very large: pension savings and banking were both roughly the size of SA’s GDP. Unit trusts were valued at around half of GDP. The sector in total made up almost five times SA’s GDP in assets.

Generally, in the financial sector, a few firms dominated. When the IMF did a review of the South Africa financial system, not only were there few firms but they were highly interconnected, which exposed the system to risk. Companies dominating banking were also likely to dominate insurance.

What was meant by transformation in the sector? A de-racialised financial sector would be reflected by: increased black ownership and management, enterprise development, greater access and inclusion of black households, and promotion of asset wealth for black households. Developmental and competitive objectives included funding infrastructure and decreasing financial sector concentration.

In summary, Mr Momoniat questioned whether the Financial Sector Code targets gave effect to transformation objectives. He expressed his approval that the FSTC was doing a review of the targets. He pointed out one of the code’s weaknesses was that it did not consider ownership of listed companies. Most companies on the JSE were owned by institutional investors more than individual owners. A better way to conceptualise transformation through ownership and management, possibly including capital requirements for banks and insurers. Banks were intrusively and effectively regulated. When it came to ownership, one should not be able to buy a share in a bank through debt from another bank. The financial sector had to do more to transform and be transformative. Transformation had suffered from state capture and low growth. Some sectors had to transform more than others, for example asset management. The FSTC was looking at targets. Government also had to review its codes.

The Chairperson thanked National Treasury for the presentation.

Briefing by Financial Sector Transformation Council (FSTC)

Mr Sibongiseni Mbatha, Chairperson, FSTC, said that the FSTC had members from trade associations, organised labour, community, government and representatives of black professional associations. There was a need to do more for transformation in the financial sector. It was time to act, not talk.

Ms Busi Dlamini, COO, FSTC, gave an overview of what had happened since November 2017: the amended Financial Sector Code (FSC) was gazetted in December 2017, and in the same year the FSTC’s mandate was expanded to beyond monitoring B-BBEE. This mandate sought to let the FSTC to look at broader issues not limited to transformation, for example economic growth. In 2019, increased targets for access to services and empowerment financing were set. The financial sector code review commenced in February 2019. The annual transformation report for 2017/18 would be published in December 2019.

The FSTC had implemented some recommendations from Parliament, and was in the process of implementing others. The FSTC had developed public awareness, and was reviewing FSC targets. The draft Conduct of Financial Institutions Bill had requirements for transformation planning for financial institutions renewing licenses. The FSC provides the FSTC with powers to name and shame institutions who did not comply with FSTC reporting guidelines. The FSC was aligned with DTI’s generic codes on the “once empowered, always empowered” issue. The Codes did have special dispensations for dilutions due to regulatory and capital requirements in the financial sector. The Council had made progress on capacitation of the FSTC, and “seniorised” some members. Challenges with funding limited this progress.

On empowerment targets, realities were as follows:

• Management control in sector: the sector was still not meeting targets – discussions were underway to figure out why.
• Empowerment financing: specific targets had been set for SME funding, and discussions were underway in the review of codes to better structure empowerment financing targets.
• Procurement and enterprise and supplier development: the FSTC was looking into the DTI target for 50% procurement from black suppliers by 2021.
• Asset management targets were under review. Financial education and cooperative banks were similarly part of the review process.

The FSTC was working on a report on the implementation of the December 2017 gazetted FSC. The 2017/18 report was still in draft form. 167 financial institutions reported to the FSTC, and about 50% had a BEE contribution level between 1 and 4. Larger entities tended to perform better, whereas small entities tended to struggle to meet most targets. On ownership, the sector was still below target, although scores had increased since 2015. There had also been an increase in management control code compliance, which remained nevertheless below target. Skills development had stagnated below the target. Procurement and skills development had also increased but remained below target. SED and consumer education declined and remained below target. In terms of rand value of empowerment financing, the target had been exceeded, although the points scores remained below target. Access to financial services had declined significantly between 2015 and 2018. The decline was not in banking, but in the insurance industry.

Some work had been done on the FSC review process to assist labour and community to capacitate members. Subcommittees were now in full force, and the FSTC expected a FSC draft in May 2020. Key proposals included: compulsory reporting by retirement funds, alignment of targets to race and gender demographics where possible, supporting black suppliers through increased access to markets and finance. Increasing support for black women-owned businesses was also included. Job creation was to be incorporated as a measure of transformation. Penalties should be imposed for failure to meet targets.

In conclusion, the FSTC believed the financial sector summit had to be held, and it would work with NEDLAC to ensure this. It did require the government to assist in funding the FSTC. The Council was aware of complexities in the FSC, which had to be simplified to ease implementation. The FSTC was working on improving stakeholder engagement.

The Chairperson thanked the FSTC and moved on to the BBBEE Commission Presentation. He welcomed learners and teachers from Milnerton Primary School attending the meeting.

B-BBEE Commission Presentation

Ms Zodwa Ntuli, Commissioner, B-BBEE Commission, said the Commission was the regulator for B-BBEE legislation. The B-BBEE Amendment Act of 2013 allowed the Commission to assess year-in year-out compliance and progress with BBBEE objectives.

Generally, codes of good practice were published by the Department of Trade and Industry to measure how transformation was progressing. Targets included Ownership, Management Control, Skills Development, Enterprise and Supplier Development & Socio-economic Development. Financial Sector Codes added elements to these targets. Where a sector code existed, it replaced the generic code, meaning every entity was assessed on these codes.

In the last committee sitting, the committee had stressed that the regulator and council should work together. The B-BBEE Commission facilitated workshops with councils, and agreed on a reporting protocol. The Commission presentation would focus on 3 areas: investigation, ownership deals and implementation. Any BEE ownership deal over R25m had to be reported to the Commission. The Commission would report on compliance with the codes in the financial sector, which it felt were not ambitious enough.

Ms Busisiwe Ngwenya, Executive Manager: Compliance, B-BBEE Commission, laid out the financial sector targets. The JSE listed companies had to report to the Commission, sector councils had to report to the Minister, and the state likewise had to report. The increase in reporting in 2019/20 had been down to mandatory reporting on BBBEE in the JSE agreed to recently. 63 major B-BBEE transactions were registered with the Commission in the financial sector. Out of 686 total complaints, 16 were in the financial sector.
           
Ownership in the financial sector had dropped from 38% to 21.64% in 2018. This was only in JSE entities. Black women ownership declined from 9% to 7.62%. Compliance in Management control dropped from 57% in 2016 to 51.5% in 2018. Compliance in Skills development dropped to 55% from 64%. Enterprise and supplier development compliance had declined from 92-71.5%. Socioeconomic development compliance had similarly diminished from 88-69%: The B-BBEE Commission had noted that many SED claims did not necessarily constitute SED.

Ms Ntuli said that the role of the B-BBEE Commission had developed, and that now when someone submitted a BEE deal for consideration, the Commission could determine whether it was a real empowerment deal or merely a warehousing deal that ended up without value in black hands. The role of the Commission was important in looking at quality and sustainability. In respect of the financial sector, there was no uncertainty on targets. The B-BBEE Commission was happy with certainty in the area. It was important to emphasise that B-BBEE was mandatory for every entity that wanted to do business with government. The Commission had increasingly seen that government continued to do business with untransformed entities.

In terms of the financial sector specifically, Ms Ntuli implored the sector to submit reports to the Minister for Trade and Industry. Sectoral councils should also submit reports. She expressed concern over the regression in ownership and management. There was an opportunity for the financial sector to reflect on the extension of empowerment finance.

The Chairperson thanked the B-BBEE Commission and ceded to the Prudential Authority.

Briefing by Prudential Authority (PA)

Mr Unathi Kamlana, Head: Policy, Statistics and Industry Support, PA, said that there were 4 pillars that the Financial Sector Regulation Act prescribed to the Prudential Authority: institutional soundness, soundness of financial market infrastructure, protection of financial customers and assisting the Reserve Bank with financial stability. For the first time, the FSRA specifically listed transformation as an objective.

The FSRA prescribes that the Prudential Authority publish a regulatory strategy and review it annually, publishing any amendment thereto. The PA created supervisory frameworks for sectors. Due to concentration and conglomeration of the financial sector, the PA was developing frameworks for financial conglomerates and significant owners. Immediate focus areas were concluded in first year of existence. The Prudential Authority supervised 234 entities.

The Authority had additional capital requirements for larger banks given the detrimental impact of their failure. Mutual banking had increased to R3bn in assets, cooperative banking to R369m. Mutual and cooperative banks were new in the regulatory framework, and there was a need to update rules and standards for them. Insurers held R34bn in assets by end 2018.

The Insurance Act was the first piece of financial sector legislation promulgated after Twin Peaks. The FSRA was promulgated in 2017 and created the Twin Peaks model. The Act formalised the financial stability mandate of the SARB. There was a recognition that there could not be safety and soundness in the financial sector system without inclusion and transformation.

The presentation addressed the Prudential Authority’s role in transformation. The PA had a role in sector entry through its licensing function. It looked at development of financial institutions and plans for stability, as well as transformation data. It also supervised products offered to consumers. Resolution in exits from the sector were also under PA’s authority. The role of the Authority in transformation could only be within its mandate. The Prudential Authority allowed for the progressive meeting of prudential requirements for transformative purposes. Reducing barriers for entry and promotion of competition would be done without risking the stability of the financial system.

The Chairperson thanked the Prudential Authority

Discussion
Ms M Mabiletsa (ANC) said the big question was: what was transformation? There was only one mandate required – the people of South Africa and its economy. If there was no financial access, no transformation would happen. She raised the issue of individual negative credit ratings being extended to collective savings initiatives. She wanted to know what the entities had done to provide access to funding to South Africans. The reason for fronting was that people could not get access to funding. She stressed her displeasure that the FSTC was still reviewing recommendations made by the Committee and the Portfolio Committee on Trade and Industry in 2017. She enquired as to when the FSTC would finish reviewing. Financial access had to happen for empowerment.

Ms P Abraham (ANC) stressed the importance of the financial sector summit to the National Treasury delegation. The FSTC had talked to the issue of fronting which suppressed economic growth – she emphasised the need to pick this up where it happened. She asked the FSTC for solutions to the financial sector’s failure to meet transformation targets, as well as what its contribution to financial education was. She asked the B-BBEE Commission to clarify on the failure to submit financial sector annual report and financial regression in B-BBEE targets, as well as the decline in reporting from entities. She raised the issue of fraudulent transactions with the Prudential Authority, and asked whether a stage where this was no longer a problem would be reached. She noted the case of Old Mutual where a family had to take a corpse to Old Mutual offices to prove the death of their family member, and it was only when they did that that they were paid their claim. Prevention of such occurrences had to be shared with the Committee. The FSCA should share with the Committee what could be done or was being done in this regard.

Dr D George (DA) noted that Treasury had mentioned that transformation had only benefited a few people – he proposed this was because the economic model transformation, in its current form, was built on was designed so that it would never benefit the masses, and would only ever benefit a rich elite. Was it not time to focus on economic growth to benefit the masses? Why did the Treasury not focus on pension funds given the vast majority of pension fund owners were black and owned their assets? He argued that BEE was a massive intervention in the South African economy, which was not growing. Did the Treasury have any idea of the opportunity cost brought by this intervention?

Mr G Skosana (ANC) remarked that the FSTC seemed to be struggling to meet its targets and that that was a matter of serious concern to him. Were there any entities that had been named and shamed in terms of the Financial Sector Codes? On empowerment financing, he noted the review process was restructuring this area, and requested more detail. Why was it using the abbreviation SME and not SMME? How did the B-BBEE Commission handle transactions under the value of R25m? On the issue of fronting: how rife were the cases? In the event fronting was found, what were the penalties? 

Dr M Ndlozi (EFF) said that the financial sector was the real South Africa – where one sees one has to stop living a lie, because there was no transformation actually taking place. It was essentially an anti-black sector, and racism was the “beast” nobody wanted to name. A young black person who goes to a bank to request help with business financing faces all types of stereotypes, even from other black people. These stereotypes made conditions of finance very difficult. There was too much racism in the financial sector.

Dr Ndlozi said that the cosmetic changes the presenters were busy with would not the change the financial sector. Depending on the market and the good-heartedness of racists was not going to change the financial sector. He argued that white people were not going to give away their wealth – they were not socialised this way. Everyone in their lives was seen as a servant. It was very difficult to ask people who live in these conditions to lead transformation in banks, insurance companies, or asset management institutions. There had been no interest in transformation in the financial sector in the last 25 years. He asked what came after naming and shaming, noting there was no punishment as the financial sector was so organised and powerful. He asked for an example of a situation where there were real consequences for non-compliance, where a big company was punished for not complying with the transformation objectives. Some of the insurance companies were children of the 1990s, and they had developed and were still white. Legislation had to allow for punishment of non-compliant institutions.

The other interest for Dr Ndlozi was the impact of 4IR on the financial sector and the implications of that for transformation. He submitted that the best thing to do was establish a state bank, black-controlled, with a pure pan-Africanist mandate that allowed it to finance young black entrepreneurs, even if the odds of success were low. Pension funds managed the funds of black people – there was a need to establish parallel institutions that managed the funds of black people with a non-racial mandate. Alternative financial institutions may be the route to be taken, supported by the state. He also proposed legislative changes were needed – in the National Credit Act for example, it should be much more difficult for people to lose their houses. These were some of the legislative measures used to perpetuate racism. He recalled the “inevitable” amendment of the Constitution to allow for expropriation without compensation, and how this would impact bond and stock markets.

Ms Dlamini clarified the issue of the review process – it seemed like the FSTC did nothing but review – but this was not the case. Financial Sector Codes were gazetted in 2017 and the FSTC spent the whole of 2018 implementing. The review of codes required a period of implementation of the codes to see issues and challenges. The FSTC had been implementing what was gazetted for the previous 2 years. It had indicated its deadline for the review process was May 2020. The process of reviewing a sector code was lengthy as it involved different stakeholders. The FSTC was running consumer education as part of its code and measuring entities on performance. Access to finance had been acknowledged as an issue for black SMMEs. It had set a specific target, where a minimum of funding in the sector had to go to SMMEs. It was not enough though, which was why the FSTC was considering what to do in the sector code. It was a matter of concern for the FSTC that the sector was falling behind on transformation targets.

Ms Dlamini believed that if there could be penalties for non-compliance, some traction could be gained. There had been a regression in the sector in certain areas. Change in legislation tended to lead to a regression. The gap between legislation lead to uncertainty which made it difficult for entities to plan. The FSTC was keeping entities up to date with its planning to prevent this. It was making sure to police them in submitting reports, and looking at having a compulsory scorecard for pension funds. Given that scorecard, the FSTC needed to start measuring the ownership of pension funds. The FSC only allowed the FSTC to name and shame those who did not report, not those who failed to meet targets. The next codes had to allow it to name and shame those who failed to meet targets. Empowerment financing had 4 subcomponents: financing for affordable housing, transformational infrastructure, black agriculture and black businesses (large and small). Current codes did not have a requirement on specific components.

The B-BBEE Commission monitored BEE funding through media monitoring, compliance reports and random site visits. On fronting, in more than 85% of cases that had been reported to the Commission, fronting was the major driving issue. This meant there were many more it did not know about. When the Commission issued findings, it had to refer the matter to the NPA. If someone was convicted, a jail term of 10 years could be assigned, or the person could be declared a delinquent director or barred from doing business with the state for 10 years. The introduction of B-BBEE was intended to reach a wider pool of beneficiaries than a small elite. However, often the money did not reach beneficiaries, and when entities were asked for a list of beneficiaries they could not produce. The Commission had not looked at the cost of putting B-BBEE deals together. For 2017-18 large transactions for B-BBEE were worth roughly R188bn. The decline in compliance figures was likely due to the fact that, when the new administration came to power, many thought B-BBEE might be scrapped and thus did not report. From a policy perspective, B-BBEE was hinged on 2 areas: transforming existing entities, and the establishment of new businesses by black people. It was important to look at it from both sides. In terms of access to funding, of the 272 transactions worth R188bn, only 19% of the funding came from the financial sector. In terms of what there was to lose for an entity that was noncompliant, S10 of the B-BBEE Act made it clear that any interaction with government should be halted for noncompliance.

Mr Kamlana indicated that the Reserve Bank had already issued a directive on authenticated collections. By April 2020, no non-authenticated collections would be allowed, so no non-authorised debit orders would exist.

National Treasury replied that BEE funding only benefiting a few people was precisely its frustration – its priority was that transformation should be mass-based and available to all South Africans. Treasury agreed with the understanding that economic growth and transformation were two sides of the same coin, one could not go without the other. On the status of retirement funds and black ownership through institutional funds, the last research in 2013 had placed black ownership through institutional funds on the JSE at 13%. Treasury wanted direct ownership as well.

The Financial Sector Conduct Authority replied to the question on Old Mutual, noting this was an unfortunate incident. There was a requirement for funeral policies to be paid within 48 hours. A lot had happened behind the scenes. As a regulator, the FSCA had engaged with Old Mutual to investigate the issues.

The Chairperson asked Mr Momoniat who was responsible for the convening of the financial sector summit.

Mr Momoniat replied that this was the responsibility of NEDLAC, who was not present.

The Chairperson stated his intention to meet NEDLAC before Parliament rose in that regard. There was no need to repeat some of the issues. In the 5th Parliament, a report on financial sector transformation was adopted requiring a summit of the financial sector on transformation.

The Chairperson argued there could not be high concentration of the economy in a particular race. There was a report published by the Minister of Labour on the lack of transformation, which made for ugly reading. The Committee was not prevaricating – it had authenticated, data-based reports that confirmed the issue. Banks had huge business with government. Part of the money they made was from government – this money came from taxpayers. Without government, these banks would not be as rich as they were. The country was at the stage where there had to be real transformation, there had to be a summit, and the report had to come back to Parliament. The authorities and structures present should be involved, otherwise they should be dissolved. There was a tendency for companies not to comply and budget money for penalties. That could not be allowed. The Committee would meet with NEDLAC and Treasury the following week to decide on when the summit should be held.

The Chairperson thanked the Committee and stakeholders.

The meeting was adjourned.