National Treasury & SARS briefing: Financial Sector and Deposit Insurance Levies Bill & Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill

Meeting report

Briefing by National Treasury: Financial Sector and Deposit Insurance Levies Bill & Administration Bill
Mr Ismail Momoniat, Deputy Director-General: Tax & Financial Sector Policy, led the presentation by National Treasury. He said that the Bill aims to fund the regulatory system that applies to the financial sector and deposit insurance. The legislation imposes a levy on financial institutions. It funds the entire regulatory and advisory system. The Financial Sector and Deposit Insurance Levies Bill is the final implementing stage of the comprehensive reform agenda undertaken by the government which introduces the Twin Peaks regulatory architecture.

(See slides 8-9 for the explanation of the twin-peaks regulatory architecture)

The financial sector size comparison
The financial sector requires regulatory resources proportional to its centrality (because of the dependence the entire economy has on the sector) as well as its size (in relation to the economy). This is called the systemic role of the financial system. Finance is the largest industry in South Africa leading with 24%.

Seeking to balance industry and customers
The cost imposed on the sector is a balancing act. The costs of regulation cannot disappear but can only be assigned to different people in the economy (business or customers). For regulation and supervision to be effective, intensive, and intrusive, the industry must pay its fair share. If regulators are inadequately resourced, the cost is passed onto customers: individually, through abusive practices (mis-selling and over charging), and collectively, through the failure of institutions (bank failures and loss of funds).

(Examples of financial sector bodies & regulated financial institutions can be found on slide 11 of the presentation)

Financial sector regulation before and after twin peaks
Ms Olaotse Matshane, Head of Department: Policy, Statistics & Industry Support, said that focus is on the new entities that came over to the Prudential Authority (PA). These include: co-operative finance institutions, insurers, and market infrastructures.

(see the full list on slide 12-13 of the presentation)

Funding of financial sector bodies: Chapter 16 of FSRA
Mr Momoniat explained that it focuses on fees, levies, and finances. Section 237(1)(b) of FSRA provides for funding of financial sector bodies through legislation that imposes levies for purposes of funding operational requirements, for example salaries, systems, rental, and equipment.

Section 239 requires the preparation and adoption of budgets by financial sector bodies and proposals for fees charged and levies to be imposed.

Sections 239 and 240 provide for public consultations on levy proposals and the submission of finalised budget proposals, including levies to the Minister of Finance for approval. Overall, Chapter 16 allows for a transparent and consultative process that will also feed into legislation imposing financial sector levies i.e. the Financial Sector and Deposit Insurance Levies Bill.

What other taxes does the financial sector pay?
The financial sector is subject to usual taxes (Personal Income, Value-Added and Corporate Tax). In addition, South African financial institutions are subject to a Securities Transfer Tax (a type of Financial Transactions Tax).

(see slide 15 of the presentation for an explanation)

Prudential Authority funding requirements
Ms Matshane said that the Financial Sector Regulation Act (FSRA) established the Prudential Authority as a juristic person. However, it is within the administration of the Reserve Bank. R500 million (including the special levy) is proposed to be collected in levies for the PA by the Reserve Bank. R11 million in fees will also be collected from industry. The total operating expenditure budget will be R895 million. 54 per cent (of which R487 million is remuneration) and R99 million is for operational costs. A further R309 million will be for indirect operational costs, IT infrastructure, and capital expenditure and so on. The operating deficit is R385 million, however, the Reserve Bank will continue to provide funding to cover the shortfall.

(PA’s forecasted budget, fees and levy proposals are on slide 17 of the presentation)

The Financial Sector Conduct Authority funding requirements)
Ms Katherine Gibson, Deputy Commissioner, FSCA, said that R883 million is proposed to be collected by the FSCA in levies (including the special levy), to fund its operations. An additional income of R66 million is envisaged, comprising fees, interest received and other income. Total operating expenditure will be R967 million, of which R617 million is for staff expenses (R530 million is for staff remuneration) and R350 million is for general expenses, such as the running of the call centre, IT infrastructure, and maintenance, etc. An estimated operational shortfall of about R18 million will be realised, which will be funded from reserves.

Mr Paul Kekana, Chief Financial Officer, FSCA, said that the main source of revenue is levies. The special levy is only there to fund us for two financial years. The shortfall is because there are capitalisation costs that will over time depreciate in non-cash funding items.

(FSCA projected budget, fees, and levy proposal can be found on slide 19)

Mr Vukile Davidson, Chief Director: Financial Markets and Competitiveness, explained the proposed levies payable to the PA and FSCA per sector.

Ms Matshane said the concept of proportionality is making sure that smaller entities will pay fewer levies.

(Table can be found on slides 20, 21, 22 of the presentation)

Funding requirements for other financial sector bodies
Ms Gibson said that FSCA and previously the FSB has had a close and supportive relationship with the Ombuds and other financial bodies. It is through the FSRA and the Levies Bill that these bodies will be more operationally independent. This is important given the role that they play in the system to protect customers. To be completely operationally independent, they need to collect their own levies, and this is how the bill is structured. The FSCA will collect these on behalf of the bodies.

The FSCA will collect R90 million (including the special levy) in proposed levies on behalf of the Office of the Pension Funds Adjudicator. The total operating expenditure will be R87 million. The FSCA will collect R81 million (including the special levy), in proposed levies on behalf of the FAIS Ombud. Operating expenses will comprise R46 million in staff expenses, R33 million in expenses (including Capital Expenditure). The FSCA will collect R34 million (including special levy), in proposed levies on behalf of the Financial Services Tribunal. The levies will be allocated towards hearings and other general expenditure and the rest will be used for remuneration and other staff expenditure, audit fees, depreciation, and amortisation. The FSCA will collect R22 million (including special levy), in proposed levies on behalf of the Ombuds Council, which will be allocated towards rental expenses, remuneration, and other staff expenditure, audit fees, depreciation, and amortisation, as well as expenditure on supervision and oversight activities.

Mr Momoniat said that all of these institutions are accountable to Parliament. Most of them provide their own annual reports.

The Reserve Bank will collect levies on behalf of the Corporation for Deposit Insurance (CoDI).

Dr Hendrik Nel, Chief Director/Interim CEO of the Corporation for Deposit Insurance, said that CoDI will be a new entity and subsidiary of the Reserve Bank. The initial start-up costs will be absorbed by the central bank. The total cost to be levied will be R41 million used for operational elements. CoDI was established by the Financial Sector Laws Amendment Act that was promulgated recently and will come into effect as soon as the commencement notice has been agreed by the Minister of Finance. CoDI will be accountable to a board of directors and Parliament. They will have to provide an annual budget and report through the Minister of Finance and Parliament. CoDI will be funded by its members which includes the banks. These levies by members will only be charged when CoDI becomes fully operational, which will be 1 April 2024. He said that the survey shown on slide 29 was done in 2014. A survey was conducted late last year, and the results will be available towards the end of February.

(See slides 25-29 for more information)

Example of the application of the levy formula: Banks and Co-operative banks

Ms Matshane said what is interesting and important is the cap of R45 million. The banks will not pay more than that amount.

Mr Stewart Bobo, Policy Specialist: SARB-Prudential Authority, said the cap is there to raise sufficient funds for operations. He took the members of the Committee through the levy formula for a big and small bank. He mentioned that big banks will pay more than smaller banks.

Mr Momoniat said the Bill is now tabled and asked the Committee to approve it before the next budget meeting.

Discussion
Dr D George (DA) said that for South Africa to grow the economy and lift people out of poverty, it is important to attract investment capital. It needs to be easier for people to save in the economy. This is how to drive economic growth. The key aspect of regulation needs to provide oversight and protection. However, it should not get in the way of economic activities. It must not drain funds from the economy that could have otherwise been used productively.

South African taxpayers are heavily burdened given the economic factors such as direct taxes like levies and administrative taxes. He said that this is essentially just another tax. He agreed with the Treasury that the customer always pays. This ends up in the pocket of the consumer and hard-pressed savers.

Government is not wise with spending taxpayers' money. This problem has been raised many times before. He said that they have to squeeze every corner. He used the example of service costs for service delivery. There is not much confidence in the government to spend money effectively or efficiently. He mentioned that people were concerned about bank roll and more government expenditure. He used the example of FSCA and their staff expenses of R617 million. This is R617 million out of R967 million, approximately 64% of the budget. This is too high.

He found the special levy too problematic. Every entity needs money. He said when entities ask for money it does not necessarily mean that they will get it. He asked how they arrived at these numbers. Did you look at the state of the economy? The existing tax burden on hardworking South Africans? He asked whether a financial impact assessment was done. If not, when will it be done because it is crucial to pass the Bill.

It is a key pillar in the economy to make it easier to save and not make it difficult for savers by introducing more taxes.

Ms P Abraham (ANC) said that taking responsibility for the conduct of banks is a step that is appreciated. She said it would be interesting to see the move towards the protection of the consumer. She asked how the medical aid and estate agents will be monitored and how they will pay for their levies. She acknowledged that a sliding scale is used on how banks will pay their fees. It depends on their capacity. Big ones will pay more, whereas small ones will pay less. Has there been any interaction with the banks on this matter? She asked how these banks will be traced. She asked how many banks there are and how many are big and small.

She was impressed with the use of foreign schemes. As far as time frames are concerned, she asked what needed to happen and what the target time was to pass the Bill. What is supposed to happen in 2024? The Committee does not want to take for granted the dates that have been established.

The Chairperson asked if there was a hearing with Treasury and the financial sector. If so, what was the financial sector’s take on the bill? Was it agreeable? As far as the staff expenses of R617 million is concerned, he wanted to know how this amount was benchmarked. It is benchmarked against something that is done in other economies or entities? He asked for a breakdown of this amount. He noticed that annually there will be collective bargaining and staff cost will not remain R617 million. It is going to increase, for example, inflation. He asked if this will be sustainable, taking into account slide 18-19 of the presentation. He asked why a shortfall of R18 million was budgeted for. He wanted to understand this.

Responses
Mr Momoniat said that they are deeply mindful of the impact anytime a new tax law is introduced, or any current tax being increased. National Treasury has worked many years of incrementing this. In fact, the Financial Sector and Deposit Insurance Levies Bill, and the Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill have been ready since 2015, even before the system was implemented. Agencies for the last two to three years have had to rely on the past way of funding. As soon as funding was up, agencies had to rely on their reserves, meaning that they are dependent on the fiscus. He acknowledged that the financial sector was always meant to pay.

It is an increase on the current pre-twin peaks arrangements.

He acknowledged that not all taxes are bad. It depends on how it is being spent. He agreed with Dr George that there is not much confidence in government to spend money effectively. As far as the high staff expenses are concerned, agencies are personnel intensive, and high salaries need to be paid. If staff of the agencies are paid the same as people in the government department, the agency will not attract people that know how to regulate the industry. Agencies will be held accountable by Parliament if there are any deficiencies in spending and so on. The financial impact assessment was conducted and published on the website. He said that this can also be made available to the Committee.

He mentioned that if South Africa decided not to regulate the financial sector, major banks will beg the state to do so. If they are not regulated, overseas regulators have to place reliance on the quality of regulation that takes place following 2008, whether it is money laundering. Peer reviews are conducted in the financial sector. The moment that South Africa’s regulatory standards are seen to be substandard, other regulators will not trust the quality of supervision done on these entities. This exposes South African institutions that operate overseas but also corresponding banking relationships here in South Africa.

The special levy is a once-off cost. It will only be there for two years and then it will fall away. The focus is to treat customers fairly.

Mr Davidson recalled that the Bill intended to allow regulators to start a levy in line with the financial sectors for the financial year which is around April.

Ms Matshane said the principle on which National Treasury is operating is purely cost recovery. So what does it cost the authorities to supervise and regulate the sector? This is the amount that is trying to be recouped. Direct costs are covered by the South African Reserve Bank (SARB), which goes a long way in alleviating the burden for the consumer. There are three tiers of banks: commercial, mutual, and co-operative banks. There are 31 commercial banks, and they take up the bulk of the levy being paid, about 90% by big banks like the top five.

The idea of the special levy was to pay for the start-up costs of the authorities. She used the example of the PA’s transformation programme about the ICT solution that is being implemented in the next five years. This programme alone will cost more than R400 million.

Ms Gibson said that FSCA is primarily a service-driven organisation. She felt that the staff and the numbers were testament to not only the amount of work but the changing way that the organisation is going to be working with a much closer relationship with financial institutions, the organisations that FSCA is regulating and supervising. She suggested another session to provide dedicated information on how supervision happens to see how effective supervision conduct space can be complex and is not quantitative as it happens in the credential space. It requires a deep understanding of business models and individual entities. One must be able to leverage data that is good and reliable to monitor how financial institutions are treating their customers. This means how they design their products, what distribution channels they use, what promises, and commitments have they made to their customer, how are they living up to those promises and commitments, do customers understand the products and services that they are being offered, has disclosure been done reasonably, and what recourse do they have if something goes wrong? This is about 70 000 thousand entities and will be expanded by an additional 25 000. This just shows how much power is needed. Therefore another session explaining all of this can be arranged. The medical aid schemes are currently under purview. More context of this will be provided.

Mr Kekana emphasised that the special levy is only for two years. It is there to cover start-up costs mainly on ICT infrastructure. For example, in the digital space, there is a high intensity of defects, and this increases staff costs.

Mr Momoniat said the mutual evaluation on money laundering was bleak. The National Treasury is facing an uphill task to not be put on the grey list later this year. The role of Parliament is to make sure that regulators are doing their jobs and being strict. If they are not strict, it will undermine the country. Standards must be maintained. The financial sector is globalised and there are many interconnected interactions with the outside world like trade.

Ms Jeannine Bednar-Giyose, Director: Financial Sector Regulation and Legislation, National Treasury, declared that estate agents do not fall under this legislation. It falls under the Property Practitioners Act. The protection of customers under that Act, there is a fidelity fund that property practitioners need to contribute to to provide some protection for financial customers who may suffer from the conduct of troubled practitioners. They fall under the Department of Human Settlements.

Mr Momoniat said that there needs to be scope for harmonising the different pieces of legislation. National Treasury does not go to each sector and asked how much they should be taxed before announcements are made. There are consultations, like this bill. He emphasised again that the Bill was ready in 2015 and a lot of consultation has happened over the years. The amount charged is also less than that of international norms.

The R617 million was benchmarked on the fact that an official who understands the sector is appointed. It will be useless to appoint someone who does not understand bank balance sheets. For instance, there was a former supervisor and bank supervisor departments that had their own organisations and budgets. This is what Treasury took into account, certain roles were expanded and a budget for the Act itself had to be catered for. However, there is a remuneration committee that guides salaries.

Mr Kekana said the shortfall of R18 million is a once-off that was budgeted for. He emphasised that this is the first year the twin peaks model is being used. There are going to be once-off expenses, like professional fees. Once-off costs can be covered by reserves. There are other non-cash items. He used depreciation as an example. So when investments in IT are intensified, the depreciation component goes up. He said the shortfall amount was fundable.

National Treasury is mindful when setting up budgets. They look at the current economy and look at the most effective way of delivering their mandate. Costs are being aligned to what is currently happening in the economy. Specialised staff must be appointed to do the regulations in the banking sector, therefore there is no baseline amount for staff costs. The explanation of total operating expenditure is on slide 18 of the presentation. The breakdown of how much executives all the way to the cleaners are being paid is something that National Treasury is not in a position to tell in detail. National Treasury was happy to provide any other information and documentation that is needed.

Dr George found all the inputs very useful especially for a deep understanding of the regulation. National Treasury, its entities and the Committee are in agreement on having an effective and robust regulatory environment. For example, on how to achieve this cost-effectively in the economy and what is doable.

Ms Abraham thanked everyone for their responses and asked to brief the Committee again on a deeper level when visiting different sectors.

The Chairperson said that the bill will be processed as any other bills are ordinarily processed. It will not be able to do so before the next budget meeting.

The meeting was adjourned.