Financial Sector and Deposit Insurance Levies Bill & Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill: Treasury response to public submissions

Meeting report

Opening Remarks
The Chairperson welcomed those in attendance. He stated that the Committee would receive a presentation from Treasury on its responses to the submissions received on the Financial Sector and the Deposit Levies Bill [B3 – 2022] and the Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance premiums Bill [B4- 2022].

Presentation by National Treasury on the Bills
Mr Vukile Davidson, Director: Financial Stability, National Treasury, made brief remarks and introduced those in attendance from National Treasury and the Prudential Authority, amongst others. He appreciated the submissions made by the public, and where necessary, adjustments had been made. Most of the comments dealt with the level of the levies and possible duplication between the levy and aspects of the special levy.

Ms Jeanine Bednar-Giyose, Director: Fiscal and Intergovernmental Legislation, National Treasury, presented the consolidated comments matrix relating to both Bills. The Consolidated matrix principally dealt with the comments made by the Financial Intermediaries Association of Southern Africa (FIA), South African Insurance Association (SAIA) and Strate.

It was of paramount importance that the regulation and supervision of the financial sector be appropriately and adequately funded to enable the regulators to execute their mandates effectively. While all regulation comes with some costs, the cost of funding the Regulators would be based on cost recovery and would be kept at a minimum. While the Financial Sector Conduct Authority (FSCA) would be fully funded by the industry, the Reserve Bank would continue to fund a portion of the Prudential Authority’s (PA’s) total costs from its resources. What the PA would recover from the industry were direct costs, indirect costs, which were estimated at 40 percent of the total costs, would be funded by the Reserve Bank. Therefore, there was no duplication of costs. It was also understood that financial hardship may be experienced as a result of the pandemic. As noted above, the Authorities were empowered to grant exemptions from the payment of all or part of a levy in the circumstances set out in clause 11 of the Bill. On the basis that the principle underlying the charging of the levies was cost recovery, this could not be supported because it would mean that the Authorities would not be sufficiently funded to execute their important mandates. It should be noted that the FSCA would receive considerably less from the insurance industry than it currently did.

The special levy was reduced from 15 percent to 7.5 percent. This was a balance between ensuring that the Authorities have adequate resources for set-up and other required systems while also minimising the burden on the supervised entities. The special levy would be imposed for only the first two levy years following the date of the commencement of the Bill. The special levy was not only for establishing the PA/FSCA – it was for other expenses that were not part of the ordinary course of the regulation and supervision of financial institutions. A special levy may be charged in accordance with the provisions of the Levies Bill to cover other initial costs. The estimate of expenditure had been published by the Authorities which included an estimate for the special expenditure in relation to a special levy proposal.

The principle underpinning the charging of the levies was that of cost recovery. The methodology that was adopted for the calculation of the levies was such that it took proportionality into account. The larger players would contribute more towards the funding of the Authorities while the smaller players would contribute less and, in some instances, would be exempt from paying any levy e.g., co-operative financial institutions. Treasury disagreed with the notion that proportionality had not been applied in the charging of the levies. The total levies that would be paid by Strate to both Authorities accounted for about 4 percent of the total operating costs and 0.3 percent of the total revenue. The calculation of the levies had been structured in such a way that the Authorities could recover their operating costs.

The adoption of a twin peaks regulatory framework established two authorities (the PA and the FSCA) that were separate regulators, each one with its own objectives and functions. The levies were imposed to fund their operations in pursuit of fulfilling their mandates. The underlying principle was that the levies imposed on the supervised entities were meant to recover the costs involved in the regulation of the sector.

See Consolidated Comments Matrix for further information.

Discussion
The Chairperson asked what the impact of the levies was on consumers. As an MP, with two dependents, he paid R10 000 – he was not sure if that was standard for a medical aid scheme. He had not received a salary increase – he was ‘not complaining’ - he was simply making a case. It was the same with public servants and others. Salaries and wages had not increased for quite some time. The pandemic had affected the economy. Be that as it may, insurance premiums had been increasing. Bonds had been increasing. The petrol price and food inflation had been skyrocketing. Thus, he asked what the impact was of the levies on clients. He noted that there were parents who were defaulting on school fees, particularly at private schools because they could no longer afford to pay. The financial sector had not yet been reformed. How many Black players were there in the financial sector? How would this affect smaller players or those who were interested in getting into the sector? R250 million was required by the Reserve Bank to set up a bank in South Africa. Were these factors not making it more difficult for new entrants, especially Blacks to get into the financial sector.

Dr D George (DA) stated that the levies were effectively additional taxes on the industry. The economy was in a very difficult place, there was no doubt that these taxes would be passed on to consumers. He noted there was mention in the presentation of a reduction, which seemed to be a significant change. Clearly, there must have been a significant amount of wriggle room. He was concerned about how the taxes were actually being calculated. He realised the Committee received a presentation previously from the Financial Sector Conduct Authority (FSCA) regarding setting up and start-up costs. A very sophisticated and expensive system was being built. Given that the situation had changed significantly since the financial crisis in 2008 when this process began, he suggested an alternative might be more appropriate, given the current context. He asked how Treasury checked the claims made by entities when they stated that X amount was needed. His concern was that these amounts were possibly ‘padded.’ Obviously, if one was going to have a regulator, one would need to pay for it. The State entities tended to get/be more expensive than needed because there was inefficiency; this had been seen during his time on the Committee. When one considered additional taxes, his view was that more taxes should not be imposed on already heavily burdened South African taxpayers.

Mr Ismail Momoniat, Deputy Director General (DDG): Tax and Financial Sector Policy, National Treasury, stated that this was not a new decision. Treasury had delayed how to fund this system for too long. The legislation was ready in 2017 but Treasury had held back. From the start, when Treasury created the twin peaks in the response to the financial crisis, the financial sector needed to be more intrusively regulated. It was a unique sector. When one looked at banking, retirement savings, and insurance – the sector relied on making promises. What was clear was that it was too lightly regulated up to 2008 and that Treasury needed to step up the prudential regulation and step up the way in which customers were being treated. Lots of people complained about their financial products.

Ordinary customers would suffer if everyone was just allowed to come in. This sector did have strict criteria for entry. For some sub-sectors, such as banking, it was extremely complex and money would be lost. Therefore, the regulatory requirements were much tougher. The issue was around how to allow small players to enter and transform the industry. In the early days of the Financial Sector Charter, Treasury pointed out that particularly in the banking sector, ownership was dependent on deep pockets. Those issues need to be grappled with. How one scored ownership was quite an important issue, it was often institutional investors that came in, such as the large, listed companies. The question was then what the role was of small players, who might not be listed and were owned by a few. These were important questions. In the financial sector, Treasury had tried not to only focus on ownership but on management when it came to transformation.

On the regulatory side, Treasury had tried to have a risk-rated system, so that the bigger ones ended up paying a lot more. Treasury had not necessarily succeeded in doing this. One needed to shift the burden on them – so that there was entry. The principle taken was that the financial sector should generally fund its own supervisory regime that it operated. It was embarrassing that the big players in the industry were coming to complain about ‘paying too much.’ He noted the burden put on the regulatory side and highlighted what was paid in other comparable jurisdictions – it was embarrassing – as so little was actually paid. He suggested that one needed to be less apologetic about saying paying more, given the risk posed to the economy and consumers by such institutions. Ultimately companies would transfer the costs onto customers. This was something that needed to be watched.

Financial inclusion was an important objective. He would not pretend that Treasury had answers. Treasury looked at the situation before twin peaks. The other technical problem experienced was the different interpretations and if it should be put forward as a money bill rather than license fees. Some components might be regarded as a form of tax. That would subject Treasury to all kinds of challenges when companies did not want to pay towards regulatory fees. Treasury had taken the old Financial Services Board as a base, which had a system where it charged institutions. Treasury had also taken into account the different functions that it had taken on. The difficulty was that Treasury had to do this for different activities, as seen in the schedule. He was not suggesting that Treasury always got the amount of risk right – and certainly over the following few years, Treasury might need to phase it in. It might impact customers in cost but it would also provide more protection. That was why if one considered the socio-economic studies that were done, on the whole, this would provide a huge net benefit for the economy to ensure there was a safer financial sector.

Ms Katherine Gibson, Deputy Commissioner, Financial Sector Conduct Authority (FSCA), stated that when one spoke about what Treasury was trying to balance, it was between making sure that the regulatory burden was reduced as well as the cost associated with regulation but at the same time it needed to make sure that individuals and users of the financial system were protected. It was a very complicated space for consumers to operate in, one where people could lose their livelihoods. There was a cost to regulation. She noted the reference to the financial crisis and the suggestion that the economy had largely moved on from that - this was only true to a point. The financial system had become more complex. Since the crisis, additional challenges were being dealt with in relation to the digital space, such as cryptocurrency. Linked to that were additional risks and additional complexities for regulators to be managing. The potential for loss was not small, sometimes it went into billions. These losses were borne by municipalities, retail investors, and the ‘man on the street’ for example. The FSCA was responsible for tens of thousands of entities. The FSCA needed to understand the business models etc of these entities, this required a resourced capability. Part of that required intense skills within the FSCA and significant investment into its Information Technology (IT) infrastructure. The special levy would result in higher upfront costs, but it meant a much more efficient organisation over the longer term.

She noted the questions about small businesses, the DDG was correct in emphasising that the numbers looked big when one looked at them in isolation, when one considered them in relation to the size of bigger businesses, it put things into perspective. To monitor these entities effectively required fairly intense resource allocation. For the smaller players – additional assessments had been done into this. The smallest of these would be a one-man Financial Service Provider (FSP), which was currently regulated in terms of the phased framework. These things did need to be looked at comparatively, in terms of sales practices, advice being given to clients, and protection against the likes of fraud, which was highly prevalent in the sector as well.

Inputs from Stakeholders
Ms Pheona Haertel, Head of Legal Risk and Compliance, Strate, stated that the need to protect consumers was recognised. Strate’s position, in terms of the comments submitted, spoke to proportionality. Strate did play a significant role within financial markets and acknowledged that responsibility in terms of ensuring that the market operated in a sustainable manner and in a manner where there was confidence, in not only the infrastructure that made up the financial market but the regulatory functions that oversaw and supervised the financial markets. From a proportionality perspective, looking at the current levies and the quantum of those levies, and looking at the forward levies based on the calculations contained in the Bill, there was a need for proportionality in what would be paid going forward. She appreciated the comments made about the smaller entities that would be coming in, as well as the comments made by Katherine Gibson about viewing levies in a comparative manner. She suggested there needed to be proportionality in terms of the quantum, current value paid and the future value that would be paid to be taken into consideration. 

Ms Ntsoaki Ngwenya, Legal Specialist Manager, South African Insurance Association (SAIA), stated that the Bills were what they were and the responses by Treasury would be taken back to the industry. She thanked the Committee for the opportunity and National Treasury for its feedback.

Ms Samantha Williams, Head of Legal and Regulatory Affairs, Financial Intermediaries Association of Southern Africa (FIA), stated that FIA took on board the feedback. She appreciated the concession and consideration granted in terms of the exemption process. It was an unwieldy process for many financial services providers to make exemption applications, which became incredibly onerous. The cost for a small, regulated entity was lower – the point made in their submission, was that with the special levy, there was potentially a 22 percent increase in those levies from previous years. In the current economic climate that was exorbitant. While consideration had been given to lower fees being applicable to smaller entities – the increases were still large. Larger entities were looking at up to 40 percent increases. Unlike insurers, intermediaries were not able to pass on any of the increased costs to their clients, insurers could do that. The commission was regulated in the intermediary space. This was the gateway for entrepreneurship in the sector, small businesses were finding it increasingly difficult to enter the market, especially with the pressure of transformation. 

Responses
Mr Davidson stated that a lot of the substantive points that were raised in the presentations were dealt with in detail in Treasury’s detailed responses. Effective regulation and financial stability were critical for economic growth as well as the public good. Treasury had been seeking to balance the cost of regulation with the benefits that accrue to individual customers as well as the system as a whole. In the presentation, the huge costs were addressed, as well as where those costs were because of weak and ineffective regulation. The levies were on the lower end compared to jurisdictions of a similar size and complexity of the financial system, as well as regulatory architecture. The basis of the levies was a cost-recovery model. Additional accommodation had been made, particularly with respect to the Prudential Authority, where the costs were absorbed by the Reserve Bank more broadly. It was Treasury’s view that it was at the limit of where it could squeeze out greater efficiencies. Mechanisms were included to promote small businesses and boost competition, this related to the last comment made by FIA. Those mechanisms were built-in through the exemption framework. It was understood that this could be unwieldy and bureaucratic at times – Treasury would always seek to improve and reduce that bureaucracy, the existence of that mechanism was to mitigate the concerns that had been articulated, particularly by the last commentator. There was a proportionality mechanism built-in, with large institutions that dominated specific spaces and paid more than smaller ones. This was aimed at levelling out the playing field and bringing competition.

Mr Momoniat stated that engagement had taken place with the FIA. There were differences in the way Treasury and FIA understood the base. Treasury did not think the level would be as high as FIA was suggesting. Treasury was willing to have a quick meeting with FIA before the next session. Treasury had some numbers on that, which could be shared with FIA. He expected such stakeholders to be unhappy with the charges. Like with all taxes, one hoped that everyone was ‘equally unhappy,’ as Treasury had been fair in how it was dispensing this tough medicine.

Ms Olaotse Matshane, HOD: Policy and Industry Support, Prudential Authority, stated that the Prudential Authority was fully aligned and in agreement with Treasury and FSCA. There was a significant cost that went into investigations into illegal depositing as well as the unregistered insurance business. These were costs that, as regulators, they could not easily budget for because the numbers would vary from year to year. One year there were about 40 complaints about illegal depositing and then there were years when there were only 10 complaints. SARB subsidised at least 40 percent of the costs of the Prudential Authority. Some of the international commentators and assessments, such as the Financial Sector Assessment Programme (FSAP), a programme run by the International Monetary Fund (IMF) and the World bank, raised a concern about the reliance of the Prudential Authority on the South African Reserve Bank (SARB). One of their findings and recommendations was that going forward, the Prudential Authority needed to consider fully recovering its costs via levies, rather than relying on SARB. Section 51 of the FSRA mandated SARB to cover some of the costs of the Prudential Authority.

Ms Gibson supported what was said by the DDG, and the commitment to supporting small businesses within the sector; this was a crucial part of the strategy going forward. This was fundamental to supporting a healthy financial sector through being a competitive and representative sector. This view and proposed interventions were articulated through the financial inclusion strategy and financial transformation strategy. The additional support envisaged came with a cost – this needed to be balanced.

Closing remarks
The Chairperson stated that what must be made clear was that the Committee agreed with the rationale for regulations. There could not be a lawless society. The role of the State was critical to ensuring that the sector was properly regulated. One needed to be aware of the socio-economic impact on customers and small players. If it was at the Cabinet level, where Socio-Economic Impact Assessments (SEIAs) were considered. COVID-19 worsened the situation that had existed previously – more jobs were lost, petrol prices increased etc. The conflict between Russia and Ukraine would likely also impact certain food prices. This affected citizens, sometimes indirectly. One could not close one’s eye and only look at the regulations and not consider the socio-economic impact of the regulations. He requested that a socio-economic impact report be submitted to the Committee prior to deliberations. Would small players and those who wanted to enter the sector be able to do so?

The Committee Secretary indicated that deliberations were scheduled for the following Wednesday.

The Chairperson asked that the report be communicated by the Tuesday before the meeting, detailing the impact on customers and small players.

The meeting was adjourned.