Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill & Financial Sector and Deposit Insurance Levies Bill: NT briefing

Meeting report

The Select Committee on Finance met to be briefed on the Financial Sector and Deposit Levies Bill and Administration Bill by the National Treasury (NT).

Financial Sector and Deposit Insurance Levies Bill & Administration Bill

Mr Vukile Davidson, Chief Director: Financial Sector Policy, National Treasury, presented the Bills. The NT focused on the capacitation and funding of regulatory institutions. The Bills allowed for the operation of the framework by providing the resources necessary for executing the mandates held by various institutions.

The NT had introduced the Corporation for Deposit Insurance (CoDI), along with a framework for its funding, for the first time in South Africa.

'Twin Peaks' system of financial sector regulation

The Bill would fund and capacitate the Prudential Authority (PA) and conduct a regulatory, as well as a supporting, Ombud system through the Financial Sector Conduct Authority (FSCA) and the CoDI. This was proposed to support the overarching South African Reserve Bank (SARB) mandate of ensuring financial stability.

Seeking to balance industry and customers

The costs of effective financial sector regulation into provisions could not be avoided. Rather, the incidence of the costs could be placed on various stakeholders. Low or under-capacitation of financial regulators' costs would be borne by customers and result in increased complaints, failure of financial institutions, or systemic problems in the financial sector.

Mr Davidson noted that minimising low costs would accrue to the owners of financial institutions, shareholders and management. The costs could only be proportioned, not dealt away with.

The PA's mandate had been expanded, in terms of regulatory oversight, from 40 to 240 institutions. The Bills would enable a significant increase in scope, scale and intensity of the quality of supervision over the various institutions.

Prudential Authority funding requirements

It was proposed that the PA was to collect R500 million in levies, including special levies, from the Reserve Bank, while R11 million was projected to be collected from industry. The total operating expenditure budget would be R895 million, with the majority of the costs going towards remuneration. The NT said there would still be an operating deficient on regulatory activities that the Reserve Bank would fund.

Special levies would be enacted on the 2022/23 forecast revenue to address the once-off start-up costs of establishing the regulators.

Financial Sector Conduct Authority funding requirements

It was proposed that the FSCA was to collect R883 million in levies, including special levies, to fund operations. Total operating expenditure was projected to be R967 million, with the majority allocated towards staff remuneration. 

Proposed levies payable to Prudential Authority

Dr Janet Terblanche, Division Head: Policy, PA, said that majority of the levies payable to the PA were from large banks and the insurance sector. The levies were proportional to the size of the organisation being regulated. Mutual and cooperative banks, and micro-insurance companies, would have smaller levies in line with their business models to reach the aims of financial inclusion. It was proposed that cooperative financial institutions would be exempt from levies.

The special levy would function to implement and upgrade systems for the cooperative financial institutions and market infrastructures (MIs).

Proposed levies payable to Financial Sector Conduct Authority

Mr Davidson explained that the fiscus would, for the first time, be providing supervision over the banking sector for aspects related to the mandate. This included consumer education, financial inclusion and treating customers fairly. This was proposed for cooperative, mutual and commercial banks.

The NT would continue to provide oversight for the insurance sector, as well as MIs, which included sectors such as FinTech and stock exchanges, which were areas highly susceptible to abuse and fraud.

Structure of the financial sector and proposed levies

Larger sectors would be responsible for greater amounts of the levies within the PA. This was evident especially in the banking and insurance sectors, despite their smaller-sized contributions to the overall financial system.

On FSCA levies, financial responsibilities were more evenly split when compared to PA levies. This was because multiple entities often had multiple licences.

Current vs proposed cost of financial sector regulation

Mr Davidson said that there was a marginal increase of R290 million in the cost of financial regulation after implementing the 'Twin Peaks' system.

Funding of Corporation for Deposit Insurance & Deposit Insurance Fund

Dr Hendrik Nel, Interim CEO: Corporation for Deposit Insurance, SARB, said that South Africa would now have an explicit deposit insurance scheme to protect depositors in the case of a bank failure. He noted that the insurance was meant to target the most vulnerable depositors. It provided limited protection at this stage of up to R100 000 for depositors. This was planned to be specified through secondary legislation.

The Levies Bill would provide the CoDI with the ability to source funding for its operations from the industry. The Administration Bill would enable the CoDI to source premiums from banks. This was meant to finance the Deposit Insurance Fund (DIF) to pay out depositors in the event of a bank failure.

Levies and premiums paid by banks were based on total cover deposits. This consisted of cover deposits that qualified for insurance up to R100 000. The figures were based on a 2014 survey which would be updated soon with new data from the banks.

The costs per qualifying depositor per bank would be R1 per qualifying depositor per annum, while the annual premium would be R13 per qualifying depositor per annum. The SARB had made an effort to limit the burden on the sector by adding a liquidity tier to the deposit insurance fund. This would be 3% to cover deposits in the form of a loan from the industry to CoDI. Afterwards, banks would be remunerated at a market-related interest rate, thus lowering the cost of premiums.

Ms Jeannine Bednar-Giyose, Director: Financial Sector Regulation and Legislation, NT, went through a summary of the Levies Bill.

(See presentation for public submissions and Treasury's response.)

Outcome of Standing Committee on Finance (SCoF) process

Ms Bednar-Giyose said that a notable sub-theme from the submissions focused on the impact cost of the proposed levies on smaller financial intermediaries in the financial sector. Under instruction from SCoF, the NT had submitted a report consisting of:

• The proposed amendments to alleviate the costs for smaller intermediaries;
• The benefits of financial sector regulation for customers;
• A high level summary of the socio-economic impact assessment on the proposed levies.

Discussion

The Chairperson thanked NT for a comprehensive presentation and said that it would take a while for Members to digest the full contents of it.

Mr D Ryder (DA, Gauteng) agreed with the Chairperson that the impact of the Bill would be apparent only after receiving other inputs. He noted many issues, including conflict. He said that the structure of regulators being paid by people meant to regulate did not encourage frugality.

He said there was conflict in how the NT was planning to push the costs of compliance on to the consumer. He felt that these were the individuals that Members needed to protect. While he appreciated the plans to regulate the financial sector, he urged that there be an awareness of the effect on increased banking and insurance premiums.

He connected these issues to an underlying lack of trust in financial service regulators. The example was used of the Financial Intelligence Centre Act (FICA), where people were furious when they had their accounts blocked and experienced other compliance issues.

He quoted a press release from the PA that there were 8 388 clients with unknown citizenship at one bank, and 1 782 clients where the country of their incorporation was unknown. He said that because it was not mentioned that their accounts had been frozen, it gave the impression that different standards applied to different people.

Considering state capture and the cash flow in transactions described at the Zondo Commission made people question why the Financial Intelligence Centre (FIC) could not pick up on these transactions and the money laundering.

He asked how the Bill impacted Development Finance Institutions (DFIs). On the Insurance Premium Bill, he asked whether the figures presented on the affordability related to compliance were the maximum or the average. He also asked if institutions would be rewarded for their liquidity controls and FICA compliance. In the same light, he asked if there would be penalties for institutions failing to be Financial Advisor and Intermediary Services (FAIS) or FICA compliant.

He noted an unfair disparity between strict control measures for formal lenders and loan sharks, who were loosely monitored.

The Chairperson said that Members were concerned about the burden of payments, with particular concern for smaller intermediaries. While he acknowledged that everyone would be affected by the Bill, he questioned who would disproportionately bear the costs.

On the consultation regarding levies, the Chairperson asked for further clarity on the provision-making allowance. He asked why the Bill had taken so long to reach Parliament, and whether this was due to policy issues. On amendments, he asked if the participants at the public hearings had been reasonably satisfied.

NT's response

Mr Davidson said that regarding the credibility of the regulation system and financial integrity, a Bill was urgently in development to address corruption issues.

Mr Ismail Momoniat, Acting Director-General, NT, said banks provided information on suspicious transactions. Many banks did notify NT of these transactions, while a few -- who were literally in bed with the Guptas -- did not make reports on them to the FIC. The FIC reports were confidential and unavailable to the NT. The NT only knew of reports in the public domain, or from matters emerging in the courts.

Mr Momoniat explained that this posed a difficulty for NT, as they could not assess who was or was not performing. He felt it was important for the NT and the public to know these matters. It was suggested that this could be done by appointing an inspector general.

Regarding tax, he said the financial sector was a sophisticated sector that was expected to pay for its own regulation. It was important that the sector be regulated to avoid problems with money laundering. The NT encouraged Members to wait to see the benefits of the new system, bearing in mind the expensive costs for regulation and supervision.

Mr Momoniat said that South African banks needed regulators under the oversight of other authorities to assess the quality and supervision in the country.

On costs, it had been decided that the burden should ultimately be placed on the customer. He said this route was unavoidable, though it was tough on credentials and market conduct. This was still seen as beneficial, because the benefits far exceeded the costs for the customer due to their savings being safely protected.  

The NT agreed that the consultation process took too long. It was explained that regulators were funded through a licence fee which amounted to a levy under the Constitution. Though the Bill had been ready for a long time, there had been a lengthy back and forth determining levies, user charges and licence fees under the Constitution.

Finally, the NT had opted to call the funding of regulators a levy, as it was a safer approach. However, it had created a burdensome task in terms of legislation. The NT also took accountability for the delay, attributing it to wanting to reconcile the differing tax and financial sector policy perspectives on the matter.

He commented that introducing a new tax was usually met with a backlash. A particular concern was the impact the tax would have on smaller institutions, but he felt comfortable with the approach adopted by the NT. He reassured Members that they would be open in their approach to consider the negative impact on these smaller institutions.

Mr Davidson said that the comments received by the NT that were related to drafting suggestions had been largely adopted. They felt that a commentator, posing questions on costs and the approach to regulations, suggested institutions had not paid sufficiently for the regulation as a percentage of their overall revenue. The NT believed, consistent with the 'Twin Peaks' approach, that the approach of that particular institution had been correct.

Regarding the impact on small financial service providers (FSPs), he said that the NT allowed additional flexibility for even the smallest FSPs. This worked within a framework for exemptions for institutions operating in a temporarily difficult environment. This would allow these small FSPs to be put off, or exempt, for certain periods.

Ms Katherine Gibson, Deputy Commissioner, FSCA, said that FSPs included a wide range of entities, from the largest banks to one-man sole proprietors. She noted concerns about whether charges were fairly distributed, especially amongst smaller businesses.

The FSCA said that the overall levy charges considered fairness, from a sector perspective, when funding the FSCA. A large portion of its attention was allocated to supervising and regulating FSPs due to the large number of institutions. The majority of the charges were placed on the larger businesses to alleviate smaller businesses from the hefty levies.

In effect, the FSCA proposed to raise the maximum levy payable from R2 million to R2.5 million. This meant that smaller entities could be charged less. This was planned to occur by having larger FSPs cross-subsidise smaller businesses. Ms Gibson noted that the FSCA base levy charges had decreased. This ultimately brought down the total levy for small FSPs to R4 700, which was lower than the current regime levy of R4 964.

Mr Ryder asked whether the NT had run any models to see what the individual impacts would be on the various institutions when taking into consideration the different levies from the bills.

Ms Gibson confirmed that the NT had done so, and offered to provide further information on it to the Members.

Mr Davidson continued that the NT had provided Members with socio-economic impact assessment (SEIAS) report to unpack the impacts in various sectors.

The Chairperson said that people used banks assuming that their money would be best protected there. He felt that additional administration fees should not have any impact on protection, because that was a general expectation from banks.

He made the example of the recession when banks collapsed, turning to the financial sector for assistance. This had placed customers in a position where they had lost money and, if they remained with the bank, had to pay to be protected against exploitation from financial institutions. Based on this example, it was better for customers to pay slightly more to protect them against losing large sums in the worst-case scenario. He agreed with the NT that the regulatory institutions must do their jobs. The first and second rounds of public hearings with the Department of Trade, Industry and Competition (DTIC) had shown that regulation had massively improved.

The Chairperson also agreed with the principle that having the poorest of the poor pay slightly more if it enabled them access to greater security. He urged the NT to balance how much customers paid and the profits of financial institutions.

He felt these issues would be ironed out upon taking a clause-by-clause look through the Bill and the public hearings. He asked whether there was a general consensus that the Bill, as it was passed now, was sufficient or if there were still amendments in disagreement.

Mr Davidson said that there was broad agreement around the drafting issues for those sets of commentators. There was another subset of commentators who were dissatisfied with the number of levies they would be required to pay, consistent with the mandate of the institutions and cost recovery basis provided for the levies. He imagined this subset would still be unhappy with the outcome, as the ideal levy for them would be zero.

The NT had numerous engagements on FSPs during that period to provide further accommodation. He felt that FSPs were generally happy with the flexibility provided by the Bill.

The Chairperson said that going forward, Members must go through the Bill clause-by-clause and observe attendance at the public hearings. He emphasised that Members must be committed to proceed swiftly with the Bill once it had been tabled before them.

The Chairperson asked Mr Momoniat if he would like to brief Members on the omnibus or multi-disciplinary Bill that had been mentioned in the media.

Mr E Njadu (ANC, Western Cape) appreciated the presentation and looked forward to having the articles presented clause-by-clause.

The Chairperson expressed concern over bringing a bill that required input from many committees at the end of the year.

Mr Momoniat said that the annual tax bills were published to deal with the two-part retirement system, which allowed for limited withdrawals while encouraging preservation. He said this would be a smaller-scale example of a multi-disciplinary bill.

He said that the NT had scrambled to get the omnibus Bill together in time, and hoped to introduce it later in August. This would create many amendments for the FICA and several other Acts. This included the Non-Profit Organization Act, the Companies Act and Trust Property Control Act.

Due to the broad scope, this would involve many departments, such as the Department of Justice and Constitutional Development, the Department of Social Development (DSD), the DTIC and the Department of Safety and Security.

The Minister was in discussions with the Standing Committee on Finance to determine the best way for Parliament to deal with its necessary involvement. Mr Momoniat emphasised that the Bill must be passed before the end of 2022. Parliament had to test whether deliberations over the bills could be done with the relevant portfolios and select committees before it became a solely SCoF process. Due to the large size of the meeting, the NT would have to be guided by Parliament on the best way to effect the processes.

The Chairperson said that if the Bill was referred to only the National Assembly, then there would be a joint meeting on the Bill. When there were public hearings, it was classified as a SCoF meeting with the presence of NCOP Members. This would amount to separate meetings. Once the SCoF was in the process of looking at the bill clause-by-clause, committees could not sit together. This was due to the fact that a committee may not oversee the Bill that it had drafted. The House Chairperson and Speaker, under direction from the Minister, must request a joint referral.

The Chairperson said that Members were struggling with how to structure a committee under joint referral. He explained that one scenario could be that the main finance committee was tasked with the Bill, while the two chairpersons from the finance committee met with two representatives from each committee to decide how to structure the committee. Alternatively, an ad hoc committee could be constructed. Given the great responsibilities of the two finance Chairpersons, the committee should be constructed with one or two senior representatives from the SCoF.

The Chairperson asked Adv Frank Jenkins, Senior Parliamentary Legal Advisor, if it was referred to only the SCoF, the committees could have a joint meeting. He further asked what the options would be if the Bill were referred to both Houses.

Adv Jenkins agreed with the Chairperson. He said that the Constitution allowed the two Houses of Parliament to sit in a joint committee for Section 75 legislation. However, those mechanisms were not in place due to issues of mixed bills dealing with Section 75 and 76 legislation. This created practical issues for Parliament when trying to execute this. It was attributed to the number of Members required, the busy schedules of the chairpersons, and detracting from the work of committees.

Adv Jenkins said that ad hoc committees were formed for a specific purpose before falling away, not legislation. He suggested that the committees rather confer. After the legislation was introduced, the Speaker should be notified to ask the relevant committees to confer on matters. It would be up to the committees to identify Members representing them to sit with the Standing and Select Committees on Finance to share their views.

Ms Bednar-Giyose clarified that the Bill would just be a Section 75 bill, which should be taken into consideration when undergoing the appropriate processes.

The Chairperson strongly suggested that if an ad hoc committee were created, the Chairpersons be left out of it. This was in order to not distract them from their high volume of incoming work. He also asked for adequate consultations with the relevant officials from related committees before the Bill was processed.

Mr Ryder said there were rules for joint legislative processes in the joint rules of Parliament for the Committee and the NT to consider.

The meeting was adjourned.