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

Meeting report

The Chairperson welcomed the Select Committee on Finance to a meeting with National Treasury (NT) and the South African Revenue Service (SARS) to be briefed on amendments to the Deposit Insurance Levies Bill and Administration Bill. The Committee had not received any public submissions.

Financial Sector and Deposit Insurance Levies Bill Administration Bills

Mr Vukile Davidson, Chief Director: Financial Markets and Stability, National Treasury (NT), took Members through the presentation.

He said the NT planned to distribute the incidence and instances where regulation costs could not be avoided. He explained that a weak regulatory framework would ultimately cost consumers of financial services through increased complaints, predatory action by certain financial firms and the increased likelihood of failure of financial institutions.

NT said that they had tried to insert proportionality into the two Bills. Larger institutions would have to contribute significantly more to financial institutions that had levied only on a cost recovery basis. Mechanisms were put in place to allow for delayed or nullified levies from regulators in certain circumscribed circumstances.  

Submissions and NT Responses

Ms Jeannine Bednar-Giyose, Director: Financial Sector Regulation and Legislation, NT, took Members through the comments [from the Standing Committee in the National Assembly] and NT responses.

South African Insurance Association comments

NT was asked by the South African Insurance Association (SAIA) to clarify the definition of ‘supervised entity.’ It was proposed that the definition be amended to one clearly linked to the definition of the term described in the Financial Sector Regulation Act, as listed in Schedules one to six.

Due to the significant impact on smaller insurance companies, it was highlighted that there should not be a duplication of the levy payments to the Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA).

NT responded that the cost of funding regulators was based on cost recovery, which would be kept to a minimum. The South African Reserve Bank (SARB) would fund a portion of the PA’s total costs, including indirect costs. Clause 11 was amended to allow regulators to grant exemptions on their own initiative.

Mr D Ryder (DA, Gauteng) disagreed that NT would keep costs to a minimum, because he felt there was no incentive for them to do so. Regarding Clause 11, he asked if there was a clause to allow someone to appeal in instances where regulatory authorities denied an exemption.

The Chairperson informed Members on issues concerning insurers, particularly emerging black insurers. He asked NT what the amendment to Clause 11 actually entailed. He asked whether it involved public consultations and if the Minister was required to assent. If so, he asked what the requirements would be, and whether the process involved Parliament.

The Chairperson supported the view that costs should be kept to a minimum. He asked whether the indirect costs of 40% accurately reflected the costs.

On determining levies, Ms Bednar-Giyose said that the imposition was imposed in terms of legislation which Parliament would enact. Any subsequent amendments would be done through Chapter 16 of the Financial Sector Regulation Act (FSRA), which required the process to adhere to standards and public consultation.

On granting exemptions, NT said that this would be handled through a discretionary process. Due consideration would be given to regulators when handling exemptions.

Mr Davidson asked the NT to speak to the appeal processes for institutions.

Ms Bednar-Giyose said that decisions of regulators constituting administrative action, were subject to reconsideration by the Financial Sector Tribunal. Generally, decisions by regulators could be opposed via the Tribunal.

Dr Janet Terblanche, Division Head: Policy, SARB, referred to the funding from the SARB, and said that the estimate of 40% was correct. SARB planned to finance indirect costs, including shared services such as information technology (IT) infrastructure and building costs. Direct costs were planned to be levied. This included Prudential Authority (PA) specific systems and staffing, which fell into the remaining 60%. 

The Chairperson clarified that the 40% would not place a substantial burden on the SARB, as it was a shared service with regulators. He asked for clarity on the comment regarding how the number of representatives would be calculated.

Ms Bednar-Giyose said there was confusion regarding how the number of representatives would be determined, which was relevant to the imposition of certain levies. The NT explained that the FSCA Schedule set out how the average number of key individuals and representatives would be calculated. It would be based from 1 September to 31 August each year, and then dividing the number by 12.

Strate comments

Strate commented that all Central Security Depositories (CSD) and associated clearing house levies from the PA and FSCA should be viewed collectively, as they would be paid by a single supervised entity.

NT responded that the levies were structured in a way that charged each type of supervised entity a separate levy. This was because it was based on the different licensed activities they were performing. The adoption of a 'Twin Peaks' approach to regulation meant that the two separate regulators had separate responsibilities under the same supervised entities. NT felt it was necessary and appropriate to be imposing levies for each of the regulators appropriately at a certain level, in relation to their regulation and supervision functions.

The Chairperson said there were issues, as ultimately, the costs would be placed on consumers. While the cost may be burdensome for them, it saved them from the damaging costs if the system were to fail.

He worried that a lot more could be done to ensure that the effect on low-income consumers would be alleviated.

Strate submitted that the levy for Associating Clearing Houses (ACHs) should be treated similarly to trade repositories, with a fixed maximum of R500 000. R100 000 would go to the FSCA and PA respectively.

NT responded that authorities disagreed with the proposed fixed amount charge for an ACH. The annual maximum for an ACH had been reduced from R5 million to R2 million. Regulators felt that the maximum set for an ACH was appropriate to compensate them for their activities.

Mr Ryder said that the reduction to the fixed amount to R2 million reflected that the charges had not been appropriately calculated. He questioned what keeping costs to a minimum would mean for financial regulators. It gave regulators scope to decide on amounts as they pleased.

Though he agreed that the costs were reasonably unavoidable, he asked that an assessment be done a year after implementation, to assess the practical impact on banking charges.

The Chairperson said the drastic drop in the fixed amount impacted the confidence of Members, and was questionable. He asked NT to explain the role of Strate and the rationale behind their comment.

Ms Bellina Sebesho, Head of Department: Finance, FSCA, commenting on the decrease in levies, said that determined budgets were used to decide what was appropriate to compensate for the functioning of the FSCA and PA. This was informed by the organograms provided to Members. The decrease was due to the minimum levy being based purely on a cost-recovery basis, rather than trying to derive a profit.

On ACH, the FSCA had observed which activities would require greater resources, activities and regulation, and it gave an assurance that the costs were based on scientific calculations. The FSCA also clarified that for the first year, it was projected that there would be a deficit of R18 million. Profits and functionality would be accurately determined only in the third year of operations.

Ms Retha Stander, Senior Legislation Manager, FSCA, said that Strate was one of the only operating CSDs in the country. It functioned as an ACH, which was a licence that an entity already licensed as a market infrastructure, could obtain. Strate had an overlap over the two types of market infrastructures. When looking at the Strate comment, the NT was able to adjust the levy.

Mr Ryder clarified that Strate was a joint collaboration established by banks to clear their transactions. Strate processed all of the transactions done between banks.

The Chairperson said that he did not have a suggestion on the way forward to reducing the costs for low-income consumers. He did not have the requisite financial background to make suggestions. He encouraged Members to provide comments on the matter.

He agreed with Mr Ryder’s point on the effects of levies. He suggested that an annual report should be provided to assess progress, starting a year after the legislation had been enacted.

Strate submitted that, given that only one entity would be prudentially reviewed, only one levy should be payable. This was regardless of the fact that the entity carried two licences.

NT responded that Strate would be charged separate levies for its activities -- as a CSD, for holding securities, and as an ACH, for clearing the transactions. Ms Bednar-Giyose clarified that different activities, when performed by a single entity, were licensed, regulated and supervised separately. This resulted in different levies based on the different activities performed.

The Chairperson suggested that after the first general annual report from the NT was issued, it could be passed on to stakeholders for engagement.

He asked the NT for a copy of the high level summary on the socio-economic impact assessment on the proposed levies.

Financial Sector and Deposit Levies Bill [B3-2022]

The Chairperson took Members through the preamble of the Bill.

Clause 10

The Chairperson asked the NT to explain the role of Parliament when amending Schedules.

Ms Bednar-Giyose said that the clause aimed to enable an efficient process when amending Schedules in the Bill, rather than the traditional process of amending a bill. Levies may be adjusted, as stated in Schedule 2, due to annual levy proposals, clarity of meanings or to include new institutions in the regulatory framework. Adjustments may also allow the schedules to align other legislation detailing categories and activities that fall under the regulatory framework, such as in the FSCA.

The Committee recommended that the process allow for a period of comment for 30 days before the Minister submitted an amended Schedule to Parliament. Parliament would be afforded a strong role in approving amendments and may hold public hearings, in addition to the public comments gathered before its submission to Parliament.

When amendments had been approved by Parliament, the amended Schedules would be published in the Government Gazette and come into effect on that date. In instances when amendments were less than the specified amount, it would not have to return to Parliament for amendments. However, amendments higher than the consumer price index (CPI) would need to be approved by Parliament.

Mr Ryder said that the wording in Clause 10(1)(b) was confusing as to what Parliament must do.

The Chairperson clarified that Parliament would have three options. They could approve, adopt with amendments, or reject the proposed Schedule in its entirety.

NT confirmed that the Chairperson was correct.

The Chairperson said that, while he found the wording confusing, it was still appropriate.

Clause 11

NT said that the provision allowed regulators to grant exemptions in writing, or in writing in an application by a supervised entity to a supervised entity. The phrase “or on its own initiative” had been added into the clause at the request of Members following public hearings. Exemptions may be granted to supervised entities, including a type or category of supervised entities, from the payment of all or part of the financial sector levy.

The effect of the comments from the National Assembly (NA) had widened the scope of the type of exemptions that could be granted. It also enabled regulators to grant exemptions on their own initiative. NT said that all exemptions must be published.

Clause 12

NT said this clause provided for the collection of levies allocated to the different institutions. This included the FSCA, the Financial Sector Tribunal, the Ombud Council, the Office of the Pensions Fund Adjudicator and the office of financial service providers. The FSCA would be responsible for allocating the collected amounts to the institutions.

Clause 11 stated that SARB would collect and allocate the levies for the PA. It also addressed the collection of various other levies, including special levies, deposit insurance levies and interest on levies.

Schedule 1: Clause 2

Ms Bednar Giyose said that this dealt with specific incidences when clearing houses were approved, in terms of the Financial Markets Act, to perform the functions of a central counterparty or a licensed clearing house. They would have to pay the licence applicable to a central counterparty, excluding levies to associated or independent clearing houses. The purpose of this was to avoid duplication of payment when performing multiple functions.

Clause 3

On levies and payments to insurers, reinsurers licensed to perform non-life insurance business would pay the appropriate levy. Businesses performing life insurance would have to pay the levy for life insurers. If both types of insurance were provided, they must pay both applicable levies.

Table A

The Chairperson asked NT and the Committee Secretary to work together from page 11 onwards to ensure the content was correct. Once the researchers and content advisors had provided input and established a report, Members would be able to assent to the section.

NT said that the table concerned the levies payable to the PA, the frequency of levy payments annually, the minimum amounts payable as a levy and any additional amounts payable to the PA.

Ms Bednar-Giyose said that the formula worked with the base amount added to the variable amount when determining the total payable amount.

The table also established the maximum levy amount payable. Levies for banks and cooperative banks were set at a much lower level when compared to mutual banks. For insurers, the formula worked accordingly when setting maximum amounts for non-life insurers and Lloyds, life insurers and micro-insurers, as was the case with the various financial market's infrastructures.

The PA had a base amount of R100 000 payable by the Road Accident Fund (RAF), as it was one of the responsibilities of the PA.

Mr Ryder said that the R100 000 fee seemed like an arbitrary amount. This might affect the complexity of interrogation of their transactions.

The Chairperson asked how the variable amounts were decided, and how they would be decided if levies were annual or quarterly.

On the amount payable by RAF, Ms Terblanche said that it was difficult to determine the appropriate amount because the PA had not previously supervised and regulated the entity. NT had estimated the costs of supervision and looked at the size of the RAF to determine the R100 000 amount. The process was further complicated by the fact that the structure of the RAF was not like a normal insurer, as per the Insurance Act.

The FSCA said that the entity's nature, scale and complexity were generally considered. They also assessed the requisite supervision and regulatory returns, considering the available budgets to determine the maximum amounts. For example, cooperative banks, as small institutions with financial inclusion, were capped at a very low amount.

Mr Stewart Bobo, Policy Specialist: SARB, PA, said that the old regime from the Financial Sector Board (FSB) had been adopted. It was for this reason that levies were paid on a quarterly basis under the precedent of the Financial Management Information systems (FMIs). New financial systems were under an annual fee charge previously, and the previous approach had been adopted.

On the budget, Mr Bobo said they were working on a cost-recovery basis. Once determining the necessary funds, they assessed where the funds could be acquired, considering proportionality to avoid overly burdening small businesses.

The Chairperson took Members through the Bill. He asked the EFF their position on the Office of Ombud Financial Services' levy payments. He asked the DA, on page 21, what their opinion was on category one of four concerning financial service providers.

Mr Ryder said that the DA was unsure of the impact of the amendments in the Bill. Generally, the DA's position was that they would need to wait and see.

The FF+ and EFF reserved their positions to comment.

The Chairperson, representing the ANC, also reserved the party's rights to comment on the matter.

The Chairperson agreed that Members should receive an annual report on how this effectively played out. He also urged the staff to cross-reference the Bill to ensure it was correct. He encouraged Members to submit any comments to the Committee Secretary.

Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill [B4-2022]

The Chairperson took Members through the Financial Sector and Deposit Insurance Levies and Deposit Insurance Premiums Bill.

Section 4

NT said that the consequential amendments amended a few pieces of legislation, namely Chapter 16 of the Financial Sector Regulation Act (FSRA). It was planned to facilitate the imposed levies. The amendment to the Pension Funds Act provided that the funds of the adjudicator would be the ones listed in Section 246 of the FSRA. It had updated the references appropriately to align with the overall funding framework.

The amendment to the Banks Act and Mutual Banks Act provided that, as the PA would be receiving levies, they would no longer impose separate licensing fees relating to applications for licences.

On the Financial Advisory and Intermediary Services Act, the funding was set out in Chapter 16 of the FSRA.

Amendments had been made to the definitions in the FSRA. ‘Deposit insurance premium’ was written to include Schedule 5. ‘Financial sector and Deposit Levies Act’ was included in the definition of financial product provider. The term ‘levy’ was adjusted to refer specifically to the Financial Sector and Deposit Levies Act.

‘Member’ was amended to include the branches of mutual and cooperative banks responsible for paying insurance premiums. The definition of period was adjusted to reflect the period of deposit insurance premiums. “Special levy’ was adjusted to align with the Financial Sector and Deposit Levies Act.

In the FSRA, Section 166BG was amended to provide for the imposition of deposit insurance premiums. This meant that banks would be liable to pay deposit insurance premiums. If a premium was paid during a period, then there would be a pro rata refund of the premium if the bank had its licence cancelled or suspended during the period.

Section 237 was amended to add wording related to levies in the Financial Sector Levies Act and premiums imposed under the FSRA. The refinements were made to ensure alignment with the Levies Bill, and establish how the levies would be imposed and collected. It was specified how and when the levies were payable to regulators, and when deposit levies would be due and payable to the corporation for deposit insurance and premiums.

NT specified that different levies and deposit insurance premiums may be imposed for different categories of supervised entities and members.

An amendment was made to the heading of Section 238, and referencing was added to deposit insurance premiums and levies. Section 239 amended the heading, and inserted references to deposit insurance premiums. NT said that the levies proposed would be made in terms of the deposit insurance premiums.

In the Levies Bill, specifically Schedule 5, the Schedule may be amended similarly to Clause 10 in the Levies Act.

Sections 240, 241, 242 and 243 were amended to insert references to deposit insurance premiums and levies for members. Similarly, Section 244 provided for the aforementioned references to be included. The Section also detailed how interest would be charged on the deposit levy and premium amounts.

Section 245 addressed the potential to grant exemptions to the deposit insurance premiums.

Section 246 also included references to deposit insurance premiums and levies. How the levies would be collected and allocated by the FSCA and SARB to the relevant bodies had been inserted. It specified where the amounts must be paid to by the FSCA and SARB when distributing them.

Section 248 required corporations for deposit insurance to prepare an annual budget of estimates and expenditure for the coming year. It assigned the responsibility for the preparation of accounts and ensuring that the expenditure was in line with the budget and accounts to the Chief Executive Officer (CEO) of the corporation. 

On the corporation for public deposits, it was stressed that particular matters must be specified in annual financial statements, accounts and reports. This was to ensure that there would be open accounting and reporting.

NT proposed to amend Section 288 of the FSCA to allow regulations to be made by the Minister of Finance to prescribe banking and accounting requirements related to the administration and interest on levies, with regulation by prescribed banking and financial accounting arrangements to be adhered to.

Section 301 had been amended so that once Chapter 16 was enacted, there would need to be a Schedule of fees prescribed by the different regulators. It would replace the fees that were currently imposed under the financial sector laws. For a transitional period, the existing arrangements would automatically fall away immediately. The FSRA would make a new determination of fees to replace those fees.

 

Schedule 5

Schedule 5, which was to be inserted in the FSRA, established the different categories of entities that would have to pay the deposit insurance premiums monthly. The manner of determining the premiums each month was also set out. The arrangement of sections in the FSRA was also amended.

The Chairperson expressed surprise at the number of amendments made to the FSRA, though he found it understandable as the amendments had been made after the various consultation processes.

Ms Bednar-Giyose said the reason for the many amendments was because they were related to deposit insurance levies and premiums, which had still been in discussion at the time of drafting the FSRA. Parliament had enacted the legislation that provides for deposit insurance corporations, and envisaged premiums and levies, in 2021. Many of the adjustments were related to appropriately accommodating the deposit insurance levies and premiums within the envisaged framework for the levies. 

NT added that when the FSRA was developed, it was thought that the FSCA would conduct all the collections of levies. This had then been changed to include the SARB in the role of collector for the PA and premiums and deposit insurance levies to corporations. Though there were a number of amendments, they were not radically substantial in nature.

The Chairperson said that the Development Bank of Southern Africa (DBSA) meeting had been postponed without a clear reason. He stressed that it was important for the meeting to occur, as it had been postponed from the last quarter.

The meeting was adjourned.