ATC220831: Report of the Select Committee on Finance on the Financial Sector and Deposit Insurance Levies Bill [B3B - 2022] (National Assembly- section 77), dated 30 August 2022

NCOP Finance

Report of the Select Committee on Finance on the Financial Sector and Deposit Insurance Levies Bill [B3B - 2022] (National Assembly- section 77), dated 30 August 2022

1.Background and introduction

Section 77 of the Constitution requires all money Bills to be considered by a procedure for passing revenue Bills established by the Money Bills Amendment Procedure and Related Matters Act, 2009 (Money Bills Act). Section 11 (4) further requires the Committee to hold public hearings on the revenue Bills and report to the House.

As explained in the memorandum on the object of the Bill, the Financial Sector and Deposit Insurance Levies Bill (Levies Bill) is a money bill that provides for the imposition of levies on supervised entities to fund the Prudential Authority (PA), the Financial Sector Conduct Authority (FSCA), the Financial Services Tribunal, the Ombud Council, the Office of the Pension Funds Adjudicator (OPFA), the Office of the Ombud for Financial Services Providers (OFSP) and the Corporation for Deposit Insurance (CoDI).

The Levies Bill forms part of the Financial Sector Regulation Act (FSRA) or “Twin Peaks” regulatory reforms which were introduced in 2011 and enacted in 2017. The FSRA sought to establish a regulatory and supervisory framework that promotes financial stability; the safety and soundness of financial institutions; the fair treatment and protection of financial customers; the efficiency and integrity of the financial system; the prevention of financial crime; financial inclusion; transformation of the financial sector; and confidence in the financial system.

The FSRA also makes provision for the imposition of levies to fund the operations of the financial sector bodies and charge members of the CoDI, a levy. The Levies Bill thus seeks to impose levies for funding and capacitation of supervised entities to match their broadened scope and increased regulatory intensity, as National Treasury explained.

The FSRA established the FSCA and the PA, under the South African Reserve Bank (SARB). The PA is responsible for the safety and soundness of financial institutions to ensure that they can meet their obligations. The National Treasury and the SARB reported to the Committee that since the implementation of the FSRA, the number of supervised entities under the PA increased by 498 per cent, from 40 to 239. The largest increase came from the insurers (150), followed by the Cooperative Finance Institutions (24) and Over-the-counter Derivative Providers (16).

After the implementation of the “Twin Peaks” regulatory reforms, the financial sector conduct supervision under the FSCA saw an increase in the number of Banks (31), Financial Services Providers (806), Over-the-counter Derivatives Providers (16 licensed and 50 pending applications) and Cooperative Banks (5). There were no changes with other entities such as the collective investment schemes, insurers, market infrastructures and pension fund administrators.

In 2021, the National Treasury introduced the Financial Sector Laws Amendment (FSLA) Bill, which has since been passed by Parliament. The FSLA Bill sought to amend several Acts, including the SARB Act, the Financial Markets Act and the FSR Act, for various reasons, including the establishment of a Deposit Insurance Scheme. National Treasury expected the scheme to ensure protection for depositors in an event of a bank failure; provide a safety net for ordinary depositors; minimise disruption and adverse effects of failures and act as a crisis management tool available to the SARB. The scheme includes a CoDI and a Deposit Insurance Fund (DIF).

In terms of the process followed by the Committee, on 08 June 2022, the National Council of Provinces (NCOP) formally referred the Levies Bill to the Committee for consideration and report. The Committee received a briefing from the National Treasury and the SARB on 02 August 2022. As required by the Money Bills Act, the Committee invited comments from the public and received no submissions. On 23 August 2022, the Committee held a meeting to consider the Bill clause-by-clause and to deliberate on the policy aspects of the Bill, before the adoption of the report, on 30 August 2022.

2.Overview and objectives of the Levies Bill

The objective of the Levies Bill is to provide for the imposition of financial sector levies on supervised entities; to provide for the imposition of a deposit insurance levy; to provide for exemption from such levies under certain circumstances; to provide for the allocation of amounts levied to financial sector bodies, and to provide for matters connected therewith.

The section below summarises the key objectives of the Bill presented by the National Treasury and the SARB.

2.1The types of levies to be imposed

There are three types of levies to be imposed, namely, the financial sector levy and the special levy, payable annually or every quarter of the financial year, to the FSCA and the PA, as well as the deposit insurance levy payable by each member of the CoDI.

2.2Supervised entities

The supervised entities under the PA include Banks; Cooperative or mutual Banks, insurance companies and the Road Insurance Fund (RAF). The FSCA supervised entities include banks, insurance companies, pension funds, credit rating agencies, investment schemes and financial service providers. Other supervised entities are the Tribunal, Ombud Council and Statutory Ombud Schemes.

2.3Exemption from levies

The FSCA, the PA and the CoDI or any member can apply for exemption, in writing, from any of the three levies imposed. Exemptions will be approved subject to a set of criteria, once the relevant bodies are satisfied with them. The criteria include that the exemption should alleviate undue financial hardship or prejudice to affected parties; is not contrary to the public interest; is necessary for developmental, financial inclusion and transformation objectives and facilitates the affordability of the levy.

2.4Allocation of amounts levied to financial sector bodies

The levies will be calculated by a formula based on an entity’s total liabilities and its variable costs, such that entities with larger liabilities pay more than those with relatively smaller liabilities. The entities are exempt from paying a levy if their total liabilities are less than R2 million. The amounts of levies charged and the number of payments made per year differ from entity to entity classification.

2.5Costs imposed on the financial sector

As National Treasury explained, the calculation of costs imposed on the financial sector exercise was informed by both the economy’s dependence on the sector and the sector’s proportional size to the economy. Statistics South Africa showed that in the third quarter of 2021, the finance sector accounted for 24 per cent of the Gross Domestic Product (GDP) and it was the largest industry, followed by personal services at 17 per cent.

The cost of regulation is therefore assigned to financial customers. It was clarified that if regulators are not adequately resourced, the cost will be passed on to customers, through abusive practices such as overcharging or collectively through institutions' failure, which might lead to loss of funds.

The Levies Bill, therefore, proposes a total cost of levies of R1.6 billion (excluding the estimated R548 million proposed to be collected towards deposit insurance premiums). Of the total R1.6 billion, about R883 million will be collected by the PA, R500 million will come from the FSCA, R90 million from the OPFA, R81 million from the Financial Advisory and Intermediary Service (FAIS), R41 million from the CoDI, R0.034 million from the Tribunal and R0.022 from the Ombuds Council.

In comparison with other “Twin peaks” jurisdictions such as Australia, the UK, the Netherlands and New Zealand, the National Treasury reported that South Africa’s cost of prudential and conduct supervision is 1.7 per cent lower than the average, as a percentage of GDP.

It was further explained that the proposed cost of financial sector regulation in comparison with the current cost, adds R290 million. As such, the FSCA funding increases slightly from R768 million before the twin peaks legislation to R883 million (an extra R115 million), the PA cost increases from R423 million to R500 million (a difference of R77 million), and the cost of other entities increases from R173 million to R230 million (an extra R57 million) while the DIF is envisaged to cost R41 million.

2.6The proposed funding model

The FSRA makes provision for funding the operational requirements of the financial sector bodies. The Levies Bill, therefore, proposes the establishment of a funding model, where levies and fees collected will be used to fund the operations and functioning of the financial sector bodies.

2.6.1Funding of the FSCA and the Prudential Authority

The PA was previously funded by the SARB but the scope of the entities it regulates has increased by a significant margin. The SARB expects to collect a total of R500 million in levies for the PA. Of the total R500 million, about R465 million (93 per cent) will come largely from the deposit-taking institutions (R288 million), insurance companies (R250 million) and “others” (R27 million) and about R35 million (7 per cent) will be collected in respect of the special levy. An additional R11 million will be collected from the industry.

With the PA’s proposed total operating budget of R895 million, there will be a shortfall of R385 million, which will be covered by the SARB. The PA forecast revenue in 2022/23 comprises 91 per cent financial sector levies, 7 per cent special levies and 2 per cent fee income.

The FSCA and the statutory Ombuds are currently funded by levies raised in terms of the FSRA, while the Financial Services Tribunal is funded through transitional arrangements provided for between the PA, the FSCA and the Financial Intelligence Centre (FIC). The FSCA’s scope has also broadened to include fair treatment of financial customers; financial integrity and efficiency of financial markets; financial inclusion; consumer education; and transformation objectives.

The FSCA expects to collect R883 million in levies to fund its operations. An additional income of R66 million is envisaged, comprising fees, interest received and other income. The total operating expenditure will be R967 million, of which R617 million (70 per cent) is for staff expenses and R350 million (30 per cent) is for general expenses. This leaves an estimated operational shortfall of R18 million, which will be funded from reserves. The FSCA forecast revenue in 2022/23 comprises 88 per cent financial sector levies, 7 per cent special levy, 3 per cent fees and 2 per cent other income.

Of the total levies that the FSCA will collect, banks will contribute R95.9 million, insurance companies R135.8 million, market infrastructure R71 million, collective investment schemes R78 million, FAIS R257 million and pensions R183 million. A once-off special levy charged will contribute R61.6 million.

2.6.2Funding of other financial bodies

The OPFA funding will amount to R90 million, FAIS Ombud R81 million, the Financial Service Tribunal R34 million, Ombuds Council R22 million and CoDI, a new entity and subsidiary of the SARB, R41 million. The SARB will collect levies for the CoDI while the FSCA will collect the levies for the other financial bodies.

2.6.3Funding of the Corporation for Deposit Insurance and Deposit Insurance Fund

The deposit insurance levy will be used for funding the expenses of the CoDI such as staff and board member fees; deposit insurance communication and public awareness; administrative fees and the SARB management fee for support services and maintenance of information technology systems. The DIF will be built up through deposit insurance premiums, which will be R548 million per annum. As National Treasury clarified, these premiums have not been included in the Levies Bill but will be imposed in terms of the Levies Administration Bill, at 0.2 per cent of all members’ covered deposits per year, and payable monthly.

2.7Summary of the proposed amendments

Clauses 2, 9-12 of the Levies Bill provide for the imposition of financial sector levies on supervised entities; the imposition of a deposit insurance levy to fund the CoDI; Ministerial powers to amend Schedules subject to Parliamentary approval; exemption from levies under certain circumstances and the allocation of amounts levied to the financial sector bodies. Schedules 1 – 6 of the Levies Bill provide for the calculation of levies applicable to certain supervised entities by the PA and the FSCA and the calculation of levies for purposes of funding the Financial Services Tribunal; the Ombud Council; the OPFA and FAIS Ombud; and the CoDI.

2.8Summary of issues raised during the National Treasury’s Public Participation Process

As reported by the National Treasury, the majority of comments and issues from the industry were raised by three stakeholders, namely, the FIAS, the South African Insurance Association (SAIA) and Strate, a Financial Market Infrastructure (FMI). A broad range of issues raised included the definition of a supervised entity; the cost of the special levy, which was deemed to be too high at 7.5 per cent and the general increases which are deemed substantial and above inflation; the burdensome application process for exemptions; concerns about the possible duplication of levy payment to FSCA and the PA, the cost of which might be significant on smaller insurers; the formula for calculating costs and suggestions that one levy should be payable by an entity, even though such an entity carries two licences.

One of the key issues raised during the Standing Committee on Finance (SCoF) participation process was the impact that the cost of the proposed levies might have on smaller financial intermediaries in the financial sector. The National Treasury has since responded and submitted a report to the SCoF, highlighting proposed amendments to alleviate the impact cost on smaller financial intermediaries; benefits of the financial sector regulation for customers and a summary of the socio-economic impact assessment on the proposed levies.

3.Committee observations

3.1The Committee noted (1) that the proposed Levies Bill forms part of the FSRA regulatory reforms which were introduced after the global financial crisis in 2009, with the expected outcome of a stable financial system that works in the interests of financial customers while supporting sustainable economic growth; and (2) that the main objective of the Bill is to impose levies on supervised entities for funding and capacitation of the financial sector bodies. The total cost of levies proposed is R1.6 billion, excluding an estimated R548 million proposed to be collected towards deposit insurance premiums.

3.2The Committee noted the consultation processes that the National Treasury embarked on, with the financial sector, the FSCA and PA under the SARB and the SCoF, between 2017 and 2022.

3.3The Committee noted the three broad categories of comments received during the National Treasury’s public participation process with SCoF. These comments are, (1) drafting related suggestions, (2) overall costs and approach to regulations, a comment which National Treasury felt is in line with the new regulatory approach of the “Twin Peaks” legislation, and (3) the impact of costs of regulation on smaller financial service providers.

3.4The Committee noted the National Treasury’s responses to the issues raised by the stakeholders, particularly the impact that the cost of the proposed levies might have on smaller financial intermediaries in the financial sector, which the National Treasury addressed by tweaking the formula used to calculate costs. The Committee wants to see that the framework for exemptions published by the National Treasury assists in practice to reduce the costs for small operators.

3.5While the Committee remains concerned about the costs of the regulations and supervision, which might be passed on to financial customers, the Committee noted (1) that the calculation of costs was informed by the fact that in 2021, the financial sector was the largest industry, as a percentage of GDP, (2) that best practices with selected “Twin Peaks” legislation jurisdictions show that the South African cost of prudential and regulation is below average, as a percentage of GDP, and (3) that National Treasury and the SARB conducted a socio-economic impact assessment on the proposed levies and a Cost Benefit Analysis study to determine the regulatory costs of compliance and benefits, amongst other studies done in support of the proposals of the Levies Bill.

3.6The Committee found the tables presented in Schedules 1-6 of the Levies Bill on the financial sector levy calculations for supervised entities extremely challenging. They are based on modelling exercises that the Committee does not have the capacity and resources to evaluate.

3.7This, once again, highlights the extreme imbalances in resources, skills and capacity between the Executive and Parliament, which serves to undermine the ability of Parliamentary Committees to exercise effective oversight of the Executive. The Committee, once again, implores Parliament’s decision-makers to provide Committees, over time, with the necessary resources and capacity to be more effective in implementing our constitutionally required role.

3.8Some of the amendments made by the National Treasury in the SCoF processing of the Bill, such as reducing the levy from 15 per cent to 7.5 per cent for two years and the annual maximum for the Automated Clearing House (ACH) from R5 million to R2 raise questions about how scientifically valid some of these percentages and figures are. The criteria used to make these changes are not clear to the Committee.

4.Committee recommendations

4.1The Committee supports the objectives of the FSRA, under which the current Levies Bill falls. These objectives seek to establish a regulatory and supervisory framework that promotes financial stability; the safety and soundness of financial institutions; the fair treatment and protection of financial customers; the efficiency and integrity of the financial system; the prevention of financial crime; financial inclusion; transformation of the financial sector; and confidence in the financial system. The outcomes of this are expected to ensure a stable financial system that works in the interest of financial customers while supporting sustainable economic growth.

4.2The Committee also supports reasonable and proportionate proposals in the Levies Bill which provides for the imposition of levies and allocation of amounts levied on the financial sector bodies. These proposals are expected to, amongst other things, provide funding for supervised entities in line with the expanded scope and the intensity of the supervision and regulations.

4.3The Committee recommends that:

4.3.1Over the medium term, the National Treasury and SARB should review and report to the Committee, on the criteria used for exempting the financial institutions from paying levies and the formulas used for calculating the cost of regulation and supervision to ensure that there are no unintended consequences in implementing this legislation.

4.3.2The National Treasury and the SARB should annually review and report to the Committee, on the impact of the legislation on low-income earners and smaller financial service providers and to what extent the cost of banking has increased as a result of this Bill, especially for these categories.

The Select Committee on Finance, having considered and examined the Financial Sector and Deposit Insurance Levies Bill [B3B - 2022] (National Assembly – section 77), referred to it, and classified by the JTM as a section 77 Bill, accepts the Bill.