New Development Bank; Update on Twin Peaks & Market Conduct Framework: National Treasury briefing

Meeting report

BRICS New Development Bank: outstanding issues

Mr D Ross (DA) said the role of the IMF and the World Bank should not be undermined in the early days of the New Development Bank.

Dr M Khoza (ANC) said people come from different ideological backgrounds and others like her were victims of the World Bank’s structural adjustment programmes in Zimbabwe in the 1990s.

Mr D van Rooyen (ANC) said studies done by the monitoring units of the Bretton Woods institutions confessed that their approach had not been developmental and not consultative, which Mr Ross should accept.

Mr N Kwankwa (UDM) said the shortcomings of the Bretton Woods institutions had informed the formation of the development bank.

The Chairperson said the government was more sensitive to the issue of ideology.

South African Airways (SAA) would present a progress report on its turnaround and its quarterly reports. The board chairperson and her deputy must be present. Members must prepare to visit customs and excise offices.

Twin Peaks Regulatory reform: briefing by National Treasury

Mr Ismail Momoniat, Deputy Director General: National Treasury, said South Africa had too many regulators involved with the financial sector. Most financial firms were regulated by a number of financial regulators. The major banks in SA were regulated by the SA Reserve Bank (SARB), the Financial Services Board (FSB), the Financial Intelligence Centre (FIC) and the National Credit Regulator (NCR). This was because most banking groups dealt with banking, credit, insurance and asset management, among others. But each “activity,” like deposit taking, lending, insurance, investment management was regulated separately, each with its own laws. This led to fragmentation, which meant an uneven playing field, gaps, and regulatory coordination being compromised. There was a need for regulators to co-ordinate and ensure that they did not contradict or work against each other. How did one prevent regulatory (forum) shopping? Internationally, this was an even harder problem – most local banks operated in more than one country, so regulatory co-operation between the different country regulators was needed as well. The concept of home-host regulators meant SA was not the home regulator for two of its major banks and insurers.

The twin peaks system was needed to strengthen financial stability, improve market conduct, widen access to financial services and combat financial crime. The “peaks” were the Prudential Authority and the Financial Sector Conduct Authority. The Prudential Authority was required for promoting and enhancing the safety and soundness of financial institutions, and to assist in maintaining financial stability. The Financial Sector Conduct Authority was required to protect financial customers by ensuring that financial institutions treated their customers fairly, enhancing the efficiency and integrity of the financial system, and promoting financial literacy and financial capability. The Financial Services Tribunal and Enforcement would provide clear internal policies and procedures for administrative actions, including enforcement, enhance transparency and accountability, and hear and decide appeals.

Prudential regulation looked at the financial health and soundness of a financial institution. The focus was on financial institutions directly, to the indirect benefit of customers. Prudential regulators ensured a financial institution could meet its commitments now and in the future. Market conduct regulation, on the other hand, prioritised the customers of financial institutions and evaluated how financial institutions interacted with customers and each other. Market conduct regulators had to ensure that financial institutions were not abusing their customers. Regulators needed to be proactive and had to prevent a crime, rather than only punish after the crime. Market conduct involved more than consumer protection, as higher standards were expected from the financial sector. (See document for interesting examples)

Discussion

Dr Khoza said numerous councillors across the country had lost their money in pension schemes. What was the FSB doing about this?

Mr Monomiat replied the charges laid by pensioners were criminal charges, and for changes to happen, urgent reforms were needed.

The Chairperson said local government pension schemes must be put on the agenda, so the Committee could engage with the SA Local Government Association (SALGA) and National Treasury. However, he was not sure if this fell within the Treasury’s mandate.

Mr Monomiat replied that it was within its mandate. The issue was about looking at municipal pensions funds and Transnet funds as well. One of the reforms needed was to follow the general pensions fund and if exemptions were required, those would be an exception.

Mr Ross said competition brought normality, giving the example of Sanlam against Old Mutual. He asked why competition did not bring normality in the pension sector and the insurance industry.

Mr Momoniat replied that there were more than 1 000 insurance companies with different insurance schemes. If one visited the website, there was an option to compare, but the 11 companies one compared with were owned by the same company. The practice of not paying for your car in the first six months had been banned in advanced capitalist economies. People were worse off now than they were in the time of Charles Dickens. Adverts showing an old lady getting a loan in ten minutes were criminal and against humanity. Miners and public servants were more indebted through pay day loans. The design of the pay day loan system in South Africa had to be changed, and no loan should be renewed for more than two months. The pay day system was designed to get a person into a debt. Why was it that a person wanting to open a deposit account had to go through the Finance Intelligence Centre Act (FICA) process, while getting a loan could be done over the internet? This was a huge societal problem and there was a need to change the regulations on pay day lenders, seven-year loans and other short-term loans. The financial sectors needed to serve customers, rather than shareholders. All regulatory legislation needed to be changed to deal with current challenges.

The Chairperson said the presentation was simple and understandable.

Mr Ross said caution must be exercised so as not to over-regulate. He asked if there had been consultation with the industries concerned. The focus should be on growing the economy, and this might not bring about the desired outcome.

Dr Khoza said the problem in South Africa was about emphasising principles rather than rules. SA claimed to be financially inclusive, but was yet not there. There was a problem with banks getting involved in areas where they had never been before, stealing funeral plans from the “mamas” in the townships who used to run burial societies. She asked about the principles that undermined financial inclusion. Social grant recipients were vulnerable to pay day lenders. She asked if there was legislation that made it mandatory for the financial services sector to disclose their information outside South Africa. She was happy that the National Treasury has become customer-oriented. There were over 79 companies in local government, each with its own asset manager and fund manager.

Mr Kwankwa said that as an ex-relationship manager of a bank, he knew where banks hid their fee charges. If one told them to reduce their charges, they would introduce fees in another are. Market conduct was a problem. The banks worked better for rich clients than for the poor. For example, a person residing in Gugulethu paid more for insurance than a person who stayed in a suburb because the former had a likelihood of driving his car to the Eastern Cape, while the latter was more likely to have his car spending months parked at the airport while he traveled.

Dr Khoza said people living in townships were concerned with differential premiums, as the poor subsidised the rich.

Mr Momomiat replied that a lot of abuses affected the lower income owners, more so than upper income owners. Everyone was a victim of these systems, and they were designed to confuse. There was need for radical change. Twin peaks had come from the United Kingdom’s Conservative government. Britain was SA’s former colonial master, and the SA financial system was almost similar to the British one. Indebtedness could be a bubble and if it bursts, there was a problem. Financial inclusion was aimed at making the financial sector meet the needs of the poor. All banks had to take the responsibility for saving the poor. Insurance companies always argued that insurance should be compulsory, but their costs were expensive. Treasury had had more than 35 meetings with local government on the retirement funds of their members. It had tried to persuade banks on the use of biometrics, so that a person could have one card for Myciti and Joburg metro buses.

Ms Katherine Gibson, Chief Director: Market Conduct, National Treasury, said that principles were a judgment focus that required a high risk matrix on how the executives were making their decisions on products, to the ethics, and not just ticking the box or given pages of disclosure documents one could not understand. There should be a balance that customers were protected, with the inclusion of both “mamas” and the insurance companies. The Treasury was learning lessons from Members. There was need to look at disclosure outside South Africa and the digital world, which the Treasury would study. It was not looking at increasing laws, but at having better laws.

Mr Momoniat said the increase of premiums for people living in townships was a move away from the “red-lining” of townships in the 1990s, to increasing premiums as risk minimisation. When Members visited their constituencies, they should spread the information about market conduct.

The meeting was adjourned.