Financial Sector Regulation Bill [B34-15]: public hearings; Taxation Laws Amendment Bill [B29B-15]: voting

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Finance Standing Committee

25 November 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee had gone through a list of Standing Committee amendments to the Taxation Laws Amendment Bill [B29B-2015] the day before (the 'A' list), and a subcommittee chaired by Mr D van Rooyen had processed another set of amendments. The Committee was now ready to vote on the Bill as a whole. No new matters were raised and the Bill was adopted.

The Committee Report on the Bill was considered. The Chairperson drew attention to paragraphs added the day before, expressing the Committee's regret at not having achieved consensus on the amendments and reflecting the requirement for the Minister to review them in two years, and describing National Treasury's communication and engagement programme, also noting that the Committee would hold Treasury to account. A paragraph had also been added expressing the Committee's view that the Comprehensive Social Security Reform Paper needed to be finalised and published as soon as possible. The report was adopted with some minor amendments.

The Committee then heard public submissions on the Financial Sector Regulation Bill [B34-2015].

The Johannesburg Stock Exchange submitted that the version of the Bill tabled in Parliament had introduced significant changes with indefensible new policies that were contrary to well-established and effective regulatory policies. It also felt that there had not been any meaningful consultation with market participants and infrastructure. Three issues were raised: First, it objected to the Bill's withdrawal of its clearing house status as a central counterparty. Second, it objected to the waiving of licence requirements for international central counterparties operating in South Africa. Third, it objected to the proposed removal of the directorate of market abuse, which was an important contributor to South Africa's highly rated regulatory environment.

Committee members questioned whether the matters raised really reflected the intentions of the Bill; and encouraged Treasury to consult with the Johannesburg Stock Exchange. Treasury defended the consultation process, and objected to what they perceived as an unnecessarily alarmist submission.

The Free Market Foundation submission was critical of the Bill. It called for the Bill to be sent back and subjected to a rigorous socio-economic impact assessment. It had also searched in vain for a statement on what it was precisely that the Bill was intended to achieve.

Committee members debated the status of the market conduct regulatory powers; requested written submission of more concrete suggestions on the Bill, and directed the Foundation to the National Planning Commission if the Free Market Foundation wanted to discuss matters of broad policy. Treasury insisted that these provisions would protect customers, because there was an asymmetry of power in the financial sector. There was some limited support for a socio-economic impact assessment.

The South African Reserve Bank submission looked at the role of the Reserve Bank in maintaining financial stability, governance issues within the Prudential Authority, and the conglomerate supervision provisions of the Bill. The Bill facilitated co-operation to ensure financial stability through the creation of a Financial Stability Oversight Committee, and provided for both macro- and micro-prudential supervision. In a country with relatively concentrated financial markets like South Africa, the latter was particularly important. It was explained that the Bill conceived of the Prudential Authority as being part of the Reserve Bank and headed by a deputy governor. It explained that the rationale behind the conglomerate supervision provisions was that the Reserve Bank did not want the Prudential Authority to supervise banking and insurance separately, because there were risks that could arise within a banking and insurance conglomerate that would remain hidden if these two aspects of its business were supervised separately.

The Reserve Bank's submission was largely expository and there was no discussion on it.

The Financial Services Board submission described the mandate of the Financial Sector Conduct Authority created by the Bill, as found in Clause 57. Its scope would be broader than that of the current conduct regulator, as all banking products would be subject to regulation under the Bill.

The Committee expressed some concern that the powers of the Financial Sector Conduct Authority were too intrusive.

Meeting report

Taxation Laws Amendment Bill [B29B-2015]: voting
The Chairperson explained that the Committee had gone through a list of amendments the day before (the 'A' list), and that a subcommittee chaired by Mr van Rooyen (ANC) had processed the original set of amendments. With the B version of the Bill in front of them, the Committee was now ready to vote on the Bill as a whole. No new matters were raised and the Bill was adopted.

The Committee Report on the Bill was then considered. The Chairperson drew attention to paragraphs added the day before, expressing the Committee's regret at not having achieved consensus on the amendments and reflecting the requirement for the Minister to review them in two years, and describing National Treasury's communication and engagement programme, also noting that the Committee would hold Treasury to account. A paragraph had also been added expressing the Committee's view that the Comprehensive Social Security Reform Paper needed to be finalised and published as soon as possible.

Mr Ismail Momoniat (Deputy Director-General: Tax and Financial Sector Policy, National Treasury) said that it was important for National Treasury to engage with trade unions, especially those who had expressed their opposition to the Bill, even if no consensus could be reached, to forestall potentially panic-inducing public disagreements. He said they would stress the fact that the effects of the disputed amendments (concerning annuitisation of provident funds) would not be felt for many years for a majority of people. Treasury would review the amendments and monitor negative consequences.

Ms T Tobias (ANC) suggested that Treasury consult with trade unions not just as part of their communications strategy but in the development of the strategy.

Mr Momoniat said that they wanted to do a joint campaign.

Mr A Lees (DA) requested a few minor changes to the report to make it clearer.

The report was adopted with these changes.

Financial Sector Regulation Bill [B34-2015]: public hearings
The Chairperson stressed that the current hearings were an initial foray only, and that stakeholders might be asked to come back in future. Submissions were received from the Johannesburg Stock Exchange, the Free Market Foundation, the South African Reserve Bank and the Financial Services Board.

Johannesburg Stock Exchange (JSE) submission
Mr Louis Cockeran (Legal Counsel, JSE) said that the JSE had been largely supportive of the 2014 draft of the Bill and had limited its comments to minor matters. The version introduced in October 2015, however, introduced significant changes with indefensible new policies that were contrary to well-established and effective regulatory policies. The JSE also felt that there had not been any meaningful consultation with market participants and infrastructures on the 2015 version. Mr Cockeran focussed on three major issues. First, the JSE objected to the Bill's withdrawal of the JSE clearinghouse status as a central counterparty. A central counterparty was an important structure for mitigating risk to market participants, especially in the derivatives market. JSE Clear had played in important role in insulating the South African economy from the effects of the 2008 financial crisis. The new law would not allow JSE clear to operate as a central counterparty because it was associated with the JSE and not independent. Second, the JSE objected to the waiving of licence requirements for international central counterparties operating in South Africa. It was inconsistent with the rule of law to allow international financial institutions to operate according to different regulations from local institutions. Third, the JSE objected to the proposed removal of the directorate of market abuse, which was an important contributor to South Africa's highly rated regulatory environment. Although the Bill did provide structures for the combating of financial crime, these were not appropriate.

Discussion
Ms Tobias wondered if the intention of the legislation really was to exempt international entities from local licensing requirements.

Mr Momoniat said that of course it was not Treasury's intention to disadvantage local central counterparties. The JSE did have to accept, however, that it could not expect legislation to protect its monopoly.

Mr Cockeran said the JSE was not asking for its monopoly to be protected. However, he insisted that 49b was unambiguous in allowing the regulator to exempt only a foreign central counterparty.

The Chairperson said they needed to take the JSE's experience of the consultation process seriously. He encouraged Treasury to meet with the JSE.

Mr Momoniat assured the Committee that they had consulted with the JSE executive. He said there was broad agreement with the intention of the Bill, and found the submission given somewhat alarmist.

Mr Cockeran disagreed. The consultations had been confined to regulations, he said.

Free Market Foundation (FMF) submission
Mr Temba Nolutshungu (Director, FMF) said that the FMF submission would focus on broad policy issues rather than technicalities. He said that the financial services sector was the lifeblood of the economy and that the impact of any new legislation on it needed to be considered especially carefully. He agreed with the JSE that the consultation process had been insufficient. The FMF called for the Bill to be sent back and subjected to a rigorous socio-economic impact assessment, in line with Treasury's policy document of 2011.

Mr Leon Louw (Executive Director, FMF) agreed that it was strange that Treasury had not done such an assessment despite the fact that the Minister had said it was government policy and also the global norm. He added that he had searched in vain for a statement of what it was precisely that the Bill was intended to achieve. 

Discussion
Mr B Topham (DA) supported the FMF's called for a socio-economic impact assessment of the Bill.

Mr Momoniat said that an impact assessment would need to be focussed.

Dr B Khoza (ANC) asked the FMF to give more specific details on their position with regard to the Bill.

The Chairperson agreed, saying that the FMF was not offering any realistic alternatives. Could they provide a written submission on their precise proposals?

Ms Tobias suggested that, given their interest in broad policy issues, the FMF should engage with the National Planning Commission, rather than the Standing Committee, who were not involved in policy development.

Mr Momoniat asked if the FMF supported any regulation at all, and how they explained the failures of 2008.

Mr Louw replied that it was a myth that supporters of the free market wanted zero regulation. The FMF was in support of regulation, it just wanted a few regulations that were ruthlessly applied. The financial crisis of 2008 was a banking crisis with very specific causes, and it had really affected only a few countries, and South Africa had been very minimally affected. The market conduct powers being sought were vague, unjustified and without international precedent, and usurped the right to make law from the legislature.

Mr Jonathan Dixon (Deputy Executive Officer for Insurance, FSB) disagreed that there were no international standards on market conduct regulation. He pointed out that the G20 had agreed on key principles of consumer protection, for instance, and the International Association of Insurance Supervisors had also set market conduct regulation standards.

Mr Momoniat insisted that the market conduct provisions of the Bill would protect the customers, because there was an asymmetry of power in the financial sector.

The Chairperson did not agree that the consultation process had been inadequate. The Bill had been discussed for five years. He suggested that the FMF was only saying this because they did not agree with the contents of the Bill. He added that similar legislation had been passed in free market economies all over the world.

South African Reserve Bank (SARB) submission
Mr Kuben Naidoo (Deputy Governor, SARB) covered three areas of interest: the role of the Reserve Bank in maintaining financial stability, governance issues within the Prudential Authority, and the conglomerate supervision provisions of the Bill.

Mr Naidoo said that the key lesson of the 2008 financial crisis was that price stability was an insufficient index of financial stability. While it played a key role, financial stability could not be achieved by a central bank alone. It needed the co-operation of market players, financial institutions and policy makers. The Bill facilitated co-operation through the creation of a Financial Stability Oversight Committee, and provided for both macro- and micro-prudential supervision. In a country with relatively concentrated financial markets like South Africa, the latter was particularly important.

Mr Naidoo explained that the Bill conceived of the Prudential Authority as being part of the Reserve Bank and headed by a deputy governor. It would consist of two front-office departments, dealing with banking supervision and insurance supervision respectively, whose staff of about 60 would be drawn from people presently engaged in prudential regulation under the Financial Services Board (FSB), and two back-office departments, dealing with risk support and policy statistics respectively. The finances would be managed by SARB, but in a separate account.

Mr Naidoo said that the rationale behind the conglomerate supervision provisions was that SARB did not want the Prudential Authority to supervise banking and insurance separately, because there were risks that could arise within a banking and insurance conglomerate (which almost all of South Africa's major financial institutions were, including Old Mutual, Nedbank and Standard Bank) that would remain hidden if these two aspects of its business were supervised separately. The application of the regulations would be risk-based and sensitive to changes in key risk factors.

Discussion
Ms Tobias understood the reasons for the conglomerate supervision provisions, but thought SARB should be careful of over-regulation.

Financial Services Board (FSB) submission
Mr Dixon conveyed the apologies of FSB Executive Director, Dube Tshidi. He said that the over-arching rationale for the Bill was to respond to the lessons of the 2008 financial crisis. This type of “twin peaks” legislation (which focussed on prudential and market conduct regulation) was particularly relevant to South Africa because of the prevalence of financial conglomerates here. The market conduct “peak” was a less well-developed form of regulation worldwide.

Mr Dixon described the mandate of the Financial Sector Conduct Authority (FSCA) created by the Bill, as found in Clause 57. The scope of the FSCA would be broader than that of the current conduct regulator, as all banking products would be subject to regulation under the Bill. There was also a fundamental change in the approach to market conduct regulation, most importantly the emphasis on collaboration between regulators, but also the requirement to promote sustainable competition and financial inclusion. The FSCA would be pre-emptive, outcomes-focussed and risk-based. A rebalance of responsibilities would be effected, so that the whole life-cycle of a financial product would be regulated, from development, marketing, advice, to post-sales service. He stressed that regulation was not opposed to innovation, but in the absence of good regulation, poor products proliferated. Research in behavioural economics had given the lie to the idea that the only obligation was to give the customer information.

Discussion
Dr Khoza was concerned that the FSCA would try to micro-manage the business of financial institutions. She also called for a more customer-centred approach.

Mr Dixon said that the relationship between regulators and the industry was intended to be less adversarial and more collaborative. The focus of regulation needed to be on the financial services firms because they were the ones offering services to customers, but the first responsibility for providing good services remained with the firms themselves.

Mr Topham was similarly concerned that the FSCA's powers might be overly intrusive. At what point during a financial product's development did the FSB see the FSCA intervention starting?

Mr Dixon assured him that product pre-approval was not going to be the default. This would be impractical. Again, the first responsibility for providing good services remained with the firms themselves, the regulator would only intervene if a firm was failing to provide good services.

The Chairperson said that the deliberations on the Bill would continue in 2016, and the meeting was adjourned.

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