Cost Estimates of Twin Peaks

A huge amount of documentation was published last week by the National Treasury, providing an update on its views on feedback on the Financial Sector Regulation Bill.

One document reported the findings of an impact study conducted by Treasury which included a cost projection of the new dispensation, and how it would be funded. The information below is extracted from this document.

Preliminary estimate of initial costs under Twin Peaks
1. Costs under the current institutional framework 2. Estimated initial costs under Twin Peaks institutional framework
Financial Services Board R679m SARB: Financial Stability R44m
SARB: Financial Stability R29m Prudential Authority R294m
SARB: Bank Supervision R200m Bank supervision R198m
Total for 2015/16 R907m Insurance supervision R96m
Total held constant for 2016/17 R962m Financial Sector Conduct Authority R696m
Supervision of non-bank financial institutions R624m
Additional costs: conduct supervision of retail banking R72m
Total R1,033m
% of GVA of financial corporations 0.27%

The initial increase to around R1 033 million represents an estimated 7.4% increase over the cost of the current institutional framework. The main increase is associated with the introduction of market conduct supervision of retail banking at the FSCA. These estimates are tentative, as it may take some time for the new institution to reach full capacity. Costs associated with the financial stability role of the Reserve Bank are also projected to increase.

Treasury also states that the direct costs of regulation and supervision of financial institutions is equivalent to only 0.27% of the gross value generated by the industry in the economy.

Importantly, these initial estimates do not fully take into account potential efficiencies generated by the institutional structures or additional governance or operational costs that might arise in the new system. Moreover, the longer-term shift to a more harmonised system, with an emphasis on pre-emptive, risk-based and outcomes-focused approaches may also have implications for funding that are yet to be estimated. Finally, no data are currently available on the potential costs of the Ombud Regulatory Council and Financial Services Tribunal established by the FSR Bill, although the Ombud Regulatory Council will in effect build from existing resources allocated to the ombud system supported by the Financial Services Board. More detailed projections on costs will be provided with the Levies Bill.

Levies paid by regulated financial institutions

Banks: Under the current regulatory system, the costs of prudential regulation of banks are not explicitly recovered from banks by the South African Reserve Bank. Instead, these costs are funded from the general revenue of the Reserve Bank, which includes revenue generated from the unremunerated cash reserves held by commercial banks with the central bank. Banks have therefore not previously paid levies to fund the full costs of prudential and market conduct supervision of banking activities (with the exceptions of levies to the FSB under the FAIS Act and fees to the National Credit Regulator). Under the new regulatory framework, it is proposed that a financial sector levy will apply to regulated financial institutions to fund the Twin Peaks system (to be set out in the Levies Bill). Further work is required to assess the appropriate division and structure of funding associated with prudential and market conduct supervision of banking. Some increase in the amount that banks contribute to the cost of regulation could be expected in the context of the new remit of market conduct regulation of retail banking located at the FSCA.

For all other financial institutions (including long and short-term insurance companies, retirement funds, collective investment schemes, intermediaries, service providers, exchanges, depositories, and credit rating agencies), the proposed levies framework will replace existing levies paid to the Financial Services Board. At least in the short-term, the expectation is that the impact should be limited but some increase could be expected in the longer term in light of the strengthened framework for market conduct regulation at the FSCA. Forecasts for 2015/16 provided by the Financial Services Board indicate that levies collected from financial institutions currently amount to R611 million, with a further R33 million collected from fees for services provided by the regulator . Together, levies and fees account for 96% of the total income of the Financial Services Board (the remainder is mainly accounted for by investment income). The largest source of levies is attributed to FAIS supervision, followed by insurance and pensions.

An assessment of the proposed structure and level of levies under Twin Peaks will be provided with the Levies Bill, to be informed by more detailed costings of the regulatory institutions.

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