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Financial Sector Regulation from Budget Speech

The scramble to be first with news of the budget reminds me of the old bull and his aspiring successor who stood on a hill observing the herd of cows grazing below.

Youngster: “Old bull, let’s run down there and cover a cow each.”

Old bull: “Youngster, let’s saunter down there slowly and cover the whole herd.”

Most of the reports I read only commented on the possible implementation of Twin Peaks in April.

Below is an extract from the speech on transformation of the financial sector.

Financial sector regulation

Transformation of the financial services sector is critical, as the allocation of capital greatly influences patterns of ownership and production in the economy. Government has gazetted the Financial Sector Codes and a R100 billion “Black Business Growth Fund” has been created through the code. The fund will assist black entrepreneurs to finance big deals – an intervention that is crucial to transforming capital allocation in the economy.

The Financial Sector Summit will also take place in April 2018.

All of these efforts serve to extend access to South Africans who were excluded from the financial system.

Strengthening the regulatory system

The two new Twin Peaks authorities will be established on or soon after 1 April 2018, and their powers will be phased in to ensure a smooth transition to the new and tougher regulatory system. Further steps will be taken to strengthen the system, including introducing deposit insurance and introducing a new way of resolving banks that are in financial distress.

Draft legislation will be published shortly.

Work will continue on reforming the legislation for financial markets and the payment system, to ensure that our infrastructure remains globally competitive. The Treasury is working with the Reserve Bank, Financial Services Board and other government entities towards a regulatory framework for all types of Fintech. The emergence of cryptocurrencies is a major development to which our regulatory regime must respond.

New banks

In 2017, the Reserve Bank granted three bank licences – two for banks with significant digital banking capabilities and one for a new digitally focused mutual bank. These licences will ensure banks are able to harness the power of technology and bring competition and innovation into the sector.

Improving the treatment of retirement fund members

Government’s retirement reform programme will continue in 2018. Consultations at NEDLAC on annuitisation of provident funds and preservation are still in progress, and it is my hope that an initial agreement can be concluded later this year.

Government has also directed the Financial Services Board to proceed with measures to modernize and improve the governance of all retirement funds, starting with the requirement that all retirement funds must now submit audited financial statements annually.

See Information Circular PF No. 2 of 2018 in this regard which also prescribes a compulsory switch to an accrual accounting basis from 1 January 2019.

Other steps include the strengthening of enforcement measures, lowering costs and consolidating funds, and consulting with NEDLAC on more efficient measures to find beneficiaries when funds are not claimed.

Industry reaction

Not all is enamoured by these measures, and particularly Twin Peaks.

In my view, the hesitation in implementing the annuitisation of provident funds is yet another example of an approach that says “…all animals are equal, but some are more equal than others.” Sections of the industry that does its best to comply are subjected to even more rigorous requirements, while the most vulnerable members of society will not enjoy the same protection.

Biznews recently published an article by Dr Gerrit Sandrock, a Director of several short-term insurance related enterprises, on other possible unforeseen outcomes of this legislation on the insurance industry.

“The South African insurance industry is an Oligopoly. That is, a market structure similar to a monopoly, but in which a small number of companies has the majority of market share.”

“This is not the creation of faceless ‘white monopoly capital’”. It is an entirely predictable response to the intrusive and extensive overreach of muddled Government agencies in their quest for control of the industry. Through its regulatory exuberance, the State has curtailed industry growth, and thus capital and job creation.”

“If the industry is to grow at all in the future, it needs to welcome and enable new entrants in radically new ways.”

“Contrary to the popular political view, the apparent lack of industry transformation is therefore not due to intransigence on the part of the owners of existing insurance companies or the lack of entrepreneurial drive from previously disadvantaged persons to set up new insurance enterprises more reflective of our demographics. Instead, the current regulatory and legislative environment (as set out in more recent and pending insurance legislation and the inscrutable Twin Peaks idea) favours large-scale consolidation of existing insurers, making transformation and future inclusive growth highly unlikely. It creates and nurtures a monolithic mindset where everything must be rigidly controlled and where innovation and flexibility is severely subjugated to the power of authoritarian bureaucrats.”

Rather an old bullish view? Methinks not.

Click here to read the full article in Biznews.

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