The FSCA forecasts it will have a total income of R949 million in the 2022/23 financial year, while its operating expenditure will be R967m, leaving it with a shortfall of R18m.
This emerged during a presentation on Wednesday by National Treasury to Parliament’s Standing Committee on Finance on the Financial Sector and Deposit Insurance Levies Bill and the related Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill. (See “FSPs face paying regulators much higher levies”.)
According to the presentation, the bills are the final step required to implement the government’s comprehensive financial sector reforms that introduced the Twin Peaks regulatory architecture.
The bills give effect to the provisions in chapter 16 of the Financial Sector Regulation Act concerning the financing of regulatory bodies.
The FSCA’s projected income of R949m comprises:
- R883m in levies, including the special levy, the FSCA will collect once the Financial Sector and Deposit Insurance Levies Bill becomes law. The special levy will run for the two financial years from the date on which the law takes effect.
- R66m from fees and other income.
By comparison, the Prudential Authority (PA) envisages collecting levies (including the special levy) of R500m in 2022/23.
Of the R967m operating expenditure, R617m will go to staff expenses (including R530m for remuneration) and R350m to general expenditure, such as office rental and IT infrastructure.
The operational shortfall of R18m will be funded from reserves, National Treasury said.
The shortfall will mainly result from once-off costs to set-up the infrastructure the FSCA will require to fulfil its expanded mandate in terms of the Twin Peaks system.
The FSCA forecasts that it will also collect the following levies (which include the special levy) on behalf of other regulatory bodies:
- R90m for the Office of the Pension Funds Adjudicator, which will have operating expenditure of R87m.
- R81m for the Ombud for Financial Services Providers, which will have staff expenses of R46m and other expenses (including capital expenditure) of R33m.
- R34m for the Financial Services Tribunal. The levy will be allocated to the expenses related to hearings, and to general expenditure, remuneration, audit fees, and depreciation and amortisation.
- R22m for the Ombuds Council, which will spend the levy on office rental, remuneration, supervision and oversight activities, audit fees, and depreciation and amortisation.
In its 2020/21 annual report, the FSCA said it received revenue of R927m and incurred operating costs of R914m, while it recorded a surplus R31m. Its accumulated surplus increased from R348m to R361m.
According to the report, approval must be obtained from Treasury at the end of every financial year in order to retain the accumulated surplus. It said the surplus is used to fund working capital requirements, capital expenditure, budgeted deficits (if any), as well as other unforeseen events. The accumulated surplus is maintained at about two to four months’ operational expenditure.
The PFA’s revenue for 2020/21 was R75.5m, while it spent R68.7m, leaving a surplus of R6.7m.
The FAIS Ombud’s revenue in 2020/21 was R57.6m and expenditure was R42.1m, leaving a surplus of R15.4m.
The table below provides a breakdown of the FSCA’s proposed levy income by sector. Entities regulated by the FAIS Act will pay the lion’s share, followed by retirement funds and administrators.
Figures have been rounded
Twin Peaks doesn’t come cheap
The reasons put forward by the team from National Treasury in support of the bills included:
- It was aware that additional taxes on the financial sector were ultimately borne by the consumer and had a negative impact on the growth of the sector and innovation. However, consumers paid the price for inadequate protection in the form of mis-selling, overcharging, institutional failure and outright scams.
- Twin Peaks has expanded the mandates of the Prudential Authority and the FSCA in terms of the number of entities they have to supervise.
- Furthermore, Twin Peaks means that supervision and oversight have gone beyond checking that entities have filled in the correct forms and are ticking off certain boxes. The regulators had to examine the entire life cycle of a product or service to see whether it was resulting in fair outcomes for customers. These activities were personnel-intensive and required sophisticated IT systems.
- The levies would not be introduced from a “zero base”. The total levies collected by the PA and the FSCA would rise by R290m compared to the pre-Twin Peaks funding model.
- When compared to other countries that had a similar Twin Peaks system (Australia, UK, Netherlands and New Zealand), the proposed levies were 1.7 times below the average levies charged in these jurisdictions when the size of their financial sectors was measured as a percentage of GDP.
- In response to questions from the committee about remuneration expenditure, Treasury said the regulators had to pay salaries that would attract the calibre of staff required to analyse financial institutions, and their business models and products and services.
About that tax deduction…
National Treasury’s deputy director-general (tax and financial sector policy), Ismail Momoniat, said he believed Treasury has been “very fair” in capping the levies.
He said the fact that many regulatory taxes were tax-deductible cushioned their impact. However, he went on to say there should be a discussion “at some point” about whether regulatory costs should continue to be tax-deductible.
Momoniat said the regulators needed financial certainty and urged the committee to adopt the bills before the Budget Speech. However, committee chairperson Joseph Maswanganyi said this would not be practical.
Treasury hoped to table the Conduct of Financial Institutions Bill by April.