Parliament’s Standing Committee on Finance has tasked National Treasury with producing a report on how the Financial Sector and Deposit Insurance Levies Bill will impact consumers and small entities.
Treasury, the FSCA and the Prudential Authority (PA) this week briefed the committee on their responses to submissions on the legislation, and the committee heard supplementary comments during the meeting.
Committee chairperson Mkhacani Maswanganyi said the committee had to consider the socio-economic impact of regulations in light of the economic hardships experienced by many South Africans.
Treasury’s report should address whether the legislation would result in small players exiting the market and prevent new players from entering the financial sector, Maswanganyi said.
“It must be a well-researched report with clear numbers […] It must not just be a narrative. You might take a case study of one smaller player. If this [legislation] goes ahead, how will it impact such a small player?”
The committee is scheduled to deliberate on the Financial Sector and Deposit Insurance Levies Bill and the associated Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill next week.
Samantha Williams, the head of legal and regulatory affairs at the Financial Intermediaries Association of Southern Africa (FIA), told the committee that, according to the FIA’s calculations, a small entity was potentially looking at a 22% increase in levies (taking the special levy into account) compared with previous years.
She said this was exorbitant in the current economic environment.
Although the FIA understood there was a need for better supervision and consumer protection, greater consideration needed to be given to the actual amounts that financial entities will end up paying.
She pointed out that commissions are regulated in the intermediary space; therefore, unlike, say, insurers, intermediaries could not simply pass on additional costs to their clients.
Treasury said it was willing to engage further with the FIA, because its calculations did not indicate that the impact of the levies would be as significant as the association’s numbers suggested.
Exemption provision broadened
Williams said the FIA appreciated Treasury’s proposed rewording of section 11 of the Financial Sector and Deposit Insurance Levies Bill, which may make it easier for the FSCA, the PA or the Corporation for Deposit Insurance to grant levy exemptions.
In its written submission, the FIA said the way the section was currently worded would make it overly burdensome for some firms to apply for an exemption. In addition, the section allows for exemptions only in specific circumstances and does not provide for FSPs that are regulated by the FSCA and another regulator, such as the Council for Medical Schemes.
Treasury has therefore proposed to amend section 11 “slightly” so that the regulators can grant exemptions not only on application by an individual institution but also if they identify circumstances where an institution or a category of institutions can be exempted from all or part of a levy.
It said the regulators could also apply this exemption to mitigate the impact of extraordinary circumstances, such as the Covid-19 pandemic.
The proposed amendment to section 11 was the only significant change to result from the submissions.
Treasury said the legislation would be reworded to clarify that an entity whose licence was withdrawn would receive a pro rata refund of the levies it had paid during a payment cycle.
It also clarified how the average number of key individuals and representatives will be determined when calculating the levies paid by FSPs to the FSCA in terms of Schedule 2.
Treasury said the averages will be determined by adding the number of KIs/representatives from 1 September to 31 August each year (according to the FSCA’s records) and dividing that number by 12. The information will be detailed on the assessment notice issued in terms of section 242 of the Financial Sector Regulation Act.
Regulators must recover their costs
Treasury’s and the FSCA’s responses to the submissions traversed the points they have previously made about ensuring there was sufficient funding for Twin Peaks.
They acknowledged that the legislation could have adverse cost implications for financial entities, and these costs could end up being passed on to consumers. This needed to be balanced against the cost to the financial system and individual consumers if the regulators did not have the capacity to undertake the intrusive regulation that Treasury believed was necessary.
In its view, the levies were “on the lower end” compared to South Africa’s peers with a financial sector that was of similar size and had a regulatory architecture that was similar to Twin Peaks.
The levies were based on the principle that the regulators needed to recover their operating expenses, and that smaller entities should pay less than larger ones.
A concession had been made in respect of levies paid by the PA, because the South African Reserve Bank would continue to subsidise up to 40% of its costs.
However, the PA’s head of policy, statistics and industry support, Olaotse Matshane, told the committee this was not regarded as international best practice, and the Authority might come under pressure to increase its levies so that it could recover all its costs from the entities it supervised.