The 5th democratic Parliament: what it means for the financial services sector

Intellidex is constantly monitoring the legislative and regulatory changes occurring in Parliament and elsewhere that affect the financial services sector clients. Intellidex social media editor Mayo Twala chatted to Intellidex’s head of capital markets, Peter Attard Montalto, about the last five-year term of the fifth democratic Parliament and its effect on the financial services sector.

What were some of the highlights and lowlights of the last Parliamentary term? How would you characterise the work of Parliament with respect to financial services?

Parliament really started to come into its own through the latter two-and-a-half years of the last term. State capture and immense pressure from civil society enabled a partial awakening of its senses and its powers to hold to account and interrogate legislation, institutions, politicians and policy makers. However, looking back we can actually see that Parliament passed relatively few pieces of financial sector-related legislation in the five-year period. Much time was concerned instead with processing biannual budget updates and accompanying votes and bills, and then investigation work, particularly for the Standing Committee on Finance, into SARS, PIC, the audit profession, carbon tax, VBS, Steinhoff, ABIL, Viceroy, SOEs and more. This work has been positive and necessary though the capacity of the state or Parliament to do much with the outcomes of these deliberations is still in doubt as we move towards the sixth Parliament.

The major, landmark, set of two pieces of legislation taken together were the Financial Sector Regulation Act 9 of 2017 and the Insurance Act 18 of 2017. Together these created the twin peaks regulatory framework which was subsequently enacted from 2018. This was a mammoth reorganisation of the institutional framework of the state which Parliament had to process under National Treasury’s watchful eye.

Apart from that there was the Banks Amendment Act 3 of 2015 which sought to strengthen the creation of the curatorship process for insolvent banks under SARB’s eye, the National Credit Amendment Bill (soon to be Act after presidential signature) which incorporates a new form of personal insolvency into law and the Financial Matters Amendment Bill (again soon to be Act) which in addition to some minor changes, enables the creation of state-owned banks.

Parliament spent a huge amount of time working on illicit financial flows which is a hugely important issue, but it is exceptionally tough for Parliament to do anything about and requires supranational, state-to-state co-ordination. Far too little time was also spent on fintech or the fourth industrial revolution which seems to have largely passed the standing committee by.

How can we better understand the twin peaks regulatory model that began operating since April 2018?

On the surface twin peaks is nothing new, regulatory activities have always been occurring on banks and insurance companies. However what twin peaks does is organise this regulation much more systematically and empowers more directly in law the FSCA (Financial Sector Conduct Authority) and the Prudential Authority (PA, part of the Reserve Bank). This was important given the FSCA’s predecessor was largely “at sea” institutionally while within the Reserve Bank there was a somewhat fuzzy edge around the bank regulation department and other areas. The separate legal entity of the PA now provides a more cohesive structure institutionally with its own strategy and momentum. Insurance also fell through the gaps somewhat in the past but now is more firmly wrapped into the model. Overall twin peaks is about specialisation between the two peaks, co-operation, and a greater degree of independence from politics.

Has the twin peaks model worked in regard to strengthening the regulation and supervision of banking institutions?

It is in some sense too early to tell, but we have seen strong early momentum internally within the PA to define its corporate strategy and methods of operations. It is being built on a strong foundation of capacity and talent which is so evident elsewhere in the Reserve Bank. VBS has provided an early challenge, though that was mostly outside of its control. The reaction to such an early challenge however will be important and useful in how it puts in place intelligence and data collection systems, especially ones that are not totally reliant on auditors.

Kuben Naidoo (CEO of the new Prudential Authority) has provided the leadership and direction so crucial at this early stage and it was arguably fortuitous that he was in the right place at the right time for this role. The FSCA however has struggled and does not have the same depth of capacity. National Treasury should focus more urgently on ensuring a full bench of quality leadership beds in there so it doesn’t become the loose link in the regulatory chain.

Will the proposed Conduct of Financial Institutions Bill in the 2019 Budget create a single comprehensive law for the financial services industry in the long term?

Several bills and policy streams were left outstanding at the end of this Parliament. COFI will be a highly complex bill and probably take up significant Parliament time in the new term. Its fundamental problem is to what degree of legal and regulatory certainty a piece of legislation that works on principles and outcomes-based requirements can work within the South African legal system. It is still up for debate if this kind of shift is better encapsulated within the regulator principles of conduct and prudential management rather than primary legislation, as well as the sector charter process.

The end result is that the bill is unwieldy and at times unclear. This is especially the case regarding the increased flexibility on regulatory requirements and new forms of lite-licence that the bill allows. These can create uncertainty in the system and more challenging credit risk pricing for investors while potentially opening the door to future capture.

It is not clear within the bill that there is a firm set of minimum regulatory standards that cannot be compromised for transformation or development purposes – and this is likely to be the focus in the new parliamentary term when the bill comes before committee. Transformation is already well baked into the system through the charter process but also increasingly through the PA – which particularly for new entrant banks has been seen as being surprisingly active on the transformation front.

The Financial Matters Amendment Bill, tabled in Parliament in January 2019, allows for the establishment of state-owned banks. Only part of this got passed into law before the end of the term, what happens next?

Yes, the bill that has now gone for presidential signature allows only national level and not provincial or municipal level state-owned banks. This is a positive move given the huge breadth the bill as originally drafted would have allowed for across the country.

When combined with alternative regulatory-lite frameworks allowed in COFI, the key for financial stability and the sector as a whole will be that state-owned banks do not get off lightly and are regulated just as strongly as other entities. This has always been the Reserve Bank’s line and from their perspective it’s a credible stance. The risk however, which everyone in South Africa should be cognisant of, is “state-capture-proofing” legislation and institutions. The current threats to the Reserve Bank and the politicisation of the debate around it should be kept in mind – future state capture will rely on a pliant Reserve Bank as much for its control of the financial sector as for the MPC and monetary policy. As such it would not be positive if a combination of COFI and the FMA Bill were to create a nexus of risk on this front.

Ultimately, however, such banks would be at the behest of markets for funding and so their balance sheets will need to be carefully studied by corporate treasurers, existing banks from a counterparty risk perspective, and investors. We watch this issue closely and will see if the next round of the bill returns with more localised state-owned bank provisions.

Can the South African financial services industry see a large push towards fintech if the Reserve Bank, FSC and Financial Intelligence Centre regulate it in a controlled environment?

The simple answer is that it will be tough. Not enough attention has been focused on this by Parliament. Currently there are very high hurdles to entry even with the PA’s sandbox, in major part because exchange controls keep things largely local. Exchange controls in particular are on a very long-term loosening trend and in the coming years fintech should be the issue to accelerate on that front.

However, adding in a debate on prescribed assets as well together with the wider immigration, visa and skills problems, we think more focus will be required in order to accelerate development in this field. Regulators should welcome some aspects of fintech, such as enhanced security and lower costs for consumers and the ability for automated real-time reporting to regulators. We expect a focus on this to grow in the new parliamentary term.

With the last term of Parliament closed, do you think that the financial services industry has been supported regarding the above legislation?

Supported doesn’t really seem to be the right word – but the financial services sector now sees better and clearer delineation of regulatory oversight. The political environment however remains hostile to the financial services sector. Criticism of banks often is unconstructive and based on partial or no facts at all. Too often the financial sector feels like the “enemy” when watching parliamentary committee hearings. While certainly the sector needs to do more to transform and support harder-to-reach places in the economy, economies of scale help this more than anything else. There still seems to be a basic lack of understanding that banks are not on strike and are lending as much as they can given the creditworthiness of clients within this part of the economic cycle. This however is unlikely to change in the new term and it will be a continual battle of the sector and regulators to keep Parliament from stepping over the line into populism.

What themes will be coming next for Parliament in the sixth term after the elections?

The biggest and most dramatic theme will be Reserve Bank nationalisation which should become an active topic for Parliament straight after the elections. Prescribed assets – being in the ANC manifesto – will also raise its head though it’s hard to see how that would move forwards without the backing of National Treasury.

Both issues can create significant uncertainty for markets and the financial services sector even without implementation. Parliament and especially the ANC caucus will be the nexus of both issues.

We will then have the COFI bill and possibly another bill taking further bank resolution frameworks, including living wills and bail-in bonds. More generally, Parliament is likely to continue its investigatory role with illicit flows being high on the agenda, but bank funding of coal and other related environmental matters will be a hot button topic.

Support for municipalities increasing borrowing and issuing debt will be on the agenda and so too the role of financial services role in that (not necessarily a good thing given their inherently low and declining credit quality).

We are also watching for more debate in Parliament on transformation in the sector and consumer fairness – a number of recent court cases rulings about, for instance, foreclosure and collateral (house) auctions may well find themselves into legislation either via government or private members bills.

We also watch with some concern the capacity of Parliament. The parliamentary budget office which supports the work in this area is severely under-capacitated and lacks skills, while the DA could lose some of its strong committee members on these issues while the talent bench on the ANC side remains mixed. One potential strong new addition to the standing committee on finance could be Ronald Lamola, who is placed very high at number five on the parliamentary list. He would be one of the few “policy wonks” in the ANC caucus in Parliament.

Intellidex helps a range of financial services institutions tackle their strategic challenges – get in contact to discuss how we might be able to help your company.