Parliament, Monday, 27 November 2017 – Following extensive public hearings on 14 March, 22 March and 3 May 2017, the Standing Committee on Finance (SCOF) and the Portfolio on Trade and Industry (PCTI) finalised the 1st Report of on Financial Sector Transformation. An Interim Report was finalised on 6 September and sent to the participants in the hearings to comment on, and many of their responses were included in the final Report. The Report is to be voted on in the National Assembly on 28 November.
The recommendations in the Report will be reviewed each year based on progress on the implementation of its recommendations. The recommendations in the Report will be processed through a further review of the Financial Sector Code (FSC) and the Financial Sector Summit to be held next year. The Committees will finalise a 2nd Report on Financial Sector Transformation within 6 months of the Financial Sector Summit.
Progress on Financial Sector Transformation
The participants in the hearings were very polarised, with stakeholders representing financially marginalised constituencies expressing huge frustration and anger at the failures of the financial sector. The pace of transformation, they insist, is far too slow, and they blame both the dominant players in the financial sector and the government. There was a sense in which every frustration these participants have with the effects of the slowdown in economic growth and increasing unemployment became concentrated on the financial sector. It was almost as if they were holding the financial sector responsible for every ill in the economy. Given the crucial role that the financial sector plays in the country’s economy and in economic growth, this is perhaps understandable.
The dominant players in the financial sector insisted that there has been significant transformation. It is clear that a significant number of stakeholders distrust and are even suspicious of the dominant corporates in the financial sector, and the Committees believe that these dominant players need to reach out more to those stakeholders, their own customers and the general public to explain what they have done to transform the financial sector.
The Committees’ overall view is that the financial sector has certainly transformed since 1994, but there needs to be more effective transformation consistent with the country’s developmental needs. The banks and other sections of the financial sector are crucial to the economic growth and development goals of the country, and the transformation of the financial sector needs to be directed towards ensuring that the sector contributes effectively to this, both in its own and the country’s interests. The Committees believe that there has been more transformation in the financial sector than has been made out by most stakeholders critical of the big players, even if less transformation than the big players make out.
The Committees are not calling for an overnight overhaul but the sector needs to transform more and more effectively and sustainably, within reasonable timelines, otherwise it will contribute to the social explosion looming in the country.
The majority in the Committees believe that there is an interrelationship between transformation and growth as part of a radical economic transformation approach. We agree with the perspective of National Treasury’s (NT) that: ‘Our growth challenge is intertwined with our transformation imperative. We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality, without growth, transformation will be distorted by patronage.’
Financial Sector Transformation must benefit all classes and strata of the people but primarily the poor and lower income earners and must contribute to the reduction of inequalities.
Key Observations and Recommendations
The recommendations are in section 12 of the Report and are summarised in section 12.20. Among the key recommendations are (with relevant sections of the Report in brackets):
Abiding by the Financial Sector Code (FSC)
- Industry be compelled, including through licensing conditions, to provide the necessary information to the FS Charter Council and the newly established B-BBEE Commission. CEOs of financial institutions be active in the decision-making processes of the FS Charter Council to ‘ensure sector buy-in’. (12.2.4) 2.
- NT, DTI, the FS Charter Council and B-BBEE Commission through engagements among them and the Summit process address their differences on the disparities between the FSC and the Generic Codes and present a single report to the Committees within a month after the Summit. The Committees will thereafter decide on our own positions. (12.2.10)
- Achieving targets be a condition of the licensing of financial institutions as provided for in Section 10 (1) of the B-BBEE Act. (12.2.11)
- The DTI and B-BBEE Commission to develop a system of effective fines for failure to achieve targets and present a policy on this by June 2018. Consideration be given to amending the B-BBEE Act to provide for a system of fines (12.2.12)
Market concentration, monopolisation and ownership
- Government and other relevant institutions give concerted attention to reducing the high levels of monopoly in the banking subsector and encouraging new entrants. NT to consider in what ways there can be more black, including African and women, ownership of the major banks and also report on this regularly. Among many other issues, consideration needs to be given to the following:
- Legislative changes to allow for proportional entry requirements for new entrants to support progressive growth from an informal entity like a stokvel through to becoming a small player, to becoming larger. Capital adequacy requirements for banks not systemically important financial institutions be lower. Appropriate minimum standards apply so that the depositors’ interests are protected.(12.3.12.1)
- Compliance with the FSC be a condition for licensing. (12.3.12.2)
- FSC requires that the South African ownership of banks, within reasonable timeframes, be mainly black, particularly African, with adequate ownership by women. (12.3.12.3)
- FSC requires that within certain timeframes blacks, particularly Africans, be the majority at all levels of management, with adequate inclusion of women.(12.3.12.4)
- Engaging with stakeholders to legislate where appropriate on these and other relevant proposals. (12.3.12.5)
- The SARB needs to do far more to encourage competition in the financial sector. (12.3.13)
- Similar to the above recommendations on banks, government and other relevant institutions give concerted attention to reducing the high levels of monopoly in the insurance subsector and encouraging new entrants. NT to consider in what ways there can be more black, including African and women, ownership of the major insurance companies and also report on this regularly. (12.3.15)
- Support for the easing of licensing and other requirements for new entrants in the financial sector, provided the needs and interests of depositors and policyholders protected. Need for balance between focusing on the need for new entrants, and deracialising the financial sector and protecting depositors and policy holders; both these aspects are important parts of transformation. (12.3.18)
Other Issues
- Support changes to the Rules of Court and legislation to stop repossession abuses. (12.6.3 and 12.6.6)
- Balance need to introduce global standards and regulations with need for new entrants in the financial sector and other transformative goals. (12.7.3)
- B-BBEE Commission and FS Charter Council tighten loopholes in policy and regulations to reduce prospects of the system being rigged. (12.7.5)
- Appropriate targets to be set in the FSC for asset managers and asset consultants. (12.9.2)
- Support DTI proposal that by 2019 state assets must be managed by asset management entities that are at least 51% black-owned and/or Level 4 B-BBEE status. (12.9.3)
- Strong action against bank collusion on the manipulation of currency trading. (12.15.2)
- If there has been wrongdoing, not just the banks, but the individuals responsible be acted against. (12.15.1)
- Consider tightening legislation to reduce prospects of bank collusion. (12.15.4)
- Banks and law enforcement institutions to do more to combat Illicit Financial Flows. (12.16.1)
- The SCOF and DTI Portfolio Committee will develop a programme on the implementation of the key recommendations.
- The Committees also need to work closely with relevant civil society stakeholders in taking forward our joint programme. The active participation of civil society in financial sector transformation can contribute to advancing the Committee’s programme and the Committees’ programme can also contribute to more active civil society participation.
Not overnight, but not slow either
The Committees do not expect that all our recommendations will be implemented immediately. There needs to be a phased approach with immediate, short-term and long-term aims. We are not calling for an overnight overhaul of the financial sector, but we are clear that further transformation cannot take place at a snail’s pace either. As far as possible, the nature and pace of the transformation have to be negotiated with all the relevant stakeholders, but where there is no prospect of significant consensus on irreconcilable interests, government and Parliament have to take decisions. The huge inequalities in our country and the impatience and frustration of the excluded and marginalised in our society point to a huge social explosion looming that will consume all stakeholders in the financial sector, including government and Parliament. It is in all our interests that the financial sector makes an adequate contribution to the economic transformation our country so desperately needs.
ISSUED BY PARLIAMENTARY COMMUNICATION SERVICES ON BEHALF OF THE CHAIRPERSONS, MR YUNUS CARRIM, AND MS JOANMARIAE FUBBS.
Name: Mr Justice Molafo
Parliamentary Communication Services
Tel: 021 403 8444
Cell: 081 424 7481
E-mail: jmolafo@parliament.gov.za
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