Lofty expectations for twin peaks

But better regulation of SA’s financial services industry could mean higher bank charges

As South Africans reel from two bank collapses in the past four years, authorities have been steadily overhauling the entire legal architecture of the country’s financial services industry, aiming to prevent similar implosions in future.

Only time will tell whether the new “twin peaks” regulatory regime, as it is known, will prevent failures such as those at African Bank and, more recently, VBS Mutual Bank.

Implementing the twin peaks model will cost more than current regulation — about R1.4-billion by 2020 or what equates to a 42% increase in the budgets of the existing regulators . It will also require an unpre-cedented level of co-ordination and co-operation by regulators, say industry players.

Increased costs notwithstanding, industry experts argue that the benefits of better regulation outweigh the costs of implementing it.

The Financial Sector Regulation Act was promulgated in August last year and brought into being the two regulatory “peaks” — the prudential authority, housed in the South African Reserve Bank, and the Financial Sector Conduct Authority (FSCA), which replaces the Financial Services Board.

Both the prudential authority and the FSCA were launched last month, although work towards establishing them has been years in the making.

The prudential authority will oversee the soundness of financial institutions that provide financial products and services, as well as the soundness of market infrastructure such as clearing houses and securities exchanges. As a result, the twin peaks model extends the reach of what was once the banking supervision department in the Reserve Bank — to scrutinise not only the soundness of banks but also of insurers and entities such as the JSE.

The FSCA will regulate all financial institutions, including banks — which the FSB did not oversee — from a market conduct perspective to ensure they treat customers fairly.

Twin peaks is the biggest change in the South African financial sector’s regulatory landscape since democracy, Finance Minister Nhlanhla Nene noted recently. It will require overhauling a range of laws and introducing new ones, including a Conduct of Financial Institutions Bill, a draft of which is expected later this year.

Cost concerns

There will be increased regulatory costs in the form of levies and fees to fund the expanded mandate of both regulators, as well as other bodies that will be created under twin peaks — such as the Financial Services Tribunal and the Ombud’s Council.

The overall costs are still to be determined, as a draft levies Bill governing the fees structure is still making its way through Parliament.

One estimate for a large commercial bank suggests costs will rise from about R300 000 to more than R40-million on the prudential side alone. These estimates do not include what a bank will have to pay for additional staff and systems to meet compliance requirements, expected to be about three to four times the cost of the regulatory fees themselves.

In a recently updated study on implementing twin peaks, the national treasury outlined the cost implications.

For now, the two new regulators will be funded from existing sources for the 2018-2019 financial year, according to the treasury. In the case of the FSCA, these sources are levies and fees raised under the Financial Services Board Act, amounting to just under R663-million. The prudential authority gets its R294-million funding from the Reserve Bank. The envisaged levies are expected to kick in during the 2019-2020 financial year.

Once fully operational, the new levies and fees for the prudential authority are estimated to reach about R423-million by 2019-2020 and R768-million for the FSCA; fees for other bodies such as the Ombud Council are expected to be in the region of R173-million. This will amount to almost R1.4-billion or 42% more than in the current financial year.

But the treasury says in its assessment that when comparing banking supervision costs for the prudential authority, the levies on banks — when compared to the previous year’s budget — wil be 8% lower.

“This effectively means that the cost of regulation for banks will be reduced and this could be attributed to benefits from economies of scale,” the treasury maintained.

The industry has raised concerns about costs, particularly in interactions with the prudential authority, said Cas Coovadia, managing director of the Banking Association South Africa. The authorities will have to be transparent about how levies are used and must properly account for them, he said.

The banks would largely absorb the regulatory costs but some may be passed on to consumers, he said.

Rich data = better decisions

The treasury said regulation in the financial sector has been typically funded on a “user pay” principle, requiring the institutions “that benefit from a robustly regulated financial sector” to be levied for this purpose.

Relying on the fiscus for funding can hamper the ability to achieve effective regulatory and supervisory outcomes, it said. Extensive reporting and accountability measures are imposed on the new regulators, through the Public Finance Management Act and the Financial Sector Regulation Act.