The Twin Peaks contradiction

Malusi Gigaba flagged the new regulatory regime as one way to bring down banking costs — but it will do exactly the opposite of what he says

Perhaps it’s fitting that in a society with so much ambiguity, SA is a world leader in unselfconsciously trumpeting mixed messages. Take Malusi Gigaba. A few days ago our dapper finance minister railed against the profligacy of SA Airways (“I want that airline off my list of top priorities,” he grumbled) when it was he who installed the wrecking ball that was Dudu Myeni as the airline’s chair in 2012.

Last week, in his 14-point policy plan, Gigaba spoke of his plans for the banking sector, which included the goal of “bringing down banking costs by implementing Twin Peaks” from February 2018. It’s not that all his points were bad: it’s just that they were generic and safe — all hat, no rabbit, delivered by an empty suit.

Still, it all sounded so warm and fuzzy, you’d almost gloss over the contradictions.

Take “Twin Peaks” — the new regulatory regime which will bring down the cost of banking for average South Africans in the same way that scoffing that extra Aero will help you lose those extra kilos.

Twin Peaks might share a name with David Lynch’s surreal cult TV series from the 1990s, but it’s nowhere near as much fun. Essentially, it will create two brandnew regulators — a “prudential” regulator to ensure institutions remain safe and sound, and a “conduct” regulator, to protect customers and make sure companies are doing what they’re meant to do.

Speaking to journalists this week, Banking Association MD Cas Coovadia questioned the need for the overwhelming raft of new rules — especially since many of them, including Basel 3, were “put in place to deal with what was essentially a crisis in Europe and America. It’s the way the world works, unfortunately.”

The grim news for customers, however, is that

Twin Peaks will make itself felt in your bank costs.

The Banking Association’s Mark Brits says that, as it stands, banks are regulated by the Reserve Bank’s bank supervision department, for a paltry R300,000 a year. “But tomorrow we will be regulated by a separate prudential authority sitting outside the Reserve Bank, which needs to be funded,” he says.

Under Twin Peaks, large banks will, every year, each have to pay R45m to the “prudential authority” and R15m to the “conduct authority”. Like magic, a R300,000 annual bill has turned into a quick R60m. Even the City of Johannesburg’s billing department would struggle to replicate that trick.

To be fair, these levies aren’t as high for smaller banks, who’ll pay proportionately less. It’s not that our banks don’t need regulation — but it shouldn’t be a thinly veiled excuse to tap them for more money which will, ultimately, be recovered from bank fees.

Last November, parliament’s standing committee on finance said it was “particularly concerned” about the impact Twin Peaks would have on “the fees financial institutions will charge customers, and the disproportionate impact this would have on the poor and those with low incomes.” It said the banks will probably pass these costs to their customers.

If the losers are bank customers and investors, the winner will be Gigaba’s treasury, which will be the accountable authority for the new regulators.

But Twin Peaks doesn’t just apply to banks. It’ll cost SA’S wider financial sector a whole lot more than R60m apiece every year.

Robert Vivian, a professor of finance at Wits University, estimates that the new model will actually cost R6bn/year — R2bn for the new regulators, and R4bn on internal compliance for these companies. This is sharply higher than the R3bn compliance bill today.

Says Vivian: “Until now, the banks paid very low regulatory fees and it was all covered by tax money. But these new regulators will have the right to institute whatever levies they want. I believe it’s a new tax, and should be subject to parliamentary control.”

It stings, argues Vivian, particularly since the new model doesn’t specify how it’ll make SA banking a safer place or even protect customers. What is worse, the new rules will harm government’s much-touted transformation goal of “opening up the sector”.

“It actually prohibits transformation because the smaller players don’t have the expertise or resources to finance these rules,” he says. “When similar rules were recently put in place for intermediaries in England, it knocked out the lower end of the market.”

Again, it’s a case of mixed messages. In February, President Jacob Zuma said the “banks that dominate everything are just four . . . we want to change this”. Only, rather than breaking down exactly those barriers, his government has just put up another one.

The new Twin Peaks regime could cost up to R6bn a year — and it’ll act as a barrier to prospective new banks