Financial sector ‘should embrace tighter rules’

THE FINANCIAL services industry must be careful about saying there was overregulation in the sector and should instead embrace the changes that supported the consumer, Chris Harvey, Deloitte’s global head of financial services, said yesterday.

Although new regulations had had unintended consequences that led to an uptick in compliance costs, Harvey said, they were necessary and not all of them drove up costs.

“The proposed Twin Peak regulatory model in South Africa, for instance, provides the necessary checks and balances between oversight, regulation and doing the right thing versus fuel for growth. The principle behind it is ensuring that there is oversight from a consumer perspective, as well as oversight on the more technical and functional aspect of the financial institutions,” he said.

A number of players in the financial services industry, particularly in the insurance sector, have raised concerns about the cost implications of the regulatory changes.

But others like Steven Nathan, the chief executive of retirement fund administrator 10X Investments, have come out to defend the changes, even though they are affected in the same way as their competitors.

“The industry attempts to blame regulation for the cost of investing because they cannot defend their high fees,” he said.

The Treasury’s Financial Services Laws General Amendment Bill has proposed amendments to 11 existing pieces of legislation in the financial services sector. The biggest impact of all the regulatory changes has been the requirement for financial institutions to hold more capital, which means that they can no longer use a certain portion of their cash to grow the business or lend out.

South Africa became one of only 11 countries this year to implement the Basel 3 regulations, which require banks to increase their liquidity.

Harvey said the regulatory changes that had taken place over the past five years were an understandable reaction given what happened when the financial crisis struck in 2008.

“If you look at it from [a] point of a safety and security and from a systemic perspective, it makes a lot of sense. And if you look at countries whose financial institutions were least impacted by the crisis, one of the reasons they weren’t was because of the regulation requirements from their countries to hold more capital.”

He, however, acknowledged some changes, such as Basel 3, could have dire implications for bank clients.

“What it means in reality is that it’s going to be more difficult to get loans, [such as] funding for small businesses. The banks are going to take less risk,” Harvey said.

With South African banks already tightening their lending rules to control the rise of non-performing loans, the phased implementation of Basel 3 could leave high-risk, low-income consumers more vulnerable when banks started passing on the compliance costs. “Costs don’t just disappear somewhere. Somebody has to pay for that. We will ultimately pay for the cost of compliance,” he said.

He pointed out that one international bank, JPMorgan Chase, spent $1 billion (R9.6bn) in regulatory compliance costs last year.

“If you use that as a proxy of what’s going to happen everywhere, it’s clearly going to be a major cost impact, no doubt,” he added.