A new regulatory regime is in place to govern all SA’s finance companies, including banks – but it will come with a hefty price tag of R6bn/year.
The Twin Peaks system is now law, which means all financial companies will be governed either by the Reserve Bank’s Prudential Authority, which began operating this week, or the Financial Sector Conduct Authority (FSCA), which replaced the Financial Services Board (FSB) on April 1.
The problem is, the exorbitant costs these companies must now pay for compliance and regulation will inevitably get passed on to the investor and consumer, leading to soaring costs across the board.
As it stands, the four big banks — Absa, Standard Bank, FirstRand and Nedbank — can expect to pay R416m, using 2017’s figures. This includes R311m to the Prudential Authority and R105m to the FSCA. Each life insurance company will pay collective maximum fees of R40m to both regulators.
Dube Tshidi, the executive officer of the FSB, says the regulator expects levies of R611m for the year to March 2018. "The principal base in budgeting for the FSB is to break even, in that expenses should equal income, as far as possible," he says. "This same principle would apply for the FSCA."
But is it worth it? It’s a pertinent question, especially considering the FSB’s record on regulation isn’t exactly stellar.
Rosemary Lightbody, policy adviser at the Association for Savings & Investment SA (Asisa) — which represents life insurers and asset managers — says the cost of Twin Peaks is acceptable, provided it leads to the industry operating more efficiently, lowers barriers to entry and improves competition.
"However, there are concerns that if this is not achieved and regulatory costs become excessive, the national agenda of delivering low-cost financial services to a far broader group of South Africans cannot be realised."
The Free Market Foundation (FMF) is less kind. Wits University professor Robert Vivian said at an FMF event the FSB had, for years, made financial intermediaries pay a large share of its "ever-escalating" costs.
"FSB management and other costs have skyrocketed," said Vivian. "Costs per FSB employee have quadrupled and now average over R1.2m/year per employee, with the CEO being paid nearly R600,000/month, excluding benefits and freebies."
The FSB’s annual report shows it collected R782m in income last year, with R676m of this from levies and fees paid by the financial services industry, excluding banks. Financial advisers paid the lion’s share, followed by pension funds and insurers.
Despite the fees it collects, the FSB has been unable to fill the vacancies it advertised. The result: a cash-flush, toothless regulator.
One FSB insider paints a picture of staff inundated with work, unable to keep tabs on everything – and being crucified when something slips through the cracks.
Consider this statistic, for example: there are 10,600 financial advisers and intermediaries, but just 140 posts in the FSB’s financial intermediary division. Equally, only 75 people oversee the plethora of pension funds. The FSB is trying to focus on 200 of the 1,600 it now examines, while 94 people keep an eye on the long-term insurance industry.
In all, the FSB has a budget for 622 people, though it employed only 589 staff members by the end of March last year.
Overseas regulators have far more resources. For example, the US Securities & Exchange Commission (SEC) has a US$1.6bn governmental budget, offset by any fees and levies it collects from industry. This allows it to employ 4,600 people to oversee 4,300 listed companies and 26,000 registered market participants such as advisers.
And the SEC regulates only listed securities — not pension funds or insurers.
"Capacity is a challenge faced by regulators around the world, including here in SA," says Tshidi. "We do our best with the resources we have, and we have been fortunate over the years to attract staff who are not only capable, but are also willing to extend themselves in service of the industry."
But Tshidi says capacity is about the most effective use of resources — not just hiring as many people as possible. "We are always conscious of the fact that we are funded by levies paid by the institutions we supervise, and that ultimately these costs will have an impact on you and me as consumers."
Which is why, for all the extra fees we’ll now pay, the new regulators will need to up their game substantially to justify the costs.
The FSB said it did its best with the resources it had, and had attracted capable, hardworking staff over the years
— What it means:
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