It is inevitable, in the Twin Peaks regulatory structure, that one arm — the Financial Sector Conduct Authority (FSCA) — is the busier and noisier of the two outfits. It regulates market conduct, which can be an emotional issue, particularly where misselling is concerned. The other regulator, the Prudential Authority (PA), is far more low profile: it is concerned with the financial soundness of banks and insurers.
When it comes to the age-old question of who guards the guards, in the PA’s case it is nobody. It is effectively a department of the Reserve Bank and its governing committee is chaired by Bank governor Lesetja Kganyago. He’s assisted by three deputies, one of whom, Kuben Naidoo, is also head of the PA. There is no advisory committee and no input from nonexecutives. The PA doesn’t have a reporting line, dotted or otherwise, to the finance minister or parliament.
Kganyago argues — though he would — that it makes sense for issues of financial soundness to be dealt with independent of political processes. But, he says, because market behaviour is a political issue, the FSCA should report through political channels to the finance minister.
The PA was launched on April 1 2018, when the demand to start new banks was reviving after an 11-year hiatus. The five large banks still account for 90.5% of deposits, but newcomers such as TymeBank, Discovery Bank and Bank Zero (just weeks from final registration) should eat into that. Naidoo believes that, within 10 years, the market share of the big banks could fall to 80% or less.
Even with undoubtedly clever people in its employ, the Reserve Bank could not prevent the VBS Mutual Bank collapse
The PA fined two institutions R10m over the past year: Safrican Insurance underwrote sinking funds policies that it was not licensed to underwrite; and Grindrod Bank did not disclose the pay of key management in its annual report.
The PA doesn’t have the final word: there is the right to appeal to the Financial Services Tribunal. But whose side will it take against the Reserve Bank?
Confusingly, the PA is involved in a type of market conduct by investigating possible illegality in deposit taking — an activity reserved exclusively for banks. Anyone involved in soliciting for deposits and advertising them to the public who is not a banker is considered an unregistered person.
Unnoticed signs of trouble
The Reserve Bank likes to see itself as a world-class regulator, and it certainly is visible at global gabfests, from Davos to International Monetary Fund meetings.
Yet, even with some undoubtedly clever people in its employ, it couldn’t prevent the VBS Mutual Bank collapse last year. This despite the fact that there would have been signs of trouble not only at the bank itself, but also at its sister companies, Nzalo Insurance Services and Bophelo Life. The regulator can’t simply wash its hands of this.
To be fair, the Reserve Bank did a good job in leading the restructuring of African Bank, which now has an excellent transactional banking platform.
It makes sense for the Reserve Bank to keep its 50% holding until there is a listing, or possibly a merger, rather than to dispose of an unlisted holding on the open market. It won’t want to follow the example of the Public Investment Corp and sell the holding cheaply to potentially questionable investors.
The PA hopes to increase the size of the co-operative sector, where entries are often minnows, with as few as 200 members and R1m in deposits. But they can mobilise investment in highly localised, often rural, areas.
The co-operative bank and co-operative financial institution sector has just R294m in deposits. But it is ideal for being a vehicle for empowerment on the ground.
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