transformation:
necessary but
not instant
Given the crucial role that the financial sector plays in the country’s economy and in economic growth, transformation within the sector is not just a topical subject, it is one that requires a more deliberate, and concerted effort if the sector is to achieve the transformation targets envisaged in the Financial Sector Codes.
Financial sector transformation became a prominent point of discussion in 2017 during the finalisation of the now Financial Sector Regulation Act No. 9 of 2017 (FSRA) by Parliament Standing Committee on Finance (SCOF). Committee members expressed concern over perceived slow progress of meaningful transformation across the sector and asked how transformation can be embedded in the FSRA to address this. While it is acknowledged that the FSRA is not the main instrument to effect transformation, it was strengthened to entrench the principle of transformation, in particular by making transformation an object of the FSRA. The SCOF also resolved to jointly hold public hearings on transformation with the Portfolio Committee on Trade and Industry (PCTI), in order to get a deeper understanding of and stimulate debate on the state of transformation in the sector, the main barriers to transformation, and options for driving improved transformation.
Following extensive public hearings that took place between March and May 2017, the SCOF and PCTI finalised the first report on financial sector transformation which was voted on in the National Assembly on 28 November 2017. The participants in the hearings were polarised, with large and well established financial institutions saying that much has been done to transform the sector, whilst stakeholders representing financially marginalised constituencies expressed their frustration on the slow pace of transformation. The general view at the hearing which came out strongly in the report is that although progress has been made in promoting transformation of the financial sector since 1994, there needs to be more effective transformation consistent with the country’s developmental needs. This view was reinforced by Mr. Jacob Mathupha, a Deputy Director for BEE at the Department of Trade and Industry (DTI). According to Mr. Mathupha, “Some progress has been made though not enough to say the sector has transformed. Some ground has been covered. Some banks have instituted their own empowerment deals. We can look at successful empowerment deals implemented in the past and learn from them”.
The SCOF and PCTI report has also identified several barriers to transformation of the financial sector and made several recommendations to address these barriers.
Some Keys Issues and Recommendations from the Standing Committee on Finance (SCOF) and the Portfolio Committee on Trade and Industry (PCTI) report:
• Greater emphasis should be on subsectors that are lagging behind, such as asset management. By 2019, state assets must be managed by asset management entities that are at least 51% black-owned and/or Level 4 B-BBEE status.
• Legislative changes to allow for proportional entry requirements for new entrants to support progressive growth from an informal entity like a stokvel through to becoming a small player, to becoming larger. Capital adequacy requirements for banks not systemically important financial institutions be lowered. Appropriate minimum standards apply so that the depositors’ interests are protected.(12.3.12.1)
• Compliance with the FSC be a condition for licensing. (12.3.12.2)
• FSC requires that the South African ownership of banks, within reasonable timeframes, be mainly black, particularly African, with adequate ownership by women. (12.3.12.3)
• FSC requires that within certain timeframes blacks, particularly Africans, be the majority at all levels of management, with adequate inclusion of women.(12.3.12.4)
• Engaging with stakeholders to legislate where appropriate on these and other relevant proposals. (12.3.12.5)
• The SARB needs to do far more to encourage competition in the financial sector. (12.3.13)
• Similar to the above recommendations on banks, government and other relevant institutions give concerted attention to reducing the high levels of monopoly in the insurance subsector and encouraging new entrants. NT to consider in what ways there can be more black, including African and women, ownership of the major insurance companies and also report on this regularly. (12.3.15)
• Support for the easing of licensing and other requirements for new entrants in the financial sector, provided the needs and interests of depositors and policyholders are protected. Need for balance between focusing on the need for new entrants, and de-racialising the financial sector and protecting depositors and policy holders; both these aspects are important parts of transformation. (12.3.18)
(Credit Source: Financial Services Transformation Report)
These recommendations were deliberated on earlier this year at Nedlac’s Financial Sector Transformation Workshop held at the CSIR Convention Centre on the 5th - 6th April 2018. Amongst the issues discussed at the workshop was the role of financial sector regulators in promoting transformation of the financial sector, in particular the role of Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA). During the workshop the general view was that regulators should play a supporting role to the BEE Commission and Financial Sector Transformation Council (FSTC) (formerly known as the Financial Sector Charter Council) whose role is to oversee transformation at a national level and at a sector level. The supporting role that regulators could play entails overseeing transformation at a financial institution level in line with what has been entrenched by SCOF in the Insurance Act No.18 of 2017. In terms of the Insurance Act, insurers are required to submit a transformation plan to the PA as the responsible authority in terms of the Act when applying for a license. To ensure this is consistently applied across the financial sector it is proposed that the envisaged Conduct of Financial Institutions (COFI) Act replaces transformation provisions in the Insurance Act and apply to all financial institutions. The FSCA as the responsible authority in terms of the COFI Act will be responsible to oversee compliance with these provisions.
In the interim, before the implementation of the COFI Act, the work of the FSCA will be to look at the steps taken by financial institutions to transform. In this regard the FSCA will be working with, for example the banking industry on the Retail Banking Diagnostic report and the proposals contained therein, many of which impact on transformation and access.
FSCA transitional committee member Adv. Dube Tshidi says ,”The Committee has been exploring the various ways in which we can make help support real transformation in the sector. Our aim is to ensure that regulatory and supervisory frameworks support and strengthen transformation initiatives in the sector, including the Financial Sector Codes (FSC) other initiatives aimed at broad-based black economic empowerment.”
This process will be guided by the following strategic objectives:
- Improve transformation of the financial sector by supporting the BBBEE Commission and FSTC in fulfilling their mandates, including phasing in over-time monitoring the extent to which financial institutions implement their own transformation plans
- Support innovation that leverages technology where suitable, and support greater participation of Black owned and managed businesses in the financial sector, through identifying and removing disproportionate barriers in the regulatory and supervisory frameworks as pertain to market conduct and financial markets
- Further support greater participation of Black owned and managed businesses in the financial sector by developing and implementing regulatory compliance capacity building and awareness programmes for small and emerging financial institutions
- Improving financial inclusion by ensuring that regulatory and supervisory frameworks promote and support access to and responsible and sustainable usage of, appropriate financial services for individuals and SMMEs.
Mr. Tendani Mahlobo, Senior Customer Inclusion Specialist at the FSCA emphasised that part of the FSCA transformation targets for the 2019/2020 period are to develop a transformation strategy and plan for the financial sector in line with the objectives of the FSCA, including how transformation is to be embedded into the licensing, regulatory and supervisory frameworks.
Further to this, the FSCA will ensure that the regulatory and supervisory frameworks for conduct and market integrity promote financial inclusion and support transformation, including developing suitable frameworks for SMMEs and sole proprietors, and FSPs like funeral service providers.
When delivering the 2017 Budget Speech, former Minister of Finance, Pravin Gordhan remarked: “Our growth challenge is intertwined with our transformation imperative. We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality, and without growth, transformation will be distorted by patronage.”
With the financial sector being at the heart of the economy, it has become clearer that the sector needs to transform so that it can meaningfully contribute to the country’s inclusive growth. The FSCA’s role is to ensure that its regulatory and supervisory frameworks promote transformation and that financial institutions meet their transformation commitments in terms of the FSC.
