FSPs... dust off your wallets
The promise of the New Year is rapidly losing its shine as South Africa’s financial services providers (FSPs) brace for another raft of regulation and the resultant compliance and levy cost escalations. Some of these, for example, the Conduct of Financial Institutions Bill (COFI), have been stewing for years…
Others, such as the Financial Sector And Deposit Insurance Levies Bill (Bill 3 of 2022) has been making its way through the necessary committees and processes virtually unmentioned. This new piece of legislation, and its bill-buddy, the Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill (Bill 4 of 2022), were introduced to Parliament on 20 January this year. What a mouthful!
Bravo to the lawmakers for their catch-all capabilities
The first I heard of these new Bills was courtesy a recent Moonstone newsletter covering the topic. Being an inquisitive journalist type, I jumped straight onto the National Treasury website to learn more. It took me some time to find the documents in question, and even longer to figure out what I was looking at. In a nutshell, Bill 3 deals with financial services and deposit insurance levies.
“Why has National Treasury chosen to mix financial services levies with deposit insurance levies in a single Bill?” I wondered. And of greater concern, why do they refer to an ‘insurance deposit levy’ instead of the more accurate ‘insurance deposit ‘premium’? Dig a bit deeper and the issue of what constitutes a levy versus a tax arises. It appears that the levies (sic) mentioned in Bill 3 and Bill 4 are more accurately described as taxes, which was an issue raised by the Standing Committee on Finance when dealing with the Financial Sector Regulation (FSR) Bill, way back in 2015. At the time, National Treasury reportedly conceded that such levies were in fact taxes, meaning a money bill would be necessary per section 77 of the Constitution.
And that begs a further question: Do the levies, or taxes as Treasury concedes, that have been levied against FSPs over the past few years stand up to Constitutional muster? A money bill was published in 2018, the year after FSR Act was passed, but never became law… And in 2021 a second money bill was published, which has not yet made it to parliament, possibly due to the pandemic. In this context, Bill 3 looks suspiciously like a third attempt at a money bill to legitimise the collection of said levies, or taxes. Incidentally, this could also explain why the regulators have chosen to rebrand insurance premiums as insurance levies!
The lowdown on the latest bills
The aforementioned concerns aside, Bill 3 will allow for the imposition of financial sector levies on supervised entities; the imposition of a deposit insurance levy (sic); exemption from such levies under certain circumstances; the allocation of amounts levied to financial sector bodies; and matters connected therewith. We loved the “matters connected therewith” catch-all and commend the lawmakers for their “in case we did not think of everything” positioning. Bill 4, then, creates the legal mechanism for the collection and administration of the levies imposed in terms of Bill 3.
Bill 4 includes proposed amendment to the Financial Sector Regulation (FSR) Act to provide for the administration of levies imposed in terms of Bill 3; the imposition, collection and administration of deposit insurance premiums; and the amendment of the Pension Funds Act, Banks Act, Mutual Banks Act and FAIS Act to align with the FSR Act in respect of the financing of financial sector bodies. Again, what a mouthful… It left this writer thankful for being a mere financial hack rather than a legal and compliance ‘body’.
Whatever the case, we can expect more money to be extracted from FSPs in coming years. According to Mark Bechard, Managing Editor at Moonstone, these Bills will result in FSPs “paying significantly higher levies”. By his estimate, a sole-person FSP will pay 12.61% more in levies under the proposed Bills, compared to the 2021 total, while an FSP with a key individual (KI) and 10 representatives will pay around 29.9% more. Staggering!
Yet another levy burden for advisers and brokers
These levies will be collected from the financial sector to fund the Financial Sector Conduct Authority (FSCA), the Financial Services Tribunal (FST), the Financial Ombud Scheme Council (FOSC) and other statutory ombudsman schemes, the Prudential Authority (PA) and yet another structure, the Corporation for Deposit Insurance (CDI). The CDI is a new structure that will be established specifically to administer a Deposit Insurance Fund to protect bank deposits of financial customers. More on the CDI in a moment.
The new levies include a two-year special levy to either the PA or FSCA; a levy to fund the FST; and another for the FOSC. Thanks to Moonstone for publishing the following estimated impact of proposed levies per Schedule 2 of Bill 3, applicable to entities regulated by the FSCA, as compared to 2021 levies.
- The FSP levy for Categories I and IV would increase from R3792 to R4000, a 5.49% increase.
- The FSP levy for Categories II, IIA and III would go up from R7642 to R8000, a 4.68% increase.
- The FSP representative levy would increase from R605 to R620, or 2.48%.
- The FSP representative levy for Category A would increase from R250 to R280, or 12%.
- The levy on funds under management would go up by 0.73%.
- The FAIS Ombud FSP levy would decrease from R1172 to R1100, or 6.14% lower.
- The FAIS Ombud FSP representative levy would increase from R447 to R690, an increase of 54.36%.
In addition, FSPs would pay a FST levy of 2.5% of the FSP levy, including representatives and KIs; a FOSC levy of 2.5% of the FSP levy, including representatives and KIs; and for two years, a special levy of 7.5% of the FSP levy. National Treasury was accepting comments on the legislation until Monday, 7 February 2022, and the Financial Intermediaries Association of Southern Africa (FIA) has confirmed that it made a submission on behalf of its intermediary members.
The tip of the financial sector regulation iceberg
Sadly, the abovementioned legislation is just the tip of the regulation iceberg. Another Bill, the Financial Sector Laws Amendment (FSLA) Bill was recently described by Dr Brian Benfield, Retired Professor, Department of Economics at the University of the Witwatersrand as “yet another bureaucratic power-grab”. He said the FSLA Bill, as proposed, contained “dubious” depositor insurance provisions and introduced “significant costs” among other concerns.
In an article on Biznews.com, Benfield said that the Bill’s ill-thought deposit insurance scheme was likely to introduce further moral hazard to the financial services sector rather than reduce it. Of greater concern is that the proposed flat premium that would be levied against banks and insurers contradicts the fundamental insurance principle that insurance premiums be based off the nature and extent of the risk involved. Our brief comment on the CDI thus begins with Benfield’s dismissal of the institution as “yet another state-owned enterprise”.
South Africa will get another statutory body instead of a “registered insurer [that] complies with statutory solvency and reinsurance margins, and charges each institution an individually-assessed premium”. Another market commentator reflected that the CDI should have come with its own enabling Act, in the same way as the Road Accident Fund or Unemployment Insurance Fund.
Countering moral hazard with yet moral hazard
The FSLA Bill appears to introduces more risk than it counters. Its objective of maintaining financial stability and protecting the interests of depositors through the orderly resolution of troubled financial institutions is noble; but according to Benfield the legislation places too much power in the hands of the South African Reserve Bank (SARB).
“SARB personnel [will be] endowed with extensive discretionary powers, including the power to cancel or suspend an institution’s existing contracts with outside parties; to force the institution to transfer assets or liabilities, amalgamate or merge; and to cancel shares or issue new ones,” he writes. “Bestowing such wide-ranging unconstrained powers on bureaucrats violates the fundamental requirements of the Rule of Law”.
Writer’s thoughts: On the topic of deposit insurance, I briefly contemplated diving down the Insurance Guarantee Fund (IGF) rabbit hole; but figured readers had enough in their pipes for a single newsletter instalment. Instead I conclude with a two part question. Are you concerned with the proliferation of levies and charges in the financial services sector? And what are your thoughts about the apparent blurring of lines between levies, premiums and taxes?
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