Regulatory update

1. Regulatory update Ismail Momoniat Ismail.momoniat@treasury.gov.za National Treasury

2. Outline1. Global context2. “Red book”3. Next steps

3. Global financial crisis highlighted serious deficiencies in global regulation • Global financial crisis highlighted: • Structural macroeconomic imbalances • Deficient / inappropriate financial system regulation • Regulations • Regulators • Initial focus has been on • regulation • Might end up talking about imbalances

4. The initial response of the global community informs the current reforms London Summit Pittsburgh Summit G-20 Min/Gov St Andrews Min/Gov Sussex Min/Gov London Washington Summit Nov’08 Jan ’09 Feb Mar Apr May June July Aug Sept Oct Nov FSB FSF re-established as FSB with additional members 2nd Plenary meeting in Paris 1st Plenary meeting in Basel

5. Priorities • Improving global and domestic co-ordination • Strengthening the global capital framework for banks • Making global liquidity more robust • Reducing the moral hazard posed by systemically important institutions • Strengthening accounting standards • Expanding oversight of the financial system • Re-launching securitisation on a sound basis • Promoting adherence to international standards Decisions Consolidated list of 93 G-20 / FSB recommendations Priorities

6. From this we have drawn our own priorities “A safer financial sector to serve South Africa better” discusses our priorities Institutional architecture of regulation  Who regulates? Shift to twin peaks Strengthening our approach to prudential regulation  How do we regulate risk? New banking regulations (Basel 2.5 and Basel 3) New insurance rules (Solvency II) Financial Markets Act Credit Ratings Services Act Financial Services General Laws Amendment Bill Strengthening our approach to market conduct  How do we regulate behaviour? Important that financial services firms must be held to a higher standard (people’s savings and livelihoods are at risk, as is the entire financial system) Consumer protection regime needs to be enhanced

7. Outline1. Global context2. “Red book”3. Next steps

8. In South Africa, we have adapted international standards to our own circumstances

9. The global financial crisis has forced a rethink of the approach to financial sector regulation • Key lessons from the crisis: • “Macro-prudential” or system-wide approach complements micro-prudential approach • Market conduct regulation • Swift action to prevent contagion • Analysethe impact of • economic imbalances • asset price bubbles • rapid, possibly indiscriminate credit growth • financial engineering • procyclical regulations on the financial sector • Respond using a mix of traditional macroeconomic and financial sector tools: e.g. interest rates, capital reserve requirements, asset risk-weights

10. In banking, Basel II.5 and III introduce new requirements

11. Lessons from the crisis Focus on supporting stability and countercyclicality • Stronger prudential requirements in banking (2012 to 2019) • Improve quantity and quality of capital • Mitigate counter-cyclicality with a capital conservation buffer • Leverage (capital:assets) ratio • Liquidity ratios (liquidity coverage ratio and net stable funding ratio) • Stronger prudential requirements in insurance (2014/5) • Pillar 1: capital adequacy • Pillar 2: governance • Pillar 3: reporting requirements • Systemically important financial institutions • Increase scope of financial regulation • Private pools of capital • Over-the-counter derivatives • Credit rating agencies

12. Twin-peaks model of financial regulation gives equal weight to prudential and market conduct regulation • Reserve Bank leads on • Macro-prudential (systemic stability) • Micro-prudential • Responsible for: • Prudential regulation of banking and insurance • Assessing and responding to financial stability risks • Crisis planning • Financial Services Board leads on market conduct for financial services • Works closely with National Credit Regulator • Market conduct regulation of all aspects of financial services, including banking, insurance, advisory services etc. Market conduct including Enforcement Prudential Interagency review process will flesh out timelines, and decide how the prudential and market conduct aspects of certain activities will change (e.g. securities regulation)

13. Protecting consumers of financial servicesThe financial services industry is unique Financial services industry should be held to a higher standard of market conduct than other industries for the following reasons: • Loss of deposits or savings imposes immediate costs on consumers • The underperformance or even failure of financial products such as retirement annuities may inflict considerable hardship on consumers • Quality or appropriateness of financial products such as life, property and income-protection insurance is only established some time after purchase or when a disaster occurs • Many long-term financial contracts impose heavy penalties for cancellation and switching.

14. Safeguarding pensioners and supporting savings • Mandatory preservation - preservation is critical and urgent to maximise savings and retirement income. To be accompanied by restricted withdrawals across all retirement funds and products • Provident funds - immediate step to dealing with post-retirement leakage is to treat provident funds similar to any other retirement fund • Portability - ability to keep accumulated pension benefits with former employer or to transfer to new employer will entrench preservation • Enhanced disclosure and transparency – statutory requirement for minimum disclosures • Trustee education and governance – statutory requirement that trustees be fit and proper with certain minimum qualifications • Retirement annuity market to be reviewed with the objective of facilitating competition, reducing costs and improving transparency • Living annuities - expand the eligibility of living annuity provision to other intermediaries (e.g. Government Retail Bonds and CISs)

15. Financial inclusion Vital for inclusive economic growth Ensure that all South African have access to financial services that allow them to:

16. Retirement Reform Proposals • Four papers on retirement proposals released in 2012, as announced in Budget 2012, dealing with: • Options to encourage preservation, especially during job changes • Options to encourage annuitising at retirement • Simplifying the taxation of retirement contributions • Introducing individualtax incentivised saving plans to encourage short to medium term saving • The above retirement reform proposals were initiated by the policy document: “A Safer Financial Sector to Serve South Africa Better”, released and endorsed by Cabinet in 2011 • The primary aim of these proposals is to encourage household savings and ensure that individuals are not vulnerable to poverty, especially in retirement • These are urgent proposals to address major challenges in the current retirement system, especially member protection • Reforms meant to complement social security proposals and support Twin Peaks

17. Encouraging preservation before retirement • Current situation • Employees are allowed to cash in their retirement savings upon job changes, and therefore do not preserve • Key factors taken into account • Protection of vested rights • Workers should be permitted access in case of need • Preservation requirements should not deter workers from participating in the system • Administrative burden should not be too high • Defaults should be the ‘right’ defaults

18. Pre-retirement preservation proposals • Key proposals for Budget 2013 • Protect vested rights:retirement savings accumulated up to the date of the new rules coming into effect, including growth on these accumulated savings, will not be affected by the new rules • Default: upon leaving an employer, accumulated retirement savings will be automatically transferred to a preservation fund, of the employee’s choice or a default chosen by the employer • New contributions after the date of legislation/new rules will be subject to new rules: • workers can withdraw annually an amount equal to the greater of the old age grant and 10% of the initial deposit into a preservation fund • unused withdrawals can be carried forward

19. Post-retirement preservation proposals • Key proposals for Budget 2013 • Phase out the means-test for the old age grant by 2016 • It discourages saving for retirement and annuitising • Raise de minimis requirement on annuitisation to R150 000 • Protect vested rights: employees can still take all accumulated savings on date of implementation, and growth on them as a cash lump sum in retirement (i.e. not annuitise) • Existing members above 55 years not to be required to annuitise, to avoid disrupting their retirement plans • Members below 55 years required to annuitise new contributions and growth on them after date of the new rules • Provident fund members to enjoy same tax benefits as pension fund members

20. Post-retirement preservation Current situation Members of provident members are not compelled to annuitise at retirement So they can take entire money as cash lump sum; many spend it quickly Members reluctant to annuitise since they lose old age grant if annuity larger than the grant (problem of means-test) Key factors taken into account Means test on state old-age grant is an implicit tax on annuitisation Vested rights crucial, especially for those near retirement Reforms needed to make annuities market function better for low-income workers Standard annuity rules required as part of tax harmonisation

21. Governance • Whistle-blowing protection for Board members, valuators, principal/deputy officers, and employees who disclose material information to the Registrar. • Requires a fund board member to attain skills and training as prescribed by the Registrar, within a certain period. • Extending personal liability to employers in respect of non-payment of pension contributions to a pension fund. • Protection for board members from joint and several liability, if they act independently, honestly, and exercise their fiduciary obligations. • To require pension funds to notify the Registrar of their intention to submit an application to register prior to commencing the business of a pension fund.

22. Improving fund governance • Pension fund governance problems emerge from weaknesses in governing boards of trustees • No relevant experience and skills • Conflicts of interest • The Financial Services Laws General Amendment Bill 2012, which contains various provisions pertaining to governance, is currently before Parliament • Proposals • The FSB is to monitor the appointment of trustees, including ensuring that trustees meet “fit and proper” requirements • The current Trustee Toolkit may be elevated into a basic, independent, compulsory and free training kit for Trustees • Strengthen governance by elevating PF Circular 130 to a Directive

23. Retirement income proposals • Budget 2013 proposals • Trustees of funds must guide the member during contribution phase until the annuitising phase, and not only during contribution phase • All retirement funds to identify and have suitable default annuity products they can automatically put their members into • Living annuities to be permitted as default, but “suitability” to be guided by principles and rules (e.g., limited investment choice, simplicity, transparency, cost effective and limited draw down levels) • Splitting annuities to be made easier • Retail Distribution Review of FSB to be supported • Opening living annuity market to more competition

24. Simplifying the taxation of retirement contributions and also incentivising non-retirement savings • Current situation • Different bases used to calculate retirement contributions and related tax deductions, making system complex & increasing costs • Limited tax equity as some individuals and employers contribute more than is sufficient, and thereby excessively benefiting • Pension and provident funds contributions taxed differently; members of provident funds not eligible for a tax deduction, only the employer • Limited incentives on non-retirement savings might be contributing also to low household savings • Budget 2013 proposals • Base will be the greater of remuneration or taxable income • New contribution rate of 27.5%, with annual rand cap of R350 000 • Provide same tax dispensation for provident and pension funds; i.e. provident funds members to directly receive tax benefit for their contributions • Proceed with previously announced tax incentivised individual saving accounts, in addition to the current tax-free interest allowance

25. Improving annuities market • Current situation • Two types of annuities; living and life • Living annuity can be complex to manage, costly and might not protect against longevity risk (ie risk of outliving your retirement savings) because of high draw down rates and market volatility • Life annuity protects against longevity risk, but can be opaque (since they are an insurance product) and some make it hard to bequeath • More people opting for living annuities • Key considerations taken into account • Many flaws in retirement income market caused by lack of preservation, addressed above, and problems with intermediation, being addressed by the FSB • High levels of heterogeneity means specifying a particular default difficult • Simpler products to be preferred to more complex ones

26. Outline1. Global context2. “Red book”3. Next steps

27. Substantial amount of legislation and regulations Legislation • Twin Peaks legislation later this year to establish new system • Financial Markets Act  promulgated 3 June • Credit Ratings Services Bill  promulgated • Banks Act Amendment Bill  tabled • Financial Services General Laws Amendment Bill  tabled • Framework for Financial Regulation bills  drafted Regulation • Market conduct • Treating Customers Fairly  out for consultation • Prudential • Basel 2.5  signed • Basel 3  watch this space • Solvency 2 / SAM  in consultation

28. What does this mean for South Africa? • Aim to be in the middle to front of the pack globally, e.g. OTC derivatives • Be pragmatic and flexible, e.g. banking regulations • Consult heavily • National interest and national priorities • Focus on long-term economic growth, job creation, and inequality • Stable and growing financial sector (and Gateway to Africa) means we need a world-class regulatory framework • Focus on what matters for us (market conduct) not for the world (bankers’ bonuses)

29. What does this mean for Financial Planners? • Much stronger focus on Market Conduct • Treating Customers Fairly • How do financial planners and intermediateries respond to twin peaks? • Focus on the interests of the customer • Focus away from constant selling of new products just to get a commission • Financial intermediaries/advisors often also offer services as debt counsellors, tax practitioners etc • Serving the interest of the customer • Key principles:Enhancing transparency and disclosure • Improving incentive and fee structures (i.e. commissions) • Reducing costs for the customer • Consultation process is still open for intermediaries to provide input

30. Thank you