South Africa's financial regulators are sheep in sheep’s clothing

South Africa has implemented the "Twin Peaks" model of financial sector regulation. Two regulators, the Finance Sector Control Authority (FSCA) and Prudential Authority housed in the South African Reserve Bank (SARB), are the twin agencies – “peaks” – of the new model. 

They were formed with the passing of the Financial Services Regulation Act that “gives the SARB an explicit mandate to maintain and enhance financial stability”. Both came into operation on 1 April 2018.

The FSCA replaces the Financial Services Board (FSB) and has control over financial service providers, insurance companies and banks, the last of which was excluded under the old FSB.  It’s responsible for “protecting the consumer and enforcing market conduct”:

●       Protect financial customers by promoting their fair treatment by financial institutions.

●       Enhance and support the efficiency and integrity of financial markets.

●       Assist in maintaining financial integrity.

The Prudential Authority’s mandate is to “to promote and enhance the safety and soundness of regulated financial institutions”:

●       Promote the safety and soundness of financial institutions and market structures.

●       Protect financial customers against the risk of financial institutions failing to meet their obligations.

●       Assist in maintaining financial stability.

According to its website, the PA is committed to the SARB’s values, policies and procedures and the “values of respect and trust, open communication, integrity, accountability and excellence”.

South Africa’s banking sector is highly regulated with high barriers to entry which is one of the reasons, if not the main one, the sector is so concentrated.  The concentration ratio is over 80%, which is oligarchy to near monopoly. In 2016 six banks – Standard Bank, Absa, First National Bank, Nedbank, Capitec and Investec – accounted for over 90% of all retail deposits. 

In 2016 the IMF’s David Lipton said South Africa’s banks are among the country’s private sector’s “privileged markets” – eerily reminiscent of the EFF’s “white monopoly capital” accusation although he never meant it that way – that “damage competitiveness by keeping business costs high”.  He pointed out “success” and “innovations” in other countries including Kenya that “resulted in “higher rates of financial inclusion” which is absent in this country.

While there is some competition in the sector particularly after the entrance of start-up Capitec, Munacinga Simatele found the larger – big four or five banks – have relatively high transactions fees which in 2015 was over R53 billion from R38 billion in 2010, a significant contributor to revenue. 

The Reserve Bank’s stringent regulations include capital adequacy ratios that must be maintained, prudential laws and other requirements of the Banks Act. 

However, government and SARB gave banks the power to self-regulate their market conduct and customer relations, extraordinary power – the keys to the financial kingdom, so to speak – other sectors don’t have particularly after the introduction of the Consumer Protection Act (CPA) that established clear rules of market conduct for various industries.  Indeed, the Financial Services Laws General Amendment Act 45 of 2013 exempts the banking industry from the operation of the CPA and the purview of the National Consumer Commission. 

Customers who experienced unfair or poor treatment could either try to resolve the problem on their own with their bank, and good luck with that, or refer it to the industry-funded, nominally “independent” Ombudsman for Banking Services, a unit of The Banking Association South Africa. 

The Banking Ombudsman is not a statutory regulator but a voluntary organisation, although there’s a proposal the twin peaks model will include an ombudsman. Until then, the introduction and scope of the FSCA and PA, the “new sheriffs in town”, which have explicit mandates of protecting financial customers, appear encouraging.  But are they all they make out to be?

Remember that historically the (post-1994) government has been reluctant to take issue with banks’ practices and prefer to leave them to their own devices.  (How with all its regulations the SARB never foresaw African Bank’s collapse is a mystery.)  

In 2008 the Competitions Commissions wound up its tepid investigation into excessive bank charges, among the highest in the world.  At the time newly appointed finance minister Pravin Gordhan (later in some circles considered “Sir” Pravin, South Africa’s “Horatius at the bridge”) backtracked from a similar undertaking after the banking association reportedly threatened to review their interests in the country.  He allowed them to continue “self-regulating” despite everyone knowing high charges and confusing fee structures were inhibiting customers and the economy including the poor who lacked banking services.

Soon after his intervention ostensibly on behalf of customers, charges and fees went up significantly. This matches banks’ fee revenue escalating 40% from 2010 to 2015.  Today there’s still dissatisfaction including among social grant beneficiaries having to pay R10 a transaction to get money from an ATM when it was originally understood it would be free or at minimal charge.  R10 buys a litre of milk, a loaf of supermarket bread or other basics, which is significant if you’re poor.

But already a harbinger is the twin peak sheriffs appear unwilling to take on the powerful banking empire leaving me wondering if their mandates are nothing more than the usual rhetoric. 

Out of consumer activism, I sent a complaint to the FSCA in 2018 to test their mandate.  But early May, only one month after they began operating, they declined to investigate Standard Bank for charging its credit card customers for “value-added services” even if they don’t want them. They claimed it does not “fall within our jurisdiction. The best forum to deal with this matter is the Banking Ombudsman”. 

It's strange they should take this position when their mandate is purportedly to “protect the consumer and enforce market conduct”; that Standard Bank was already under scrutiny by the National Credit Regulator (NCR) for a different aspect of the same matter and that the practice is outlawed under the Consumer Protection Act (“bundling”). 

They refused to say why it fell outside their jurisdiction, or what their purpose is if not to investigate banks’ alleged problematic conduct.  (However, last week, the FSCA advertised on radio stating their mandate includes “control over financial service providers, insurance companies ... and banks", and "protecting customers".) 

Instead they outsource their legal duty of “protecting financial customers” and resolving financial institutions’ alleged unfair treatment to the banks’ representative body, continuing to allow the pre-twin peaks practice of self-regulation. Wasn’t twin peaks supposed to be the start of a new consumer-protection era?

I put these issues to a legal expert on financial regulation and the twin peaks model, Andrew Schmulow.  He was nonplussed as he understood the FSCA should have jurisdiction.  In the absence of them giving reasons, he suggested they only “protect consumers at scale”.  I didn’t agree because if we assume tens or hundreds of thousands of customers are being charged for value-added services they don’t want, potentially Standard Bank is earning millions a month for doing nothing.  Is that not “at scale”?  He had no answer.  (The bank didn’t respond except to say they’re not doing anything illegal.)

The Prudential Authority values “respect, open communication, integrity, accountability and excellence”.  But the conclusion I’ve come to is like most of South Africa's statutory agencies, they and FSCA are sheep in sheep's clothing.  I acknowledge it’s early days yet and they may improve, as the expert suggested, but how they perform now sets the tone for the future, and it’s not encouraging.  As I discovered with only one example, which I’m loath to generalise but in the absence of an explanation must go with, banks are still not answerable to anyone except themselves regarding their customers and market conduct.

Consumers and citizens must not be misled into believing the regulators’ function is to protect them, but to maintain the status quo of and for the privileged markets – big businesses’ and banks’ interests.  We are in for more disappointment unless the National Treasury and South African Reserve Bank clarify and strengthen their intended purpose, operation and commitment to ethical market conduct. 

I put Prudential Authority's “accountability, open communication and integrity” and their “protecting financial customers against risk” to the test when I approached them about Standard Bank's lack of response response and measures to a large-scale fraud attack – a “scam” – in 2018 on credit card account holders that affected me too. There was no response.