1. A safer financial sector to serve South Africa better 2015 reform agenda Presenter: Ingrid Goodspeed | Chief Director: Financial Sector Development, National Treasury 17 February 2015 Safari into consumer credit 2015

2. A predictable result of the financial crisis was an overhaul of the regulatory framework of the global financial system Strengthen global financial stability and mitigate systemic risk from –interconnected nature of the financial sector –systemically important financial institutions (SIFIs) –shadow banks –over-the-counter derivatives Co-ordinate supervision within and between countries to –Mitigate regulatory arbitrage –Level playing fields Ensure the reckless behaviour, irresponsible practices and misaligned incentives do not happen again Establish a global financial system that serves the real economy Financial stability is to be achieved without sacrificing other policy objectives: appropriate market conduct (and consumer protection), market integrity and financial inclusion 2

3. The overhaul saw several measures to reduce the systemic risk across the financial system Banking –Improve the safety and soundness of banks (enhanced capital and liquidity requirements – Basel III) –Are banks that are too big to fail, too big to manage and too big to supervise therefore too big to exist? Insurers: –Reinforce stability with a revised prudential regulatory framework (Solvency II) (Solvency Assessment and Management in South Africa) Financial market infrastructures (payment systems, exchanges, central counterparties, central securities depositories, trade repositories): Improve transparency and regulatory oversight of over-the-counter derivatives markets Shadow banking (bank-like activities by non-banks) –All financial market participants need to be appropriately regulated and subject to supervisory oversight –Learn the lessons from African Bank Crisis management and resolution: Ensure that the entire cost of failure is not carried by taxpayers including bail-in and living wills 3

4. … and improve the behaviour of financial institutions and ensure their fair treatment of consumers Market conduct problems unless dealt with quickly can become prudential and possibly systemic problems The financial crisis highlighted market conduct failures (sub-prime lending) Subsequent market conduct abuses have come to light including –Fixing benchmarks (LIBOR, EURIBOR, foreign exchange and commodity) –Mis-selling products such as payment protection insurance –Abusing emolument attachment orders, debit orders and consumer credit insurance –Failing to take reasonable care to ensure the suitability of advice What needs to be done? –Improve the protection of consumers through a market conduct regulatory framework that ensures the fair treatment of consumers –Promote competitive markets to provide consumers with greater choice amongst financial services and –Place pressure on providers to keep prices competitive and service quality high –Support consumer redress by strengthening the financial sector ombuds system 4

5. A safer financial sector to serve South Africa better Reform proposals in four priority areas “A safer financial sector to serve South Africa better” policy document is available at www.treasury.gov.za Financial Stability / micro-prudential Combating financial crime Market conduct Access to financial services Reserve Bank to lead on macro-prudential (systemic stability) micro-prudential (safety and soundness of institutions) Group supervision Much wider regulatory net Higher standards apllied consistently across all sectors Focus on outcomes for customers: treat them fairly Fit and proper requirements Ombud schemes Financial literacy Treasury to lead Co-operative and dedicated banks and Postbank Microinsurance framework International co- operation (G20 Global Partnership for Financial Inclusion) Financial inclusion forum (2015) Enforcement agencies to lead Investigating and prosecuting abuses Continued work with international partners Ensure coordination, co-operation and information-sharing between regulators particularly if an event threatens the stability of the financial system

6. Twin-peaks model of financial regulation gives equal weight to prudential and market conduct regulation Regulators will have clear internal policies and procedures for enforcement, enhanced transparency and accountability with a strong appeal mechanism through the Tribunal Prudential Authority Enhanced micro-prudential oversight and regulation for banks, insurers, financial market infrastructures, shadow banks, credit providers Special focus on conglomerates Market conduct regulation that is complete, harmonised, integrated and proportionate of all financial services Increased focus on customer outcomes Targeted interventions where there is market failure Financial Sector Conduct Authority Financial Services Tribunal and Enforcement ₋Promote financial stability and assess and respond to financial stability risks (FSOC) ₋Crisis management and resolution ₋Inter-agency co-ordination of financial stability issues Financial Stability (responsibility of the SARB within agreed policy framework)

7. Twin peaks reform process to date February 2011: Policy paper “A safer financial sector to serve South Africa better” July 2011: Policy proposal to move to a twin peaks model of financial regulation approved by Cabinet February 2013: Roadmap “Implementing a twin peaks model of financial regulation in South Africa” December 2013: First draft of Financial Sector Regulation Bill published January to February 2014: Consultation with stakeholders. Comments deadline was 7 March 2014 December 2014: Second draft of Financial Sector Regulation Bill (with Market Conduct Policy Framework) January – February 2015: Consultation with stakeholders 2 March 2015 comments deadline for Financial Sector Regulation Bill 6 April 2015 comments deadline for Market Conduct Policy Framework 7

8. Highlights of the Financial Sector Regulation Bill Confers functions on the SARB in respect of financial stability and powers for systemic oversight Establishes the Prudential Authority and the Financial Sector Conduct Authority and confers on them functions and duties Provides for co-ordination, co-operation, collaboration, consultation and consistency between the Prudential Authority, the Financial Sector Conduct Authority, the National Credit Regulator and other organs of state Sets up a wide scope of application to minimise potential for regulators gaps (definitions for financial institutions, financial product and financial service) Introduces a legal framework for regulating and supervising financial groups, from both a prudential and a conduct perspective Provides for powers for the licensing of financial institutions; gathering information, conducting on-site inspections and investigations Provides for enforcement powers Establishes the Financial Services Tribunal Strengthens the financial sector ombuds system 8

9. Highlights of the Financial Sector Regulation Bill Definition of financial product Participatory interest in a collective investment scheme Interest, subscription, contribution, or commitment in a pooled fund Long-term or a short-term insurance policy (Long/Short-term Insurance Act) A benefit provided by a pension fund organisation (Pension Funds Act) or a friendly society (Friendly Societies Act) Deposit (Banks Act) Health service benefit provided by a medical scheme Credit agreement A product designated by the Minister of Finance as a financial product 9

10. Highlights of the Financial Sector Regulation Bill Definition of financial services Services performed in relation to financial products, foreign financial product, securities, market infrastructure or the payment system –promotion, marketing or distribution –providing advice, recommendations or guidance –dealing or making a market –operating or managing, or providing administration services –services provided in relation to credit agreements, including legal services –services provided by payment system participants A financial service designated by the Minister of Finance as a financial service 10

11. Highlights of the Financial Sector Regulation Bill Licencing 11 Phase 1: Licensing requirements remain set by the relevant sectorial law Regardless of what authority issues the licence both Prudential Authority and Financial Sector Conduct Authority can apply their regulatory, supervisory and enforcement powers on all financial institutions New licences – two key approach Phase 2: More significant changes to licensing process as prudential and conduct frameworks develop

12. Highlights of the Financial Sector Regulation Bill Standards The Bill introduces new standard-making powers, which will allow the two authorities to impose requirements (subordinate legislation) on financial institutions The Prudential Authority can set prudential standards, including to maintain financial stability, for matters such as liquidity, leverage, risk management and capital The Financial Sector Conduct Authority can set conduct standards for matters such as product design, advice, disclosure, transparency Where standards overlap, the two authorities may set joint standards A clearly defined public consultation process is set out SARB may, after consulting the Prudential Authority, impose requirements on SIFIs through prudential standards issued by the Prudential Authority 12

13. Highlights of the Financial Sector Regulation Bill Enforcement Authorities provided with comprehensive powers in the Bill for undertaking administrative and enforcement action Financial Services Tribunal established as independent arbiter Administrative actions –Authorities must adopt written administrative action procedures –An administrative actions committee may be established to advise the authority on appropriate action in complex cases –All administrative actions are subject to the Promotion of Administrative Justice Act Enforcement actions If there is a breach of a financial sector law or standard, the authority can choose to: –Remediate the situation, which aims to rectify the breach and ensure it does not recur including by issuing directives entering into enforceable undertakings declaring practices as undesirable applying to court for appropriate orders imposing an administrative penalty –Institute criminal prosecutions 13

14. The twin peaks regulatory model is comprehensive and coherent What is the role of the NCR? 14 Financial stability: NCR is a member of the Financial Sector Oversight Committee

15. Implementation of twin peaks regulatory framework 15

16. Other financial sector regulatory reforms 2015 focus areas Retirement reform –Improve governance and disclosure of retirement funds –Reduce costs and ensure appropriate performance incentives –Harmonise regulation and supervision between private and public retirement funds –Design a uniform tax and contribution system –Reduce any bias against passive investment funds Strengthen the supervision of investment funds, starting with hedge funds Demarcate medical schemes and health insurance products Extend access to poorer households and communities as an important developmental objective Further development of the credit infrastructure to enable improved access to credit by small enterprises Modernise exchange control system to attract inward and outward FDI Implement measure to reduce over-indebtedness 16

17. Measures to address household over-indebtedness Deal with unlawful emolument attachment orders –Employers to investigate and address EAOs they are deducting from employees’ pay –Government to implement the Public Service Debt Relief Project –Magistrates Courts Amendment Bill Establish norms and standards for debit orders –Enable customers to confirm debit orders before they take effect –“Blacklist” abusive / fraudulent debit order users –Penalise debit order collectors with deficient mandates Harmonise the treatment of debt collectors, particularly legal firms Finalise holistic measures to deal with problems in consumer credit insurance Support banks’ provision of unilateral relief e.g., DCRS, restructured terms Expand voluntary debt mediation measures Introduce affordability assessment criteria (dti) 17

18. A safer financial sector to serve South Africa better 2015 reform agenda Presenter: Ingrid Goodspeed | Chief Director: Financial Sector Development, National Treasury 17 February 2015 Safari into consumer credit 2015