Edition: September / November 2017
Editorials

MARKET REGULATION

Dissimilar twins

Now that the Financial Sector Regulation Bill has been passed by
parliament, a hurdle prior to implementation must be overcome.
Assumptions should be matched with practicalities.

As if the stressed National Treasury didn’t already have enough to worry about, while adapting to the regime of finance minister Malusi Gigaba, another problem looms. It’s how to staff the mooted Financial Sector Conduct Authority – a sibling in the new ‘Twin Peaks’ model of financial regulation – slated for launch during the second quarter of next year.

The one sibling, to be housed in the SA Reserve Bank (SARB), is the prudential regulator. The other is the FSCA, to be the regulator of market conduct. It is seen by the Financial Services Board as a reconfigured mutation of itself but with additional responsibilities for regulation and supervision of all players, banks included, amongst financial institutions.

“The FSB is in the process of reviewing its structures, frameworks and resources in preparation for the shift to its new Twin Peaks focus,” says the present regulator of non-banking activities in the financial sector. The FSCA will “replace” the FSB, it explains in a newsletter.

Tshidi . . . rumble ahead

BIG BUCKS, SMALLER BANGS

No problems on the SARB side. Well-staffed, its reputation is solid. Not quite so well and good on the FSB side, however.

For starters, who’s to lead the FSB into FSCA absorption? Who’s to review the regulatory strategies?

FSB executive officer Dube Tshidi is already beyond the retirement age of 63 that normally applies in the organisation. He’ll be 67 by the time the FSCA kicks off. Yet, if only because FSB succession planning doesn’t indicate an alternative candidate internally, he’s likely to become the first FSCA commissioner.

The procedure to make selections, for commissioner and deputy commissioners, cannot be prescribed by the finance minister until the bill has been signed into law. Once prescribed, it’ll take another protracted period for the selection procedures to be followed if openness and fairness are to apply.

At the FSB, the tier below Tshidi comprises the deputy executive officers. Here the holes in key portfolios are gaping.

Jonathan Dixon (insurance) resigned to take up a senior position in Switzerland, possibly having sensed that a white skin disadvantaged prospects for promotion. Rosemary Hunter (retirement funds) departed in a storm of litigation over alleged prejudice to members of cancelled ‘dormant’ funds. Bert Chanetsa (investment institutions) left on reaching retirement age, apparently without encouragement to stay, at the critical point of two competitors to the JSE being introduced.

None have been replaced. A flood of candidates can’t be expected for jobs that might not exist, or whose specs might substantially change, in a few months’ time. Meanwhile, to put it mildly, the FSB exco is denuded. These days the FSB lacks even a chief operations officer and a chief information officer.

In terms of reputation, too, the FSB can hardly hold a candle to SARB. At least on transparency and accountability, there’s a chasm between the pretensions in the FSB’s annual report and users’ experiences on the ground (TT June-Aug).

Also reflect on efficiency. For instance, in four years the FSB has not produced an amendment to Regulation 28 of the Pension Funds Act on over-the-counter derivatives. Consultation processes go on and on.

Yet it’s more than a year since National Treasury, obviously wanting to stimulate action, publicly warned: “Given the global nature of OTC derivatives markets...regulation was necessary to achieve the policy objectives of reducing systemic risk, increasing transparency and financial stability, and enhancing the integrity of financial markets.”

In its order of priorities, the FSB has produced regulations for hedge funds. This is seemingly more pressing than derivatives, once famously described by Warren Buffett as weapons of mass destruction. Be forewarned on FSB capacity.

It’s one thing to have regulations. It’s another thing to ensure compliance. Take two topical examples.

The first relates to insider trading. When it comes to the bond market, department head Solly Keetse should be tearing his hair.

The investigation by senior counsel Geoff Budlender, into Trillian Capital Partners, hit a brick wall in attempting to unravel suspected shenanigans by traders who knew in advance of Nenegate. All they needed to do was make a few calls on offshore accounts, presumably by phone, and there’d be no records for the FSB to traverse.

Not much evidence in policing of market conduct there. Not much evidence of attempts to address it either. The FSB smacks smaller guys for insider trading in the equities market. Bigger guys, wanting to crook in the bond market, are untroubled.

The second is maladministration at Bophelo Benefit Services and Bophelo Benefit Fund, involving some R500m of mineworkers’ pension savings, from right under the nose of the FSB. That nothing happened from its investigation a year previously remains for the FSB to explain.

The statutory recognition of beneficiary funds, at the behest of the FSB to prevent another Fidentia debacle, was not particularly effective in preventing a replay of ominous similarity at Bophelo. This speaks to the FSB’s efficacy, or lack of it, in the enforcement of existing regulations.

It also speaks to the FSB’s efficacy, or lack of it, in the investigations that precede the grant of licences to act as authorised providers of financial services. Bophelo shouldn’t have happened. The frustration of the Pension Funds Adjudicator at licensing of Akani Retirement Administrators also springs to mind (TT June-Aug).

If these recent instances are illustrative of what’s falling through the cracks at the FSB, there’s cause to worry. Which takes the focus back to staffing of the future FSCA, specifically for competence and credibility. Such characteristics cannot be based on the premise of old dogs adapting to new tricks. And this as Fintech begins to rock the financial-services industry.

In theory, the FSCA opens opportunity for recruitment of talented graduates with appropriate qualifications to launch their professional careers. The Securities & Exchange Commission of the US, which similarly seeks to protect investors by promoting fair and efficient markets, draws from amongst the best and brightest of university leavers because of the early exposure and experience they gain within its ranks.

In practice, it will take more than an airbrushed FSB in FSCA guise to become an aspirational destination. Money isn’t a problem because the FSB, an entrenched bureaucracy as matters stand, has a huge budget predominantly funded by levies (see chart). Levy payers, significantly including pension funds, have their own views (rarely shared publicly) on value received.

Where the executive officer is paid over R6m a year, and each deputy executive officers over R3m, remuneration levels aren’t exactly mean. They’re multiples against the public sector and competitive against the private. Elements a whole lot more inspirational than pay will have to top up the mix.

National Treasury has a real problem. Or a great opportunity. It’s about the FSCA leadership, stupid.