South African banks await final details of a new initiative by banking regulation authorities to cap charges widely seen as excessive by bank customers. The initiative is called Treating Customers Fairly (TCF) after a UK programme of the same name. Tom Nevin discusses the implications for both banks and customers.
CF is part of the so-called Twin Peaks initiative, the other peak being a separate regulatory thrust that aims to modulate the prudential sector in such aspects as insurance, assurance and other financial products.
The Chairman of the Ombudsman for Banking Services, Advocate John Myburgh SC, explains the ‘Twin Peaks’ approach to financial regulation as “essentially splitting market conduct regulation from prudential supervision, giving the Financial Services Board (FSB) more power to deal with banks reluctant to lower their fees under the Treating Customers Fairly (TCF) reform initiative and entrusting prudential regulation to the South African Reserve Bank”.
South African banks’ wide-ranging charges across their transaction spectrum have long been a bone of contention with their customers. The issue came to a head in 2006 when, led by the Competitions Commission, a two-year probe into bank overcharging was instituted.
The banks were asked to ‘play the game’ and reduce banking services fees considered by some ‘as the highest in the world’. The softly, softly call came in a Competition Commission-appointed Banking Enquiry Panel chaired by Judge Thabani Jali.
The objectives of the panel were “to ensure greater competition in the retail banking sector in South Africa and achieve real benefits for customers through lower costs, better service and greater access of financial services to poor communities whilst at the same time preserving the stability of the banking system”, according to the National Treasury.
Consequent adjustments by the banks yielded some relief for customers but fell short of fulfilling the 28 specific remedies identified by the Commission.
“Across the board, banks have to a lesser or greater degree gone some way to reducing fees,” says the Ombudsman for Banking Services, Advocate Clive Pillay. “I’m not suggesting, however, that they have gone far enough.”
Just how much headway has been made in the intervening years since Jali depends on whom you ask. By and large retail banks believe encouraging progress can be reported while those in the regulatory arena feel more is desired. That a balance of “fairer fees” in the retail sector particularly is still some way off and needs some ramrodding is borne out by the emergence of a raft of new regulatory measures that will soon take legal effect in both consumer and prudential financial services environments.
The banks’ response to the Jali commission’s recommendations was considered lacklustre, to the point that the Finance Minister called their heads to a meeting and read them the riot act. The banks may also have misjudged the rising ire of the regulatory authority – including the Financial Services Board, the Treasury, Reserve Bank, Department of Trade and Industry (especially the consumer affairs division) and the Competition Commission.
The new initiatives in the pipeline will make it more difficult for banks to set high fees and charges without having reasons acceptable to regulators for doing so.
“TCF was originally proposed as a consumer protection approach in respect of the non-banking financial services sector, of which we are currently the regulator,” says Leanne Jackson, Head of the newly-established Treating Customers Fairly bureau at the FSB.
On the enforcement muscle available to regulators, the intention is to bring infringement fully into the regulatory framework “so we certainly intend to have all the enforcement powers that would apply to any regulatory breach”, explains Jackson.
“We do intend to build this into legislation formally. Exactly which mechanism we use, which piece of legislation and when is still work in progress. A TCF regulatory framework steering committee is in place to set up recommendations on how best to do that, understanding that it would also have to fit into the broader regulatory and legislative changes that need to take place in order to move towards the Twin Peaks model.”
Drawing the sting
Banks have attempted to draw the sting from the government-led criticism by reducing the charges they levy on the accounts of South Africa’s very poor, but fees have remained largely unaltered for banks’ mainstream clientele while new charges, for example, a cheque deposit fee for paying into a home loan or credit card account, were introduced.
Across the financial spectrum, banks have made impressive inroads into the legions of this country’s unbanked, financially illiterate and those marooned from traditional banking services through distance and hard terrain. More than anywhere else, possibly worldwide, South Africa’s banks have ventured into deep rural regions and have brought financial services to those would-be customers previously considered “unbankable”.
Such a client base is expensive for the bank both to establish and to maintain. But it satisfies Pretoria’s needs to see a previously ignored sector of the public economy catered for and nurtured, and takes some of the heat off costs levied elsewhere on the banks’ clientele.
It also opens a new sector that might be unprofitable for now but which will pay future dividends. The banks consider the time, money and effort invested in developing the so-called ‘unbanked’ market well-spent. They also see themselves as developmental partners in the government’s drive to strengthen economic performance in the rural areas.
Not a good time to start messing with fees
For the banks, the ruckus over fees is happening at the worst possible time. It has come when economies are in collision, financial models no longer make sense in a Europe (still South Africa’s biggest trade and investment partner) where neighbouring economies vie in a race to the bottom, and where the financial merchandising pieces just don’t fit as they used to.
South Africa is caught in the First World’s vortex, and while it has so far escaped the tornado itself it must weather its own blustery economic climate. The financial services institutions say they’re getting the worst of it.
The banks probably have every right to feel badly done by.
The tightening fists of Twin Peaks and Treating Customers Fairly on their fee income, or non-interest revenue (NIR), come at a time of double whammy income loss and increased investment.
Their commitment to social responsibility, their obligation to a partnership with the government to help grow the rural economy by extending financial services to the unbanked, and the organic need to develop and nurture a more extensive customer base means an investment of no small measure to establish banking services where none or very little existed before, with no quick return.
“The underbanked segment is generally quite unprofitable to service, and notwithstanding there has been a lot of political regulatory pressure to serve this segment,” observes Imran Moten, Financial Services Lead in KPMG’s Management Consulting Advisory Division.
What other income avenues are available to the banks? Obviously there’s the opportunity to increase trade income from their proprietary book but markets have been quite volatile and generally depressed and there has been a respite in trade income.
The third area has been around wealth management revenues, the insurance and investment space when income has generally been down over 2010 due to the low interest environment and volatile equity market.
What’s left to take up the slack? Fees, from the non-interest income point of view, have been the easier piece of the pie to control and maintain profitability as interest margins have declined.
But to what extent this can be used by the banks is what the current brouhaha is all about.
For the posse of regulators ranged against the banks, the Jali Commission demonstrated that the financial services organisations failed to come satisfactorily to heel, even after five years’ latitude within which to do so.
The extent of the ire being experienced by the financial services regulatory authority was expressed by one highly-placed source in those ranks.
“In 2007, the Jali Commission went to a great deal of effort and spent a lot of money and time holding an inquiry that went on for two years to come up with a wide range of recommendations,” he expounds. “So now, after all this time, the question is: after a mission of no small magnitude, why is it necessary to have a regulator? Presumably the answer is that the banks have been slow in implementing the Panel’s recommendations. The Minister of Finance is on record as saying they have been ‘too tardy’. So now you have something that has much stronger impetus. Beforehand, you simply had the recommendations. Now the Twin Peaks and Treating Customers Fairly initiatives will be enshrined in legislation.”
Asked how legally binding these measures will be and whether or not they would have the necessary teeth, the reply was: “The transactional legislator, (the effective head of the Treating Customers Fairly initiative) can do three things. Firstly, if you’re not doing what you’re supposed to be doing, he can issue a compliance notice. If you fail to comply with that notice he can impose a substantial financial penalty. He can also order a suspension of the offending activity. You can be sure peer pressure will play an important part. Banks won’t want to be seen in transgression and out of step with expected behaviour.”
The FSB’s Leanne Jackson says that although TCF will have some explicit “rules-based” components, the primary intention is to protect financial services consumers by requiring firms to develop their own governance processes and management information tools, as appropriate to their business, to demonstrate that they are in fact delivering the six TCF fairness outcomes to their customers.
“As such,” she points out, “TCF does not seek to introduce price-setting or to be prescriptive on product design. However, having said that, there are instances where the market conduct regulator may need to intervene in cases where products or product features pose unacceptable risk to customers – particularly vulnerable customers.”