Hon Speaker, hon members, hon Minister of Finance, hon Ministers and hon Deputy Ministers who are present here, the rising centrality of financial services in economies across the globe has raised a number of critical questions centred upon the practices and regulatory environment for the financial services industry. It is common cause that economies to a greater extent have become financialised, resulting in certain benefits whilst at the same time this has led to undesirable practices.
Credit rating agencies' opinions are translated into ratings that carry a considerable weight in the economy, particularly in the financial markets, both in terms of business practices and regulatory requirements. Credit rating agencies, therefore, have been widely criticised for their role in 2008 global financial crisis, for failing to detect the worsening of conditions that underpinned financial markets; failing to adapt to the risks of the derivative trading; collusion in the collateralisation of debt obligations with financial institutions; and the output of poor quality of ratings.
The widespread fallout of the subprime lending crisis precipitated by loans to people with no income, no jobs and no assets, what were commonly known as "ninja loans", led to a massive fallout across the globe with millions of jobs lost. This resulted in calls for far stricter regulations governing the practices of credit rating agencies. Any weaknesses in this respect can generate uncertainty and exacerbate volatile markets, which can trigger general financial instability. This crisis was of a nature and scale that required a global response.
As a result, the G20 jointly committed to regulating these agencies. Introducing a regulatory framework for credit rating agencies is thus one of South Africa's G20 commitments.
The Bill seeks to align the South African regulation of credit rating agencies with international best standards and practices, including the International Organisation of Securities Commissions' principles, G20 countries' regulations and the European Union's equivalency requirements.
In his 2011 Budget Speech, the Minister of Finance announced a range of reforms to further strengthen South Africa's regulatory system, the intention of which was to shift towards separating regulation of prudential risk, which is the probability of companies going bankrupt, from market conduct through financial sector regulations.
In short, the commitments of this Bill are in four areas: a stronger regulatory framework through the development of appropriate principles to address areas of weakness in the global system of financial regulations; effective supervision through the strengthening of the effectiveness of governance of financial service agencies, at both national and international level; addressing systemic weaknesses in the financial institutions and ensuring that the financial and human costs of a financial institution's failure are reduced as far as possible, and that such a failure does not affect the broader financial system; and the introduction of international assessment and peer review through the undertaking of regular assessments of the regulatory system and benchmarking principles and practices against the international norms.
The aims of the Bill as stipulated in the Bill itself, amongst others, are to ensure that South African authorities can work with their international counterparts to ensure responsible and accountable credit rating agencies at a global level, and to protect the independence, integrity, transparency and reliability of the credit rating process and credit ratings results or improve investor protection. In terms of the process of processing this Bill as a committee, I can say, on behalf of the committee, that the Bill has undergone a considerable number of changes under the guidance of the Standing Committee on Finance to ensure that the Bill is more effective.
In considering the changes made by the committee, we were mindful of the strategic objective of the Bill, that of establishing South Africa as a financial centre for Africa. To achieve this strategic objective, the amendments we have effected had to ensure that the regulatory framework remains up-to-date, and is benchmarked to the best of our ability in relation to the rest of the world.
This Bill, in our view, needed to be processed as quickly as possible so that we do not fall outside the developments in relation to the rest of the world. To clarify the intention of the Bill, the committee introduced a definition of "registered credit rating agency" that includes both internal and external credit rating agencies approved by the registrar in this country.
With regard to the entrenchment of common-law, delictual liability in the Bill, we believe it is the most practical approach as the principles of common-law liability are well-established in South African case law. When faced with a claim for liability, the courts will be able to rely on these principles and precedents rather than relying on interpreting legislation.
As the ANC, we have also come to the conclusion that it is important to support the Bill before us with all amendments that were effected by the committee. The ANC supports this Bill, hon Chairperson. Thank you. [Applause.]
House Chairperson, the DA accepts the need to introduce a regulatory framework for credit rating agencies. This need flows from the commitments of the G20, but more importantly it will ensure that South Africa remains open to institutional investors from Europe whose governing legislation now requires us to establish broad equivalence with their regulatory framework.
However, that does not mean that our approach should simply emulate the particularly heavy-handed approach taken by the European Union, EU, as this Bill tends to. We maintain that equivalence could have been established with a much lighter touch.
In general, National Treasury's approach to financial regulation, following the global financial crisis, seems to be one of overreaction without sufficient consideration of the cost of regulation.
Treasury officials have spoken gleefully in the committee about how they are eager to confer what they call "draconian powers" on regulators. The definition of draconian is overly harsh and severe. Surely this is, at the very least, an unfortunate choice of words. At worst, it may represent a growing power hunger in National Treasury and the Financial Services Board, FSB. So, the committee found itself having to work hard to ensure that this new legislation is balanced and appropriate and that civil liberties are protected.
It's clear to us that National Treasury and the FSB overplayed their hand in the original drafting of the Bill by taking this overbearing approach that was out of step with regulations in many other smaller markets. They seem to give insufficient consideration to the costs of compliance and how those costs will simply be passed on to the issuers of debt.
In this regard, it's worth remembering that approximately 60% of debts in South Africa are issued by the public sector; meaning that increased costs of debt issuing will be borne by taxpayers.
In particular, the endorsement framework established by this Bill seems to require the endorsement of every single credit rating produced offshore for use in South Africa. This framework is unnecessarily onerous and should have been replaced by a simple blanket endorsement by the registrar of all credit ratings from approved external credit rating agencies. That blanket endorsement is in there, but it's alongside this complex endorsement framework for no obvious reason.
Having said that, while we would have strongly opposed the original draft of the law, the major problems were fixed by our working committee. The remaining problems, such as the overambitious role envisioned for compliance officers and the requirement that a credit rating agency must ensure that a member of the public understands how a credit rating was arrived at, are relatively minor.
During the committee process, we made significant progress in limiting the powers of the registrar in terms of site visits and requests for information that aren't required in terms of this Act. We managed to take out clauses that would have prevented credit rating agencies from limiting their own liability through individual contracts and we removed the ability of the Financial Services Board, FSB, to prescribe rules around rating assumptions.
So, the bottom line is that we will vote in favour of this Bill now. But we most certainly wouldn't have supported it in the form in which it came to our committee. That we now do so, as the DA, is credit to the hard work of the Standing Committee on Finance in fixing this Bill. I thank you. [Applause.]
House Chair, many commentators were concerned that this industry would be subject to disproportionate regulation, given the small size of the industry and because government is not happy with the series of downgrades we have seen recently, but that is not the case.
This legislation is in line with what is happening elsewhere in the world, and specifically in the European Union. It is important for South Africa to remain the leader on the continent of Africa and to keep up with its regulatory framework. It is also in line with the G20 requirements.
However, at the introduction of the Bill, some concerns were valid and the committee dealt with them quite effectively. It was a little bit unfair towards the committee to be confronted with an industry whose modus operandi was not fully understood at the beginning. The legislation is now definitely in better shape after committee deliberations.
It is no secret that the Finance Minister is not a fan of credit rating agencies, or rather, let me say, their ratings or findings, and because of this the proposed legislation was perceived to be a reaction from the Treasury to contain their operations in South Africa, and we saw that a little bit when it was introduced. I want to say, I don't think that was the case, and that is not what the legislation was all about.
Sovereign rating downgrades are a serious matter, and so is a downgrade of any other investment house, and to allow the industry to perform this function without a proper framework would be unfair and out of sync with what is happening elsewhere in the world.
After the worldwide economic crisis, everything is different; credit rating agencies could not escape this fact. This new framework recognises the important role played by them, and their job must be done professionally and without fear. Cope shall support the legislation.
Hon House Chairman, in spite of the very valuable amendments made by the committee, we have very strong reservations about this Bill. As the hon Mufamadi indicated, this Bill is about to be passed in a rush, or rather in a short time, and that is to comply with what has become an international standard. In our opinion, there has not been sufficient assessment of our national interests in complying with that international standard, or at least in complying as fast as we are doing, rather than delaying for a little longer.
The harsh fact is that if one looks at all the countries that have adopted similar legislation, within a matter of months before or after the adoption of that legislation, they had their sovereign debt downgraded, as happened in South Africa a few weeks ago. Why? It is because this piece of legislation creates a liability on the credit rating agencies in giving an opinion and controls opinion-making. If that opinion turns out to be wrong, they are liable at the corporate level. This therefore forces credit rating agencies to be conservative.
What has not been adjusted on the other side of the equation is the extensive regulation which requires regulated investment agencies and funds to only purchase triple-A paper. So, we have a situation in which the one Bill forces the downgrading while the existing legislation maintains a standard that will become increasingly difficult for both institutional and private investors to meet. This will create another contraction within the market and the continuing possibility of further reduction within the financial markets. We thought it would have been more appropriate to have the legislation ready and to wait for further developments, delaying a few months - perhaps a year - to take full advantage of South Africa continuing to have triple A-rated sovereign bonds. [Time expired.] Thank you.
Hon Chairperson, credit rating agencies have been criticised for their role in the global financial crisis. They were blamed, inter alia, for failing to detect the worsening financial market conditions and to adapt their ratings timeously; failing to adapt to the new risks of the credit market, as well as some of them lowering their ratings due to pressure introduced by competition; and contributing to the crisis because of poor quality of some of the ratings of structured financial instruments.
Now, the G20 response to the financial crisis recommended that credit rating agencies whose ratings are used for regulatory purposes should be subjected to a regulatory oversight regime that includes registration.
Why is this? Credit rating agencies issue opinions on the creditworthiness of a particular issuer of a financial instrument or the likelihood that an issuer will honour its financial obligations, such as a country, and that is where we have downgrades of sovereign ratings. These opinions carry considerable weight in financial markets, both in terms of business practice and regulatory requirements.
This Bill aims to ensure responsible and accountable credit rating agencies and to protect the integrity, transparency and reliability of the whole process and their ratings and to improve investor protection.
The Bill was substantially improved following public submissions on the Bill as introduced. Delictual liability has been watered down and the powers of the registrar and Financial Services Board, FSB, have been limited. Now, it must be stressed that this Bill is not a response to the recent downgrades. The ACDP agrees that sovereign downgrades are a very serious matter and that such credit agencies should be regulated; therefore, we do support this Bill, notwithstanding the reservations expressed by other members and the reservations that we also have. Thank you very much, Chairperson. [Applause.]
Hon Chairperson, one of the key issues of the Credit Rating Services Bill is liability, and I would like to speak about the issue of liability. A credit rating agency's relationship with an issuer is governed by the terms of a contract, entered into between sophisticated parties and which should govern the liability arrangement between those two parties, without legislative interference.
It should be remembered that this Bill gives the Financial Services Board significant regulatory powers to enforce the resulting regulatory framework, including the power to withdraw the registration of a credit rating agency.
A simplified liability clause was adopted stating in terms of section 19(1) of the draft Bill that a credit rating agency, CRA, may be held delictually liable to an investor or a member of the public, in respect of a credit rating issued or credit rating service performed, for any loss, damage or costs sustained as a result of such credit rating or credit rating service.
Credit rating agencies have never before been the direct subject of legislation. The position is, however, about to change with this Credit Rating Services Bill 8 of 2012.
While many of our proposals to amend the liability clauses in section 19, we are pleased to announce, were adopted, we remain concerned that the legislation as it stands provides a disincentive for credit rating agencies to provide credit ratings. This could lead to a reduction in the amount of information available in the market to investors, rather than increasing the accuracy of credit ratings.
The liability provisions in the Bill should have been tailored to limit the liability of credit ratings to cases where there was either intentional error or gross negligence in the formulation of ratings, and not simply when credit rating agencies issue a credit rating. Thank you. [Applause.]
Hon House Chair, hon Ministers, hon members, comrades and guests, acknowledgement of the triple challenges of poverty, unemployment and inequality means that all efforts must be focused on how South Africa's economy can be changed for the better.
It is a credit to the ANC that between 1994 and 2009, the economy achieved sustained growth, albeit at a low level. Fiscal prudence ensured government debt was consistently serviced and reduced while the budget deficit was reduced steadily. The cost was very low capital investment in infrastructure. However, the credibility of the new government ensured favourable ratings and access to the world's financial markets.
At present, the performance of our economy reflects the recession in the global economy, especially the eurozone. But our leaders in the ANC have done remarkably well to strengthen our trade links with the developing economies in the East, especially given the difficulties facing many world leaders. The financial services sector is at the heart of the South African economy and touches the life of each and every citizen. Financial services allow people to make daily economic transactions, save and preserve wealth to meet future aspirations and retirement needs, and insure against personal disaster. Given the need for higher economic growth and job creation, it is imperative to ensure that the South African financial system remains competitive and that it is made safer through regulation that follows global best practice, but always bearing in mind the specific circumstances of our own economy.
Credit rating agencies serve an important purpose in the capital markets. They assist borrowers to access capital from public capital markets or private loan markets. Their primary duty, without regard to their revenues or business, is to conduct diligent, systematic, independent analysis and provide intelligent, readable, informative and timely reports and opinions about creditworthiness of borrowers to potential lenders. If I may add to this list of requirements, it should, above all, be honest and fair.
Any weaknesses in the system can generate uncertainty and exacerbate volatile markets, which can trigger general financial instability. The cost of capital for government, companies and individuals rises on all levels and reduces disposable income. In other words, people will have less money to spend, and economic growth will drop considerably. This also means fewer jobs, less domestic investment, less foreign direct investment and less risk-taking by capital.
It has been said that, in the run-up to the eurozone financial crisis, credit rating agencies often gave top-class ratings to complex financial instruments that later proved to be almost worthless, meaning immense losses for financial institutions, many of which had to be bailed out by the taxpayer.
Following the credit crisis, with the value and relevance of credit rating being called into question, the ANC government has wisely put forward the Credit Rating Services Bill to raise standards of independence, diligence, codes of conduct and internal controls for credit rating agencies. It also specifies that credit rating agencies bear financial liability.
Credit rating agencies are important financial market participants and need to be subject to an appropriate legal framework that requires them to comply with rigorous rules of conduct in order to mitigate possible conflicts of interest, to ensure high quality and sufficient transparency of ratings and the rating process. The Credit Rating Services Bill aims to introduce standards of care, diligence and process, and to ensure the independence of rating agencies in South Africa and public ratings in this country. It raises several bars, including the adoption of codes of conduct, the introduction of compliance departments, requirements to submit information to regulators and to get regulatory approval, and general statements of the credit rating agencies' duties.
The Bill proposes that credit rating agencies will have to register with the Financial Services Board, FSB, which, before it registers an agency, will be entitled to ask questions about its ownership and organisational structure, corporate governance, resources and expertise to perform credit rating services - information that is currently unavailable to lenders. The FSB will be able to suspend or cancel the registration of an agency that no longer meets the conditions under which it was registered.
The Bill furthermore proposes that an agency will be liable to compensate an investor for the ratings it issues, if it can be proved that the agency did not do a proper job or was materially conflicted in formulating a rating. The senior management of a rating agency will have to meet fit and proper requirements set by the FSB.
Credit rating agencies will be obliged to, amongst other things: ensure that at all times they have the necessary knowledge and experience to issue credit ratings; manage and disclose any conflicts of interest that agencies and their analysts or employees have; use rigorous methodologies that, along with the key assumptions of their ratings, are reviewed regularly to ensure that they are appropriate; publish ratings with their key underlying elements, their attributes and limitations, as well as the practices, procedures, methodologies, model and key assumptions that agencies use when rating credit; and monitor their ratings regularly and publish any decision to discontinue a rating timeously.
There were a number of comments relating to the scope and application of the Bill. I refer specifically to the concern expressed that the South African credit rating services industry would be subject to disproportionate regulation, given the small size of the industry in South Africa. The ANC does not agree. As a matter of fact, the intention with regard to the use of approved external credit rating agencies could be even more explicitly stated.
Some commentators also noted the strategic objectives of the international credit rating agencies to expand into Africa, using Johannesburg as a base, and for the smaller rating agencies to grow business to ensure a competitive and growing industry. As the ANC, we are of the view that, given that many of the rating agencies plan to actually increase the size of their South African offices, this Bill balances the need for good regulation with the need to support the growth of the industry.
As we approach the end of the second decade of the ANC's democratic government, we must be conscious of the fact that despite all of the achievements made thus far, we are still faced with the huge responsibility of accomplishing unfulfilled tasks for the majority of the millions of South Africans. The 1994 democratic breakthrough provided the ANC with the opportunity to pursue economic policies, which hold inclusive growth, development and wealth distribution at their core, in order to bridge the inexorable gap between the rich and the poor, the haves and the have-nots within our country.
Much has been done, and so much more remains to be done. Therefore, the ANC cannot allow grading systems to virtually destroy what has been built up to now, through processes without sufficient standards of care and diligent processes. The ANC supports the Credit Rating Services Bill. I thank you. [Applause.]
Hon Chairperson, let me thank all members for their contribution and the committee for its support for this Bill. Hon Mufamadi, hon Adams, hon Koornhof and hon Swart in particular have very clearly explained the rationale which requires us to put this Bill before the House.
Regrettably, hon Harris still has a kind of dinosaur element to his thinking. For his and for his party's benefit, let me explain once again why we require a Bill like this on credit rating agencies. We require a Bill like this on credit rating agencies in order to have certainty, consistency, a clear legislative framework and, above all, harmonisation of our legislation with international trends and commitments that we have actually made.
Let us also remind ourselves, as speakers and hon members have done, that credit rating agencies and their challenges came to the fore for the first time in almost 110 years in 2008-09, when the financial crisis hit the globe. As speakers have pointed out, they came to the fore because they had misread the risks involved in subprime lending, subprime lending products and the derivatives that emerged from subprime lending, which gave us the recession, not only in the United States and Europe, but also in our own country. We seem to forget that we have still not recovered from the impact of the recession and that we still have a long way to go.
We are members of the G20 and we participate in the global Financial Stability Board. We have an obligation in respect of developments that are taking place in this regard, all of which are a reaction to the global crisis that we are confronted with. More important is the realisation that, for about 20 years before the crisis, the world had fallen asleep. It had begun to believe in an ideology which said, as the hon Harris said, that we needed a much lighter touch.
It is this lighter touch that got the globe into trouble, put the regulators to sleep, and allowed them to become captive to certain interests in the financial markets. Everything that we are seeing before us, and the great work that is happening in the G20 and the Financial Stability Board, is in fact exactly opposite to the lighter touch approach. It is now beginning to compensate for 20 to 30 years of misapplication of the regulatory approach in this particular regard.
South Africa is fully aligned and its approach is fully harmonised with international developments and commitments. South Africa is the first country in Africa to pass this legislation and to create the kind of legislative certainty that we require within our own situation. We must dismiss any idea that credit rating agencies will have their independence interfered with. The legislation takes care of that.
There is a difference between independence on the one hand and accountability on the other. What we are saying is that you are independent, make up your own mind, and give your own rulings. We have the democratic right to disagree with you when you do so. At the same time, what this legislation does is to ensure that we have proper accountability to an independent regulator in the form of the Financial Services Board, FSB, in South Africa.
In fact, what we have done through this legislation places us way ahead of many countries around the globe, and indicates to those who want to lend to South Africa and to South African entities, which involve the private sector and the state-owned enterprises - all of whom go and borrow within and outside South Africa - that we fall within the investment grade as far as ratings are concerned.
Reference was made to the question of draconian powers by the hon Harris. The only question in the committee that was raised by a representative of the Treasury was that sometimes when extreme crises take place within the financial sector, draconian or far-reaching powers are required to actually intervene. Go back to 2008 and the manner in which the United States government had to intervene and you will find that, overnight, they had to find trillions of dollars, print them in the Federal Reserve, make sure that they made them available to the banking system and stopped the crisis from becoming any worse that it actually became.
If we went through very slow, pedantic processes, the United States would not have been able to stop a depression from setting in, let alone a recession which we were impacted by. We are told by the hon Harris, as well, that there are issues of the cost of compliance. That is a perpetual balance that, as in anything in life, you have to get right.
How do you fall within the regulatory environment, but also not impose too many costs on compliance? There is no perfect formula or textbook for this. It is experience that will teach us whether we are overstepping or understepping the mark in this particular regard. We are told that the endorsement process is onerous. It is not. All it is saying is that, if you are using a rating that has been provided by an agency outside of the geography of South Africa, that agency must be registered with the Financial Services Board. That's all - not each rating or opinion being required to be endorsed, as might have been suggested.
In the last minute and a half, let me also refer to the hon Harris's rather melodramatic, and I believe unnecessary, remarks about the fiscal framework. To make reference to the fiscal framework and the smoke and mirrors concept is absolutely uncalled for. We are internationally recognised as being first to second in budget transparency. Yet, to score cheap political points, we are using words like "smoke and mirrors". We are told that we are depending on underspending. All we are doing is estimating a reality. The reality is that entities do underspend. We are anticipating and taking that into account in a transparent way. It is not hidden anywhere.
He has a complete misunderstanding of contingency, which we repeatedly explained in the committee meeting chaired by the hon Mufamadi. If you like, contingency caters for a surprise element such as floods and natural disasters. In the outer years, contingency also caters for policy initiatives that we can't anticipate at this point in time; and then the contingency gets absorbed within the normal framework.
The hon Harris must stop scoring cheap political points. Thank you for your support. [Applause.]
Debate concluded.
Bill read a second time.