J Moleketi: National Treasury, SARS and Stats SA Dept Budget Vote,
2007/08

24 May 2007

Introduction

The past year has been very eventful in terms of developments in the
financial sector. Many successes have been registered, while we have also been
confronted with certain challenges which again highlight the need for
vigilance.

My input today will cover financial sector regulatory imperatives, reform of
the retirement fund industry, bulking and secret profits, Surplus Fund
Apportionment, Banks Amendment Bill, Co-Operative Banks Bill, Financial Sector
Charter, special pensions and the 2010 Fifa World Cup.

Financial sector regulatory imperatives

One of our most important national assets is our strong, sophisticated and
sound financial sector. The developmental benefits of a strong financial sector
are considerable. A sophisticated financial system allows for an efficient
allocation of economic capital, it provides an absorber against economic shocks
and, if properly aligned and channelled, can make a significant contribution to
breaking the cycle of poverty by facilitating access to affordable and
appropriate banking, insurance, savings and credit facilities.

South Africa has benefited from a financial sector characterised by
efficiency, innovation and strong growth. Increasingly, as witnessed by the
Financial Sector Charter, we are also seeing a financial sector that is
embracing transformation and reforming business models to extend services to
low-income communities and finance broad-based economic development. This, in
turn, has contributed to stronger, shared and sustainable economic
performance.

We have seen a shift in regulatory practice from a traditional focus on
prudential standards to one that balances and complements this approach through
improved consumer protection measures, such as specific market conduct
regulation and increased vigilance relating to matters affecting overall
financial stability.

But ultimately, confidence in the South African financial sector is built on
a foundation of trust. The vast majority of financial service providers cherish
and respect the licence that is granted to them, which places them in a
position of trust to manage the monies of others.

However, Chairperson, recently we have witnessed various instances where
financial service providers have flouted the trust placed in them. The
allegations levelled in respect of Fidentia are extremely worrisome and
exceptions of this nature must not be allowed to undermine public and investor
confidence in the South African financial services system.

In the wake of this transgression, we are obligated to ask how these events
could have been avoided and what can be done to arrest this transgression. At
the outset Chairperson I would like to state that we must recognise that this
was in part a failure of collective responsibility.

The financial sector as a whole is placed in a position of trust and must be
held to the highest levels of accountability. It is in the interests of the
financial sector as a whole that confidence in the sector is maintained. This,
in turn, implies a collective commitment and responsibility for ensuring that
we maintain our prescribed standards of transparency, accountability and
equity. In practical terms, this means that a number of financial services
providers should be asking themselves hard questions about whether they had
done enough to avert the Fidentia episode from occurring.

There was also a clear failure of proper governance on the part of trustees
in exercising their fiduciary duties, especially when considering the
allocation and method of payment of death benefits to beneficiaries. Collective
action must also be considered to provide income support to those widows and
orphans who may be left destitute by the actions of a handful of unscrupulous
individuals. We therefore remain a strong advocate for educating trustees to
execute their fiduciary duties in a responsible manner.

Closing the regulatory gaps that allow unscrupulous providers to operate
will require a co-ordinated response across regulators, together with increased
capacity to enforce the law substantially. The licensing process introduced by
the Financial Advisory and Intermediary Services (FIAS) Act and steps to
increase the enforcement powers of the Financial Services Board (FSB) are first
steps in this regard.

All regulators and agencies involved in the financial sector, including the
FSB, FAIS Ombud, the Financial Intelligence Centre and the South African
Revenue Service (Sars), have a collective responsibility to ratchet-up their
enforcement efforts. With this in mind, the Ministry of Finance will be
convening a process with all financial regulators to jointly identify potential
financial regulatory gaps and to improve the effectiveness of licensing,
monitoring and enforcement.

Furthermore, the Financial Institutions Amendment Bill to be tabled in
Parliament later this year will seek to strengthen the FSB through the
formation of an Enforcement Committee with the powers to apply administrative
penalties.

Reform of the retirement fund industry

The retirement fund industry more broadly has come under the spotlight in
recent years in terms of various concerns relating to unfair practices, poor
governance and high costs. This is largely a legacy of non-disclosure, opaque
products, inappropriate sales techniques and a lack of effective competition –
all exacerbated by poor financial literacy.

To address some of the most pressing inequities and inadequacies in the
current system, various legislative and regulatory measures have been put in
place to advance Government's social security and retirement reform. These
include:
* the December 2005 Statement of Intent committing the life assurers to
compensate for past inequities
* the March 2006 Discussion paper on contractual savings in the life
industry
* the Pension Funds Amendment Bill currently before Parliament.

Furthermore, the FSB has also released a draft Code of Conduct for pension
fund trustees. In the longer-term, however, improving the quality of private
pension fund provision in South Africa, in terms of lowering costs and
improving equity, will require more far-reaching reforms. These include
facilitating effective competition, achieving economies of scale, protecting
the value of retirement benefits, especially for the member's dependants after
the member's death.

These areas of retirement fund industry reform are covered in the National
Treasury's Social Security and Retirement Reform: Second Discussion Paper,
published in February 2007. More detailed proposals in a number of these areas
are currently being finalised as part of the work of the Inter-Departmental
Committee on Social Security and Retirement Reform.

Bulking and secret profits

The Registrar of Pensions is investigating the extent of bulking and secret
profits in the industry. In a survey in March 2006 eleven administrators
reported that they bulk their clients' funds, but that the enhanced interest
rate is passed on to their clients and that the prior approval of trustees were
obtained for any benefit accruing to the administrator from this practice.

A handful of administrators declared that they had derived some benefit by
way of practices such as undisclosed scrip lending fees and commission sharing
arrangements with brokers. These administrators submitted proposals on how to
deal with the benefits that they derived from these practices. The Registrar is
monitoring the position with regard to these administrators. It is the
Registrar's intention to refer all the responses received from administrators
who admitted to making a secret profit to the national Director of Public
Prosecutions for further investigation. Administrative action such as the
withdrawal or suspension of licences will be considered by the Registrar once
the full investigation and monitoring process in respect of the administrators
have been completed.

Surplus fund apportionment

As at Tuesday, 22 May 2007, 661 schemes for surplus apportionment have been
received by the Registrar. Of these, 312 have been approved, while 347 are
pending or not yet completed. As at the same date, 15 214 "nil" returns have
been submitted to the Registrar. Of these 13 965 (92%) have been approved, 22
rejected and 1 227 are pending or not yet completed. The relatively large
number of pending schemes is due to the fact that many funds submitted close to
31 December 2006, which was a crucial cut-off date for the submission of a
scheme.

Banks Amendment Bill

A further piece of financial sector legislation currently before Parliament
is the Banks Amendment Bill, which largely aims to bring the South African
banking sector in line with international risk management and capital standards
published by the International Basel Committee known as Basel II standards.

In summary, the Basel II amendments aim to create a sufficiently robust
regulatory environment that will enable the Registrar to properly discharge
supervisory responsibilities in respect of banks, controlling companies and
banking groups on a solo, cross-border or consolidated basis.

The implementation of Basel II capital adequacy standards is scheduled for
implementation on Tuesday, 1 January 2008 and is expected to further strengthen
the soundness of the South African banking sector and its international
competitiveness.

Co-operative Banks Bill

The purpose of the Co-operative Banks Bill is to create a development
strategy and a regulatory environment for deposit-taking financial services
co-operatives such as village banks and savings and credit co-operatives.
Co-operative banks are member-based, deposit-taking financial services
co-operatives which offer basic banking services such as deposit-taking,
savings and issuing of loans to their members.

The draft Co-operative Banks Bill came about as a result of extensive
consultations with relevant sector stakeholders with the intention to promote
access to basic affordable financial services to all South Africans
particularly those excluded by formal financial institutions. The Bill will
ensure the sound and safe management of depositor money by financial services
co-operatives and promote the development and growth of such co-operatives. The
draft co-operative Banks Bill has been approved by Cabinet and it is expected
to be tabled in Parliament in June 2007.

Update on the Financial Sector Charter

The first reporting cycle of the Financial Sector Charter took place in
2005, which reviewed performance of the institutions towards reaching the
Charter targets. The purpose of this initial review was to establish the
transformation status of the industry and to assess progress in implementing
the Charter. Performance is assessed in terms of comprehensive reports
submitted by each participating financial institution and is recorded on a
scorecard.

The second Financial Sector Charter report will be released in July 2007.
Chairperson I am glad to report that the financial sector is making good
progress with regard to reaching the 2008 targets although there are some
challenges.

Progress on meeting the five-year targets is as follows:

* In 2005 the financial sector had virtually achieved its R50 billion target
for funding major black economic empowerment (BEE) transactions, set to be
achieved only in 2008, and surpassed its R5 billion 2008 target for financing
black small and medium enterprises (SMEs).
* Financial institutions have provided over R100 billion to targeted
investments in support of SMEs, low-income housing, resource-poor farmers and
developmental infrastructure.
* The number of Mzansi bank accounts for the period up to November 2006 is
estimated to be in excess of 3 million.
* Over 73% of the approximately R16 billion of the sectors procurement was from
BEE accredited suppliers.

Special pensions

The Special Pensions Act of 1996 made provision for those persons who served
the liberation struggle on a full-time basis for a period of five years and
were therefore unable to provide for a pension. After ten years, 31 December
2006 marked the closing date for new applications under this Act. In terms of
the Act, the Board and Review Board will be dissolved and any further
adjudication and administration of benefits will become the direct
responsibility of the National Treasury. We will ensure that adequate capacity
is put in place to enable the speedy processing of the remaining
applications.

During the last ten years we have paid R2.1 billion in benefits to
approximately 16 500 beneficiaries. On a monthly basis the State pays an
average of R23 million in pensions. There are admittedly those who have served
in the struggle who have not met all the criteria prescribed in the Act. We
have received numerous submissions from affected parties which are currently
under consideration.

Resolutions have been passed in the National Assembly and we need to ensure
that they are acted upon. Most pressing, in this regard, is the need to step up
our commitment in training and skills development initiatives to assist younger
men and women to take adequate advantage of opportunities associated with
broad-based economic growth.

Chairperson it is unfortunate that fraudulent claims have been submitted to
the Special Pensions Board in some instances. We will not allow the memories of
our fallen heroes and heroines to be tarnished by such individuals. To this end
we have requested the Special Investigating Unit to verify all applications.
This is not a witch-hunt. Those who truly served have nothing to fear. Instead
it should be viewed as an integral part of Government's overall commitment to
root out fraud and corruption.

2010 World Cup Soccer

Chairperson the awarding of the right to host the 2010 Fifa World Cup to
South Africa was a great achievement in itself and the recently concluded 2006
Fifa World Cup held in Germany has proven that a well-packaged and managed
event can ensure immeasurable development in South Africa.

The hosting of the 2010 Fifa World Cup provides enormous opportunities to
upgrade our sporting facilities and infrastructure and also to market the
country to the rest of the world as a destination for investment, sport and
leisure.

Government has set aside R17,4 billion direct investment in the 2010 Fifa
World Cup which is integrated into a much larger spending programme between
2006 and 2010. During this period, the government will be investing more than
R415 billion in infrastructures. The 2010 Fifa World Cup investment is
approximately five percent of the R415 billion programme, although its
significance as a catalyst for improved planning and infrastructure development
extends well beyond these numbers.

The resources allocated to 2010 Fifa World Cup projects are significant and
escalation of costs is an issue that must be addressed. A unit within the
National Treasury has implemented checks and cost controls to track the
escalation in costs of stadia and other infrastructure projects.

We are confident that construction of all stadia will be completed within
the specified timelines. In some cases we are ahead of schedule and anticipate
that R1,9 billion will have to be brought forward in the Adjustments Estimates
Budget in October 2007, raising the expenditure in 2007/08 from R2,7 billion
specified in February 2007 to an estimated R4,6 billion. All stadium
facilitates will be ready by October 2009 to allow for the identification and
allocation of seats and issuing of tickets.

Conclusion

In conclusion Honourable Chairperson we need to be mindful of the
wide-ranging reforms of our financial sector and social security arrangements
that are currently underway. We have achieved far-reaching reforms to date, but
it is clear that there is still room for improvement in tightening the
monitoring and compliance framework, so as to protect the hard-won confidence
in our financial system.

We will push ahead to process and finalise the new applications for Special
Pensions in a timely manner to ensure that those who meet the criteria, or
their dependents, receive the benefits due to them in this regard.

South Africa will take full advantage of the 2010 Fifa World Cup opportunity
to attract inward investment and, new investment in stadia, transport,
airports, communications, accommodation, broadcast and information technology
and financial services. The 2010 Fifa World Cup projects will stimulate skills
development and create the much-needed jobs, develop football and its
commercial base and upgrade facilities to ensure South Africa is a competitive
destination for major events.

In concluding, I would also like to thank the Minister of Finance for his
stewardship in managing the Treasury, Sars and Stats SA and to the management
teams for maintaining the high standards of efficiency and competency.

I am proud to be part of this team.

Issued by: National Treasury
24 May 2007