Recent parliamentary hearings on the de-racialisation of the financial sector have exposed the structural and legislative impediments that foster anticompetitive behaviour. Government has now proposed that a Financial Sector Summit be held to introduce interventionist policy aimed at aligning government’s broad agenda designed to engender the attainment of economic equality. We contextualise the issues at play and hope that the summit will finally address what is long overdue.
Embedded in the attainment of political independence is the need for markets and transactional freedom. In fact, it is unarguable that the former cannot be complete without the latter. It goes without saying that the clamour for the re-examination of the financial sector is a corollary of an aspiration for a deeper entrenchment of economic freedom and parity through the elimination of barriers to competition in the highly concentrated sector.
It is inarguable from whichever angle one looks in South Africa, it is obvious that nearly every industry is concentrated into fewer and fewer hands. Despite the widely recognised phenomenon of scale economies, the majority of firms have always sub-optimal. This is especially so in the highly concentrated financial sector. In a sector dominated by a cartel of a handful of giants, calls for an urgent intervention aimed at addressing the asymmetric size distribution of financial benefits and the dismantling of this oligopoly have merit. The foundations of this lopsided and anti-competitive set up and the consequent dominancy – barriers to entry for smaller firms (and therefore to economies of scale), collusion with political powers, among other factors – are common cause and need not be restated. For a country whose highly celebrated Constitution, one which is premised on the need to ease economic participation, these oligopolistic features are not only sad but are an anachronism of the pre-1994 milieu. It undermines the economic welfare agenda upon which, among other objectives, the Constitution is built. As such the South African situation defies the notion that markets operate in a competitive environment and that government should not interfere.
Let us consider the possible way out. As much as global standards can be of assistance in policy formulation help, what works in other jurisdictions might not be suitable for South Africa. As such it is important that country differentiation be undertaken. A number of solutions can be tendered:
Reframe the policy debate. The financial sector narrative be reassessed through the lens of inequality. In other words there is need for a radical re-assessment of the competitive nature of the financial sector, so far recent promulgated changes such as the highly anticipated twin peaks only deals with structural changes in the way the financial sector is regulated and supervised and not much in terms of meaningful transformation. As such government still doesn’t have a mechanism that serves to counter-weight the economic power of large financial firms. Governmental dalliance with these firms is associated with the real risk that black firms in particular might lose their belief in the State’s normative regulatory underpinnings. It would lead to cynicism and a view that economic growth is only achievable through the largest players in the market. Because they lose confidence in government, these firms end up losing hope in the expected ability of being able to acquire just rewards through established frameworks such as regulations, they cease sowing. Therefore what is still missing is a market oriented or focused approach that aims to bring parity within the sector.
Too disconnected to succeed: A factor that has contributed to the unfairness in the financial markets is rooted in the interdependence between larger financial firms and the government. Big business think they control the government and the government fallaciously thinks it owns the financial sector. Big business enjoy government’s coercive and allocative power in terms of regulation, policy and benefit from shaping financial sector governance and from government’s uncoordinated efforts in addressing anticompetitive factors. If government is to reverse the inequality that big business foment, it can craft laws that will spur competition by reducing barriers to entry. South Africa could build on the framework of the Competition Commission. This could be a crucial weapon in breaking-up or averting market concentration.
Appraisal of the whole financial sector. For a proper perspective to be gleaned and policy to be formulated, it is suggested that a holistic theoretical and empirical appraisal of the levels of concentration and competitiveness within the whole financial sector be undertaken. Such a professional diagnosis/assessment would be crucial as a guide to policy market assessments, regulatory formulation as well as its enforcement. Modes of analysis would need to be developed to identify where intervention is needed. That would be convenient as well in formulating entry/exit rules that engender contestable markets which would in turn assist in levelling the playing field across financial services providers and thus engendering effective intra-sectoral competition. Such an appraisal would undoubtedly expose entrenched financial market practices that have helped to maintain the status quo.
It is reasonable to claim that larger financial firms (balance-sheet, size, aggregated capital, power, and volume of business) have had it easy. This is because of the economic power that they accumulated over the years with the protection of the then government and some would argue as well as the current. Democracy and competition necessitate maintaining the interaction of many players rather than few large ones. The plea to government is for inclusion rather than exclusion, to redress the entrenched anti-competitive environment so as to level the playing field. Such intervention would not be unprecedented. Historical evidence demonstrates that most of the large firms benefitted from the protection they got from the apartheid government and it would only be fair if the democratic government did the same in the case of smaller firms. Anything short of that will see smaller firms stagnating, becoming smaller or even disappearing. This is not a call for the removal of dynamics that curtail competition but rather a call to remove structural and legislative impediments that foster anticompetitive behaviour. DM
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Fatima Vawda is the founder and Managing Director of 27four Investment Managers. She holds an MSc in Applied Mathematics and has over 21 years experience in financial markets. She has over the years received numerous accolades both domestically and internationally, having most recently won the Ernest & Young World Entrepreneur Southern Africa Emerging Category award. Fatima is an active member of the Association of Black Securities and Investment Professionals and represents the industry body at Nedlac on Financial Sector Policy and is also a member of the Financial Sector Charter Reporting Working Committee.
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