What can we do to stop the bleeding?
According to SARS data, the number of companies in the financial and business services sector dropped from 222,532 in 2007 to 139,664 in 2016 – a loss of more than 80,000 firms in 10 years.
While the 2007/8 financial crisis is identified as one of the reasons behind this decline, administrative and regulatory burdens, long-term confidence and high crime in South Africa, coupled with the far better chances of prosperity and security available outside of South Africa all contributed to this massive loss of firms, and most crucially jobs, in this sector.
In response to the crisis of 2007/8, governments and regulatory bodies around the world stepped up the regulation of various industries and sectors, including finance, all of which have since resulted in steady job losses.
In 2018, the Twin Peaks regulatory model was implemented in South Africa. This model has authority over every single South African firm or business that offers a financial product or service.
First adopted in Australia over two decades ago, Twin Peaks consists of one peak, the ‘system stability’ regulator, which is charged with creating and enforcing prudential regulations – these are designed to prevent a financial crisis, and a second peak responsible for deterring misconduct and protecting consumers of financial products and services.
South Africa’s financial services regulation had always been exemplary over the years – there was no need at all to introduce Twin Peaks.
Whom does regulation affect the most in South Africa?
Is it the large, mainly white-owned companies that have armies of lawyers and personnel who can spend hour after hour ensuring that the company complies with all the regulations? No, it is the small firms and businesses, owned mainly by black people, that are affected the most.
With their very limited resources, every hour spent on compliance is an hour that could rather have been spent on growth and investment – with an accompanying growth in the number of people employed.
Twin Peaks provides regulatory bodies with arbitrary powers to decide who can operate as a financial services firm and who cannot.
Arbitrary laws and regulation fundamentally undermine the rule of law. The rule of law, properly applied, views no one as above the law. Twin Peaks places regulatory bodies above the law; they are empowered to punish and reward firms as they see fit. The rule of law means very little when businesses are treated differently from each other, when they are unable to understand the rules and regulations which are placed on them; you cannot know right from wrong if the two concepts are constantly swapped and changed arbitrarily.
Regulation rests on the premise that, without government or an outside regulatory body, companies and firms would exploit the consumer at every given opportunity.
This view presumes that consumers are incapable of assessing the services on offer to them; without an authority figure telling us with whom we can and cannot transact, we will fall victim to firms only looking to make easy money.
Freedom of choice
It is in each firm’s long-term interest to interact openly and honestly with its customers. If not, customers are fully within their rights to take their business elsewhere, and the offending business will suffer the effects of bad business practices.
Instead of more and more regulation, which inhibits job creation and economic growth, government and regulatory bodies need to step back and allow firms and businesses to compete in an open, free market.
The better a business treats me, the higher the likelihood that I will continue to use that business, and to recommend them to my friends and family. A business should be allowed to stand or fall based on the quality of the services and goods it provides, not on whether it is favoured by a regulatory authority.
Impediment to growth
Almost 10 million people are unemployed in South Africa. Fewer people are in a position to pay taxes, taxes regularly increase, investment flows out of the country, and we witness sluggish to zero economic growth as a result.
The government ought to make it as easy as possible for anyone to start a business, in all sectors of the economy. Regulation does not encourage ethical behaviour; it only drives away potential new business. Some companies can afford to adapt to the regulations, but others will make friends with the ‘right’ people and ask them to look the other way.
At the end of the day, we should not be surprised at the loss of 80,000 firms – the bigger surprise is that more have not closed down or left these shores.