Financial Advisory and Intermediary Services Bill: briefing

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Finance Standing Committee

21 January 2002
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Meeting report

FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
22 January 2002
FINANCIAL ADVISORY AND INTERMEDIARY SERVICES BILL: BRIEFING

Chairperson: Ms B Hogan (ANC)

Documents handed out:
Financial Advisory and Intermediary Services Bill [B52-2001]
Matrix of Amendments
FSB Response to Constitutionality Attacks (See Appendix 1)
FAIS: Provisions of the Bill ensuring independence of Ombud (See Appendix 2)
FAIS Response to Submission by Medical Schemes Council (See Appendix 3)

SUMMARY
The Financial Services Board briefed the Committee on the latest version of the FAIS Bill. In response to attacks on the constitutionality of the Bill the FSB have effected amendments to ensure that the ombud for financial services providers will be independent. The inclusion of medical brokers under the Bill was discussed. The Medical Schemes Council want exclusive control over health brokers and the FSB are proposing amendments to accommodate their submission. The issue was held over for further discussion along with the Policyholder Protection Rules.
The exclusion of micro-lenders from the Bill was raised. However until their capacity has expanded the FSB will not include loan products under FAIS and therefore also not micro-lenders.

MINUTES

The Financial Services Board was represented by its head, Mr Van Rooyen, Mr Wessels and Dr Van Zyl.

Ombud for financial service providers
Clause 20
With respect to the independence of this office, the wording of Clause 20 implies that he takes no instruction from any party.

Clause 21
Previously there were problems regarding the tenure of the ombud. Previously it was provided that appointment was for a fixed three year term and it created uncertainty about reappointment at the end of the three years. That provision was therefore deleted and Clause 21(2)(b) now provides that tenure is to be determined by the Board. This will be bilateral; an ombud will have a substantial say in the length of their tenure. Candidates who are advanced in their life and may welcome appointments for only three years while a person in the middle of their career may negotiate a longer term.

Clause 23
With respect to the discharge of the ombud it is clear that there is a form of accountability. However this is restricted to the administration of his office; that he has the correct number of staff and so forth, but also in respect of his financial affairs. This is similar to the situation of The Pensions Adjudicator.

Clause 25
The Office of the Ombud may only be disestablished or liquidated by an Act of Parliament.

Clause 27(5)(d) and (e)
The idea for (d) and (e) was gathered from Justice Steyn, the long term ombudman, and he in turn gathered it from overseas counsel. The party conducting the investigation must not also do the determination. The facts must go before someone who is cold, impartial and objective.

Clause 28(3)
The ombud may not make an award of interest exceeding the rate at which the court may have been awarded it.

Clause 39
The determination by an ombud is subject to appeal. This right to appeal is limited, subject to the ombud granting leave to appeal. If leave is refused, it may be sought from the Chairperson of the Board of Appeal. It constitutes a lawyer (the chair), a practicing accountant and a qualified actuary (in terms of the Financial Services Board Act this has to be a person knowledgeable of financial aspects). The Board of Appeal is currently chaired by Justice Friedland. Some think that a Board of Appeal would be better if constituted of three judges. But sometimes they only have to hear minor matters and using three judges may not be practical.

Mr Wessels assured the Committee that is the FSB lose a challenge they would make necessary adjustments but there were so many people covered by FAIS that they were confident that the Bill, as it stands, is adequate. In this respect they were supported by the State Law Advisors, who are confident that it could withstand a Constitutional Court appeal.

Mr Ken Andrew (DP) referred back to Clause 25 on the disestablishment of the Office of the Ombud. He did not understand the relevance of Clause 25 in the light of Clause 20 and Clause 21 (on the duty of appointment). Surely the only way to disestablish and liquidate the Office would be to amend the Act through an Act of Parliament?

Mr Wessels responded that this was a reasonable question. This provision was copied from the Pensions Act and inserted for an abundance of caution. It asserted that the Office would be there regardless of the circumstances.

Ms Hogan said that while Clause 25 did seem superfluous but there was no harm in its inclusion.

Mr Andrew said that while there was no harm, in law one should have greater consistency. He referred to Section 181(2) which stipulates that Chapter 9 institutions "are independent, and they must be impartial and must exercise their powers and perform their functions without favour, fear or prejudice." The wording of legislation with respect to independence and impartiality always differs. Is it at the whim of a particular drafter?

Mr Wessels said that he thought that the clause should be left as it was. Its purpose was to show that the FSB cannot just decide not to have such an office. Only Parliament could decide on its disestablishment. He acknowledged that Mr Andrew was correct but the clause was there for a purpose.

Mr Andrew asked what difference Clause 181(2) made to Clause 20(4) which states that when the ombud deals with complaints he is "independent and impartial".

Ms Hogan said that when drafting this provision in the Constitution they were requiring a higher order of independence, such as no party affiliation, for these institutions which are important for the functioning of democracy. The clause in FAIS seeks to render the ombud independent of the institution which gave rise to it, FSB.

Mr Andrew pointed out that Section 181(2) distinguishes between "is independent" and "must be impartial". Mr Wessels responded that the fleshing out of the provision relating to independence is fleshed out in the rules; the ombud takes no instruction and favours no parties and so forth. The two together have a net effect.

Ms Hogan suggested that it is a language issue. You are impartial in the manner in which you carry out your work while independence is a form of institutional behaviour.

Mr Wessels agreed to make an addition to the amendment schedule. Clause 20(4) would be amended.

Opinion of State Law Advisers
The legal advisers thought there was merit in the view that the provisions relating to the appointment and functions of the ombud are inconsistent with the Constitution. The law advisers think that the latest FSB amendments are more substantial than previous. An effort is made to ensure independence. The law advisors express the view that should the amendments be made the relevant provisions will withstand constitutional scrutiny.

In terms of other constitutional amendments, there were very few others affected.
Ms Hogan pointed out that earlier there were many amendments which gave guidance as to how regulations could be drawn up. These were approved. She referred members to the 'FSB Response to constitutionality attacks'.

Clause 34
The Clause relates to undesirable practices. Mr Wessels pointed out that Clause 34, for example, was immediately adjusted in accordance with the views of the law advisers.
A new Clause 34(2) has been inserted, setting out the principles which must guide the registrar in determining whether a business practice must be declared undesirable in terms of Clause 34(1). The inclusion of these guiding principles mean that such a declaration is not simply left to the discretion of the registrar. In terms of the new Clause 34(3) the registrar has to give reasons for such a declaration.

Mr Ken Andrew (DP) said he had no problem with Clause 34 (2)(a)(iii) or (iv). However, he found Clause 34 (2)(a)(i) problematic. For example, if a bank was to raise its charges [banks are exempt from FAIS, this was purely an example], this could be said to harm the relationship with the bank. This illustrates that 'harming the relationship' is so wide as to give an almost unfettered discretion. If the registrar does not take action could an action then be brought against the registrar?

Mr Wessels said that although the (i), (ii), (iii) and (iv) are clouded in wide wording, there is an essential element to all of them. In addition to stipulating that the practice continues it is also required that one or more objects of the Act may be defeated. This additional requirement must be noted because it restricts this discretion. This was borrowed by a suggestion made in a judgement on undesirable practices.

Mr Andrew agreed that this link is crucial but did not accept that (ii), (iii) and (iv) are in the same category. Where were the objects of the bill set out?

Ms Hogan found Mr Andrew's approach problematic. Since each clause of the Bill deals with one or more objective, should there still be a separate clause dealing with the objects of the Bill?

Professor van Zyl responded that nowadays legislation usually includes a separate provision dealing with the objectives. Furthermore, there is the long title and contents of the Bill from which the object can be detected. For instance, in FAIS, it can be detected that consumer protection is an objective. In FAIS there is no specific clause on the objects; he cautioned against limiting the ambit of the Bill.

Clause by Clause consideration of the Bill
Mr Wessels pointed out that most of the amendments emanate from the matrix, which reflects the combined view of all parties, including the FSB.

Clause 1: Definitions
Clause 1(3)(a)(4) has been deleted and there is now a new Clause 1(4), dealing with banks. When a bank advises a client on deposits exceeding twelve months that are subject to the full application of the Act but are exempt on short term deposits.

Ms Hogan explained that this arose out of discussion with the banks. She raised the issue of microlenders and referred in particular to the recent problems between ABSA bank and UNIFER. In a recent interview the CEO of ABSA said that UNIFER's problems were caused by unregulated activities of its brokers. The restrictions placed on them were ignored.

Mr Wessels said that UNIFER were registered as a bank.

Ms Hogan said it appeared that as a bank, UNIFER had a relationship with its brokers. This is different to the insurance industry where there is an intermediary relationship with brokers. FAIS covers intermediaries.

Mr Wessels added that if advice or a brokerage service does not relate to advice on financial products, as defined, it will not be covered. For now, enough is being taken on. In the future, if there is added capacity they could amend the Act and FAIS could cover loans, which are currently excluded.

Ms Hogan put it to him that micro-lending does not fall under FAIS because loans are not defined as a financial product?

Mr Weesels said that unfortunately that was the case.

Mr Van Rooyen, head of the FSB, added that in the case of UNIFER there was a breakdown in risk management, especially with regard to brokers. How could you grant brokers commission and then allow them to approve loans themselves? He added that the FSB specifically engage with institutions on their risk management processes. The micro-lending industry, however, falls under the Micro Finance Regulatory Council.

Ms Hogan replied that the brokers ignored restrictions placed on them. And she was not sure whether risk management is an area which the MFRC regulates.

Mr Van Rooyen said that risk management is the responsibility of the institution.

But, Ms Hogan, said, intermediaries are acting recklessly.

Dr Van Zyl commented that the perhaps the Trade and Industry Consumer Affairs Committee could do something about it. Could they ask this Committee to do an investigation?

Mr Ken Andrew (DP) said that there were other bodies and legislation (such as the Usury Act) which ensures that an institution does not lend money unreasonably. FAIS goes in the other direction; it protects clients when they give money to banks through deposits. FAIS does not tackle irresponsible brokers in the banking sector.

Ms Hogan questioned why insurance brokers are there included?

Mr Andrew replied that they take money from the public.

Mr Wessels disagreed with Mr Andrew's approach. The central object of FAIS is to regulate market conduct. People do get bad advice on loans and it may be that loans belong here. But at this point the ambit of FAIS must be directed and they still need to grow capacity. Theoretically the situation with UNIFER brokers is that they are the same as insurance brokers. FAIS is taking huge steps but it would be logical to include loans at some point.

Ms Hogan said that there would be problems in this delineation, especially with respect to loan products. However, she could see the difficulty of opening up to loans right now. But was the FSB committed to including loan products? Is it just a capacity problem?

Mr Van Rooyen said that this speaks to the current review at policy level in the FSB and can be addressed as part of that debate. It is also part of the discussion around a super regulator.

Clause 2
A new position has been created; a deputy executive officer, who is also the deputy registrar. The executive officer is the registrar.

Clause 3(1) and (2), (3)
A decision taken by the registrar is to be put in a written form. A new Clause 3(3) obliges the registrar to consult with a regulatory or supervisory person referred to in Clause 42.

Clause 4
The registrar has the power to extend time periods for his activities. Clause 4(3) has changed. It was questioned what the meaning of 'contrary to the public interest' was. This phrase was therefore substituted and deleted.

The registrar may seek an interdict urgently for interim relief pending an action which may take place at a later time.

Clause 5
An Advisory Committee on Financial Service Providers is being set up, on which three interested groups will have representation. In the meantime a shadow committee has been set up. This advisory committee will have to be consulted frequently. For now, things can be bounced off the shadow committee and they are hoping that eventually this shadow committee will become the real committee and they can then simply formalise issues. In this was they can expedite the process to meet the promulgation date of 1 April 2002. The Committee may be tasked with various duties and also have the provisions of the Commissions Act at its disposal.

Clause 6
The Minister may delegate down to the head of the National Treasury, the registrar or another official in the Treasury, except the power to make regulations. The Board may also delegate to the Chairperson, member of the Board or the to the registrar, excluding the power to make rules. If the delegated person omits doing anything the Minister or the Board remain responsible. There will be criteria set for subordination to others. There is already subordinate legislation, which has been commented on.

Clause 7
The Minister will publish a date in the Gazette and from this date no person may act as a financial service provider (FSP) unless this person has been issued with a licence in terms of Section 8. By the promulgation date of 1 April they hope to have subordinate legislation in place already.

In terms of Clause 7(2), if you buy a product, having been intermediated by someone not authorised, the contract with the product supplier will be enforced.

Mr Lekgoro (ANC) said that if an agent knows he is not authorised, how do you protect the client against improper conduct? If the client was misguided he has recourse to full remedies. In Clause 36 it stipulates that of a person contravenes Clause 7(1) the person is liable for a fine and so forth. But this does not eman that a client cannot use civil remedies, even though the contract ermains valid. This takes the same approach of insurance legislation.

Clause 8(a)(b)(c)
When makign an application for a licence or authorisation a candidate must show honesty, competency and financial soundness to become a licenced financial service provider. Key individuals of applicant trusts or unincorporated bodies must only show honesty and competency, not necessarily financial soundness.

In terms of Clause 8(3) the registrar may grant or refuse a licence. If he grants the licence he may impose conditions or restrictions. There are many more guidelines for imposing conditions and restrictions. In terms of Cl8(3)(b) such conditions include the introduction of a new key individual or other changes made. The registrar must be informed and will then take the necessary steps.

In terms of Clause 8(6), should the registrar refuse an application it is subject to appeal.

Clause 9
The registrar may suspend a licence if the licenced provider no longer meets the requirements of honesty, competence or financial soundness. When the registrar suspends a licence he must publish it in the Gazette. There may be an urgent suspension but the person has the right to be heard and the Registrar has to respond within a reasonable time.

Dr Rabie (NNP) asked what constitutes a reasonable time.
Mr Wessels replied that whenever the term 'reasonable' is used, you must look at the circumstances. It may be that taking longer with the decision does not matter but often there are interests to be guarded. A shorter rather than a longer time is preferable.

Clause 10
This clause sets out the circumstances under which he may withdraw a licence. There is a reference to Clause 9(2), which deals with the processes the registrar needs to go through.

Clause 11
A license lapses where an estate is sequestrated or a company is liquidated or the business of a licencee is dormant. The registrar must be advised of the lapsing and the reasons for it.

Clause 12
A product supplier may be exempt in terms of what they must submit to the registrar in applying for a licence.

Clause 13
Clause 13 deals with representatives of authorised financial services providers. A representative is someone working for a FSP or mandated by the FSB. No one may be a representative unless they are working for a FSP who is authorised or exempt. The FSP must accept responsibility for the representative in implementing an agreement. The responsibility for acts and omissions of the representative is on the FSP.

Clause 14
The FSP has responsibility for ensuring that if the representative does not comply with requirements that he is prohibited from providing financial services. The registrar must be informed in writing.

Clause 15
Dr Van Zyl explained that there was a constitutional concern about principles of conduct towards consumer protection and avoidance of conflict of interest. A dedicated code for banks has already been drafted. The enabling provision is now Clause 15(2)(b).

Clause 17
More than 16 000 compliance officers need to be authorised because ensuring compliance with the compulsory provisions is important. The compliance officer may also act as a whistleblower to the Registrar. There is also provision made for appointment criteria. If you are a single practitioner you have to act as your own policeman but you have the same requirement or duties as the compliance officer.

Clause 18
In terms of maintenance of records they have cut costs by setting out what records need to be kept. The period has also been changed from five to three years to comply with industry practice.

An ANC member asked what would happen if a claim came up and a four year old record has been destroyed. Will this not affect the claim?

Dr van Zyl responded that if a FSP can afford to keep records for a longer period it will be advantageous, especially where a complaint arises.

Ms Hogan asked how long the Financial Intelligence Centre Act requires records to be kept for? She asked them to enquire about this and also for how long SARS retains records.

Clause 19
This clause sets out the accounting and auditing requirements. There was a complaint that the provision was too onerous. The statements of the relevant financial year must be audited by an auditor.

Prof Turok (ANC) asked whether the auditor and accountant can be from the same firm.

Dr van Zyl said that they may be from the same firm.

Prof Turok thought this sounded hazardous.

Mr Wessels said that when it came to listed companies the two cannot be from the same firm but it is acceptable in all other circumstances.

Prof Turok suggested that the FSB needs to look at this question.

Ms Hogan added that the Accountancy Profession Bill is in the pipeline and this aspect will come under scrutiny.

Prof Turok said that some time ago he received a complaint that separate accounts are often retained for a long time, and it draws interest. Is there a limit on the time for which it may be retained?

Dr Van Zyl said that while this is a part of a contractual agreement it is also subject to a code of conduct. If it is contrary to the interests of the client it may be in violation of the code. In terms of the Financial Institutions Act trust money must be available and readily payable on demand.

Clause 19(4) regulates the duty of an auditor to inform the registrar of irregularity in the conduct or affairs or conduct of the FSP. If the registrar finds the auditor is not doing his job he may be terminated. However, in terms of Clause 19(5) the registrar must be informed of the reason for the termination of an auditor. Termination may be due to the auditor doing his work too well and uncovering irregularities.

Mr Wessels said that there had been many complaints about the provisions relating to accountants and auditors. However, he had written a letter to many African countries on how they regulate their brokers and he was surprised to learn that their regulation of brokers is heavy-handed. Many have capital requirements for brokers, fitness and competency and also auditing requirements.

Clause 32
This clause regulates civil remedies. The registrar may apply for an interdict, pending an action in terms of Clause 33. The registrar may also institute a class action on behalf of consumers for compensation for loss suffered. This provision follows the example of the Insider Trading Act.

Prof Turok said he had just been involved in work around a class action and it is very difficult.

Mr Wessels said there was no overall common law class action in SA law and therefore it must be provided for in legislation. Only the Insider Trading Act has provided for the action so far. It was very difficult. In this case there may be far more evidence of loss, which may make the action easier. The FSB have recovered millions through settlements but it is necessary to provide for class actions and they are confident that it would work.

Clause 34
The Clause regulates undesirable practices and they believed it to be beyond constitutional reproach now.

Clause 35
The Minister may make regulations after consultation with the Advisory Committee. A number of regulations have already been drawn up.

Clause 36
The clause sets out a number of heavy penalties for offences and contraventions.

Clause 37
The imposition of penalties must take into account civil awards. The penalty or fine goes to the state and the civil award goes to the public.

Clause 38
The Registrar should be formally advised of an application for liquidation of the business of a financial service provider.

Before completing the clause by clause briefing Ms Hogan asked the FSB to address two important policy issues. These were the Policyholder Protection Rules (PPR) and the inclusion of health brokers in FAIS.

With respect to health brokers the Council for Medical Schemes suggested that vendors of health services would fall under FAIS, to which they were opposed. The Council argued that an amendment to Clause 45(1)(a) brought medical fund administrators as well as health brokers within the ambit of FAIS as the Medical Schemes Act did not regulate these persons. In other words FAIS, by default, regulate certain functions not regulated by the Medical Schemes Council. Clause 45(1)(a), before it was deleted, had referred to Section 65 of the Medical Schemes Act. Now there will also be the repeal of Section 65(3) and (4) in the Schedule to the Bill. This gives the Medical Schemes Co

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