Credit Rating Services Bill [B8 -2012]: Committee deliberations

Meeting report

Introduction
The Chairperson called upon Members and delegates to find a way to process the Credit Rating Services Bill [B8 -2012] in a manner that reflected concern for a sector of South Africa's economy that needed to be assisted; however, Members should not be too worried about a Business Day report on the 05 September 2012 meeting (see relevant documents): they were present to make laws. Last week the Committee had completed Clauses 1 to 3; and Mr T Harris (DA) was to confer with National Treasury on Clause 4. It had also been agreed that written submissions should be sent to the Committee Secretary for forwarding to National Treasury so that it could respond in advance. He was not sure how many comments had been made.

Credit Rating Services Bill [B8 -2012]: National Treasury responses to Committee Comments
Committee's general comments
Mr Roy Havemann, National Treasury Chief Director: Financial Markets and Stability, referred to the National Treasury Responses to the Committee’s comments following the 05 September Meeting document. The Committee had raised comments referring to the relative stringency of the South African regime relative to other regimes. In particular, the concern was raised that following the European Union (EU) standard was not appropriate. National Treasury's response was that the EU, particularly the United Kingdom, was the main market for fundraising for the South African National Treasury, state-owned entities, and private companies, while the United States was not a big market for fundraising at all. The Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (H.R.4173) [USA] was not necessarily simpler and it would be necessary to completely redraft the Bill to follow the US approach. In general South Africa was better off following the European Securities and Markets Authority (ESMA) especially since most of South Africa's companies did business there. (See document, paragraph 1).

Clause 1: Definitions and interpretation
Mr Havemann referred to the Parliamentary Monitoring Group (PMG) minutes of the Finance Standing Committee dated 05 September 2012 meeting (see Relevant Documents) and quoted Adv S Swart (ACDP)'s suggestion. National Treasury's response was to propose new wording: '”credit rating services” means data and information analysis, evaluation, approval, issuing or review for the purposes of credit ratings.' (See document, paragraph 2).

Members confirmed their agreement.

Clause 3: Application of Act
Clause 3(1)(b)
Mr Havemann said that National Treasury's response to Mr Harris's concern, and to Dr Oriani-Ambrosini (IFP)'s concern, was to propose that the wording follow the EU regulation: 'this Act applies to credit ratings issued by credit rating agencies registered in the Republic'. (See document, paragraph 3).

Members confirmed their agreement.

Clause 3(2)
Mr Harris had indicated that the endorsement regime was a problem because it would be cumbersome for credit rating agencies (CRAs) to obtain approval from the registrar for each rating that they intended to endorse. National Treasury believed that the Bill as it now stood allowed for the registrar's approval of agencies as such and did not require the registrar to approve individual ratings case by case. Mr Havemann quoted Clause 18(4)(a) in the Bill as tabled [B8-2012], and explained that the Bill allowed for three types of entities to provide credit rating services, or issue credit ratings in South Africa: South African agencies; external agencies that qualified as external companies in terms of the Companies Act (so that they were required to have some presence in South Africa – see Clause 5); and external agencies that formed part of the group of a South African agency and were approved by the registrar (see proposed new Clause 4(1)(b) below). Thus National Treasury did not think it appropriate to do away with the endorsement regime. (See document, paragraph 5).

The Chairperson asked Mr Harris if he was satisfied.

Mr Harris replied that he thought that Clause 18(2) implied that endorsement would have to apply on a rating-by-rating basis.

Ms Z Dlamini-Dubazana (ANC) pleaded that one issue be addressed at a time.

Mr Harris said that if his proposal for Clause 4 (see below) was accepted, it would mean deleting Clause 18.

Ms Retha Stander, FSB Senior Legal Adviser, said that the intention was to provide for the consequences of when a rating was endorsed; it was not with regard to the approval basis but to the status of that rating once it had been endorsed by the local agency.

Ms Jeannine Bednar-Giyose, National Treasury Director: Fiscal and Intergovernmental Legislation, said that  in drafting practice as stipulated by the State Law Advisers it was preferred to use the singular, in this case 'a credit rating', even though it would be equally appropriate to read it as 'credit ratings'; it was not intended to preclude the plural.

Mr Harris understood that under the EU system which South Africa was replicating to a degree, each credit rating needed to be endorsed. Was South Africa following same approach, and would a credit rating issued by an external credit rating agency for use in South Africa have to be endorsed in line with EU legislation?

Mr Havemann replied that the endorsement provision was in the Bill because of the EU legislation, and this was why National Treasury did not want to take it out. The current draft of the Bill had been submitted to the EU and it was happy with it. 

Mr Roland Cooper, FSB Board Senior Specialist: Credit Ratings, explained how the Bill made provision for a credit rating agency group to be approved and the ratings issued by the approved entities in the group to be valid in South Africa, provided that the group was domiciled in a domain which had regulations equivalent to those of South Africa. If not, there would have to be endorsement of the credit rating itself.

Mr N Koornhof (COPE) asked if it would not be better to prescribe in full in Clause 18 the requirements for endorsement of external credit ratings.

Adv Frank Jenkins, Senior Parliamentary Legal Adviser, could not answer directly. However, as the requirements were explained in Clause 18 made more sense. He did not know how a court would deal with the matter, as they had not, in South Africa, dealt much with credit rating agencies. There was little in the common law about credit rating agencies. The clarification principle might be preferred to leaving it wide.

Credit Rating Services Bill [B8 -2012]: Committee deliberations
Clause 4: Use of Credit Ratings
The Chairperson noted that the Committee was now dealing with Clause 4 in conjunction with Clause 18.

[New] Clause 4(1) [Credit Rating Services Bill finalised with amendments ….]
Mr Havemann had said, with reference to Mr Harris's proposal, that National Treasury proposed new wording which combined Mr Harris's wording and that proposed by the Association for Saving and Investment South Africa (ASISA): 'Where a regulated person uses published credit ratings for regulatory purposes, such a regulated person must only use credit ratings that are: (a) issued or endorsed by credit rating agencies which are registered in accordance with this Act or (b) issued or endorsed by an external credit rating agency approved by the registrar'. (See document, paragraph 4).

[New] Clause 4(2) [Credit Rating Services Bill finalised with amendments ….]
National Treasury's response was that Mr Harris's proposal was already captured under Clause 5(10). However, National Treasury could agree to an additional Clause 18(6) to clarify [that] it was modelled on Clause 5(10): 'The registrar must maintain a list of external credit ratings agencies whose ratings may be endorsed in terms of this section on the Financial Services Board (FSB) official website.' (See document, paragraph 4).

Mr Harris said that it was a good idea to ask for legal advice, as it was a question of interpreting the law. However, Clause 18(2) still had references to individual credit ratings. Therefore his suggestion, to replace the entire Clause 18, with a short addition to Clause 4, would be much simpler.

Mr Koornhof preferred codification, hence keeping Clause 18. However, National Treasury had conceded that it wanted to add a Clause 18(6), which might make it easier for everybody.

The Chairperson thought that Members had agreed on that.

Ms Bednar-Giyose explained the purpose of Clause 18. Clause 18(2) was intended only to address the legal effects and status of those ratings.

Mr Harris said that if this was the intention, then it was necessary to tighten up the phrasing as it was confusing.

Adv Jenkins thought that the answer lay in the new wording of Clause 4. He did not share the specific confusion of Mr Harris. An endorsement was not on the basis of rating-by-rating. It was on the basis of methodology. National Treasury's proposed Clause 18(6) would make it quite clear that the Bill provided for the endorsement of external credit rating agencies rather than individual ratings. 

Mr Koornhof suggested that National Treasury had changed the definition of 'registered credit rating agency'. If one read that, then the proposed insertion was already present. 

Ms J Tshabalala (ANC) said that National Treasury's wording was correct.

Adv Mongameli Kweta, Senior State Law Adviser, Office of the Chief State Law Adviser, quoted from Clause 18(1). 'Credit rating', whether the meaning was singular or plural, must be read in context.

Mr Harris proposed tightening up the wording to make it clear that reference was to all credit ratings. National Treasury's proposal on the top of the third page of its document added to the confusion. He read from it. It implied a rating-by-rating endorsement. Though he agreed with the spirit of it, he suggested that it should read 'a list of external credit rating agencies whose ratings are endorsed'.

The Chairperson asked for Members' agreement that they would take one Clause at a time.

Ms Dlamini-Dubazana concurred exactly.

The Chairperson thought that National Treasury's wording was sufficient.

Mr Harris said that it was not.

Ms Dlamini-Dubazana referred Members to National Treasury's written response to Mr Harris. What Mr Harris was saying now was an addition to his written submission.

Mr Koornhof said that he would prefer the word 'are' to 'may be'.

Ms Dlamini-Dubazana clarified that Mr Koornhof was referring to National Treasury's proposed new Clause 18(6) (see Document, paragraph 4).

The Chairperson said that perhaps 'may be' was ambiguous.

Mr Koornhof confirmed that it was.

Adv Jenkins said that one must still make an application. The registrar 'may' or 'may not' approve it. The approval, if granted, would apply to all the ratings from the agency concerned. One could not say that the ratings 'are' approved in terms of the proposed Section. The registrar would not endorse on his or her own initiative. One must apply to have them endorsed. Therefore to use the word 'are' would not add clarity. So he would prefer retaining 'may'.

Mr Havemann completely agreed with Adv Jenkins. The registrar did not endorse ratings (as distinct from external credit rating agencies). The credit rating firms in South Africa endorsed credit ratings. So it would be onerous on the registrar to maintain a list of all the ratings that the ratings agencies had endorsed. If 'may' was to be changed to 'are' then it would be necessary to add a Clause to the effect that ratings agencies must submit a list to the registrar of all the countries whose ratings they endorsed.

Mr Harris said that this was his proposal.

Mr Havemann proposed a compromise: to keep Clause 18 and add Clause 4(2). Having obtained EU approval for it, National Treasury would not remove Clause 18.

Ms Tshabalala wanted to deal with Clause 18 when the Committee came to it.

Ms Dlamini-Dubazana supported what Mr Havemann and Ms Tshabalala had said. National Treasury, whose drafting was crystal-clear, had responded adequately.

Mr Havemann was perfectly happy with the added Clause 4(2), so long as it was understood that Clause 18 remained. With that in mind, National Treasury accepted the wording suggested by Mr Harris.

Members agreed.

Clause 5: Application for registration
Ms Dlamini-Dubazana said that Members had read this Bill for more than two weeks.

The Chairperson observed that Mr Harris always felt obliged to respond to any point that Ms Tshabalala raised. Was it a youth issue?

Mr Harris wanted to return to this Clause later. 
The Committee did not appear to complete its consideration of Clause 5, but, in the light of the Chairperson's closing remarks (see below) it appears that the Committee agreed to this Clause.

Clause 6: Suspension and cancellation of registration
Members agreed.

Clause 7: Duties [of credit rating agency]
Clause 7(b)
Mr Harris felt that it was going too far to give the Registrar powers that went beyond the Act, so he argued that any words after 'this Act' should be deleted.

Mr Havemann said that National Treasury always wanted the registrar to have enough flexibility to request additional information, but accepted Mr Harris's proposal. 

Ms Dlamini-Dubazana had a problem with removing 'this Act'.

Mr Van Rooyen asked what other information the registrar might require. The sub-clause must have been drafted in that way for a reason. 

Ms Stander agreed. It was difficult to envisage beforehand which information might be required for a specific purpose. She suggested extra wording to limit 'additional information'.

Mr Koornhof felt that the Committee had lost the debate on the definition of 'this Act'. Who decided what 'additional information' was? He wanted an example why National Treasury and the FSB wanted these additional powers for the registrar.

Mr Cooper said that the registrar might require additional information in the light of an objection from a member of the public to an application for registration.

The Chairperson thought that 'any additional information requested by the registrar' needed to be qualified, as it might be interpreted too widely by those who were charged with administering the law.

Mr Cooper replied that in terms of the G20 and many regulatory authorities worldwide, South Africa had agreements to cooperate. If a credit rating agency in South Africa registered and issued a rating for an entity in another country, and that country, in terms of the MoU requested South Africa to obtain additional information, the registrar would need that additional requirement.

Ms Dlamini-Dubazana agreed with Mr Harris. Too much power was given to the registrar. The requirement for any 'additional information' should be qualified.

Adv Jenkins understood the concern. He suggested, instead of 'any additional information requested by the registrar', substituting 'any information necessary for the implementation of this Act'.

The Chairperson said that the shorter a sentence the better. He proposed 'in terms of this Act'. Any additional information should be understood as being in terms of this Act.

Members agreed.

Clause 7(c)
Mr Harris wanted a limitation to any material change in that information.

Mr Havemann was open to the Committee's views.

Ms Tshabalala endorsed the Chairperson preference for economy in the use of words.

Mr Van Rooyen was comfortable with the existing wording, which was clear in the context of Clause 5 (see above).

Mr Harris said that a huge amount of information was required. He wanted to eliminate irrelevances by adding 'material' changes.

Adv Kweta favoured Mr Van Rooyen's view. Clause 5 was confined to a specific list which left no confusion as to what information, if there were any changes, should be given to the registrar. Adding the word 'material' might give rise to different interpretations of what constituted 'material' change leading to subsequent confusion and argument.

Mr Van Rooyen agreed with Adv Kweta. He was satisfied that, reading this sub-clause in conjunction with Clause 5, if there were any changes the registrar must be informed.

Mr Harris asked National Treasury if its understanding was that if a credit rating agency changed its catering company it must notify the registrar.

Mr Havemann referred Mr Harris to the definition of outsourcing.

Mr Harris accepted this explanation.

Clause 7(f)(i)
Mr Harris corrected the grammar of this sub-clause.

Mr Havemaan conceded this change.

Members agreed.

Clause 8: Appointment of directors
The Chairperson thought that this was a standard Clause.

Members agreed.

Clause 9: Methodologies, models and key rating assumptions
Members agreed.

Clause 10: Credit ratings
Clause 10(b)(2)
Mr Harris considered the obligation to provide an explanation of the key elements underlying a credit rating was entirely reasonable, but then the sub-clause went on to state that the explanation must mean that an investor, a potential investor or a member of the public was able to understand how  a rating was arrived at. He was concerned at the idea that the credit rating agency had an obligation to make someone understand. A physicist could explain quantum physics to him over and over again but he would still not understand. One could not impose a legal obligation on that physicist to make him understand. This sub-clause's requirement went too far.

Ms Dlamini-Dubazana said that this sub-clause was correct according to the Constitution, in order to ensure transparency.

Ms Stander explained that the purpose of the wording was to include an objective element to that credit rating so that a 'reasonable person' would be able to understand it, and to comply with the EU regulations and ESMA for purposes of transparency.

Ms Dlamini-Dubazana agreed.

Mr Harris still thought that it was too much to ask of a credit rating agency.

Ms Tshabalala said that the point of the sub-clause was to provide enough information to enable a potential investor or member of the public to make an informed decision.

Mr Koornhof asked if there would be any objections to removing 'lines two and three'. There were many activists who might subsequently challenge a credit rating on the basis that they did not understand the basis on which it was determined, and succeed in convincing the court.

Mr Harris said that, even with the plain language provision, it was still necessary to ensure that the credit rating was in plain language such that a reasonable person could understand it. However, this sub-clause just went too far.
Mr Cooper added that one of the financial crisis criticisms was that the rating reports and the publications on ratings were not easily understood. Also the wording levelled the playing field so that all investors, from the sophisticated to the beginner, had a fair opportunity to make the required decisions.

Mr Havemann agreed with Mr Cooper. To clarify Mr Harris's point about plain language, the rating itself must be in plain language. Here one was referring to the explanation of how the rating was arrived at, which should also be in plain language. One of the reasons for this was to reduce the cost for clients of using the credit rating agency's service. It was necessary to impose some kind of requirement on the credit rating agency to help the people who used the ratings to understand the ratings.

Mr Koornhof was convinced by the above explanation to retain the requirement, except to remove the words 'member of the public'.

The Chairperson disagreed and wanted to keep the sub-clause as it was.

Mr Harris still did not agree with the above explanations.

Ms Dlamini-Dubazana said that his concerns would be noted.

The Committee agreed to Clause 10 but noted Mr Harris's concern.

Clause 11: Code of conduct
Members agreed.

Clause 12: Outsourcing and other services
The Chairperson observed that there had already been discussion of outsourcing.

Members agreed.

Clause 13: Disclosures
Members agreed.

Clause 14: Records
Members agreed.

Clause 15: Annual report
Members agreed.

Clause 16: Independent compliance unit
Mr Harris was concerned at the level of responsibilities given to the compliance officer under Clause 16(3)(f). Effectively the compliance officer was to be asked to resolve, avoid or mitigate any conflicts of interest. The compliance officer's role was not one of managing those issues. Such was the responsibility of the board. The most that one could ask the compliance officer to do was to refer any material conflicts of interest to the board. He wanted instead the words 'refer any material conflicts of interest to the board'.

Mr Cooper talked from experience on this point and from the EU requirement. One of the compliance functions clearly was to eliminate and to manage conflicts of interest, and this was evident from the actual practice of compliance units of credit rating agencies. The compliance units needed to eliminate and manage conflicts of interest rather than report it before any credit rating was made rather than wait for the registrar to resolve issues. Moreover, it was difficult to see how the registrar could resolve such issues other than by issuing directives. The intention was that the agency should resolve conflicts of interest by itself.

The Chairperson suggested the words 'in consultation with the board'.
Members agreed.

Clause 17: Accounting and auditing requirements
Ms Tshabalala suggested some rewording.

Mr Havemann conceded that there was repetition on numerous occasions of 'registered credit rating agency' in that Clause. These words could certainly be removed from the second part. Sub-clause (a) could also be changed.

Members agreed.
Clause 18: Requirements for endorsement of external credit ratings
The Chairperson observed that the Committee had already spent much time on this Clause (see above).

Mr Harris repeated his earlier statement that the Clause was redundant. Moreover, in the way it was written it was unclear whether one was providing a blanket endorsement to all external credit rating agencies or were indeed following the EU's model whereby every external credit rating needed to be endorsed. In consideration of the Committee's earlier amendments to Clause 4, he again proposed deleting Clause 18. 

Mr Koornhof had an alternative proposal; he wanted to add Clause 18(6), as he had mentioned earlier. He also favoured a codification provision.

Mr Cooper explained that the EU did not require an endorsement of every rating. It had a blanket endorsement for each credit rating agency and its group. National Treasury and the FSB had followed that model in drafting the Bill.

Ms Dlamini-Dubazana supported Mr Koornhof's proposal for inserting Clause 18(6).

Mr Havemann, with reference to the inclusion of Clause 4(2), whereby the registrar would have a list of external credit rating agencies, was not sure how maintaining a list justified deleting Clause 18, which formed the entirety of Chapter 4.

The Chairperson sensed that the general agreement was that Clause 18(6) and Clause 4(2) adequately covered the concerns raised earlier on.

Mr Harris asked that his objection be recorded. He asked what the exact wording of Clause 18(6) was.

Mr Havemann replied that the wording was as given in paragraph 4 of the Document: 'The registrar must maintain a list of external credit rating agencies whose ratings may be endorsed in terms of this section on the FSB official website'. Mr Koornhof was correct.

Mr Harris proposed grammatical amendments. 'May be' should be changed to 'are'.

The Chairperson thought that this subject had been concluded earlier.

Ms Dlamini-Dubazana agreed. 

The Chairperson noted that the Committee had agreed to Clause 18 as amended, subject to noting Mr Harris's objection. (See also discussions on Clauses 3 and 4.)

Clause 19: Liability of credit rating agencies
Clause 19(3)
Mr Havemann said that Mr Harris had proposed deleting Clause 19(3) in the Bill as tabled and replacing it with new wording (see document, paragraph 6). Mr Havemann said that the courts were wary of allowing companies to contract out of their liability. Moreover, contracting out of liability was unconstitutional. This was really an unnecessary sub-clause.

Ms Stander said that the FSB wanted to make it abundantly clear that, as with any other service provider, if a credit rating agency acted in a way that caused damage, it would not be immune to a delictual claim.

Adv Jenkins had difficulty with this sub-clause at first, but then accepted it. He explained South African contract law, and how its interpretation was now changing in the light of the Constitution and the boni mores, or principles of the community. Under the Constitution, community rights and individual rights had come to the fore. The Consumer Protection Act (No. 68 of 2008) totally outlawed contracting out common law remedies. This sub-clause was in line with that. Therefore this sub-clause should be retained. In South Africa it was very difficult to claim pure economic loss, unless one could prove a direct cause for the loss. He doubted if just reading an opinion and acting upon it would be sufficient for a claim against a credit rating agency. It always depended on the facts.  Without this sub-clause, a court would examine the contract between a credit rating agency and the user of the credit rating, and say that the user had contracted out and was not allowed to claim because the credit rating agency was not liable for negligence. If the user wanted to overturn that contractual provision, he or she would have to go to court and argue on the basis of either the Consumer Protection Act or the Constitution that 'this Clause' went against community values. If the court agreed, and he thought that the court would agree, there would be only one example that was binding between that user and the credit rating; it did not follow that it would be a principle throughout South Africa– this was the nature of a court ruling, which applied just to the people involved in the case. The court could not make that law; Parliament could make the law. It had to be asked if, in South Africa, one had reached the point of saying that in principle that if one entered into a contract one must accept liability. If that was the case, he would argue that it was Parliament's duty to say, in terms of this industry at least, that this was the norm, and that a contract against this norm would be invalid: a court would consider such a contract as pro non scripta. Contrary to his earlier impression, this sub-clause did not prevent a credit rating agency insuring itself against liability.

Mr Harris said that the whole of Clause 19 exposed credit rating agencies to claims from any investor or member of the public.

Ms Bednar-Giyose proposed another paragraph in sub-clause 19(3) to indicate that the existing provision did not preclude a credit rating agency from entering into a contract of liability insurance.

Mr Harris did not accept that Ms Bednar-Giyose's proposal answered his actual concern, though he did not object to the proposal.

Mr Cooper said that after the financial crisis there were comments across the markets that one should not rely on these credit rating agencies. This Clause provided that if someone chose to rely on a credit rating, that person had recourse. However, this was not something that the registrar would be able to enforce.

The Chairperson asked for clarification.

Mr Cooper replied that the registrar would not be able to compel an investor to take action against a credit rating agency.

Ms Tshabalala was comfortable with the explanations.
 
After much discussion the Chairperson proposed deferring further consideration of Clause 19 as it was very involved.

Members agreed.

Clause 20: Independence
Members agreed.

Clause 21: Registrar and deputy registrar of credit rating agencies
Members agreed.

Clause 22: Delegation and assignment
Members agreed.

Clause 23: Powers and duties of registrar
Members agreed.

Clause 24: Rules
Clause 24(1)(f)
Mr Harris proposed deleting Clause 24(1)(f). He was not sure how the registrar could make rules about rating assumptions. It was a matter of opinion and it was the core business of the credit rating agency'. One could not register opinions or assumptions.

Mr Cooper explained that in terms of the Memorandum of Understanding (MOU) currently being completed with Europe a rating agency must publish its rating assumptions. Furthermore, it must show that the rating assumptions had been adapted for particular instances.

Ms Dlamini-Dubazana seconded the removal.

Mr Koornhof wanted to include a definition of rating assumption in the definitions.

Mr Harris supported Ms Dlamini-Dubazana.

Mr Van Rooyen was more comfortable with Mr Koornhof's approach to ensure sufficient empowerment of the minister to make rules.
Mr Havemann accepted both proposals.

Ms Dlamini-Dubazana clarified that she meant 'remove them for now and amend later'.

Mr Cooper explained that the EU had a requirement to publish rating assumptions. The MoU currently being completed was quite factual.

Mr Havemann said that Ms Stander had given him the wording from the EU regulation. He read it. He could consider taking out Clause 24(1)(f) or following this EU wording to make it clear that National Treasury was not going to prescribe rating assumptions but rather prescribe a process or methodology. National Treasury was open to either option.

Mr Harris said that Clause 10 already dealt with methodology. Clause 24 flowed much better, but he was equally uncomfortable with it. He supported Ms Dlamini-Dubazana's proposal to delete the sub-clause until the relationship with the EU was clarified. 

Mr Havemann was happy to delete the sub-clause.

Mr Van Rooyen thought that the EU required that South Africa provide rules on credit rating assumptions. 

Mr Cooper said that there was an original proposal by the EU that it could become involved in signing off the methodologies and assumptions to be used. He was not sure of the current status of that proposal.  One of the decisions made in South Africa was that the FSB would not get involved in the methodologies. He wanted to defer consideration, but stated again that he did not favour making rules about rating assumptions.

Mr Havemann was happy to remove 'rating assumptions'. The second option was to not say that the rules were with respect to rating assumptions, but with respect to the process of arriving at rating assumptions.

The Chairperson observed that some things were not clear at the moment.

Dr Z Luyenge (ANC) was shocked; it was not for the first time that there was a lack of concurrence between FSB and National Treasury. One could not continue like this when dealing with contentious legislation. This gap must be closed.

The Committee agreed to remove sub-clause 24(1)(f) and moved to Clause 25.

Clause 25: Inspections and on-site visits
Clause 25(1)(a)
Mr Koornhof was uncomfortable with this sub-clause. Why not stick with 'instruct an inspector appointed in terms of Section 2' and say in the second line 'carry out an on-site visit or an inspection'. Why the words 'a suitable person'? Surely the powers existed in terms of the Act in any event.

Mr Harris supported Mr Koornhof. This sub-clause undermined the Inspection of Financial Institutions Act (No 80 of 1998).

Ms Stander explained that these provisions were aligned with those in the Pension Funds Act and with those of the Financial Advisory and Intermediary Services Act (No. 37 of 2002). National Treasury was proposing similar powers for all the registrars in the FSB in the Financial Services General Laws Amendment Bill [B21B-2008]. She explained further.

Mr Koornhof asked if a credit rating agency in the course of its daily business conduct a criminal activity.

Ms Stander had been an inspector for a long time and, in her experience, anyone left alone could think of criminal activities to conduct. She was not aware of actual examples in South Africa, but in the USA there were instances where some of the smaller agencies had colluded with issuers to issue false ratings.

Mr Harris asked what the justification was for not simply relying on sub-clause 25(b) and extending the framework provided by the inspection of financial institutions. Why was it necessary to give the registrar power to appoint other people? 

Ms Dlamini-Dubazana did not think that National Treasury and FSB had really applied their minds.

The Chairperson understood that the aim was to make clear what the inspector should do.
Ms Stander replied that the powers of the inspector were captured in the Inspection of Financial Institutions Act. These were similar powers, but these provisions were taken almost word for word from the Financial Advisory and Intermediary Services Act. She explained further.

Ms Dlamini-Dubazana was not sure about the words 'suitable person'.

The Chairperson sought a concrete proposal so that the Committee could move on.

Mr Van Rooyen asked why it was not possible to confine the inspection only to inspectors appointed in terms of Section 2 of the Inspection of Financial Institutions Act.

The Chairperson clarified Ms Stander's explanation.

Mr Cooper explained further with reference to completing the ASMA MoU for cooperation and enforcement, which required on-site visits and the use of an inspectorate. The two are different from each other. The on-site visit was like an annual audit to ensure compliance with the Act. It had no negative intent.

Ms Dlamini-Dubazana disagreed with deleting sub-clause 25(1)(a) but was still not happy with the word 'suitable person'.

The Chairperson said that it might be difficult to define 'suitable person'. It was an operational matter.

Mr Van Rooyen was content with the explanation and was happy to leave sub-clause 25(1)(a) intact.

Dr Luyenge concurred. An operational matter like this could not be a responsibility of the registrar. When one said 'a suitable person', it did not refer to anybody. The key term here was suitability, so there would be a specific aspect that would identify 'a suitable person' in accordance with the contents of this Act.   

Mr Harris asked all Members to refer to the Inspection of Financial Institutions Act. One could invoke all the powers of inspectors in sub-clause 25(1)(b). There was no logic in empowering the registrar with further powers to appoint any person, as in sub-clause 25(1)(a).

Mr Koornhof asked if there would not be a conflict between the Inspection of Financial Institutions Act and this Act. If National Treasury was not happy with the Inspection of Financial Institutions Act then it must propose amendments to it. Which Act would now take precedence, this Act or the Inspection of Financial Institutions Act?

Mr Van Rooyen gathered that there was a difference between an inspection and on-site inspection. Perhaps the registrar was to empower a suitable person to conduct an on-site visit as a preliminary to an inspection.

Mr Harris provided clarity. In terms of this Act, the inspector may enter any premises. This, in Mr Harris's mind, covered on-site visits.

Mr Van Rooyen said that it was obvious that on on-site visit must be conducted before an inspection.

Mr Harris said that it was allowed in terms of the Act.

Ms Stander replied that the FSB viewed the on-site visit and the inspection as two separate processes.

Mr Koornhof asked for an explanation of what the on-site visit could achieve. He appeared concerned that the person conducting an on-site visit could virtually halt the operations of a business.

Ms Dlamini-Dubazana said that the provision was copied from another Act. She also appeared concerned about what the person conducting an on-site visit could do.

The Chairperson said that the duties of the 'suitable person' and the inspector were almost the same. He was inclined to favour deleting sub-clause 25(1)(a) as it was inherent, unless its removal would have catastrophic consequences.

Mr Havemann agreed to remove sub-clause 25(1)(a). However, the implication was that National Treasury would have to remove sub-clause 25(2).

Mr Van Rooyen thought that there was a reason for on-site visits.
The Chairperson said that there was no dispute about the need for an on-site visit. The question was who should perform the on-site visit.

Ms Tshabalala asked for a focus on those duties.

Mr Havemann said that it was necessary to consider the implications of removing sub-clause 25(1)(a) in terms of the on-site visits. Removing it would overly constrain the powers of the registrar to perform his functions under the Act, in particular, the need for the registrar to ensure that the information provided was correct and to do on-site inspections. 

Mr Harris said that Mr Havemann's assessment was correct, but he felt that this was not a problem, as what remained was sub-clause 25(1)(b) which invoked Sections of the Inspection of Financial Institutions Act.

Ms Stander said that there was an inspectorate department in the FSB, but a 'suitable person' was someone – an analyst - from the registrar's office. The FSB was often criticised on the basis that the powers of the different registrars were not aligned. The FSB sought to correct this and so this sub-clause was drafted. There were similar measures in the Financial Markets Bill [B12-2012].

Mr Harris proposed a way forward. Members should receive a copy of the Inspection of Financial Institutions Act and satisfy themselves that this particular Act provided sufficient powers. Thereafter the Committee would reconsider sub-clause 25(1)(a).

Ms Stander said that the 'suitable person' and the inspector had almost the same powers. The Inspection of Financial Institutions Act went a little further, in so far as the inspector was required to produce a certificate of appointment. There were two Sections in the Inspection of Financial Institutions Act which provided specific powers to the inspector. The one related to offices of the institution. The other related to other functions, such as the audit. It also protected the right to legal professional privilege. It brought the whole of investigation into the sphere of a proper forensic investigation. So the inspector had similar powers to those that the on-site 'suitable person' was afforded in this Act, but slightly more powers. However, the inspector was a slightly different person from the on-site 'suitable person', although the 'suitable person' conducting the on-site visit might also open a strong room and interrogate or interview personnel.   

The Chairperson found it hard to make head or tail of these arguments.

Ms Stander explained that the 'suitable person' envisaged in sub-clause 25(1)(a) would not be an inspector, but would conduct an on-site visit, although in the way that the legislation was drafted he or she would have the same powers as an inspector.

Mr Van Rooyen proposed removing also sub-clause 25(2).

Ms Dlamini-Dubazana spoke further about sub-clause 25(1)(a) and said that the duties of the on-site person were supposed to be aligned with the contents of this Act in particular; it was not fitting to copy the provisions of the  Inspection of Financial Institutions Act. She proposed deferring further consideration of this sub-clause.

The Chairperson disagreed. He referred to sub-clause 25(3). Why could this matter not be left with the inspector? There was no 'suitable person' appointed in terms of this Act in the definition of 'suitable person' at the beginning.

The Chairperson said that sub-clause 25(1)(a) was not relevant. There was no need to be hindered by the question of who was a 'suitable person' when the Act was quite clear. He referred to sub-clause 25(1)(b). He asked if the Committee could agree on the removal of sub-clause 25(1)(a) and move.

Ms Dlamini-Dubazana supported the Chairperson.

Mr Van Rooyen agreed but said that some other changes might have to be made in consequence.  

Members agreed.

The Chairperson noted that whether the inspector wanted to perform an on-site visit or a full inspection was immaterial to the Committee. He wanted the inspector to be able to get on with his or her work.

Closure
Mr Koornhof and Mr Harris pointed out that they had other meetings to attend.

The Chairperson wanted agreement on what had been accomplished. Clause 19 remained unresolved.

Mr Harris pointed out that sub-clause 24(1)(f) – the credit rating assumption – remained unresolved.

The Chairperson said that there had been agreement to remove sub-clause 24(1)(f). 

The Chairperson adjourned the meeting until next week (date to be confirmed) when the Committee would, after completing Clause 19, continue its deliberations from Clause 26.

Note: Apologies had already been tendered, in the previous meeting, by Mr Ismail Momoniat, National Treasury Deputy Director-General: Tax and Financial Sector Policy, who was attending a meeting of the Group of 20 (G20) Financial Stability Board.