Financial Services Laws General Amendment Bill [B29-2012]: National Treasury informal briefing

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Finance Standing Committee

13 November 2012
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The National Treasury informally briefed Members on the Financial Services Laws General Amendment Bill. This Bill was an 'Omnibus Bill'. In future there would be a smaller annual Omnibus Bill, similar to the Taxation Laws Amendment Bill, The Bill addressed urgent issues in 11 financial sector laws. These included legislative gaps highlighted after the 2008 financial crisis and the need to align these laws with the new Companies Act (No. 71 of 2008) and other legislation. The Bill aimed to ensure that even during the transition to the 'Twin Peaks' system South Africa had a sounder and better regulated financial services industry promoting financial stability, and had a strong financial sector regulatory framework with enhanced supervisory powers for the regulators. National Treasury gave an overview of legislation amended, and noted gaps identified by the International Monetary Fund (IMF)/World Bank Financial Sector Assessment Programme (FSAP). The Bill also addressed ensuring higher consumer protection standards, removing duplication in terms of the Consumer Protection Act, and dealing with mergers in the non-banking financial sector. National Treasury explained the public consultations on the Bill, and key issues: aligning to the new Companies Act 2008, strengthening the regulatory framework and enhancing enforcement powers, inspections and on-site visits, policyholder protection rules, broadening of advisory process, publication of subordinate legislation, overlapping regulatory powers, and strengthening emergency powers of the South African Reserve Bank to act quickly and decisively to mitigate a potential or actual financial systemic or stability risk. National Treasury also explained key changes to the Financial Services Board Act, including limitation of liability, responsibility of the Financial Services Board (FSB), and consultation on mergers. National Treasury also explained key changes to the Pension Funds Act and to the Insurance Acts. National Treasury emphasised that the Bill dealt with urgent legislative requirements. National Treasury continued to engage with affected NEDLAC constituencies. The Bill was urgent because of the need to commit for peer review and to align with existing legislation.

ANC Members asked the FSB what it did if it found that the information given in an on-site visit was incorrect and no documentation was volunteered. Did the FSB have the legal right to seize any documentation? They also asked how the introduction of the National Health Insurance (NHI) would align with the legislative proposals for medical aid schemes, about the Banks Act (No. 94 of 1990), protection of personal information, accident cover, the role of the National Credit Regulator, how the legislative proposals would affect the South African Reserve Bank, and about the implications that, if a regulated person had acted within the law, no person should be liable for any loss. How would removing the words 'but not grossly negligent' affect the general public's protection. They asked if National Treasury could group the similarities of the current Acts so that the Committee would have a better understanding of the reasons for the amendments. This was especially so where the Bill limited the powers of other regulators.

DA Members fully agreed with the provisions for the protection of policy holders but disagreed with the insistence on urgency. Rules were not made 'at the speed of light'. Previously Section 55 of the Short Term Insurance Act allowed the regulator to introduce rules, provided that they were approved by the Minister and the public had had the opportunity to comment. Now the new Bill removed the Minister from the process. This could impact on freedom of speech. 'The regulator would now have the authority to pass its own legislation.' This seemed extraordinary. Could one really make the regulator both part of the legislature and part of the executive? The Bill clearly contained 'some contentious stuff'. This Bill might simply add to the impression of some in the legal community that legislators were expecting members of the public to take too much on trust. In its deliberations on the Financial Markets Bill and the Credit Ratings Services Bill the Committee had managed to highlight the role of competition as a regulatory tool. This role of competition was not apparent in the presentation. One could not abandon the principles of civil liberties and justice while setting out to establish stronger regulators. What was the NEDLAC process? Surely NEDLAC needed to finalist its view on the Bill first? If not, why not? There had been criticisms in the pres that the Bill gave excessive legislative powers to the FSB, and that this Bill was 'a bill of attainder', which gave the regulator powers to find a party guilty and punish without the due judicial process. The use of the word 'draconian' was inappropriate. Regulation should consist of options along a continuum from no regulation to harsh regulation, with 'light touch' or moderate in between. 'Draconian' raised a red flag about a tendency throughout these bills as one approached the twin peaks process to be excessive.

In its responses National Treasury maintained that the proposed legislation was 'appropriately harsh', precisely because so many had fought hard for human rights.

Meeting report

National Treasury Financial Services Laws General Amendment Bill 2012 Presentation
Background
Mr Ismail Momoniat, National Treasury DDG: Tax and Financial Sector Policy, said that the Financial Services Laws General Amendment Bill 2012 was an 'Omnibus Bill'. In future there would be a smaller annual Omnibus Bill, similar to the Taxation Laws Amendment Bill, where amendments were effected annually. The Bill addressed urgent issues in the financial sector laws. He emphasised the word 'urgent'. These included legislative gaps highlighted after the 2008 financial crisis and to align these laws with the new Companies Act (No. 71 of 2008) and other legislation. The Bill aimed to ensure that even during the transition to the 'Twin Peaks' system, South Africa had a sounder and better regulated financial services industry which promoted financial stability, had a strong financial sector regulatory framework, and had enhanced supervisory powers for the regulators.

Overview of legislation amended
The financial sector laws updated included: the Financial Services Board Act (No. 97 of 1990), the Inspections of Financial Institutions Act (No. 80 of 1998), the Financial Institutions (Protection of Funds) Act (No. 28 of 2001), the Long-term Insurance Act (No. 52 of 1998), the Short-term Insurance Act (No. 53 of 1998), the Pension Funds Act (No. 24 of 1956), the Financial Advisory and Intermediary Services Act (No. 37 of 2002), the South African Reserve Bank Act (No. 90 of 1989), the Collective Investment Schemes Control Act (No. 45 of 2002), the Financial Services Laws General Amendment Act (No. 22 of 2008). the Co-operative Banks Act (No. 40 of 2007), and the Medical Schemes Act (No. 131 of 1998).

Further background
There was still an urgent need to address gaps within financial sector legislation and mitigate existing risks in the financial system. The Bill, therefore, addressed several urgent areas. It addressed gaps identified by the International Monetary Fund (IMF)/World Bank Financial Sector Assessment Programme (FSAP) to adhere to international standards for financial regulation. It was important to note that South Africa was currently undergoing a peer review on implementation of the FSAP. It addressed aligning financial sector legislation with the new Companies Act. It also addressed ensuring higher consumer protection standards and removing duplication in terms of the Consumer Protection Act (No. 68 of 2008) dealing with mergers in the non-banking financial sector, and ensuring adequate emergency powers to deal with systemic risks to the financial system. Many of the gaps were noted in the policy paper 'A Safer Financial Sector to Serve SA better'.

Background on Twin Peaks reforms after the global financial crisis
The background was making financial regulators/supervisors like the Financial Services Board (FSB) and Banking Supervision Department much stronger, more intrusive and much tougher – it was meant to be draconian in line with G20 commitments. He emphasised the words 'stronger', 'intrusive', and 'draconian'. The background included the re-organisation of the Prudential Regulatory Authority in the South African Reserve Bank (SARB) and transforming the Financial Services Board (FSB) into a new market conduct regulator. Regulators would need to be protected from legal liability when they acted. The General Secretary of the Congress of South African Trade Unions (COSATU) had concerns on this issue of legal liability, but National Treasury believed that COSATU's position was not correct and, if adopted, would be a move back to the 'light touch' regulation which had caused the financial crisis. Financial institutions would be held to higher standards on consumer protection, market conduct, capital reserves, liquidity etc. Financial institutions would also have to continue to meet access targets, as agreed in the Financial Sector Charter.

Public consultations on the Bill
The Bill was approved by the Minister of Finance and Cabinet on 22 February 2012 and released for public comment on 9 March 2012. The comment period was extended from 13 April 2012 to 2 May 2012 to accommodate stakeholder requests for an extension. A total of 35 submissions were received during the public comment process. Each submission was thoroughly considered by the National Treasury and the Financial Services Board (FSB).In May 2012, the National Treasury also held an information session with key industry stakeholders including the Association of Savings and Investments South Africa (ASISA), the Banking Association of South Africa, the Institute of Retirement Funds, and the South African Insurance Association. National Treasury consulted with the National Economic Development Council (NEDLAC) chamber and labour federations. National Treasury met with any party who wished to engage, and, even if technically late, considered their submissions. Details of responses to the 35 submissions were included in the documentation pack for Members. In September 2012 the Bill was tabled in Parliament. The tabled bill reflected the changes made to take account of the comments received during the consultation process and the 35 submissions received, and differed considerably from the version of the Bil tabled in March.

Key issue 1: Aligning to the new Companies Act 2008
Ms Jeannine Bednar-Giyose, National Treasury Director: Financial Sector Regulation and Legislation, said that the Bill sought to: align terminology used in all FSB legislation with terminology used in the Companies Act 2008 (e.g. the new Companies Act 2008 redefined 'public company' and 'subsidiary company'); align certain duties stipulated in financial sector legislation with how those duties were reflected in the new Companies Act (e.g. the duty to declare interests and duties relating to the investment of trust property in the Financial Institutions (Protection of Funds) Act) 2001; and ensure that FSB legislation appropriately referred to business rescue procedures in the new Companies Act 2008, while retaining existing enforcement procedures contained in the Financial Institutions (Protection of Funds) Act 2001, so that Registrars had appropriate mechanisms at their disposal to appropriately enforce their legislation.

Mr Momoniat pointed out that the new Companies Act 2008 had all kinds of implications for the financial sector. He also pointed out that even under the old Companies Act 1973, banks were not subject to insolvency procedures, and for good reason. The concept of bank rescue was new. National Treasury had taken extensive legal advice. There would be more changes in future.

Key issue 2: Strengthening the regulatory framework and enhancing enforcement powers
Ms Nonku Tshombe, FSB Head of Department: Legal said that the following amendments took into account the FSAP recommendations and addressed regulatory gaps identified in the FSAP: strengthening the operational independence and effectiveness of the Registrar of Insurance, by extending the powers of the Registrar to apply to court for the winding-up of an insurer without first securing the approval of the Minister; empowering the Registrar of Pensions, Insurance and Collective Investment Schemes to take swift and decisive action when necessary to protect consumers and financial stability by enhancing inspector’s powers to summon persons to provide documentation required for an inspection, and allowing the Registrar to publish details of inspection, if it was in the public interest to do so.

Mr Momoniat said that it was in the public interest for regulators to be able to make public comments, especially when the truth was flagrantly distorted by those who should face sanctions. He emphasised that as more powers were provided, National Treasury was looking at making sure that regulators or supervisors were also held more accountable.

Key issue 3: Inspections and On-site Visits
Ms Tshombe said that the Bill proposed to include specific amendments to extend the powers of various registrars on-site powers and enable appropriate expertise to be appointed to assist in successfully carrying out an on-site visit. On-site powers were different from inspection powers. Inspection powers contained in the Inspections Act were aimed also at investigating unregulated persons conducting the business of financial institutions and could be exercised where entities unlawfully operated outside the regulatory framework. On-sites are limited to FSB regulated entities. On-site visits were regular reviews of regulated institutions as part of ongoing supervisory activities, and enabled the Registrar to obtain information and detect problems early. For the most part inspections were of a forensic nature.

Registrars needed the power to be able to appoint suitable skills to assist with on-site visits because industry specific, specialised skills such as external auditors, and external actuaries might be needed for on-site visits. For example, for overall effective supervision there might be a need to secure assistance from persons with expertise in hedge funds, derivatives or other complex financial instruments. In the light of recent deliberation in relation to on-site powers, the tabled Bill would, where appropriate, be amended to align to the approach adopted in the recently adopted Credit Rating Services Bill.


Ms Tshombe pointed out that the purpose of an inspection was not to seize documents, but to investigate whether there had been any contravention or non-compliance that should concern the regulator. Thereafter the regulator would be duty bound to collect documents and necessary evidence.

Mr Dube Tshidi, FSB Executive Officer, said that on-site visits were a supervisory tool. In these visits, the regulator functioned like an auditor. The on-site visits were preceded by statutory submissions. It was wise that, from time to time, the regulator actually visited an entity to verify these statutory submissions. If something seriously amiss was detected, it was then that an on-site visit would lead to a formal inspection or investigation.

Key issue 4: Policyholder Protection Rules
Mr Momoniat said that the Bill empowered the Registrar of Insurance to make Policyholder Protection Rules, to give effect to treating customer fairly principles, without Ministerial approval. This was an important market conduct power that National Treasury thought was necessary, though it had been questioned in articles in the Financial Mail and Business Day. He gave the example of a car insurance product and of intimidation of the Short Term Insurance Ombud. The provision enabled the Registrar to act swiftly to protect consumers by improving disclosure in insurance contracts, for example, policyholders were mislead into thinking that they had “comprehensive” motor insurance cover, when in fact, the cover was partial with exclusions.

Ms Jo-Ann Ferreira, FSB Head of Insurance Regulatory Framework said that standardised policy wording would help consumers compare insurance policy benefits and risk. The provision was in line with international standards. The USA, UK, Singapore, China, South Korea and Malaysia had introduced standard contract provisions, exclusions and definitions.

Mr Tshidi said that the aim was to prevent service providers from including devious insinuations in the clauses of insurance contracts, for example, the word 'comprehensive' in respect of a certain form of motor insurance. He also said that the value of one's car over time decreased, but one's motor insurance premiums remained the same. All these issues needed to be addressed.


Mr Momoniat said that it was scandalous that a well-known bank was behind an insurance product, where a claim would be paid only if there was 80% damage to the client's car. To this day he had not heard an apology.

Mr Momoniat said that the ombuds should be operationally independent, and not subject to pressure when they acted against bad products.

Key issue 5: Broadening of Advisory Process
Mr Momoniat said that there were currently too many industry advisory bodies, standing committees and boards operating at the expense of the tax payer. The aim was to rationalise consultation processes, and broaden to cover all key stakeholders. The current legislation was inflexible, and overly prescriptive and restricted to specific persons only (rather than stakeholder representatives). The coming twin peak reform would formalise consultation processes with stakeholders, but in the meanwhile the Bill enabled the Minister to prescribe better standards for consultation on regulatory and policy issues, through a code of engagement, consultation and communication for the FSB.

Key issue 6: Publication of subordinate legislation
Ms Bednar-Giyose said that in light of recent deliberations regarding what constituted subordinate legislation, the Bill was carefully examined to ensure that the publication of subordinate legislation and actions of the FSB Registrars were appropriately addressed. The regulations prescribed by the Minister would continue to be published in the Government Gazette. Rules issued by the Registrar, for example, Policyholder Protection Rules, would be published for comment and tabled in Parliament; the final rules would be published in the Government Gazette. Directives, exemptions and other similar subordinate measures would be published on the FSB website rather than in the Government Gazette, when restricted to licensed operators. Where a directive or exemption had been issued in the interest of consumer protection, then the Registrar might consider publishing such directives and exemptions in the Government Gazette. A list of directives and exemptions intended to have general application would be published annually as a schedule to the FSB annual report tabled in Parliament.

Key issue 7: Overlapping Regulatory Powers
Mr Momoniat said that it was important to begin to recognise a lead regulator. The Bill proposed amendments to the FSB Act to deal with overlapping legislation. It established the FSB as the lead regulator, where there was concurrent jurisdiction and where there were conflicts with other legislation (e.g. the Consumer Protection Act 2008, the Competition Act (No. 89 of 1998), and the Companies Act 2008) or regulators. It limited the powers of other regulators unilaterally to take actions and decisions relating to the financial services sector without consultation. It overrode the Consumer Protection Act. He emphasised that the financial sector must be held to higher standards of consumer protection, especially given the shift to twin peaks and a new market conduct regulator/supervisor. financial contracts might require instantaneous protection (e.g. transfer of funds), and also a very long period of protection (e.g. pension funds). There would be an interim period of overlapping jurisdiction between the FSB and the Consumer Commission.

Key issue 8: Strengthening Emergency Powers
The Bill empowered the South African Reserve Bank to act quickly and decisively to mitigate a potential or actual financial systemic or stability risk by removing section 13(c) of the South African Reserve Bank Act 1989, which unduly constrained the ability of the Reserve Bank to provide emergency liquidity to the banking system during a financial crisis, rather than resort to the taxpayer.

Key changes to FSB Act (No. 97 of 1990) amendments in tabled Bill
FSB limitation of liability: the initial Bill proposed to delete the words “bona fide, but not grossly negligent” from the FSB Act. The FSB had therefore perhaps been given undue immunity. This provision had since been amended to address public comments, including the comments of some of the unions. Now the FSB would be protected from liability if it acted in good faith. This was a standard measure, but one wondered if it went far enough, as people needed to be protected even after they had left the regulator, since regulators made enemies every time they acted against those exploiting the financial system, or policy-holders. The IMF had done a survey on this.

Ms Tshombe said that this Clause tended to be unfortunate because of its heading, as it suggested that the regulator was seeking to limit its liability. However, this was not the issue. There had to be a clear process of establishing the liability of persons who were acting, in good faith, within the law. Anyone acting outside the legal framework became liable. She explained different forms of liability and how it should be established.

Mr Momoniat said that this was a key provision to ensure that there was effective regulation. Without it there would be very 'light touch' regulation, as the regulator would be afraid to act against anyone for fear of being held liable.

The Clause on the responsibility of the FSB Board had been revised to ensure that decisions taken by the enforcement committee would not be overturned by the Board. Emergency powers: the initial Bill proposed to empower the Minister to act quickly and decisively to mitigate a potential or actual financial systemic or stability risk. In light of the comments received, it was proposed that this amendment be deferred to the broader 'Twin Peaks' discussions underway.

Consultation on mergers: the wording of this Clause had been refined to provide for the Competition Commission to consult with the Minister and FSB Registrars in respect of mergers in the financial sector. Conflicts with other legislation: the wording of this Cause had been refined and simplified to appropriately define the relationship of FSB legislation with other legislation. Function of the Board: the wording of this clause had been refined to extend the functions of the FSB Board to deal with consumer financial education matters, which everyone agreed was of critical importance. Confidentiality: a new provision had been provided to ensure that information received by the FSB was treated confidentially. This provision did not preclude the FSB from sharing information with fellow Regulators and the National Treasury.

Key changes to the Pension Funds Act in tabled Bill
In the appointment of the deputy Principal Officer (PO), discretion was given to funds for the possible appointment of a deputy PO and delegation of a PO's functions by the Board. There was a requirement that Board members attain level of skills and training as prescribed by the Registrar within six months. Fund registration prior to undertaking pension fund business: there was provision to curb the undertaking of non-registered fund business by requiring funds to approach the Registrar with an application to register. Protection for whistle blowers: there was provision for whistle blowing protection for Board members, valuators, principal/deputy officers, and employees who disclosed material information to the Registrar.

The liability of non-payment of contributions extended to certain individuals liability for the non-payment of pension fund contributions by an employer was extended to certain individuals, for example, directors, shareholders, partners within the employer. The removal/repeal of the advisory committee was to enhance the independence of Registrar and reduce costs on the taxpayer. The liability of trustees provided for circumstances in which a court might find a trustee not liable if a trustee acted independently, honestly and reasonably. Broader reforms would also deal with how one strengthened trustees, and how Government could assist capacity and education for trustees, and make them less dependent on the service industry.

Mr Olano Makhubela, National Treasury Chief Director: Financial Investments and Savings (responsible for insurance, pension funds, investment funds, and governance in the National Treasury) said that an especially important amendment was on training of trustees. The unions had felt strongly that a statutory mechanism was required to make it mandatory that once a trustee was appointed, within six months he or she should ensure that he or she was sufficiently trained for the position, and remained so trained. Being a trustee was a major responsibility.

A bank should not begin the business of a pension fund unless it was registered. National Treasury was not in favour of provisional registration of pension funds. This was part of the market conduct consumer protection objective.

Protection of whistle blowers related to some of the accidents that one had seen with pension funds. It was necessary to give whistle blowers incentives by providing them with protection, but not in the form of monetary reward.

Employers had been taking contributions to pension funds but the money was not transferred to a pension fund. Therefore it was necessary that the law should enable action against the shareholders, directors and partners.

The provision for liability of trustees related to the earlier provision on enhancing governance. He explained further.

Mr Momoniat added that National Treasury had now produced four of the five papers that it had promised on retirement reform. These were on the National Treasury website.

Key changes to Insurance Acts in tabled Bill
Comments were noted that the Clause on Policyholder Protection Rules (PPR) provision could extend the scope of delegated powers to the Registrar if there was no Ministerial approval and no public consultation afforded. The wording of the Clause had been refined to provide for a reasonable comment period before the PPR were published. In an emergency situation, the Registrar might publish the PPR without public consultation; however, the reasons for the emergency publication must be provided for upon publication. The Bill further required that the PPR be tabled before Parliament. A period for objection by the public and Parliament had been provided.

Other Amendments in tabled Bill
An amendment to the Co-operatives Banks Act 2007 was required to transfer the supervisory function of the Co-operatives Banks Development Agency to the Banking Supervision Department of the SARB and provide for the SARB to be the sole supervisor of co-operative banks.


Ms Reshma Sheoraj, National Treasury Director: Financial Sector Policy, said that an amendment to the definition of 'business of a medical scheme' in the Medical Schemes Act (No. 131 of 1998) (MSA), sought to make the definition of medical schemes clear. It was required to support the Demarcation Regulations, which the National Treasury and the Department of Health (DoH) were finalising. The Regulations aimed clearly to distinguish health insurance policies from medical schemes policies. This had been a long standing issue since the early 2000s, when insurance products were seen to be undermining medical aid schemes. The Draft Demarcation Regulations were released for public comment on 2 March 2012. A total number of 343 comments were received. There was strong resistance to some of the proposals in the Regulations, specifically the proposal to ban 'gap-cover' products, which covered the difference between what a medical aid scheme would cover and what a specialist would charge. The National Treasury and DoH were still going through a review process following the public comments. The revised Regulations would be released once this review was finalised.

Mr Momoniat noted that this was a big issue.

Conclusion
Mr Momoniat emphasised that the Bill dealt with urgent legislative requirements. The Bill was extensive, and had elicited many public comments (some with no formal submissions). There was a request to take Bill to NEDLAC, even though this had been discussed in a NEDLAC chamber. Some criticised the Bill on the ideological basis of powers of regulators. National Treasury recommended that the Standing Committee on Finance invite those making public comments to submit comments to Parliament and to appear before the Committee. National Treasury continued to engage with affected NEDLAC constituencies. The Bill was urgent because of the need to commit for peer review and to align with existing legislation. There was guidance on the Parliamentary process as this was not new legislation like the Financial Markets Bill [B12-2012] and Credit Rating Services Bill [B8-2012] but was more like the Taxation Laws Amendment Bill as an omnibus bill amending 11 current Acts.

Discussion
Mr E Mthethwa (ANC) asked the FSB did if it found that all the information it had been given in an on-site visit was incorrect and the company visited volunteered no documentation (slide 3). Did the FSB have the legal right to seize any documentation?

Ms J Tshabalala (ANC) sought clarity on the legislative proposals for regulators. 'Who takes what, and when?' How did the legislative proposals align with the regulations that would follow?

Ms Tshabalala asked how the introduction of the National Health Insurance (NHI) fit in with the legislative proposals for medical aid schemes.

Ms Tshabalala asked about insurance, the Banks Act, personal information and the protection of such, and accident cover.

Ms Tshabalala was concerned that personal information was not adequately protected as any shop anywhere could, at the click of a button, obtain personal information about a customer's identity very easily.

Ms Tshabalala asked also about the role of the National Credit Regulator.

Ms Z Dlamini-Dubazana (ANC) said that the Chairperson was so right to say that Members must examine the 11 current Acts. As Mr Momoniat had said, they were different from the Tax Laws Amendment Bill and the Taxation Administration Laws Amendment Bill. She asked if National Treasury could, if possible, group the similarities, if some of the current Acts had similarities, so that the Committee would have a better understanding of the original Act and the reason for amendments. This was especially so with reference to slide 15, where the Bill limited the powers of other regulators. It was necessary to understand the powers given to other regulators, so that, if there was a dispute about the powers given to the registrar, the Committee would be able to understand that these powers given to other regulators were to be limited.

Ms Dlamini-Dubazana wanted to be clear about how the legislative proposals would affect the South African Reserve Bank.

Ms Dlamini-Dubazana asked about the implications of the provisions that, if a regulated person had acted within the law, no person should be liable for any loss (slide 17, bullet 3). How would it affect the general public's protection If one were to remove the words 'but not grossly negligent'?

Mr D Ross (DA) fully agreed with the provisions for the protection of policy holders. However, he disagreed with National Treasury's apparent insistence on urgency. Rules were not made 'at the speed of light'. Why not leave it to the Minister or the regulator to make the rules, with reference to the democratic process in Parliament? He had read the article by Professor Robert Vivian, Professor of Finance and Insurance at the University of the Witwatersrand. The insurance industry certainly thought that this was an attack on the very sustainability of the insurance industry. Previously Section 55 of the Short Term Insurance Act allowed the regulator to introduce rules, provided that they were approved by the Minister and the public had had the opportunity to comment. Now the new Bill removed the Minister from the process. This was a complete new dimension, and could have problematic implications as to freedom of speech. 'The regulator would now have the authority to pass its own legislation.' This seemed extraordinary. It was also of concern that the regulator could operate in terms of 'a bill of attainder'. Had National Treasury abandoned that proposal? It had been in the press statement. Could one really make the regulator both part of the legislature and part of the executive? He asked National Treasury for its view on the proposal that Section 55(3)(b) be scrapped.

Mr T Harris (DA) said that the Bill clearly contained 'some contentious stuff'.

Mr Harris asked when Members would receive the pack of documentation mentioned by Mr Momoniat, which would include, Mr Harris imagined, the inputs that National Treasury had received so far. Business Day had included comments from a law lecturer at the University of Cape Town (UCT). He quoted. He cautioned that this Bill did not simply add to the impression of some in the legal community that legislators were expecting members of the public to take too much on trust. In its deliberations on the Financial Markets Bill and the Credit Ratings Services Bill the Committee had managed to highlight the role of competition as a regulatory tool. This role of competition was not apparent in the presentation.

Mr Ross had spoken about liberties. Mr Harris' view was that the problem was one of civil liberties and justice. One could not abandon those principles as one set out to establish stronger regulators. It was a deficit that he detected throughout the presentation.

Mr Harris understood that the Bill had been taken to NEDLAC, but perhaps not formally. What was the NEDLAC process? Surely NEDLAC needed to finalise its view on the Bill first? If not, why not?

Mr Ross had covered the two criticisms in the press, from Professor Vivian, in particular. The one was that the Bill gave excessive legislative powers to the FSB, and the other was that this Bill was 'a bill of attainder', which gave the regulator powers to find a party guilty and punish without the due judicial process. It was a new concept for Mr Harris.

Mr Harris was quite surprised to see the National Treasury's emphasis on the use of this word 'draconian'. He reminded Mr Momoniat that the definition of 'draconian' was 'excessively harsh and severe'. This should not be the role of any regulator. Regulation should consist of options along a continuum from no regulation to harsh regulation, with 'light touch' or moderate in between. Certainly, if something is overly harsh and severe, it would not be a regulatory approach which he and his colleagues could support, or indeed which any legislature could, in good faith, support in the process of establishing such a regulatory framework. One did not want to be excessive; one wanted to be appropriately harsh. Taking out the reference to draconian legislation did not preclude moving quickly or regulating harshly. 'Draconian' for him raised a red flag about a tendency throughout these bills as one approached the twin peaks process to be excessive. This word was not appropriate.

Responses
Mr Momoniat dealt with the issue of regulation and whether it was harsh or draconian. He believed that the proposed legislation was 'appropriately harsh', precisely because many in the room had fought hard for human rights. The possibility that National Treasury would seem to be compromising on those rights was something to which it would seriously have to apply its collective mind. Many of its staff would defend the Constitution to the death. However, National Treasury believed that what South Africa was doing was not out of line with what the other G20 countries were doing. No regulator in South Africa could call in a bank on Friday night and order it to close, or to merge with another bank, but this had happened in the USA. Fortunately, South African law, unlike the law of the USA, did not regard corporates as persons. South Africa was saying that anyone who played in the financial sector must have the appropriate licence. South Africa had a problem with the question as to whether all persons who extended credit were regulated. Did they pass a fit and proper test? Many financial players were not fit to operate and did not have a democratic right to do so. The incentive structure in the financial sector was such that people could not just abuse but affect the livelihoods of millions of people. Market conduct processes in South Africa were atrocious. Where else could someone take, legitimately, 60% of all the growth in a person's pension fund? Consumers were never going to be as advanced as the financial sector, and it was vital to equalise in order to protect the weak. This was why South Africa had an ombud system. National Treasury used the word 'draconian' because it did not want to pretend to be a wolf in sheep's clothing.

National Treasury took seriously the views of people like Professor Vivian, and would make such articles available. Indeed, Mr Momoniat had responded to him. However, 'legal experts don't know what he's talking about'. Therefore, he wanted the Committee to invite Prof Vivian to explain himself. 'I don't think he's talking nonsense, in some instances.' However, he should declare his interests. However, Mr Momoniat did not think that Prof Vivian's issues were valid. The Committee could call Mr Brian Martin, the previous ombud. There should be open discussion. The market conduct regulator should have norms and standards. Moreover, Parliament allowed delegation of powers, whether to the Minister or to an entity, although there must be checks and balances, and the regulators and supervisors should be made much more accountable when they dealt with subordinate legislation.

Whether one published in the Government Gazette was not really the issue but rather the powers that regulators had. He would like to do a comparison, country by country, of the powers that regulators had. They really were draconian at times, and appropriately so, but they were also corrective. On the other hand, in the United Kingdom, where banks were charged over the insurance product that they had and where there was the LIBOR case, or where there were money laundering cases that various regulators had taken up, these were big, big issues. In such instances the powers of the regulators were enormous, to the extent that, as in New York recently, when a regulator acted against a person, that person just pleaded guilty, because it was too difficult to take on a regulator. It was because of the regulators' enormous powers that they must be accountable.

Aside from limiting the regulators' liability, they should be called much more often to Parliament and on specific instances.

However, if one took action against any person, that person would come back with all kinds of allegations. These were not easy issues. However, South Africa was not being an exception to the trend. At the same time, it was necessary to comply with the Constitution.

Financial institutions operated globally but were regulated nationally. With Basel III one had to apply global standards. Given that South Africa was a small country, those global standards were not always the best for South Africa, as they were determined by the big players. These were issues that National Treasury was worried about.

In terms of the speed of light, to obtain rules at the level of Parliament did take time, and this was why there were regulators in this instance, and they had some legislative powers. He explained how Parliament might determine the framework, while the regulators worked out the detailed rules. The broad framework should have some political endorsement.

Mr Momoniat said that the more competition the better. However, if one looked at the banking sector, the banks that survived were the ones that were more concentrated. If one wanted to establish another bank, one needed a group of people who had sufficient capital. One could look at other countries and see that there was a limited number of retail banks. It was good to have competition, but it was necessary to have a balance with safety. It was a hard trade-off and required judgement. When establishing the lead regulators, National Treasury sought to make sure that there were higher standards, for example, in consumer protection, and that it was achieving the spirit of the other legislation that it had exemptions over. So, in business rescue, one wanted to make sure that one made every effort to save the institution, not close it down.

Mr Tshidi, said that on-site visits were not meant to be investigations. On-site visits were preceded by statutory submissions. The on-site visit was for the regulator to confirm what the regulated entity had submitted. When FSB employees went out to conduct an on-site visit, they were not officially appointed as inspectors in terms of the Inspection Act. Whatever they might discover on an on-site visit, if it was serious, they would bring back that information, so that inspectors were formally appointed and sent out to do a proper investigation. This was the difference between the on-site visit and the inspection.

Mr Tshidi also dealt with being found guilty without due process. This spoke to the earlier issue of making public inspection reports. Often there was publicity in the media about a person who claimed to have been found guilty by the FSB, and there was public sympathy, but, in the meantime, members of the public had not seen the investigation report. This was why the FSB was asking for a provision to publish the investigation report so that whoever complained about being found guilty could be confronted with the findings of the investigation report. These investigation reports were substantial and elaborate documents. No statement was made in those reports without an attachment. It was important for the FSB to have the power to publish its investigation reports.

Mr Tshidi explained the issue of the FSB's liability. There was a provision in the FSB Act to the effect that anybody who was aggrieved by the decision of the regulator had the right to challenge that decision. The challenges to those decisions were done in terms of what was done domestically 'and if you succeed, good luck'. If one did not succeed, the matter would be elevated to the courts of law. The FSB wanted to address – not for people to assume that whatever decision the registrar may have taken with good intentions (the intentions might be good but the outcomes might be perceived as negligent or perceived to be harmful). A person still had the right to challenge the registrar's decision, but it was wrong to say, that, because of this, the registrar was automatically liable. It was not a legal principle anywhere in the world to say that a person was guilty until proven innocent. A person was innocent until proven guilty. The FSB was saying that this was not to stop anybody from challenging a decision of the regulator internally and through the courts.

Ms Jo-Ann Ferreira, FSB Head of Insurance Regulatory Framework said that if one looked at the FSB's mandate from Parliament, this mandate was based on two critical elements. Firstly, it was to protect the public by ensuring that there were sustainable financial markets. It was not a matter of industry versus the consumer or the industry versus the regulator. It was necessary to realise that, when the industry engaged with individuals, there was an inequality in respect of sophistication. When an ordinary person signed an insurance contract, 2 000 lawyers would have examined it beforehand, from the viewpoint of the insurance company's best interests. The ordinary individual, on the other hand, received advice from one person at the most on his or her rights. All the FSB wanted to establish was fairness between the ordinary consumer and the industry. To do that it was important that somebody be able to examine the advice provided and the product provided; and sometimes it was important to intervene in that relationship between consumer and the industry. If one considered what Prof Vivian had said about contractual freedom, it was important, in the FSB's view, also to have fair contractual relationships. The FSB was not saying that the industry was trying to exploit consumers, but rather that it was necessary to have legislation to protect the public from the few who were not upstanding citizens.

It was the FSB, in this case, that implemented the legislation, but it was Parliament which gave the FSB its mandate, and the FSB's job was to protect consumers.

The supervisory process was quite a complex one, and it was built on trust and engagement with the people that the FSB regulated. Very few entities objected to the on-site visits, and, as Mr Tshidi had explained, it was to ensure checks and balances. However, sometimes the FSB discovered that there were not enough funds to cover policy-holder liabilities or to cover all assets on loan. It was then that the process of an inspection needed to start. There were a number of regulatory interventions. Ms Ferreira explained.

Mr Momoniat explained who was responsible for banking and insurance. At present there was the Banks Act, the Long Term Insurance Act, and the Short Term Insurance Act, each of which gave powers to various regulators. In banking, the regulator was in the South African Reserve Bank. In insurance it was the FSB. The Bill was structured per Act amended. Many of these were common approaches across the field.

Mr Momoniat thought that a pack of documents had been circulated to Members. This included the explanatory memorandum, Clause by Clause. It also dealt with the matrix of the comments received, and the details. He was puzzled as to what had happened to it but would ensure that it was sent to the Members.

Mr Momoniat explained the issue of medical aid schemes, in which the young effectively subsidised the old. It was important to discourage schemes to which only the old contributed, while the young did not whilst still benefiting from the scheme if they needed medical care. This was why there was the discussion on national health insurance. To the extent that there were medical aid schemes currently, there was a demarcation between general insurance products and medical schemes, which were a form of insurance. It was dealing with that gap, or so called gap cover – the hospital plan that paid, for example, R50 000 if a person went into hospital; what one found was that the more people who took out a hospital plan, the fewer people who took out a medical aid scheme. These were hard issues.

Mr Momoniat said that the Protection of Personal Information Act (POPIA) would deal with some of Ms Tshablala's concerns. Everyone needed to be protected from these issues.


Mr Momoniat said that National Treasury was not obliged to take these bills to NEDLAC. The law was clear on what legislation needed to go to NEDLAC when such legislation affected key constituencies.

Mr Momoniat referred to National Treasury's papers on retirement, preservation of funds, and auto-enrolment. National Treasury had tabled proposals. It did not believe that it could proceed with those issues unless there was consensus. He hoped the proposals would not get stuck at NEDLAC like the youth wage subsidy. The unions were not opposed to these proposals, but just concerned at the timing.

National Treasury had raised the issue of retirement costs at NEDLAC meetings, but did not need NEDLAC's endorsement to decide on bringing down the cost of retirement. The only people who might object would be industry. Mr Momoniat did not believe that there were issues with this Bill in this regard. The unions had supported the Bill's proposals on sanctions against employers who did not hand over contributions.

Ms Tshombe said that the Protection of Personal Information Act would go a long way to protect the dissemination of information. This Act also took precedence. To the extent that regulatory activities needed some level of protection from the provisions of that Act, there were exceptions built into the Act to enable regulation.

Ms Tshombe responded on the question of whether because a person had acted within the law he or she would not be liable. This was not what the amendment said. The present legislation said that a person would not be liable for actions in good faith but not if the person was grossly negligent. This assumed that all the other requirements for the person to be liable were assumed. There were several requirements for a person to be held liable in a court of law. She explained in detail. The present legislation limited liability if a person was not grossly negligent. Even with the concept of gross negligence, there were difficulties. It was therefore appropriate to amend this particular piece of legislation to make it congruent with the Constitution. She explained further.

Ms Bednar-Giyose responded to a question on the amendment to Section 13 of the South African Reserve Bank Act. It listed certain prohibited business that the South African Reserve Bank could not currently engage in, for example, subject to certain other provisions, generally not lend or advance money on security of a mortgage on immovable property or of another bond or cession thereof or acquire immovable property. The Bill proposed to remove that prohibition. So then the South African Reserve Bank, could, potentially, in a situation where credit needed to be provided to the financial markets, it could potentially loan or advance money on the security of a mortgage or acquire immovable property. The amendment was just to open up an avenue to provide liquidity in a financial crisis.

The Chairperson asked Mr Momoniat what kind of time frames he envisaged, not - he hastened to add – 'draconian' time frames.

Mr Momoniat replied that National Treasury would be happy if the Committee could process the Bill by March 2013, after which National Treasury would want to present the twin peaks legislation. However, one would not be falling off a cliff if the Bill was not completed by March or April.

The Chairperson joked about the fiscal cliff. Economists were becoming creative with new definitions.

The Chairperson said that the issues covered by the Bill were very urgent. The discharge of fiduciary responsibilities of trustees of pension funds was not a good example of proper conduct. If one talked about wastages in the public sector, it might not be comparable to individual wastage in that area of pension funds, where the most vulnerable were robbed of their lifetime savings. There had been a very porous regulatory environment. Parliament must be seen to be doing something about it. Interventions in the insurance sector were long overdue. Parliamentarians must be motivated by the need to protect the consumer, as there was inequality between the industry and the consumer, for example, with so-called 'comprehensive' motor insurance, where there were many loopholes to the disadvantage of the ordinary individual consumer.

The Chairperson proposed at least a day's workshop to gain a fuller understanding of all these issues, even before the public hearings. It would be a very interesting process. The consumers must be represented in the hearings.

The meeting was adjourned.



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