Credit Rating Services Bill [B8–2012] and Financial Markets Bill [B 12– 2012]: National Treasury briefing

NCOP Finance

21 November 2012
Chairperson: Mr C de Beer (Northern Cape, ANC)
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Meeting Summary

National Treasury explained the background and purpose of the Credit Rating Services Bill [B8B-2012].  The President had signed a commitment to the other Group of 20 (G20) countries to a range of reforms in the financial sector. One of these commitments was to register and create a regulatory framework for credit rating agencies. South Africa was a member state of the International Organization of Securities  Commission (IOSCO) and was required to adopt at a national level  its  principles on the activities of credit rating agencies. Other jurisdictions had introduced requirements for credit rating agencies. If South African companies wanted to sell debt or equity in the EU, they had to have a credit rating from a credit rating agency in the EU or from an agency regulated in a way equivalent to the way such agencies were regulated in the EU. This Bill introduced a framework for regulating credit rating service agencies in South Africa. This framework was similar to those introduced in the other jurisdictions.  There was concern at the 'pro-cyclicality' of credit ratings. Ratings improved as the economy improved and vice versa. This itself could actually create the crisis. There were also major conflicts of interest  when agencies provided constancy services as well as rating services. National Treasury explained key issues - jurisdiction, application, and liability. Credit rating agencies operated globally. They were true multinationals. The key challenge was to create a framework in which the regulation of these agencies would have teeth, and in which South Africa would be able to regulate in line with other jurisdictions. However, South Africa would be able to regulate only what happened  in South Africa. Definitions of 'regulated person' and 'external credit rating agency'.were explained. The Bill would allow credit rating services agencies that were registered in South Africa to endorse ratings from entities in other countries. However, the agency was liable for any claims that might arise  as a result of the rating that it had endorsed. National Treasury had obtained external legal opinion. In the end the Finance Standing Committee and National Treasury agreed that the best approach would be a common law liability. The Bill's original provision that credit rating agencies could not contract out of their liability was amended. After much discussion and after obtaining external legal opinion, it was agreed that it was not necessary to entrench the common law in the legislation. The Bill also provided for investor protection, the independence and integrity of the credit rating agencies, and their transparency and accountability. The Minister and Registrar would regulate the process that the agencies followed not their decisions. The Bill also provided that records must be kept for five years. The Chairperson recommended that Members read the Explanatory Memorandum.

A COPE Member asked what National Treasury meant when by 'without extra-territorial powers' and what prompted the establishment of the G20. An ANC Member asked if this Bill was not really a response to the downgrading of South Africa's own sovereign credit rating. Was a new endorsement needed for every credit rating issued and published. What sort of endorsement was envisaged? If a country or entity was downgraded for any particular incident or reason, could it request to be re-evaluated? Did the Bill provide for South Africa to have its own credit rating agency or agencies, rather than agencies that were merely extensions of overseas agencies and endorsed their ratings? Would this Bill would provide for the establishment of a credit rating agency other than just simply regulating existing agencies? Was South Africa at the mercy of the western credit rating agencies such as Standard and Poor, and Moody's? A DA Member asked when the Bill would become a working document? When would the office of the regulator, under the FSB, be open and staffed? What would be the costs?

In its responses, National Treasury indicated that South Africa as a country could obviously not regulate the activities of institutions that operated outside its borders.

The Committee reported that it agreed to the Credit Rating Services Bill [B8B– 2012] (proposed section 75) without amendments.

National Treasury said that the Financial Markets Bill [B12B – 2012] was essentially an update of the Securities Services Act (No. 36 of 2004) and was part of its approach to broader upgrading of legislation and strengthening regulation in the shift to Twin Peaks.  As a result of the G20 requirements South Africa was required to update its securities legislation. It was thought preferable to bring a new Bill to replace the Act rather than an amendment Bill. Capital markets were important as they converted savings, through investments, into growth. They were also the key way in which pension funds could invest in the system. Thus investment bonds and equities had to be regulated. South Africa was fortunate in that it had an extremely deep and liquid capital market relative to other jurisdictions, and a well-regulated system.  The Johannesburg Stock Exchange (JSE) was regarded as one of the best exchanges in the world. South Africa had the least number of banking crises. The Bill updated the Act mainly by alignment with international developments. Every five years, South Africa was assessed comprehensively by the International Monetary Fund (IMF) and the World Bank. South Africa was also a member of the UNIDROIT convention on insolvency. National Treasury explained the Bill's objects and reviewed it chapter by chapter. A new Clause had been introduced to require the Minister to consult extensively before he exercised his powers. The Bill introduced an independent clearing house, which South Africa had never had before, but which was a requirement from the G20.  Derivative trading needed to be cleared through the clearing house, and records of those trades needed to be sent to the trade repository. South Africa had never had a framework for regulating derivatives before. It was of major concern to the G20 and was a huge step forward in South Africa's legislation. The exchange, the Central Securities Depository, the clearing house, and the trade repository were the four pieces of financial market infrastructure needed to run a financial market. A principle-based code of conduct was imposed. The Bill also had provisions against market abuse and insider trading.  National Treasury  gave further detail on the major changes from the Securities Services Act 2004 and the role of the self-regulatory organizations (SROs) - the JSE and the Central Securities Depository. South Africa was not yet quite ready to do dispense with the SRO model, but as these entities played a role as both referee and player National Treasury had committed itself to a review of SROs. National Treasury felt it unwise to adopt the concept of an 'exchange light' as for such an important institution as the JSE 'light touch' regulation was not appropriate. 

A COPE Member asked about powers of a court to disqualify a person for an indefinite period or a period specified by the court. These were vague. The Principal State Law Adviser said that the principle of separation of powers mandated that the discretion of the court be upheld. An ANC Member asked if there were any transitional arrangements, and asked for details on the Minister's power to issue regulations. He pointed out that certain pieces of legislation had overturned by the Constitutional Court on the extent of public consultation. In whose understanding would the Minister have adequately consulted before taking any particular decision?  National Treasury explained the Bill's detailed consultation process to involve all the relevant stakeholders in the process and to ensure adequate parliamentary oversight of the regulations. The Principal State Law Adviser affirmed that there was no way in which the Minister could abuse his or her powers, as he or she made the regulations in terms of the Act. A DA Member disagreed: Parliament had no determination in the process as given in the Bill.  The DA Member also asked if this Bill would return for amendment when the Twin Peaks model was implemented, and expressed  his party's view that there was a lack of promotion of competition. The market needed to be regulated, but it also needed to be competitive.

The Committee reported that it agreed to the Financial Markets Bill [B12B- 2012] (proposed section 75) without amendments. The Chairperson noted Members' concerns and would refer to them in his statement in the House.
 

Meeting report

Credit Rating Services Bill [B8–2012] (proposed section 75): National Treasury briefing
Mr Roy Havermann, National Treasury Chief Director: Financial Markets and Stability apologised that Mr Lungisa Fuzile, National Treasury Director-General, could not be present at this stage of the meeting. Mr Ismail Momoniat, Deputy Director-General (DDG): Tax and Financial Sector Policy, also could not be present. They were both assisting the Minister in the meeting of the Cabinet being held that morning.

Background
The purpose of the Bill was to introduce new legislation to provide for the registration of credit rating agencies, certain activities relating to those agencies, conditions around the issuance and rules on the conduct of credit rating agencies, and all matters therewith (see Bill).

The reference points to the Bill had been especially around the global financial crisis. The President had signed a commitment to the other Group of 20 (G20) countries to a range of reforms in the financial sector. National Treasury would, in the course of the next year or two, bring a considerable amount of legislation to the House on these G20 commitments. One of these commitments was to register and create a regulatory framework for credit rating agencies. In addition an organization, the International Organization of Securities Commission (IOSCO) had also put out a statement of principles on the activities of credit rating agencies. South Africa was a member state of IOSCO and was required to adopt these principles at a national level.

There were also other jurisdictions – the USA, the European Union (EU) and Australia – which had introduced requirements for credit rating agencies. Members had probably heard about the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (H.R.4173) [USA]. If South African companies wanted to sell debt or equity in the EU, they had to have a credit rating from a credit rating agency. At present, the only way in which they could do that was to obtain a credit rating from a credit rating agency in the EU. If they obtained a rating from a South African credit rating agency such an agency would have to be regulated in a way equivalent to the way such agencies were regulated in the EU. He explained in more detail subsequently.

This Bill introduced a framework for regulating credit rating service agencies in South Africa. This framework was similar to those introduced in the other jurisdictions.

He explained how credit rating agencies, such as Moody's and Standard and Poor, worked. There had been much controversy about their role in the global financial crisis. Thus the G20 had decided that it was important to create a global framework for credit rating agencies to ensure that they behaved appropriately in terms of how they rated instruments. It was believed that such agencies had to some extent exacerbated the current Eurozone debt crisis. Some credit agencies had downgraded countries which were able to repay their debts. In other cases they had not downgraded countries. One of the concerns had been that many countries were not clear on the methodologies used by credit rating agencies in making their ratings. The EU had introduced legislation to ask credit rating agencies to explain how they went about their business and basically to be more transparent. He emphasised that National Treasury's proposals [in line with the EU's] were not telling the agencies what to do but rather to be more transparent. There had also been issues around the 'pro-cyclicality' of credit ratings. This meant that ratings improved as the economy improved and when the economy deteriorated ratings began to be downgraded very quickly. This itself could actually create the crisis. There were also major conflicts of interest with some credit rating agencies which provided consultancy services as well as rating services. He gave an example. It was very important to create regulation for this.
 
Key issues that had arisen over the past year or so in the comment period with stakeholders
Such issues had arisen over jurisdiction, application, and endorsement.

He pointed out that credit rating agencies operated globally. They were true multinationals. They offered different services in different jurisdictions. For example, one agency, when it did ratings on banks, had its whole team based in Cyprus. When it did ratings on insurance companies, all its analysts were based in France. Yet the agency was actually rating South African banks and insurance companies. The key challenge was to create a framework in which the regulation of these agencies would have teeth, and in which South Africa would be able to regulate in line with other jurisdictions. However, South Africa would be able to regulate only what happened in South Africa. This had led to many discussions with credit rating agencies and with the Financial Services Board (FSB). Essentially in Clause 4, if as a regulated person one used ratings for regulatory purposes such person must use ratings that either were issued or endorsed by ratings agencies that were registered in accordance with this Act or a rating that was issued by an external credit rating agency that had been approved by South Africa's Registrar of Credit Rating Agencies.

He explained the definitions of 'regulated person' and 'external credit rating agency'. (See the Bill.) In the case of the latter, the approach was modeled on what had happened in the EU.
 
It was important to note that the Bill did not require an entity to use credit ratings, but rather to use ratings that either were issued or endorsed by ratings agencies that were registered in accordance with this Act or a rating that was issued by an external credit rating agency that had been approved by South Africa's Registrar of Credit Rating Agencies if the entity was required by law to use ratings for regulatory purposes.

Often it happened that entities became lazy and did not do their own research. Then things went wrong and the tendency was to blame the credit rating agency, but, in reality, there was fault on both sides. This was quite important with regard to liability.

Mr Havermann pointed out that the key strength of all the global credit rating agencies was that they were able to specialize and have centres of excellence in ratings around the world. So National Treasury had introduced another approach, which was to allow credit rating services agencies that were registered in South Africa to endorse ratings from entities in other countries. This concept had been quite contentious, but Mr Havermann thought that it made it much easier for credit rating agencies to utilise their skills around the world and still be subject to South African law. He gave the example of a South African bank given a credit rating by an agency based in Cyprus. It was necessary to find some way in which Moody's in South Africa could endorse that rating, as issued by one of the agencies in its group, and therefore the rating could be used by a bank in South Africa. He thus explained the concept of endorsement. So if a credit rating agency registered in South Africa endorsed a rating, that rating could be used for South African regulatory purposes. He described the Bill's allowance of the concept of endorsement as a cut-and-paste from the EU legislation.

However, while endorsement created flexibility it also created liability about which there had been an enormous amount of contentious discussion. Importantly, the agency was liable for any claims that might arise as a result of that rating. National Treasury had responded to the industry that when one bought a rating from Moody's, one did not actually care where in the world it was made, but one wanted to hold the South African part of Moody's liable.

Some issues that had arisen in the Finance Standing Committee and changes made
The Standing Committee had considerable discussion on liability several times. National Treasury had obtained external legal opinion to assist it in its careful consideration of what kind of liability regime it wished to have for credit rating agencies. In the end the Standing Committee and National Treasury agreed that the best approach would be a common law liability. Thus, in the Bill, Members would see that the common law liability provisions applied. It was agreed that this was very important, because there was a well-established case law and grounds for liability; and obviously there were aspects like negligence, maliciousness, and the courts had been very good at building a whole framework for principles of restitution.

There was in the initial draft of the Bill [B8-2012] a Clause that provided that credit rating agencies could not contract out of their liability. After much discussion with the Standing Committee, and after obtaining external legal opinion, both from the Senior Parliamentary Legal Adviser and National Treasury's own independent firm, it was agreed that the common law was actually developed far enough that it was not necessary to entrench it in the legislation. Thus in the Bill it was said that the common law applied. It was very important to create that framework. There was obviously much to be discussed on whether it was appropriate for legislation to entrench the common law. The Senior Parliamentary Legal Adviser had said that the Promotion of Administrative Justice Act essentially did that. So there was precedent.

The Bill also provided for investor protection, the independence and integrity of the credit rating agencies, and their transparency and accountability.

The investor protection requirements ensured that ratings were defined, reviewed and updated in a timely and non-selective manner. The ratings agencies should not publish a rating if they did not have enough information available and must communicate with investors and the public questions, concerns and complaints. They must improve their disclosure information to regulators in the market. These requirements were to ensure that the agencies provided sufficient information to the people whom they were rating. These Clauses were almost directly from the European legislation.

It was important that credit rating agencies were arranged in such a way that their business interests did not impair their independence. Most importantly, there was a Clause which said that the Minister and Registrar could not interfere with the decision that credit rating agencies took. It was the process that the agencies followed that was the subject of regulation. There had been considerable discussion on this. The Bill also provided that records must be kept for five years.

Mr Havermann reviewed the Bill chapter by chapter. (See presentation document, and the Bill itself.)

The Chairperson recommended that Members read the Explanatory Memorandum at the back of the Bill.
 
Discussion
Mr M Makhubela (Limpopo, COPE) asked what National Treasury meant when it referred to the regulation's having teeth ' without extra-territorial powers' (slide 7). How would this Bill address or respond to this concern.

Mr Havermann replied that South Africa as a country could obviously not regulate the activities of institutions that operated outside its borders. One must therefore be very careful in drafting the legislation to avoid the implication of extra-territorial powers. Other countries had accidentally imposed their regulations on South Africa, for example, the, USA, in its Dodd-Frank Act. National Treasury had engaged the G20 on extra-territorial issues.

Mr Makhubela asked for clarity on the requirements (slide 7, first bullet point; slide 8, second bullet).

Mr Havermann replied that the Bill provided that a credit rating agency could operate in South Africa if South Africa was happy that another regulator regulated that agency in a way which satisfied the South African regulator. This came close to extra-territoriality, but not quite.

Mr Havermann said that it was a concern that credit rating agencies used a standard approach and did not take account of the particular circumstances of different countries. He thought that the EU's new legislation, where most of the credit ratings agencies were based, would help considerably, in terms of ensuring that when the agencies rated South Africa they applied their minds better to specific issues.

Mr Makhubela asked what prompted the establishment of the G20.

Mr Havermann replied that the G20 had existed for a long time. South Africa had chaired it at one point. After the global financial crisis and in the time of the British Prime Minister Mr Gordon Brown 'it got a new life of its own' and began to deal more specifically with financial regulatory issues. Since its enlargement from its predecessor, the Group of Eight (G8), in which South Africa and other emerging markets had no voice, it had become a highly useful forum, but involved a great deal of travel.

Mr B Mashile (Mpumalanga, ANC) asked for a narrative summary, not for technocrats but for politicians, of the motivation for the Bill.

Mr Havermann replied that the National Treasury was trying to create a framework to register credit rating agencies, to ensure that they were transparent, and operated appropriately and similarly to credit ratings agencies in other countries.

Mr Mashile said that National Treasury had technically avoided the question that the Minister had been having problems with the downgrading of South Africa's own sovereign credit rating. He asked if this Bill was not really a response to the downgrading of South Africa's own sovereign credit rating. Mr Mashile said that the finance family especially had thought that South Africa was still on track. These credit ratings from outside South Africa's borders disappointed one's expectations.

Mr Havermann replied that he could prove that this Bill was not in response to the downgradings, as drafting of the Bill had begun beforehand just after South Africa had received an upgrade.

Mr Mashile said that his biggest problem was when there was more than one credit rating agency, and each produced its own, and different, credit ratings on the same institution. He asked, if, when any particular investor relied on the worst credit rating, and disadvantaged that institution, notwithstanding the existence of other ratings that were positive about that institution, that institution had any recourse, and what the limits of that recourse would be.

Mr Havermann replied that the intention was that an investor had to look after him or herself to some extent. It was not recommended to rely on only one agency. He referred to Clause 3(4).

Mr Mashile asked if an endorsement had to happen every time that a credit rating was issued and published. He asked if National Treasury was, on the other hand, envisaging a memorandum of agreement (MoA) that said that this particular local credit rating agency would always endorse or support the ratings of its 'mother agency' in another country. He was worried that such endorsements would be a 'typical on-line endorsement'. This would mean some grey areas in between where nobody knew that they were endorsing until endorsement was actually done. What sort of endorsement was one really talking about?

Mr Havermann replied that the Bill required that the Registrar must maintain on his or her website a list of the agencies that could be endorsed to ensure complete transparency.

Mr Mashile asked, if Eskom was downgraded for any particular incident or reason, but Eskom thought that it had dealt with the problem and wanted its rating to be reviewed, how Eskom was supposed to go about obtaining a fresh rating. Did Eskom simply have to wait for the credit rating agencies to be happy with Eskom and decide, by themselves, to re-evaluate it?

Mr Havermann replied that there were two types of credit ratings – solicited (requested) and unsolicited. Eskom, as a client of the credit rating agency, could apply for a fresh rating. It was completely within its rights, if it had solicited a rating, to request a new rating after new financial information had emerged.

Mr Mashile asked if there were independent credit rating agencies in South Africa. Did the Bill provide for South Africa's own credit rating agency or agencies, rather than agencies that were merely extensions of overseas agencies and endorsed their ratings. He asked if South Africa was at the mercy of the western credit rating agencies such as Standard and Poor, and Moody's. Would this Bill provide for the establishment of a credit rating agency other than just simply regulating existing agencies?

Mr Havermann explained that if there were going to be South African credit rating agencies which wanted to operate in South Africa, elsewhere in Africa and even in Europe, then they had to be regulated in the same way that Moody's, Standard and Poor, and Fitch were regulated. This Bill enabled them to be registered in South Africa and regulated in the same way that credit rating agencies were regulated elsewhere in the world. Thus this Bill would create the space to have regulated South African credit rating agencies. Currently there were two which were interested in applying, one of which had been operating in South Africa for quite a long time; the other had been operating in South Africa from time to time. This Bill would allow them to register and enable them to compete with the global credit rating agencies. Moreover the Bill helped to develop South Africa's own credit rating agencies. One of the agencies was Ratings Africa; the other was Global Ratings.

Mr A Lees (KwaZulu-Natal, DA) asked if any work had been done on the implementation of the Bill, if enacted. When would it become a working document? When would the office of the regulator, under the FSB, be open and staffed? What would be the costs?

Mr Havermann replied that a senior manager in the FSB had already been employed. The office had been 'set up'. The individual concerned (Mr Roland Cooper) was a former person from Fitch Ratings, and he had already given much insight on many issues. The office had already set out the required rules, and would be up and running as soon as the Bill was passed.

Mr Mashile asked if a local agency could endorse a rating from Standard and Poor.

Mr Havermann replied that, unfortunately, this would not be possible. It could endorse only a rating from a credit rating agency that was in the same group as it. National Treasury had felt that it would create too much risk both ways.

Mr Lees was encouraged by the speed with which this office had been set up, even before the Bill had become an Act.

Mr Havermann replied that the individual concerned, employed by the FSB, did not yet have any powers under the law. However, he had drafted rules and put them out for consultation already. He would be appointed officially when the Act was passed.

Financial Markets Bill [B12B- 2012] (proposed section 75): National Treasury briefing
Mr Havermann said that the Financial Markets Bill [B12B – 2012] was essentially an update of the Securities Services Act (No. 36 of 2004) and had been a long time in the making. As a result of the G20 requirements South Africa was required to update its securities legislation. This was part of National Treasury's approach to broader upgrading of legislation and strengthening regulation in the shift to Twin Peaks. It was thought preferable to bring a new Bill to replace the Act rather than an amendment Bill.

Capital markets were important as they converted savings, through investments, into growth. They were also the key way in which pension funds could invest in the system. Thus investment bonds and equities had to be regulated.

South Africa was fortunate in that it had an extremely deep and liquid capital market relative to other jurisdictions. Its equity to GDP ratio was 144%, which was slightly a function of South Africa's high equity to debt markets. South Africa was fortunate in having a very well regulated system. The Johannesburg Stock Exchange (JSE) was regarded as one of the best exchanges in the world. So this Bill was a continuation of National Treasury's never ending upgrading to regulation of financial markets.

South Africa had the least number of banking crises, which was amazing when it was considered that in the last 15 years South Africa had experienced three bank losses. South Africa was also the best in the world as regards securities exchanges and auditing and reporting. It was the second best as regards the soundness of its banks. However, South Africa did not do so well as regards affordability, ease of access to loans, and venture capital availability. The cost of financial services was one of the Minister's pet topics, and would be part of National Treasury's next set of reforms which it would table next year.

The Bill updated the Act mainly by alignment with international developments. South Africa was a member of the G20's Financial Stability Board, which had also made recommendations. South Africa was also a member of IOSCO. Every five years, South Africa was assessed comprehensively by the International Monetary Fund (IMF) and the World Bank. South Africa was also a member of the UNIDROIT convention on insolvency.

Mr Havermann explained the Bill's objects. In particular, the requirements around insider trading had been tightened. Fines for insider trading had been raised.

He reviewed the Bill chapter by chapter. He noted that the powers of the Minister had been the subject of much discussion in the Standing Committee, and a new Clause had been introduced to require the Minister to consult extensively before he exercised his powers under the Act. Mr Havermann thought this was good. He explained the difference between a Central Securities Depository and an exchange. The former was like a deeds office, while the exchange could be compared to an estate agent. Also the Bill introduced an independent clearing house, which South Africa had never had before, but which was a requirement from the G20. This was a mechanism for risks in financial markets to be reduced. Derivative trading in particular needed to be cleared through the clearing house, and records of those trades needed to be sent to the trade repository. The clearing house was a kind of exchange for derivatives. The trade repository was to some extent the same thing as the Central Securities Depository. South Africa had never had a framework for regulating derivatives before. It was of major concern to the G20 and was a huge step forward in South Africa's legislation. The exchange, the Central Securities Depository, the clearing house, and the trade repository were the four pieces of financial market infrastructure needed to run a financial market. The common requirements for these four were contained in Clauses 59-73. A principle-based code of conduct was imposed (Clauses 74-75). Nominees were dealt with in Clause 76) Clauses 77 to 88 dealt with market abuse and insider trading provisions. (See presentation document and the Bill.)

Ms Petula Sihlali, National Treasury Deputy Director: Financial Markets, gave further detail on the major changes from the Securities Services Act 2004 and the role of self-regulatory organizations (SROs). The SROs were basically the JSE and the Central Securities Depository. (See presentation document and the Bill.)

Mr Havermann said that the big issue had been the changing of the market structure. South Africa was not yet quite ready to do dispense with the SRO model, but it was important to highlight that these entities played a role as both referee and player so National Treasury had committed itself to a review of SROs going forward.

There had also been discussion of an 'exchange light'. It was National Treasury's view that it was not appropriate to introduce such a concept. Because the exchange was so important, it was felt that 'light touch' regulation was not appropriate.

Discussion
Mr Makhubela asked about the powers of a court to disqualify a person for an indefinite period or a period specified by the court. He thought the latter vague and could lead to abuse.

Mr Havermann replied that it was true to say that the Bill was silent on how to deal with offences. However, Clause 109 set out the specific penalties that could be imposed in the event of an offence under the legislation. In Clause 82, a new penalty for insider trading had been introduced. He explained changes from the Securities Services Act. Also all the penalties now rose in accordance with the rate of inflation. Clause 98 provided that a court might prevent a person convicted of an offence from carrying on business or being employed in a position of trust. The JSE rules had a similar provision.

Mr Havermann added that there was an enforcement committee which was an internal committee within the FSB. This was an administrative body that could take actions and could deregister in terms of Clause 98.

Ms Jeannine Bednar-Giyose, National Treasury Director: Financial Sector Regulation and Legislation, said that it was appropriate to have the separation between Clause 109 and Clause 108, as Clause 109 dealt strictly with the criminal aspects of the offences and the penalties that could be imposed. The criminal aspects would always be dealt with by a court. Clause 98 then provided the court, in those serious matters, with an expanded power also to disqualify.

Adv Xoliswa Mdludlu, Principal State Law Adviser, Office of the Chief State Law Adviser, added that the principle of separation of powers mandated that the discretion of the court be upheld.

Mr Mashile asked if there were any transitional arrangements.

Mr Havermann replied that Clause 110 provided for transitional arrangements.

Mr Mashile asked about institutional arrangements to be independent, and the limited powers of the Minister. What was to be understood by independence? Was this legislation drafted subjectively or objectively? He asked what the Bill's provisions were, in principle, when it referred to the Minister's power to issue regulations. Did it mean the Department or the Ministry? How did these provisions tie in with the limitations of the Minister?

Mr Havermann replied that the Bill set out in considerable detail in Clause 107(2)(a) the process that the Minister must follow. If the regulations were called into question, the courts could decide whether or not the Minister had followed the process for consultation as set out in the legislation, which was quite prescriptive. The process for the regulations required the Minister's formal signature, but prior to that was a process to be followed internally in the National Treasury. Clause 107(2)(a)(vi) said that the Constitution provided for Parliament to scrutinise legislation or subordinate legislation. Therefore the Bill provided that the Minister must submit the draft regulations to Parliament for scrutiny at least one month before promulgation. Final regulations must also be tabled.

Ms Bednar-Giyose said that the Bill set out a very detailed consultation process for the regulations to involve all the relevant stakeholders in the process and to ensure adequate parliamentary oversight.

Adv Mdludlu said that there was no way in which the Minister could abuse his or her powers, as he or she made the regulations in terms of the Act. Anything that he or she did outside the Act was regarded as ultra vires.

Mr Lees said that Clause 107 did not provide for consideration, only for scrutiny. Regulations were not simply a result of the Act. The detail was in the regulations. He disagreed with the Principal State Law Adviser. Parliament had no determination in the process as given in the Bill.

The Chairperson said that Section 69 of the Constitution described the oversight role of this Committee.

Mr Mashile asked about Clause 107(2)(a)(i) to the effect that the Minister must ensure consultation with recognised industry bodies. It appeared that, should the recognised industry bodies not cooperate, everything would stop. Was that indeed so?

Ms Bednar-Giyose replied that it would be incumbent on the Minister and on the National Treasury to ensure that there were efforts to consult. If for any reason some of the industry bodies decided not to participate, then they would have failed to take up the opportunity to be consulted. Indeed, they would have elected not to do so. However, this could not preclude the Minister's finalising regulations, and the Minister would have fulfilled his or her obligations.

Mr Mashile said that Clause 107 provided for making draft regulations. Did this also mean amending regulations?

Ms Bednar-Giyose replied that amending regulations would follow a similar process to that for making the original regulations. She noted that there had been some discussion in the Standing Committee on the term 'scrutiny'. This was a broad term that provided for a stringent degree of oversight by Parliament over the regulations.

Mr Havermann added that there had been extensive discussion on Clause 107(2)(a)(vi) around the very idea of subordinate legislation, which was to provide the executive with some flexibility within the constraints of the legislation. It had taken National Treasury four years to get the Bill to this point, and it would hesitate to have regulations also follow a four year process for approval. It was necessary to bear in mind the practicalities of regulation versus legislation. He thought that agreement been reached on the correct position – to allow Parliament to scrutinise the regulations and engage with the Minister but there was a difference between legislation that was passed by Parliament and subordinate legislation (regulations) which was within the powers of the Minister, which were quite constrained.

Mr Mashile asked about issuing a subpoena to a person who might refuse to give information on insider trading or to give any explanation required by the Registrar. It was important to ensure that this area was clear of any misbehaviour.

Mr Havermann said that National Treasury had struggled with the fact that the legislation applied only to regulated persons. It was also necessary to prove that someone was conducting unregulated business, which might be subject to criminal sanctions. The Bill had actually introduced some flexibility between the Registrar and the Minister – and it had to be a joint decision – to create additional categories of regulated persons under the regulations. Mr Havermann was not sure that the Registrar had the power to subpoena. He or she might have to have recourse to the courts.

Mr Havermann said that Clause 94 set out the processes that the Registrar needed to follow to obtain information. This was also referred to in Clause 95.

Mr Mashile reminded the Chairperson that certain pieces of legislation had overturned by the Constitutional Court on the extent of public consultation. In whose understanding would the Minister have adequately consulted before taking any particular decision?

Mr Lees asked if this Bill would return for amendment when the Twin Peaks model was implemented.

Mr Havermann replied that there would be amendments to the proposed Financial Markets Act in the Twin Peaks legislation.

Mr Lees said that the DA believed there was a lack of promotion of competition. Yet this was a market. It needed to be regulated, but it also needed to be competitive.

Mr Havermann replied that Clause 2 provided that one of the Objects of the Act was to promote competitiveness. The Standing Committee had discussed if that was enough. National Treasury and the Standing Committee had reached agreement that this concept should be extended slightly. So Clause 2 had been changed to say that the Act was to promote the internal and domestic competitiveness of the South African financial markets and of securities services within the Republic. The Minister of Finance had highlighted in the National Assembly that National Treasury felt that the explicit recognition of competition as an Object of the Act would put the Minister in conflict with the Minister of Trade and Industry, because competition was under the Competition Act (No. 89 of 1998) and would create a strange overlap between the responsibilities of the Registrar of Securities Services and the Competition Commissioner. It was very important, for purposes of regulation, not to create two conflicting pieces of legislation. There was a new addition, in Clauses 5 and 6, that the Minister must take account of the Objects of the Act.

Mr Lees, with reference to independent assessments and conflicts of interest, said that the DA's view was that Clause 62 should have been amended to provide for independent assessment of potential conflicts of interest within the market infrastructure.

Mr Havermann said that there was a concern about independence in Clause 62 that it should not be a self-assessment. An early draft of the Bill had provided for an annual self-assessment, but this had been changed, following discussion in the Standing Committee, to an assessment in the manner prescribed by the Registrar.

Mr Lees said that the DA still held some reservations that the regulations were almost entirely in the hands of the Minister, and there was no provision for the signing off of at least some of the regulations by Parliament.

Mr Lees had hoped that National Treasury could answer more satisfactorily than it had answered to his colleagues in that Committee.

The Chairperson pointed out that one did not always get what one wanted.

Mr Havermann replied that Mr Lees' issues had all been discussed in the Standing Committee and had been highlighted by Mr T Harris (DA), the Shadow Minister of Finance, in the National Assembly. In the discussions with the Standing Committee there had been agreement to disagree on a few topics.

Credit Rating Services Bill [B8B– 2012]: Committee’s Report adoption
The Chairperson welcomed Mr S Montsitsi (Gauteng, ANC), who had been required to attend another meeting. The NCOP would be very busy until 04 December 2012 and many Members had multiple committee commitments. He read the Committee report that the Committee had agreed to the Bill without amendments. Mr Mashile moved for adoption. Mr Makhubela seconded. The Committee adopted its Report.

Financial Markets Bill [B12B- 2012]: Committee’s Report adoption
The Chairperson read the Committee’s report that the Committee had agreed to the Bill without amendments. The Chairperson noted that Members' concerns would be captured in the Committee's minutes. He would also refer to them in his statement in the House. Mr Mashile moved for adoption. Mr Makhubela seconded. The Committee adopted its Report.

Committee minutes: adoption
The Committee adopted its minutes of 13 September, 26, 30 and 31 October, 13, 16 and 20 November 2012 with corrections.

The meeting was adjourned.
 

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