Financial Services Laws General Amendment Bill [B29-2012] public hearings: Day 2

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Finance Standing Committee

23 April 2013
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The South African Insurance Association (SAIA) was committed to effective self-regulation. SAIA continued to engage with the FSB and National Treasury on the need to introduce compulsory third party motor property insurance in South Africa. The short-term insurance industry was important for the sustainability of South Africa’s economy. SAIA supported enhanced consumer protection and National Treasury’s aim to promote financial stability for the benefit of all. SAIA supported the repeal of the advisory committees and the introduction of a code of engagement. However, this code of engagement should be obligatory rather than optional. SAIA supported the role of compliance officers. SAIA commented on the Bill’s potential unintended consequences and practical challenges that might impact the short-term insurance sector, its customers and other stakeholders, such as limitation of Regulator’s liability. SAIA preferred that the Minister rather than the Registrar decide on the immediate publication of a Rule “if circumstances necessitate” to ensure appropriate checks and balances and in compliance with the separation of powers. SAIA supported the enhancement of market conduct practices in the financial sector and enhanced policyholder protection. Implementing rules without first submitting them for public comment was not supported. SAIA did not support any provisions that departed from the Promotion of Administrative Justice Act in the issuing of directives. SAIA remained convinced that the Registrar must not only follow fair administrative procedure but must also be 'seen to follow it, including a right of review or internal appeal. SAIA supported the Bill’s provision for a phased-in approach' and welcomed the proposed availability of directives and exemptions on the FSB’s official web site. However, relying on the FSB website as the only communication method might prejudice both insurers and consumers alike. The proposed amendment (in the Schedule of the Bill) to the definition of “business of a medical scheme” in Medical Schemes Act (No 131 of 1998) would extend the ambit of that Act to all medical insurance products. Regulations were to be promulgated to allow only certain categories of medical insurance products. These Regulations were still the subject of discussion and SAIA proposed that it would be appropriate for the implementation of this Section to be delayed until the Demarcation Regulations were law.

The Banking Association of South Africa (BASA) submitted that it was imperative that the amendments fitted into the broader Twin Peaks legislation which was in the offing. The treatment of the concept of negligence should be consistent across all financial sector legislation, for example the Bill proposed gross negligence in the amendment to the Financial Services Board Act (No 97 of 1990) whereas the Financial Markets Act (No 19 of 2012) had a lesser test for negligence. The Bill proposed removal of the Industrial Advisory Committee with a code of conduct for consultation. The Advisory Committee at present served as an important forum for industry engagement with the Regulator and provided a level of oversight. Its removal would give the Financial Services Board extensive autonomous powers. A draft code of conduct should be released for comment and should provide industry with similar opportunities for engagement with the Regulator. For on-site inspections the Bill should require qualified inspectors as per the Inspection of Financial Institutions Act (No 80 of 1998). Clauses in the Bill that dealt with on-site visits and inspections should be redrafted to provide clarity and limitations as to when and how on-site inspections should take place. BASA noted the intention to reduce costs of publication in the Government Gazette. However commencement of laws could only come into effect after publication in the Government Gazette in terms of the Interpretation Act (No 33 of 1957). BASA recommended retention of the use of the Government Gazette whether in print or electronic form and for the 'official website' to be used as a subordinate tool for publication. Clause 68 of the Bill amended section 28 of the Financial Services Board Act 1990 by conferring upon the Financial Services Board absolute regulatory power over the financial institutions that it regulated. It was imperative the uncertainties created by the proposed exclusion of the Consumer Protection Act (No 68 of 2008) from financial institutions be dealt with so that there was no confusion for the banking sector or its clients. BASA recommended that Clause 68 should be redrafted at in such a way that where there was a gap ('lacuna') in consumer protection legislation, the principle of the application of best legislation that promoted consumer protection should be invoked.

The Law Review Project (LRP) confined its submission to Clauses 102 and140, but anticipated that the proposals contained in other amendments would lead to considerable problems to the financial industry in the future. The Bill would force consumers to buy costly benefits and end pro-consumer innovation and competition The LRP recommended that the existing Section 55 of the Short-term Insurance Act be repealed and nothing be substituted in its place. The existing rules passed in terms to the existing Section 55 should be re-promulgated as regulations to the Act. Moreover, the LRP alleged that National Treasury's proposals were unconstitutional as they implied that Parliament was being asked to hand-over its legislative powers, unfettered, to an unelected regulator. LRP further alleged that National Treasury sought to justify patently unconstitutional draft legislation by reference to world financial crises and international standards and powers extended to other registrars, but failed to provide adequate references. LRP found fault with the drafting of the Bill, which was complex in layout and required time-consuming analysis. The LRP recommended six months for analysis and comment and scrapping dubious clauses. Furthermore, the Bill challenged basic constitutional principles – the rule of law, separation of powers, general application (equality) and certainty, objective criteria (versus discretion). LRP feared abuse of delegated power and alleged that Parliament appeared to be becoming redundant.

The Chairperson objected to what appeared to be an insult to Parliament in general and the Committee in particular. The LRP explained that it had never intended to attack Parliament, but was expressing its concern at clauses that contained amendments that might undermine Parliament. LRP’s intention was rather to defend Parliament's role as the highest lawmaker in the country, and show that the Bill, by increasing the power of the regulator, was in danger of detracting from Parliament's legislative authority in a way that would be unconstitutional. The Chairperson made it very clear to the LRP that the Committee was fully aware of its responsibilities, and explained the parliamentary process. Moreover, it was this Committee that would make a recommendation to Parliament whether this Bill should be passed or not. Once a Bill was in the hands of the Committee, it was the Committee's responsibility to ensure that it applied its mind and guided Parliament properly.

A DA Member said that it was the Committee's job to balance out the tendency to intervene with a defence of the principal of competition to achieve the same regulatory outcome. It also meant balancing out this tendency to draconian measures with the imposition of appropriate regulation. It was this that the Committee should defend. He asked SAIA what it found wrong with the advisory committees. He asked BASA if it could explain the potential abuse of power if 'suitable persons' were allowed to carry out inspections, and to explain its issues around the Consumer Protection Act. The whole premise of LRP's submission was that rules provided in Clauses 102 and 140 would effectively be laws. Could LRP explain, from its own perspective, the difference between rules, directives, regulations, and laws? A second DA Member agreed with the Chairperson that this Bill was extremely complicated and placed a huge responsibility on legislators to ensure that it was constitutionally correct and would not be rejected by the Constitutional Court. However, as the Chairperson had assured Members, this Bill was not cast in stone and there would be extensive deliberations. This was most encouraging. This Bill was a step towards market conduct regulation in terms of the Twin Peaks legislation. Because of the exclusion of the Consumer Protection Act, which was not applicable in terms of the provisions of the Bill, the Bill gave the sense of giving excessive powers to the Regulator. He asked all three presenters if the Bill, through provisions to give excessive powers to the Regulator, might limit Parliament's oversight. What specific recommendations did the SAIA, BASA and LRP make for the checks and balances? He shared BASA's view that he wanted to retain the advisory committees as they utilised the expertise in the sector.

An ANC Member asked the BASA to enlarge on its concern at the removal of the advisory committees. He found the LRP's submission vague, ambiguous and unhelpful. He sought to sift specifics from it. There were specific checks and balances proposed in Clauses 102 and 140, to which the LRP referred. These checks and balances emphasised the need for the Regulator to publicise for public comment and make submissions to Parliament within a specific period for scrutiny. A second ANC Member requested clarity from the LRP on its fears that regulations would be ultra vires [beyond lawful powers]. Which clause had actually triggered its comment? What were the LRP's recommendations? The LRP alleged that not only was the Regulator asking Parliament to hand over its legislative powers but it wanted also to pass what it called Bills of Attainder. What triggered this comment? If there was such within the Bill, the Committee needed to be aware of it, as it represented the people and needed to protect the citizens. It was necessary to be objective. A third ANC Member said that there must be mutual respect in addressing issues. She asked SAIA if it supported the provision that the Registrar should have the power to make policyholder protection rules. She asked SAIA if it could suggest other ways, such as disciplinary measures, in which to hold the FSB accountable for negligence, rather than making the levy payers, in effect, pay for delictual damages. She asked BASA why it had reservations with searches and seizures taking place at night rather than in the day time and why BASA recommended that the requirement for a warrant to conduct search and seizures be extended to institutions as well as individuals. Whom did BASA think should be held accountable or rather liable for the expenses of the search and seizure operation? She asked the LRP how it proposed to protect policyholders given the imbalance of the interests and the resources between the insurer and the policyholder. Furthermore, she asked the LRP please to clarify whom it represented in this meeting and asked it to tell the Committee if it had any involvement with any financial services provider or insurer including memberships of boards or work as consultants. The LRP could not expect Members not to take exception to such blunt allegations such as that Parliament was becoming redundant. She asked the LRP if it really thought that Parliament had no delegated legislative authority to a public entity that it oversaw, such as the FSB. The Constitutional Court had ruled that delegated legislative powers were critical to make government work. In which way did the Bill remove constitutional principles related to lawmaking?

A COPE Member told the LRP that one was living in a dream world if one thought that one could legislate without regulatory powers. Without such powers government would be slowed down to the extent that it could achieve nothing. Did the LRP really suggest that the government could function without Parliament's giving regulatory powers? The debate should be whether one should give regulatory powers to the Regulator or to the Minister. He would prefer to give them to the Minister. Did the LRP think that one could run a financial system in this country without giving regulatory powers to the Minister? If it thought that way, then he and the LRP were living on different planets.

An ANC Member agreed that it was necessary for the legislature to give regulatory powers. South Africa was a global player and had identified gaps in its compliance. The LRP's conclusion that the Committee should abandon this process was very unfortunate. He guaranteed that it was the Committee itself that had given this process the go-ahead, irrespective of the source of the legislation. It was the Committee that was in authority and would conclude on this process. The objects of the amendment process were very clear. There was a need for the Committee to move in and it had picked up lessons from international practice. He affirmed the need for delegated regulatory powers to some of the key stakeholders to ensure an efficient environment for being competitive and growing South Africa's economy.

The Chairperson said that the global crisis had arisen partly from over reliance by regulators on self-risk assessment by institutions on such issues as liquidity and creditworthiness. So it was important that regulations and regulators should play a very critical role. He assured SAIA, BASA and LRP that all their views would be taken into account and welcomed them to attend, as observers, the upcoming report-back session with National Treasury and FSB.
 

Meeting report

South African Insurance Association (SAIA) keynote address and submission
Ms Lelo Ntshalintshali, SAIA Manager: Stakeholder Relationships, said SAIA represented the short-term insurance industry in South Africa. It had 60 members. This represented 93% of the market measured by premium income. Most of those short-term insurance companies that did not belong to the SAIA were ‘captives or companies in run-off’. The SAIA had been in existence for 105 years. Its vision was to promote and represent the interests of the short-term insurance industry, while leading and enhancing the efforts of the industry to become recognised and as an important contributor to South Africa's economy and society.

Commitment to effective self-regulation
The SAIA and its members were committed to effective self-regulation. This was evidenced by a
new, more onerous Code of Conduct which was implemented in March 2010 and was regularly
updated. Before this, SAIA had a general Code of Good Business Practice. Its Code of Conduct set standards for members in all areas of business which included but were not limited to market conduct, communication with customers, underwriting and claims, behaviour of contracted parties, advertising, and much more. It provided for a complaints handling process which started with the insurance company itself and ended with the Complaints Committee, which was an independent Committee with representatives from the Ombudsman for Short-term Insurance, the Financial Services Board (FSB) and a consumer representative.

Proactive interventions
Specific reference had been made to a certain motor insurance product of which the name and benefits were understood by consumers as comprehensive cover. The SAIA in collaboration with the Ombudsman for Short-term Insurance, alongside the Financial Services Board had intervened in view of protecting consumers in this instance where the product design might have been to the detriment of consumers. This proactive intervention resulted in a positive outcome in that the product was changed as well as the name.

In 1989 the SAIA was instrumental in setting up an alternative dispute resolution mechanism to enable consumers to complain about the rejection of their claims in a fair, efficient and affordable manner. The Ombudsman for Short-term Insurance (OSTI) handled complaints from consumers in an open, transparent way, applying the principles of equity and fairness.

The OSTI was funded on a fee per complaint model, so that those insurers with the most complaints ended up paying the most fees to the OSTI.

The more than R60 million spend on consumer financial literacy education in the low income communities assisted in empowering people to use financial products to their advantage. In addition, SAIA’s efforts in collaboration with Business Against Crime South Africa (BACSA) in the fight against crime which had resulted in an overall reduction of vehicle theft in South Africa by 62% since the beginning of its involvement. SAIA’s current talks with Government and Eskom to replace electric geysers with green geysers going forward, and a potential public private partnership (PPP) to provide affordable agricultural insurance to South African farmers, big and small, were further examples of SAIA’s contribution to a sustainable economy and a better life for all South Africans.

In addition, the SAIA and its members were committed to transformation. It took a lead role in negotiations of the Financial Sector Charter, which had now been gazetted as the Financial Sector Code. However, the industry still had challenges in the transformation process, especially since it was yet to be seen by prospective job hunters as an attractive employer. It was also difficult to find and retain people at top management level and the sub-sector found it difficult to compete with banks and life insurers for scarce skills.

Short-term insurance industry challenges
SAIA did have its challenges as an industry. In a country with very high accident rates, as well as higher than most crime levels, and many challenges regarding the cost of vehicle repairs, motor insurance was as a result expensive.

In addition, with no compulsory third party motor property insurance in place, the insurance industry effectively carried the full burden of damage to insured vehicles, while only around 35% of the vehicles on South Africa’s roads were directly insured. Many individuals could not afford motor insurance, and yet they used the road infrastructure. Motor insurers were struggling to make profits in order to remain financially viable. As motor insurance represented more than 40% of short-term insurance business, this was an extremely important area to address. SAIA was also mindful that insurance was necessary when applying for finance in order to purchase a new vehicle. SAIA continued to engage with the FSB and National Treasury on the need to introduce compulsory third party motor property insurance in South Africa as SAIA believed that ultimately it would be good for the economy as well as the general insuring public. A number of Southern African Development Community (SADC) countries had compulsory third party motor property insurance in place.

Despite the industry having designed many products aimed at the low-income market with the objective of growing the market and providing better access to products, constraints had limited SAIA’s success in certain areas including legislation that hampered distribution of products to this market and made such products costly.

Importance of the short-term insurance industry
Lastly the short-term insurance industry was an important one for the sustainability of South Africa’s economy. Insurance assisted individuals in their daily lives by covering their losses when they were most in need. In addition, the role of insurance and the insurance industry in the economy was crucial. Insurance was a key component of an efficient economy. Not only did the insurance industry provide more than 100 000 jobs, it also contracted the services of many other arms of the economy, such as builders, plumbers, motor body repairers, and many more, indirectly providing work for many. It should be noted that most businesses such as construction and building would not be able to operate without insurance. This was particularly appropriate with the construction of large new infrastructure projects.

SAIA support for enhanced consumer protection
Ms Suzette Strydom, SAIA General Manager: Technical, said that any comments raised here must be taken in light of the fact that SAIA supported National Treasury’s objectives of creating a safer and more sound operating environment and one of trust by all stakeholders, addressing potential risks to the financial system and promoting financial stability for the benefit of all. The SAIA was committed to enhanced consumer protection, the highest standard in market conduct practices in the short-term insurance sector as well as the Treating Customers Fairly (TCF) project. SAIA aimed to remain relevant as an industry, inspire confidence in stakeholders and consumers alike and offer products and solutions within the South African market in such a way as to promote and not harm the environment and the communities that SAIA supported. With these objectives in mind, it was appropriate that legislation was drafted to address the objectives of the Bill and to align South Africa with international best practice.

SAIA support for repeal of the advisory committees
SAIA’s comments were submitted to ensure that the application of the legislation was correct and effective, so it urged Members to view them in this spirit. SAIA confirmed that it supported the repeal of the Advisory Committees and the introduction of a Code of Engagement in their place as part of rationalising the consultation process. SAIA supported a process of broader consultation with industry bodies as opposed to the current regime which limits it to representatives on the Advisory Committees, which ultimately reflected the opinion of individuals or a few select companies bound by confidentiality. It was however proposed that Clause 56 should be amended to impose an obligation to prescribe a code of engagement, consultation and communication for the Financial Services Board rather than providing for this Code as optional.

SAIA support for phased-in approach
The SAIA supported the phased-in approach provided for in the Bill, affording the Honourable Minister the right to determine different dates for the enactment of the different provisions of the Act, once promulgated. This would facilitate the process of regulating certain definitions such as “independent intermediary”, “representative”, and “services as intermediary” and considering the approach of intermediaries receiving policy fees from clients in the Regulations as part of the retail distribution review planned for later this year.

Proposed availability of directives and exemptions on FSB’s official web site welcomed
SAIA welcomed the requirement of the FSB Board to submit an annual report including a list of all directives and exemptions issued under Financial Services Board legislation during the reporting period and providing for the report to indicate that the directives and exemptions were available on the FSB’s official web site.

SAIA supported the role of compliance officers as part of the Regulator’s review of regulated financial institutions in its ongoing supervisory activities.

Whilst recognising the objectives of the Bill, it was important to comment on the potential unintended consequences and practical challenges that might impact the short-term insurance sector, its customers and other stakeholders.

Limitation of Regulator’s liability clause
The SAIA recognised that it was appropriate that the Regulator was empowered in the discharging of its functions to limit its liability in order to ensure critical supervision. This was in line with the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICP), to which the Financial Services Board and the SAIA subscribed. ICP number 2.9 provided for:

“The supervisor and its staff has the necessary legal protection against lawsuits for actions taken in good faith while discharging their duties, provided they have not acted illegally. They are adequately protected against the costs of defending their actions while discharging their duties.”

Nevertheless, the concern remained that the removal of the words “but not grossly negligent” would result in extending FSB immunity from liability further than was reasonable in the circumstances.

In the event that the qualification “but not grossly negligent” provided for in Clause 67 was retained, it would provide clarity and certainty that the Regulator was required to demonstrate good faith as well as reasonableness in carrying out a duty or performing a function so as to ensure a high standard of care. It was accordingly proposed that the deleted words “but not grossly negligent”, should be restored. This would result in a more balanced approach in ensuring the quality of supervision and the protection of the reputation of the Regulator, which should not be open to attack through a lack of accountability in fulfilling its public interest mandate. In addition, consumers and insurers alike would be in a position to take recourse when the Regulator acted recklessly without giving consideration to the consequence of its actions or acting with a total disregard of duty. This would be particularly relevant in times of crisis when the consumer looked to the Regulator for responsible actions affecting the livelihoods of so many.

This approach would also ensure that the Regulator had the necessary redress available where it might wish to act against its employees or agents who exceeded their mandate.

Publish/prescribe
The SAIA considered it appropriate for the Honourable Minister rather than the Registrar to decide on the immediate publication of a Rule “if circumstances necessitate” to ensure appropriate checks and balances were in place, in addition to ensuring compliance with the separation of powers principle embedded in the Constitution.

SAIA supported the enhancement of market conduct practices in the financial sector and enhanced policy holder protection, which principles were entrenched in the National Treasury Policy Document entitled “A Safer Financial Sector to serve South Africa better” published in February 2011.

At the heart of the principle of separation of powers was a desire to enhance democracy, increase accountability and efficiency and protect the fundamental rights enshrined in the Constitution from abuse. It was suggested that in the event that circumstances necessitated the immediate publication of a rule, the Minister must make this decision.

The implementation of Rules without first submitting them for public comment was also not supported. One should ensure that the audi alteram partem [hear the other side] rule of natural justice was not only followed but also seen to be followed.

In addition, the Minister should review the draft rule in light of any submissions made.

Directives, Exemption Notices and Board Notices
The SAIA found it difficult to support any provisions that departed from the Promotion of Administrative Justice Act (No 3 of 2000) (PAJA) in the issuing of Directives, even with a condition that a statement to this effect and the reasons for the departure were included in the Directive (which might be found in Clause 201 of the Bill). The SAIA remained convinced that the Registrar must not only follow fair administrative procedure but must also be seen to follow fair administrative procedure, including a right of review or internal appeal.

Publication on the FSB’s website
Although the SAIA appreciated the intention of National Treasury to reduce costs by replacing gazetting with publishing via the official website of the FSB, SAIA believed that the benefits of the gazetting process for all stakeholders outweighed the potential cost saving on the website. In addition, the FSB website as the only communication method might prejudice both insurers and consumers alike. Alternatively, it was suggested that the enactment of the provisions in the Bill affording the right of the Regulator to publish them on the FSB’s official website should be delayed in anticipation of the completion of the FSB’s project to upgrade its website infrastructure, expected to be completed by September 2013. This would be achievable through
Clause 259 that provided for the staggered implementation of the Act.

Medical Schemes Act (No 131 of 1998)
SAIA submitted that the proposed amendment (in the Schedule of the Bill) to the definition of “business of a medical scheme” would result in an unreasonably broad application of the Act, in that it would apply to any person rendering a health service in return for the payment of a premium, and not just a person intentionally undertaking the actual business of a medical scheme. The result of the Omnibus Bill amendment would be to extend the ambit of the Medical Schemes Act to all medical insurance products. Regulations were to be promulgated to allow only certain categories of medical insurance products. These Regulations were still the subject of discussion and SAIA therefore proposed that it would be appropriate for the implementation of this Section to be delayed until such time as the Demarcation Regulations were law.

Conclusion
In closing, SAIA urged Members to consider the importance of ensuring that the short-term insurance industry survives and thrived in an environment in which it could serve individuals and businesses in South Africa, as well as the economy at large. The insurance industry was a well-regulated industry that was committed to playing an important role in the lives of individuals, communities, businesses, Government and the economy. It also had several self-regulatory mechanisms in place, which would continue to ensure that consumers were treated fairly. SAIA was willing to consult at any time on the Bill.

Banking Association of South Africa (BASA)
Mr Nicky Lala-Mohan, BASA General Manager, Legislation and Regulatory Oversight, commented on the alignment of the Bill and Twin Peaks. He also commented on the removal of the Advisory Committee, on on-site inspections, the substitution of the publication of notices in the Government Gazette by an official web site set up by the Financial Services Board, and exemption from the Consumer Protection Act.

Alignment of the Bill and Twin Peaks
Whilst this was an omnibus bill amending various pieces of legislation in the financial services sector it was imperative that these amendments fitted into the broader Twin Peaks legislation which was in the offing. The treatment of the concept of negligence should be consistent across all financial sector legislation, for example the Bill proposed gross negligence in the amendment to the Financial Services Board Act (No 97 of 1990) whereas the Financial Markets Act (No 19 of 2012) had a lesser test for negligence.

Removal of advisory committees
The Bill proposed removal of the Industrial Advisory Committee in the Collective Investment Schemes Control Act (No 45 of 2002), the Long-term Insurance Act (No 52 of 1998), the Financial Advisory and Intermediary Services Act (No 37 of 2002), the Short-term Insurance Act (No 53 of 1998), and the Pensions Fund Act (No 24 of 1956). The Bill proposed the replacement of the Advisory Committee with a code of conduct for consultation. The Advisory Committee at present served as an important forum for industry engagement with the Regulator and provided a level of oversight. The removal of the Advisory Committees would give the Financial Services Board extensive autonomous powers. One was unaware of the provisions of the code of conduct as no draft code had been made available for comment.

BASA recommended that a draft code of conduct be released for comment so that the industry could have an indication of its effects. The code of conduct should provide industry with similar opportunities for engagement with the Regulator.

On-site inspections
The Bill provided as an addition to the Long-term Insurance Act (No 52 of 1998), the Short-term Insurance Act (No 53 of 1998), and the Collective Investment Schemes Control Act (No 45 of 2002)(see paragraph 69) for on-site visits to be conducted by 'suitable persons'. The Bill also expanded on the Inspection of Financial Institutions Act (No 80 of 1998) which already provided for on-site visits or inspections. BASA found the term 'suitable persons' was too broad and gave the Registrar a broad discretion without balancing the relevant inspected persons' and entities' constitutional rights to privacy.

BASA recommended that the Bill should require qualified inspectors as per the Inspection of Financial Institutions Act (No 80 of 1998). Clauses in the Bill that dealt with on-site visits and inspections should be redrafted to provide clarity and limitations as to when and how on-site inspections should take place. BASA further recommended that publication of an investigation ought to occur only after the investigation was finalised thus limiting the damage to the reputation of the investigated person or entity. BASA recommended alignment of those provisions with those of Section 95 - the Power of the Registrar to conduct on-site visits or inspection in the Financial Markets Act 2012 as per Annexure A.

Substitution of publication of notices in Government Gazette by official website set up by FSB
The Bill amended the current requirement of the Registrar to publish notices on the official website of the Financial Services Board instead of in the Government Gazette. The Bill further extended the power of the Registrar to publish in 'such other media' or 'any other appropriate media'. The Bill did not define 'media' and forms of media. BASA noted the intention to reduce costs of publication in the Government Gazette. However commencement of laws could only come into effect after publication in the Government Gazette in terms of the Interpretation Act (No 33 of 1957). (See slides 11-12).

BASA recommended retention of the use of the Government Gazette whether in print or electronic form and for the 'official website' to be used as a subordinate tool for publication.

Exemption from the Consumer Protection Act (No 68 of 2008)
Clause 68 of the Bill amended Section 28 of the Financial Services Board Act 1990 by conferring upon the Financial Services Board absolute regulatory power over the financial institutions that it regulated. The amended Section excluded the application of the Consumer Protection Act (No 68 of 2008) to financial institutions under its control. BASA listed them. (See slide 14). The Acts specified in the definition of 'financial institution' did not regulate certain activities at all. However, these activities were regulated by the Consumer Protection Act. Examples of this would be 'auctions', 'promotional competitions', and 'pre-paid certificates, credits and vouchers and pre-payment for services'. There might be other examples. This list was not intended to be exhaustive. As there was no consumer protection provided by the Acts in the definition of 'financial institution' it must be assumed that the Consumer Commission would continue have jurisdiction over those activities.

The proposed amendment would result in extreme confusion and, additionally create fertile ground for regulatory arbitrage. The resultant uncertainty but not be in anyone's best interest. It was imperative the uncertainties created by his proposed exclusion of the Consumer Protection Act from financial institutions be dealt with so that there was no confusion for the banking sector or its clients.

BASA recommended that Clause 68 should be redrafted at in such a way that where there was a gap ('lacuna') in consumer protection legislation, the principle of the application of best legislation that promoted consumer protection should be invoked. (See slide 15)

Annexure 'A' of the submission described the powers of the Registrar to conduct on-site visits or inspections. (See slides 17-18).

Law Review Project (LRP) submission
Mr Leon Louw, LRP Executive Director, noted that a draft Bill was released for comment on 09 March 2012 which after revisions reappeared in the present finalised form. The provisions of the Bill were wide ranging with the intention of amending numerous sections in 11 existing Acts of Parliament. Clearly the scope of the proposed amendments was far too extensive to permit consideration of all the proposed amendments. This submission was confined to Clauses 102 and140. Clause 102 proposed a substitution of Section 62 of the Long-term Insurance Act (No 52 of 1998) (LTIA) and Clause 140 proposed a substitution of Section 55 of the Short-term Insurance Act (No 53 of 1998) (STIA). Additional concerns about other proposed amendments in this wide ranging Bill must also exist and it could be anticipated that the proposals contained in these amendments would lead to considerable problems to the financial industry in the future.

The LRP recommended that the existing Section 55 of the Short-term Insurance Act be repealed and nothing be substituted in its place. The existing rules passed in terms of the existing Section 55 should be re-promulgated as regulations to the Act.

The written submission alleged that the Bill did not follow the custom of references to clauses and designated the clauses in the Bill as 'sections'. Therefore 'to avoid unnecessary confusion' the LRP’s comments referred to the clauses in the bill as 'sections' 'so as to be consistent with the text of the Bill itself'.

Mr Louw alleged that National Treasury's proposals were unconstitutional as they implied that Parliament was being asked to hand-over its legislative powers, unfettered, to an unelected regulator. He further alleged that National Treasury sought to justify patently unconstitutional draft legislation by reference to world financial crises and international standards and powers extended to other registrars.

The Bill proposed far-reaching amendments of 11 Acts in 280 pages. It was complex in layout and required time-consuming analysis. It represented fundamental departures from local and international conventions. It contained unsubstantiated justifications, some known to be misinformed and others probably misinformed. The LRP recommended six months for analysis and comment and scrapping dubious clauses. The Bill challenged basic constitutional principles – the rule of law, separation of powers, general application (equality) and certainty, objective criteria (versus discretion). The separation of powers entailed legislation by the legislature, execution by the executive and adjudication by the judiciary. Subsidiary law was to be only in terms of clearly specified objectives and criteria. Parliament must know and agree with the laws that it made and were made for it. The LRP alleged that Parliament was being made to appear as becoming redundant. 'Quis custodiet custodes'? The LRP translated this as 'Who would regulate the regulators?' The LRP feared that the regulators would become a state within a state and that this threatened the legitimate legislative process and checks and balances.

The LRP feared abuse of delegated power. 'Delegatus non potest delegare': the one to whom [power or responsibility] was delegated could not delegate [that power or responsibility].

Moreover, the LRP alleged that elected legislators were being asked to give more power [to the Regulator [than they as elected legislators had. The LRP appeared to be alleging that legislators would have no idea what laws they were making and that Parliament was increasingly being undermined and rendered superfluous or redundant.

Intermediate discussion
The Chairperson objected at what appeared to be, from the wording of the submission, an insult to Parliament in general and the Committee in particular (Slides 5 and 8).

Ms Z Dlamini-Dubazana (ANC) concurred. Members were being insulted by Mr Louw's saying that Parliament was becoming redundant.

Mr T Harris (DA) said, however, that the LRP should be allowed to express its views without being interrupted, even if Members disagreed.

Mr Temba Nolutshungu, LRP Executive, explained that the LRP had never intended to attack Parliament. LRP was talking of clauses that contained amendments that might undermine Parliament, which was responsible for the legislative process.

Mr Louw hastened to apologise and assure the Committee that it was not his intention to offend Parliament or the Committee but rather to defend Parliament's role as the highest lawmaker in the country. He was attempting to show that the Bill, by increasing the power of the regulator, was in danger of detracting from Parliament's legislative authority in a way that would be unconstitutional.

The Chairperson made it very clear to the LRP that the Committee was fully aware of its responsibilities. He then asked the LRP to continue.

LRP submission continued
The LRP criticised National Treasury’s choice of countries as examples - the USA, UK, China, Korea, Singapore, and Malaysia – and gave reasons. The USA, China and Malaysia were federations. In the UK the Financial Services Authority (FSA) had been abolished. Singapore was a financial centre (‘tax haven’). South Korea was one of the world’s freest economies.

The LRP found fault with the Bill's aim to align South Africa with the Group of 20 countries (G20) commitments. It alleged that National Treasury and the FSB had not provided sufficient evidence to support their motivation for wanting to act swiftly and have ‘stronger’, more ‘intrusive’, much ‘tougher’ and ‘draconian’ powers. The LRP said that regulators should implement regulations not make them. The LRP demanded substantiation of claims and sources.

The Bill would force consumers to buy costly benefits and end pro-consumer innovation and competition.

The LRP criticised the Bill's provision for tabling regulations in the National Assembly and maintained that the drafting of the relevant Clause revealed a misconception of Parliament.
(See submission document)

Discussion
The Chairperson explained that Parliament did have its own processes to introduce a Bill. He explained the processes to clarity the LRP's apparent confusion. The process of lawmaking in South Africa was not a one way street. This Bill was tabled in Parliament on 31 August 2012. The Committee had called National Treasury to give it an informal briefing on 14 November. Thirdly, the Committee held workshops with the National Treasury on 13 and 20 March 2013. Now the Committee was holding the public hearings. The Committee would call National Treasury to give a report-back on interactions with the sector itself. This was the normal process when National Treasury introduced a Bill into Parliament. Effective engagements with the sectors affected did take place. After the report-back, the Committee itself went into deliberations in which it applied its mind to what the stakeholders had said and how National Treasury had responded. The Committee itself would decide whether it needed more time to study the Bill. However, Parliament did have the capacity in terms of support systems, technical, legal, and economic. The LRP should not underestimate the capability of the Committee to deal with the issues tabled before it. It was this Committee that would make a recommendation to Parliament whether this Bill should be passed or not. Once a Bill was in the hands of the Committee, it was the Committee's responsibility to ensure that it applied its mind and guided Parliament properly.

After these hearings, the Committee would call National Treasury to report back and thereafter the Committee would deliberate. Even if Members differed, they hammered out those issues in the Committee's meetings.

He advised Members that the morning's three submissions should guide them in their work, and emphasised that there was not one submission that should not be taken seriously.

Mr T Harris (DA) said that the Committee's many public hearings had always been conducted in a similar spirit of openness and receptivity to what those who made submissions wanted to say. However, he cautioned that if individual Members of the Committee were allowed to intervene in the way that had happened earlier, it perhaps compromised that spirit and the fact that Members needed to listen to everything that presenters wanted to say. Whether Members agreed or not, the presenters were giving their view.

The Chairperson had pointed out that the Executive was allowed to introduce legislation. Indeed National Treasury had tabled this Bill, but the Bill had been explained to Members, defended, and effectively shepherded though Parliament by the Regulator [the FSB]. This should alert the Committee to the fact that the Regulator was playing a very central role in drafting a law that governed it. Therefore Members needed to be aware that the Regulator would come from the perspective of wanting to maximise its powers and seeking the ability to intervene perhaps as a measure of regulation but also to maximise its powers, and perhaps giving itself the ability to impose draconian measures. This was something that National Treasury had already identified. It was the Committee's job to recognise this potential tendency and balance out the tendency to intervene with a defence of the principal of competition to achieve the same regulatory outcome. This meant balancing out the powers that the FSB was requesting for itself with the defence of civil liberties and defence of good value for consumers. It also meant balancing out this tendency to draconian measures with the imposition of appropriate regulation. It was this that the Committee should defend.
 
Mr Harris asked SAIA what it found wrong with the advisory committees.

Mr Harris said that National Treasury's argument in favour of introducing Sections that allowed for the protection of policyholder clauses was that it would allow swift action that was consistent with international standards and powers extended to other registrars. What was SAIA's view?

Mr Harris asked BASA if it would be happy with simply seeing the wording of the Code and would that satisfy its concerns that the advisory committees had been scrapped in favour of the Code. Would it not be desirable to incorporate the provisions of that Code with some form of parliamentary oversight?

Mr Harris asked BASA if it could explain the potential abuse of power if 'suitable persons' were allowed to carry out inspections. Why would that be a problem?

Mr Harris asked BASA to explain its issues around the Consumer Protection Act.

Mr Harris said that again National Treasury defended Clauses 102 and 140 on the basis that these provisions were consistent with international standards. He asked the LRP if the countries that it had mentioned were those in which National Treasury was alleging that these international standards were already in place.

Mr Harris said that the whole premise of LRP's submission was that rules provided in Clauses 102 and 140 would effectively be laws. Could LRP explain, from its own perspective, the difference between rules, directives, regulations, and laws?

Mr Harris referred to standardised terms that might arise from Clauses 102 and 140 that the LRP alleged would kill innovation. Why would that be a problem for South Africans? Why would ordinary consumers benefit from innovation? Surely innovation was simply used to pull the wool over consumers' eyes?

Mr Harris asked the LRP if it had examined the indemnity provision, the idea that we drafted gross negligence. Every other presenter had dealt with it. Did LRP agree on retaining the indemnity provision instead of drafting the provision on draft negligence?

Mr D Ross (DA) agreed with the Chairperson that this Bill was extremely complicated and placed a huge responsibility on legislators to ensure that it was constitutionally correct and would not be rejected by the Constitutional Court.

However, as the Chairperson had assured Members, this Bill was not cast in stone, and there would be extensive deliberations. This was most encouraging.

This Bill was a step towards market conduct regulation in terms of the Twin Peaks legislation. Because of the exclusion of the Consumer Protection Act, which was not applicable in terms of the provisions of the Bill, it was unfortunate, however, that the Bill gave the sense of giving excessive powers to the Regulator. He agreed with Mr Harris that perhaps the process of drafting the Bill was led by the FSB and not by National Treasury. However, he was gratified to sense that National Treasury would assist the Committee to refine the Bill.

He asked all three presenters if the Bill, through provisions to give excessive powers to the Regulator, might limit Parliament's oversight. He asked what checks and balances they proposed to prevent a situation in which Parliament gave powers to a regulator and, in terms of accountability, a very important word, who would ultimately be accountable when things went wrong? Things did go wrong whenever money and financial services were involved, hence the Financial Advisory and Intermediary Services (FAIS) ombudsman.

In terms of the oversight of Parliament, what specific recommendations did the SAIA, BASA and LRP make for the checks and balances? Surely Parliament should still play the role of accountability? This came down to the Regulator versus the Minister in terms of powers. Surely the powers should be vested in the Minister?

Mr Ross asked SAIA on publication and to confirm the wording of its recommendation.

Mr Ross could sense that BASA was hugely concerned at the removal of the advisory committees. He shared BASA's view that he wanted to retain them as they gave oversight and utilised the expertise in the sector. How strongly did BASA believe that the advisory committees should be reinstated in the Bill?

Mr Ross asked BASA to explain further what it meant by qualified inspectors for on-site inspections.

Ms Z Dlamini-Dubazana (ANC) thanked the three presenters, but requested clarity from the LRP on its fears that regulations would be ultra vires [beyond lawful powers]. Which Clause had actually triggered its comment? What were the LRP's recommendations?

Ms Dlamini-Dubazana found the LRP's submission unclear in its specific comments on the amendments proposed in the Bill.

Ms Dlamini-Dubazana said that the LRP alleged that not only was the Regulator asking Parliament to hand over its legislative powers but it wanted also to pass Bills of Attainder (slide 11) [by Bill of Attainder the LRP meant laws that were discriminatory]. This was a very critical point. What triggered this comment? If there was such within the Bill, the Committee needed to be aware of it, as it represented the people and needed to protect the citizens. It was necessary to be objective.

Ms Dlamini-Dubazana said that the LRP was saying that because what National Treasury had presented to the public in making its case for the Bill was unconstitutional, then the National Treasury tried to correct it by inserting the Section 55(3). The LRP was alleging that the Registrar would make arbitrary, specific rules. What was the Committee not aware of?

Ms J Tshabalala (ANC) said that it was important to consider everyone who was concerned in the drafting of the legislation, and there must be mutual respect in addressing issues.

Ms Tshabalala asked SAIA on the issue of publication. With reference to Clause 102 and the proposed substituted Section 62(4)(a)(i), was SAIA comfortable with ‘may not be less than 30 days’, as this wording could become open-ended? Would it not be better to say 'within a certain period’?

Ms Tshabalala asked SAIA if it supported the fact that the Registrar should have the power to make policyholder protection rules.

Ms Tshabalala asked SAIA if, even when the Registrar made certain rules setting out standardised wording or definitions for that matter, that would benefit policyholders in any way.

Ms Tshabalala asked SAIA, if there was not an international approach to the liability of the Regulator, why it must be a requirement for the FSB.

Ms Tshabalala asked SAIA if it could suggest other ways, such as disciplinary measures, in which to hold the FSB accountable for negligence, rather than making the levy payers, in effect, pay for delictual damages.

Ms Tshabalala asked BASA why it had reservations with searches and seizures taking place at night rather than in the day time.

Ms Tshabalala asked BASA why it recommended that the requirement for a warrant to conduct search and seizures be extended to institutions as well as individuals.

Ms Tshabalala asked BASA who became liable for the process in the case of a search and seizure operation. Was it an individual or a company? Whom did BASA think should be held accountable or rather liable for the expenses of the search and seizure operation?

Ms Tshabalala asked the LRP how it proposed to protect policyholders given the imbalance of the interests and the resources between the insurer and the policyholder.

Ms Tshabalala asked the LRP please to clarify whom it represented in this meeting and asked it to tell the Committee if it had any involvement with any financial services provider or insurer including memberships of boards or work as consultants.

Ms Tshabalala told the LRP that it could not expect Members not to take exception to such blunt allegations such as that Parliament was becoming redundant.

Ms Tshabalala asked the LRP if it really thought that Parliament had no delegated legislative authority to a public entity that it oversaw, such as the FSB. The Constitutional Court had ruled that delegated legislative powers were critical to make government work. In which way did the Bill remove constitutional principles related to lawmaking?

Ms Tshabalala asked the LRP if it really thought that Parliament did not know its job, as it implied, intentionally or otherwise, in its submission. The Committee would not be dictated to, but was amenable to any constructive and pertinent recommendations from the LRP.

Dr Z Luyenge (ANC) said that the Chairperson and Ms Tshabalala had already covered his concern over LRP's allegation that the Committee did not know its work and had allayed any such fears.

Dr Luyenge asked SAIA on the terminology such as 'comprehensive' about which it had complained. The word 'comprehensive' was very misleading when used in insurance. He commended SAIA for intervening in such instances, but was it really sure of the meaning that insurers gave to this term currently?

Dr Luyenge asked SAIA if it thought that the struggles of motor insurers were not because of the cost of repairs that were not monitored or evaluated? Many repairers cost their repairs extortionately and assessors agreed without question. What measures would SAIA recommend to protect consumers?

Dr Luyenge asked SAIA if there were shortages of certain skills in its industry.

Dr Luyenge asked SAIA if it could inform the consumers about the 7% of insurance companies that were not in membership of SAIA. Such consumers might continue to buy short-term insurance only to find that they were buying from bogus companies, and when consumers wanted to make claims such bogus companies would be nowhere to be found.

Dr Luyenge agreed with the Chairperson that the process of policy initiation and lawmaking could not be a one-way process. There were laws as a result of a political discussion, there were executive policies that were derived from the executive, and there were also policies and laws – operational policies - that were derived from the operational level.

Mr N Koornhof (COPE) was covered by many other questions.

Mr Koornhof asked SAIA why it thought that Clause 201, on the proposed insertion of Section 38C, would not comply with the Promotion of Administrative Justice Act (No 3 of 2000).

Mr Koornhof asked SAIA and BASA why they thought that the FSB's web site was not up and running as it should be. Was that really the case? Were they waiting for a new web site?

Mr Koornhof told the LRP that one was living in a dream world if one thought that one could legislate without regulatory powers. Without such powers government would be slowed down to the extent that it could achieve nothing. Did the LRP really suggest that the government could function without Parliament's giving regulatory powers? The debate should be whether one should give regulatory powers to the Regulator or to the Minister. He would prefer to give them to the Minister. Did the LRP think that one could run a financial system in this country without giving regulatory powers to the Minister? If it thought that way, then he and the LRP were living on different planets.

Mr D van Rooyen (ANC) asked the BASA to enlarge on its concern at the removal of the advisory committees. BASA had said that it did not even know what went on in the Code of Conduct consultations. In the informal sessions that National Treasury and FSB had conducted, had the BASA not had the opportunity to interrogate the content of the Code of Conduct consultation? Had it not compared the Code with the removal of the advisory forums before coming to a conclusion that such consultation processes would then compromise the role of the advisory forums?

Mr Van Rooyen found the LRP's submission vague, ambiguous and unhelpful. He sought to sift specifics from it. There were specific checks and balances proposed in the two Clauses, 102 and 140, to which the LRP referred. These checks and balances emphasised the need for the Regulator to publicise for public comment and make submissions to Parliament within a specific period for scrutiny. He asked for LRP's response. He agreed with Mr Koornhof that it was necessary for the legislature to give regulatory powers. As policymakers, one of Parliament's roles was to ensure that it characterised the environment in such a way as to assist the country. South Africa was a global player and had identified gaps in its compliance. The LRP's conclusion that the Committee should abandon this process was very unfortunate. He guaranteed that it was the Committee itself that had given this process the go-ahead, irrespective of the source of the legislation. It was the Committee that was in authority and would conclude on this process. The objects of the amendment process were very clear. There was a need for the Committee to move in and it had picked up lessons from international practice. He affirmed the need for delegated regulatory powers to some of the key stakeholders to ensure an efficient environment for being competitive and growing South Africa's economy.

Mr Barry Scott, SAIA CEO, replied that he had been a member of the short-term advisory committee for as many as ten years. He had also been a member of the policy board for financial services and regulation. The work of the committees was always seen as confidential. However, the industry was broad and complex with many different classes of business. There were vastly complex issues, such as Twin Peaks and Treating Customers Fairly (TCF). These advisory committees tended to comprise a few experts from various industries. It was impossible for a few individuals to be able to understand the full impact of all of these proposals and trends in such a vast and complex industry. It was almost unfair to expect a few such individuals to be able to contribute effectively on such a vast array of subjects. He therefore very much supported the current process of wider consultation with industry associations and other bodies before laws came to Parliament. In the advisory committees the expertise was never wide enough to cover the impact across such a wide array of different companies. Therefore SAIA supported the abandonment of the advisory committees in favour of the current process of much wider consultation and engagement conducted by the National Treasury and the FSB. The SAIA was very happy with the current process of engagement and believed that it was more effective than the previous process with the advisory committees.

Members might recall than ten years ago motor vehicle theft was a worsening issue to the extent that SAIA was concerned that motor vehicle insurance was becoming unaffordable as the rapid increase in motor vehicle theft was driving the industry to despair. In those days motor vehicle theft cost the industry about 85% of insurance claims while 15% of insurance claims were for accident damage. SAIA had participated in interventions (see document) and was now pleased to report that motor vehicle thefts had decreased by over 60% in the last ten years now to the extent that motor vehicle thefts now cost the industry less than 15% of the total value of insurance claims. It was now accidents that cost the industry about 85% of the total value of claims and were driving the industry to despair. For example, it might cost R60 000 to replace air bags in a small accident involving otherwise minor damage to the bumpers. Such an otherwise valuable safety and life-saving feature was pushing up the cost of vehicle insurance.

SAIA had just launched an initiative to try to employ alternative parts in repairing vehicles. Manufacturer-supplied parts were far more expensive than the after-market parts. However, in many cases these alternative parts were not certified for use in vehicles here. So SAIA was undertaking a process of engagement with an international certification agency. This was so that it could bring its global expertise to the South African market to help with the certification of alternative parts, which in many cases cost only a third of the price of the parts from the vehicle manufacturer. If one could get this process up and functioning, one could hope to achieve a reduction in the cost of vehicle parts in an attempt to drive down the cost of repairing accident damage to the benefit of insurers, the insured and also the uninsured. The same applied to the glass industry. The cost of locally produced glass was way in excess of that of the cost of glass produced abroad. Already, to reduce costs, glass produced overseas was being imported to replace glass that would have been produced locally and this unfortunately had an impact on job creation. It was a trade-off between job creation locally and the cost of insurance and the cost of repairs. This was an issue that one had to face. SAIA was very concerned that if one did not drive down the cost of repairs then people would not be able to afford motor insurance. This would be to the detriment of the manufacturing sector, since, if people could not insure cars, they would not be able to afford to buy them. It was probably SAIA's biggest project at the moment to solve this vehicle accident cost issue.

As to the 7% of insurance companies what were not members of SAIA, Mr Scott replied that the law did not require insurance companies to be members of SAIA. Most of the 7% were insurers who dealt only with corporate insurance companies, or who were 'captors of their own company'. Typically they were not selling products to the man in the street. There was one exception, a company launched a year ago. SAIA had approached it many times in an effort to persuade it to join, but without success. Typically, however, all other insurer of which SAIA was aware of that Members would encounter in everyday life were members of SAIA and it applied its code of conduct to them, and they were all members of the Ombudsman for Short-term Insurance.

As industry representative SAIA was very concerned about skills shortages. SAIA worked very closely with the Insurance Sector Education and Training Authority, which had launched a campaign to encourage more actuaries, specifically black actuaries. It was a critical issue, as the industry could not survive if such skill shortages were not remedied. There was certainly a need to make short-term insurance more attractive to people coming from universities.

Ms Ntshalintshali gave more detail and how she encouraged new companies that had received an FSB licence to operate to join SAIA. She would endeavour to make a call and explain how the company could benefit. There was one company, mentioned by Mr Scott, established a year ago which she had visited, but she was told that the reason why it was not on board was that it was a start up company and needed to establish its business and make a profit before it would consider becoming a member. However, it was certainly not bogus companies that were not yet SAIA's members.

Ms Strydom replied to Mr Harris that the swift action was proposed in an amendments contained in Clause 140 which amended Section 55 of the Short-term Insurance Act. The purpose of publishing the rules was to ensure that policies were entered into, executed and enforced in accordance with sound business principles in the interest of parties and in the public interest. This was the basis for making the rules. The particular Clause then proposed the immediate publication of a rule and that the Registrar should issue a notice in respect of the reasons why an immediate publication was necessary and to allow for comments. In SAIA's view it might be necessary for the Regulator to act swiftly in order to allow checks and balances. SAIA noted that the rule itself would not be published immediately but the reason for the rule would be published. SAIA suggested that this proposed Section should be reconsidered to afford that particular function to the Minister rather than to the Registrar. In addition, SAIA submitted that the Minister should review the draft rule to ensure that the rules of natural justice were adequately followed. Currently, Section 55 of the Short-term Insurance Act allowed for the making of rules by the Registrar of the advisory committee. She was not aware of any rule that the advisory committee had proposed. The reason for that was that the members of the advisory committees were appointed in a personal capacity, bound by confidentiality, and represented individual views rather than those of the industry. Accordingly SAIA supported a code of engagement and consultation but with the proviso that this must be a mandatory code as opposed to the current wording which provided that the Minister might publish a code. The current process then allowed for the Registrar after it had proposed a rule to invite comments. The comments and the Registrar's response were then submitted to the Minister who could reject or approve the rule even in a modified form. Thereafter the rule was gazetted. Clause 140 proposed for the Registrar to make the rule and then the process was to invite comment by notice within a period of at least 30 days. However, the notice in the Government Gazette would not include the rule. It would merely refer members of the public and the industry to the FSB website. The checks and balances in Clause 140 included submitting the rule to Parliament for scrutiny. SAIA's view was that the existence of checks and balances was very important. Clause 140 explained the rest of the process. One needed to acknowledge that there was a changing regulatory environment with the Twin Peaks model of regulation being introduced and the regulators following a proportional approach. This meant that the Registrar to into account the nature, risk and complexity of the environment in its ongoing supervisory activities. One also needed acknowledge not only that one had a changing regulatory environment but that the nature of the insurance business must be taken into consideration. Therefore SAIA thought it appropriate that a rational approach must be followed and that rules might be made in respect of a specific policy. An example was micro insurance policies, or consumer credit insurance policies. SAIA was comfortable with the 30 days. SAIA agreed that there was a role for standardised wording and terminology. To this end SAIA rejected collaborative efforts and engaging with the FSB and the National Treasury and proposed that certain definitions that were currently difficult for consumers to understand, such as 'comprehensive', and the difference between a 'regulated driver' and a 'nominated driver'. What did it mean if a consumer took out an all risks policy? SAIA had asked the FSB and the National Treasury to list these terms, find a common definition in plain language rather than legal definitions, ensure consistency in the use of these terms, and issue this list so that consumers received the benefit of understanding the terminology. This was in line with the approach of the Association for Savings and Investment South Africa (ASISA) which had on its website a jargon buster.

As to the liability clause, and the reference to ICP 2.9, SAIA was a member of the Global Federation of Insurance Associations. In the different jurisdictions there were different views. In the UK the Financial Services Act 2012 provided protection for the regulators as the UK also had a Twin Peaks model of regulation except if the regulators act in bad faith. In Australia there was a similar approach. Italy followed a different approach and allowed for liability for negligent actions. In Canada the good faith approach was followed. In Japan the good faith approach was followed together with the intentional and negligence approach. The Banks Act (No 94 of 1990) and the Medical Schemes Act provided Sections for bona fide actions only while the National Credit Act appeared to have no provision in respect of the limitation of liability of the Regulator.

The Consumer Protection Act followed a different approach and followed the vicarious liability angle to say what when acting in the course of employment the particular staff members would be protected. Members would be familiar with the liability provisions of the recent Credit Rating Services Act (No 24 of 2012) and the Financial Markets Act. From a liability point of view to act in good faith and to be protected was good and well. However, the concern was with the intention to act in good faith. If one acted recklessly with a total disregard of duty, then, in SAIA's view, the Regulator must attract delictual liability. Consumers and insurers alike must be afforded the opportunity to take the Regulator to task and to claim damages in respect of negligence or reckless actions, despite the fact that the Regulator had acted in good faith. SAIA recommended that this issue of liability be considered further and that this proposed Section be circumscribed rationally for the protection of both consumers and insurers alike. As to the insertion of Section 38C of the Financial Advisory and Intermediary Services Act, it had to be asked if this was a contravention of the Promotion of Administrative Justice Act. SAIA did not support any provision that departed from the Promotion of Administrative Justice Act. It supported the right to review and internal appeal.

The FSB website was a huge concern. To this extent SAIA had engaged with the FSB directly on its concerns. The project was anticipated for completion in September 2013. Accordingly, SAIA found it difficult to support any provision of prescription on the website in the event that this project was not completed, as the current website needed a lot of work to be done.

Mr Lala-Mohan replied that advisory committees and codes of consultation were two different things. The advisory committees were appointed by the Minister in most instances and were composed of persons that the Minister felt suitable to advise on a particular issue. A code of consultation was different. The difficulty was that BASA had never had sight of that code of consultation, and did not know the parameters. Nor did it know who was to be consulted and how. It also did not know the limits of consultation or its purpose. He could not say if he was happy with the doing away with advisory committees, as he did not know what was to be substituted for them.

BASA felt that there was a distinction between a ‘suitable person’ and a ‘qualified person’. The definition of a 'suitable person' was to some extent subjective. Therefore BASA commended the approach of the Inspection of Financial Institutions Act which laid down the requirements. BASA looked for such consistency. Parliament oversight was very important.

BASA fully supported the proposal on the Consumer Protection Act. Currently, issues which dealt with the National Credit Act were exempt, so credit was out of the situation. To illustrate his point, he gave the example of an overdraft account, which was a financial service and was exempt. However, if the product that one bought by means of the overdraft broke, one had recourse in terms of the Consumer Protection Act. If one bought a house at an auction, and the house was subsequently repossessed, the purchase of the house was a financial transaction. If one sold the house at an auction, the terms of the Consumer Protection Act applied. He feared that a savvy consumer might play regulatory arbitrage from the banking ombudsman to the Consumer Commission. BASA supported the proposal but wanted to ensure that the 'carve out' was quite clear. This was quite a difficult thing to do because one wanted to offer consumers their protection. BASA's suggestion was that in those kinds of instances, where there was consumer protection, the best consumer protection should apply. It was the mechanics and unintended consequences, particularly in banking and financial services, that became complicated and concerned BASA. BASA urged a clean and proper break.

Mr Lala-Mohan had no objection to a night raid. Probably that was the best time for a raid. The Competition Act had certain provisions regarding such raids. From a liability point of view, those, whether institutions or individuals, who were accountable must be held liable. Raids and seizures, however, could sometimes have a negative effect. A firm or institution was likely to suffer damage to its reputation from a raid even if nothing adverse was discovered. As one could not mitigate that kind of damage after it had happened, everything must be in a controlled environment with a balance of powers. To a large extent the Competition Act did that quite well.

As to the FSB website, the time and date of publication, and all the accoutrements of the official recognition of legislation, needed to be quite clear and correct. At least with the Government Gazette, the date of assent was quite clear.

Mr Louw said that the LRP did not disagree with anything that SAIA or BASA had said. It was rather raising additional issues.

The countries mentioned were those listed by National Treasury or the FSB in their submission of 14 November to the Committee. National Treasury and FSB had given no source or reference. The LRP knew that it was not true of the UK. It was probably untrue of the USA because it was a federal country and law differed from state to state. Malaysia was not regarded anywhere in the world as a significant source of guidance on policy. Most of the G20 countries were European and provisions such as the ability to prescribe contracts, proposed to the Committee would not be permitted in the European Union. It was safe to say that it was not true of places like Singapore, which were financial centres or South Korea, which was regarded as an icon of economic freedom. China was a federation where the law differed substantially from one province to another. In particular the most important parts of the economy were the six special economic zones. In those no provisions like this existed. The closest similarity to these provisions for prescribing contracts was in Germany which had to drop such provisions after its insurance industry became notoriously moribund and the G20 and the European Union had required it to drop them. All the research showed that the British insurance industry and that of other countries was more dynamic. The references to international norms and standards were misplaced and mistaken.

Mr Louw was the acting director of the Law Review Project. He was also the part-time director of the Free Market Foundation. None of what had been submitted was Free Market Foundation policy. He was instead presenting points of law. He hoped that Members would consider the substance of the submission rather than the presenter. Fortuitously he had no interests. He held no directorships of any kind nor was he a consultant to any insurer, although he had consulted to BASA on a separate matter, and frequently had contact with other role players. The LRP did not receive any money from anyone with any vested interest and he personally had no vested interest.

Rules were usually pertained to self-regulation. In the past these were drawn up by advisory committees and submitted to the Minister, negotiated with him, and then published.

Regulations or subsidiary legislation was a law mandated by Parliament to the Executive.

LRP agreed on the need for clear and unambiguous definitions. This was quite different from saying that the terms of contracts should be prescribed. The LRP wanted insurance companies to compete with each other and innovate, and for consumers to be the beneficiaries of new offers and cheaper or better products. Competition and innovation were by far the best protection for buyers of insurance. This could be achieved within the legal principles that the legislature prescribed.

The term bona fide [in good faith] varied from country to country with different legal systems. In South African law it would be quite inappropriate to exempt someone from liability on account of good faith. Acting in good faith was not a defence against doing something wrong and should never be. Instead there should be actual liability for inappropriate behaviour, which should include recklessness and negligence. A distinction should be made between liability of an organisation such as the Regulator and that of an individual. Someone acting in the course and scope of their employment in good faith might not be held personally liable but this was quite different from exempting the organisation from its liability. LRP assured the Committee that it wanted parliamentary oversight. LRP respected Parliament. Parliament was the place to give marching orders that were clear and under which all regulators were clearly positioned and subordinate.

Delegated legislation was not the issue. The issue was to have clear guidelines on what might feasibly or legally be delegated and what might not. Under the Constitution, Parliament could pass on regulatory powers, but Parliament did so under very clear marching orders. The Constitutional Court was very clear about this in its judgements on the matter that when power was delegated there must be no confusion in the mind of the person who had the power as to why he or she had the power. In Clauses 102 and 140, which were essentially identical, this was not the case. The Regulator could even amend or repeal rules promulgated by the Minister. He quoted the offending wording. Moreover, the LRP objected to Parliament being asked to give the Regulator powers to make different 'laws' for different people. Parliament itself did not have such powers, as such ‘Bills of Attainder’ had been outlawed many years ago all over the world.
As to Parliamentary oversight, the provision to table rules in Parliament was vaguely and incorrectly worded. It was moreover a curious, unprecedented and inappropriate manner of making law for Parliament to review rules after they had been made and enforced.

Mr Louw apologised for the passion generated by his unfortunate remark that Parliament was in danger of being made redundant. The whole point was that the LRP did not want Parliament to be made redundant. It wanted Members to be in the driving seat. It was because of the LRP's faith and confidence in Parliament that it made this submission.

The Chairperson had outlined very eloquently and in great detail the process, which the Committee followed in making laws. However, the Bill contained proposals that in future 'laws' would be made without those elaborate processes. The LRP's objection to these proposals did not detract from its support for the Constitutional provision for delegated law-making which should be clearly subject to specified objectives and criteria, as defined by the Constitution and the Constitutional Court.

Laws should not be made swiftly, but should be made with thorough and due deliberation.

Mr Louw referred Members to the LRP's written submission for more detail.

The Chairperson thought that if the LRP had been part of the interaction with National Treasury and the FSB, and other stakeholders, it would have found clarity on many issues at that level, particularly on what had caused the global financial crisis. He noted that the Committee should be fully alert in processing the proposals before it. Secondly there was a concern about the regulator being a referee and a player at the same time. Equally the industry should not think that it should be a player and referee itself, because the global crisis had arisen partly from over reliance by regulators on self risk assessment by institutions on such issues as liquidity and creditworthiness. So it was important that regulations and regulators should play a very critical role. South Africa could pride itself on the stability of its banking sector and that it was Basel III compliant. This had not happened through self-risk assessments but because the South African Reserve Bank played a very important role in that area. The Chairperson assured SAIA, BASA and LRP that all their views would be taken into account and welcomed them to attend, as observers, the upcoming report-back session with National Treasury and FSB. Thereafter the Committee would deliberate and have robust discussions.

The meeting was adjourned.
 

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