Financial Services Laws General Amendment Bill [B29-2012]: Department response to submissions

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Finance Standing Committee

17 June 2013
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The National Treasury, with the Financial Services Board, briefed Members on formal responses to comments received during the public hearings in April 2013 on the Financial Services Laws General Amendment Bill [B29-2012] and provided a draft ‘A’ Bill [B29A-2012] for the Committee’s consideration. National Treasury emphasised that the Bill was urgent and would be consistent with the coming Twin Peaks legislation. National Treasury reviewed the background to the Bill and the public consultations and reminded Members of the Bill’s aims – including making financial regulators such as the Financial Services Board and the Banking Supervision Department much stronger, more intrusive, and much tougher in line with the Group of Twenty (G20) commitments, enabling the reorganisation to the Prudential Regulatory Authority in the South African Reserve Bank and transforming the Financial Services Board into a new market conduct regulator, protecting regulators from legal liability when they acted, holding financial institutions to higher standards on consumer protection, market conduct, capital reserves, and liquidity, and ensuring that financial institutions continued to meet access targets as agreed in the Financial Sector Charter.

National Treasury then reviewed key themes arising from public submissions and workshops - limitation on liability (Clause 67), policyholder protection rules (Clauses 102 and 140), delegation of subordinate legislative powers by Parliament, re-assigning of powers of the Minister and of the Registrar in certain instances, Financial Services Board on-site visit powers, effective consultation, publication on the Financial Services Board website versus in the Government Gazette, and the material amendments proposed in the Pension Funds Act (No. 24 of 1956), the Financial Services Board Act (No. 97 of 1990), the Long-term Insurance Act (No. 52 of 1998), the Short-term Insurance Act (No. 53 of 1998), the Inspections of Financial Institutions Act (No. 80 of 1998), and the Financial Institutions (Protection of Funds) Act (No. 28 of 2001). It reviewed inspection and on-site visit power amendments to the Financial Advisory and Intermediary Services Act (No. 37 of 2002) (Clause 177), the Collective Investment Schemes Control Act (No. 45 of 2002) (Clause 213), the Financial Markets Act (No. 19 of 2012) (Clause 257), and the Credit Rating Services Act (No. 24 of 2012) (Clause 260). In conclusion, National Treasury emphasised that the Bill dealt with urgent legislative requirements. It was extensive, had elicited many public comments, and was urgent because of the need to commit for peer review and to align with existing legislation. It should not be confused with the coming Twin Peaks legislation that would be implemented over the next few years. The Bill would ensure consistency in the transition period to Twin Peaks as current sector legislation would still apply over the next five years, until replaced by new-order sector legislation.

ANC Members welcomed the National Treasury and Financial Services Board’s ‘noble effort’ in responding to all submissions from stakeholders. This would go a long way to giving effect to the participatory model of South Africa's system. ANC Members asked for more detail on the replacement of the advisory bodies by the code of conduct and how National Treasury would respond to the call by some of the stakeholders to delay the implementation of new medical scheme provisions. They also noted that there had been an outcry against prolonged curatorships, asked if it would really be disastrous to delete ‘grossly negligent’ from the liability clause 67, and for elaboration on the time frame for the new Twin Peaks legislation. With reference to ‘intruding’ and the ‘Registrar’s right to access’, if taken to court, would it be possible to defend this law effectively? Would ‘fiduciary duties’ be more clearly defined in the Regulations? Did the Registrar really need to obtain the institution’s agreement to intervene? Members sought to avoid challenges in the court.

A COPE Member wanted National Treasury and FSB to define ‘grossly negligent’. The Regulator's powers were open-ended and could even be changed to override the Minister. While supporting the streamlining of the process, he asked if it would eventually be fairer? If those who were involved were not happy, could they eventually go to court?

A DA Member was quite appalled at the lack of regulation that existed in the USA at the time of the sub-prime crisis there and the poverty that was created and also noted the role that the credit rating services agencies played or did not play correctly. On the other hand, to give regulators carte blanche was also problematic. It was necessary to find the right balance. He supported the COPE Member on exercise of powers in good faith [bona fide]. This provision was a little vague. He also wanted more detail on 'grossly negligent' and on the accountability of the Registrar. He feared that the impact of the amendments could be ‘wholly disastrous’ for the insurance industry. He was concerned at the abolition of the advisory committees. In the past these had brought much expertise to the process. Was there no way to restore that balance? Parliamentary scrutiny was still necessary. One should not give all the powers to the Registrar. A second DA Member wondered if National Treasury was deliberately provocative in referencing this word ‘draconian’ again with added emphasis and saw again a prioritisation of intervention over competition with significant powers of the Financial Services Board over the civil liberties of citizens. On the big three issues – liability, the protection of policyholders, and the process of consultation, there had been some concessions at the margins. However, his question on whether the Bill struck the right balance between draconian powers and appropriate powers remained unanswered. On the liability clause, there had been, essentially, no concession. How did exempting the Registrar from gross negligence help to increase accountability? This was, he thought, the biggest question on the Bill and it remained unanswered.

In responses National Treasury assured the DA Members that ‘intrusiveness’ did not come from National Treasury but from the International Monetary Fund. One way of dealing with some of the sensitive proposals particularly the medical aid schemes, the issue of consultation, and possibly the Financial Services Board website, was to approve the amendments as they were, but suspend their dates of coming into effect until the Regulations had been finalised. The Financial Services Board replied that, in doing away with the advisory committees, it had not disregarded expertise. There was a specific committee created in terms of legislation to advise the Registrar when there was litigation. Its members were appointed on the basis of expertise. The Board also consulted industry bodies in order to obtain a collective voice. National Treasury emphasised the importance of parliamentary scrutiny and that South Africa was actually lagging behind international standards. The focus in regulation must always be to protect the customer.

The Chairperson said that it would be a priority in the third term for the Committee to meet jointly with the Portfolio Committee on Health on medical aid schemes. He noted the DA’s concerns and undertook to follow-up on the legal opinion expected from the Senior Parliamentary Legal Adviser.
 

Meeting report

National Treasury Financial Services Laws General Amendment Bill [B29-2012] presentation
Mr Ismail Momoniat, National Treasury DDG: Tax and Financial Sector Policy, thanked the Committee for the opportunity to give formal responses to questions and comments received. There had been submissions from the Association of Savings and Investments South Africa (ASISA), the South African Insurance Association (SAIA), the Banking Association of South Africa (BASA), the Principal Officers Association (POA), and the Law Review Project (LRP). There had been two workshops with the Committee – on 13 and 20 March 2013, and public hearings on 22 and 23 April 2013. The National Treasury and Financial Services Board (FSB) response was in the form of the draft A Bill [B29A-2012] for the Committee's consideration. The Bill was an urgent Bill that would be consistent with the coming Twin Peaks.

Background to public consultations on the Bill (See slide 4)

Background to the Bill
The Bill was urgent as it addressed gaps identified by the International Monetary Fund (IMF)/World Bank/Financial Sector Assessment Programme (FSAP) to adhere to international standards for financial regulation. Some gaps had been identified through the 2012 peer review by the Financial Stability Board. The Bill sought to align financial sector legislation with the new Companies Act, ensure higher consumer protection standards and remove duplication in terms of the Consumer Protection Act, deal with mergers in the non-banking financial sector, and ensure adequate emergency powers to deal with systemic risks to the financial system. Many of the gaps had been noted in the policy paper A Safer Financial Sector to Serve SA Better. The Bill reformed current legislation and would be consistent with the new-order Twin Peaks legislation as well as the transition into the new system.

Background reminder on the Bill
The Bill sought to make financial regulators such as the FSB and the Banking Supervision Department much stronger, more intrusive, and much tougher – it was meant to be draconian in line with the Group of Twenty (G20) commitments.

Furthermore, it would enable the reorganisation to the Prudential Regulatory Authority in the South African Reserve Bank (SARB) and transform the FSB into a new market conduct regulator.

Regulators would need to be protected from legal liability when they acted.

At the same time, financial institutions would be held to higher standards on consumer protection, market conduct, capital reserves, liquidity, etc.

Financial institutions would also have to continue to meet access targets as agreed in the Financial Sector Charter.

Key themes arising from public submissions and workshops
Key issue 1: limitation on liability (Clause 67)

In the public hearings, ASISA, SAIA, and BASA made submissions on this Clause. National Treasury, however, recommended that the provision be retained as in the tabled version of the Bill, in order to afford regulators legal protection provided that they exercised their powers in good faith [bona fide].
(See slide 8)

Mr Momoniat emphasised that this was a critical point. If regulators did not have legal protection, they could not do their work.

Ms Retha Stander, FSB Senior Legal Adviser, gave examples from other legislation of protection to regulators.

The Chairperson was annoyed that Members did not have copies of the presentation. Such a large delegation should have assigned someone to make copies in advance. He hoped that it would not happen again.

Mr Momoniat apologised and took serious note of the Chairperson’s observation.

Ms Stander continued. The intention was to remove the works ‘not grossly negligent’ so as to afford the Regulator protection in law. Such protection was in line with international standards.

Mr Dube Tshidi, FSB Executive Officer, commented that any regulator operated on the basis of a given piece of legislation. Negligence might arise but what was critical was the regulator’s intention coupled with that negligence. If that negligence was coupled with acting in good faith [bona fide] there could not be liability. However, if that negligence was coupled with acting in bad faith [mala fide] then there should be liability.

Key issue 2: policyholder protection rules (Clauses 102 and 140)
Mr Momoniat said that in the public hearings, SAIA and the LRP made submissions on these Clauses. National Treasury proposed, in response, that the sub-clauses on the emergency publication of rules be deleted. National Treasury believed that the provisions were consistent with Constitutional requirements on the delegation of powers to make subordinate legislation.
(See slide 9)

Ms Suzette Vogelsang, FSB Head of Department: Insurance Group Supervision, said that the Registrar would like to have the power to prescribe the standards or norms for the wording of policies. This was in line with international standards and would make matters easier for consumers. She referred Members to their document pack.

Dr Reshma Sheoraj, National Treasury Director: Insurance in the Financial Sector Policy Unit, emphasised that National Treasury and FSB had indeed taken note of the submissions on these Clauses. The FSB had now proposed to remove the provision for the emergency publication of the rule. The intention was for the Registrar of Insurance to be able to make rules generally for insurers and all types of insurance policies. These responses were captured in the ‘A’ Bill.

Mr Momoniat commented that the insurance policy protection rules had attracted considerable attention in the media. There were those who believed that the financial sector should not be regulated and had tried to pressurise the Short-term Insurance Ombuds. He made no apologies for an intrusive approach in the case of bad products.

Key issue 3: delegation of subordinate legislative powers by Parliament
(See slide 10)
Mr Momoniat emphasised the importance of enabling the Regulator to act swiftly on the basis of specialised knowledge.

Ms Jeannine Bednar-Giyose, National Treasury Director: Financial Sector Legislation and Regulation, said that the Constitutional Court had consistently recognised that it was essential in a constitutional democracy that there was provision for Parliament to delegate subordinate legislative powers to the Executive and within appropriate parameters to regulators and officials.

Mr Tshidi commented that all subordinate legislation was subject to the ultra vires rule.

Mr Momoniat commented that it followed that it was necessary to increase the accountability of regulators – to the Minister of Finance and ultimately to Parliament.

Key issue 4: re-assigning of powers of the Minister and of the Registrar in certain instances
Committee Members had expressed concern that removing the requirement for the Registrar to secure the Minister's or the Court's approval for certain actions would give the Registrar too much power. However, National Treasury believed that it was appropriate to provide these powers to the Registrar. (See Slide 11)

Long Term Insurance Act: removal of necessity for court order for transfer of long-term insurance business
Ms Stander said that the intention was to bring about alignment between the Short-term and Long-term Insurance Acts. (See Slide 12)

Ms Vogelsang emphasised the Registrar could not instruct an insurer to transfer part of a business unless the insurer actually made that request. This was a critical point.

Key issue 5: FSB on-site visit powers
Mr Momoniat said that subsequent to the tabling of the Bill and following the Committee's deliberations on on-site visit powers, National Treasury amended the proposed provisions to align with the approach adopted in the Credit Ratings Services Act (No. 24 of 2012) (See slides 13-14)

[There was no key issue number 6]

Key issue 7: effective consultation
Mr Momoniat said that ASISA, SAIA and BASA commented that given the repeal of the advisory committees and the additional powers given to the FSB, these powers must be balanced with an appropriate and robust process of consultation. National Treasury agreed with these comments and accordingly had amended Clause 63 to oblige the FSB to prescribe a code of norms and standards for consultation. (See slide 15)

Mr Momoniat commented, however, that National Treasury was now considering a further change to the ‘A’ Bill to give the power to the Minister, not the FSB, to prescribe the code of norms and standards.

He commented further that National Treasury and FSB prided themselves on the extent to which they consulted when introducing legislation.

Key issue 8: Publication on FSB website versus Government Gazette; FSB website functionality / usability 
ASISA, SAIA and BASA supported publication of matters on the website subject to its being redeveloped. However, there were some concerns that this might be contrary to the Interpretation Act (No. 33 of 1957) and impede access to documents so published. The Bill's provisions were consistent with the Interpretation Act. However, the National Treasury would delay the coming into operation of the relevant provisions until the accessibility and usability of the website satisfied the requirements that would be stipulated in accordance with the Code of Consultation. (See slide 16).

Material amendments proposed in respective Acts:
Pension Funds Act (No. 24 of 1956)

Ms Alta Marias, FSB Head of Department: Pensions Research and Policy, gave the highlights.

● Commencing of business (Clause 5)
● Trustee fiduciary duty (Clause 9)
● Delegation of principal officers’ functions (Clause 12)'
● Fund exercising control (Clause 33)
● Inspections and on-site visit powers (Clause 35)
● Undesirable business practice (Slide 36)
● Division of pension interest (Clause 52)
(See slides 18-20)


FSB Act (No. 97 of 1990)
Ms Bednar-Giyose explained
● Code of norms and standards for consultation (Clause 63)
● Utilisation and disclosure of information and co-operation (Clause 66 amending Section 22 of FSB Act)
(See slide 21)

The Long-term Insurance Act (No. 52 of 1998) and the Short-term Insurance Act (No. 53 of 1998)
● Inspections and on-site visit powers (Clauses 72 and 114)
● Policyholder protection rules (Clauses 102 and 140)
(See slide 22)

Inspections of Financial Institutions Act (No. 80 of 1998)
Ms Stander explained
● Disclosure to certain affected parties (Clause 152)
● New amendment to Section 11 of the Act
(See slide 23)

Financial Institutions (Protection of Funds) Act (No. 28 of 2001)
● On-site visits (Clause 160)
● Curators (Clause 162)
(See slide 24)

Inspection and on-site visit power amendments
Amendments to the Financial Advisory and Intermediary Services Act (Clause 177), Collective Investment Schemes Control Act (Clause 213), Financial Markets Act (Clause 257), Credit Rating Services Act (Clause 260). (See slide 25)

Conclusion
Mr Momoniat said that the Bill dealt with urgent legislative requirements. It was extensive, had elicited many public comments, and was urgent because of the need to commit for peer review and to align with existing legislation. It should not be confused with the coming Twin Peaks legislation that would be implemented over the next few years. The Bill would ensure consistency in the transition period to Twin Peaks as current sector legislation would still apply over the next five years, until replaced by new-order sector legislation.

Structure of National Treasury supporting response documents
Supporting Annexures were provided as attachments for Members only (See slide 27 for list of titles).

Discussion
The Chairperson said that the report-back would greatly assist the Committee in its subsequent deliberations.

Ms Z Dlamini-Dubazana (ANC) referred to slide 12. What powers did the supervisor have?

She referred to slide 14. With reference to ‘intruding’ and the ‘Registrar’s right to access’, if taken to court, would it be possible to defend this law effectively? How would one defend ‘the greater clarity as to the Registrar’s right of access to documents/information’ in a court of law?

She referred to Clause 9, slide 18. Would ‘fiduciary duty’ be more clearly defined in the Regulations?

She said that Ms Bednar-Giyose had indicated that Clause 37 had been removed. However, it needed to be clear on paper that Clause 37 had been removed, beyond the mere absence of the Clause.

She referred to page 33 of the ‘A’ Bill and the words ‘statutory management’ and ‘the Registrar may, by agreement, with a financial institution’. Did the Registrar really need to obtain the institution’s agreement to intervene? It was confusing. She sought to avoid challenges in the court.

Mr N Koornhof (COPE) thought that there had been progress. He commented on three matters.

The first was on slide 8. He wanted National Treasury and FSB to define ‘grossly negligent’. As the Bill stood, if a person was acting in good faith [bona fide] and 49% negligent he or she would ‘get away with it’. Mr Koornhof was most uncomfortable with this.

Secondly, with reference to slides 10 and 11, the Regulator's powers were open-ended and could even be changed to override the Minister.

Thirdly, with reference to slide 12, he supported the streamlining of the process and avoiding the need to go to court. However, would it eventually be fairer? If those who were involved were not happy, could they eventually go to court?

Mr D Ross (DA) was quite appalled at the lack of regulation that existed in the USA at the time of the sub-prime crisis there and the poverty that was created. He also noted the role that the credit rating services agencies played or did not play correctly.

On the other hand, to give regulators carte blanche was also problematic. It was necessary to find the right balance.

He supported Mr Koornhof on the exercise of powers in good faith [bone fide]. This provision was a little vague. He also wanted more detail on ‘grossly negligent’ and on the accountability of the Registrar.

With reference to the second key issue, the policy protection rules, it was certainly necessary to protect the consumers and this should be the priority. However, he noted concerns of the insurance industry that the amendment could damage the industry, and that the economic impact of the amendment could be 'wholly disastrous'. What was the capacity of the FSB to intervene? Did it have the capacity to look at every insurance policy?

With reference to the third key issue, the delegation of subordinate legislative powers by Parliament (slide 10), he was concerned at the abolition of the advisory committees. In the past these had brought much expertise to the process. Was there no way to restore that balance? He also believed that parliamentary scrutiny was still necessary and should be kept intact, and that one should not give all the powers to the Registrar.

Mr T Harris (DA) found the presentation and annexures helpful in understanding the Proposed Standing Committee Amendments to Financial Services Laws General Amendment Bill 14 June 2013 [B29A-2012]. Members had received this last document the previous week and the presentation and annexures that day. He still needed time to understand what had changed and what had not.

He wondered if Mr Momoniat was deliberately provocative in referencing this word ‘draconian’ again and with added emphasis (slide 6). He saw again a prioritisation of intervention over competition, and significant powers of the FSB over the civil liberties of citizens. On the big three issues – liability, the protection of policyholders, and the process of consultation, there had been some concessions on the margins. However, his question on whether the Bill struck the right balance between draconian powers and appropriate powers remained unanswered. He would study the amended Bill in the next few days and return with a position.

However, on the liability Clause 67, there had, essentially, been no concession.

He understood that ‘gross negligence’ meant ‘serious carelessness’. He was not sure that exercising powers in good faith was compatible with this concept of 'serious carelessness'. Did removing the words not grossly negligent’ exempt the FSB from acts of gross negligent. If that was so, why was that necessary? National Treasury had failed to convince him.

If National Treasury and FSB had admitted that delegating greater powers to the Registrar would increase the Registrar's accountability, how did exempting the Registrar from gross negligence help to increase accountability? This was, he thought, the biggest question on the Bill and remained unanswered.

On the protection of policyholders, Mr Momoniat had prefaced his remarks by referring to 2008 and the sub-prime crisis. Everyone on both sides of the House agreed that what happened in 2008 was a failure of regulation and that it was important to ensure that this failure did not happen again. However, that crisis had been triggered entirely by mortgage financing, and it was inappropriate to use that as a justification for changing insurance laws. He argued, on the other hand, for appropriate interventions in the insurance market, not 'draconian' ones. It was wrong to use 2008 to justify going too fast.

Given that one had constructed this robust parliamentary oversight over almost two decades, it would be wrong to take this away from Parliament by giving these powers to the Registrar while side-stepping the Minister (slide 11).

On the process of consultation, there was now direction on a new code of conduct (slide 15). This was a step in the right direction. However, would it be possible to see a draft code of conduct? Members needed assurance that this process would be superior to the advisory boards.

Mr D van Rooyen (ANC) welcomed the National Treasury and FSB’s ‘noble effort’ in responding to all submissions from stakeholders. This would go a long way to giving effect to the participatory model of South Africa's system.

He asked for more detail on the replacement of the advisory bodies by the code of conduct (slide 15).

Secondly he asked for more detail on the call by some of the stakeholders to delay the implementation of medical scheme regulations.

Thirdly, on Clause 162, he was not sure to what extent this provision enabled the Registrar to deal with one of the perennial problems of curatorship which was prolongation of the curatorship in certain cases and also the area of managing finances of institutions under curatorship. He was not sure if this provision would give the Registrar enough power. There had been 'terrible experience' of recent cases and there was an outcry against prolonged curatorships.

Ms J Tshabalala (ANC) asked if it would it really be disastrous to delete the words ‘grossly negligent’ (slide 8)?

She asked if the provision to authorise the Registrar to prohibit an insurer from carrying on insurance business without the prior approval of the Minister was really feasible? (Slide 11). She could imagine the amount of work that this would involve for the Minister. She was also concerned at the time frame.

She asked for more details of the draft Code setting out some of the key principles for consultation (slide 15).

She asked National Treasury to elaborate on the time frame for the new Twin Peaks legislation that would eventually replace the legislation currently being discussed (slide 26).

Responses
Mr Momoniat replied that he had put the word ‘draconian’ to remind everyone of what had been said before. However, he assured Mr Harris that the word ‘intrusive’ did not come from National Treasury but from the IMF. There were, of course, those who believed in free markets and that nothing happened in 2008. Some of them had done consultancy work for the industry. It would not surprise him that Members would be lobbied not only by the industry but by those who did consultancy work for the industry and were ‘more Catholic than the Pope’. It was a reality that the world had moved towards being more intrusive. In the USA and the United Kingdom regulators were giving directions to the industry. This was intrusive. He would be very happy to share the papers from the IMF and others that referred to this term. The world was fed up with the excesses in the financial sector. Perhaps the world was going far in one direction, but this was the direction of most of the major economies with which South Africa dealt. It was like the legislation on money laundering. When it was introduced, many said that it was draconian. Now it had become standard. Even if South Africa did not have legislation against money laundering, its financial institutions would still enforce standards against it in order to be able to deal with institutions in other countries. The issue was that in giving the Regulator that power, the independence of the Regulator was critical. Regulators generally needed to be able to act without asking for political approval. The FSAP had, in the case of insurance, flagged the instance of a regulator having to consult the minister as an issue to deal with. Much of this was not taking away the power of the Minister, but that there was a notion of operational independence and the Regulator needed to act and have the necessary powers. Obviously, regulators still needed to be accountable, since South Africa was a democracy. He appealed to the Committee to check that National Treasury was holding the regulators accountable, in the first instance to the Minister and in the second instance to Parliament. The UK's Treasury Select Committee summoned and interrogated regulators. National Treasury would welcome the same approach from the Finance Standing Committee. There must be post-accountability and Parliament must be more vigorous. Even if there was no legal liability of a regulator, it did not mean that the regulator might not make mistakes or act irresponsibly, even in good faith.

Some of the framework of the powers of the Minister was already in the Banks Act (No. 94 of 1990). If the registrar acted improperly to close down an insurance company or a bank, the company or bank could still take the registrar to court. However, this might be a moot point. At the same time much work had been done internationally on the resolution of banks when they were in trouble, without going through the court process. However, the court process remained as an option, even though it was a moot point.

The UK had established the Financial Conduct Authority. Many of these provisions related to how the market conducted itself. Part of the problem was that there had not been transparency. Market conduct referred not just to consumer protection but to how an institution or company conducted its business. Saying that National Treasury and FSB were being too intrusive was to ignore trends in other countries. It was nonsense to say that the insurance industry would be destroyed if regulated. Nor would the industry itself say so, if one spoke to SAIA, but perhaps the consultants who advocated on behalf of the industry and needed a job would make this claim.

The draft norms and standards for consultation were included in the Members' pack of documents.

He replied to Mr Ross that there were as many as 14 advisory committees and membership was statutory. It was preferable to ask the industry whom it wished to nominate to advise on a particular issue. The current method almost killed the consultation process.

Ms Bednar-Giyose explained the implications of the amendment to the FSB Act as to liability. In a particular court case against the FSB, the FSB would have to establish that it was acting in terms of one of its powers or statutes and that it exercised that power properly and in good faith. If that were established, the court would have to consider whether the exercise of that power had been done with due care and reasonable precautions to avoid injury to others. If the court concluded that the power was exercised in good faith, with due care and taking reasonable precautions, then the court would conclude that the FSB had exercised its power lawfully and that the FSB or the official concerned would not be held liable. If the court found that the FSB had exercised its power in bad faith, or without due care or reasonable precautions to minimise injury, then the court would determine that the FSB had not exercised its power properly and the FSB or its official would be held liable.

The importance of the amendment was that if the wording 'if not grossly negligent' were retained, it would create issues in particular court cases where it was necessary to establish negligence and that could be a difficult and unclear determination to make. This could involve lengthy litigation.

Regulators such the FSB were quite often dealing with contentious matters that were subject to dispute and so, if there was not some degree of protection for the FSB in the exercise of its powers, as the Constitutional Court had recognised that regulators did need some kind of protection to exercise these regulatory powers in these contested arenas, the ability to act as a regulator would not be properly protected and recognised.

Mr Harris asked for a specific example of where this might apply.

Mr Tshidi referred to the example of the Joint Municipal Pension Fund. The trustees had decided on a particular investment vehicle that had gone sour. If the Registrar had not acted in bad faith [mala fide], then there could not be any liability on the part of the Registrar.

Mr Momoniat said that National Treasury had received two informal legal opinions, but would provide the Committee with a formal legal opinion. Also he observed that the Committee had asked Adv Frank Jenkins, Senior Parliamentary Legal Adviser, for an opinion.

There was a whole host of questions on on-site inspections and curatorships. In South Africa's legal system, when there was a problem, many people made money. Perverse incentives applied. There were contingency arrangements. Many of these practices were problematic. Hence in the new cases, amounts were capped. There was a definite need for tighter guidelines. There were two types of curatorship – one appointed through a court process and the other by agreement with the company in which case there was greater ability to cap amounts.

Mr Tshidi linked Ms Dlamini-Dubazana’s question on the statutory management approach with the curatorships. The word ‘may’ was used in the context of the Registrar’s entering into an agreement to indicate that the curatorship remained the preferred route. However, with the FSB’s experience over a number of years, and the comments of industry and this Committee, the FSB had applied its mind to how to address this issue of curatorship. Even before this amendment, there were two examples of statutory management and both were done through a court decision. The statutory management would happen where no assets had legally been taken out of the entity. The statutory management would be based on management's failure to do what it was supposed to do in terms of compliance. Secondly it would happen, and this would come out more strongly, in the environment of the Twin Peaks where the FSB would encourage entities to do what was already happening in other countries – this was 'in-breach reporting', in which the leadership of an institution would report on itself to the Registrar that it was in breach of a certain provision and needed assistance. Then the Registrar would try to reach an agreement with the company on how to resolve the issues. However, on reaching agreement, that agreement would have to be made a court order to make it binding. He explained why.

On the other hand, if assets had been removed from the entity, there would still have to be recourse to curatorship. He did not believe that anyone was against curatorship itself. The problem with curatorship was the length of the curatorship and the money involved. The FSB had already worked on a policy and this policy was now in place. According to this policy, curators could not use their own law firms or auditors. The FSB was applying its mind to the money issues, but had not reached a conclusion. However, it thought that it could apply a policy on the basis of the legislation already in place. He explained further. The advantage of managing the monies within a special account at the FSB would be that this account would be subject to auditing by the Auditor-General.

Mr Tshidi replied that, in doing away with the advisory committees, the FSB had not disregarded expertise. When there was litigation there was a specific committee created in terms of legislation to advise the Registrar. Its members were appointed on the basis of expertise. The FSB also consulted industry bodies in order to obtain a collective voice.

Ms Bednar-Giyose said that National Treasury and FSB were proposing to delete the amendment to the definition of non-member spouse in Clause 1 of the Bill as tabled.

Dr Sheoraj thanked Mr Van Rooyen for his question on the amendment to the definition of medical schemes. In the tabled Bill there had been a proposal to insert a consequential amendment in order to support demarcation regulations on which National Treasury and the Department of Health were currently working. The regulations spoke to delineate clearly what a health insurance policy (regulated by the FSB) was, as opposed to a medical scheme policy (regulated by the Council for Medical Schemes). Comments received during the public hearings had indicated that the implementation of that definition should be delayed until the revised draft regulations were released for a further round of comment. National Treasury and the Department of Health hoped to finalise their engagements soon and supported the commentators’ proposal that the implementation of that definition be delayed.

Mr Van Rooyen (ANC) asked what the impact would be in terms of the Committee’s processing the Bill.

Mr Momoniat would ensure that the Department of Health was present before or during the Clause-by-Clause deliberations. This was a difficult area as both were insurers.

Mr Olano Makhubela, National Treasury Chief Director: Financial Investments and Savings, said that one way of dealing with some of the sensitive proposals, particularly the medical aid schemes, the issue of consultation, and possibly the FSB website, was to consider approving the amendments as they were now, but suspending their dates of coming into effect until the regulations had been finalised.

It was similar with the FSB website. The Committee could still agree to the amendment but conditional on the FSB’s website being up and running.

It was the same with consultations. The Committee could still agree to the amendment but with the effective date conditional on the finalisation of the consultation code.

Ms Bednar-Giyose added that the commencement provision in the Bill did allow for different dates to be set for coming into operation of different provisions.

Mr Momoniat replied to Ms Tshabalala that National Treasury and FSB introduce later in the year a Bill to establish the prudential and market conduct authorities with a view to their coming into operation early in 2014. These two authorities would still act when it was a banking issue in terms of the Banks Act. When it was an insurance issue they would act in terms of the two Insurance Acts. There would be a demarcation as to which regulator did what. However, over time the National Treasury and FSB might consider that the two Insurance Acts and the Banks Act needed to be modernised. The two authorities initially would just take over the powers that the current FSB Registrar and the Banking Supervision Department exercised. So the powers would be allocated differently according to whether it was a prudential matter or a market conduct matter. Over time as this legislation came into effect much of the existing legislation would need to be updated as with the Financial Markets Act (No. 19 of 2012), which replaced the Securities Services Act (No. 36 of 2004).

Ms Stander replied to Ms Dlamini-Dubazana that the courts held that when performing a regulatory examination of a person's premises, one must be careful not to enter a private dwelling. Hence the addition of 'enter a regulated person's business premises'.

She replied to the question on the fiduciary duties of pension funds that the FSB had not defined those duties in the Pensions Funds Act itself but there was a description, not a definition, in the Financial Institutions (Protection of Funds) Act, Section 2. In the common law, fiduciary duty was understood in the same sense.

Ms Dlamini-Dubazana said that it was critical to have the time frames for these additions, particularly when the Registrar discovered wrongdoing.

Mr Momoniat emphasised the importance of parliamentary scrutiny. South Africa was actually lagging on international standards. The word ‘market conduct’ was very broad. Essentially the system was based on the two legs of Twin Peaks. The first was how to deal with the prudential authority. The second was how to deal with market conduct and protect the customer. This was always the focus. In curatorship the aim was that the money should go back to the members of the scheme.

The Chairperson commended the quality of the presentation. The Committee could concur that much work had been done. The Committee should examine whether the consumer was a priority in order to avoid ambivalence. Trustees of funds must not become a forum for lobbying. It was not clear what their purpose or training was. He agreed that perverse incentives in curatorships caused much damage to ordinary members of funds. The Committee needed to meet jointly with the Portfolio Committee on Health on medical aid schemes. This would be a priority in the third term. He had noted Mr Harris’ concerns.

Mr Harris requested that National Treasury explained the annexures and distribute the presentation and annexures to Members electronically.

Mr Harris asked about the status of the legal opinion from Adv Jenkins.

The Chairperson undertook to follow-up the matter.

Mr Momoniat agreed to provide the annexures and presentation electronically but reminded the Members that paper copies were available to them.

Ms Sheoraj gave brief details of the annexures. They included a comparative analysis and a supporting case. Also, linked to the key themes document were matrices of the technical amendments. Also included was a draft code of consultation that expanded on the principles entrenched in the legislation. Also included, besides the 'A' Bill, was the 'B' Bill, which incorporated the changes.

Mr Momoniat emphasised that these documents represented work in progress.

The Chairperson adjourned this last meeting of the second term.

[Apologies: Ms P Adams (ANC) and Mr E Mthethwa (ANC)]
 

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