The National Treasury presented the Financial Services General Laws Amendment Bill and explained the background and purpose of the Bill. It also provided a background on the ‘Twin Peaks’ reforms after the Global Financial Crisis. The presenters provided an overview of the legislative amendments, noting that his was a general laws amendment that covered 13 pieces of legislation; many of the amendments were purely technical in nature, but the main amendments related to the Pension Funds Act, the Short and Long-term Insurance Acts, as well as the Financial Services Board Act. Key issues intended to be covered by the amendments were outlined; namely the need to align with the new Companies Act, the need to strengthen the regulatory framework and enhance enforcement powers, inspections and on-site visits, policyholder protection rules, effective consultation, publication of subordinate legislation as well as the need to contain overlapping regulatory powers. The key changes to the Financial Services Board Act, and the Pension Funds Act were outlined.
Members were not entirely happy with the presentation, and questioned, in particular, the assertion that wide consultation had been carried out, and asked to whom, and how, it had been conveyed, and whether National Treasury was sure that it had reached people in rural and remote areas. Members were at pains to point out that those operating in both the first and second economy had to be kept fully informed. Members also felt that they were being pressurised, and asked National Treasury why it felt that the matter was so urgent. They were concerned that the changes seemed to allow greater power to the Financial Services Board, and wondered if the Board itself could be held accountable. Members noted recent press reports insinuating problems within the Board itself, and wondered how general public could claim protection. They felt that a better balance was needed between allowing the regulators to do a job, and ensuring that the consumers were properly protected. They asked about the limitations of liability, asked for expansion on the concepts of gross or ordinary negligence. Specific explanations were sought on various clauses in the Bill.
The Financial Services Board presented the Credit Rating Agency (CRA) rules, which were drafted in terms of the Credit Rating Services Act of 2012, which came into effect 15 April 2013. The rules had been published with the Act and were also separately published in a recent Government Gazette, calling upon the public to comment within thirty days. Five submissions had been received that were taken into account. The presentation encompassed the organisational requirements necessary for the structure of the board of the CRA, the manner in which ratings were to be presented so as to ensure that methodologies were explained and attributes and limitations were clearly stated. It also went through the obligations in relation to ratings of structural finance instruments stipulating how the CRA had to provide investors and subscribers with sufficient information on the transaction in order for them to understand the basis of the agency’s rating. It was highlighted that the CRA had additional duties of disclosure and assessment of ratings when it rated a structured finance instrument, and had duties to investors and the public.
Members repeated their comments earlier as to whether these Rules took into account the two economies and cautioned against merely importing rules from the West, also asking whether they were in line with BRICS countries. Members again asked to what extent there had been explanation of the matters involved, and stressed that the Rules must be clearly understandable to everyone.
Financial Services Laws General Amendment Bill: National Treasury briefing
Mr Olanu Makhubela, Chief Director: Financial investments and savings, National Treasury, alerted the Committee to the urgency of the Financial Services Laws General Amendment Bill (the Bill), which sought to amend thirteen pieces of legislation. He noted that it was thus an “omnibus” Bill, and sought to address gaps that were identified by the International Monetary Fund (IMF)’s World Bank Financial Sector Assessment Program (FSAP),so South Africa could adhere to international standards for financial regulation. He added that the Bill would address the gaps identified after the 2008 global financial crisis as well as aligning the financial sector legislation to the new Companies Act.
He stressed that the amendments would result in ensuring higher consumer protection standards and removing duplication in relation to the Consumer Protection Act. It would also deal with mergers in the non-banking financial sector, and it would ultimately ensure that even during the transition of the “Twin Peaks” system, South Africa would have a sounder and better regulated financial services industry which promoted financial stability. A stronger financial sector regulatory framework, and stronger supervisory powers for regulators, would result
Background on Twin Peaks reforms After Global Financial Crisis
Mr Makhubela said that the reforms included making financial regulators like the Financial Services Board (FSB) and the Banking Supervision Department much stronger and tougher. He added that there would be re-organisation to the Prudential Regulatory Authority in the South African Reserve Bank (SARB) as well as transformation of the FSB into a new market regulator. Regulators would need to be protected from legal liability when they acted. Financial institutions would be held to higher standards on consumer protection, market conduct, capital reserves and liquidity. They would further have to continue to meet access targets, as agreed to in the Financial Sector Code.
Mr Makhubela briefly summarised the 13 pieces of legislation being amended, but noted that in ten the amendments were of a minor and largely technical nature. The main amendments related to the Pension Funds Act, the Short and Long-term Insurance Acts, and the Financial Services Board Act.
Aligning to the New Companies Act
Mr Makhubela then outlined that the Bill would align all terminology used in FSB legislation with the terminology used in the Companies Act. He cited some examples - the new Companies Act redefined “public company” as “subsidiary company”. The amendments also sought to align the duties stipulated in the financial sector legislation with how those duties were reflected in the new Companies Act. FSB legislation would now appropriately refer to business rescue procedures, although the existing enforcement procedures contained in the Financial Institutions (Protection of Funds) Act would be retained, in order to afford Registrars the appropriate mechanisms to appropriately enforce legislation.
Strengthening the Regulatory Framework and Enhancing Enforcement Powers
He stated that amendments took into account the FSAP recommendations and addressed the regulatory gaps identified by FSAP. The amendments therefore included strengthening the operational independence and effectiveness of the Registrar of Insurance, by extending the power of the registrar to apply to court for the winding up of an insurer without first securing the approval of the Minister. He also added that the FSB registrars would be better equipped to take swift and decisive action when necessary to protect consumers and financial stability. He said that the amendments would particularly clarify and strengthen the powers to conduct on-site visits and inspections of financial institutions, and emphasised this again in the next slide.
Policyholder Protection Rules
He said that the Bill empowered the Registrar of Insurance to make Policyholder Protection Rules, to give effect to Treating Customers Fairly (TCF) principles, without Ministerial approval. This would enable the Registrar to protect consumers by improving disclosure in insurance contracts. The international standards required regulators to ensure that customers were treated fairly, and added that the USA, UK, Singapore, China South Korea and Malaysia had introduced standard contract provisions, exclusions and definitions.
The Bill provided for the abolition of Advisory Committees which were provided for by financial sector legislation, as one of the anomalies were that simply too many advisory bodies, Standing Committees and Boards were operating, at the expense of the tax payer. The Bill’s aim was to rationalise the consultation processes so as to cover all key stakeholders. In the meantime, however, the amendments would enable the Minister to prescribe better standards for consultation on regulatory issues through a code of norms and standards for consultation for the FSB.
Publication of Subordinate Legislation
Mr Makhubela said that the Bill amended requirements in the FSB legislation relating to publication of subordinate legislation and other actions of the FSB Registrars. Regulations prescribed by the Minister would continue to be published in the Government Gazette. The rules issued by Registrars would be published for comment and tabled in Parliament, with the final rules thereafter being published in the Government Gazette. Directives, exemptions and other similar subordinate measures would be published on the FSB website rather than in the Government Gazette. He added that a list of directives intended to have general application would be published annually as a schedule to the FSB Annual report that was tabled in Parliament.
Overlapping Regulatory Powers
The Bill further proposed amendments to the FSB Act to deal with overlapping legislation. The FSB was now established as the lead regulator, and the Bill would limit the powers of other regulators. The amendments now prescribed that in the case of conflict, the FSB amendments would override the Consumer Protection Act because higher standards of consumer protection were to be held. He also added that the Competition Commission would also have to consult the Minister and FSB Registrars in respect of mergers in the financial sector.
Key Changes to FSB Act
Mr Makhubela outlined the main changes to the FSB Act. The Bill amended section 23 of the FSB Act that dealt with limitation of liability, by deleting ‘but not grossly negligent’ while retaining the words ‘bona fide’ and he said that this wording provided regulators with legal protection, with the provision that powers be exercised in good faith. This provision was consistent with international practice and other regulatory statutes, namely the South African Reserve Bank (SARB) legislation, and with comparative international examples, such as Australia.
He added that the Bill would also amend section 22 of the FSB Act to appropriately provide for the sharing of information and co-operation with other regulators, in line with the framework set out in the Protection of Personal Information Bill, and would apply to all FSB Registrars.
Key Changes to Pension Funds Act
Mr Makhubela noted that the Pension Funds Act was being changed, since the duty to members would now be explicitly stated to them as well as the Fund, and the changes would ensure that the funds would be responsibly managed and governed. He said that Board Members would have to undergo training within six months of appointment. There were provisions around liability of non-payment of pension contributions to certain individuals within the employer. The changes also encompassed protection for whistle blowers who disclosed material information to the Registrar. He added that a pension fund could not commence business without first being fully or provisionally registered and, in addition, it would enable the distribution of pension benefits to a non-member spouse married under Islamic law if a divorce was decreed by a Court. He said that the changes would allow for the appointment of a Deputy Principal Officer and for the delegation of duties.
Mr Makhubela said that an amendment to the Co-operatives Bank Act was required to transfer the supervisory function of the Co-operatives Banks Development Agency to the SARB and provide for the SARB to be the sole supervisor of the co-operative banks.
An amendment to the definition of ‘business of a medical scheme’ in the Medical Schemes Act sought to make the definition of medical schemes clear and the Department of Health and Medical Schemes fully supported the amendment.
The Bill removed section 13(c) and empowered the South African Reserve Bank to provide emergency liquidity to the banking system during a financial crisis.
Mr Makhubela concluded that the Financial Services Laws General Amendment Bill dealt with urgent legislative requirements and that it had been in the pipeline since 2012. It had been adopted by the National Assembly on 31 October 2013. He added that the Bill had gone through rigorous public consultations, deliberations in Parliament, as well as refinements.
The Chairperson opened the discussion remarking about the changes to the Pension Funds Act. He said that the FSB needed to tread carefully given that when they dealt with pension funds they were dealing with people’s life savings, and there was always a risk that people might engage in court action if money was mishandled.
Mr B Mashile (ANC Mpumalanga) questioned the assertion that National Treasury had done ‘rigorous consultation’ on the Bill and asked if ordinary people in Bushbuckridge and Malumlele would know about the Bill if they were asked about it, because it was going to impact upon their lives. He said that people who had money and the resources to attend meetings took for granted those who did not and that it was unfair for them to make decisions on behalf of ordinary people who did not have the means to get to meetings on legislation. He asked what had informed the presenter’s statement that “everything” was done to ensure public participation. He made an example of the Gautrain and said that the reasons why there were issues around it was because of lack of public knowledge.
Mr Mashile referred to slide 9 and said that the intention to abolish advisory committees could lead to a situation where power was concentrated on one entity, which was the FSB. He asked if this would not be creating bureaucracy and a bottleneck. He also referred to slide 10 and enquired about the directives and who was going to have the discretion to decide which directives would be appearing. He also asked what exemptions had been given over the financial year to avoid an individual deciding at their own discretion, without taking into account other people.
Mr Mashile questioned slide 11 which indicated that the FSB would be a lead regulator. He said that if this was done the particular powers and functions of other regulators and other Acts would be cut. He wanted clarity as to who would be reviewing any particular views on consumer protection, and wondered what certainty there might be on matters being closed. Mr Mashile also enquired about slide 12 and asked about the limitations of liability of officials. He said that officials were capable of ruining an individual’s life so how could the argument of ‘having acted in good faith’ be verified and who would have the power to determine what ‘good faith’ was, if somebody lost their life savings. He urged that there must be a balance between the protection of officials and consumer protection.
Mr Mashile addressed the issue on information sharing and asked what would happen when the FSB had authoritative information. He said that the FSB was being given too substantial power, and the amendments seemed to suggest that no contradictory information would be allowed. He was, finally, concerned about the many issues affecting ordinary people such as the garnishing orders on the public domain.
Mr D Joseph (DA, Western Cape) wanted clarity on whether these amendments meant that there was more protection for clients, and the issue of inspections on unregulated persons or entities. He asked what determined that these entities were unlawful, and whether this would be assumed if they were not linked to the FSB. He asked if the board was asking for powers to go after people who were acting illegally; if so, it needed to be me quite clear. Mr Joseph also enquired what the role of the Ombud actually was and what made this FSB so different from other boards. He asked what was wrong with an official being charged with ‘gross negligence’ if they actually had acted in this manner. He also questioned the assertion that there had been ‘rigorous public participation’, and asked what form this took.
Mr T Chaane (ANC North West) wanted clarity on the extent to which employees or members or trustees could hold the FSB accountable for their actions, if these amendments were passed, and how they would be protected, because the protection appeared to be one sided and the people who were supposed to be getting the services were not protected. He said that there was a lack of action from the Minister of Finance on the issue of the FSB. The media had carried very serious allegations about the FSB. He was worried about the emphasis on ‘urgency’ of the Bill, as he said the fact that it was discussed extensively at one house in Parliament did not mean that was sufficient. He would not likely to feel pressurised against engaging properly with the amendments. He asked the presenters to expand more on the urgency aspects, and deliberate more on how this Bill was likely to affect ordinary people, because it seemed as if there would be no checks and balances. He said it seemed that the FSB could be abusing its power and asked what had informed the whole proposal.
Mr S Montsitsi (ANC Gauteng) said that the problem with the Bill was that there was too much power concentrated on the FSB. He said that the FSB had to take into account that South Africa was a developmental state and it had to be able to accommodate everyone. He felt that some of the amendments proposed were too stringent for people within the country and that there would be problems of access.
Mr Makhubela responded by saying that the Bill would give the FSB powers to act swiftly. Currently it faced accusations of always acting slowly, and that the Committee had to bear in mind that in the industry of consumers, money moved very quickly, and could disappear. He said that currently the FSB was not enabled to act swiftly and that was why it was in such urgent need of the amendments. He reminded Members, in addition, that the FSB was, in all its actions, accountable to the Minister of Finance as well as Parliament. He said that the FSB also needed to enjoy operational independence. National Treasury could not be perceived as interfering. The Board was assessed by the IMF and it was trying to come up with a framework for checks and balances on the FSB, through a policy framework as well as the Bill. He also added that there were ‘dodgy individuals’ who embarked on a smear campaign against the FSB, hence the media reports. Where there were legitimate cases against the FSB, these had been investigated and addressed through the courts. The FSB did not take kindly to media reports that attempted to discredit an institution that was there to protect ordinary people.
Mr Makhubela noted that the Bill was essentially aiming to raise the standards in order to provide better protection for ordinary people and provide a balance between consumers and the money industry.
Mr Makhubela noted that there had been immense criticism that the FSB appointed certain curators but that the Committee should note that he was not blindly defending the FSB. The main issue of third tier banks was that the National Treasury was trying to nurture them all into first tier banks, like Standard Bank, ABSA, FNB, and the other larger institutions. He pointed out that money was an emotional issue and it tended sometimes to distort views, taking a different twist. The key point was that the Treasury must strike an essential balance between consumer protection and the protection of officials in carrying out their duties.
Ms Jeannine Bednar-Giyose, Director: Financial Regulation and Legislation, National Treasury, added that there was a concern to try to facilitate entry level institutions so that they could be nurtured to grow.
Mr Makhubela said that the CBDA was a stable and financially sound development agency. He said that it was paramount for the regulators to have a measure of independence so that they could conduct their own oversight visits and identify breaches. Any breaches had to be reported to the National Treasury at the moment; and that was problematic because it caused a delay in the process. The references to “gross negligence” could be problematic – on first sight it was sometimes difficult to determine whether an action amounted to negligence or gross negligence.
Ms Bednar-Giyose said that the Court must determine if a person was acting in good faith or not and also emphasised that it was difficult to determine when negligence became gross negligence; hence the proposed amendment.
Mr Makhubela said that in a sophisticated financial system such as South Africa, an Ombud system was handy because it was cost-free to the consumer. There were attempts to rationalise the whole system; some institutions were not as effective as others, so there needed to be a single unified system. He added that the directives of general application were the ones that were most important, so they needed to be published, and that there would be involvement of the Minister and Registrar if there was an issue that affected the financial sector as a whole.
Mr Makhubela responded, in respect of the issue of public participation, that he was not sure how to account to Members, save that to say that National Treasury felt that it had carried out full consultation processes. He appealed to the Committee Members to help convey the issues to their constituencies. The National Treasury would ideally like to take the Bill to remote places, but would have to rely on MPs, to some extent to convey these messages to the constituents.
The Chairperson said that the Committee needed to have public hearings.
Mr Makhubela said that the Bill was urgent because it had critical issues that needed to be addressed, and that the IMF assessment review had led to the need for the review, and the drafting of the proposed amendments. It would be difficult to explain why there was a delay in moving forward, but the Treasury would respect the NCOP Committee.
Mr Mashile said that Treasury should be aware that South Africa had two economies and that it should not base everything on the IMF. He said that there was a need also to provide for the second economy, and that everyone needed to be aware of the problems prevalent in the South African economy.
The Chairperson said that the Minister of Finance was quoted in the newspaper saying that the rest of South Africa did not look like Sandton.
Mr Chaane said that he was not satisfied with the manner in which the questions were answered. If Mr Makhubela believed there was a smear campaign against the FSB, this must be investigated. He noted that people were not immune to investigation – including the National Commissioner of Police and SARS officials. The FSB should not imagine itself immune from disciplinary procedures, as these re-assured the integrity of the institution.
The Chairperson said that the FSB would be called in January, and that all the members’ concerns were captured.
Credit Rating Agency Rules in terms of the Credit Rating Services Act: Presentation
Mr R Cooper, Representative, Financial Services Board, presented the Credit Rating Agency (CRA) Rules to the Committee. He provided a background, noting that the Credit Rating Services Act came into effect on 25 April 2013. He added that during the public consultation period, draft Rules were published for comment, together with the Bill during August 2011, and that all these comments had been considered. On 15 March 2013 the Registrar of Credit Rating Agencies published draft rules for public comment, for a period of thirty days. The comments received from five commentators were considered and incorporated in the draft Rules, which were now being submitted for Parliamentary scrutiny
He took Members through the basis of the rules. The Credit Rating Services Act (the Act) contained the definitions, and it was stated in that section that the Rules would apply to all registered credit rating agencies.
The Act provided for the structure of the board of a CRA, with at least two independent members. He said that the CRA had to have proper controls to ensure compliance with the Act and the Rules as well as compliance with the duties of the CRA when it outsourced its functions.
A CRA had to present its ratings in such a manner that methodologies were explained, as well as how the different methodologies or other aspects were taken into account, and any attributes and limitations of the rating had to be clearly and prominently stated.
He then explained the obligations in Relation to Ratings of Structured Finance Instruments. When a CRA rated a structured finance instrument, it had to provide investors and subscribers with sufficient information on the transaction so that an investor intending to invest in the product could understand the basis for the Agency’s rating. He also added that the CRA had additional duties of disclosure and assessment of ratings, where it rated a structured finance instrument.
The general rule for a CRA was that it must to render services honestly, fairly, with due skill and diligence and in the interest of the integrity of the credit rating services industry. He added that any CRAs had to deal fairly and honestly with rated entities, investors, other market participants and the public. The ratings had to be distributed in a timely and transparent manner. Confidential information had to be protected.
Mr Mashile said that the CRAs needed to note that they were but one entity in an emerging market and cautioned that there was a need to tread carefully before imposing international standards of ratings in an economy such as South Africa. He said that the issue of two economies needed to be kept in mind at all times by all the financial institutions. Credit rating needed to be applied in a manner that it did not discourage the second economy.
Mr Mashile wanted some explanation of the linkages and liaison between CRA, National Treasury, the Finance Minister, and FSB. He also asked what the appropriate measures were for public entities in terms of oversight on the CRA.
Mr Cooper said that that the CRA Rules complied with international standards and that the two economies were noted and well represented. He said that, in order for any entity to play on the field, it must recognise that it had to comply with a field requirements and that accommodation for entities was determined on a national scale. He said that each institution retained its independence but that there was no permission required to play their oversight role on any of the entities. He added that if an entity did not have methodology to give ratings then it was not allowed to give them at all, which was one of the ways in which there was regulation of their rating service.
The Chairperson said that it was crucial to assist and enhance the economy in places like Shoshanguve and Hammanskraal.
Mr Mashile said that Mr Cooper had provided a negative answer by saying that entities operating in a sector had to adhere to ‘a game rule’ because those rules eventually sought to discriminate against someone. He said that those that were not favoured would remain in the second economy, and that could cause discrimination. It was necessary for South Africa to look to other ways of doing things. The CRA Rules and Act should not seek to disadvantage those that were already disadvantaged.
Mr Montsitsi enquired as to why it seemed that there was a constant import of fiscal discipline rules from the West, when South Africa was more aligned with BRICS countries.
Mr Cooper responded by saying that there were three CRAs in every country, including those from China and Japan, and this extended to all countries with interests in South Africa.
The Chairperson said that 19 February 2014 was the date on which the National budget would be tabled for debate and that the latter issue could be raised then. He thanked the National Treasury for the briefings, and said that the concerns and issues would be captured.
The Chairperson proposed that Committee Reports be circulated, for Members to comment on them, and they could be amended in line with the Members’ concerns. The meeting to adopt the reports would take place on the following day.
The meeting was adjourned
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