Financial Advisory & Intermediary Services Bill: adoption; Collective Investment Schemes Control Bill: briefing; Committee Repor

NCOP Finance

17 September 2002
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report


17 September 2002

Chair: Ms Q D Mahlangu (ANC)

Documents Handed Out:
Financial Advisory and Intermediary Services Bill [B52B-2001]
FSB Presentation on the FAIS Bill
FSB PowerPoint presentation
Comparison between UK & SA marketing of Life Insurance Products (Appendix 1)
Collective Investment Schemes Control Bill [B28B-2002]
Collective Investment Schemes Control Bill: Presentation by Financial Services Board
Collective Investment Schemes Control Bill: Presentation by Treasury
Committee Report Provincial Public Hearings on Financial & Fiscal Commission's Submission on Division of Revenue for 2003/04 (Appendix 2)

Financial Advisory and Intermediary Services Bill was adopted. The FSB pointed out that the regulations governing brokers in this country are far more lenient than in other countries on the continent and elsewhere.

Both Treasury and the Financial Services Board briefed the Committee on the Collective Investment Schemes Control Bill.

The Committee Report on the FFC Submission Hearings was adopted.

Financial Advisory and Intermediary Services Bill
As a follow-up to the
previous week's meeting, Mr Louis Wessels from the legal department of the Financial Services Board (FSB), had prepared a file of case studies on similar legislation to the Financial Advisory and Intermediary Services Bill. He pointed out that brokers in other African countries like Zimbabwe and Botswana are very strictly regulated. For instance, these brokers are required to put up substantial capital in order to operate.

He said that the
cost-benefit analysis deals with the impact of the Financial Advisory and Intermediary Services Bill on the small broker. A full report on the matter has been prepared. Complaints in general There is a dedicated dispute resolution mechanism by which complaints in general will be dealt - and that is the FAIS ombudsman. Consumer courts in the provinces will be in operation [as set up by each relevant MEC] - for the time being, only Gauteng has one up and running.

In reply to Mr Durr (ACDP) asking for a copy of the comparative legislation, Mr Wessels said that they would distributed as soon as copies had been made [electronic copy not available].

Mr Krumbock (DP) asked if one could say there should be different approach towards the big and small brokers? What assurance does the consumer have that the broker has been put through the same rigorous testing as the bigger brokers?

Mr Wessels pointed out that on issues of honesty and integrity, there is only one standard applied, whether it is a big or small broker. The competency measurements will also be the same for both. Licences will be capped according to competency. Brokers might therefore be restricted as to which services they can offer.

Mr Taabe (ANC) asked what would help prevent small brokers from being 'kicked out' of the industry due to the issue of costs, that is, in the event of non-compliance due to high costs.

Mr Wessels believed that the regulation of these brokers is not done in a harsh manner. The Bill is flexible - for smaller brokers, there is no requirement of a compliance officer, no annual renewal of licence, they can request the FSB for exemption from auditory requirements. For instance in Botswana, which is not the case here, a broker is required to put up a large amount of capital.

Mr Aulsebrooke (DP) asked if the Financial Services Board has the capacity to implement and administer the provisions in the Bill. Secondly, would the regulations become available before the promulgation?

Mr Wessels replied that the FSB is in the process of ensuring capacity by the time the Bill becomes law so that it can administer it effectively with the assistance of recognised representative bodies. The regulations would become available before promulgation. The draft regulations will be out by the end of this month [on
the FSB website].

Mr Kolweni (ANC) asked what provisions there are to ensure that the small brokers are not squeezed out the industry.

Mr Wessels pointed out that the Bill has been very well workshopped so that people are aware of its provisions in general. He noted that the Black Brokers Forum and other similar bodies exist as representative bodies.

Collective Investment Schemes Control Bill
Ms Samantha Anderson, Chief Director for Financial Markets: Treasury, briefed the Committee (see document).

Mr Rob Barrow, Deputy Executive Officer/Deputy Registrar: Investment Institutions of the FSB, also presented on the Bill (see document). He noted that this is one industry which is very 'clean'. Clean in the sense that the procedures followed are very transparent and there is a very rigid disclosure process which makes it almost impossible for fraud to take place. Contrary to popular belief, there is no competition between this industry and the insurance industry. The former is short term whereas the latter is long term, so they are servicing different markets with different needs. One of the strengths of the industry is the requirement that the investments be segregated into different portfolios.
Mr Boyd, also from the FSB, continued with the briefing on the specific amendments.

Mr Kgalane (ANC) asked if the Bill seeks to transform or democratise the profile of investors?

Ms Anderson pointed out that on the issue of investor profiles, the situation is prevalent right across other financial services as well. This problem is indicative in general of the broad picture of the skewed distribution of wealth in the country. Regarding the accessibility to a wider market, she pointed out that the industry has pointed out that they are looking at a range of options that will make access more widespread across the income spectrum of the country. Mr Barrow also highlighted the issue of administrative costs for debit orders which leaves the companies in an unprofitable situation, especially in the lower tiers of the investment markets.

Mr Kolweni (ANC) asked if the change of name does not imply that there is going to be a review of some of the products available on the market? Will there be an attempt to educate the public about these kinds of products?

Regarding the name change, Mr Barrow pointed out that it does not. Effectively, a unit trust can still continue in the same manner as before and as part of the CIS. An attempt to educate consumers is covered by efforts from the Association of Unit Trusts which has a comprehensive consumer education programme to educate consumers about these products.

Mr Durr (DP) asked if there is parity in terms of disclosure between the local CIS industry and the international market?

Mr Barrow pointed out that the local industry subscribes to an international standard of disclosure, so the parity is guaranteed.

Mr Aulsebrooke asked what the industry felt about the issue of single pricing?

Mr Barrow pointed out that the issue of single-pricing is an attempt to rid the industry of the tendency to front different buying and selling prices whereas there is only one price, whether buying or selling. So the industry feels there is a need to clean up this aspect.

Committee Report on provincial hearings on the Financial and Fiscal Commission Submission on the Division of Revenue for 2003/04
The committee agreed that the report be adopted with the proviso that certain amendments be effected and that the committee sees the report before its final submission.

Meeting adjourned.

Appendix 1:

1. In 1988 the UK regulators introduced legislation which distinguished between tied advisers and independent advisers - the so-called polarisation regime. The regulations required that advisers on life insurance, personal pensions and mutual or investment funds either had to represent one company as tied agents, or advise clients about products across the whole market as independent financial advisers (IFA's).
2. Polarisation was subsequently widely criticised in the UK because it was seen as ineffective in providing consumer choice and consumer protection.
3. As part of creating a new regulatory environment to enhance financial advice to consumers through greater access to advice and choice in available financial products, the present Financial Services Authority (FSA) has now taken steps to remove polarisation.
4. New legislation to be introduced soon envisages that the UK will allow tied advisers to recommend products from more than one product provider - known there as General Agency. A possible implication includes the re-emergence and influence or multi-tied agents, which in turn can lead to increased product competitiveness and enhanced service levels. Tougher competition, as well as changes to the distribution mix and influence, may mean that life insurers will be required to chase market share through more aggressive marketing strategies.
1. With small exceptions, life offices market their products

  • through tied agents
  • through independent brokers
  • through a direct marketing facility.

2. Normally tied agents are restricted to marketing only the products of the life office to which they are tied. However, the "big three" life offices (Old Mutual, Sanlam and Liberty) have agreed with each other to allow a percentage (approximately 35%) of their tied agents to market certain products of the other offices as well. This is mainly to serve the upper market.

3. Independent brokers vary from small and medium sized operations to large corporate brokers such as banks, most of which have a broker division.

4. All brokers whether tied or independent are compensated on a commission basis. However, staff employed in an office's direct marketing division are ordinary salaried employees. The cost of a product sold through this division is "loaded" to ensure equality of pricing throughout the organisation.


16 September 2002

Appendix 2:
DRAFT Report of the Select Committee on Finance on the Provincial Public Hearing held on the Financial and Fiscal Commission (FFC) submission on Division of Revenue 2003/04, held in the different provinces


On 29 April 2002, the Financial and Fiscal Commission (FFC), tabled its submission on the Division of Revenue (DOR) in Parliament. The FF0 has a legislative mandate of advising the Government on the DOR among the National, Provincial and Local spheres of government and to make recommendations on provincial and local fiscal matters.

Pursuant to that, the Select Committee on Finance in the National Council of Provinces (NCOP) requested provinces to host their own public hearings to assist the NCOP in drafting a consolidated report based on the information from these provincial public hearings.

The FFC's mandate is to make submissions to the National Parliament, in terms of Section 9 the Inter-Governmental Fiscal Relations Act of 1997. In Chapter 13 of the Constitution, and in the FF0 of 1997 Act. In terms of the Act, the FF0 has to make this submission ten months before the Minister of Finance presents his budget. The FF0 is also expected to assess the financial implications of new policies and to develop mechanisms to support the effective and efficient funding of these policies. This gives the Minister of Finance, Parliament, and other stakeholders a chance to debate, and discuss and use the FFC's recommendations and proposals as input into the Minister's budget speech and the drawing-up of the budget.

The Minister of Finance is obliged to consult with the FF0 before but he is not compelled to take the recommendations makes the budget speech. In the response the Minister highlights some of the concerns and issues that face government with respect to the equitable share and inter-governmental fiscal relations. The meetings with the Minister take place in December and January in terms of the Inter-Governmental Fiscal Relations Act. The Minister is obliged in terms of the Act to respond to the proposals that the FF0 has submitted. The formal response of government is contained in the Budget Review submitted by the Minister on Budget Day.

Section 214(2) of the Constitution, states that the FF0 in making its recommendations, must take into account all the constraints that government face that is sections 214(2) A to J compel the FF0 to take the following factors into consideration when making its recommendations, namely.

a)The national interest;

b) Any provision that must be made in respect of the national debt and other national obligations;

c) The needs and interest of the national government determined by objective criteria

d) The need to ensure that the provinces and municipalities are able to provide basic services and perform the functions allocated to them;

e) The fiscal capacity and efficiency of the provinces and the municipalities;

f) Developmental and other needs of provinces, local government and municipalities;

g) Economic disparities within and among the provinces

h) Obligations of the provinces and municipalities in terms of national legislation;

i) The desirability of stable and predictable allocations of revenue shares and

j) The need for flexibility in responding to emergencies or other temporary needs, and other factors based on similar objective criteria.

The recommendations are also informed by request the FFC gets from other stakeholders.

2. The FF0 Recommendations for 2002-2003

The nature of their proposals was within the framework of a proposal they made for the MTEF cycle in the year 2000. Annual proposals have to be made for the next fiscal year within that cycle.

2.1. Provincial Government Proposals:


The FFC proposes that conditional grants remain the most appropriate mechanism for targeting spending of Early Childhood Development (ECD) and HIV/AIDS funds. The conditional grants for ECD and HIV/AIDS should, therefore, not be included in the equitable share since the equitable share is unconditional and it will be difficult to track funding.

The FF0 proposes the development of a suitable data and information base for HIV/AIDS to be prioritised.

With regard to own revenue, provinces can generate revenue through.

 Road traffic revenues

 Hospital and patient fees; and Horse-racing and gambling.

The Provincial Tax Regulation Process Bill should:

 Specify criteria against which the Minister measures provincial tax proposals;

 Clarify the implications and procedures relating to capacity limitations of


 Allow provinces maximum flexibility in determining tax rates within tax rate bands;

 Include guidelines with regard to tax room and equalisation measures, where certain taxes have implications for the equitable share revenue pool; and

 Specify regulations for dispute resolution, especially where a province may fail to reach an agreement with SARS on certain tax proposals.

The FF0 Report suggests that there are possibilities for improvement relating to financial management, appropriate revision of fees, and incentive structures.

2.2. Local Government Proposals:

Municipal borrowing and finance markets

There should be a combination of market discipline and rules-based approach. The government should set out rules that will ensure market discipline and not leave this up to financial markets.

There should also be a differentiated approach to municipalities and policy measures to assist municipalities to build their credit-worthiness.

Primary health care

The FF0 supports the recommendation that district municipalities should be the service authorities for health. It also recommended that local municipalities should be the main service delivery agents and authorities for water and sanitation unless there is no capacity.

Councillors' renumeration

On the contentious issue of councillors' remuneration, the FF0 states that although the Constitution states clearly that councillors must be remunerated from municipal revenue, relief can be provided for those municipalities who are experiencing extreme financial difficulties.

Restructuring of electricity

On the restructuring of electricity distribution, the FF0 proposes that out of the six regional electricity distributors (REDS) to be formed their demarcation should be co-terminus with municipal boundaries. This will ensure that two people living in exactly the same municipality are not payin9 two different tariff rates.

There should be a national tariff support programme for low-income consumers through lifeline tariff, or free basic services.

There should be compensation to municipalities for losses related to this transfer. Approximately 6% of municipal revenue is collected from electricity.

2.3. Cross-cutting Equitable Share Proposals:

Disaster management funding

The FF0 proposes that central funding mechanisms for disaster management should be introduced so as to ensure that budget frameworks and the delivery of constitutionally mandated basic services (CMBS) are not compromised.

The FFC proposes that 1 percent of provincial or municipal budgets should be spent on disasters. Once the 1 percent limit is exceeded, national funding must kick in from the contingency fund.

Contingency reserve

The FFC proposes that a more defined objective criteria be provided to guide the purpose of the contingency fund.

The contingency reserve fund should be set aside only for emergency cases in all spheres of government. Currently, the fund is reserved for unforeseeable and unavoidable circumstances. It suggests that the two amounts should be separated, i.e., new spending priorities of the outer years of the MTEF and one for emergencies that deals with macroeconomic stability and response to natural or human made disasters.

Social security

The FF0 proposes that old age and veteran pensions be budgeted for and administrated by national government.

The FF0 also proposes that a national security agency should be established to deal with problems in the delivery of social security programmes. Its main aim would be to improve the access as well as the efficiency and effectiveness of service delivery to the poorest of the poor.

Review of the current equitable share formulae

The 200412005 financial year begins the new MTEF cycle; all stakeholders i.e. government, parliament are required to apply their minds on reviewing the equitable share formula.

The FF0 proposes that the mechanism of distributing nationally collected revenue should introduce a principle of balancing the requirements of the Bill of Rights for the delivery of constitutionally mandated basic services (CMBS) on the one hand, with the constraints that are contained in a-j of the Constitution.

It also mentions the need for improvement in the collection of data to enhance the development of intergovernmental fiscal mechanisms consistent with constitutional requirements.

Provinces that participated in the hearings submitted the following responses to the 2002-2003 FF0 recommendations.

3. In support of FFC recommendations

 The review of the equitable division of revenue should take into account the Census 2002 data. When allocating funds between the different spheres of government, poverty alleviation and economic development should be prioritised based on population density informed by the soon to be released new Census data.

 The RED boundaries should be aligned With municipal boundaries to ensure that residents of a given municipality do not fall within different REDs and hence under different tariff structures.

 Metro or urban municipalities rely on electricity as their key rates collector for own revenue for solvency. The move to compensate such municipalities for the losses that might be caused by the transfer to RED's is welcomed.

 A budget for contingency reserves should be set as a percentage of total provincial budgets to deal with unforeseeable and unexpected events.

 That greater emphasis should be placed on needs and cost recovery issues.

 The current arrangement for disaster declaration is unstructured The funding of catastrophes should be drawn from the contingency reserve.

4. Disagreement with FF0 recommendations

 Provinces support the phasing out of conditional grants are therefore not in agreement with the HIV/AIDS and ECD.

 The development of specific inter-governmental fiscal capacity-building programmes should be accelerated and funds initially transferred through equitable division of revenue but also supported by specific conditional grants.

 The provinces argued that capacity constraints exist at all levels i.e. national, provincial and local spheres of government. The issue of increasing conditional grants to provinces may have an impact on their autonomy.

 The functions and powers related to the distribution of social grants must remain with the provinces. Capacity constraints exist at national, provincial and local levels.

 Provincial Tax Assignment issue is still unresolved because of its complexity. A surcharge on PIT needs to be debated because most provinces disagree on this arrangement.

 Municipalities would like to receive an equitable share to speed up service delivery in those municipalities who cannot afford to raise their own revenue and also help in the adjustment of councilors' remuneration.


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