Financial Sector Regulation Bill: briefing overview on Chapters 9, 10, 13 and 15

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Finance Standing Committee

18 November 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee met with National Treasury and the Financial Services Board to discuss Chapters 9 (Information gathering, supervisory on-site inspections and investigations), 10 (Enforcement), 13 (Administrative penalties) and 15 (Financial Services Tribunal) of the Bill. The other chapters were skipped to keep the discussion relevant to the Financial Services Board (FSB).

Chapter 9 made a clear distinction between an inspection, which was within the ordinary course of business, and an investigation of an institution. An investigation was a much more aggressive inquiry which would be initiated if there was a specific concern and there was reason to believe that a law was being broken. It might involve a search and seizure warrant, for example. A search could still be conducted without a warrant if the investigator had reason to believe that the delay would defeat the purpose of the search, but the Financial Services Board had decided to err on the side of caution by requiring a warrant in other cases.

Members suggested that “mystery shopping” needed a proper definition; worried that inspections would be ‘too polite’ and allow transgressors to conceal or destroy evidence of wrongdoing; that the requirement of obtaining a warrant would rob investigators of the element of surprise when raiding business premises; and that investigators were ill-equipped to confront violent resistance.

Chapter 10 contained one contentious clause, which dealt with the extent to which a responsible authority could give an interpretation of the law, and what the status of such an interpretation was. Some interpreters said that the Bill gave these bodies the right to make the law through their interpretations, but Treasury did not think it went quite that far. The Chairperson asked the Parliamentary Budget Office to look at the issue on behalf of Parliament. He did not want to see the Bill contested for constitutionality because of a technical matter. From a moral point of view, however, he was personally in favour of giving these bodies far-reaching powers. The 2008 financial crisis had shown that banks wield tremendous power over the lives of ordinary people, and that they need to be closely regulated.

Members said that there was a much public unhappiness about this clause, and felt that there needed to be some kind of body to protect the banks from over-regulation by government. They said the intention of the clause was unclear; and questioned the purpose and efficacy of some of the regulatory tools.

Chapter 13 streamlined the process of issuing administrative penalties although the principles were unchanged. These principles had been challenged and confirmed in the Constitutional and Supreme Courts. It was noted that the organisational structures responsible for processing administrative penalties were covered in Clause 87 of Chapter 6.

The intention of part 2 of Chapter 15 was to create a relatively quick remedy for decisions made by the financial sector regulators. There were essentially two options: to follow the model of the National Credit Regulator (NCR) or that of the Financial Services Board. The NCR procedure was to prepare a case against a transgressor which it took to the Tribunal which made a decision, whereas the FSB made a decision which could then be appealed at the Tribunal. The effect was similar but the FSB procedure was usually quicker.

Members were concerned about the independence of the Tribunal in light of its funding sources; suggested that clauses dealing with the formation of panels of review for specific applications to the tribunal should be clarified; and recommended that the Tribunal chairperson should always be one of the two or more retired judges required to be part of the Tribunal.

Meeting report

Mr Roy Havemann (Chief Director: Financial Markets and Stability, National Treasury) began by clarifying a matter about standards that had come up the day before. He explained that the “regulatory instruments” that Treasury proposed fitted in below ministerial regulations in the hierarchy. In existing legislation they had gone by various names (“rules” in the Insurance Act, and “directives” in the Banks Act, among others). Treasury wanted to regularise and simplify the system into three elements: prudential standards, set by the Prudential Authority, conduct standards set by the Market Conduct Authority and joint standards.

The discussion of the day covered Chapters 9 (on information gathering, supervisory on-site inspections and investigations), 10 (on enforcement), 13 (on administrative penalties respectively) and 15 (on the Financial Services Tribunal) of the Bill. Chapters 11, 12 and 14 were skipped to keep the discussion relevant to the Financial Services Board (FSB) representatives who were present.

Chapter 9: Information gathering, supervisory on-site inspections and investigations
Mr Havemann explained that Chapter 9 made a clear distinction between an inspection, which was within the ordinary course of business, and an investigation of an institution. Inspections and investigations were defined in parts 3 and 4 of Chapter 9 respectively.

Mr Gerhard van Deventer (Head of Enforcement, FSB) explained that an investigation was a much more aggressive inquiry which would be initiated if there was a specific concern with a particular institution, and there was reason to believe that a law was being broken. It might involve a search and seizure warrant, for example. The Auction Alliance case in the Constitutional Court had set certain precedents on search and seizure without a warrant, and while there were still circumstances in which a warrant would not be needed, the FSB would take a conservative approach to ensure that their operations were safely within the law. He explained that during the transitional phase, while there were still cases ongoing that had begun under the old legislation, this legislation would continue to be valid until all such cases were settled.

Mr Deva Govender (Enforcement Counsel, FSB) explained that a search could be conducted without a warrant if the investigator had a reasonable reason to believe that the delay caused by obtaining the warrant would defeat the purpose of the search.

The Chairperson asked for a definition of the term “mystery shopping,” used in part 2 of Chapter 9 on information gathering.

Mr van Deventer gave an example. If the FSB suspected that a Ponzi scheme was being run but it did not have enough evidence to start an investigation or obtain a search and seizure warrant, it might send one of its agents to pose as an investor in order to gather evidence.

The Chairperson suggested that the Bill needed to include a proper definition of this term.

Mr van Deventer elaborated on the practical difference between inspections and investigations. An inspection would be typically arranged beforehand with the institution, indicating which information the inspector would need. The inspector might then examine a sample of the information provided.

The Chairperson worried that the conduct of an inspection was too polite and would allow institutions to hide transgressions.

Mr van Deventer conceded that this was a possibility, but said that there were ways to detect when someone was hiding something.

Mr Govender explained that one could look at financial statements, for example.

Ms T Tobias (ANC) worried that the requirements to obtain search and seizure warrants would rob investigators of the vital element of surprise. When investigating someone who was knowingly acting illegally, evidence will be hard to find even in the best cases. She was also concerned that the FSB did not have the capacity to handle dangerous criminals.

Mr van Deventer appreciated the point being made. He explained that the element of surprise was protected by the fact that an application for a warrant could be done ex parte. The FSB co-ordinated its investigations closely with the Financial Intelligence Centre (FIC) and the Asset Forfeiture Unit (AFU) to ensure that no information was hidden or destroyed. It was able to work with the police where there was physical danger.

Mr B Topham (DA) asked for clarity on the provisions of Clause 136, which gave up certain powers for investigators in accordance with the Constitutional Court judgement. Was the clause extending these provisions to business premises?

Mr van Deventer said that the Constitutional Court judgement was, understandably, not completely clear on the distinction between private and business premises because some people worked from home. The legislation erred on the side of caution, he said.

Ms Tobias drew attention to recent allegations that warrants were obtained on the basis of false information. What measures existed to prevent this from happening?

Mr van Deventer assured the Committee that this had not happened in any FSB investigations. He pointed out that the application for a warrant required evidence to be given under oath, so the first line of defence against false information was the fear of perjury. The FSB would also take strong disciplinary action against anyone who was found guilty of such conduct.

Part 5 of Chapter 9 dealt with incriminating statements. There was an ever-present dilemma between allowing a person to remain silent with the understanding that anything that is said can be used as evidence in court or any other forum, or forcing them to give a statement which might then not be allowed as evidence in court. Part 5 left the choice to the discretion of the financial sector regulator / investigator.

Chapter 10: Enforcement
Mr Havemann said that Clause 141 Binding was quite contentious which stated: “The responsible authority for a financial sector law may issue a binding interpretation on the application of a specified provision of that law” unless overturned or modified by a court. It dealt with the extent to which a financial sector regulator or responsible authority could give an interpretation of a law, and what the status of such an interpretation was. Some interpreters said that the drafting of the Bill gave the responsible authorities the right to make the law through their interpretation, but Treasury did not think it went quite that far.

The Chairperson asked the Parliamentary Budget Office to look at the clause on behalf of Parliament. He did not want to see the Bill contested for constitutionality because of a technical matter. From a moral point of view, however, he was personally in favour of giving these bodies far-reaching powers. The financial crisis of 2008 had shown that banks wielded tremendous power over the lives of ordinary people, and that they needed to be closely regulated.

Mr Topham said that there was a lot of public unhappiness about this clause. He felt that there needed to be some kind of body to protect the banks from over-regulation by government. Was there any other body, besides a court of law, that could give an interpretation? Perhaps an ombud or similar independent middle-man could be created for this purpose.

Mr A Lees (DA) said that the intention of this clause was unclear. If a regulator or responsible authority made an interpretation, was it binding on itself only, or also on a person who asked it to give one? Could it make a binding interpretation without having been approached for one?

Mr Havemann said Part 2 of Chapter 10 clarified the difference between rules, notices and directives, terms which had been used somewhat loosely in the past. In the current Bill, a directive was always something that required a specific action by the directed party. Part 2 covered the scope of what a directive could include, to whom it could be addressed and the requirements for issuing one.

Mr D Maynier (DA) observed that “directive” was included in the list of definitions at the start of the Bill.

Mr Havemann explained that in this case Treasury's practice had been to define terms relative to the clause in which they were used.

The Chairperson suggested that Treasury think about whether this was the best practice in this case.

Mr Lees observed that a directive was intended to stop a breach of the law. If the law itself could not prevent the breach, how would a directive be able to?

Mr Havemann explained that the usual practice in this context was to tell a person that they were breaking or were about to break the law, and then if you were ignored, you had a strong basis for suspicion. Essentially, it functioned like a very strong warning.

Mr van Deventer said that for registered businesses, a directive was typically very effective because the business licence would be at stake.

Ms Tobias added that it could also help to protect people who were breaking the law unintentionally from unnecessary court action. The law should not be punitive, she noted.

Mr Havemann said Part 6 covered leniency agreements. It allowed the relevant authorities to be lenient with transgressors who co-operated with them.

Ms Tobias expressed some concern about the possibility of this provision being abused, for example by someone who deliberately broke the law, knowing that they would be able to reach a lenient settlement when they were caught. It could also be abused by investigators who, for whatever reason, were unwilling to put all their energy into uncovering incriminating evidence.

Mr van Deventer replied that in some cases, there was no other way to crack a case other than by letting one person off lightly in order to prosecute another whose transgressions might be more serious. He did concede that it could conceivably be misused.

Chapter 13: Administrative actions and administrative penalties
This chapter streamlined the process of issuing administrative penalties. The principles, however, were unchanged. These principles had been challenged and confirmed in the Constitutional and Supreme Courts.

Mr Havemann noted that the organisational structures responsible for processing administrative penalties were covered in Clause 87 of Chapter 6.

Chapter 15: Financial Services Tribunal
Mr Havemann explained that the intention of Part 2 of Chapter 15 was to create a relatively quick remedy for decisions made by the financial sector regulators. There were essentially two options: to follow the model of the National Credit Regulator (NCR) or that of the FSB. The NCR procedure was to prepare a case against a transgressor which it took to the Tribunal who made a decision, whereas the FSB made a decision which could then be appealed at the Financial Services Tribunal. The effect was similar but the FSB procedure was usually quicker. Part 2 also covered the requirements for the members of the Tribunal: appointed by the Minister, they must include at least two retired judges or persons with equivalent legal experience, and at least two other persons with experience or expert knowledge of financial products, financial services, financial instruments, market infrastructures or the financial system.

Mr Maynier asked who funded the Tribunal, and whether the source of funding had the potential to compromise their independence.

Treasury explained that levies would be raised to fund the Tribunal.

Mr Maynier observed that according to the principles of the Bill, the Tribunal was to be operationally independent, a qualified sort of independence which would seem to fall short of absolute independence.

Mr Govender said that the FSB Appeals Board had been subjected to litigation and the High Court had found that it was sufficiently independent. The Financial Services Tribunal was a similar structure, so he did not foresee any problems of independence.

Mr Topham asked for the clauses dealing with the formation of panels of review for specific applications to the tribunal to be clarified if possible.

Mr Maynier asked if he was correct in understanding that the chairperson of the Tribunal did not necessarily have to be one of the retired judges.

Mr Havemann confirmed that he was correct.

Mr Maynier recommended that the chairperson should always be one of the retired judges.

The Chairperson supported this suggestion.

The meeting was adjourned.

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