The Committee met with National Treasury to approve the Portfolio Committee's amendments (the A list) to the Taxation Laws Amendment Bill . The changes considered dealt with two matters: (1) To take out the retirement reform proposals in the tabled Bill, effectively going back to the law as it stood in Act 39 of 2013, so that the tax harmonisation measures would take effect on 1 March 2016, the only change being that the threshold for annuitisation of provident funds would be raised from R150 000 to R247 500. (2) To incorporate the Committee’s request, made in response to opposition to the Bill from COSATU, for the annuitisation reforms to be reviewed after two years. National Treasury's communication strategy document was circulated which outlined the most important facts about the Bill that needed to be widely communicated to the public. It was pointed out that for many people, depending on their level of income, the reforms would not affect them for over ten years. Nothing was further from the truth than the rumours that government was trying to touch workers' money.
The Committee asked for confirmation of the inclusion of the raising of the threshold to R247 500; requested a more detailed communication strategy from Treasury; and asked for clarity on the process that the Bill would now undergo as the Committee had not had sight of the B version of the Bill that integrated the Portfolio Committee amendments into the tabled Bill. Due to the parliamentary worker strike, there had been delays. It was agreed that one had to have sight of the full changed Bill when voting.
The Committee then heard public submissions on the Financial Sector Regulation Bill [B34-2015] from the Banking Association of South Africa (BASA) and the Association for Saving and Investment South Africa (ASISA). BASA supported the Bill in principle, but noted several points where it felt the Bill gave the regulators powers that were too intrusive and lacked sufficient checks and balances. It was also worried that a clause granting regulators the power to issue binding interpretations of law might be subject to constitutional challenge, because it appeared to breach the principle of the separation of powers. It welcomed the risk-based approach to supervision, but pointed to several provisions in the Bill that did not reflect this approach. It was also opposed to the compulsory disclosure of licences, would create significant problems for banks, which were required to hold a large number of licences. ASISA also raised several questions about the constitutionality of the powers granted to regulators. It raised a concern about the legal status of the Financial Services Tribunal, insisting that it could not take over the functions of a court of law, and about a clause which appeared to place the directors of a company under an obligation to prove their innocence in certain circumstances.
Members asked how the proposed regulatory environment compared with the existing one; asked for concrete examples of the regulators' intrusive powers and discussed the purpose of these powers; said that there needed to be transparency in the disclosure of licences; and urged Treasury to consult on the Bill with a wide variety of stakeholders. Treasury admitted that in the majority of cases, ASISA had correctly understood the intentions of the Bill, for example regarding the legal status of the Tribunal.
Taxation Laws Amendment Bill [B29-2015]
Mr Ismail Momoniat (Deputy Director-General: Tax and Financial Sector Policy, Treasury) explained that according to the normal process, further amendments to the version of the Taxation Laws Amendment Bill tabled on 27 October 2015 would have had to have gone through the Money Bill process. The Minister had since sent the Committee a letter asking for certain amendments to be made. These changes dealt with two matters: (1) To take out the retirement reform proposals in the tabled Bill, effectively going back to the law as it stood in the Act 39 of 2013, so that the tax harmonisation measures would take effect on 1 March 2016, the only change being that the threshold for annuitisation of provident funds would be raised from R150 000 to R247 500. (2) To incorporate the Committee’s request, made in response to opposition to the Bill from the Congress of South African Trade Unions (COSATU), for the annuitisation reforms to be reviewed after two years.
Ms Yanga Mputa (Chief Director: Tax Policy Unit, Treasury) took the Committee through the final list of proposed amendments to the Bill (the A list). Many of them were technical, and there were some errors that had not been picked up during proofreading. It was requested that the effective date for changes regarding retirement funds be changed from 1 March 2018 to 1 March 2016. This change was made in several clauses. With reference to Clause 16, the change requested was that existing law be reinstated to allow for the introduction of a regulation. This change made (k) and (kA) in Clause 18 (page 23) unnecessary. On page 29, Clause 28(c)(ii), a printing mistake was corrected, so that the sentence “in respect of transactions . . . connected person” applied to both 28(c)(i) and (ii). On page 31, Clause 32(2), page 34, Clause 37(3) and (4) and page 35, Clause 41, a provision was requested to allow the effective date to be at the Minister's discretion instead of 1 January 2016. A duplicated paragraph in Clause 50(d) was to be deleted. On page 43, Clause 53, lines 15-45 were requested to be deleted. A proposed change regarding reinsurance was withdrawn after a debate with Old Mutual and Sanlam. On page 67, Clause 112, the effective date was changed from 1 January 2016 to 1 March 2016. Similar changes were made in Clauses 113, 121 and 160.
Mr A Lees (DA) asked whether the increase in the de minimis was included somewhere in the changes.
Mr Momoniat said that it was already in the tabled Bill, but it was not part of the present changes.
The Chairperson said that they would try and vote on the Bill as a whole later that day. He gave the Committee a rough and unofficial version of a report on the consultation process of the amendments. He asked Adv Frank Jenkins (Senior Parliamentary Legal Advisor) if he was happy with the sections that made use of the Money Bills Amendment Procedure and Related Matters Act.
Mr Jenkins was happy with these sections.
The Committee approved the Portfolio Committee's proposed amendments (the A list).
The Chairperson asked Mr Momoniat to tell the Committee exactly what they planned to do to communicate the contents of the Bill to all affected parties. This was particularly important because of COSATU's expressed opposition to the Bill.
Mr Momoniat agreed that it was important to communicate the facts. Nothing was further from the truth than the rumours that government was trying to touch workers' money. A document was circulated to the Committee which outlined what Treasury thought were the most important facts about the Bill that needed to be widely communicated. He noted that for many people, depending on their level of income, the reforms would not affect them for over ten years.
The Chairperson did not think Treasury had adequately explained their communication strategy, but only described the contents of their communications. The onus was on Treasury to assure workers that they would not be disadvantaged, otherwise the Bill would face opposition. He asked them to provide a written account by that afternoon.
Mr Lees asked if Mr Jenkins could explain the process the Bill would now undergo. What instrument of referral would be used to get it into the House, for instance?
The Chairperson asked Mr Jenkins to tell them what exactly they would be able to vote on in the afternoon, given the disruptions to parliamentary processes caused by the ongoing strike and other challenges.
Mr Jenkins explained that ideally, a version of the Bill with all changes incorporated should have been considered by the Committee before it votes. He doubted whether this version would be able to be printed by the afternoon. It was not unheard of, however, for a Committee to vote on a Bill having only the list of changes, the A list, without having seen the version with the integrated changes, the B version, because of time constraints.
Mr Lees was concerned that the Committee could be asked to vote on the B Bill without having seen it.
The Chairperson agreed that there had to be a copy of the B version available. One could not vote on it otherwise. This would be illegal and would result in the Bill being thrown out. The question was about the form in which they vote, depending on the unusual set of circumstances in Parliament at the moment with the strike.
Banking Association of South Africa submission on the Financial Sector Regulation Bill
Mr Cas Coovadia (Managing Director, BASA) said that BASA supported the Bill in principle, and he commended Treasury for the thoroughness of the consultation process. The third draft of the Bill was a sizeable document though, and BASA would welcome further consultation on it. He suggested that the Committee create a technical subcommittee, with which BASA would be happy to engage. He then handed over to Ms Wendy Dobson (Head: Group Policy, Advocacy, and Sustainability, Standard Bank and a BASA member, who gave the first part of the presentation.
Ms Dobson said that the Bill was the most important piece of financial legislation in the last twenty years, and it was vitally important that we got it right. The first issue concerned the powers of the Regulatory Authorities which the Bill would create. BASA was not convinced that the balance of powers between the regulators, the executive and the legislature was right. In particular, the powers granted in Chapter 7, Clause 141 and Clause 163(2) were felt to be too strong and lacking sufficient checks and balances. The powers described in Chapter 7 covered almost every commercial aspect of operating a financial institution, and BASA recommended that the powers be limited. Clause 141 granted regulators the power to issue binding interpretations of law. BASA was worried that this clause might be subject to constitutional challenge, because it appeared to breach the principle of the separation of powers. Clause 163 gave the Prudential Authority the power to direct a financial conglomerate to restructure. Because corporate restructuring was a massive undertaking, BASA felt that this power needed to be subjected to strict administrative justice provisions. BASA welcomed the risk-based approach to supervision, Ms Dobson said. However, several provisions in the Bill did not reflect this approach, and BASA recommended that these provisions be revised (see slides 12-15). She then handed over to Ms Yvette Singh (Public Policy and Regulatory Affairs Executive, FirstRand Bank) who continued the presentation.
Ms Singh said that Clause 155, dealing with significant owners, was cumbersome and not in line with international standards, and recommended that it be rephrased. Clause 127, dealing with the compulsory disclosure of licences, would create significant problems for banks, which were required to hold a large number of licences. The definition of a “key person” was problematic when read together with the definition of a “governing body,” and BASA offered a recommendation for how it should be changed. Lastly, BASA supported the policy that a central counterparty should be an independent clearing house, but thought that the five-year transition period for JSE Clear should be made explicit in the Bill.
Association of Saving and Investment South Africa submission on Financial Sector Regulation Bill
ASISA was represented by Adv Geoff Budlender SC, who discussed various possible constitutional challenges to the Bill as it stood. He described the hierarchy of relevant legal instruments; the Constitution, the Bill, then regulations, and finally regulatory instruments. Where there was a conflict between two levels of the hierarchy, the higher one took precedence. At the same time, the Bill provided for itself to trump older law where there was a conflict, and while there was nothing inherently problematic about this, the way this provision was formulated allowed a regulation or regulatory instrument to overrule a previous Act. He did not think that this could be the intention.
Adv Budlender referred to Clause 141 Binding 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. He said that the power of regulators to give a binding interpretation was inconsistent with the principle of separation of powers. A further problem was that if the interpretation was subsequently overruled by a court, this ruling would be only operative prospectively. This was inconsistent with the rule of law insofar as it allowed an invalidated ruling to remain law.
The third issue concerned the Financial Services Tribunal. It could not judicially review decisions made by the regulators because it was not a court, nor did it meet the constitutional requirements of independence that would allow it to act like a court: for instance, the members were appointed by the Minister to review the conduct of regulators for which the Minister was accountable. He stressed that the Tribunal was a good idea, but it could not usurp the powers of the court. It needed to allow for its rulings to be appealed in a High Court.
Lastly, Adv Budlender raised a serious concern about Clause 266(1), which stated that “if a financial institution commits an offence in terms of a financial sector law, each member of the governing body of the financial institution also commits the offence...unless it is established that the member took all reasonably practicable steps to prevent the commission of the offence.” This effectively made directors responsible for proving their innocence, and could force a court to convict someone whom it believed was innocent. He suggested modelling the clause after Section 214 of the Companies Act of 2008, so that only directors who are knowingly party to a contravention are held responsible.
The Chairperson asked members not to get too preoccupied with issues of constitutionality, as these could be dealt with in a subcommittee.
Dr B Khoza (ANC) thought that not enough attention had been paid to the current regulatory environment. We do not want to undermine the good reputation that South Africa's financial sector currently enjoyed.
Mr Coovadia was confident that the proposed regulatory environment was an improvement over the existing one, and would build on existing successes in line with international best practice.
Dr Khoza asked if anyone could provide examples of overly intrusive regulatory behaviour.
The Chairperson agreed that the Committee needed specific examples of how the measures were intrusive.
Ms Dobson said that the intrusiveness of the new regulations was primarily on the "conduct" peak, rather than the "prudential" peak. She said the powers around the retail distribution review were one example of overly intrusive powers. The move from a commission-based system to a fees-based system had, in the UK, led to the exclusion of the lower end of the market.
Ms T Tobias (ANC) said that the market conduct regulator needed to play a role to ensure that product formulations were not exploitative, while still allowing financial institutions the freedom they needed to innovate.
The Chairperson suggested that perhaps there might be a case for departing from international norms in this matter because of the low levels of financial literacy in South Africa. We have to make an extra effort to protect the poor.
Ms Dobson assured the Committee that BASA was not asking for “light-touch” legislation, but only smart, selective and appropriate legislation.
The Chairperson asked whether the issues raised at the meeting had been raised during the consultation with Treasury.
Dr Khoza thought that the constitutional principle of transparency had to come into play when considering the compulsory disclosure of licences.
Ms Singh replied that BASA would like the regulator to indicate how it wanted a licence to be disclosed when it issued the licence, instead of a blanket requirement of disclosure, which was practically onerous.
In response to ASISA's submission, Mr Momoniat agreed that it was important that the Bill was not vulnerable to constitutional challenge.
Ms Katherine Gibson (Chief Director: Financial Sector Conduct, Treasury) added that in the majority of cases, Adv Budlender had correctly understood the intentions of the Bill, for example regarding the legal status of the Tribunal.
Ms S Kekana (ANC) urged Treasury to meet with a wide variety of stakeholders, not just the big industry players.
The meeting was adjourned.
- Banking Association South Africa on Financial Sector Regulation Bill [B34-15]
- Association for Saving and Investment South Africa (ASISA) submission
- Extract from Memorandum from G M Budlender SC and C de Villiers dated 15 November 2015
- Taxation Laws Amendment Bill [B29A-2015]
- Taxation Laws Amendment Bill [B29B-2015]
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