Financial Sector Regulation Bill [B34-15]: National Treasury response to public hearings

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Finance Standing Committee

16 February 2016
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The meeting began with a presentation by National Treasury on its responses to the major points raised during the public hearings on the Financial Sector Regulation Bill.

The six major areas were: role of parliament in making regulatory instruments; clause 141 binding interpretations; significant owners; directives to holding companies; the role of the tribunal; and liability of directors. Of which the following raised substantial discussion.

Significant Owners

Here the stakeholders had raised concerns about the Bill providing that the Minister may lower the threshold for where the purchase of a significant portion of an institution such as a major bank or insurance company would require extra due diligence and approval by the relevant regulator. Treasury, following the international standards was willing to allow the removal of the clause fixing the threshold at 15% of the company’s shares.

Members were interested in the reason the clause was introduced in the first place and what the effect of its removal will be. Further, they asked whether the aim of the provision was to capture people with control rather than ownership of the company.

Treasury’s response was that the provisions were inserted to give the legislation flexibility and focuses on ownership, because there are other provisions which deal with the situation where a person is a significant owner is not a controlling person. This would receive further attention in engagements with stakeholders.

The Role of the Tribunal

Public submission and engagements with stakeholders had seen concerns about the tribunal’s jurisdiction overlapping or replacing that of the courts. Further, there were issues about the remedies which the tribunal would provide regarding various decisions made by the regulators.

As Treasury had proposed removing reference to judicial review the uncertainty about the court’s jurisdiction is resolved and a scheme of remedies regarding various types of decisions aimed to resolve the other concern. The Committee was in broad agreement with the intention of the redraft.

Liability of Directors

Here the public had submitted that the defences available to directors were not adequate, specifically that they could not plead ignorance as opposed to active measures taken to prevent an offence taking place. Treasury was willing to concede, because it was very concerned about unconstitutionality.

Members agreed with the need for constitutionality, but wanted to ensure that directors would not escape liability. Further, the interface between this provision and the significant ownership provision was of interest. 

The Committee noted that the major part of the Bill would be done between 12 April and the third week of May. The Bill would reach the NCOP probably by the end of August. National Treasury was advised to have meetings with stakeholders to iron out problematic and outstanding arears.

Meeting report

Opening Remarks

The Chairperson said up until the previous day the Committee had intended to process the Double Tax Agreement, but National Treasury (NT or Treasury) could not deliver on that. So he would speak to the Minister and the Director-General about sending endless Bills to the Committee when it did not have the capacity to process them. He apologised to the Members and said he felt that the Committee should rather be dealing with the Financial Intelligence Centre Amendment Bill. What was particularly worrying was that the Financial Sector Regulation Bill [FSRB or the Bill] was being discussed in the absence of the stakeholders and he would suggest limiting the presentation to an overview. He then decided, on behalf of the Committee, that Treasury should not burden Parliament and should interact with the public stakeholders and report to the Committee. The Committee had decided that it would not be looking at Bills, when so many entities under Treasury were facing challenges. The programme would be sent out that afternoon and highlight that the Committee would begin dealing with legislation again at the start of the second quarter.

National Treasury Presentation on the Financial Sector Regulation Bill

Mr Roy Havemannn, Chief Director: Financial Stability, NT, said the Department had prepared a draft comprehensive response matrix to all the public submissions. The previous week the Association for Savings and Investments South Africa (ASISA) and Banking Association of South Africa (BASA) highlighted areas where there had been a lot of engagement between the senior counsel of both sides. This had led to agreement on a range of issues, although there were still small areas where agreement had not been found. One area was where BASA felt one fine should be limited to R5 million. BASA would also like many things to be called material, but Treasury would take the advice of the Parliamentary Legal Advisors and its own legal advisors. He proceeded to the major areas of contention.

Mr Havemann said the bulk of the comments were on six areas:

Role of Parliament in Making Regulatory Instruments

Mr Havemann said this was one of the biggest areas for discussion. In the Bill, Treasury had put in place a framework for the regulators and the Minister to make subordinate legislation. Treasury had requested two senior counsel opinions and the stakeholders had also received opinions; all of which come to the same conclusion. This was that the provisions were within the bounds of the Constitution, but there was discretion for Parliament to determine how regulatory instruments were to be made. The Committee could discuss how Parliament would like to go about scrutinising potential regulatory instruments.

Clause 141 Binding Interpretations

Mr Havemann said many stakeholders had concerns about regulators being able to make binding interpretations, because the regulators would essentially be creating law on the go. As ASISA highlighted the previous week, a lot of engagement had been had and possible redrafts which the Committee could consider. The proposals prepared by Treasury’s senior counsel were acceptable to the stakeholders and were similar to the proposals in the tax laws. Essentially, this would mean that Regulators can make interpretive rulings.

Significant Owners

Mr Havemann said this matter came up in ASISA’s presentation. There was the view that the proposals put forward were too wide, possibly capturing financial service providers. They were not drafted in order to capture financial service providers and Treasury believed that they did not. However, NT was looking at proposals to ensure that it was clear that this was not the intention. There was also a clause which allowed for a lower threshold for significant ownership, which Treasury did not view as a problem. Treasury did not foresee a situation where a lower threshold would be required and so it was open to removing this clause. Further, there was a concern that the process for obtaining approval for the status of being a significant owner was unclear and cumbersome. Having considered these issues NT would not provide for a lower threshold and if this was needed an amendment to clause 155 to effect that. NT had also proposed some refinement to the clauses to incorporate thresholds and materiality around how the process dealing to significant ownership should work. NT could perhaps engage with ASISA to determine whether the proposals were in line with what was submitted.

Directives to Holding Companies

Mr Havemann said BASA felt there were wide powers given to authorities to direct financial conglomerates to restructure and this could have unintended consequences. What BASA requested was a right for the conglomerates to make representations and for there to be an appeals process with regards to restructuring. NT thought that the Bill was drafted in such a way that there were extensive requirements for the regulators to consult before they issued directives generally, contained in other parts of the Bill. Treasury therefore proposed making it very clear that the consultation requirements which applied generally, also applied here.

The Role of the Tribunal

Mr Havemann said a very big issue among the stakeholders was about the role of the tribunal and how it interacted with the courts. A view was expressed that the Bill could be read in two ways. One would be that the tribunal essentially replaced a court and the other way would be that the tribunal would simply be an internal remedy, but did not take away any of the powers of the court. The intention had not been to replace the court, which could not be done in any case as this would be unconstitutional. There was a lot of engagement between all the senior counsel and essentially one or two clauses were required to ensure the intention was clear. A clause was put in which explicitly stated that the court’s powers were preserved. The way forward was to not use the word judicial review and to use reconsideration to make it absolutely clear what the Tribunal’s role was. This was really a case of misunderstanding the drafting.

Mr Havemann said a second issue related to the scope of the powers of the tribunal. Essentially, there would be three types of decisions that the tribunal would be required to reconsider. These were complex decisions, decisions with precedent and decisions which lied in between made by the regulator. A complex decision which a regulator may make could include granting a new banking licence. This would require consideration of all the public interest considerations, macro-economic conditions and investigate the business model of the bank. Obviously one would like someone who is affected by that decision to be able to refer it to the tribunal, but the question is what is the tribunal to do with the decision? NT believed that the Tribunal should not be able to replace the regulator’s decision. In a normal judicial review the judgements showed that courts were reluctant to replace the decisions of the executive and prefer to evaluate whether the correct process had been followed in coming to the decision. In general, the tribunal would be reluctant to re-decide on behalf of the regulator and therefore NT wanted to make it clear that for complex decisions the Tribunal could not replace these decisions. For decisions with precedent, the courts and the tribunal should be happy to ensure the precedent was followed. There were essentially two types of remedies - either replacing the decision or ordering reconsideration by the regulator. For the third set of decisions which lied in between the above extremes, NT proposed a list of such decisions, but clearly stated the remedies which the tribunal could impose. Treasury was proposing that complex decisions should be referred back to the regulator for reconsideration, while the decisions with precedent could be replaced. There were a fair number of decisions with precedent in the law already, for example the Johannesburg Stock Exchange took decisions and these could be replaced. Therefore, a set of amendments had been proposed to Chapter 15 regarding a more practical way of implementing this. Clause 214 was proposed to read “the Financial Service Tribunal is hereby established to judicially review the decisions of financial sector regulators and the ombuds regulatory council on the application of aggrieved persons”, but the opinion of all the senior counsel was that the problem lied in the words judicial review. The Promotion of Administrative Justice Act (PAJA) spoke about the creation of a tribunal to judicially review, but senior counsel had advised Treasury that the wording created the impression that the intention was to replace the courts.

The Chairperson asked if the words judicial review had been used in any other Bill.

Mr Havemann said Treasury had not used it, but it is in PAJA.

The Chairperson said PAJA was a different kettle of fish and it should be dropped, as long as what was intended in policy could be effected without those words.

Mr Havemann said the proposal iwa to insert a new clause which dealt with the remedies available. Instead of making a complicated distinction between appeal and review, the new clause clearly stated the remedies available to the Tribunal.

The Chairperson said the aim of the present meeting was to indicate whether the Committee broadly agreed or disagreed. Whatever the agreement was between NT and the public stakeholders Parliament would decide. In general a Bill which was broadly consented to was the aim, but it must be remembered that the stakeholders being consulted had vested interest and other parties such as the trade union federations and NGOs were not present. Therefore, the Committee would bring them in at some point and it had been agreed that hearings would be had up until the last day before the Bill was voted on if necessary. As long as it was understood that Treasury was dealing with a sector which had a deeply vested interest.

Mr Havemann said the amendment was effected in clause 230, which stated that a person aggrieved by a decision of a financial sector regulator may apply for reconsideration.

Liability of Directors

Mr Havemann said here NT was not completely convinced, but would not fight. Treasury still believed that if a company took a resolution, which was a criminal act, as a director one was automatically liable. The problem was that this could raise substantial constitutional questions about how the onus would be proven. Treasury was concerned that if the draft was not carefully crafted, then it would end up in the Constitutional Court against very well resourced directors. NT would not put in anything which hinted of unconstitutionality. The stakeholders had put forward a proposal which in his view was weak, which he would explain through an example. A director proposed a motion to the board which is an offence, which was agreed to by all the other directors, except the Chairperson who did not register a vote. The question was whether the person who did not vote was criminally liable. This was where Treasury disagreed with ASISA which was of the opinion that that person should not be liable. Treasury was of the view that the director’s defence would be to show that they took reasonable steps to ensure that the offence did not occur. This would basically require voting against the motion or asking the board to put in place a system to prevent the offence, but doing nothing would not be sufficient.

Mr F Shivambu (EFF) asked where the revised wording of the clause was.

Ms T Tobias (ANC) agreed with Treasury, but said the Committee needed to be clear on how the provision would be constitutional, particularly as when decisions were made in boards or in committees, people could plead ignorance, allowing them to buy time in court to delay them taking responsibility. There should be an element of disclosure about decisions made by the board, so that when decisions were made the makers were aware that decisions had been taken on shareholders’ behalf. This would ensure that directors were always aware that if they took poor decisions they would be liable. If the gap was not closed, then the directors would still take the regulators to court, wasting resources.

Mr D Maynier (DA) asked if ASISA was present and secondly, since it could be inferred that Treasury felt strongly about this clause were there any real life examples of South African cases which caused them to feel so strongly.

Mr Havemann said the report on the collapse of Regal Bank was very ‘entertaining’. The outcome was that regulators struggled to take directors to court. It was a global problem, because usually in their dealings they acquired a lot of money which they used to stay out of court. NT would like to avoid any hint of unconstitutionality and two opinions had been sought which indicated that the redraft was fine. NT would still like to ensure that regulators had a reasonable chance of taking someone to court under the provision.

Mr A Lees (DA) asked whether the issue was a reverse onus type of concern.

Mr Havemann agreed.

Discussion

Mr Shivambu said he thought that the revised wording was going to be provided, because he wished to check its adequacy.

The Chairperson asked to deal with the broad policy issues. He asked for input on Parliament’s role in issuing directives, but felt that there was general agreement. The Committee may change its mind when the text was tabled. He then asked for input on binding interpretations, receiving no responses moved on to the issue of significant owners and asked Mr Havemann to highlight the issues.

Mr Havemann said there was a feeling that the Minister should not have the ability to reduce the threshold and NT accepted this, because it could not see any situation where this would be necessary.

Ms Tobias asked if the new provisions would address the concerns raised by ASISA around materiality and the point that people who were involved with internal arrangements were not necessarily owners. Has NT resolved this, because she could not see this being addressed in the text. The threshold was the issue which was being raised, but here she understood that directors needed to be made to take responsibility for the decisions made. Once the significant ownership clauses were changed, she felt that the entire object of the Bill may be undermined. The submissions were actually targeting clauses which would impose responsibility.

The Chairperson asked whether the draft covering the issues raised in public hearings up until the previous week had been sanctioned by the Committee staff.

Mr Havemann said it had not been submitted to the staff or the Parliamentary Legal Advisors.

The Chairperson said this was not the job of executive, Parliament was to do this. The Committee ought to consider going on a go slow starting from the first day of the next term, if it did not have a researcher and content advisor. The present report was a tentative one, which had not been reviewed by the Committee Section, but when it is reviewed with the stakeholders it must have been reviewed by Parliament. The point Ms Tobias was raising was something which the researchers should pick up and the Committee was encouraging dialogue, but was not necessarily in agreement with what the public was saying. Treasury was agreeing with what the stakeholders were saying, but what was the motivation for having the lower threshold in the first place?

Mr Havemann said it was to provide flexibility and the power was in two pieces of legislation: the Banks Act and the Insurance Act. What Treasury had done was to extend it to one type of entity: collective investment scheme manager and it was thought that the regulators may want some flexibility. Under the Banks Act, when someone bought 15% of a bank they become a significant owner. When a person put down that type of cash then the regulators would want to be able to conduct enough due diligence to ensure that the person was sound. This threshold already existed in the Banks Act and the Insurance Act. The motivation for allowing a lower threshold was to allow flexibility, because these were very large groups and even if 10% of a major bank was bought that was still a lot of money, which ought to be approved by the regulator. Having had a lot of engagement with the regulators, they did not feel it was completely necessary and if they want that lower threshold they would apply to Parliament.

The Chairperson said he felt a bit nervous about simply agreeing to the changes, but the majority would decide.

Mr Lees said what Mr Havemann was implying was that the extent of the value was of importance, rather than control over the bank which he did not understand. If the concern was the future of the bank, then the extent of control over the bank should be the concern rather than the shareholding. Particularly as 1% of one bank may be as valuable as 15% of another, so he was unsure why control was not the crux.

Ms Tobias said she thought that the nominal value of shares influenced the control of a company. Those who actually make decisions were the ones who held significant quantities of shares. Therefore, the Bill should not drop the guard, but should also not be too rigid. This was based on her past experience seeing irresponsible decisions being taken by companies. The role of government is to be cautious, regulate and this must be a balanced. The way the clause should be drafted should cover both the persons in control and the significant shareholders.

The Chairperson asked if there was a correlation between the quantity of ones shareholding and the power of the shareholders say. In other words, was it possible to have a situation where a 5% shareholder had more say than a 25% shareholder? Secondly, did the size of the company matter, because the issue was not about comparing companies, but the power of shareholders within a particular company? If 5% of bank A was worth R5 and 5% of bank B iwa worth R100, it was irrelevant as the crux was control within a certain institution. With regards to a balance or middle ground, the broad framework was aimed at protecting the consumer and not letting the directors who were responsible get away. Therefore, the middle ground had to be within this paradigm and these primary concerns must be kept in mind.

Mr Havemann said on page 70 of the Draft Response Matrix, Treasury had listed ASISA’s representations and the responses, along with revised drafting. NT preferred the draft which was tabled, but the Committee could consider removing the lower threshold.

The Chairperson said Treasury should engage with the public stakeholders, but should not wilt from its position and should simply inform the Committee of the different views. He asked whether Treasury had anything further to add.

Mr Havemann said NT would really prefer a notification process, rather than a strict threshold process. It was happy with a 15% threshold, but would like notification if any material changes happen to the shareholding. This would be the most practical solution, as proposed on page 72. This struck the middle ground by ensuring there was knowledge of what is going on, but not insisting on approval.

The Chairperson said he felt it was important for Members to read the Draft Response Matrix, because the Committee would waste a lot of time otherwise. He would engage with Parliament’s management towards determining a solution. A possible solution could be the use of Subcommittees to process the Bill. He was very concerned about the use of time in Committees and the meeting could not proceed as Members had not read the document, nor had it been processed by the Committee staff. On the threshold matter, he asked for Members to hold their views in abeyance until it had been considered properly. He asked for further issues around significant ownership.

Mr Havemann said the Draft Response Matrix document listed the major issues on the front page and the details in the later pages. The other concern around significant owners was that conceptually the aim was to ensure that the people who were able to control regulated companies were fit and proper. NT had proposed wording to achieve that and the stakeholders had indicated that the wording should be clear on the materiality of that ability to control. NT agreed and wanted it to be clear that significant owner’s ability to control the company must be material.

The Chairperson asked whether the word significant did not imply materiality and in what sense was it used in the Bill.

Mr Havemann replied that significant meant substantial ownership of the company, such as the ability to appoint directors and influence the strategy of the company.

The Chairperson asked why there should both be a significance and materiality requirement; because significant implied that the owners could materially affect the company. Presumably the public was saying that an owner may be a significant owner, but may not have a material effect over certain decisions. 

Ms Tobias said most of the time the people who were operating the company and actually taking decisions were not owners. So in this context the aim was to avoid significant owners being pinned down by the decisions of the executive directors. As she understood it the public wanted to minimise the scope of the sanction.

Mr Lees said the stakeholders needed to be consulted again; because it may well be that a person was a significant owner without the ability to make any real impact on the company. This was a complex subject and the Committee needed to consider it carefully.

The Chairperson noted that the shareholders appointed the board and asked if they should not be ultimately accountable.

Mr Lees said the Chairperson’s point was valid, but accountability was something different. For example, if a Minister appointed a director general who later committed an offence, the Minister would not be charged for the actions of the director-general who actually did the wrongdoing. 

The Chairperson asked whether there were similar provisions in other legislation abroad and whether they used a materiality criterion.

Mr Havemann said every country had a similar model and the reason this was in the Bill is because it is an international standard. It is a requirement in the Bank Supervision Standards or Basel Standard, that significant owners had a material or significant ability influence a company. The wording generally followed the international standards which did not require a lower threshold than 15%, which was why Treasury was willing to allow it to be removed. He asked the Committee to move to clause 156 (2) where it is stated that a person who had a shareholding above the required threshold, but did not have direct control they were not a significant owner.

The Chairperson said he did not fully understand what the relationship was between a shareholder and a board of directors, nor what the norms were which defined that relationship. The third problem was a legal one; did putting in the word material create a problem for the policy outlook, because the aim was not to allow people to escape the scope of the provisions?

Adv Frank Jenkins, Parliamentary Legal Advisor, said he would agree, because clauses 155 and 156 were there to ensure that where someone had a shareholding above 15% and had the ability to influence the decision making process in a company there must be oversight, supervision and permission from the relevant regulator. He would like to see the lower threshold, which had been complained about, in the context of whether the person still had the ability to materially affect the direction of the company. This would act as a brake in the situation, because the stakeholders may be fearful of the power being abused by the Minister to interfere with regulated businesses. The Minister could not make that regulation arbitrarily, because the person would still have to be in a position to materially influence the company. The meaning of material had been used in various pieces of legislation and interpreted by the courts. Essentially it meant not insignificant, but he did not think it would make interpretation more difficult for the regulators or government. The crux of his input would be that while the 15% threshold may be based on international standards, the Committee needed to look at South Africa as a developmental state. Providing for the potential lowering of the threshold could be a useful mechanism to allow the making of regulations. The question was always what kind of parliamentary oversight would be required over this subordinate legislation making.

Ms Tobias said she was not overly concerned about the threshold, because the basic principle was accountability. The issue was not the intention of the legislation, because there would always be competition between government and the private sector. There was a generic view that government should not regulate the private sector and there iwa always a suspicion that where government intervened this was done in a punitive manner. Not enough had been done to engage with business and ensure they understood that government was not trying to hamstring their operations. This was why robust engagement was required and it could not be limited to a few days. It was often left to treasury, because it had the resources and time to hold these engagements. Where there was a suspicion that government was over-regulating, it should be clear that Parliament or the executive would always review the law where unintended consequences were discovered. Business should understand that Members were not only the defenders of the Constitution, but of the people who would suffer in the event that the law did not cover them properly.

The Chairperson agreed and said the Committee would like more engagement. He would confer with the Members, because the major policy matters such as significant ownership could be dealt with in a subcommittee more effectively. 

Mr Havemann said this was one of the more complex parts of the Bill and grappling with it would be worth it.

The Chairperson asked for a summary of the issues around the role of the tribunal.

Mr Havemann said the issue here was whether it overlapped the role of the court, which had led to the dropping of the word judicial review. There were issues about the remedies which the tribunal could impose.

The Chairperson said at present the Committee was in broad agreement with the measures proposed by Treasury, but it would return with a considered position.

Ms Katherine Gibson, Chief Director: Market Conduct, NT, said there was a lot of confusion between what a review was and what an appeal was, the scope of the two and which decisions would be subject to the different standards. The approach being put forward, dealt with those nuances in a much clearer manner. 

The Chairperson asked to move on to the next point.

Mr Havemann said this was on the liability of directors and what was to be done about a sleeping director.

The Chairperson asked if there was any value in going through each clause now, because the major part of the Bill would be done between 12 April and the third week of May. The Bill would reach the NCOP probably by the end of August.

Ms Gibson asked what Treasury should do in anticipation of that.

The Chairperson said it should have meetings with stakeholders and for Parliament’s staff to look at the draft amendments.

He then declared the meeting adjourned. 

 

 

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