Financial Sector Regulation “Twin Peaks” Bill [B34-2015]: deliberations

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Finance Standing Committee

17 August 2016
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The afternoon session opened with a continuation of a discussion on the National Credit Regulator in relation to the Bill before the Committee.

The meeting then moved onto a consideration of the financial impact of the Bill. Members were concerned about the costs being transferred from the financial institutions onto the consumers, particularly the poorest households. Industry representatives indicated that the cost estimates are accepted for now, but it will be important to see if these are accurate during the implementation process. Treasury stated that the collapse of systemically important institutions is very costly to the fiscus. Further, that the proportionality aspect of the Bill ensures that more complex institutions carry a heavier financial burden than simple institutions. Members noted that the phasing in approach decided upon should allay concerns of the industry.

The Chairperson then went through the Committee’s Report on its study tour to the United Kingdom indicating major themes he would like Members to pick up upon including:
- The meaning of financial stability,
- The true cost of the Twin Peaks model and it being a potential impediment to economic growth, and
- Market access by smaller players given the 90% market share of the four major banks.

The Bill was then considered clause by clause, with the Committee covering the long title, definitions and clause 2. Most of the definitions were accepted, but some had points of contention such as ‘financial crime’ and ‘governing body’.

Meeting report

The Chairperson said dual regulation has been a theme and National Treasury should deal with outstanding issues. If the National Credit Regulator wanted to be present, then it should do so.

Mr D Maynier (DA) said before the break, the Committee had been discussing the National Credit Regulator (NCR). The Chairperson had mentioned an informal and a more lengthy interaction. He requested formally inviting the NCR to appear before the Committee to put forward its case.

The Chairperson said he did not see the point in having the NCR being called again and perhaps the NCR could simply write to the Committee. This point should be discussed with more Members present. The first time the NCR representative, with due respect, was ill prepared and the second time the person presented more substantially. In principle, doing so can be kept open, and the majority of Members can decide. In the meantime, as the Treasury team meeting with the Department included the NCR, a common report could be produced indicating agreements and disagreements. The next issue is the cost of the Bill and who would bear the cost and how much. A document was submitted by Treasury at a meeting at the end of the last quarter, which Committee should consider.

Presentation on the Cost of the Financial Sector Regulation Bill [B34-2015]
Mr Roy Havemann, Treasury Chief Director: Financial Stability, said this is something which Treasury would give the Committee within a Money Bill, but it was previously raised that the Committee would like to see this beforehand. Government has a process known as a socio-economic impact assessment system, which is now a requirement for all Bills to go through. The Free Market Foundation pointed out that this had not been published.

The Chairperson said he remembered hearing this and it was even discussed. The Committee should not re-cover ground, people can look at their notes.

Mr Havemann said two slides were relevant. Basically, when a bank fails, it is incredibly expensive to the country.

The Chairperson said he remembered this and if other Members were not present. However, he would allow some latitude, because Members were coming back from recess.

Mr Havemann said if there is a bank failure it is really expensive. Treasury has done some work on what the cost implications are and currently the system direct costs would be R907 million in fees to the Financial Services Board. It is expected that this will rise to R1.03 billion. Interestingly, if one adds the remuneration packages of South Africa’s financial sector directors and senior executives it comes up to R1.2 billion. The cost differs by company, but there are certainly very big companies where the amount they pay to the regulator is substantially less than the remuneration package of their CEO. From GDP statistics, the financial sector contributed about R325 billion to the economy in 2015 and Treasury estimates that the costs of regulation are between 1.3 to about 1.8%. That includes indirect, looking at a survey which tried to determine how much companies’ compliance functions cost them. Treasury submits that it is costly, but not that it is ridiculously expensive and even if the costs double they are at around R2 billion. The big concern is the indirect costs, such as having a compliance function and having to fill out all the forms. Treasury has tried to minimise these as far as possible, but he wanted to emphasise that if a bank fails it costs the fiscus a lot of money. So, it feels the costs are balanced.

Mr Maynier said the Committee should not make light of the financial implications of the Bill. As far as he was aware this was the first time the Committee had formerly considered the impact assessment and the cost implications are not insignificant. The document provided by Treasury concedes that 11 of 16 respondents indicated the costs would be passed on to consumers. So there is going to be a cost to consumers. Yet almost in contradiction the document later indicates that there should be no additional direct or indirect costs for the poorest households, black people, youth, women, small enterprises or rural development over and above the costs which generally apply to financial consumers and institutions. On what basis was that conclusion drawn and what measures would be taken to prevent costs accruing to the poorest households? Secondly, there is reference in the document to an implementation levy and the costs are to be borne by business. However, why should that cost not be borne by the state?

The Chairperson said he was not sure whether this theme had been discussed in full, but Treasury had brought in most of those things in the endless discussions which have been had. It was up to Members to decide whether they want to keep harping on the same issues; the difference now being Mr Maynier has specific statistics. This is a major theme which will be carried through to the last. Before Treasury responded, he suggested that as this would affect the average person out there, perhaps the industry would like to state whether it feels that these costs are an underestimate or anything else. He noted that Members should be taking the representations by the industry, as from a partisan perspective.

Ms Marguerite Jacobs, General Manager: Legislation and Regulatory Oversight at the Banking Association South Africa (BASA), said BASA is concerned about the financial impact, but it is difficult at this point to understand what the exact costs to be incurred are. She could come back to the Committee on if this was a reasonable estimate, but BASA is concerned.

Ms Rosemary Lightbody, Senior Policy Advisor at the Association for Savings and Investment South Africa, said ASISA members were concerned about heavy costs when the Financial Sector Regulation Bill (FSRB) was first mooted. However, they do not know at this stage and it depends on how it rolls out. ASISA’s members feel the twin peaks structure is right, are supportive of it and that legislation coherently produced under that structure would be better than the silo approach at present. ASISA supports it, as long as levies are not outrageous. There are costs when new structures are set up, such as staff. It will probably level out and at the end of the day the structure would be better than at present.

The Chairperson commented that nothing new is being said so far.

Ms Raksha Semnarayan, BASA Representative, said the development of the framework for the regulatory strategy and standards will help ascertain costs, but that is still outstanding.

Ms T Tobias (ANC) said it was mentioned by Treasury that there would be a phasing in of the levies and that should always be in the back of our minds. The matter is neither here nor there, because the estimates do not reflect the phasing in approach.

Mr Havemann said the state could pay the implementation levy through taxes or a levy on the industry and that would require an additional tax. A new tax increase could be pushed through in a Taxation Laws Amendment Bill. Treasury has taken the view that it is much more efficient to raise it through the industry being regulated, otherwise it would be making ordinary citizens who have no interest in financial services pay the levy. It is actually a quite small percentage of their profits and the value which they add to the economy and most people would argue that a well regulated financial system assists with economic growth.

Ms Katherine Gibson, Treasury Chief Director: Financial Sector Conduct, said the greater cost is not necessarily coming from the twin peaks model but is coming from the change in the manner of regulation of the sector. There is already a more proactive, closer monitoring and engaging on how businesses are behaving from a conduct and stability perspective. That closer scrutiny is what is going to be generating the cost. On the financial inclusion aspect, what this law provides for is a more proportionate response to financial institutions and the business they are doing. So with complex financial institutions providing complex products, the costs would be higher than a simple institution, with simple products which should see a come down. This law and the Insurance law and regulations coming forth provide for the micro-insurance framework are a signal of this. It also needs to be considered that the costs would be borne differently. It levels the playing field, which is a good thing. As institutions which were not previously regulated will become regulated, so their costs will increase significantly more. Retailers for example are in a tricky space, because they are essentially providing financial products and services such as credit and insurance, but they have not always been regulated like a bank or an insurer. Their regulation has been a lot lighter, but they are essentially doing the same thing. As the framework harmonises, some entities will end up paying more than others. This from Treasury’s perspective is correct for the reasons expressed.

Ms Tobias said Members are being short changed by the Treasury and the stakeholders, because the gist of the matter is concern about the cumbersome process. They have not spoken about the cost sharing process or phasing in towards making sure the legislation is realised. Stakeholders do not want to openly urge Treasury to enter into a cost sharing agreement.

Mr Maynier said his impression was that there does not seem to be a compelling argument to support the statement in Treasury’s document that there should be no additional direct or indirect costs to the poorest households. He however would leave that there. What he would urge is that there is sight of the Levies Bill as soon as possible and possibly before this Bill is passed.

Mr Ismail Momoniat, Treasury Deputy Director General: Taxation and Financial Sector Policy, commented on the impact on the poorest households, saying it must be borne in mind that one of the big objectives in the financial sector is financial inclusion. That is something which Treasury hopes to produce a policy document on, and Treasury has been working on something. Those things are still intentions and that is the difficulty. Looking at banking alone, banks themselves would come asking for regulation if Treasury took its hands off. A lot of this is set by international standards and if Basel III was imposed ten years ago there would have been outrage. However, today these have become international standards and if government does not apply this, banks would face trouble when dealing internationally. Money laundering does go very far and if South Africa tries to impose lower standards, it will not work. So a lot of these costs are driven by those standards and they will probably increase, but it is very difficult to cost that. The Bill will lay the basis, because looking at the system as it applies for banks they do not pay fees towards their regulation, due to the capital they hold with Banking Supervision. The approach taken to the financial sector in the United Kingdom is that the industry is to bear the cost. The costs are significant so cost sharing is not really possible. The industry will take most of these costs and it should in certain sectors. Yes, some of it goes to the consumer, but thinking about financial inclusion, how many poor people have many accounts. It would therefore probably be those with more money paying the greater cost. Everything depends on the assumptions and an estimate can be given, but the reality is that when implementing, the base will be what the regulators are currently charging. Further, the capacity of the regulators needs to be looked at, because not everything will be in place immediately. It will be important for Treasury to put out papers and ensure there is a proper process. The contestation being had with the regulators and the international institutions is that they are saying that operational independence means they must have their own budgets. Every regulator when it sets up the international standards argues its own case on that. He would ignore their position on that, because in many countries regulators are allocated funding. Further as a democratic country there should be some accountability around that. The important thing will be that when the fees are collected the process should be less opaque than the present FSB process. As it is a regulatory measure, ultimately someone has to decide and he felt the Minister ought to have a role. Here not even the regulators can be trusted to do this on their own, because there has to be accountability. We have to be sure that the process is right and have to give the industry and others opportunity to make comments, especially on the first few budgets. Once there is a baseline, then the adjustments are really inflationary. The best that Treasury could do was to provide the estimate, but when implementation is happening that is when proper consultations should happen to get to the right baseline. More studies, with different assumptions could be provided, but he was not sure whether Treasury could do better at present.

Ms Tobias said to allay Mr Maynier’s fears what Mr Momoniat has said should be included in the Committee’s note. When regulation is phased in, proper consultation process will be there, but at present the Committee must deal with estimates. This should also allow that when regulations are passed, Parliament is given an opportunity to look at them.

Mr Maynier said on his identifying and pursuing the theme of the financial implications, he felt Treasury was fighting the wrong battle. Treasury’s responses about financial implications tend to assume one is not in favour of the regulation of the financial sector or that one supports light touch regulation. This was not the case. He was pursuing this because he felt there was an interest in limiting the costs and trying to create greater certainty about the costs. He understood there were significant uncertainties. Then, most especially, one must try to protect poor households from incurring further costs. For example, it needs to be explained why the CFO of the FSB earns three times what the Public Protector earns. Going forward there probably are significant savings that could be looked into. His interest was to limit costs, have greater certainty about costs and also to help poorer households avoid further costs. He would therefore be very interested in seeing the Levies Bill.

Ms Tobias said Mr Maynier was playing politics on the issue, it was not about the costs to be borne by the poor. It is a political statement about how remuneration is structured in South Africa. In the present context his issue is covered by the Committee noting that when the implementation is done, it needs to follow the public consultations very closely. Here we are trying to find a middle ground and the Committee will observe the implementation, including the regulations produced by the Minister. The Committee was not trying to do things at all costs, making the process cumbersome for the industry. This is to be a phased in process, which will be observed and the Committee wants to assure them by putting this in its notes.

Ms Semnarayan said BASA supports having sight of the Money Bill as soon as possible. Aside from what was said by Treasury, banks also pay a licence fee under the Banks Act regulatory regime.

The Chairperson said it is inappropriate for a stakeholder to request to see the Money Bill in this phase of the process, because they will not vote on it which is why it is fine for Mr Maynier to say so. He accepted that it is hard to draw the line and the Chairperson has to enforce decorum. People should understand that the Committee is in phase two and some things only Members decide upon. His own view was that it is strange for Treasury to say that this will not have any significant effect on the poor. Secondly, his view was that it does not matter what one’s motivations are, it does not make that issue raised any less legitimate. He thought to be fair to all, 95% of what has been said has already been aired in some form, repeatedly in the Committee. The only new thing emerging is that the Money Bills Act related to this would have to be considered. To be fair not much more could have been done aside from what Treasury has done. At this stage it is very hard to take this debate further. It should be agreed that the document should be looked at more closely. Secondly, the Money Bill should be considered at whatever stage that was. Further, the Committee should put in the report what was noted by Ms Tobias. Members should accept that it is impossible to have precise figures. The Committee staff could also conduct independent assessments. The Committee at times raises good, sound policy and political issues, but is unable to carry it forward due to its limited capacity. It is right for Members to be cautious about what Treasury says, because any Treasury would likely state what it said. How will it be taken further, unless the Committee can show that the figures presented are wrong?

Mr Momoniat said the Chairperson has clarified what needs to be done, so Treasury would work on the Money Bill and present it. The process of approving of budgets by regulators and the accountability around that is going to be important. He believed that there is a role for the Minister. This goes to Mr Maynier’s point, because you do not want the regulators themselves to decide, as they would simply say maximise the budget. The Minister’s role could be a counter to that and the accountability mechanisms should be looked at. On remuneration, a proper process is needed and if there is a board, there will be a remuneration committee. It may well be that the Public Protector is not getting enough and South Africa’s regulator salaries are not completely out of line. Looking at Hong Kong, the regulators get an average of the CEOs of the top five companies which they regulate and are very well paid. Our remuneration levels are fairly low, but what is not wanted is that the regulators themselves determine their pay. To be correct, he did not say that there would be no impact on poorer households; it depends on the accounts held.

The Chairperson said transitional provisions should be addressed at the end, because then Members will have a firmer idea. Particularly, it was important that the Committee summarise the Bill, so that articles can be produced to ensure that it is not misunderstood. There will be a lot of mobilisation against this Bill, but significant constituencies should not be swayed by misrepresentations of the Bill. He asked to move onto a consideration of the Committee Report on the Committee’s UK study tour.

FSRB and the Committee’s Report on its United Kingdom Study Tour
The Chairperson said the Report had been presented to Members and he wanted to alert Members to major headings. He noted that the UK parliamentary committee section indicated that its Bill had taken a lot of work to process, despite that being an established Parliament with a battery of support staff. The aspects he highlighted in the Report were:

- The need to strengthen the oversight role, which has been a consistent theme. He urged Members who were not on the tour to read that, as it was something being picked up on.
- Multiple accountability is a similar theme and he directed Members to the four bullet points under D.
- Financial stability was an interesting theme and what came up was how to define, measure and regulate for this. He requested the support staff to prepare something further for the Committee’s consideration.
- Accountability of the regulator, and he understood Treasury’s point, but there could be concerns with a Minister interfering in an independent regulator and he did not know how to find the correct balance.
- Appointment of key staff, this is something which the FSRB does not do, but hopefully something to be considered in the future. He read from the report: “appointment of key staff, in the UK system Parliament can conduct a hearing ahead of the appointment of key staff, but the appointment remains the prerogative of the executive”. He liked this personally and felt it consistent with South Africa’s norms and values.
- Whether the UK’s is a Twin Peaks model or not, raised interesting issues and applies to the SA system. “The SA system could be seen more as a mountain, two peaks and a mole hill”, which he drew from the Treasury summary.
- Clear segregation of duties is an important aspect and the Committee needs to ensure that these conflicts between roles are minimised. This had been raised that morning by public stakeholders and the NCR.
- Financial education of the public, this relates to the need to simplify this Bill to ensure disadvantaged people are made aware so that there is less chance of their being taken for a ride.
- On fees being borne by the sector, he said according to various UK financial sector reform stakeholders the reform of the sector was welcome, but the costs of the reforms were high. Some of the financial institutions were already fined by US or EU regulators or both, for their role in the 2008 global financial crisis. So when people get heated about what is in the Bill, the banks are still bound by these rules operating in the global system. It is interesting that South Africa has led this push, with Mr Kader Asmal chairing the Financial Action Task Force (FATF). The UK banks argued any further costs would hamper their ability to contribute to the economy, but a significant part of the costs are being borne by the consumers. Given the lower levels of income and the material inequalities in South Africa, the Committee needs to be much more concerned than even the UK Parliament. So nothing new has been said.
- The effect of the financial service ombuds person should be read by Members, which would be covered when the Committee dealt with the tribunal.
- Interpretation of legislation was also noted.
- Merger of credit and conduct regulator. He read “In SA the role of the National Credit Regulator and its location in the Department of Trade and Industry (DTI) raises some challenges and will have to be addressed in consultation with the DTI and the Portfolio Committee on Trade and Industry. He had pursued a joint meeting, but this was still in the pipeline. He continued “the Twin Peaks reforms aim to reduce regulatory fragmentation and having a single regulatory view of all activity in the financial sector is important. The FSRB intends to harmonise the approach, including by providing strong cooperation mechanisms between the NCR and FSB”. His view was that this is going to be a struggle for Treasury.
- On unintended consequences, he read: “the legislation needs to manage competing policy objectives better. The UK Twin Peaks legislation is mostly motivated by the global financial crisis in 2008. However, some of the measures imposed on the financial sector were later seen to impede economic growth. In acknowledging this, the UK Parliament, government and regulatory bodies agreed to provide changes to the then implemented Twin Peaks model to enable economic growth. These proposals were done in consultation with the sector players. Some of the financial providers however argue that the current financial regulations impede their ability to provide debt and other services needed by the economy.” This is an area where the Bill could potentially disempower emerging black entrepreneurs, because banks could use it as an excuse not to provide debt. He continued reading: “similar challenges need to be considered in the South African context and the Committee needs to ensure the FSRB does not serve to further exclude the poor and disadvantaged from the financial system. And that the stricter regulatory requirements do not unnecessarily impede economic growth.”
- On market access by smaller players, he read that “some of the arguments about the causes of the 2008 financial crisis included concerns that some of the financial institutions were too big and their failures had devastating consequences on other players in the market. The UK Twin Peaks model is also aimed at reducing conduct which could lead to big institutions’ failure. It is also intended to ensure that the financial sector is accessible to small institutions. It is unclear whether this was achieved since the introduction of the financial sector reforms in the UK.” A lot of the input received was that this was in fact not happening, so we should be slightly cautious. Especially, given that the four major banks have 90% of the market share making this a very important consideration in the South African context. This point should be put in the Committee’s report, but the thing of having four banks and the monopolistic nature is a subtheme.

The Chairperson said he really felt the tour was worth it and the points were raised. He asked if they could move on to a clause by clause reading of the Bill.

Ms Tobias suggested that there ought to be a debate where Treasury and all the banks are present on the market share.

The Chairperson said he felt there should be some discussion and Members may even want to take this to the House. This will be as an outcome of the Bill’s processing. Members can under the Rules of the National Assembly propose a matter for debate.

Ms Tobias said she was suggesting engaging with the banks.

The Chairperson said both should be done and there should be a special sitting early in the new year. He asked for this to be put in the Committee’s Report.

Mr Maynier said one of the appointments which the Committee was not able to keep was with Andrew Tyrie, Chair of the UK Treasury Committee. Mr Tyrie had recently called for a review of the Twin Peaks model and is now proposing a new peak. He felt the argument had merit. Mr Tyrie was proposing that all the enforcement functions be housed under a third enforcement peak. The model appealed to him, because the South African Reserve Bank (SARB) with conducting investigations into the banking sector is essentially taking on executive functions. As the SARB is not an executive agency, it is not properly accountable to Parliament for those investigations. The idea of an enforcement peak therefore has appeal, particularly in light of his recent experience with SARB and Financial Intelligence Centre on requests for certain investigations. This convinced him that the Committee should look at removing the enforcement functions from especially the SARB.

The Chairperson asked how he found out about this proposal and when did it happen?

Mr Maynier said he had read it in the news and it was fairly recent.

Ms Tobias said Mr Maynier was asking a very interesting question, but the intention here is not to copy the UK model as is. It is for Members to apply their minds and determine what is best for South Africa. For Mr Maynier to suggest that SARB is not accountable to Parliament is not true. SARB is called on a regular basis to respond to any questions Members have for them. Mr Maynier was making a political statement, that the current FSRB interferes with the enforcement agencies. In the South African context we have the right to have a different model, not that Members are closed to testing the feasibility of the FSRB model. To this extent there has not been a convincing argument for a different model. If and when the legislation is not effective, it will be changed.

Mr S Buthelezi (ANC) said benchmarking is a very important thing to do in policy formulation and development. The Committee should be careful where they do the benchmarking. The first world and emerging economies have different challenges. He suggested that going forward when doing benchmarking, they should look at similar economies, to better understand the impact.

The Chairperson said this was raised the previous year. The decision was to go to Mexico as a priority. The proposal was to go to one developed country and one developing country. When the Committee discovered that Parliament would not fund both, the Committee approached the NCOP which is going next Friday. The reason he had urged this to happen was exactly for the reasons raised by Mr Buthelezi. The reason the UK was opted for was because it was getting late and going to Mexico would have required translation, meaning less could have been done in that time. Indonesia was the other potential, if all goes well the funding for the NCOP’s trip was approved.

Mr Buthelezi said this is an important situation, but he was talking specifically about the speedy removal of tariffs. Regardless, he felt it would be a useful thing for Treasury to produce a document indicating the effects of similar legislation on comparable economies.

The Chairperson said that was done and he could provide the original draft which he got from the research unit, which was literally a survey looking at comparative countries. At this stage some comparative assessment could be done, but he would prefer identifying the issues which are troubling Members and look at how other countries have dealt with them. What Treasury has indicated is that the Twin Peaks model is being implemented all over and at this stage the countries which have made progress are few in the developing world. In preparing the motivation for the study tour, he had to engage with Treasury to get this information. So much of what Mr Buthelezi said was dealt with, but he could have the report.

Mr Momoniat said Treasury is happy to sit with any Members to go through the Bill, because the questions Mr Buthelezi was asking are important and they have been considered.

The Chairperson said where issues are identified where there is a deadlock, comparative studies will be important.

Clause by Clause Reading of the Bill
Long Title
The Chairperson said he noted that Treasury had made changes to what the public has termed the preamble to the Bill, but which he would call the objects of the Bill. The industry had commented on the voluntary ombuds scheme and confusing the compulsory membership to industry ombuds. Specifically, he asked what Treasury’s position was and why.

Mr Havemann said this part of the Bill has no legal standing as far as he was aware but the stakeholders have asked that their comment be mentioned.

Ms Gibson said she agreed with their comments and had inserted this.

The Chairperson said he felt it was fine and as it is only the long title, it would not be a train smash. Further, there was an objection to it containing “to provide for the protection and promotion of human rights as set out in the Constitution in the financial sector”. He did not see a problem in doing this, particularly looking at the consequences of the 2008 financial crisis. Parliament has done this before, where a Department has objected that something is covered in another Bill, by making reference to another piece of legislation. So, the person reading the particular Bill, may have a quick reference to another piece of more relevant legislation on that point. Secondly, that is a redundant thing which the Departments and State Law Advisors do not like. The problem is that there is no specific thing in the Bill which achieves this, but the Bill as a whole seeks to do so. He wanted Members to consider leaving this in there, because the banking sector has done some horrific things such as in 2008. Leaving it in does not have any material effect, but it indicates a slight pro-poor value. He asked if there were any objections.

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, said that this is acceptable.

The Chairperson asked why the Financial Intelligence Centre (FIC) and other institutions were mentioned.

Mr Havemann said this was to be consistent and include all the regulators.

Ms Jeannine Bednar-Giyose, Director: Fiscal and Intergovernmental Legislation at Treasury, said some of the amendments in the long title are included to be consistent and reflect other amendments being made in the Bill. The long title is supposed to accurately summarise the Bill.

The Chairperson asked about the removal of ombuds regulatory council and insertion of ombuds council.

Mr Havemann replied that this reflects an important change with the renaming of the ombuds regulatory council, because they do not have a regulatory role.

Ms Gibson said that this was because Treasury was unsure whether the council would retain regulatory functions and this was to leave the name neutral.

The Chairperson asked for this to be followed up upon.

Section 1: Definitions
The Chairperson said when he looked at the matrix he realised that it was not appropriate for the Committee to preoccupy itself with everything. He asked to move to page 17, considering ‘administrative action’ to ‘administrative penalty order’. He noted binding interpretation has been removed. ASISA noted something about ‘business document’.

Mr Havemann said there has been discussion about what a document is legally. So when an investigator takes documentation from a business premises and whether items seized can be used in criminal proceedings. The general view is that they cannot be used in court.

The Chairperson continued to the definition of ‘credit’.

Mr Havemann said Treasury had agreed with the DTI to change certain sections of the definitions.

Ms Gibson said it is in the definitions, rather than having to repeat the definitions of ‘credit’ and ‘credit agreement’ throughout.

The Chairperson continued to ‘document’, asking what the difference is between information stored electronically and that stored digitally.

Mr Havemann said something to do with the Electronic Communications Act.

The Chairperson moved on to ‘financial institution’, asking what other than a representative means.

Ms Gibson said those are representatives of financial institutions, who are regulated in certain ways and have their own standards. So, even though they are regulated, they do not become a financial institution by virtue of regulation.

The Chairperson returned to ‘business document’, saying ASISA had a concern with the interpretation.

Mr Havemann said ASISA argued that privileged documents should not form part of the documentation and Treasury agrees.

The Chairperson asked about the issue with ‘debarment order’.

Mr Havemann said Treasury does not feel it needs to be defined in section 1, as it is defined later on in the Bill.

The Chairperson said it is not agreed and clarity needs to be sought. He moved onto ‘financial customer’.

Mr Havemann said the law does not differentiate between a wholesale customer and a retail customer, because this is a difficult distinction. A pension fund is run by a board of trustees and they are usually ordinary union workers. So can the same requirements be imposed on them as on a bank. It is part of the Conduct of Financial Institutions Bill which is forthcoming. A lot of engagement with industry has been had on this delineation.

Ms Gibson said Treasury does not think it is necessary to make the distinction in the FSRB, because the intention of this Bill is a cross sectoral approach. The Bill provides for proportionality and the intention is that the standards which are applied to the retail against the wholesale market will be articulated through the forthcoming regulations and legislation.

The Chairperson asked if the industry had comment.

Ms Jacobs said that discussions have been had with Treasury and at present BASA has no particular issue.

The Chairperson said that was agreed to and moved onto ‘financial crime’ and asked what the issue was. Treasury mentioned the second tranche of Bills. He found it odd, because the Committee does not know what is coming. Everywhere that Treasury has indicated things will be dealt with in the second tranche or phase 2, the Committee must note and hold the executive to account. There has to be a timeframe and the Committee can use this document to provide a degree of oversight. On the second tranche, he suggested to Members that the Committee notes what Treasury has committed to doing and where possible note a timeline, to hold Treasury to its commitments.

Ms Gibson said when Treasury makes reference to phase 2, particularly with ‘financial crime’, it is not to say that there will be a problem until then. The common law principles apply and they will be improved upon in phase 2. In phase 2, Treasury would have to look at the various offences across the various pieces of legislation towards standardisation.

The Chairperson moved onto ‘financial sector regulator’, how is the Committee to be assured of the cross referencing in (c) and (d), but he would not further burden the support staff with this. He then moved onto ‘financial instrument’ and ‘financial product’ which BASA had a concern with.

Mr Havemann said there is problem here, because there are 13 pieces of legislation and these concepts are defined differently in all of them. Treasury has tried to fix a little bit of it in the FSRB, but it does not feel it is time to fully reform yet. Unfortunately, another definition is created in the FSRB, but Treasury would like to get to a point of having a coherent definition.

The Chairperson asked for Treasury to prepare a paragraph on this issue and it should be presented at least 48 hours before the Committee considers the Bill again. Further, almost all these Bills fall under the Ministry of Finance and there may be Bills which fall under another Ministry. The question therefore is how many of the Bills to be reviewed for coherence, are outside Treasury’s remit.

Mr Havemann noted the National Credit Act, but none of the others.

The Chairperson moved onto ‘financial sector law’, the concern was where legislation and regulations differ, which has been covered by the Committee. He then moved onto ‘financial sector regulator’, and indicated the acceptance of Treasury’s position. He moved onto ‘financial stability’, which means as defined in s4. This was an issue raised in the UK and he asked for it to be indicated that the Committee did not agree, and to allow it to come back on that point.

The Chairperson moved onto ‘foreign financial instrument’.

Mr Havemann explained that Treasury issues a bond in London, but what happens if someone tries to buy the bond in South Africa.

The Chairperson said that is agreed and moved onto ‘governing body’ asking what the concern was.

Ms Jacobs said BASA’s concern was that it has governing bodies, which according to its terms of reference have specific members. However, there are also people who attend those boards as attendees and not members. Hence, the concern is about the definition not being clear about those who have been invited to attend as attendees.

Ms Yvette Singh, BASA Representative, said there was also an issue with the inter vivos trust. If in the course of a normal business transaction someone happens to die, an inter vivos trust would be set up for one’s family members. Is that trust covered by that definition and that was a concern, because in financial institutions there are a lot of inter vivos trusts. In Mr Havemanns’ previous response, an explanation was given on why they were excluded.

Ms Bednar-Giyose said she did not think an inter vivos trust would fall under the definition, because it is referring to the management of a financial institution.

Ms Jacobs said this specifically speaks to the boards, management or decision makers of a financial institution and the extent to which a person partakes in that decision, how the definition will apply. On trusts the concern is more specific to the concern raised relating to ‘key persons’.

Mr Havemann said he did not read it as including attendees.

Adv Jenkins said from reading the King Report, the persons responsible for managing, controlling and formulating policy are not attendees. Usually it is properly defined who runs the company and it definitely does not refer to someone taking minutes or a legal advisor. It really refers to those who are paid to formulate the strategy of financial institutions and he had no uncertainty around that definition.

The Chairperson moved onto ‘industry ombuds scheme‘, noting the Committee acceptance of Treasury’s position. He continued to ‘key person’ and asked what the issue was.

Ms Gibson said the concern was that the way key persons had been drafted was too wide. Treasury disagrees and feels it is crafted to key persons, playing particular roles in the context of the provision of products and services in a financial institution.

Mr Havemann noted paragraph (f) of the key persons and it is only the head of the function, who is liable.

The Chairperson continued to ‘market infrastructure’ and asked for an explanation of central counterparty.

Mr Havemann said central counterparty sits in between persons trading derivatives. An example of derivative trading is where you buy a forward contract and in a sense bet that the Rand will appreciate. A central securities depository, is the institution which keeps note of the ownership of shares. A clearing house is like a central counter party and helps in the process of buying and selling shares. An exchange is a stock exchange. A trade repository records the derivate trading.

The Chairperson continued to ‘outsourcing arrangement’ and asked for an explanation.

Ms Gibson said when talking about outsourcing, this is a function that is being performed for a financial institution in relation to its business as a financial institution. Given that outsourcing could mean a whole lot of things outside of this, this definition was intended to narrow the scope. The regulators apply a direct or indirect regulatory model, so one could either license a person who collects insurance premiums directly or regulate them through the insurer. Outsourcing arrangement is to capture those situations where the regulator may not necessarily want to regulate such an entity directly, but still wants standards imposed.

The Chairperson asked for BASA to make a reply.

Ms Jacobs said the revised proposal was accepted.

The Chairperson moved onto the removal of ‘securities’.

Mr Havemann said Treasury felt this definition unnecessary as it is already defined in Financial Markets Act and it is not used much in the FSRB.

The Chairperson agreed and moved onto ‘systemic event’, he felt that BASA’s point was debatable either way. He then moved onto the insertion of ‘taxable income’.

Ms Bednar-Giyose said subsequently ‘taxable income’ has been removed.

The Chairperson said everything is agreed to in the definitions.

Clause 2: Financial Products
The Chairperson asked why changes had been made to clause 2(1).

Ms Gibson said this is what was agreed with the DTI and NCR and in effect provides for a credit agreement to be a financial product under this Bill. So it will therefore be subject to the prudential authority. However, as it specifically is excluded for the purposes of Chapter 4 which deals with the conduct authority and clause 106 which deals with conduct standards, the conduct authority will not be able to set standards on the credit instrument itself.

The Chairperson said BASA commented that the term ‘other credit support arrangement’ be defined. Treasury had noted the comment and indicates there will be dual regulation of credit and it is not covered under the National Credit Act. He asked for BASA to comment.

Ms Jacobs said BASA is comfortable with the proposed changes and it is similar to what the Foschini Group raised. BASA is very interested to see the cooperation between the regulators.

The Chairperson said what is raised around clause 2(1)(g) and (h) should not be accepted, but clause 2(1) (a) to (f) and (i) and (j) are accepted.

Ms Gibson explained that a point was raised on credit about limiting this to credit agreements as defined in the National Credit Act, but that is not the case. This was deliberate, because that Act deals with a narrow type of retail credit of a certain size and the intention is to go broader to include the wholesale market.

The Chairperson asked for an explanation of why investor was in brackets, because it was not usual in his experience.

Ms Gibson said the intention is to clarify that the clause is speaking about a person who makes a financial investment, then becoming the investor. It is the same person, when referenced further down.

The Chairperson said it is unusual to put things in brackets in legislation.

Ms Bednar-Giyose said this is informally indicating that the term will be used for the rest of the section, it is a stylistic thing.

The Chairperson said this should be deferred until Adv Jenkins looks at it. He then asked for an explanation of clause 2(5).

Mr Havemann said it was only an improvement of the wording.

The Chairperson said no comments had come from the public until clause 7, but he did not follow clause 3.

Mr Havemann said Treasury was trying to clarify the issues specifically around credit. The biggest change is with credit and secondly it is to clarify the role of security services.

The Chairperson said he had stopped reading at this clause, although he was up to date on the policy issues. He suggested stopping at this point. He said the Committee would meet the following week on the Strategic Plan of the South African Revenue Service. He suggested picking up on the FSRB on Wednesday 24 August 2016 for the whole day if the House is not sitting; Members would be informed, as it would perhaps be on 6 September 2016. He then closed the meeting.

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