Financial Sector Regulation “Twin Peaks” Bill [B34-2015]: JSE submission & deliberations; Land Bank board nomination

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Finance Standing Committee

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

The Committee approved its Report on nominating candidates for appointment to the Board of the Land Bank. It noted in the Report that Parliament was also asked to act merely as a post box in the process of receiving nominations but it did not have a say in recommending who should be finally appointed.

It was noted that there was a communication about South African Airways (SAA). It was agreed that this would be discussed on 2 September meeting.

The DA wanted the Committee to attend the Portfolio Committee on Public Enterprises meeting next week on Eskom as it had oversight over Treasury’s Chief Procurement Unit as this relationship had broken down entirely to the point that Ministers were talking in public about it.

The Chairperson agreed that this Committee had more powers than the Executive had over entities in some respect. Correct that the two Committees could exercise oversight over the Chief Procurement Officer and Eskom. That was what this Committee was here for. Perhaps changes had to be made to the Constitution but this was something the ANC had to decide on next year.

The Johannesburg Stock Exchange was allowed to submit its position on Section 49A which stated that if one was an external counter party, one had to be licensed unless one was exempted from being licensed.

Thereafter, the Committee continued its preliminary clause-by-clause reading of Chapter 4: Financial Sector Conduct Authority in the revised working draft of Financial Sector Regulation Bill.

Meeting report

The Chairperson asked if the meeting could first look at the Land Bank nominees, the programme second and the Financial Sector Regulation Bill third.

Committee Report on request to nominate candidates for appointment to Board of the Land Bank
The Chairperson said that Members had been briefed on the process about the Land Bank nominees. It was a very strange because the law said that the Minister had to notify the stakeholders through a government gazette notice calling for nominations. It was strange that Parliament was also asked to nominate so it did not have a say in who should be finally appointed. In the last meeting there was an informal exchange – and he was unsure whether there was agreement or not – but he was suggesting to the meeting that the Committee might want to put that in the report: that it did not have a say in the matter and that it merely forwarded the names to the Minister. For now there was one vacancy as advertised. This was because a board member's term came to an end and he did not want to be re-appointed. Members were asked how they felt about the process or if they wanted to object to somebody.

Mr F Shivambu (EFF) said that he thought that the meeting should start by introducing the agenda and the agenda first be adopted because this was how meetings were run.

The Chairperson interjected and said that it had not happened like that since 1994 and that if it was a rule then that could be done.

When Mr Shivambu was allowed to resume he said that he thought there was a communication from legal affairs about an SAA issue, which he thought was an issue of (Mr Shivambu was not allowed to finish his sentence)

The Chairperson interjected and said a decision on that had been taken and it would be discussed on Friday morning. The Committee had agreed yesterday – Mr Shivambu was not present – that that matter was not for discussion unless people wanted to discuss it today. The meeting was clear whether it was an ANC Member or any other Member – if a Member was not here and in the case of Mr Shivambu it was legitimate because he was a Chief Whip and Deputy Chair of his party – the meeting could not reopen matters every time Mr Shivambu had not been present.

Mr Shivambu said that the way the Chairperson presided over meetings was extremely problematic because when a member places an issue on the table, one should not create a dialogue. The issue should be put into the meeting and if clarity had to be provided, it had to be provided.

The Chairperson interjected and said if Mr Shivambu wanted to at every meeting.....

Mr Shivambu managed to resume his input and said that the issue had to be attended to as it was of national importance because SAA was going around even to the private markets looking for R16 billion. It was a matter of national importance that was urgent and oversight had to be provided.....

The Chairperson interjected and said it was coming up under the next item on the programme.....

Both the Chairperson and Mr Shivambu were speaking at the same time because Mr Shivambu did not stop speaking when the Chairperson interjected. No clear position could be gleaned from this situation.

The Chairperson, after silencing Mr Shivambu, said that the matter was discussed yesterday and an email to this effect had been forwarded last night.

The Chairperson asked Adv Frank Jenkins, Senior Parliamentary Advisor, if every agenda had to be put to the vote in a meeting. He said that Mr Shivambu had to go to the Rules Committee about this.

Adv Jenkins motioned negatively.

The Chairperson asked if Members wanted to discuss the SAA matter today.

There was no audible response, which was taken as agreement not to discuss the SAA matter today.

The Chairperson said on the Land Bank nominations, it was an anomaly and even Adv Jenkins had explained, there was no provision in the law about this; the Committee had no say it was merely a 'post box'. There was informal agreement on the matter. He asked if the Committee wanted to look at each person and decide on each person, or did the Committee just want to forward the names to the Minister.

Mr Shivambu asked if the process could be explained and what the legislation said about this. He asked further if there was a defined role for the Committee in terms of the legislation.

The Chairperson interjected and the interaction was inaudible.

Mr Shivambu resumed and said that if there was no defined role in terms of legislation then the Committee could not entertain issues around which it had no defined role. Why....

The Chairperson interjected and said that it was not the law. He said that the Committee basically agreed with Mr Shivambu. This was an anomaly and he had not seen this kind of thing before. One could amend the law and take it to the Agriculture Portfolio Committee. The Land Bank was only in the Finance portfolio  because it was transferred from the Department of Agriculture to Treasury when it was in financial trouble. Now it was going back there. This was a matter that could be taken up with the Committee concerned.

Adv Jenkins said that this was the way it was unfortunately. It was the 2002 Act, which required the Minister to seek nominations from the appropriate parliamentary committee. There was no role really for the Committee to interview and recommend one candidate...

The Chairperson interrupted and said that the Committee had no choice, it was really a ridiculous thing. What would be put in the report, if Members agreed, was that this Committee recommended that the Land and Agriculture Committees consider the value of this proposal at some time in the future?

Mr Shivambu asked if the law said that this Committee had to give the Minister the name of the person that should be appointed to the Land Bank Board.

Adv Jenkins read Section 4(2) of the Act. What was done was an advertisement was put out which stated the requirement and invited nominations from the public be sent to the Minister. There was no requirement for parliamentary committees to interview or find out whether candidates were qualified as they said they were. It seemed to be the mandate of the Minister.

The Chairperson concluded that there was actually no disagreement here. There was nothing the Committee could do but forward the names.

The Chairperson read the 'Report of the Standing Committee on Finance on the request to nominate candidates for appointment to the Board of the Land Bank, dated 31 August 2016'

The Committee approved the Report.

Committee Programme
The Chairperson said that the only issue regarding the Programme was that the Committee had tried to cluster the tax bills to avoid officials having to fly up and down.

The Chairperson said that there was agreement that a statement would be drafted and this had been distributed to all members. He asked if there were any comments on the SAA in the statement.

Mr A Lees (DA) said that there was nothing contained there that the Democratic Alliance (DA) would disagree with, but they did think that there should be an action step at the end, and as had been discussed in the last few days, they thought the action step should be the emergency meeting that they were trying to get in place as they would be calling for an emergency meeting, and hopefully that would be on 6 September 2016. However a response had not been heard from the Minister on that date but they would like to see that action step added.

Ms P Kekana (ANC) said the ANC agreed and fully supported the contents of the statement.

The Chairperson asked for assurance from Mr Lees about a date being added. He read a part of the statement which said: 'we are presently engaging with the relevant stakeholders to look into the possibility of meeting with the National Treasury before the 20th.

Mr Lees acknowledged the input but said that they believed it should be stronger than that. He said it was phrased as if there was a dialogue taking place, which there was, but he felt there should be a fall-back position of the Committee saying: 'we are presently engaging the relevant stakeholders to look into an emergency meeting with the National Treasury and SAA to take place on or about 6 September'. He felt that there should be something a bit more robust than what was there.

Ms Kekana said that she thought it was fine. If dates were added and not adhered to then there would be problems. The framework that was put in the statement was fine as it would not put a spotlight on the dates because if those dates passed then how would one account for that.

Mr S Buthelezi (ANC) said that he agreed with Ms Kekana.

The statement was approved by the Committee.

The Chairperson said that he did speak to the Chairperson of Public Enterprises – she was on sick leave but would be back on Sunday – who also as a Committee expressed concern about the matter. Since then it would have been seen in the public domain that Minister Lynne Brown had asked the management of Eskom not to wait for the September Board meeting but to give the requested information to the Treasury. He had heard on the news this morning that had been done. He also knew that the governing party had asked the three Ministers including Minister Joemat-Peterson, to meet. This very morning on a pre-scheduled meeting, Eskom was appearing before that Committee on Public Enterprises. The Chairperson of the Committee on Public Enterprises said last night that she still felt there should be a joint meeting on the issue. He thought this was a good idea because Parliament could not pretend that these matters were not in the public domain and if these matters were not looked at, it would be seen as errant and not fulfilling its duties. He had suggested that they call a meeting which could be held as a joint meeting or they could have a meeting and this Committee could send one person from the majority party and two or three persons from the opposition to this meeting.

The Chairperson of the Committee of Public Enterprises had also asked this Committee to attend a meeting with Denel on 7 September on Denel Asia because it affected both National Treasury and Denel. It was explained to her that it would be very difficult to have joint meetings because of the programme of this Committee. However he had suggested to her on behalf of the Committee, that a small team could be sent to attend the joint meeting as it would be difficult to suspend this Committee's meeting on Wednesday.

Mr Lees said that he had also heard that the Eskom documents had been delivered, but the damage that had been done to us as an economy was enormous. He agreed with the Chairperson that this Committee could not be seen as not doing their oversight. His was a split response in the sense that the issue was split. One had Kenneth Brown's unit, which this Committee had oversight over, and there was Eskom, which the Public Enterprises Committee had oversight over. This Committee should attend the Committee of Public Enterprises 7 September on Denel. He felt that this Committee had to be robustly involved in establishing what the problems were, how they could be fixed and how one could start to restore some confidence in the state apparatus which had been so badly damaged by this particular incident.

The Chairperson said it would be recalled that there was agreement to a 7 September meeting on the tax bills. He asked Members to think about the following when they contributed: this Committee had a programme it was unable to deliver on so much so that it was meeting on Fridays and in the afternoons. He asked for guidance about the following: it was true that procurement fell under this Committees' portfolio, but now issues would come up all the time. Should this Committee suspend its own meetings so that it could go to the meetings hosted by other Committees? He asked if the Committee should do it on a case-by-case basis or have a standard approach. He was very worried about situations where the Committee took decisions, which were adopted, and then the next time it met and suddenly changed things without seeking clarity. Things could always be changed. Now on this issue it had discussed many times, Mr Lees, it was not only about the Chief Procurement Officer, there were many bills that had financial implications, and at that stage, Mr Lees, we said that that would mean half of its time would be spent in joint meetings, because everything had financial implications. It was pointed out to Mr Lees and other Members that this Committee had to facilitate a meeting so a rational explanation had to be given as to why this Committee was suddenly changing. This was discussed on the endless bills that came from all parties. This Committee had experiences were it found it extremely difficult to get joint meetings. It was recalled that this Chairperson and Mr Lees had tried for seven months to get a Committee to come and sit with Standing Committee even though there had been joint agreement about who would do the report. He asked if Members were aware of how difficult it is to get eight Committees together. He asked Mr Lees to consider a compromise that this Committee sent representatives to the meetings. One person from the ANC would go and the DA could send any number of people.

Mr Lees said that the Chairperson was simply reinforcing the position that it did not want to have to do this on a regular basis. It wanted to deal with this particular issue so as not to set a precedent for future so that this Committee did not have to get involved. It was exactly why it was important this time round for this Committee to be heavily involved to sort out the processes that lead to these kinds of interruptions in the economic progress of the state. He agreed that this Committee could not be involved in every procurement matter in every department, but there had to be working oversight over the Chief Procurement unit that this Committee had oversight over and its interactions with other departments. This relationship had broken down entirely to the point that Ministers were talking in public about it.

Mr Buthelezi said that the Committee responsible should be given a chance to deal with this matter. This Committee should also be very careful not to start presenting problems for itself.

The Chairperson said that this Committee had more powers than the Executive had over entities in some respect. Correct that the two Committees could exercise oversight over the Chief Procurement Officer and Eskom. That was what this Committee was here for. Maybe changes had to be made to the Constitution but this was something the ANC had to decide on next year.

The Chairperson noted: 1. No difference between the ANC and the DA about the gravity of the situation; 2) The difference between the two parties was that what has happened over the last 24 hours had considerably improved the situation. When he spoke to the Minister last night, this issue had come up. The difference between the two parties was what the meaning was of what had happened in the last 24 hours.
This Committee had been requested to attend the meeting but could only send representatives. It was agreed that this Committee had to look at the issue so that the lessons could be learnt from it. 3) The Committee of Public Enterprises had a very good Chairperson, moreover she was an NEC Member, and had a lot of political clout, very experienced and had been in the legislature before, they would settle the matter and this Committee would attend. The ANC committee whip would consult and decide who went and DA could send all its Members if it so desired. It was preferred that with regard to the tax issues, Mr Lees attended the Finance Committee because of his knowledge of the technical issues in this terrain. This was the programme for now and if there were changes they would be very minor.

Mr Lees asked if the Minister had been spoken to about the programme

The Chairperson said that in a very fleeting exchange his understanding of what the Minister – and he could not be held responsible for accurately representing what he said - he said he was away from Friday to Monday. He reminded the Minister that he had not come back to the Chairperson about whether he had agreed to Tuesday 6 September. The Minister said that he meant that on Tuesday 6 September he would give this Chairperson a date; and therefore was not saying that it was definitely the 6th. Hence it was left open. He said he would get the Minister to contact Mr Lees and suggested there may be some developments between now and Tuesday – that might lead Mr Lees to review his call for an emergency meeting.

There was no disagreement between Members that the issues of de-registration and the implication of the advertisement. The advertisement in and of itself was not a problem if they applied to get a loan from the markets that they would have to go through the PFMA and other regulations that would require the Minister's approval.

Mr Lees said that the DA would really like to have meeting on Tuesday, but understood that much of what was done in life could not be controlled. There was a great deal of concern from Ministerial to Committee level, so he thanked the Committee for the attempts that were being made.

Financial Sector Regulation Bill [B34-2015]: deliberations
The Chairperson asked Ms Gibson how far the Committee had progressed with the Bill.

Ms Kathy Gibson, Chief Director: Market Conduct, National Treasury, said that the Committee had reached Chapter 4: Financial Sector Conduct Authority and started on Clause 58(1).

The Chairperson agreed the Committee stopped at 58(1) and he noted that 58(2) was not clear. He asked Members if they wanted to comment on 58(2). He then asked for an explanation of 58(2).

Chapter 4: Financial Sector Conduct Authority
Clause 58(2)

Mr B Topham (DA) said that the statute was discussed briefly and Treasury was going to clarify Section 108, and that there were improvements to this clause.

Ms Gibson said that it on this particular issue it would be very useful to get guidance from the Chairperson on when he wanted Treasury to cover a particular issue. Treasury had been given two weeks and had co-ordinated with the Department of Trade and Industry and had its position. They wanted to make sure that they gave adequate preparation to that so if the Committee wanted it to be circulated or should it be done 'cold'.

The Chairperson asked Members how they wanted to do this and if they wanted to deal with the text first. He asked Treasury to deal with Mr D Maynier (DA) because he was not present. He was unapologetic about what he had said to Mr Shivambu as he said this to his own colleagues. Nobody was special here. Mr Maynier was no different to anybody else. He knew what Mr Maynier was going to do. These discussions could not be co-ordinated by asking Mr Maynier if he was free. Mr Maynier should be given the minutes by PMG. His behaviour was not going to be entertained so he had to be spoken to.

The Chairperson asked why it was that the Credit Regulator was not included in this dispensation; why was a separate Credit Regulator needed. He asked further if it was true that the Credit Regulator and or the Department were unhappy with the provisions here. A lot of this had been covered already.

Ms Gibson said that Treasury had prepared a presentation on the section, which talked to these issues as well. Broadly speaking and taking a step back there has been a lot of discussion about the role of the Credit Regulator relative to the Conduct Authority and the Prudential Authority. Significant engagement had been taking place between the respective departments and the Regulators in terms of that co-operation and co-ordination. It was a misnomer to say that the Credit Regular was not under 'Twin Peaks'. The Credit Regulator was firmly under 'Twin Peaks' brought in through the described relationships in terms of how these respective agencies operated.

The question was whether the two agencies, specifically the Conduct Authority and Credit Regulator should merge. Treasury had taken the view between departments that at this stage that would not be appropriate on the grounds that broadly speaking the Conduct Authority had a lot of work to do in setting up a new agency anyway. The Credit Regulator was an operating agency. The two agencies in the way that the Treasury agencies operated, even in terms of whether they could take their own enforcement action for example, how appeals were heard, it was currently very different to how the DTI agency operated. So to merge those practically speaking would be an incredible hurdle, not to say impossible. This was not to say that over time it was something that the Treasury could work towards, but this was for now, the present was being spoken of. So what the Treasury would speak through here was what it had provided for in terms of the 'Twin Peaks' Bill. There is the question on whether the Treasury had gone far enough, and that is then open to debate.

Starting with the agreed principles for regulating the financial sector, and these were the underlying principles between the two departments, providing for proportionate risk based system-wide approach to regulating the financial sector, to level the regulatory playing field. In other words saying that if one was a credit provider who was a bank versus a credit provider versus a credit provider that was a non bank, - which could be a retail or a corner store, your regulatory obligations would be commensurate to the risk being brought into the system not just the fact of if one was a bank or non bank.

Minimising fragmentation and regulatory silos was obviously a main priority area to support and strengthen co-ordination mechanisms between the respective agencies; and then of course operational independence. And this was not just a priority in terms of the Conduct Authority and the Credit Regulator it was an instilled principle across each of Treasury's agencies provided for within the 'Twin Peaks' Bill. Yet recognising operational independence did not mean that agencies could operate completely outside of a policy framework. That policy framework needed to be clearly spelt out in the governing law.

The achievement of the objectives – again these were general twin peaks principles and again bringing the Credit Regulator under this umbrella - the achievement of objectives of one regulator should not be at the expense of achievement of the other. So if one was achieving stability that should not compromise consumer protection or conduct.

Minimising the potential for regulatory overlap or underlap – this had also been one of the main areas of contention - meant that if one had regulators which are in effect regulating the same underlying entity how do we make sure that we donot duplicate, conflict or miss something all together and someone slips between the cracks.

Based on those principles this was what had been agreed in terms of how those principles got translated into the Bill. The Reserve Bank and the Prudential Authority should regulate credit providers for stability safety and soundness, with the intensity of that oversight on a risk basis. The Credit Regulator and Conduct Authority would both regulate credit providers for conduct, but they did so in different ways and with a different focus. The Conduct Authority will complement and support the actions and the role of the Credit Regulator. So how was this given effect to? The Conduct Authority in addition to this – because the Treating Customers Fairly (TCF) approach went wider than just looking at the product - would also sit with the Prudential Authority. This was then given effect through multiple different clauses. Respective departments have agreed to the drafting of these clauses.

Ms Gibson paused and asked if the drafting was necessary to go through at this stage, but it affected the definitions of credit, financial product, financial service as well as the section that was being discussed, section 58(2), and then the standard setting powers. She asked for guidance as there had been agreement to give effect to the principles raised, was it necessary to go through the clauses at this stage.

The Chairperson said that the Committee could deal with the drafting, and asked the Department of Trade and Industry (DTI) if it agreed or disagreed.

Mr Siphamandla Kumkani, Director: Credit Law and Policy, Department of Trade and Industry, said that the DTI agreed in principle with the document that had just been presented. Both departments together with their respective regulators had worked on this document. With regard to the issue of drafting, this will only be worked on to ensure that it tallied well with the policy imperatives.

Ms P Kekana (ANC) asked if the National Credit Regulator was going to be included in the Twin Peaks Bill. She asked if this meant that it would still exist and had to comply.

Ms Gibson replied that there been contention about the literal interpretation of Twin Peaks, which meant of course that there were two peaks. There was also a Twin Peaks framework, which was more a functional responsibility, so the South African Reserve Bank (SARB) had a functional responsibility for stability for all the sectors. The Prudential Authority had the functional responsibility for safety and soundness for the whole sector and the Conduct Authority again for the whole sector. Yes, the Credit Regulator would be sitting alongside, not merged but aligned. So what Treasury had to work hard to do was that given that it was looking for the cross-sectoral approach, was that it had a common and harmonised approach across the sector. So in this case it was not about whether a bank or non-bank was being referred to, if one was bringing risk to customers, similar regulatory obligations had to be faced. What was described here was how Treasury intended those regulators to work together within the Twin Peaks framework. The issue was about the monitoring that was required because Treasury wanted to ensure regulatory effectiveness.

Mr Topham said that he felt the NCR (National Credit Regulator) should fall under this framework in the future. The existing system did work, part of the reason for this clause; and the motivation for this piece of legislation was to harmonise and collaborate and for co-operation to happen under one heading, so everyone agreed that the NCR should fall under this framework in the future, if not now. For practical reasons it has been excluded. The DA was not 100% on board with that motivation, and it was almost like there was a silo. But for now going forward if have one entity was subject to multiple regulators, which was the purpose of this Act, one had to look at bringing it to conclusion sooner rather than later.

Mr Kumkani (DTI) said that in the Bill, the DTI had provided for a chapter on co-ordination. This chapter provided an indication of how the respective regulators would co-ordinate and ensure that there was effective regulation. Hence there was no confusion as to how the different regulations should be working. This was an agreement, which had been taken from a policy point of view, and as the drafting proceeded it would become clear how it was going to work. There was a similar provision in section 17(4) of the National Credit Amendment Act in relation to the register of banks. This was working very well.

Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy: National Treasury, said that if there was a start from scratch, the preference would have been one harmonised system. One had be clear what was the optimal; even with Twin Peaks there had to be a phased approach, but certainly down the line there were risks that happened. On the one hand the prudential risk could be dealt with – which would be done solely by the South African Reserve Bank. When it came to market conduct, the NCR was not as tough as it should be. There were many weaknesses. Co-ordination had to be more effective around clear issues. The market conduct required that the industry behaved. There had been a big weakness on the credit side where there had been too much reckless credit. There were a number of mitigating mechanisms, but the question was, did this go far enough. This was a workable compromise although not ideal but it reflected reality.

Ms T Tobias (ANC) said that perhaps this matter would be resolved when one looked at the policy imperatives that addressed co-ordination because then it would close the gap of tightening the belt either on the role the banks were playing – reckless lending – or generally looking at market conduct. Perhaps when looking at the policy on co-ordination, one can engage more. Co-ordination was emphasised because those meetings were difficult to co-ordinate on reporting standards and there would be many different approaches when dealing with market conduct. It was very important how co-ordination was done in this process.

Mr Topham said that everyone was saying the same thing, but the words 'workable compromise' were very important. Because it would have been quite easy to leave the working authorities separate with a chapter in the legislation for compromise, but the NCR have got away with it, with what might call a temporary pass. Bring all the regulators under one body so there would not be a need to send a motor boat to another island when there were compromising questions. The understanding was that this was a temporary workable compromise but it was not ideal for the long-term future.

The Chairperson asked if the NCR was present in the meeting today.

Mr Kumkani said that unfortunately the NCR was not present, as it had to attend another Committee meeting. He assured the Committee that what had been agreed to here, NCR had been a part of.

The Chairperson said that this had been identified as a theme and he did not see any new issues emerging, so unless new issues emerged the meeting was more or less done with this issue. It should however be remembered that there was a strand of opinion out there from civil society, there were organisations out there who felt that the NCR should not be drawn too tightly into this dispensation. He said that the meeting should be reminded why this was raised.

Ms Gibson said that the concern raised was that the Credit Regulator was taking tough action on banks, and therefore in protection of those banks the Reserve Bank through Treasury was exploiting the Twin Peaks framework to bring in the Credit Regulator and absorb it into the Conduct Authority so that it could take softer action on banks. She said that obviously this was not the view of Treasury.

Mr Kumkani said that another issue was the avoidance of 'forum' shopping. One wanted the legislation to be clear under the Twin Peaks to say in respect of credit, the NCR would definitely, in co-ordination with the Market Conduct Authority, be dealing with credit related issues.

The Chairperson said the oversight of the banks by the Credit Regulator would be as effective as ever, it was even strengthened by what was presented here, the Market Conduct Authority would work with the Credit Regulator, and together they would exercise greater oversight. This thing about having effective oversight over the banks, in the interest of poor financial customers generally was a major thing, which across political parties there was agreement on.

Ms Tobias said that the current National Credit Act as it stood addressed all the fears on oversight.

The Chairperson said that there had to be clarity that what was being done here strengthened oversight over the banks in the interest of the poor and the financial customers. He did not really have a view on the matter and felt that what had been done in this meeting was fine. This was the first time that there was this level of concurrence between the two departments. There was a need to ensure that together the Market Conduct Authority and the National Credit Regulator were far more effective in the new model than the situation had been until now. He asked from Ms Gibson three or four arguments why the new system strengthened oversight over the banks and then this could be inserted into the Committees' report after the Researcher worked on it before it was given to the politicians to make final decisions on. In its report to Parliament, this Committee had to be very clear that the new dispensation – unless we were challenging what the two of them were saying – actually strengthened the Credit Regulator.

He noted the Johannesburg Stock Exchange (JSE) had come with another submission. The Committee has reached a stage where the broad approach was now set out. The JSE would be given a chance to respond but it would have to be in writing. As the JSE had come in, he asked the Committee if JSE should be given time to make a submission. This was entering a stage of co-legislation as everyone had been given a fair chance. The submission from the JSE had arrived yesterday and he asked them why they had sent it only yesterday.

Mr Louis Cockeran, Legal Counsel: Johannesburg Stock Exchange (JSE) apologised that the submission had been sent late. They were under pressure and had only received the revised working draft of the Bill during July and the regulations so they had to comment on what they had received. The version that was received in November had been commented on. There had been four principle concerns that were raised then, and since that time it had productive discussions with Treasury and had reached consensus on most of those issues. There were however three remaining issues of principle, the one being the exemption from issues of licensing it had presented in November. It was thought that this might have been taken out of the Bill, but unfortunately it has remained in Section 49A

The Chairperson interjected and asked the speaker to wait and asked why the submission only arrived yesterday because Treasury had distributed the revised Bill extensively. This meant that the JSE had six weeks to process this. He asked again why the submission was sent yesterday, and why did the JSE turn up here today.

Mr Cockeran apologised again and said that if the Committee needed more time to work through the submission then the JSE could return later.

The Chairperson said that the JSE would be allowed to address the Committee. He asked the Committee Secretary to let him know in future if people from the industry requested to address the Committee. There would not be any formal oral submissions any more. The JSE was free to discuss with Treasury, but even if they both agreed on a matter, this did not mean that Parliament would agree.

Johannesburg Stock Exchange (JSE) submission on principled issues
Mr Louis Cockeran, JSE Legal Counsel, said that he was pleased that this was prefaced by the discussion on systemically important financial institutions (SIFI) and the 2008 crisis because this was the very concern that the JSE wanted to raise with this Committee. It had been raised with Treasury who had disagreed with the JSE on this point.

Dealing with the exemption of external or foreign Central Counter Parties (CCP) from the requirement of being licensed, Section 49A said that if one was an external counter party, one had to be licensed unless one was exempted from being licensed. This was an exceptional type of clause, and especially in relation to a central counter party which was a systemically important market infrastructure and financial institution that interposed itself between market participants and the market. So one would not know with whom one was trading on the market but the CCP interposed itself, and that CCP insured the performance of obligations would take place.

All important financial institutions had to be licensed before they could conduct business in South Africa. Any breach of this position would be an offence. Saying this was not only a requirement of process but also one of substance. If any entity was exempt from licensing this was an important policy shift. This meant that an important cornerstone of financial marketing legislation was being changed.

It was felt that this offended against the rule of law, which stated that statutes had to find equal application to all participants that conducted the same type of business. It would introduce unfairness in the markets and lead to unlawful and unfair competition that permitted external parties to provide the same services as local parties that had to meet the South African requirements. Treasury has responded on pages 152 to 153 in its matrix.

The Chairperson asked if the JSE could shorten their submission and how much more time they required.

Mr Cockeran said that the presentation was near completion. He continued and said that with the exemption provision, Treasury has noted that they were going to change Section 6(3)(m), but that dealt with the manner in which it was drafted. In conclusion, the JSE said that an exemption in itself for this kind of statute in the end could never be lawful.

Discussion
Ms Tobias said that she strongly held the view that trade liberalisation should not create barriers to entry in any market. When dealing with trade liberalisation, one should be able to incentivise investment. If one wanted protectionist laws then investment would be limited. She believed that the gist of the matter here was more about the JSE wanting to be exempted from licensing. The Committee had looked at the clearinghouses in the UK and had not seen anything different from what South Africa wanted to do.

Mr Topham said that the issue was regarding licence cancellation or rather those entities, which the JSE regulated. JSE was saying that this Act allowed the Prudential Authority to effectively give a licence to a trading house in Switzerland to trade here without a licence. This was unlikely but the JSE was saying it should not be allowed to take place.

Mr Buthelezi asked what was the risk the JSE wanted to mitigate by not wanting them to be licensed here.

Mr Buthelezi referred to Treasury and asked if one was licensed in another jurisdiction, why do you think they should not be licensed here?

Mr Cockeran replied that the JSE did not have a problem with being classified as a systemically important financial institution (SIFI) and it would assume all those responsibilities. They were also a licensed clearing house and central counter party and would remain one; JSE would also restructure its business to become an independent clearing house and CCP as stated in the new Act. Its issue was that it believed as a matter of policy and principle, the type of legislation in the Financial Markets Act or any type of SIFI legislation granting an exemption to a specific party could never be lawful and would lead to disastrous economic consequences and this was the problem. The JSE was saying if they had to be licensed and banks had to be licensed, then everyone that conducted business in South Africa should be subject to those same requirements. It was not lawful to exempt one specific entity from those requirements. The JSE was not saying that it did not want to be licensed; it was saying that it wanted to compete on a level playing field.

Ms Tobias asked what law would be contravened when that was done.

Mr Cockeran replied Section 49(a)(1) in its last sentence says 'an external counter party must be licensed under this section to exercise functions as prescribed, unless it is exempt from the requirement to be licensed

Ms Tobias said the JSE had said it would not be lawful to exempt so she wanted to know which legislation would be contravened.

Mr Cockeran said it would be in the Constitution and the rule of law.

Ms Tobias interrupted and asked which section of the Constitution.

Mr Cockeran said he could not remember the specific section, but it was the rule of law that a statute had to find equal application to all persons regulated by it. Adv Jenkins would be better placed to remember the precise section in the Constitution.

Mr Topham asked where an exemption was granted in the Bill.

Mr Cockeran said it was not so, but it was in the schedule as a consequential amendment to Section 49 in the Financial Markets Act by the inclusion of Section 49A(1).

The Chairperson explained that to have the schedules included in the Bill would have been too thick, so it was split into two to facilitate processing.

Mr Cockeran said in answer to the question that was the big boss or higher authority: The JSE agreed that the Prudential Authority and Conduct Authority should always have the financial say. The JSE was not saying that it should have the final say. The issue arose as follows: example – there was a clearing member who was also a large bank; the bank defaulted in our market; it would be very important to close the bank's position down; and to transfer the assets held on behalf of the clients to another bank or another clearing member who was not in default. The JSE had to be in a position to take immediate action. If one read the provision of Section 31(1) read with the definition of a licence, it might argued be that the if the JSE was suspending that member from trading they were varying that clearing member's licence or the authorisation, and to do that the JSE would have to get that approval of the SARB. In this instance time was of the essence. SARB may say it did not want this message to go out to the market; it wanted to keep this bank in the market and not suspend it. But that in turn would lead to more losses on the market, because there would be this insolvent entity. So then to get concurrence, the JSE would consult with SARB, inform SARB but in a crisis situation, or in a matter of default in the derivatives market, what was of critical importance was to close that member down and get that member out of the market forthwith. The problem the JSE had with that was that it was not saying it would suspend the licence of the bank, that it would sequestrate the bank. The JSE was just saying that as the market regulator, it had to get that entity out of the market. The final say about the liquidation of the bank and so forth, had to remain with SARB. But to solve the crisis on the market the JSE believed it was appropriate for the relevant CCP to deal with that matter.

Ms Tobias asked if this could be parked because she wanted Members to apply their minds to this.

Mr Topham said that South Africa could not be the only country in the world that was on this harmonisation Twin Peaks model. The JSE had to give a more detailed submission about what the effects of this would be. One would not want to adopt this Bill and take away their power to do what they had to do but it was not in the JSE submission what the consequences would be.  If they did not have the power to exercise their mandate as a stock exchange, then that could have other ramifications.

Mr Cockeran replied that, yes, indeed, JSE discussed this in the submission and with Treasury but in such a case this had to be dealt with by the Governor of SARB directly, and the JSE would engage with the Governor, it had just thought it best to highlight this problem, and the JSE was in the process of discussing this with the Governor to get some form of agreement or concurrence about the manner in which it would deal with those crisis situations.

Ms Tobias asked the Chairperson if he saw a reason for this matter to be flagged as he could have a different opinion. They need to formulate a solution that assisted everybody. Also to re-look at when there was an institution that was defaulting whether one was going to freeze their assets or if it was liquidation. The Committee would apply its mind to this. She suggested flagging it and as the Committee engaged with Treasury, that could be raised. The three matters had been cleared so there were these two so the Committee would pay attention to that. Let them shape it together and find a way. They need more information and the view of the Competition Commission. Incentives was an issue that came in differently in a way. They could apply their minds and then respond to the JSE.

Mr Momoniat said he wanted to say what he had said to the JSE the last time: 'we are not here to defend their monopoly and we are not here to do their bidding'. The problem here was – and this was why he only dealt with their boss – firstly the delegations were different.  Secondly some of the provisions that the JSE was objecting to were not new. It was a case of new person, new objections. And further they could not accept that Treasury was not going to agree with them. It was surprising for them to start questioning equivalence between different regulators overseas. That was standard practice and he was shocked that they would raise it. If one took the provision of SARB coming in; this was an old clause, why was there a new objection now. On SIFI and exemptions, they demonstrated ignorance about current laws like the Bank Act where there were exemption provisions. The JSE was just slowing down our process. Treasury was open to discussions with the JSE, but they should be open to accept there were differences on certain matters. He had a problem with their process and their approach.

Ms Tobias said that when trade was being encouraged, one is not going to introduce protectionist laws for the local institutions that were going to create barriers to entry. That was a fundamental matter, and it was a policy issue, and it was being questioned here. It was a policy position and this could not be discussed here. It was the policy of the ANC that we cannot create barrier to entry.   The Committee wanted to give the JSE the benefit of the doubt. It had to present a scenario and show which section of the Constitution was being contravened; or any other legislation that had been adopted by Parliament so that this could be considered because fairness to everyone had to be promoted. But here normative statements were being dealt with. There were no facts on the table. It will be considered if there was a scenario put forward which has been tested, it would be considered.

Mr Topham suggested when the consequential amendments were done,

The Chairperson said that there was agreement with Ms Tobias's proposal. There was nothing stopping the JSE from writing to the Committee. He did not think it was correct, whether civil society or industry, to come with different individuals each time, and say different things. With all these crises, the ANC was concerned, but there were time constraints. There was agreement that this was a theme. He thanked the JSE for coming but said sort out your act. If people could bear to talk to each other, it would be a great help. But it was made clear that neither industry nor government had the final say, Parliament had the final say. And if a decision was taken, it was not going to be at whim. They might have to request the Speaker’s sanction to get some independent assistance from outside. But ultimately no Bill was done in the vested narrow interests of any one sector, be it workers or capital. The JSE was thanked and told that the Committee would consider any further proposals, and if necessary the JSE would be invited back but only at the last stage.

Working draft of the Financial Sector Regulation Bill [B34-2015]: deliberations continued

Chapter 4: Financial Sector Conduct Authority
Clause 58

Ms Gibson said she needed to check because Section 58(2) was approved but she wanted to confirm if the Committee wanted to go through subclauses 3, 4, 5 and 6.

The Chairperson agreed that these should be gone through.

Subclauses 3, 4, 5 and 6 were considered fine.

Clause 60
The Chairperson asked why those words were removed in subclause 3.

Ms Gibson said it was now dealt with in Clause 66.

The Chairperson asked what sort of authority was referred to in subclause 3(b)(ii).

Ms Gibson said that it would work differently from the Prudential Authority to the Conduct Authority and vice versa. There were areas of overlapping interest so it could be for example governance requirements that were set by both which could be through joint standards, but could also be through a delegation.

The Chairperson asked for a concrete example for a politician in the real world – what sort of delegation?

Ms Gibson said from the Prudential Authority to the Conduct Authority, it could be prudential oversight on asset managers for example, a hedge fund; where the Prudential Authority might consider there to be a prudential risk from that fund. The Prudential Authority may want to set standards to deal with the prudential risk brought by that fund, but rather than be a front line supervisor, because the Conduct Authority had primary interest in the asset management world, it might make sense for them to be doing the front-line supervision.

Subclause 3 was removed.

Ms Gibson said that this section was saying that for all the powers of the Conduct Authority, most of those powers could be delegated down. The Executive had to perform those particular functions

The Chairperson asked for clarity about the 'fees' referred in subclause 3(b)(viii)

Ms Gibson replied that it meant that the Committee itself would be responsible for the fees as may be determined.

The Chairperson interrupted and asked for an example of the sort of fees referred to. The Chairperson said that the question was not what the meaning of the clause was, it was a concrete one; what sort of fees?

Mr Momoniat said that putting the clause there meant that only the people right at the top of this authority would make this decision.

The Chairperson said that in that sense there was agreement, but the question actually came later as to what was meant by fees.

Mr Momoniat said that it was being done in phases at the moment because there were all kinds of fees in terms of each of the acts so that was how it was determined. There was a short chapter at the end on fees, but hearing the discussion last week, and this had to be read with the PFMA as well because the body's budget and strategic plan would apply. So it was not like obviously the Prudential Authority, which was out of the PFMA. In these things there had to be a proper process when fees were determined. This had to be included in the law when this stage was reached. With regard to the specific fees, Treasury could outline what was there currently. Treasury's approach was that there were fees and also levies. He asked Ms Ferreira to explain matters from the insurance side.

Ms Jo-ann Ferreira, Head of Department: Insurance Regulatory Framework, Financial Services Board, said it was fees for various applications that regulated entities had to make. An exercise was done to see the time spent on a particular activity then multiplying that time spent by the cost of the staff in doing this. This was how the fees were calculated.

The Chairperson said that the clause was fine but the actual fees issue came up later, and it one of the Committee's 12 themes. The Committee wanted to look carefully at the fees and levies structure. The Committee did not want the fees to disadvantage new emergent players. The Committee would not budge on this. There was no disagreement here.

Chapter 4: Commissioner and Deputy Commissioners
Clause 62

On 62(1)(b), the Chairperson asked if the reference was correct.

Ms Jeannine Bednar-Giyose, Director: Financial Regulation and Legislation: National Treasury, said in the latest version it was 60(3).

Ms Gibson said that Clause 61 had been signed off.

The Chairperson asked what the issue was with 62(2).

Ms Gibson said it was just a correction because it was talking about 'assign'. It was using better language.

Clause 66
Ms Tobias proposed that 'any other relevant schemes' should be added in subclause 5.

Ms Gibson said that this was included in the wording.

Clause 68
Ms Gibson said that that 68(1) was changed to improve the reading of the clause.

The Chairperson asked Treasury to check and see if 68(3)(b) and 68(3)(d) were consistent.

Ms Bednar-Giyose said that 68(3)(b) was merely requiring that the sub-committee could not be made up of a majority of staff members of the Conduct Authority' but 68(3)(d) was allowing additional other people to be on the sub-committee who would not be either members of the Executive Committee or staff members.

The Chairperson asked Mr Kamlana from the South African Reserve Bank who he had not seen in the meeting initially what he thought about the input from the JSE.

Mr Unathi Kamlana, Deputy Registrar of Banks: South African Reserve Bank, said that he thought it was a classic case of cutting off your nose to spite your face. Regulatory decisions were very important for financial stability and financial instability. So if they were made in a vacuum, without another organ like the SARB who had a mandate for financial stability - if you pursue your objective at the expense of financial stability - the next day one would not have any mandate to pursue. That was why there was that concurrence of reason. It was there to protect the stability and not sacrifice for the sake of technical correctness. The SARB position was made clear, but the JSE had indicated that it wanted to speak with the principals of SARB.

Chapter 4: Regulatory strategies
Clause 70

The Chairperson asked for an explanation of regulatory strategies in 70(2)(a) and guiding principle in 70(2)(b).

Ms Gibson said that it had to explain how it would exercise its mandate in practice and be specific in identifying what those priorities were from a sector perspective. The jurisdiction kicked in from day one, but there was not an existing sectoral law that there was no binding requirement that for example, a customer had to be treated fairly, those would be the standards that were developed.

Ms Ferreira (FSB) said that it was useful to add that treating customers fairly went beyond regulatory compliance requirements. There was quite a formal consultation process contained in the Bill around standards as well.

Clause 71
Ms Gibson said that issue was the 'delegation by resolution’ had been changed. Treasury had disagreed with the submission comment and felt that the delegation powers had been described adequately.

Ms Gibson requested an additional correction in 71(2)(b) which referred to 'a delegation to an administrative action committee the power to impose administrative penalties'. That was a delegation under sub-section (2b) to the Commissioner; Treasury would prefer that it be given to the Executive Committee.

Ms Tobias asked if there were powers only for the Deputy Commissioner or some only for the Executive Committee.

Ms Gibson replied that Section 60 described what powers resided with the Executive Committee itself.

Ms Tobias asked if there were powers that resided specifically with the Deputy Commissioner and were not necessarily Executive Committee powers.

Ms Gibson said that all the Conduct Authority powers would go through the Commissioner unless otherwise specified. So those powers that resided with the Commissioner could be delegated down.

Clause 72 Disclosure of interests
The Chairperson asked why the word 'material' had been dropped.

Ms Gibson said that it was dropped in the interest of disclosure. It should not be left to discretion, given the importance of the matters at hand.

The Chairperson asked what had happened in 72(6)(b).

Ms Gibson said that this was just an improvement of the grammar.

The Chairperson said that Clauses 73, 74 and 75 were fine. Chapter 5: Co-operation and Collaboration would be dealt with on Friday 2 September.

The meeting was adjourned.

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