Financial Sector Regulation “Twin Peaks” Bill: deliberations

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Finance Standing Committee

06 September 2016
Chairperson: Ms T Tobias (ANC) (Acting)
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Meeting Summary

The Department of Treasury, the Reserve Bank, and the Financial Services Board deliberated with committee members on the Financial Sector Regulation Bill. Starting from Chapter nine, the deliberations centred on legal professional privilege, on-site inspections, change of ‘designated authority’ to ‘the responsible authority,’ rational exercise of discretion by the responsible authority in searching premises, need to follow due process in obtaining search warrants, replacement of ‘reasonable force’ in clause 137 (7) with ‘reasonable measures,’ and need to prevent conflict of interest by investigators.

The meeting also deliberated on the need for self-incriminating statements not to contravene constitutional guarantees on fair hearing. In response to a member’s concern, Mr Gerhard van Deventer from the Financial Services Board explained that refusal would only be a criminal offence where there is an obligation to respond. A Treasury official explained that the framing of interpretation ruling in clause 141 gives regulators flexibility in their enforcement powers. A member expressed concern at a financial institution’s options if it disagrees with a ruling. Another sought clarity over the prudential authority’s powers to issue directives. Treasury officials explained that statutory requirements of financial sector laws override MoUs.

Regarding debarment, Advocate Jenkins noted that it is only statute that gives individuals standing in the courts. Other issues deliberated on include addition of due diligence to clause 155, changes to the meaning of ‘significant owner,’ and insertion of 15% of the members of the governing body of a financial institution in clause 157 (2).

Neither committee members nor groups that had commented on the Bill such as the Banking Association of South Africa and the Association for Savings and Investment expressed any reservations or dissent with the Bill.

Meeting report

The Acting Chairperson apologised on behalf of the Chairperson and noted other apologies. She began deliberations on the Financial Sector Regulation “Twin Peaks” Bill (Bill) from page 61 of chapter nine.

Deliberations on the Financial Sector Regulation Bill
The Acting Chairperson called for comments on clauses of the Bill.

Chapter 9 – Part 1: Application and interpretation
Clause 130
Mr Gerhard van Deventer from the Financial Services Board (FSB) explained that legal professional privilege, as amended in the Bill, means that person does not have to answer a question asked, or comply with a requirement to produce a document or information if that person is entitled to claim legal professional privilege in relation to the answer, contents of the document, or the information sought.

Ms Rosemary Lightbody, Association for Savings and Investment South Africa (ASISA) senior policy advisor, expressed ASISA’s satisfaction that all the issues they raised have been addressed.

Part 2: Information gathering
Clause 131
The Acting Chairperson sought to know the meaning of apparently in clause 131(4)(b).

Mr van Deventer explained that the clause gives an on-site inspector room to consider the situation, consider who is in charge, and make necessary adjustments.

Part 4: Investigations
Clause 134
Mr van Deventer noted that there are safeguards built into clause 134 to ensure that investigators do their work properly. He also noted that the key issue to watch out for is conflict of interest. He stated that the ideal practice is to appoint an internal investigator.

The Acting Chairperson commented that members do not seem to be opposed to the Bill.

In response to this comment, Mr D Maynier (DA) remarked that the controversial clause in the Bill is clause 140.

Clause 135
Mr van Deventer, proposed a change in clause 135 (2) from ‘designated authority’ to ‘the responsible authority’ and members agreed.

Clause 136
Mr van Deventer noted that the wording of clause 136 is in line with standard practice on what constitutes reasonable time and working hours to enter premises.

The Acting Chairperson remarked that many Ponzi schemes are fraudulent.

Advocate Frank Jenkins, Senior Parliamentary Legal Advisor, stated that discretion on the part of the responsible authority in searching premises must be exercised rationally in order to prevent legal challenges and defend against legal challenges.

Mr SN Buthelezi (ANC) noted that there is a lot of power abuse in Ponzi schemes.

A member stated that discretion on the part of the responsible authority has to be rationally applied.

Clause 137
Regarding the powers of investigators to enter and search premises, Mr van Deventer pointed out that clause 137 (1) has been redrafted in line with recent judgments to input the need for an investigator to obtain a warrant. He further noted that warrants can be obtained fairly quickly.

The Acting Chairperson proposed the replacement of ‘reasonable force’ in clause 137 (7) with ‘reasonable measures.’

Mr Buthelezi noted that reasonable measures include force. He stated that the Bill is vague regarding the critical issue of who can be appointed as an investigator.

Mr van Deventer suggested that this can be remedied by adding that an investigator cannot be a disqualified person (example of unsound mind) and must have no conflict of interest.

Clause 138
In relation to issuance of warrants under clause 138, Adv Frank Jenkins, Parliamentary State Law Advisor, stated that the power to issue warrants should follow high court precedents.

Mr van Deventer stated that judges or magistrates must not issue warrants outside jurisdiction.

The Acting Chairperson asked members to agree on the jurisdiction of warrant issuance.

Part 5: Incriminating statements
Clause 140
On Part 5 concerning incriminating statements, Mr van Deventer explained that the present amendments restrain an investigator from insisting on answers that may incriminate the maker.

Mr B Topham (DA) stated that the question of incriminatory statements is sensitive.

Mr Topham responded that the concerned clause could fall foul of constitutional guarantees on fair hearing with respect to self-incrimination.

Adv. Jenkins stated that there is a similar clause on people who testify before parliamentary committees. Clause 138 must be consistent with the Constitution.

The Acting Chairperson stated that the issue seems to be informing or warning the maker of a statement about self-incrimination. She wondered what an excuse for refusal to make a statement could be lawful.

Mr van Deventer replied that lawful excuse means a legal or lawful reason for refusing to make a statement. Examples are right against self-incrimination and legal privileges.

A member wondered whether a refusal to answer a question could constitute a criminal offence.

Mr van Deventer replied that refusal would be a criminal offence where there is an obligation to respond. People are warned of their rights regarding self-incrimination. There might be a similar provision in the Criminal Procedure Act. Legal opinion was sought on self-incrimination.

Chapter 10
Part 1: Guidance notices and interpretation rulings
Clause 141
Mr RA Lees (DA) sought clarity on the purpose of an interpretation ruling in clause 141.

A female delegate from Treasury responded that the clause gives regulators flexibility in their enforcement powers.

The Acting Chairperson asked members whether they prefer a clause by clause review, considering the extensive amendments to the clause.

Responding, the delegate from Treasury identified the key issue in interpretation rulings as concern that the regulator’s interpretation of a law could in itself become law without passing through proper regulation making process, which involves consultations and feedback. The amendment seeks to provide clarity for financial institutions and regulated entities as to how a regulator would interpret the law and take action.

Mr Lees asked about the consequences of ignoring a clarification ruling.

The delegate replied that ignoring the ruling is not a contravention of the Bill. However, the concerned financial institution would be running the risk that the regulator would interpret the original provision, upon which the ruling was based in the manner in which clarification was sought and ignored.

Mr Lee wondered whether the regulator would not be applying the law to a hypothetical situation.

Mr Jonathan from Treasury explained that the clause seeks to provide clarity on how the regulator applies existing law or regulates standards rather than to enable the regulator to make law.

Ms. Jo-ann Ferreira from Treasury added that the clause seeks to prevent ambiguity. She gave the example of encumbrance in insurance.

Mr Lees agreed that the clause provides clarity. He however expressed concern at a financial institution’s options if it disagrees with a ruling. 

The Acting Chairperson stated that from her understanding, interpretation rulings are more like notices. If they are regarded as rulings, then they become law.

Mr Lees tried to restate his concern about a ruling concerning an unclear regulation. The Acting Chairperson interrupted to clarify his concerns. Mr Lees insisted that he has a right to speak, to which the Acting Chairperson replied that she can restrict members’ rights of response to avoid dragging a particular issue unnecessarily. She stated that Mr Lees’ interpretation of the clause is incorrect, to which he replied that she cannot rule on the validity of his opinions.

Ms. Jo-ann Ferreira stated that consultations are undertaken with industry stakeholders with respect to rulings made by the responsible authority.

Part 2: Directives of financial sector regulators
Mr Topham sought clarity over the prudential authority’s powers to issue directives.

Mr Unathi Kamlana, SARB Deputy Registrar of Banks, explained the ambit of the prudential authority’s powers.

Mr Lees wondered whether it is necessary to have an undertaking accepted by a prudential authority if it is already an enforceable undertaking.

A delegate from Treasury affirmed that it would be unnecessary in a practical sense.

Part 3: Enforceable undertakings
Mr Lees sought clarity over failure to comply with the requirement to draft and publish the Memorandum of Understanding (MoU) between regulators and financial institutions.

A delegate from Treasury explained that statutory requirements of financial sector laws override MoUs.

The Acting Chairperson sought to defer discussion on Directives by Financial Sector Conduct Authority until Mr Carrim returns.

Part 4: Court orders
Treasury officials agreed to revisit the clause dealing with compliance with financial sector laws.

Mr Buthelezi wondered if it is not incumbent on a regulator to ensure that there is compliance with all the laws of the country rather than only financial sector law.

Adv. Jenkins noted that it is only statute that gives individuals standing in the courts. Currently, no law allows someone to obtain an interdict from Parliament to prevent something from happening – e.g. to enforce a contract or challenge a regulation. The Constitution gives everyone access to the courts. A court in a constitutional democracy will be reluctant to say that a litigant has no standing. Thus, there is nothing wrong with clause 152 as it is.

Part 5: Debarment
Regarding debarment, the Acting Chairperson asked how a ‘person’ is defined.

Ms Kershia Singh replied that it is a natural person. She suggested that the clause may be amended to specify person as a natural person.

Regarding the location of persons under clause 155, Mr Buthelezi noted that requirements for change of address are standard.

Mr Lees asked what happens when the responsible authority cannot locate a person. What tests apply for failure to locate a person?

Ms. Singh requested examples of debarment when a person cannot be located.

Mr van Deventer suggested that a stipulation for due diligence could be added to clause 155 such as ‘reasonable efforts.’

Part 6: Leniency agreements
Clause 156
Regarding leniency agreements, Mr Topham asked whether there is need to ask a prosecuting authority to ask for leniency.

Mr van Deventer noted that his office’s work is purely administrative. It does not usually involve criminal prosecutions. In response to the Acting Chairperson’s question on blurred jurisdiction, he responded that the National Prosecuting Authority’s jurisdiction is clear and quite different from theirs.

Mr Topham noted that the National Prosecuting Authority is usually slow.

Mr Ismail Momoniat, DDG in Treasury, noted that administrative actions are a very important component of financial regulations.

Chapter 11 – Significant owners

Clause 157
A Treasury official explained the purpose of clause 157. He proposed an insertion of 15% of the members of the governing body of a financial institution in clause 157 (2). He also proposed several minor amendments such as changes to the meaning of ‘significant owner.’

Mr Lees asked about the rationale for 15% and sought clarification on clause 157(4)(e).

The Treasury official explained the rationale for the 15%.

Mr Topham asked whether groups that made comments on the Bill such as BASA are happy with the Bill. No reservations or dissent with the Bill were expressed.

The Acting Chairperson noted that members seem to be satisfied with current amendments in the Bill. She stated that committee members need some time to refresh before their meeting at 2 pm. She therefore adjourned the meeting.

 

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