Financial Sector Regulation “Twin Peaks” Bill: chapter 17

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Finance Standing Committee

15 September 2016
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee continued its preliminary clause by clause deliberations on the Bill, covering chapter 17. During the deliberations, a lot of discussion was held in respect of clauses 242 and 243

Clause 242 dealt with Infomration sharing arrangments. A DA Member pointed out that the provision as it was had the unintended consequence of allowing certain financial sector regulators to subsume the functions of intelligence services and the Financial Intelligence Centre (FIC), which meant that the provision placed an obligation on regulators to not only report certain information but to start to correct the information.

National Treasury said the financial sector regulators were already provided with obligations to assist the FIC in terms of the Financial Intelligence Centre Act (FICA). That assistance would only be provided when carrying out those functions as the regulators were required to do so in terms of the FICA. There was no attempt to expand the activities of the financial sector regulators. A second query was whether that information sharing would be done without an agreement between regulators on cooperation. It was pointed out that although the provision had empowered regulators to share information; the Protection of Personal Information Act made it clear what that information could be used for. MoUs helped to ease matters because if one received a request from a jurisdiction where a regulator had no MoU; there had to be a few more checks done before information was shared. It was further highlighted that the Banks Act clarified what type of information could be shared. Section 89 (a) stipulates that the Registrar may furnish information to any person charged with the performance of a function under any law, provided the Registrar is satisfied that possession of such information by that person is essential for the proper performance of such function by that person. Section 89 (b) stated that the Registrar may furnish information to an authority in a country other than the Republic for the purpose of enabling such authority to perform functions, corresponding to those of the Registrar under this Act, in respect of a bank carrying on business in such other country. 

Clause 243 dealt with reporting by auditors to financial sector regulators. The Financial Services Board expressed unhappiness with the wording ‘in a material way’ as the entity did not want to get into any subjective debates about materiality, specifically because it believed there was either a contravention or there was not.  These concerns were shared by the Reserve Bank. National Treasury clairified that the provision was about the auditor informing the regulator and not that there was an obligation of the regulator because if it was immaterial the regulator also wanted to see that a contravention was immaterial. A Member argued hat materiality was a financial calculation which was being introduced into a legal space and auditors were not experts in law or legal opinions. It was easy to say when a number was material or not but it was not so easy for an accountant to say so on a breach of an Act. Anther Member pointed out that the role of auditors could not be limited to auditing only without seeking legal opinion; it was their responsibility to understand the prescripts of the law. The issue at hand was the measurement of materiality in legal terms which was why she had suggested that the provision be drafted in such a way as to cover immaterial challenges which would come up as and when auditors would be performing their duties.  The draft provision had to be such that it was not open to different interpretations.


Meeting report

Opening remarks
The Chairperson welcomed everyone and related an anecdote about the catering services and finances for Committees in Parliament. He then allowed the National Treasury delegation to proceed with the Bill presentation.

Mr Ismail Momoniat, Deputy Director-General, National Treasury (NT), said that the NT delegation before the Committee would deal with fees, levies, advisory process for the entities, what the approach was together with the clauses to back all of that up.

The Chairperson lamented not being informed in time by NT about the aspects of chapter 17 he was not supposed to have read.
Mr D Maynier (DA) wanted confirmation from NT about its intention to furnish the Committee with the Levies Bill before the FSR Bill got passed by Parliament.

Mr Momoniat said the Levies Bill was planned to be minimal compared to the current system of fees and levies. He said part of the task was dealing with how entities set their fees: with Eskom there was the National Energy Regulator of South Africa (NERSA) but with others, fee setting was done through Strategic Plans (SPs). Generally the Financial Services Board (FSB) had been setting fees through gazetting. NT through the FSR bill would be introducing a consultation period effectively and on the budget there was some tension in that there could be micro-approval in place of independence or there could be no approvals at all, but NT wanted something in between. The FSR Bill was enabling and in year one to two as NT was getting the right base, underlying that was quite a challenge to determine forward.

The Chairperson said that indeed the Committee’s role was to ensure that the financial customers and the poor did not end-up paying too much.

Financial Sector Regulation “Twin Peaks” Bill – deliberations
Chapter 17

Clause 242: Information sharing arrangements

Mr Roy Havemann, Chief Director (CD): Financial Markets and Stability, NT, said that the clause had been included because of the overlap in requirements of the FSR Bill and the Protection of
Personal Information Act No. 4 of 2013 (POPI). NT would be doing training on the clause and had good engagements with the Department of Justice and Constitutional Development (DoJ&CD) in that regard. They had found a workable solution that the regulators could share information amongst each other but would not infringe on the regulations from POPI. 

The Chairperson interjected that as long as NT and the DoJ&CD had considered that there had to be a balance between allowing some intrusion in the case of an individual committing crime because one could not say that the individual’s right to privacy trumped the right to access information relevant to a suspected criminal act. 

Ms Jeannine Bednar-Giyose, Director: Fiscal and InterGovernmental Legislation, NT, said that clause
242 (1) (a) (ii) had been redrafted because there had been concern from commentators that the previous version of the clause had phrased some of the matters from POPI as exemptions, where the DoJ&CD had indicated that if in legislation there was an expression that there would be exemption from the POPI; that potentially could raise concerns about the status of the legislation in terms of international regulatory standards.

The rephrased draft then would read- (b) a financial sector regulator or the Reserve Bank must collect and use information, including personal information as defined in the Protection of Personal Information Act, to the extent that the financial sector regulator or the Reserve Bank determines is necessary to properly perform the obligations and duties referred to in paragraph (a).
She explained that NT had phrased the provision to express specific obligations and duties on financial sector regulators which in terms of the POPI indicated that; if an entity in terms of legislation had been provided with public law obligations and duties to the extent necessary to carry out those obligations: it was permissible to share information. NT had submitted the wording to the DoJ&CD as written in the draft Bill with the DoJ&CD accepting the provision as was worded.

Mr Maynier said that the provision as it was had the unintended consequence of allowing certain financial sector regulators to subsume the functions of intelligence services and the Financial Intelligence Centre (FIC), which meant that the provision placed an obligation on regulators to not only report certain information but to start to correct the information.

Ms Bednar-Giyose said the financial sector regulators were already provided with obligations to assist the FIC in terms of the Financial Intelligence Centre Act (FICA). That assistance would only be provided when carrying out those functions as the regulators were required to do so in terms of the FICA. There was no attempt to expand the activities of the financial sector regulators.

Mr B Topham (DA) said that the Committee had in the FICA dealt with something similar; the designation as captured in clause 241 (g) bothered him when the definition referred to foreign countries. The reference to 241 (g) had to be included because of the fees; he wanted to know whether the fees levied would be between specific countries.

Mr Momoniat said that one could be a bank with an owner based in the United Kingdom (UK). In the UK one would deal with the Bank of England (BoE) and a financial conduct authority. When such deals happened; part of the discussion between the two regulators if for instance, there had been no discussion before was to have a Memorandum of Understanding (MoU) between two regulators to say the entity would be regulated. Looking at the international standards to date; there were supervisory colleges where regulators from different countries were brought in. The Financial Services Board (FSB) and South African Reserve Bank (SARB) attended such meetings where a lot of meaningful information was shared for the FSB and SARB to regulate the banks in SA but similarly the NT was expected by the supervisory colleges to have that information as well.

Mr Jonathan Dixon, Deputy Executive Officer (DEO), FSB, said that the issue of information exchange between entities across borders had been amongst the most important issues since the global financial crisis. There had been a lot of emphasis on proper information exchange and cooperation between regulators. The fact is that a lot of the large systemic regulators operating across borders had been implicated in the crisis and that regulators had not had proper information exchange provisions between themselves. Information exchange had been a core principle in the Insurance Bill.

Mr Unathi Kamlana, Deputy Registrar of Banks, SARB, said there were bodies referred to as supervisory Committees where regulators or supervisors of entities within large conglomerates came together.

Mr S Buthelezi (ANC) asked for clarity as to the type of information being referred to in the provision?

Mr Dixon said that the information related to things like fit and proper status of directives. If a company wanted to establish an operation in Singapore; the company would contact the FSB to confirm the status of a South African (SA) insurer on whether it was financially sound and had no record of contraventions in terms of legislations.

Mr Momoniat suggested that Mr Dixon also explain what FSB would ask corporates.

Mr Dixon said that the FSB would ask the same thing if a medium insurance company wanted to invest in SA. Additionally where there were investigations for instance, where investment schemes would have been established in Mauritius and then that resulted in a problem in the Isle of Man. If a regulator wanted to do investigations on any system for certain information, the provision would enable the regulator to share the information as long as the information was shared for the purposes outlined in the reasons for sharing of information.   

Mr Topham asked whether that information sharing would be done without an agreement between regulators on cooperation.

Mr Dixon replied that though the provision had empowered regulators to share information; the POPI had made it clear what that information could be used for. MoUs helped to ease matters because if one received a request from a jurisdiction where a regulator had no MoU; there had to be a few more checks done before information was shared.

Mr A Lees (DA) recalled that in the Protection of State Information Bill there had been a provision that Parliament had considered for weeks about what level of police officer could deal with certain information. Similarly it had to be specified that there had to be some level of authority that dealt with the information within the financial sector regulator. If it was assumed that there was a leak in one of the regulators through divulgence of information that should not have been shared, how would the person affected know about that breach? Was there any communication to the person on whom the report was being made about?

Mr Maynier asked that if indeed information had been properly shared by either the regulator or SARB; was that an offence.

Mr Buthelezi again sought clarity as to what type of information was not meant for sharing between regulators? Because if it was about a fit and proper investigation he submitted that he was fit and proper: therefore there was no reason for him to worried about his information being shared? However his point was based on his history as a regulator in the highly regulated gambling industry.

Mr Topham asked that if indeed something wrong in the sharing of information happened between regulators; could a regulator be sued in a civil case for damages or were regulators indemnified somehow domestically? 

Mr Momoniat replied that as the FSB Act had been amended, obviously therefore regulators acted in bad and in good faith; he was cognisant that there was scope for people to act recklessly, because sometimes people were clever in putting information in old documents. That then put institutions on the defensive and therefore regulators had to behave properly as well. By and large the provision to include confidentiality from both sides but he imagined that when an authority was licensed in SA, part of the deal was that information would be shared between regulator and entity when the entity was operating overseas.  Beyond the prescripts of the provision, he was not sure how to guard against an information leak.

Mr Havemann referred to clause 265 (1), which stipulated that: A person who contravenes section 242 commits an offence and is liable on conviction to a fine not exceeding R5, 000, 000, or imprisonment for a period not exceeding 5 years or to both a fine and such imprisonment- In terms of what happened when a financial sector regulator had not followed the law.

The Chairperson asked NT how clause 265 addressed the contravention of clause 242.

Mr Havemann said contravention of clause 242 would be a financial sector regulator divulging information was an offence with the listed sanctions as provided above.

The Chairperson interjected asking if the provision only applied to regulators.

Mr Havemann referred the Committee to clause 65 (3)(c), which stipulated that The Minister may remove the Commissioner from office if an independent inquiry established by the Minister has found that the Commissioner has failed in a material way to discharge any of the responsibilities of office, including any responsibilities entrusted in terms of legislation.

The Chairperson pointed out that the above provision referred to a commissioner. 

Mr Havemann clarified that the reference spoke to who determined as to whether there had been a contravention of clause 242; which was the Executive Committee (EXCO).

Mr Dixon said that the insurance division of the FSB had spent a lot of time sharing information when it entered into the International Association of Insurance Supervisors (IAIS) multilateral MoU where the big thing there had been the need for the demonstration of meeting the core principles around information exchange and cooperation.
In terms of how within regulator one ensured proper checks and balances, and that the right people shared information: he said that FSB as a regulator had to demonstrate within that IAIS MoU that it had established the right internal structures to deal with information exchange. Therefore the FSB only had one unit called the International and Local Affairs Unit (ILAU) which was the contact point for all exchange of information with international regulators. It had also been made it clear that it was an offence if someone within FSB shared information without being authorised to do so.

Mr Momoniat said that regulators had to work quietly behind the scenes and had to have proper processes in place. That was where NT had to check on those processes and decisions were made at a senior level when it came to exchange of information and frankly any regulator who put things in court papers to deliberately mislead had to be fined because it really affected their work and undermined trust from industry.

Mr Dixon added that information exchange was also part of Human Resources (HR) Policy of regulators and the code of conduct of all employees so that when they breached that confidentiality provision, it automatically became an offence.

Mr Buthelezi said that amongst International regulators there was an assumed code of conduct because without it partner regulators would not exchange information easily with each other. He had not heard a response to his question of what type of information would not be shared amongst regulators. If for instance, a regulator provided information about Mr Buthelezi to another, he did not think the receiving regulator simply acted on the received information. It was still incumbent on the receiving regulator to consult Mr Buthelezi about the information received if it was more than the required details so that Mr Buthelezi could attest to the correctness/ falseness of the information.

Mr Dixon said the FSB indeed also had to do assessments as to whether the information requested related to the functions of the person requesting the information. For example if the UK regulator wanted to know about the consumer credit issues of a person, the FSB could only reply only in respect of its functions as a regulator and therefore it would not be able to reply to that but rather would refer that UK regulator to SAs National Credit Regulator (NCR).

Mr Lees said when talking about financial sector regulators, the reference was not only to international regulators but local regulators as well. He was therefore still concerned about the kind of reassurances the Committee had received because they spoke to regulators doing something very naughty and received a bad reputation; therefore it sounded like before action was taken, regulators had a moral and ethical pressure to do the right thing, instead of legal pressure. He wanted to know whether he understood matters correctly.

The Chairperson interjected asking what Mr Lees’ proposal was in that regard then.

Mr Havemann said that clause 242 (4) (a) captured most of what Mr Dixon had said and that information exchanged happened when only the financial sector regulator or SARB were satisfied that the designated authority to which they would providing information to had proper and effective safeguards in place to protect the information.

Mr Lees said he accepted what Mr Havemann had said but maintained that there still had to be a level of authority required before the exchange took place.

The Chairperson said it seemed to him that the idea was that there had to be a level of authority established for the exchange to happen and if no one had issue with that, he proposed the Committee move to the following provision of the Bill. What then could be done in that regard?

Mr Momoniat said he also had the same understanding and that both the sending and receiving regulators had to have proper internal procedures in place therefore NT would talk with its colleagues to see whether those procedures were in place.

Mr Kamlana said that in terms of section 89 of the Banks Act No. 94 of 1990, the Registrar of Banks may furnish information to a foreign regulator, in terms of the level of authority for information exchange.

Mr Maynier said though they had dealt with the level of authority the following step was to look at how the clause could prohibit the disclosure of any information deemed to not be relevant to a function such that that could result in a heavy offence.

The Chairperson said that he had noted a substantial penalty which he had seen from the references which Mr Havemann had given the Committee; what had not be clear to Mr Maynier?

Mr Maynier said although the Committee would get to clause 265 where contraventions of clause 242 where mentioned but the former was quite broad as far as he was concerned.

Ms Bednar-Giyose said there had been one change that had been recommended by the DoJ&CD subsequent to the publication of the July draft of the FSR Bill; which had been clause 242 (4) (d) so as to strengthen information exchanges between regulators.

The Chairperson said the Committee had noticed that there had been a lot of unanticipated issues coming up at that stage of the processing of the FSR Bill. In summary the consensus was that a regulator was equivalent to a registrar in seniority in terms of information exchange. There would be a penalty for abuse but that would still need further discussion in terms of appropriateness.

Mr Momoniat asked that since Mr Kamlana had pointed out the strong provision from the Banks Act could the Committee not perhaps consider that.

Mr Kamlana said that the Banks Act clarified what type of information could be shared. Section 89 (a) stipulates that the Registrar may furnish information to any person charged with the performance of a function under any law, provided the Registrar is satisfied that possession of such information by that person is essential for the proper performance of such function by that person. Section 89 (b) stated that the Registrar may furnish information to an authority in a country other than the Republic for the purpose of enabling such authority to perform functions, corresponding to those of the Registrar under this Act, in respect of a bank carrying on business in such other country. 

The Chairperson said that NT talked in terms of clause  242(1)(a) A financial sector regulator or the Reserve Bank has an obligation and a duty to – (iii) perform its functions, including its supervisory functions, in terms of financial sector laws and the Financial Intelligence Centre Act. He therefore wanted to know why the FICA had been placed separately.

Ms Bednar-Giyose said that this was because of the way financial sector laws had been defined in the Act which included those pieces of legislations listed in schedule 1. For various reasons there had been long discussion about whether the FICA had to be included in that list based on generally what the implications were of a legislation listed as a financial sector law and therefore eventually it had been decided that FICA would not be included in the schedule 1 list.

Ms Catherine Gibson, CD, NT, said the listed laws where those for which regulators in the FSR Bill were specifically responsible for as there were other laws for which affected the financial sector like the FICA, National Payment System Act 78 of 1998 (NPS) and the National Credit Amendment Act, however; they were not laws in the process of the FSR Bill.

The Chairperson said that he understood NT to then be warning customers under clause 242(2)(a) - a financial sector regulator or the Reserve Bank must disclose information referred to in subsection (1) (b) if the financial sector regulator or the Reserve Bank determines it is necessary to comply with its obligations
(iii) To warn financial customers against conducting business with a financial institution or other person conducting activities in contravention of the financial sector laws or the Financial Intelligence Centre Act;
So that NT was alerting the same customers of the risks in terms of clause 242(2)(a)(v) to alert financial customers to activities carried out by a financial institution that a financial sector regulator or the Reserve Bank believes to constitute a risk to financial customers;

The Chairperson then read: (b) Information obtained in terms of the Financial Intelligence Centre Act, other than in terms of sections 45 and 45B of that Act, may only be utilised or disclosed in accordance with sections 29, 40 and 41 of that Act; and asked Members if they understood the provision.

Ms Bednar-Giyose explained that the provision had been directed at the regulators. Essentially as regulators were fulfilling functions in terms of the FICA; in performing said functions regulators were collecting particular information.  Regulators therefore could only disseminate that FICA function collected information in accordance with additional requirements in place within the FICA.

The Chairperson said he would still require Parliament’s Chief Legal Advisor to ensure that the Committee had the sections referred to from the FICA and what they meant specifically in their complimentarity to each other.

Mr Topham said it was called a ‘material irregularity provision’ as per the Act.

Mr Lees wondered why a clause in the FSR Bill that referred one to the FICA had been included when the FICA already made provision for how distribution of information would be dealt with; as that provision then seemed redundant.

Ms T Tobias (ANC) said a clause could be inserted in one Act which then referred to another Act however; the point of inserting cross referencing clauses between two Acts was to alert legislators and the users of legislation about the relation of sections of one Act to another piece of legislation.  It would have been better though if such sections had been highlighted in the FSR Bill so that as the Committee was dealing with such immediate referencing could be done.

The Chairperson suggested that the NT extract the relevant clauses from the FSR Bill that referred to other Acts be sent to Ms Tobias and Mr Topham, so that the Committee mandate to them to deal with those cross referential sections.

Mr Topham said that he was satisfied with that clause because if an auditor came across what was called a material irregularity; that would be reported to the Auditors Board within 30 days. Therefore the breach of secrecy that an auditor would normally happen very late and that clause was extending that to the regulator and the auditor who would normally report very late in any case.

The Chairperson then asked if it was necessary to have inserted ‘only’ twice in clause 242 (4) (b)

Ms Gibson replied that indeed there was a need for only to be inserted twice as they referred to separate things.

The Chairperson asked why “function and powers” had been replaced with “obligations and duties” in 242 (4) (c) 

Ms Bednar-Giyose replied that that wording in clause 242 (4) (c) had been in line with the wording in subclauses (1) and (2). NT was being clear there that there were obligations and duties on regulators in terms of the financial sector laws which necessitated the exchange of information. Additionally, the term obligations and duties had been used in the POPI.

The Chairperson asked NT to explain clause 242 (4) (e).

Ms Bednar-Giyose replied that if information had been provided to another regulator and then that regulator was compelled by law to disclose the information, the receiving regulator had to inform the providing regulator of that and also the receiving regulator had to take all the listed steps in subclause (4) (e) to avoid disclosing the information.

Mr Maynier said that the implication of clause 242 (5) was that regulators could share any other information with anybody. What then prescribed regulator limits?

Mr Havemann said that his understanding was that NT had been prescribing a complicated system for individual data and when one dealt with aggregate statistics or data, one did not have to follow that complicated procedure.

The Chairperson said he was battling to understand what was problematic about clause 242 (5)

Mr Maynier said that his understanding was that for example, it would not be an offence to share information about the average debt level of Members of Parliament (MPs) or the NT employees publicly.

Mr Momoniat said the point was that statistics were published anyway as an obligation by the regulator.

Ms Tobias said she was satisfied with how clause 242 (5) had been drafted as it spoke to aggregated statistics whereas Mr Maynier was suggesting that an individual’s personal records be made public, which was problematic as there was a level of personal information protection.

Clause 243 - Reporting by auditors to financial sector regulators
The Chairperson bemoaned the new numbering as it confused matters somewhat and asked if there had been anything new added to clause 243.

Mr Havemann said there were new additions, specifically clause 243 (ii) (bb) as a result of comments from the Banking Association South Africa (BASA).

Mr Dixon said that the addition of ‘in a material way’ in that provision was problematic for the FSB in the sense that the entity would not want to get into any subjective debates about materiality, specifically because it believed there was either a contravention or there was not. 

Mr Kamlana said that SARB also shared the similar sentiments as the FSB.

The Chairperson asked if anyone disagreed that ‘in a material way’ be removed from clause 243(ii) (bb).

Ms Marguerite Jacobs, General Manager, BASA, said that contraventions could be material or less material. For example, if one had to submit a return where the law stated this had to be done within 14 days and due to circumstances beyond one’s control one could only submit the return on day 16; one would then be seen as contravening the Act in a similar way which would attract a high penalty though it was not a material contravention. Therefore BASA would appreciate the consideration of that by the Committee. 

The Chairperson asked whether if someone did indeed do that, would the regulator still be strict about imposing the penalty?

Mr Dixon said no and if indeed the regulator was strict about the penalty, that was why there were checks and balances of the Tribunal.

Mr Kamlana said that clause 243 was about the auditor informing the regulator and not that there was an obligation of the regulator because if it was immaterial the regulator also wanted to see that a contravention was immaterial.

Mr Havemann said that if an auditor wanted to sit down and work out whether a return was immaterial or not; if the auditor saw that the return would be late, then they had to report that to the regulator.

Ms Yvette Singh, Public Policy and Regulatory Affairs Executive, FirstRand Bank, said that even in the normal accounting standards of auditors, there was always a materiality clause and therefore clause 243 (ii) (bb) aligned completely with those accounting standards.  

Ms Tobias said that how a contravention was explained and relating it to its materiality: that had to be put in such a way that it would not be interpreted differently by those that would be applying the law. If in the law it was said ‘in a material way’ and if the person responsible for checks and balances decided that something was material. There was currently no way of measuring what would be material. That would be subjected to how those responsible for applying the law measured materiality. Possibly the provision had to be drafted in such a way that it would cover lesser material challenges that would come up in future.

Mr Topham said that materiality was a financial calculation which was being introduced into a legal space and auditors were not experts in law or legal opinions. It was easy to say when a number was material or not but it was not so easy for an accountant to say so on a breach of an Act. For instance when the Auditor General South Africa (AGSA) audited the city of Tshwane and found there had been a breach of the Municipal Finance Management Act (MFMA) in terms of the 30 days payments. The AGSA during that same audit possibly would not qualify the financial statements of municipality on that basis but the breach would remain and would be recorded.
All that clause 243 (ii) (bb) was bringing to the attention of the regulator was that there would have been a breach. However; the wording was wrong because the subclause could not say: ‘or may contravene’ as the auditor could not know what would happen in the future. His proposal was that ‘or maybe contravened’ be inserted instead. The way the clause had been drafted opened it up to a lot of reporting issues. NT could also ask the Independent Regulatory Board for Auditors (IRBA) to comment on that provision.

Mr Maynier asked if the effect of that clause was to create a higher reporting threshold to the Prudential authority and IRBA?

Ms Gibson replied that auditors had been reluctant to report on contraventions of the law partly because they sometimes did not know the law. There was also an inherent conflict as well, which spoke to the point that NT probably needed to be more clearer that auditors had to report because it was either they were not required or they were required: as opposed to taking the subject to view because doing that obviously auditors would be conflicted and more inclined to not report. 

Mr Dixon pointed out that clause 243 (ii) (bb) already existed in the Long and Short Term Insurance Acts and if the auditor became aware that there may be a risk that an insurer in the following three months would have below its minimum capital requirements, auditors had to report those.

In terms of the regulator versus IRBA, Mr Dixon thought auditors were probably reporting different things to IRBA than they were to the regulator.

Mr Lees said he heard what Mr Dixon was saying but that was not what had been written in the FSR Bill. The subclause referred to a financial sector law: as an auditor he had to assess whether his client could or could not contravene a financial sector law and not the particular ones Mr Dixon had referred to. The clause was still too broad an obligation on the auditor to report on all financial sector laws when auditing. Therefore, the clause had to be narrowed down to incidences such as those Mr Dixon had made examples of. There surely could not be an obligation to make an assessment about all financial sector laws and the probability of that client contravening one or more.

The Chairperson said he had read clause 243 (1) (a) (i) and ended up confused in trying to reconcile that with the above sentiments of the Committee.

Mr Dixon replied that clause 243 (1) (a) (i) specified that auditors were required to report only when they picked up things during the performance of their functions. That had been an outcome of the discussions on the insurance legislations. As a result that already restricted what was required from the auditor versus the point that had been raised by the Committee of an auditor to know every single financial sector law.

Mr Topham maintained that IRBA be asked to comment on whether what had been drafted in clause 243 (ii) (bb) was possible to do.

Mr Kamlana accepted the suggestion by Mr Topham but noted that there was already a lot of verification required in terms of regulations that auditors did for their clients. Therefore there was nothing exceptional in what they were being required to do.

Overall the question was on financial sector laws of which SARB, NT and FSB were the custodians - the people enforcing the financial sector laws - therefore it could not be up to an auditor to determine the materiality of what would be reported to the regulators. If there was a risk that there would be a contravention of the Banks Act and an auditor picked that up, the Deputy Registrar of Banks expected such an auditor to report that.

Mr Topham said that an auditor was an accountant; therefore asking an auditor to tell whether a Managing Director of a bank would have a heart attack was not possible. That had been why he felt it absurd because a major part of an auditing company’s income came from the specialised care sector that was why he was bemoaning the point that the provision had been worded in such a way that would result in bank auditors resigning.

Mr Kamlana repeated Mr Dixon’s explanation that the scope of what was expected from an auditor was narrowed down by clause 243 (1) (a) (i)

Mr Dixon said that the way the provision had been drafted was based on a tried and tested approach where regulators depended on auditors in performing as prescribed in 243 (1) (a) (i). Therefore, he did not understand the question whether auditors had to report or not because it was rather whether the auditor had to be making the subjective judgement on materiality of a contravention. The regulator was simplifying things by saying that had to be reported material or not.

Mr Lees said that the FSB had just said that auditors did not know all financial sector laws and therefore even as they were performing as prescribed in clause 243 (1) (a) (i) they could come across a contravention and not pick it up because they did not know the law being contravened. Not reporting that then became a contravention according to clause 243.

Mr Maynier said although the question was a policy matter it had practical implications because the Committee was dealing with a case of compelling auditors to report to a prudential authority with a view to prevent some future harm. What happened when an auditor reported to the prudential authority and that authority then failed to act? What where the consequences for that prudential authority?

Mr Havemann replied that taking the African Bank case one had to be careful of letting the auditor off the hook too quickly, because if he were an auditor he would report a materiality to the regulator as that was something auditors did not want. It was better to have the regulator to take the blame for not acting.

Mr Momoniat clarified Mr Havemann’s point saying that because SA currently had a fragmented system the problem then became that every regulator blamed the other regulator. Even with the Myburgh Commission of Inquiry, it was not known whether the SARB, FSB or the Johannesburg Stock Exchange (JSE) had been involved in the African Bank case as there were a lot of players involved. Once the Inquiry was complete, it was important to get an overall approach so that regulators could be rationalised so that a more coherent process could be developed.
Indeed the financial sector had learnt from the African Bank case and the key issue there was how regulators could be held to account when they had been alerted; on the one hand regulators had to act on certified facts but on the hand they could not be expected to play God in the sense that regulators could never be able to foresee everything themselves. A failure of a bank or an institution was not supposed to be seen as a failure of the regulators; in fact there had to be some failures so that there could be lessons learnt and incentives could be built into the system.      

Ms Tobias said that the role of auditors could not be limited to auditing only without seeking legal opinion; it was their responsibility to understand the prescripts of the law. The issue at hand was the measurement of materiality in legal terms which was why she had suggested that the provision be drafted in such a way as to cover immaterial challenges which would come up as and when auditors would be performing their duties.  The draft provision had to be such that it was not open to different interpretations.

Mr Buthelezi said that when dealing with the law subjectivity was unavoidable as someone somewhere had to decide. Moreover law making was unlike natural science as it was amenable to change.

Mr Maynier reiterated that he still required a response as to where the obligation was for the prudential authority to act when the authority had received a report on a certain activity; and where was the offence when that authority failed to act. 

Mr Topham said there were three completely different points of views being proposed in clause 243 because the auditors would want as little responsibility to report or they would want to report on everything. The client would not want the auditor to report on everything as that would be embarrassing and costly in terms of penalties and the regulator of course would want to know everything so that it could act properly. He maintained that clause 243 was too broad as it was drafted then, which was why he had requested IRBA be asked for comment and that be weighed against the financial industry’s response.

Mr Momoniat said the sentiment from the Committee was that NT remove ‘in a material respect’ in clause 243 (1) (a) (ii) (bb) and also NT had been asked to consult IRBA which it would do. In terms of the accountability of the regulator he asked the NT delegation to speak to that.

Mr Havemann referred the Committee to clause 46 (1) (b) (iii) and said the subclause was putting the responsibility on prudential authorities to perform their work with care. If an authority received a report from an auditor it was certain that a reasonable person would follow up on that report because with reference to clause 256; not following up on a report was a criminal offence with the listed penalties in that clause.

The Chairperson said there were contexts where the wording in the subclause ‘in a material way’ would be relevant and there were situations where that wording was inappropriate. The fact that the Committee had moved towards directing NT to remove that subclause was that though Ms Tobias’ question and proposal were sensible in drafting a provision that would cover everyone with no opening for differing interpretations it was difficult for the Chairperson to think what kind of response could be given to that. Certainly if she could word the provision she was welcome to propose it to the Committee and everyone participating in that meeting was welcomed to also assist in that regard.

His final question was why the discussion had been so much around protecting the auditor when clause 243 (3) (b) provided for that protection.

Mr Buthelezi had an issue with clause 243 (3) (b) as it sounded contradictory to clause 243 (1) (a) (ii) (bb).

The Chairperson said the provision had a qualification in that it allowed for human error with the term ‘in good faith’ but still requested NT to elaborate on that provision.

NT replied that there was a well-developed body of law as to what was regarded as good faith.

Mr Topham disagreed with the Chairperson’s understanding of ‘good faith’ in that clause saying that for instance, if he was having a meeting with the chief executive officer (CEO) of a bank and that CEO said to him; if you report us to the regulator you’re out. Therefore ‘in good faith’ had to be defined from which point of view and therefore his proposal was that IRBA be also consulted about that terminology there.  

The Chairperson said he thought the terminology was the legalese in wherever one wrote in everyday legal practice that there was a standard understanding of what the words meant.

Mr Lees referred back to the discussion about auditors not being expected to know all financial sector laws which in good faith would include not reporting what as auditors, they were being asked to report simply because they would not have known that contravention had occurred.

Mr Topham interjected that he would want to go back to the intention of clause 243 as he did not understand what NT intended therein. A third party would always have a right against an auditor however; if the intention of that section by creating that reporting obligation; if a person acted negligently that person would not have a claim against the auditor; because the banks said that it was the depositor that moved money. If a depositor did not have a contract with an auditor there were no theoretical grounds to sue the auditors and he had become aware and was hoping that the intention of that section was not to create an opportunity for auditors to be sued indirectly.

Mr Dixon said that the intention was that if one was an auditor for a Bank, there was an expectation that one had to know what the Banks Act said in that regard and the regulator wanted to hold that auditor accountable for that. As Mr Buthelezi had pointed out, there was subjectivity in those sections, but the question was to who the subjectivity judgement would be applied to. The regulators were in a situation where they made the judgement of subjectivity in the auditors’ realm so that if there was an issue then such things would be material.

That was very different from where the regulators were saying auditors had to report and then there was agreement on whether an activity was material or not; and that if the regulators judged an activity as material and the auditor disagreed that then could be challenged. The regulators did not want that as it was not really the auditors’ role to judge on materiality.

The Chairperson then requested NT to speak to 244.

Clause 244 - Reporting to financial sector regulators
Mr Havemann said that clause 244 was simply a whistle blower clause where there had been a comment, which he did not really want to tell the Committee. His reluctance was based on fact that the comment had been about a materiality.

The Chairperson referred back asking the NT in terms of 243 (1) (b) to supply the Committee with the Auditing Profession Act, 2005 (Act No. 26 of 2005) document. 

Clause 245 - Prohibition of victimisation
Mr Maynier asked what the consequences were, when a person contravened clause 245 against another person.

Mr Havemann referred the Committee to clause 265 (3) where the consequences for contravention of 245 were outlined.

Mr Topham said that in terms of clause 245 (a) if auditors reported something they could not be, in their employment capacity be penalized; auditors were not employed obviously.  Why was that provision put there? Was that to protect the employees of the auditor?

Ms Bednar-Giyose said that the provision also referred to prejudice in any other way besides employment.

Mr Topham said for example if he made a report and then a year later the board removed him as an auditor, was that provision not opening up to unhappy auditors to saying they were being removed because of their past reports?

Mr Havemann said indeed that could happen and a court case would the have to decide the merits of such statements. It was important to protect auditors because often they were politely dismissed for doing their work and therefore NT would not want to change the provision.

Caluse 250 - Keeping of Register
The Chairperson asked why in clause 250, access to the Register was to the ‘general public’ instead of just ‘public’?

Ms Bednar-Giyose replied that the clause could be drafted to the Chairpersons’ preference.

Clause 252 - Status of Register and judicial notice
The Chairperson also asked NT to explain clause 252 (2)

Mr Havemann said that historically a law would be printed in a Government gazette which would be the truest version of the law; but because movement was to electronic systems a way had to be found to ensure what was on web was true.

Part 3
Offences and penalties
Clause 256 - Duties of members and staff of certain bodies

The Chairperson said he would defer to members of the Committee with more experience when dealing with Part 3 of the FSR Bill as he did not know how to tell whether a fine listed there would be commensurate with the transgression.  

Ms Tobias said that a penalty was intended to be a deterrent and was not necessarily intended to lead someone into contraventions.

The Chairperson asked NT to elaborate on offences and penalties.

Mr Havemann said the most important thing in clause 256 was the number of years of imprisonment as that translated into the amount of the fine.

The Chairperson wanted corroboration as to whether the years of imprisonment were equivalent to the fine

Ms Bednar-Giyose said there was the Adjustment of Fines Act 101 of 1991 which specified the maximum imprisonment and equivalent fine.

Mr Buthelezi asked whether when auditors during performance of their functions; they did them as individuals or as juristic persons because juristic persons, like Deloitte could not be imprisoned though individuals could be; he wanted to know who became liable there.

Ms Retha Stander, Senior Legal Advisor, FSB, replied that the person the obligation was placed on to report was in their official capacity but as an individual.

Ms Tobias wanted clarity whether that explanation in relation to clause 256 differed from case to case because the Speaker of Parliament had appeared on many cases before the court on behalf of Parliament as the Speaker. In that regard she had been appearing as a juristic person and not as a natural person; was the intention then in that instance that an individual would be fined though they had been acting on behalf of a company. 

Adv. Frank Jenkins, Senior Parliamentary Legal Advisor, said that criminal liability in that sense would not apply in the issue of Parliament since there was the Powers, Privileges and Immunities of Parliament and Provincial Legislatures Act 4 of 2004 that set out why the Speaker appeared on behalf of the National Assembly (NA). Over and above that, the Speaker was protected in terms of work done in good faith. Penalties and criminal liability were not applicable to good faith because if one had not acted in good faith and ones conduct led to a criminal sanction that was an individual sanction.

Ms Bednar-Giyose said that clause 256 was related to specific duties of individuals but there were other offences where institutions would be liable for fines such as licensing.

Mr Topham said the quantum of R5 million specifically in relation to the clause following clause 256 was a seriously large amount no matter what an individual earned. Was the NT satisfied about the amount since the following clause fined entities a minimum fine of R5000.00 per day?

The Chairperson also wanted to know if an organising principle was brought on deciding how amounts would be allocated in terms of fines and the number of years of imprisonment. There had been another section of the FSR Bill where entities had been enamoured by the way of fining for offences.

Mr Havemann said for the current version entities had not raised any queries to date.    

Mr Momoniat said that part 3 of the FSR Bill related to conviction.

Ms Bednar-Giyose said that in determining the penalty, the principle of proportionality was applied by the decision makers; therefore the actual quantum applied to an offence had to be appropriate to that offence. 

Mr Buthelezi said he did not agree that proportionality between the clauses in Part 3 as others specified R15 million fines whilst others spoke of much smaller amounts. 

Adv Jenkins said that the courts had a serious issue when Parliament wanted to prescribe what sentences courts handed down. For instance, murder, car theft and rape courts were generally unhappy when Parliament said they had to have a minimum sentence of 15 years unless there were extenuating circumstances. In cases such as Part 3 of the FSR Bill it was better to put an upper limit so that the discretion of the court would not be affected. The R5 million looked a lot but it allowed the Bill to be enacted for the next 10 years without being amended.

Mr Havemann said the NT had had a very interesting discussion about drafting style as it had a quite a number of drafters.  One drafter would have wanted all the offences underneath the relevant section, whereas the other drafter had proposed that all the offences be put in one place. So NT had then gone through a process of ranking offences in terms of seriousness; so that the more severe offences had the 10 years imprisonment and R15 million fines.

Ms Tobias concurred with Adv. Jenkins sentiments about the courts in that in a case she had been following a judge had handed down the maximum sentence where he had gone to town in explaining why he as the judge had applied his discretion instead of the minimum sentence. She advised that Adv. Jenkins’ sentiments be considered in terms of setting an upper limit for fines.

Clause 258 - Requests for information, supervisory on-site inspections and investigations
Mr Havemann said that BASA had asked that materiality clauses be included in terms of clause 258 so that BASA could be sure there were materiality contraventions therein. NT disagreed with that because firstly the courts worked out if there was a materiality to a contravention.

Mr Topham asked how comparable that provision was with some in the Equity Employment Act. For example, a bank license granted to a small cooperatives bank compared to Barclays how fair was the application of clause 258 if the size of the entity was not considered?

Mr Dixon conceded that indeed it would be unfair to penalize such entities on the same standards.

Mr Topham asked whether when a person or licensee admitted to have contravened was there a process to punish such small entities without going the court prosecutorial route.

Mr Havemann replied that an offender could only pay a fine once the court had findings from prosecutorial proceedings; but he believed that financial sector regulators had channels for processing minor offences from small entities however; there was the issue of institutions like Absa arguing that they were small banks though, in terms of fines. 
Furthermore Part 3 dealt with criminal offences whereas there was an administrative actions procedure where a regulator imposed an administrative sanction in that case on an offender. If said offender was lightly to go to the tribunal that was very similar to the court process.

The Chairperson made an example that if in the 2015 financial year a business made R6 profit and then in May 2016 that business committed an offence in terms of clause 268 whilst having made R9 profit. The offence then would have been in the 2016 financial year though the penalty would be charged in the 2015 financial year. Why could the fine not be deferred to the end of the financial year wherein the offence had occurred?

Mr Havemann replied that in the financial market there was a very clear link between the proceeds of the offence and the actual offence. NT had drafted the provision in terms of the practicalities of penalties but the hope was that the court which would be final decision maker in imposing the fine would confer the fine to the time where the contravention. Waiting until the end of the financial year to impose a fine could allow financial institutions to probably hide their profits as well.

Ms Bednar-Giyose said that in relation to the Committee’s earlier discussion on clause 242, NT would propose clause 265 have additional wording to clarify and to say- ‘A person who discloses or shares information for a purpose in a manner that is not authorised in terms of clause 242’. The purpose for the proposition was to clearly define the offence.

Ms Singh asked if NT was proposing to delete the whole section where fines for financial conglomerates amounted to 10% of the value of the material asset.

Clause 266 - False or misleading information
Mr Lees said that there was no provision for an intention in clause 266 (1); therefore if false information had been supplied unintentionally the fine was unfairly huge since 266 (2) was a provision based on an intention to mislead.

Mr Topham said that it almost seemed that if one gave information that was wrong, unknowingly, one would still be fined. In his view, this was unfair because one’s systems were not to the task of detecting the submission of misleading information to the financial sector regulator.

Mr Havemann said that if one’s systems generated false information, whether one was aware or not was a serious issue.

Mr Dixon said that clause 266 was also meant to incentivise people to ensure they had the correct and proper systems in place in terms of governance because regardless whether the intent was to mislead or not, those governance systems had to be in place.

Mr Kamlana said the internal system of control within an institution had to assist said institution to not be caught out with clause 266.

Mr Buthelezi said if an institution like the JSE could supply misleading information that would be serious whether intentional or not.

Mr Topham asked if there was an existing similar clause in the Banks Act or had it been newly introduced in the FSR Bill.

Mr Kamlana replied that it was either regulation 90/91 that provisioned for a fine within the Banks Act in a similar manner as in the FSR Bill.

Clause 269 – Liability in relation to juristic persons
Mr Havemann said that clause 269 had been the most contentious provision in the FSR Bill during its development but he thought there was acceptance about the current draft clause.

The Chairperson asked Adv. Jenkins to say whether clause 269 was acceptable in its current form.

Adv. Jenkins replied that he was satisfied that with that liability as that had been the way the world had moved after the 2007 crisis. 

Clause 274 - Exemptions

Mr Havemann said that in terms of clause 274 NT was satisfied with the draft clause in light of what it had been trying to achieve, which was to make more difficult for regulators to make exemption.

Clause 276 - Arrangements for engagements with stakeholders
Mr Buthelezi said because clause 276 was so broad, the risk was that regulators could end-up not undertaking engagements with stakeholders and since there had been so many challenges about public participation recently, the law makers could be opening themselves up for more complaints in that regard.

Ms Gibson said the origin of the clause was the criticism from stakeholders of there not being enough representation on stakeholder engagements by regulators. Of course the engagements could be dominated by the financial institutions as opposed to those affected by financial institutions operations. The intention therefore was to compel the regulators to be innovative when undertaking stakeholder engagements though they would not be engaging everyone.

Mr Topham said that perhaps the original draft clause which had said ‘relevant stakeholder’ be engaged was satisfactory as that would have placed a test on the regulator to say whether they had indeed engaged properly because the current clause 276 could prove impractical to implement as it alluded to everyone being consulted in every instance.

Mr Dixon said that based on that perception; as regulators they would not completely disagree with the requirement that they had to have arrangements for engagements with customers and the financial industry as that was what every regulator had to do anyway. However, he felt clause 276 had to be read in conjunction with the clauses that dealt with the regulatory strategy that regulators had to publish as one of the things that had to dealt with in that regulatory strategy was how a regulator would give effect to consultation requirements; therefore the FSB was satisfied with clause 276.

Mr Kamlana said the issue with clause 276 was whether one could have an objective test to show that a regulator had arrangements for engagements with prospective financial customers, as that alluded to everyone. Therefore the SARB had no issues except when the clause alluded to prospective financial customers as there could have been better wording to delimit the last category of stakeholders.    

Ms Gibson said that in keeping with the financial inclusion context and as far as the transformation objectives were concerned as a main priority. Talking about financial customers was a reference to them against potentially, skewing discussions towards individuals that had been already in the sector. The point of clause 276 was to ensure that those that had been excluded from having a voice would be provided with a voice. There had always been an issue about how the financial sector engaged civil society as it was not as easy as engaging the financial industry as it was already organised yet; that did not mean that civil society representation could be excluded rather more work had to be done.

Ms Tobias concurred with Ms Gibson that the Committee had at one point spoken to prospective customers being included in stakeholder engagements; moreover clause 276 also dispelled the notion of a bias by regulators towards industry over clients. The SARB would simply have to bear with Governments transformation agenda.

The Chairperson asked Adv. Jenkins whether the wording could not be found for a limitation that engagements were to be provided progressively and according to resources as he did not feel that there was disagreement with the intention of the clause. He asked that the NT come back to the Committee on that.

Ms Tobias asked if it was possible that in whatever future draft of the clause whether the wording ‘to a reasonable extent’ could be avoided as it was limiting as a statement.

Cluse 278 - Immunities
Mr Havemann said that clause 278 was NTs favourite as it had gone through 40 Senior Counsels.

He also said the regulations section simply said the Minister could make regulations. But the procedures to do so aligned very similarly to the discussion the Committee had had in terms of the role of Parliament in those processes. Those processes related to the Minister publishing draft regulations for public comment and to them submit a report to Parliament after that, so that Parliament then considered that. After which draft regulations became actual regulations. 

Part 5
Clause 281 - Regulations and Guidelines

The Chairperson said in the absence of having prepared for this clause, he would still like to submit anything he would pick-up post the meeting for further engagement at the next meeting of the FSR Bill.

Ms Bednar-Giyose said that with respect to 281 (5), NT would probably align the wording  with what ends up being agreed since that similar provision had being discussed concerning timeframes  for submissions.

Ms Singh said that in clause 281 (5) there had been agreement that the days for submission would be increased to six weeks instead of 30 days.

Part 6
Amendments, repeals, transitional and saving provisions

Mr Havemann said that Part 6 contained all the transitional provisions so that the explanations talked to how NT would go about in transitioning to the new system.

Clause 284 - Transitional provision in relation to medical schemes
Ms Gibson said that there had been overlaps between medical schemes that did not fall under the Bill and those that were under the Insurance Acts. Therefore what clause 284 was saying was that in keeping medical schemes as a product in terms of the Bill, the Council for Medical Schemes would be the financial sector regulator for medical schemes however; their functions had to be exercised to the extent determined by the Minister of Finance.

Clause 285 - Transitional prudential powers of Financial Sector Conduct Authority
The Chairperson said that the Committee would want clearer explanation of what were transitional prudential powers, how NT intended to move to prudential powers and financial sector conduct authority (FSCA) and what the implementation plan was for that movement.

Clause 288 - Transfer of staff of Financial Services Board
Ms Bednar-Giyose said that amongst the minor changes to clause 288 was relating to the name of the pension fund and as outlined in 288 (1) (c). NT also proposed to change- ‘at the date on which this Part comes into effect’ with ‘at the date on which this section comes into effect’-since NT could at one point not want to bring a whole Part into operation but a section of a Part.

Clause 292 - Enforcement Committee and Appeals Board
Mr Havemann said that clause 292 basically said that anything that was being dealt with under both the enforcement Committee and the appeals board continued as if nothing had changed.

The Chairperson said that caution had to be exercised as the Bill had been redone up to version three to date. In those sections that the Committee seemed to be breezing through, NT had to be very alert to clause 292 not being smooth sailing.

The Chairperson then spoke to further scheduling of meetings for the processing of the FSR Bill.

Clause 290 - Inspections and investigations
Ms Gibson said that in terms of investigations taking place in terms of the Short-term Insurance Act or the Long-term Insurance Act, clause 290 investigations could be done by both prudential and local components but the provision only spoke to the prudential component. She was flagging that clause so that the Committee could deal with it in that respect in future.

The Chairperson asked how that processing of clause 290 would be done.

Ms Gibson proposed that the wording be-‘prudential authority or Financial Sector Conduct Authority’- be inserted there.

Clause 295 - Savings of approvals, consents, registrations and other acts
Mr Havemann said that clause 295 (1) basically said that if one had a license before that clause became operational, that license would remain in force. Clause 295 (4) had been interesting as the FSB was consulting on standards for contributions and if the Insurance Act came into force before the standards were actually put out; the provision allowed for those consultations to be undertaken before laws came into effect.

Clause 296 - Levy
Mr Havemann said that NTs proposal in clause 296 to assist the transition from FSB to FSCA was that the FSBs current system of finances would remain for at least a year or two.

Ms Bednar-Giyose said that was also to provide for a bit of flexibility during the transitional period to the FSCA and for certain regulations to be made in terms of powers and functions of the FSB.

Clause 260 - Significant owners
Mr Lees said that in going back to clause 260 (1) the whole question of the 10% of taxable income of the relevant financial institution was concerning to him.

Mr Havemann said clause 260 (1) which Mr Lees had referred to had been proposed for deletion already.

The Chairperson said that then confused him as there still was a burden of responsibility for offenders in terms of clause 261(1).

Mr Havemann said that clause 261 (1) worked quite differently to clause 260 which would be deleted as 261 (1) referred to the size of an entity.

The Chairperson asked for better clarification as he was getting confused.

Mr Havemann said there were two types of errors that could be made. The first was criminal, where an offender could be sent to jail and the second error was civil where there was a contravention of a law and the regulator would impose a fine on the offender.  The latter was called a penalty. Therefore the sections in Part 3 of the FSR Bill related to what NT thought had to be criminalised, most important of which was operation without a license. That referred to Ponzi schemes or someone selling insurance which was actually not insurance.

There were a lot of other things that could be contravened in the FSR Bill some of which were listed under administrative penalties. In that chapter regulators had some flexibility in terms of the size of the penalty which they could impose. However; there was also an extensive process of appeal which an individual could follow particularly through the tribunal to have penalties set-aside or reduced or increased.

Mr Momoniat said that since 2008 if one looked at the United States (US) and Europe, institutions had to know what contraventions amounted to. Interestingly the major financial institutions would not support an appeals process because even though they had a right to do so, they also wanted quick processing of a fine when there was a contravention.

The Chairperson asked what the effect was of removing clause 260. In addition, he asked what was there in the Bill of equal weight that would deter that transgression.

Mr Havemann said Chapter 13 where administrative penalties were set-out; outlined criteria that the regulator had to consider in determining an appropriate penalty to deter a transgression equal to what clause 260 had originally provided for. 

Mr Kamlana said the effect of moving the intention of the deleted 260 to the penalties section; enough would be more or less similar, depending on the criteria a regulator was required to consider.

The Chairperson clarified that his concern was about whether in chapter 13 the resultant penalty would not have become less harsh compared to having kept the deleted clause 260 as it was.

NT and SARB replied in the affirmative.

Ms Bednar-Giyose added that in the penalties framework of chapter 13 what had been removed was the criminalisation of the offence, though it remained an offence and the nature of the penalty and amount would not really change as provision 168 (2) tried to entrench the proportionality principle including also considering the severity of the contravention.  

Mr Lees wanted clarity that there would not longer be a 10% of taxable income of the relevant financial institution taken for a contravention as set out in clause 168 (2).

Mr Havemann said the penalty in chapter 13 was imposed on a financial institution, which was also a juristic person.

Mr Momoniat said that although clause 168 (2) was different, generally a financial institution could face some sanctions but not go to jail, and individuals could face some form of sanction as well. Therefore it was not that it was an either or kind of penalty because when there was a problem, it could be found that banks could be fined with reasons and the individuals involved could be fined for alternative reasons as well.

Chief Actuary
Mr Havemann said that the chief actuary appeared alot in different laws and clause 297 only meant to designate that reference to a person

He also said that the NT would continue discussing from clause 158.

Clause 158 – Qualifying Stake

The Chairperson asked whether the version B of the FSR Bill had been substantially different from the A version?
Mr Havemann said there was no great difference between the two versions.

Clause 159 - Approvals and notifications relating to significant owners
He said that NT became only concerned in terms of clause 159 (1) when an individual owned more than 15% of a Bank, an insurance company or as a manager of a collective investment scheme and a financial institution prescribed in Regulations made for the purposes of this section for various reasons. That was in line with what was already provided for in the Banks Act and the Insurance Acts respectively.  Essentiall, the section was saying an individual could not own more than 15% of something without the approval of the FSCA. The Association for Savings & Investment SA, (ASISA) had concerns about the concept of influence versus control and that one could influence an organisation by controlling it.

NT had tried to make it clear that the requirement was 15% and if an individual had 15% stake in an institution, 15% in voting rights or 15% of anything else that controlled the institution then NT believed that said individual potentially could influence an organisation. 

The Chairperson asked how NT had arrived at that 15% threshold for ownership.

Mr Havemann replied that it was more historical in that the threshold was in Banks Act and the Companies Acts as well.

Ms Rosemary Lightbody, Senior Policy Advisor, ASISA, said the major concern had been from asset and investment managers as insurance companies were use to clause 159 as it was. The concern of asset managers was that they managed their clients’ monies and there could be multiple small holdings that an asset manager could be managing but which could be seen collectively as that manager having the ability to influence since the holdings could total 15%: However; ASISA had engaged NT at length over the concerns and understood the NT reasoning around clause159 (1) up to subclause (6). On Section 159 (8), ASISA still had reservations with this on the basis that in subsection 159 (2) & (3) a person acquiring a financial stake in a financial institution had been required to obtain prior written approval from the FSCA. If that individual decided to reduce their stake in said financial institution so that the individual was no longer a significant owner that also needed prior approval by the FSCA or the individual could notify the FSCA of that transaction. 159 (8) (b) however was saying that approval in terms of subsection (2), (3) or (4) may not be given unless the responsible authority is satisfied that the person meets and is reasonably likely to continue to meet applicable fit and proper person requirements. It was understandable that if it was to be an acquisition of a stake that would result in an institution becoming a significant owner, requirements of approval were acceptable but if a party was to cease to become a significant owner why was it that approval could be withheld: unless the person continued to meet applicable fit and proper requirements.

Mr Havemann said that that concern had crept in there because of the deleted section of 159 and his proposal was to have that section be undeleted as the effect would be to remove ASISAs concern entirely.

Mr Buthelezi was uncertain what difference it made when one was a significant owner or ceased to be a significant owner as far as fit and proper was concerned.

Mr Havemann replied that significant owners had to be fit and proper generally and what ASISA had highlighted was that the drafting in 159 (8) (b) was that one could not sell something without remaining fit and proper which had not been the complete intention of that provision.  

The Chairperson asked ASISA whether the gap narrowed if the deleted section of clause 159 became undeleted.

Ms Lightbody concurred that indeed the concern would be removed as investment managers preferred not to be drawn in though they had accepted that that was the way things would be.

Clause 162 - Notification by eligible financial institution
NT was proposing an addition to clause 162 (3) which would say: An eligible financial institution contravenes clause 162(1) then a holding company also would be contravening section 162 (1).

Clause 163 - Licensing requirement for holding companies of financial conglomerate
Mr Momoniat said that a certain SA bank had been put in curatorship but the holding company had not because clause 163 (1) had not been in law at the time.

Mr Havemann said that NT was a making a proposal in terms of terminology in 163 (5) (b) that feedback from industry was that they also would like to enter into binding agreements over and above imposition of the binding corporate rules which NT had no issues with.

Clause 144 - Directives by Financial Sector Conduct Authority
Ms Gibson said there had been issues raised about the readability of clause144 with all its subclauses rather than the content thereof. The changes which had been made there were to facilitate that complaint.

Clause 155 - Where person cannot be located
Ms Gibson said that in terms of a debarment the debate had been whether clause 155  was sufficient and was there enough protection of the individuals concerned given that they were about to be debarred.
Counsel had advised that to the extent that the regulator could not locate the regulated person the clause was enough because as a regulated person, with responsibility in that regard; NT felt it fair to impose that if the regulated person was to move; the person had to inform the regulator anyway.  There was a proposal that there regulator continue actively searching for the regulated person which was something NT could just add as it was not included in the B version of the FSR.

Ms Bednar-Giyose added that clause 155 could also speak to the last known electronic address as well.

The Chairperson made announcements around arrangements for the meetings of the Committee with South African Airways (SAA), NT on the FSR Bill and other Committee business for the following week.
He also proposed that there be a subcommittee set up to process whatever was remaining of the FSR Bill.

The meeting was then adjourned.


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