Financial Sector Regulation Bill and financial implications: National Treasury briefing

NCOP Finance

03 February 2017
Chairperson: Mr C De Beer (Northern Cape, ANC)
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Meeting Summary

National Treasury took the Committee through a presentation on the Financial Sector Regulation Bill (the Bill), drawing attention to comments made during the public hearings, the main areas of concern, the National Treasury response to those comments and the outline of the Bill. Substantive issues that had been raised during the period for comment related, amongst others, to the role of Parliament when making regulatory instruments, the binding nature of the clauses, interpretation, significant owners, directives for holding companies, the Financial Services Tribunal composition and work. They also looked to the liability of directors of companies, the role of the National Credit Regulator, transformation of the financial sector, fees and levies and implementation of the Financial Sector Regulation Bill (FSR Bill). I

It was pointed out that the definitions in the Bill related specifically to financial products and although there were some comments there was nothing particularly contentious around these, but some of the calls for clarity or correction were being considered by National Treasury. Chapter 2 set out the mandate, role and powers of SA Reserve Bank (SARB) in relation to financial stability. The Bill also provided for conglomerate (group) supervision, whereby authorities were permitted to regulate and supervise groups in their entirety, rather than only at holding company level. Chapters 3 and 4 dealt in turn with the Prudential Authority and Financial Sector Conduct Authority, setting out their establishment, aims and objectives and functioning and their human and financial resource management. In relation to the Prudential Authority, some comments were raised on the level of detail around its regulatory strategies and annual reports. Both this Authority and the Financial Sector Conduct Authority were bound to measures for accountability, although there were some questions raised as to whether reporting to the National Treasury could compromise the independence of the Prudential Authority. It was pointed out that the Financial Sector Conduct Authority appeared to hold a dual mandate with the National Credit Regulator (NCR). Questions were raised around the delegation of its powers, and a list of activities capable of delegation would be compiled.

In regard to Chapter 5, a system of cooperation and coordination was expected to run between the financial sector regulators, who included the the Financial System Council of Regulators, the Financial Stability Oversight Committee, the Financial Sector Inter-Ministerial Council, and Financial Sector Contingency Forum. Some comments, which did not find favour, suggested that the Inter-Ministerial Council should review all proposed legislation that had any impact on the financial sector, although National Treasury pointed out that its objectives were stipulated quite clearly in the Bill currently under discussion. Another suggestion that did not find favour proposed that all financial institutions should, under the Bill, need to be consulted about the efficacy of cooperation among regulators.

Chapter six outlined the administration actions which could be taken, including those in terms of the Promotion of Administrative Justice Act. It was being suggested that regulators could establish an administrative action committee. Other comments questioned the status of continuing the funding of the Directorate for Market Abuse and talking about reconsideration of decisions.

Chapter 7 dealt with regulatory instruments and there were questions raised and answered on the status of regulatory instruments, (it was decided that they would have the status of subordinate legislation and the newly-stipulated consultation period with Parliament before a regulatory instrument could be made. Concerns were expressed about the ability to make standards as a matter of urgency, and clarity was requested on when the instruments would come into effect ,the need for an adequate transition and set process. Further questions were asked about the ability of the Regulator to set standards for key persons to follow, which was seen as desirable.

Chapter 8 dealt with licensing, making it clear that the relevant licensing authority would be responsible for licenses issued under the Act and supervising requirements of the Act. However, it was recognised that in the later phase 2 of the Twin Peaks process, more significant changes could be required as the prudential and conduct frameworks developed. Some of the comments objected to the Regulator not responding to a license application, something being read as a refusal of licence, and the obligation on a licensed entity to report a contravention of the law, although some had commented that they regarded the requirement to disclose licences as onerous.

Chapters 9 and 10 dealt with inspections, investigations and enforcement. Comments were submitted on self-incrimination concerns, although there appeared to be some misunderstanding as to the purposes of on-site inspections and investigations. There were also comments around the nature and purpose of binding interpretations, the consultation process to be followed before directives are issue, the nature of directives that could be made and the debarment process. It was noted that in relation to debarments, the Bill now referred to a “natural person” instead of an individual and provided additional ability for the regulator to revoke a debarment.

Chapters 11 and 12 dealt with significant owners and financial conglomerates and provided the  framework to licence holding companies and impose requirements on significant owners and financial conglomerates. Comments in relation to these chapters were made around the complex drafting of significant owner provisions, and the uncertainty created on the process with the Regulator. Chapter 13 dealt with administrative penalties for non-compliance with the Bill and there was a request that clause 172 should be amplified with regulations or standards as to what types of indemnity insurance might be provided for.

Chapter 14 dealt with the Ombud Scheme, since the Bill was essentially repealing and taking over some of the provisions that had been in the Financial Services Ombud Schemes Act, aligning the provisions now with the Twin Peaks regulatory system in keeping with the unified regulatory approach. The Ombud Regulatory Council was established as the statutory body for a single point of entry into the Ombud system. Comments related to the possible change of name, the role of the Chief Ombud and whether the normal ombud powers applied. Chapter 15 dealt with the Financial Services Tribunal, and its function was explained. There was some confusion around “judicial” review and how financial institutions might approach the Tribunal for reviews of decisions by the Regulator. Chapter 16 dealt with fees and levies and National Treasury noted that an impact study had been done and a draft Levies Bill prepared. There were concerns around the vicarious liabilities of directors and exemptions from the Protection of Personal Information Act, and the scope and purpose of the consequential amendments and how the powers and duties would compare was presented.

Members noted the information but expressed their desire to have further time to study the Bill. Questions were raised around consumer protection, the composition and scope of the Ombud Regulatory Council.
 

Meeting report

Financial Sector Regulation (FSR) Bill: National Treasury briefing
The Chairperson briefly noted that the Financial Sector Regulation (FSR) Bill was initiated in 2007, at a time when the financial crisis was experienced, and this had influenced the performance of the financial sector in South Africa also. It was recognised that there was a need to strengthen the regulation of the financial sector. 

Mr Roy Havemann, Chief Director: Financial Markets and Stability, National Treasury, took the Committee through the attached presentation. Some substantive issues were raised during the period for comment, which included issues around the role of Parliament in making regulatory instruments, binding interpretation, significant owners, directives to holding companies, the Financial Services Tribunal, liability of directors, role of the National Credit Regulator, transformation of the financial sector, fees and levies, and implementation of the FSR Bill.

Mr Havemann alluded to comments made on the definitions of financial product; financial service, financial products and securities services. He noted that there were no significant disputes with definitions, although some comments asked for factual corrections or requested clarity in definitions, and these had been taken into consideration by National Treasury (NT).

He noted that Chapter 2 of the Bill sets out the mandate, role and powers of  the South African Reserve Bank (SARB) in relation to financial stability. The FSR Bill also provided for conglomerate (group) supervision, allowing authorities to regulate and supervise groups in their entirety, rather than only at holding company level.

Chapters 3 and 4 dealt with the Prudential Authority (PA) and Financial Sector Conduct Authority (FSCA), including their establishment, objectives and functions and governance, as well as human resources and financial management. There were some comments raised on the level of detail to be prescribed for the PA’s regulatory strategies and annual reports, which were seen as necessary as they were accountability measures, with similar requirements for the FSCA. Some of the comments requesting set KPIs for Prudential Committee members did not find favour because they were not viewed as necessary. There were other comments questioning whether the need for reporting to the National Treasury compromised the independence of the PA. However, it was felt that reporting to National Treasury was an important accountability measure for the Regulator.

In regard to the FCSA, some minor comments were submitted. One noted the dual regulation of credit with the NCR and there was another querying the ability of the FSCA ExCo to delegate its power. For that reason, the list of delegable activities would be clarified.

Mr Havemann noted that Chapter 5 dealt with the co-operation and co-ordination between financial sector regulators, namely, the Financial System Council of Regulators, the Financial Stability Oversight Committee, the Financial Sector Inter-Ministerial Council, and Financial Sector Contingency Forum. Comments were submitted suggesting that the Inter-Ministerial Council should be mandated to review all proposed legislation with any impact on the financial sector. National Treasury did not agree with this suggestion. The objective of the Inter-Ministerial Council was as stipulated in the FSC Bill. Another comment suggested that it should be required, in the legislation, that financial institutions must be consulted about the efficacy of cooperation among regulators. Again, NT did not agree with this.

Mr Havemann noted that Chapter 6 dealt with administrative actions that could operate in terms of the Promotion of Administrative Justice Act. It proposed that regulators could establish administrative action committees. Comments were submitted questioning the status and continuation of the function of the Directorate for Market Abuse, and there NT was presently talking about reconsideration of decisions.

Mr O Terblanche (DA, Western Cape) sought clarity on the protection of consumers.

Mr Havemann responded that consumers were protected by the Consumer Protection Act.  However, the FSR Bill also created further mechanisms for protection of consumers.

Mr Havemann continued to take Members through the Bill. Chapter 7 dealt with regulatory instruments. In answer to queries on the status of regulatory instruments, NT clarified that these would have the status of subordinate legislation. Comments on the role of Parliament in the making of regulatory instruments were made, and the Bill stipulated a consultation period with Parliament before a regulatory instrument could be made. Concerns were expressed about the ability to make standards as a matter of urgency. Clarity was requested as to when the instruments would come into effect, and the need to provide adequate transitional time, and it was clarified that a certain process would be followed to cater for that. Other questions raised related to the ability to set standards for key persons to follow and it was noted that in principle the regulators ought to be able to set standards.

Chapter 8 dealt with licensing. The relevant licensing authority would be responsible for licenses issued under the Act and for supervising requirements of the Act. However, phase 2 of the Twin Peaks process would require more significant changes to the licensing process as a prudential and conduct framework developed. Some comments were submitted objecting to the Regulator not responding to a license application being read as a refusal licence, and to the obligation of a licenced entity to report a contravention of the law, Other comments regarded the requirement to disclose licenses as onerous.

Mr Havemann noted that Chapters 9 and 10 dealt with inspections, investigations and enforcement. Comments were submitted with regard to self-incrimination concerns. There appeared to be some misunderstanding on the purposes of on-site inspections and investigations. Other comments had been directed to the nature and purpose of binding interpretations, the consultation process for directives, plus the nature of directives that could be made, and the debarment process. In the latter context, the term “individuals” was replaced with “natural person”, and there was an added ability for regulator to revoke a debarment.

Mr Havemann noted that Chapters 11 and 12 dealt with significant owners and financial conglomerates and provided a framework for licence holding companies and imposed requirements on significant owners. Financial conglomerates included African Bank, Stangen and Ellerines. Comments flagged related to the complex drafting of significant owner provisions which could create uncertainties as to the process with the Regulator.

Chapter 13 dealt with administrative penalties and specified penalties that would apply in the case of non-compliance with specific provisions of the FSR Bill. Comments submitted requested the amendment of clause 172 to specify, in regulations or standards, what types of indemnity insurance might be provided for.

Chapter 14 dealt with the ombud scheme system. The FSR Bill repealed the Financial Services Ombud Schemes (FSOS) Act and thus integrated the provisions of that Act in this new Bill, which was intending to align the financial ombud system to the evolving Twin Peaks regulatory system, in keeping with a unified regulatory approach, and in an attempt to move away from having a whole range of legislation governing the financial services industry. It established the Ombud Regulatory Council as a statutory body that would establish a single point of entry into the Ombud system. Comments included proposals to change the name of the Ombud Regulatory Council to Ombud Council, and questions were raised around the role of the Chief Ombud which did not have the normal range of ombud power.

Discussion

The Chairperson sought clarity on the composition of the Ombud Regulatory Council, asking how many members it would comprise.

Mr Havemann responded that the final number of the people who composed the Ombud Regulatory Council would be decided by the Minister. Clause 176 talked about the composition of the Council.

The Chairperson remarked that the composition and appointment of members were unclear and needed to be elaborated on in the FSR Bill.
Mr Terblanche agreed.

Mr Havemann pointed out that Chapter 15 dealt with the Financial Services Tribunal. The function of the Tribunal was to judicially review decisions of financial sector regulators and the Ombud Regulatory Council, and this would follow an application by an aggrieved party. Members of the Tribunal were appointed by the Minister. Comments had suggested that the use of the phrase  “judicial” review created confusion and raised concerns about the ability of financial institutions to approach the Tribunal requesting reconsideration of decisions by the regulator.

Mr Havemann said that Chapter 16 dealt with levies and fees. He noted that an impact study related to the FSR Bill had been prepared and was available. A Draft Levies Bill had also been prepared. Concerns were raised, in the public comments, about vicarious liability of directors and there were points flagged relating to exemptions from Protection of Personal Information Act.

Mr Havemann noted the aim of consequential amendments which indicated how current laws would operate when the FSR Bill was enacted. These clarified the powers and duties in the FSR Bill

Mr S Mohai (Free State, ANC) indicated that Members would prefer not to engage today with both the presentation and the Bill as they would want to have further time to go through the Bill more carefully.  would not engage with both the presentation and the FSR Bill in order to seek clarity because they needed a time to go through the FSR Bill. On14 February 2017, Members would go through the Bill clause by clause, and would be able to raise their concerns at this time.

The Chairperson and Mr Terblanche agreed.

The meeting was adjourned.
 

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