Financial Sector Regulation Bill: deliberations

Meeting report

Financial Sector Regulation Bill: National Treasury briefing
The Chairperson briefly noted that the focus at this meeting would be on the Financial Sector Regulation (FSR) Bill and that Members would be asked to consider the proposed changes to be presented by National Treasury. In terms of the timelines, Members would be asked to vote on the report on 10 May.

Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, National Treasury, said that the National Treasury (NT) hoped to address two main issues in this meeting. Changes had been made to the Bill in the light of earlier discussions. The two issues that he wanted to discuss related to warrantless searches, and whether those complied with the law, and to Post Bank.

The Chairperson told Members that he had discussed the issue of Post Bank with Mr Yunus Carrim, Chairperson of the Standing Committee on Finance, prior to this meeting. The two of them had agreed that an alternative route of engagement should be followed, and that this issue should probably be ,considered outside of the Twin Peaks deliberations. He continued to stress the importance of dealing with this matter swiftly.

Mr Roy Havemann, Chief Director: Financial Markets and Stability, National Treasury, said that he would take Members, clause by clause, through the document (see attached copy) and explained that the changes marked in red were those that Members had already seen and deliberated upon. Those marked in blue were new proposals that have been added since the Bill had last been discussed. I

Clause 58
In clause 58, the only change was an insertion of a single word, to which Members agreed.

Clause 79
The previous description ‘Chief Executive Officer Registrar of the Council for Medical Schemes’ had been changed to ‘Registrar of Medical Schemes’. All Members agreed to this change.

Clause 106
A further paragraph had been added to clause 106(3), dealing with the processes guiding the refusal, withdrawal, or closure of financial products and/or services by a financial institution. Other changes included the removal of unnecessary phrases in the proposed new subsection (5). All members agreed to the changes.

Clause 129
The changes in clause 129 were done to align this clause with earlier alterations. All members agreed to the changes.

Warrantless searched: Clause 132
Ms Empie van Schoor, Chief Director: Legislation, National Treasury, said she would hopefully dispel some of the confusion around warrantless searches and the fears of arbitrary exercise of power by financial sector regulators.

She explained that clause 132 noted that a financial sector regulator may pursue on-site inspections at the premises of a business, if that business had received official prior notification. If the premises of the business were also a private residence, regulators would need to get consent from the occupant of the residence. Alternatively, in the case of premises which were not private homes, warrants may be requested. However, in the exceptional case where the process of requesting a warrant may hamper the inspection, regulators may be granted permission to inspect, from an internal authority. She stressed again, however, that inspections on private residences could only be conducted after consent had been granted by the occupant.

Other amendments now suggested to the clause dealt with the appropriate conduct of investigation procedures and practices, such as respecting person’s rights to security, dignity and privacy, and the duty of the regulators to conform to the principle of decency and good order. She made it clear that all changes were in alignment with the Financial Intelligence Centre (FIC) Amendment Act.

In regard to additional changes for further protection, she noted that investigators must inform people involved that they were not required to answer questions during the inspection. In addition, if they are to give answers that are incriminating, the content of these answers cannot be used in any prosecutions in a criminal court.

Mr T Motlashuping (ANC; North West) asked how inspectors identity themselves and how an individual could ascertain that they were genuine.

Ms van Schoor answered that they could be asked to produce identification, which they were required to carry at all times when conducting inspections.

Mr Havemann explained that National Treasury had asked seven advocates to work on the amendments to the Bill, and he repeated the distinction between the searches on private and non-private premises.

Ms T Motara (ANC; Gauteng) said she was still unclear as to the explanations regarding private and non-private premises, and when a warrant could be pursued.

Mr Momoniat explained that the separation between private and non-private was made because the process of the enquiry would be different according to whether the premises were private or not. In a private residence, the regulator would need to take into account that this is the private and personal space of the resident. In addition a distinction had been made between inspections, which are conducted on licensed businesses, and investigations, which are conducted on unlicensed business.

Ms Motara said that she understood that but still felt that the issue of warrants was not sufficiently covered in clause 132.

Ms van Schoor said that clause 137 would provide further detail on the issue of warrants. Clause 132 dealt exclusively with inspections, and clause 137 dealt with investigations.

Mr Momoniat explained that warrants would be used where business entities are not willing to comply, but where there is still sufficient evidence for the issue of a warrant. He agreed that clause 137 provides further information on warrants.

Mr F Essack (DA; Mpumalanga) asked what would be the likely period of time between non-compliance and the issue of a warrant?

Ms van Schoor answered that if consent is not given, and inspectors believed that the evidence was in danger of being destroyed, it would be possible to get permission to enter the premises from internal regulatory authorities.

The Chairperson asked if this was captured in the FICA legislation.

Ms van Schoor confirmed that it is.

Mr O Terblanche (DA; Western Cape) asked if there are provisions to cover “this vague principle”. He also asked who would be the person within the internal regulatory body to authorise this investigatory power.

Ms van Schoor stated that the wording in clause 137 is much more specific on this issue.

Mr Havemann explained that Members had already seen most of the proposed changes in clause 132, and that these changes are in line with advice from the FIC and Financial Services Regulatory Board .

Members agreed to the changes so far.

Clause 135
Mr Havemann continued by highlighting that the changes in clause 135 had already been presented to members at a previous meeting. Clause 135 deals with the powers of regulators to conduct investigations, and states under what circumstances those powers may be exercised. He clarified that these changes are also in alignment with the FIC Amendment Bill.

Members agreed to the changes.

Clause 137
Mr Havemann directed the attention of Members to the insertion of several words into clause 137. This clause pertained specifically to the way in which warrants are obtained.

Ms van Schoor explained that she had covered much of the content of clause 137 already in her earlier explanation. The major points in this clause covered:

• consent (how it is obtained, and how it can be refused)
• how inspections are to be conducted (in summary, showing respect for constitutional rights to privacy and decent treatment)
• when inspections are to be conducted (during reasonable business hours; unless in the exceptional case that the investigation requires the entry to be during abnormal hours).

She also directed attention to the sections dealing with warrants, repeating earlier points she had made regarding notice of inspections, the issuing of warrants, and the exceptional cases where warrants are not necessary to conduct investigations.

The Chairperson expressed his concern that these amendments do not appear in the FIC Amendment Act, and questioned whether they would be able to withstand a constitutional challenge.

Ms van Schoor said that these amendments did in fact have the same wording and captured the same principles as in the FIC Amendment Act.

Members agreed to the changes.

Clause 138
Mr Havemann explained that clause 138 also deals with warrants.

Ms van Schoor expanded that this clause detailed the process of obtaining a warrant, the application procedure and what must be taken under consideration before the issuing of a warrant. These changes were also made in alignment with the FIC Amendment Act.

Members agreed to the changes.

Clause 140
Mr Havemann said clause 140 detailed the protection that must be given to persons required to provide documents and evidence.

Ms van Schoor said that the major point from this clause was that no answer obtained from a suspect by force could be used as evidence in a court of law.

Members agreed to changes.

Clause 160
Mr Havemann explained that clause 160 deals specifically with engagement with financial conglomerates as it related to insurance regulation. South Africa has many conglomerates, thus it is important have a regulatory framework that deals with them. The insurance regulatory bill serves this purpose.

Another official from National Treasury highlighted a key concern regarding the exercise of power and designation of conglomerates on behalf of regulators. She stressed the importance of the provisions in clause 160, as well as the principles behind them, being in alignment with the Insurance Bill. She specifically highlighted sub clause (3) mentioning the Promotion of Administrative Justice Act which will ensure administrative fairness when it comes to engaging with conglomerates. Revisions to sub clause (7) state that the designation of conglomerates must only be done in reasonable and justifiable circumstances, according to the principles of (3) and the Promotion of Administrative Justice Act. In addition, sub clauses (9) and (10) describe how designations must be continually scrutinised, allowing them to change or be revoked.

Members agreed to changes.

Clause 161
The change of the notification period in clause 161, from 14 to 30 days, was noted; this would provide a more reasonable time. This change is also in line with the Insurance Bill.

Members agreed to changes.

Clause 162
This clause outlined the licensing requirement for holding companies of financial conglomerates. The notice to the holding company of a financial conglomerate must include a statement of the purpose of, and the reasons why it is proposed that the holding company should be licensed. The holding company must be invited to make submissions on the matter within a reasonable time period.

Members agreed to changes.

Clause 163
Changes to clause 163 were again linked to the changes to clause 162, in relation to notification to a holding company of a financial conglomerate, where that holding company might be non-operative. However, the same procedures would have to be followed.

In addition, the addition of sub clause (3) provides clear guidance on how the Prudential Authority may exercise power.

Mr F Essack (DA; Mpumalanga) asked if the final line of clause 163 should be specific about the 30 day time period too.

Mr Momoniat responded that the compliance notice sent to the holding company would be specific about the time frame in which the company should respond. This is the standard and accepted practice.

Members agreed on changes.

Clause 165
Changes in clause 165 related to the considerations that must be undertaken before the Prudential Authority may issue directives, specifically when the authority wishes to partake in a process of restructuring a conglomerate. It would be particularly important that these considerations be specific.

Members agreed to changes.

Clause 166
Clause 166 deals with the approval and prior notification of acquisitions and disposals of material assets. The changes to this clause are additional considerations upon which the Prudential Authority must deliberate, before approving the acquisition or dispossession of material assets. Sub clauses (3) and (4) detail the processes with which the Prudential Authority must comply if it wished to deny approval.

Members agreed to changes.

Clause 214
Mr Havemann explained that the small changes of wording in clause 214 were done to clarify the meaning.

Members agreed to the changes.

Schedule 4: Post Bank
Mr Momoniat explained that the problem with  PostBank is that the Banks Act requires this entity to be a public company, which it is not.

Mr Unathi Kamlana, Deputy Registrar of Banks, South African Reserve Bank, explained that the Banks Act requires that a bank, as well as its holding company, be public companies. The amendment to the Banks Act in 2013, which provided a new definition of a public company in line with the Companies Act, specifically excluded State Owned Companies (SOCs) from the definition of a public company.  For that reason, an SOC cannot be licensed as a bank. Although PostBank had been granted an interim license, it could not be granted a full license as a bank because it was not a public company, and after the section 13 interim licence expired, the Registrar of Banks could not be permitted to renew or extend the license. PostBank would thus need to re-apply and this could take up to a year.

Mr Momoniat explained that currently both PostBank and Ithala Bank were operating under an exception from the Banks Act,. This was not a good situation, as it was desirable that all banks should be operating fully in accordance with the Banks Act and regulated in this way. PostBank's licence would expire whilst it was still in the process of the reapplication. National Treasury was not aware of this problem until this was notified by the Registrar of Banks.

The Chairperson noted that this point had not been part of the Committee’s public hearings, only being raised today.

Mr S Mohai (ANC; Free State) proposed that the Committee deal with this issue rigorously. He asked if Advocate Frank Jenkins, Parliamentary Legal Advisor, had any comments.

Advocate Jenkins stated that the Committee can make an amendment to the Banks Act. In addition, he believed that a formal public hearing would not be required on this issue alone, although the Committee would need to facilitate some sort of public involvement, in order to be in line with the Constitution. This involvement would need to be a meaningful opportunity for public participation. Additionally, the Standing Committee should also be afforded the time to consider these amendments.

Adv Jenkins asked what would happen to PostBank in the meantime and specifically, the consequences of it not obtaining a new license? These consequences must also be considered by the Committee and presented to the public.

Ms Motara asked if the proposed amendments to the Bank Act would also be made in this Bill being considered by the Committee presently. While she agrees with the amendments and public participation, she asserted that the Committee must deal with these proposals separately from the Twin Peaks Bill. She then proposed that National Treasury return at a later date with a formal presentation of the amendments.
Mr Motlashuping agreed with Ms Motara that the Committee had to have more time to deal with the proposed amendments.

Mr Mohai agreed that the amendments just mentioned should be presented at a later date and also would like to have a formal presentation from Adv Jenkins on the point.

Mr Momoniat confirmed that he would be willing to return at a later stage.

Ms Motara did not believe the issue of public participation must be a “hot issue”. Public participation and opinion did usually takes place within the times of committee deliberations.

Mr Jenkins agreed with Ms Motara.

Members indicated their agreement with the other amendments.

The meeting was adjourned.