Financial Sector Regulation Act regulations

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Finance Standing Committee

17 April 2018
Chairperson: Ms T Tobias (ANC) (Acting)
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Meeting Summary

The Standing Committee deliberated on regulations in terms of the Financial Sector Regulation Act (FSR Act).

National Treasury gave a presentation on the regulations and highlighted that they were intended to clarify the performance of functions in terms of the Act during the transitional period prior to the establishment of the financial sector regulators, and to provide for transitional arrangements until the Financial Services Tribunal is operational. In addition, the intended effect of the regulations was to provide for a fair and transparent process for the appointment of the Commissioner and Deputy Commissioners of the Financial Sector Conduct Authority (FSCA). On the process of coming up with the regulations, draft Regulations were published on the National Treasury website for comment in December 2017, and a Notice of that publication was published in the Government Gazette. The required six week period for public comment was completed on 31 January 2018. Prior to finalising and promulgating them in the Government Gazette, the draft Regulations had to be submitted to Parliament for consideration, for a period of at least 30 days while Parliament is in session. Therefore, the following was submitted to Parliament on 15 February 2018: draft Regulations and other documents; and comments on the draft Regulations with National Treasury’s responses. The regulations needed to be promulgated prior to the establishment of the Prudential Authority (PA), the FSCA, and the Financial Services Tribunal on 1 April 2018. The final Regulations and Commencement Notice were published on 29 March 2018.

 

The Prudential Authority (PA) gave an update on its implementation as per the FSR Act. The PA consists of four departments- these being, Banking Insurance, Market Infrastructure and Cooperative Financial Institutions; Risk Support; Financial Conglomerate Supervision and; Policy, Statistics and Industry Support. A Prudential Committee chaired by the Reserve Bank Governor operates in terms of section 42 to 46 of the FSRA. On its funding, for the 2018/19 financial year, the PA would continue to be funded from the Reserve Bank’s own resources until the Fiscal Sector Levies Bill is promulgated. The Reserve Bank’s Supervision Department’s approved budgets for the 2017/18 and 2018/19 financial years amounted to R287 million and R295 million respectively. The additional responsibilities for prudential regulation of other financial institutions in addition to banks will increase both the personnel and operational costs of the PA. On interactions between the PA and the Reserve Bank, the Reserve Bank is a macro-prudential regulator, protecting and enhancing financial stability as well as restoring and maintaining financial stability in case of a systemic event. On the other hand, the PA is a micro-prudential regulator, promoting and enhancing safety and soundness of financial institutions as well as assisting in maintaining financial stability. Stakeholders were looking forward to the full realisation of the PA’s mandate as envisaged in the FSR Act.

Furthermore, the Committee received a letter from the EFF raising concerns about the regulations. The EFF was extremely disturbed by the conduct of the Minister of Finance and the National Treasury in the implementation of the FSR Act. In particular, what was most disturbing is the manner in which the regulations made in terms of the Act were finalized, the appointment of Mr Abel Sithole as the Interim Commission and the unjustified and undeserved appointment of Ms Katherine Gibson as a member of the illegitimate Transitional Management Committee of the Financial Sector Conduct Authority (FSCA). The conduct of the National Treasury, in particular the Deputy Director-General (DDG) Ismail Momoniat, throughout the process to develop the Act is contemptible and borders on corruption, capture and irregularities. Mr Momoniat appointed Ms Gibson as a consultant for the past three years without proper supply chain processes. After he failed to renew her irregular contract as a consultant, changes to the regulations made and published on the 29th of March 2018 without following proper Parliament processes as required by the Act were meant to give her the position in the Transitional Management Committee. The Act stipulates that the regulations must be tabled in Parliament for 30 days while it is in session, and if there is no input or changes the regulations are made as tabled. As such, the regulations that were tabled on the 15th of February 2018 were not the same as the ones that were published and made on the 29th of March 2018. The regulations tabled in Parliament on the 15th of February, in particular regulation 3(1), provide that the current executive of the Financial Service Board (FSB) will be the interim executive of the FSCA. However, the regulations made and published changed to provide for the establishment of the transitional management committee, the appointment of an interim Management and the Minister’s nominee to the transitional management committee. These changes were only meant to allow for the appointment of Ms Gibson. The PA must not take off from a wrong footing. The Committee should take a posture on this.

Members queried whether the regulations were formally submitted to the Committee on 15 February 2018 as suggested. They could not recall the Committee receiving the said regulations. They asked whether the regulations and relevant documents were submitted to the Committee legally and ATC’d (Announcements, Tablings and Committee Reports) as per usual. The DA asked for a legal opinion from the Parliamentary Legal Unit which traverses the following issues: whether Treasury complied with the FSR Act in coming up with the Regulations; in the event that Treasury had failed to comply with the Act, what remedies could be put in place to ensure it complies with the Act?; and thirdly, what were the implications of a failure to comply if indeed it is correct that there was a failure to comply?

The Acting Chairperson said the Committee could not take any decisions up until the status of the regulations was clarified by the Parliamentary Legal Unit. Also, the Committee could not take a position on the issues raised by the EFF. They needed to be responded to by Treasury, ideally in the presence of the individuals being implicated.

Meeting report

The Acting Chairperson welcomed everyone and indicated that the Chairperson was not in attendance owing to work-related commitments in Washington D.C.

National Treasury presentation

Ms Kershia Singh, Director: Market Conduct, National Treasury, took the Committee through a presentation on the Regulations in terms of the Financial Sector Regulation Act (FSR Act). The regulations were intended to clarify the performance of functions in terms of the Act during the transitional period prior to the establishment of the financial sector regulators, and to provide for transitional arrangements until the Financial Services Tribunal is operational. In addition, the intended effect of the regulations was to provide for a fair and transparent process for the appointment of the Commissioner and Deputy Commissioners of the Financial Sector Conduct Authority (FSCA).

On the process of coming up with the regulations, draft Regulations were published on the National Treasury website for comment in December 2017, and a Notice of that publication was published in the Government Gazette. The required six week period for public comment was completed on 31 January 2018. Prior to finalising and promulgating them in the Government Gazette, the draft Regulations had to be submitted to Parliament for consideration, for a period of at least 30 days while Parliament is in session. Therefore, the following was submitted to Parliament on 15 February 2018: draft Regulations and other documents; and comments on the draft Regulations with National Treasury’s responses. The regulations needed to be promulgated prior to the establishment of the Prudential Authority (PA), the FSCA, and the Financial Services Tribunal on 1 April 2018. The final Regulations and Commencement Notice were published on 29 March 2018.

The summary of Regulations was as follows:

Part 1 of the Regulations addresses necessary transitional measures whereas Part 2 addresses the appointment of the Commissioner and Deputy Commissioners of the Financial Sector Conduct Authority.

Part 1- Transitional Measures

Regulation 1

It provides for certain necessary definitions in the Regulations.

Regulation 2

Addresses the issue of who would exercise powers if provisions of the FSR Act come into operation prior to the establishment of the PA and the FSCA, collectively the “financial sector regulators”.

Regulation 2(1)

If any provisions of the FSRA come into operation prior to the PA being established, a reference in a financial sector law, other than the Financial Markets Act, to the ‘Prudential Authority’, or a reference to ‘a financial sector regulator’, must be read as referring to or as including a reference to the Reserve Bank. The Reserve Bank must perform the functions of the Prudential Authority as set out in section 34 of the Act; in respect of the Financial Markets Act, section 1A of that Act applies (which designates the exercise of powers in terms of that Act).

Regulation 2(2)

If any provisions of the Act come into operation prior to the establishment of the Financial Sector Conduct Authority, a reference in a financial sector law to the ‘Financial Sector Conduct Authority’, or a reference to ‘a financial sector regulator’, must be read as referring to or as including a reference to the Financial Services Board. The executive of the Financial Services Board, referred to in section 9 of the Financial Services Board Act, must perform the functions of the Financial Sector Conduct Authority in terms of the Act. The executive officer of the Financial Services Board, referred to in section 1 of the Financial Services Board Act, must perform the functions of the Financial Sector Conduct Authority in terms of legislation referred to in paragraph (b), (c) or (d) of the definition of a financial sector law in section 1(1) of the Act, subject to a delegation under section 20(3) or (3A) of the Financial Services Board Act; in respect of the Financial Markets Act, section 1A of that Act applies.

Regulation 2(3)

If the Financial Sector Conduct Authority is established prior to the Fees and Levies Chapter, Chapter 16, comes into effect, a reference to the board in sections 15A and 16 of the Financial Services Board Act must be read as a reference to the Financial Sector Conduct Authority. This is to make it clear that the Financial Sector Conduct Authority could continue to be funded for an interim period in accordance with the Financial Services Board Act until the forthcoming Financial Sector Levies Bill is enacted.

Regulation 3

The regulation deals with the management of the transitional process to establish the FSCA. The original drafting was revised after a concern was raised that the original drafting did not directly provide for a Commissioner. The FSR Act provides that certain functions are performed by a Commissioner and clarity was requested as to who that would be in the interim period. To minimise potential conflicts of interest in the appointment process for the new Commissioner and Deputy Commissioners, the revised draft provided for a ‘transitional management committee’, still comprised of the Executive Committee of the FSB. The chair of the Board of the FSB is designated to act as Commissioner. An independent candidate (external to the FSB) is also included to ensure a transparent transitional process.

Regulation 3(2)

It sets out the functions that the executive of the Financial Services Board could perform while acting as the Executive Committee of the Financial Sector Conduct Authority.

Regulation 3(3)

It addresses how funding will be handled during the transitional period of the establishment of the FSCA.

Regulation 3(4)

It was slightly amended for clarity in providing that the board of the FSB would remain in place until 30 November 2018 to ensure that the annual report of the FSB is tabled in line with legal requirements. It also provides for the members of the transitional management committee to remain in an advisory capacity once the Commissioner and Deputy Commissioner have been appointed.

Regulation 3(5)

It addresses how the reporting of financial statements will be handled during the transitional period.

Regulation 4- Establishment of the Financial Services Tribunal

Regulation 4(1)

Provides that the FSB/FSCA must provide the necessary initial secretarial, administrative and other support for the Tribunal, and an agreement will be entered into between the FSCA and the PA to provide for the sharing of costs, until 1 April 2019, when the Financial Sector Levies Bill, once enacted, would raise levies for the functioning of the Tribunal. The Financial Intelligence Centre has now also been included as the Tribunal will hear appeals in relation to the FIC.

Regulation 4(2)

Addresses what rules, regulations, guidelines, etc., would be applied by the Tribunal to handle cases during the period from its establishment on 1 April 2018, until the Chairperson of the Tribunal may designate Tribunal Rules. During this period, either the existing rules, regulations, etc., of the existing Appeal Board of the FSB and the Board of Review in terms of the Banks Act could be jointly designated by the existing Chairpersons of the Board of Review and Appeal Board as being applicable, or, if no designation is made prior to the Tribunal being established on 1 April, the existing Appeal Board rules and regulations, etc., would be applied.

Regulation 5

The regulation deals with how documents that are required to be published on the Register must be published prior to the Register being established, as the Register cannot be established immediately.

Regulation 6

It clarifies the appropriate interpretation of certain provisions in the Act, due to the fact that those sections refer to “Chapter”, “Part” or ‘’section”, and it would be necessary to bring different provisions of the Chapter, Part and section referred to into operation at different times, and so there would not be a single date on which the “Chapter”, “Part” or “section” referred to would come into operation.

Part 2- Appointment of Commissioner and Deputy Commissioners of Financial Sector Conduct Authority
Regulation 7

It addresses advertising of the positions of Commissioner and Deputy Commissioner. Minor refinement to the wording made.

Regulation 9

Provides for the establishment of a Shortlisting panel for the vetting of applications and the shortlisting of candidates, and sets out certain requirements relating to its functioning. In response to comments that some specification of expertise for the panel should be indicated, the following revised wording for sub-regulation (2) was made. The Shortlisting Panel for the Commissioner and Deputy Commission consists of—

(i) the Director-General or a Deputy Director-General of the National Treasury nominated by the Director-General as chairperson;

(ii) a Deputy Governor of the Reserve Bank nominated by the Governor;

(iii) the Commissioner of the National Consumer Commission appointed in terms of section 87 of the Consumer Protection Act, 2008 (Act No. 68 of 2008), or that Commissioner’s nominee;

(iv) a representative of the Ethics Institute of South Africa or the Institute of Directors in Southern Africa or any other body that focuses on ethics and good governance in the financial sector, designated by the Director-General of the National Treasury; and

(v) one person designated by the Minister who has suitable experience and expertise in the financial sector, and knowledge of the financial sector, that enables them to appropriately consider and assess the suitability of applicants for appointment as Commissioner or Deputy Commissioner.

The Shortlisting Panel for the first appointments of the Commissioner and Deputy Commissioners must include the Chairperson of the Financial Services Board.

Part 2- Regulation 10

Regulation 10 provides for the appointment of a Ministerial Panel to interview shortlisted candidates and recommend a preferred candidate for appointment to the positions of Commissioner and Deputy Commissioner. Similar comments were received as were made in relation to Regulation 9, and so similar amendments are proposed to regulation 10(1) as are proposed to regulation 9(2), with the Ministerial Panel consisting of: the Minister as Chairperson; the Director-General; the Governor or a Deputy Governor of the Reserve Bank nominated by the Governor; and one other person designated by the Minister who has suitable experience and expertise in the financial sector, and knowledge of the financial sector, that enables them to appropriately consider and assess the suitability of applicants for appointment as Commissioner or Deputy Commissioner.

Regulation 11

The regulation sets out criteria for candidates to be suitable for shortlisting and interviewing and appointment as Commissioner and Deputy Commissioners, in addition to what is provided in section 61 of the FSRA.

These criteria are intended to ensure that strongly qualified candidates, with a range of appropriate expertise and experience, are appointed to these critical positions in the FSCA. Required years of experience amended from 7 years to 10 years.

Prudential Authority presentation

Mr Unathi Kamlana, Head: Policy, Statistics and Industry Support Department, Prudential Authority, gave an update on the implementation of the Prudential Authority (PA) as per the FSR Act. The PA consists of four departments- these being, Banking Insurance, Market Infrastructure and Cooperative Financial Institutions; Risk Support; Financial Conglomerate Supervision and; Policy, Statistics and Industry Support. A Prudential Committee chaired by the Reserve Bank Governor operates in terms of section 42 to 46 of the FSRA. On its funding, for the 2018/19 financial year, the PA would continue to be funded from the Reserve Bank’s own resources until the Fiscal Sector Levies Bill is promulgated. The Reserve Bank’s Supervision Department’s approved budgets for the 2017/18 and 2018/19 financial years amounted to R287 million and R295 million respectively. The additional responsibilities for prudential regulation of other financial institutions in addition to banks will increase both the personnel and operational costs of the PA.

On interactions between the PA and the Reserve Bank, the Reserve Bank is a macro-prudential regulator, protecting and enhancing financial stability as well as restoring and maintaining financial stability in case of a systemic event. On the other hand, the PA is a micro-prudential regulator, promoting and enhancing safety and soundness of financial institutions as well as assisting in maintaining financial stability. Stakeholders were looking forward to the full realisation of the PA’s mandate as envisaged in the FSR Act.

Discussion

The Acting Chairperson indicated that the Committee had received a letter from the EFF raising concerns about the Regulations. However, Members had not fully applied their minds on these issues as the letter was received late. She asked about the tentative timeframes which Treasury had set out for the processing of the aforementioned Fiscal Sector Levies Bill. She urged Treasury to be mindful of the Committee’s time constraints during this term.

Mr D Maynier (DA) commented on the presentation by Treasury. He asked about the consequences in the event that Parliament fails to pass the Levies Bill by the end of this year. He felt it would be imperative for the Committee to deal with the Levies Bill before the end of the financial year. He suggested that the Bill be introduced as soon as possible.

Mr Roy Havemann, Chief Director: Financial Markets and Stability, National Treasury, said Treasury would want the Levies Bill to be processed and enacted by April 2019, to enable the PA to raise its own funds by the end of next year. If not, then it would have to be considered how to fund the PA on an interim basis. There had been extensive and continual consultations since 2016, and if the Bill was not passed by 1 April 2019, it was not known how the PA would be funded. The current underfunding also had to be taken into account.

Mr F Shivambu (EFF) commented on the Committee’s time constraints as identified by the Acting Chairperson. The National Assembly Programming Committee had agreed in principle that committees could meet during the June to August constituency break if there were urgent issues which needed to be dealt with. Further, the EFF was extremely disturbed by the conduct of the Minister of Finance and the National Treasury in the implementation of the Financial Sector Regulation Act No.9 of 2017. In particular, what was most disturbing is the manner in which the regulations made in terms of the Act were finalized, the appointment of Mr Abel Sithole as the Interim Commission and the unjustified and undeserved appointment of Ms Katherine Gibson as a member of the illegitimate Transitional Management Committee of the Financial Sector Conduct Authority (FSCA). The conduct of the National Treasury, in particular the Deputy Director-General (DDG) Ismail Momoniat, throughout the process to develop the Act is contemptible and borders on corruption, capture and irregularities. Mr Momoniat appointed Ms Gibson as a consultant for the past three years without proper supply chain processes. After he failed to renew her irregular contract as a consultant, changes to the regulations made and published on the 29th of March 2018 without following proper Parliament processes as required by the Act were meant to give her the position in the Transitional Management Committee. The Act stipulates that the regulations must be tabled in Parliament for 30 days while it is in session, and if there is no input or changes the regulations are made as tabled. As such, the regulations that were tabled on the 15th of February 2018 were not the same as the ones that were published and made on the 29th of March 2018. The regulations tabled in Parliament on the 15th of February, in particular regulation 3(1), provide that the current executive of the Financial Service Board (FSB) will be the interim executive of the FSCA. However, the regulations made and published changed to provide for the establishment of the transitional management committee, the appointment of an interim Management and the Minister’s nominee to the transitional management committee. These changes were only meant to allow for the appointment of Ms Gibson. The PA must not take off from a wrong footing. The Committee should take a posture on this.

Mr Maynier said the FSR Act stipulated that there had to be an evaluation of the financial impact of the regulations themself. This did not seem to have happened as the document that was seemingly used to comply with that provision of the Act was an impact assessment done 19 months earlier. In fact, the impact assessment was for the legislation itself, not the regulations. It was thus questionable whether Treasury fully complied with the provisions of the Act. Also, the regulations needed to be submitted to Parliament through stipulated procedure.

Ms P Nkonyeni (ANC) pointed out that Mr Shivambu raised serious allegations that needed to be investigated accordingly. She urged the Committee to consider investigating and establishing the veracity of the allegations before proceeding.

The Acting Chairperson said the Committee could not take a position on the issues raised by the EFF. On the Treasury’s presentation she queried whether the Regulations were formally submitted to the Committee on 15 February 2018 as suggested. She could not recall the Committee receiving the said Regulations.

Mr Havemann indicated that there had been long discussions during the processing of the FSR Bill about how Treasury would make Regulations. Currently the laws had no clear-cut procedure on how Parliament should deal with Regulations. The formulation of Regulations had been largely an executive function, and generally the executive was left to make them. However the Committee had expressed a view that this was not appropriate. Some Members had pointed out although the FSR Act gave the Minister powers to make the Regulations, Parliament should at least have sight of the Regulations and be given time to engage the Minister or Treasury on them. The view of legal counsel at that time was that Regulations were not Bills and thus did not need to be formally tabled, but could just be submitted to Parliament for comment.

The Acting Chairperson sought clarity about the procedure which had to be followed in relation to the handling of the Regulations by the Committee. She asked the Parliamentary Legal Unit to confirm whether the Regulations were procedurally submitted.

Mr A Lees (DA) pointed out the need for clarity on whether the documents were submitted legally. He asked whether the said Regulations and documents were ATC’d (Announcements, Tablings and Committee Reports). as per usual. What were the implications in the event that the standard procedure was not followed in tabling the documents before Committee?

Adv. Frank Jenkins, Senior Parliamentary Legal Advisor, said documents tabled or submitted to Parliament had to be ATC’d. Standard procedure stipulates that there must be a record because if anyone would want to challenge the Regulations, they could do it on either procedural or substantive grounds. He would make a follow-up and verify whether the Regulations were ATC’d upon their submission by Treasury.

The Acting Chairperson felt decisions should be postponed up until this was clarified. In the event that Treasury had not procedurally tabled the Regulations, they should be taken as preliminary up until this was regularised. The contents of the regulations would therefore be deliberated on a later date.

Mr Maynier asked for a legal opinion from the Parliamentary Legal Unit which traverses the following issues: whether Treasury complied with the FSR Act in coming up with the Regulations; in the event that Treasury had failed to comply with the Act, what remedies could be put in place to ensure it complies with the Act?; and thirdly, what were the implications of a failure to comply if indeed it is correct that there was a failure to comply?

Mr Shivambu pointed out that it was necessary to get a brief from Treasury on the issues he had raised. He commented on the establishment of the PA. There must be a clear instruction to the effect that the Reserve Bank should pull out of the African Bank. The African Bank was now out of danger and the Reserve Bank had to undertake its prudential role without any conflicts of interest. African Bank should exist on its own and ideally the stake currently held by the Reserve Bank should be disposed to people who were historically not allowed to own banks.

Mr Kamlana replied that there was every intention by the Reserve Bank to dispose of its interest at African Bank. This was going to happen soon and the decision would be communicated. He could not make any undertaking on behalf of the Reserve Bank as to whom the stake would be disposed to.

The Acting Chairperson reiterated that the Committee could not take any decisions up until the status of the Regulations was clarified by the Parliamentary Legal Unit. Also, the issues raised by the EFF still needed to be responded to by Treasury, ideally in the presence of the individuals being implicated.

The meeting was adjourned.

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