Financial Advisory and Intermediary Services Act: progress report

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Finance Standing Committee

14 August 2003
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Meeting report

FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
15 August 2003

FINANCIAL ADVISORY AND INTERMEDIARY SERVICES ACT: PROGRESS REPORT

Chairperson: Ms B Hogan (ANC)

Documents handed out
Financial Advisory and Intermediary Services Act
Financial Services Board Presentation on Implementation
Draft Committee Programme for Third Quarter - as of 13 August 2003 (Appendix)

SUMMARY
The presentation by the FSB focused on the important definitions in the FAIS Act, the recognised bodies, the fees charged to applicants, the exemptions granted, the FAIS Code of Conduct, the Office of the Ombud for financial services providers, the regulations for the FAIS Act and the determination of the Section 7 date.

Members questioned the definition of the term "undesirable practice", who exactly the "recognised bodies" are and who they represent, whether the fees charged by the FSB would actually be a barrier to entry into the market, whether the FAIS Act Code of Conduct would undermine the Policyholder Protection Rules and whether steps are in place to limit the non-cash incentives and to regulate commissions. Members also sought clarity on the functions and current status of the Office of the Ombud, the protection currently granted by the FAIS Act to those compliance officers who alert the Registrar to cases of non-compliance within their institution. The Committee raised concerns with the serious problem with the insurance industry's failure to grant life insurance to persons living with HIV, and asked whether the FSB and Treasury have devised plans to address this issue.

MINUTES
Presentation by Financial Services Board
Mr Gerry Anderson, FSB Deputy Executive Officer: Market Conduct and Consumer Education, conducted the presentation (document attached), which outlined the important definitions in the Financial Advisory and Intermediary Services Act (FAIS Act), the advisory committee on financial services providers, the recognised bodies, the fees charged to applicants, the exemptions granted, the FAIS Code of Conduct, the Office of the Ombud for financial services providers, the regulations for the FAIS Act and the determination of the Section 7 date.

Discussion
Undesirable practices
Dr G Woods (IFP) asked whether the FSB has found it necessary to add greater clarity to the term "undesirable practices" in Section 34 of the Act, because concern was raised with the wide scope of the definition.

Dr Franso Van Zyl, FSB Head: Legislation and Research, responded that a concern was raised with the constitutionality of the term. This is not a unique provision because many of the laws administered by the FSB grants the Minister the power to declare an activity an "undesirable practice". There were some court cases on this matter in 2002, particularly on the boundaries of these "undesirable practices". The FSB has since introduced benchmarks or factors that have to be taken into consideration when declaring an activity as an "undesirable practice". For this reason phrase such as "harming the relationship between the supplier and the clients" was introduced, as well as "prejudicing clients" or "deceiving clients". In fact the actual wording used in the judgment of the court cases were inserted into the legislation. It is thus not an open-ended term, and in this sense the FSB has framed the definition of this term so that it is not as open-ended.

Recognised bodies
The Chair requested a break-down of the recognised bodies and who they will be licensing. Who, for example, would the Arcay Group be responsible for?

Mr Anderson replied that the Arcay Group is a network which represents about 300 independent financial insurance brokers, who subscribe to their services. The Arcay Group would then provide assistance to its members to assist with the processing of the application for a licence, and to make a recommendation to the FSB on the application.

The Chair contended that the Arcay Group is thus both assisting businesses to draw up a licence, and then also approve that licence.

Mr Anderson answered in the negative. The approval of the licence remains the task of the Registrar.

The Chair asked whether there is not a possible conflict of interest here in assisting with the drawing up of the licencee and then also making recommendations on that same licence to the FSB?

Mr Anderson responded that this is a possible interpretation, but the fact of the matter is that every single body is aware that it is performing a regulatory function. The entire "recognised body" concept was introduced to assist the structure being put in place and, in an effort to avoid this possible conflict of interest, the issue of the licence has been retained by the FSB itself. Before the FSB issues the licence it would first ensure that the recognised body that has processed the application has done so as though it were part of the FSB.

The Chair asked whether the Compliance Institute, another recognised body, would also assist compliance officers to register businesses and then also make formal recommendations on that application?

Mr Anderson replied that the Compliance Institute has approximately over 1000 members, consisting of compliance officers of banks and other institutions. The Compliance Institute will process the application to ensure that it is complete, and will also make a recommendation that the application is complete and that the applicant meets the stated requirements. It is important to note here that the requirements are set by the FSB.

The Chair asked whether Mr Anderson is saying that the Arcay Group is not sitting down with each individual applicant and advising them as to how to fill out the application form. The Arcay Group only checks that the requirements are met.

Mr Anderson answered in the affirmative.

The Chair asked who Price Waterhouse Coopers represents.

Mr Anderson responded that Price Waterhouse Coopers represents about 500 independent brokers. They have been approved because they have met all the criteria for authorisation. They should be seen in the same vein as networks that provide services to their clients, their consultancy arm in any event.

Dr Van Zyl added that it is a public function that recognised bodies would perform on behalf of the Registrar. The entry requirements, or the "fit and proper" requirements, are determined by law, and this would thus be the benchmark for applicants. Recognised bodies do play an important role, as they may even be in a better position than the Registrar to determine whether their members meet the stated requirements. It is in this respect that they would make a recommendation to the Registrar.

The Chair stated that the content equally could hold. If they are a representative body they have to provide a service to those clients, and there might then be an interest in over-looking certain "fit and proper" requirements.

Dr Van Zyl replied that the representation must not be the focus here. The question should be whether the applicant has the necessary infrastructure, the know-how and the operational ability to check compliance with entry requirements.

The Chair stated that she struggled to view Price Waterhouse Coopers or the Arcay Group as representative bodies. The Compliance Institute has nominal autonomy and a form of commercial independence, whereas this does not seem to be the case for Price Waterhouse Coopers.

Mr Anderson responded that the FSB is aware of the potential conflicts of interest. The Act provides that the basis of the authorisation of the recognised bodies is as follows: they are requires to show a measure of representation as the first hurdle, but they must also perform this function as an arm of the FSB. It would then be the role of the FSB itself to ensure that the function in carried out in this way. The assistance of the recognised bodies will be controlled very strictly to ensure that any conflict of interests, preference or the like does not arise.

The Chair asked the FSB to forward to the Committee the motivation for certain associations being appointed as recognised bodies and whether, in the FSB's view, this does not cause any conflict of interests.

Mr Anderson agreed.

Ms S Nqodi (ANC) asked whether the emerging brokers are represented in the recognised bodies, and whether they also have to register with these bodies.

Mr Anderson replied that an applicant for a licence may approach as recognised body, or it could approach the FSB directly. Mr Modikwe, from the Black Brokers Forum, is a member of the FSB's Advisory Committee. Mr Anderson stated that he has been informed that Mr Modikwe has reached an arrangement with the IDC for assisting his members, that his association would not apply for recognised body status. Alternative arrangements with one of the recognised body have been made.

Fees
Dr Woods asked whether these are annual fees.

Mr Anderson answered in the negative, and stated that it is a once-off fee only.

Dr Woods stated that one of the major concerns at the time of the passing of the Act was whether the fees would create a barrier to entry to the market, thus making it a bit of an elitist industry. Was this part of the reasoning behind introducing the once-off fee rather than an annual fee, and how would the FSB revisit this argument now?

Mr Anderson responded that the FSB believes that the categorisation to such an extent has alleviated some of the fears regarding the fees. The lower end of the market or the independent brokers are mainly engaged in the selling of funeral insurance. The categories and total requirements for "fit and proper" are flexible, and are structured in such a way that the fees are not necessarily seen as a barrier to entry. An insurance broker, whether long-term or short-term, has to pay a basic licence fee of R1000. There are also a number of additions depending on the size of the business, such as for the approval of the compliance officer and for each key individual. The fees illustrated by the consultant employed to do the Cost-Benefit Analysis were set at a higher average.

There will be a requirement of a very small levy to cover the FSB's costs, as far as the annual fees payable is concerned. This is the case with other industries, such as the Government Employees Pension Retirement Fund and the insurance industry.

Dr Woods stated that there are two conflicting sides to this issue. The first is that high fees could make the market too elite, and the second is that fees that are too low could create problems for the FSB because it could become too costly an exercise. Has the FSB attained the best balance of this debate?

Mr Anderson replied that Australian and United Kingdom example was a "one size fits all" approach, yet it did not make use of the extensive categorisation and flexibility of the South African model. The fees are only one issue in the approach, and the requirements are the bigger issue. Mr Anderson stated that his understanding is that the approach adopted by Australia and the United Kingdom is partly what is to blame for what happened in those industries. The South African model involves more of a building blocks approach, and is designed to be so flexible that the FSB does not foresee the same results as the Australian and United Kingdom models, not by any means.

The Chair noted that the presentation indicates that businesses that apply via a recognised body pay a reduced fee.

Categories of Financial Service Providers (FSP's)
The Chair asked how the categories would actually work, and what is the usefulness in having the categories.

Mr Anderson responded that the categories are basically aimed at the requirements of experience and qualification, and there are thus lower and higher categories. Under this approach the FSB has also included the concept of "services under supervision". This means that a new entry into this market joins an institution or an IFA, that person will become an apprentice or receive a mentor for a certain period. The mentorship period for the lower categories would be six months, whereas the period for higher categories may be twelve months. The aim is to enable the person that will be involved in the selling or providing of advice to gain knowledge of the environment within which s/he is to operate.

The Chair asked whether the FSB had to draw up qualifications and experience requirements in terms of what it saw as the appropriate requirements, which the person would then have to comply with in order to pass those tests.

Mr Anderson answered in the affirmative. He stated that this is what the recognised body or the FSB itself, depending on who gets the licence application, would have to check.

The Chair asked whether an applicant that has been turned down by the recognised body would then be allowed to apply directly to the FSB.

Mr Anderson replied that the applicant has a right of appeal. The recognised body cannot turn the applicant down, it can only recommend that the licence not be given. The FSB would then have to provide reasons, and it would thus have to check every one of those.

The Chair asked whether all the categories have been finalised.

Mr Anderson responded that that the categories and criteria requirements for experience and qualification are generally called the FSB's "fit and proper" requirements. These go hand-in-hand with the application form, and these are part of the last four pieces of this process that have not yet been finalised. They have reached the stage where they could probably be finalised in a week or two.

Exemptions and Code of Conduct
The Chair asked how the two parallel processed between the Act and the Policyholder Protection Rules (PPR) have been reconciled, to ensure that one does not undermine the other.

Mr Anderson replied that his colleagues are busy revising the PPR, and as soon as that draft is ready the intention for it to be submitted simultaneously with the Codes of Conduct in the Act to the Minister. There is thus absolute co-ordination.

The Chair asked whether it is anticipated that any of the PPR provisions will be diluted.

Mr Anderson answered in the negative. He stated that, in his view, the requirements of the FAIS Codes are more extensive as the current PPR, as far as consumer protection is concerned.

The Chair asked when this legislation will be approved.

Mr Anderson responded that it is expected in November 2003, more or less.

The Chair asked whether matters relating to the disclosure of commission are adequately dealt with.

Mr Anderson replied that this is dealt with extensively, and it is required that this be disclosed in "specific monetary terms".

The Chair asked whether provision is made for disclosure in percentage terms.

Mr Anderson responded that the provision goes further to provide an exemption from this strict monetary term, if it is impossible to write down the Rand value upfront. In this case it may be reflected as a percentage. In most cases it would however be disclosed in monetary terms.

The Chair asked whether it would not be required for it to be disclosed in terms of the impact on the investment itself. Perhaps a basic assumption such as a basic percentage growth could be employed.

Mr Anderson replied that no provision is made for the impact it would have, because some of these products do fluctuate. The assumption of a basic percentage growth would have to be disclosed, but it is a consideration.

The Chair asked whether non-cash incentives have to be disclosed.

Mr Anderson responded that this is dealt with in the Code of Conduct, and it states that a non-cash incentive is regarded as a conflict of interests.

Dr Van Zyl added that there is a specific provision on non-cash incentives, which requires the disclosure of the extent to which non-cash incentives have been received to the FSB.

The Chair asked whether "kick-backs" are included here as well.

Dr Van Zyl replied that this is included in the general Code of Conduct.

The Chair asked whether the FSB has any intention to shut down or limit the amount of kick-backs that brokers can receive, as is the case in the United Kingdom.

Mr Anderson responded that there is a very comprehensive disclosure provision in the Code of Conduct. He stated that it is his view that FAIS cannot regulate this. It is a matter which needs to be addressed in the primary legislation, be it the Collective Investment Schemes (CIS) legislation or the two insurance Acts. Mr Anderson stated that he would be raising this matter with his colleagues. FAIS, which deals with the intermediaries, provides that everything has to be disclosed, and the need to regulate that needs to be addressed in another piece of legislation.

Mr Louis Wessels, FSB: Legal Department, stated that he was wondering whether this could not in fact be addressed in the FAIS Act. He stated that he is sure that the real abuse, like exorbitant fees and kick-backs, could be fitted into the wide formulation of the Code of Conduct. The evil often comes from the product supplier, as suggested by Mr Anderson.

Dr Van Zyl responded that this is part of the bigger issue regarding the regulation of commissions. These incentives could be viewed as one way to circumvent the ceiling limits. The FSB is currently revising this in terms of the contemporary South African insurance laws. South Africa is one of the few countries in the world that still regulates the capping of commissions, and it is part of the bigger investigation.

The Chair stated that the problem here is that no attempt is even being made to regulate this, because it only deals with non-cash incentives. A wide field for potential abuse is being opened up here.

The Chair stated that it would be beneficial for this Committee to go through the Code of Conduct in much more detail when then have been finalised, because it will be at the heart of the protection offered to consumers.

Dr Woods asked Dr Van Zyl to explain the point he made in a recent article that the South Africa Code of Conduct does not differentiate between institutional and non-institutional clients.

Mr Anderson replied that he believes Dr Van Zyl means that the client can be a corporate body, as well as an individual client.

Dr Van Zyl explained that in that article he compared the United Kingdom and United States models with the South African model, and the South African model has learnt from the mistakes made by foreign jurisdictions. The United States is currently experiencing a major problem because it wants to expand its consumer protection to not only the man in the street, but also to institutional entities. This is because the institutional entities are also in need of this kind of protection. South Africa has the benefit of hindsight and it has in this point in time made it applicable to persons as well as corporate bodies.

The Chair agreed. An institution will focus on the product supplier that gives the biggest kick-back, and this abuse has to be addressed.

Dr P Rabie (DA) asked why South Africa is one of the few countries that still regulates the capping of commissions. He stated that it seems sound practice, especially in view of the Anderson scandal.

Dr Van Zyl replied that there is a modern trend to move away from capping commissions. One of the problems lies with monitoring this, because there are incentive schemes that circumvent these ceilings. The insurance laws do allow the Registrar to declare it an "undesirable practice", if these non-cash incentive schemes do lead to circumvention of the limit on the capping of commissions. This area has to be flagged for possible investigation as an "undesirable practice".

The Chair stated that South Africa seems to be in the worst of both possible worlds here. It is lifting regulation on commissions, but it has not gotten rid of non-cash incentives. People will have a field day here. What kind of protection is ultimately available to the consumer here?

Dr Van Zyl responded that the big difference between FAIS and PPR. PPR is all about disclosure, whereas FAIS goes a step further and requires the service provider to act in the interests of the client. Failure to do so could result in the service provider being reported to the Ombud, or s/he could lose the licence.

The Chair stated that requiring the service provider to act in the interests of the client is a bit vague, when there is no regulatory environment for non-cash incentives. This issue has to be returned to in greater detail, to examine whether clients are in fact being protected in the absence in any kind of cap on incentives.

Mr Anderson stated that he would take this matter up with his colleagues.

The Chair proposed that a small working group of this Committee perhaps be established to look at Codes of Conduct here.

Office of the Ombud
Dr Woods asked Mr Charles Pillay, the newly appointed FSP Ombud, to comment on how comprehensive and how useful he finds the Code of Conduct.

Mr Pillay responded that the interpretations of the Codes of Conduct will depend on the facts of each and every case presented to the Ombud. His opinion is that it is necessary and it will be given flesh and meaning as and when the actual interpretations are engaged in.

Mr Wessels replied that he believes it is a very comprehensive Code of Conduct bearing in mind that it is not only the general Code, but that there are various specific Codes as well. For a "kick-off" the Codes are good, and they are up to standard with any foreign Code the FSB has looked at.

The Chair related her recent experience at a bank where she was asked to sign a form stating that she is satisfied that she has been given all the information available on a specific product, yet she was not given an explanation of what she was signing. Is this part of the manner in which the industry must conduct itself? This has to be investigated.

Mr Wessels responded that this is definitely not part of the Code of Conduct. He contended regrettably that this is not unique to banks alone, but to other parts of the industry as well. A culture of compliance has to be developed.

Dr Woods asked the FSB to explain its plans to educate consumers on the Code of Conduct.

Mr Anderson responded that this is a two-pronged approach. After the FSB Act was amended in 2000 a new Section 3 was added, which requires the FSB to promote consumer awareness of financial services. The FSB has since approved a strategy to be followed in this regard. The launch of an extensive consumer education campaign will kick off in the next few months. At the same time the Ombud and Mr Anderson himself are responsible for making consumers aware of his office and his role, and perhaps road shows could even be employed here. It is a long-term approach, but there will be a joint short-term public awareness campaign.

Dr Woods asked Mr Pillay to explain whether he would become involved in any grievances that may be lodged by industry players or service providers.

Mr Anderson replied that the rules of the Ombud provided for in Section 26 has also been approved by the FSB Advisory Committee and gazetted, and is available on the FSB website.

Mr Pillay responded that the Ombud has just taken office on 1 August 2003, and staffing is an issue. Although the offices are very nice, the staff currently consists of only the Ombud and an assistant. The taking on of some staff should at least on an administrative level is on the cards in the short-term, and in the slightly longer term the taking on of perhaps one or two professional staff.

Consumer education is part of the role of the Ombud. But the role of the Ombud here would be to make consumers aware in as simple a way as possible of the rules of the office. This would include the way complaints are received, how they are handled and the processes through which complaints can be channeled. At the end of the day the independence and impartiality of the Ombud has to be made quite clear, both to the consumer and the industry representatives. There is a call even now for the Ombud to go out and talk to industry representatives, and this can also be crafted to ensure the impartiality and independence of the Ombud.

Dr Woods asked whether he is correct is stating that the Ombud would make a decision on the complaints he receives, and which he will forward to other existing Ombudsmen.

Mr Pillay replied that he is actually in Cape Town to visit other ombuds offices, which is fairly instructive education in the short-term to get to know how other offices are handling issues. He stated that during his meetings with the banking ombud and the short-term and long-term ombud was primarily to find areas of commonality in which the work could be shared. This will be an organic arrangement of course within the parameters of FAIS. Mr Pillay stated that he would only be in a position to comment on the Codes of Conduct once he has studied them fully.

The Chair asked whether the ombud for the long-term and short-term insurance industry has been asked to comment on the Code of Conduct and, if not, why so.

Mr Anderson answered in the negative. The FAIS Codes are the territory of the FAIS Ombud. The FSB has of course consulted with both those industries, but it has not consulted with those ombuds offices specifically.

Mr Wessels stated that these Codes of Conduct have been developed along with the FAIS Act. The FSB has indeed consulted with those Ombuds, and they are both currently on the FSB mailing list for comment. He stated that he remembers vividly that Judge Jan Steyn/Stein, the former Ombud for the long-term insurance industry, was very active in assisting the FSB. Very valuable contributions were received from Judge Stein/Steyn, especially in drafting the rules of the Ombud.

Regulations
Dr Woods asked how many compliance officers the FSB envisages employing? Will they be new employees, and how did the FSB arrive at this number?

Mr Anderson replied that it is the responsibility for every licencee to instill a compliance function in his or her business. This can be either and in-house or outsourced function. There are entities that are willing to provide a compliance function probably for a very small business, but perhaps it would be more cost-effective to outsource this. The FSB has put up a FAIS structure to monitor that the compliance function is properly deployed and carried out, on a risk-based supervision type approach.

The Chair asked whether there is any facility for a compliance officer to have whistle-blowing powers, and to report any deviation to the FSB.

Dr Van Zyl responded that the Registrar would have to liaise with the compliance officer, who is responsible for informing the Registrar of cases of non-compliance. Thus the whistle-blowing role of the compliance officer is very important. The same duty to report falls with the auditing unit. There is a provision in the FAIS Act that grants protection to compliance officers. It provides that if a compliance officer has been dismissed because s/he has alerted the Registrar to incidences of non-compliance, reasons for the dismissal have to be provided to the FSB.

The Chair asked what happens in the case of a dispute between the compliance officer and the institution around the compliance officer's report, who mediates this dispute. This would be a very brave compliance officer.

Dr Van Zyl replied that the compliance officer would have to report to the FSB and to the Registrar, and also to the Board of the institution involved. The role of the compliance officer has increased worldwide because the regulators rely on the whistle-blowing duties of the compliance officer, and it is for this reason that the compliance officers have to have access to information.

Mr Anderson added that in this instance the FSB would look into the matter without breaching confidentiality.

Dr Van Zyl stated that it is this type of boldness that is expected from a compliance officer. It is for this reason that the compliance officer should rather have a senior status and have access to information, and should also receive the requisite protection.

Dr Woods contended that the compliance officer is very vulnerable in this setting from two angles: he can be bought off in a very discreet way, and can also be threatened in a discreet way. Is this workable?

Mr Anderson responded that the FSB realises that it is a difficult issue, and this is universally acceptable by all regulatory authorities. The FSB introduced the compliance officer concept into the South African regulatory framework for the first time in the mid 1990's. The whole culture has developed, especially with the advent of the Compliance Institute of South Africa, and more recent laws have been introduced which require that the compliance officer explain his ability to act independently.

The whole culture has changed in that the compliance officer today is usually a senior person in the institution. It is usually part of his job description that the institution will not interfere in the functions of the compliance officer, because those institutions realise that it is their reputability that is at stake. It does not always work and it is very difficult, but the FSB is placing more and more requirements on the compliance officer, because the FSB sees the compliance officers as its extended arm into the institution.

Section 7 date
Mr Tarr questioned the FSB's capacity to adequately perform this function.

Mr Anderson replied that the FSB is stepping into the unknown here. It has setup a FAIS department along similar lines and size as the FSB's retirement fund department. The FSB is training its staff and it hopes to open the licensing process soon. As soon as this large task has been completed within the window period mentioned, the FSB would have the core structure to perform the basic roles of compliance and supervision. If necessary, the FSB would have to expand.

Dr Woods contended that if the problem is that South Africa is a much under-insured society, one has to be mindful of the possibility of FAIS ultimately exacerbating that situation. Issues here could be the cost for the licences which would ultimately be passed on to the clients, the "client-hassle factor" referred to by the Chair and failure to encourage new entries into the market. These matters have to be looked out for.

Dr W Odendaal (NNP) questioned whether the regulation system being proposed would not over-regulate the financial services industry to such as extent that would destroy the small entrepreneur, and remove it from the industry..

The Chair stated that the concerns raised by both Dr Woods and Dr Odendaal properly belonged with the discussions engaged in at the passing of the Bill, and certain concessions were raised on those matters. The primary concern here has to be the protection of consumers. Today's discussions should however be focused on the implementation of the FAIS Act.

Mr Anderson responded that the FSB is very aware that for the kick-off, as stated earlier by Mr Wessels, the FSB is in unknown terrain. The FSB believes that it has done much preparation to especially cater for the small broker, but it is also relying on the nature of complaints and their quantums to be evaluated so that the framework can be improved, if necessary. The FSB is currently conducting a comprehensive market research exercise into the client's experiences with his intermediary, the proposals are being sent out today to all the major research companies. The FSB then did a sample of all 9,5 million households in South Africa, and it intends to repeat this exercise in three years time.

The object of this research is two-fold: the first is to ascertain the client, so that the impact of the client awareness and client education programmes can be ascertained. The second is to assess the impact of the FAIS Act, so as to gauge whether it has produced a better environment for the consumer.

Funeral services industry
The Chair stated that the funeral services market is probably the main industry in which the FSB has to take action and root out the illegal operators, especially the licensing of operators. It is one of the worst abused industries in the financial services market. Furthermore, the quality of the product being offered has to be looked at by Treasury, as well as the exclusion clauses that exclude people living with HIV/AIDS from receiving funeral benefits. In this day and age this is like a "macabre joke". Is the FSB intending to take a much greater look at this industry, perhaps together with the Group Administrator's Forum (GAF).

Will Treasury and the FSB also look at creative solutions that look at the possibilities of the State being in a position to provide some kind of benefit fund, because it appears that the "death in a family is now increasingly becoming the event that finally forces a family into permanent poverty". This process has to be taken forward, because the needs of these people are clearly not being met.

Mr Anderson replied that FAIS will go a long way in helping to clear up the industry. FAIS and the consumer awareness campaign will not address the illegal operators, because the consumer in the funeral industry are primarily from lower-income households. They are not usually reached by conventional media and community radio, but they are the biggest purchasers of funeral insurance. If they are made aware that they must ensure they purchase their funeral insurance from a licenced insurance company, this will go a long way in clearing up the industry.

The fact that the intermediary must also be licenced would also cause consumer resistance to "cowboy operators". The FSB has only recently been successful in getting industry players to form their own representative body, and this has been a great step forward. The FSB believes that this body will also assist in clearing up this big problem.

A joint working group has also been established with the Life Offices' Association (LOA) and other important players to look specifically at this problem, and it is due to make its final report and recommendations available in the next six weeks or so.

The Chair asked whether this Committee could be supplied with a copy of that report, because it will allow Members to begin to get an idea of the problem.

Mr Anderson answered in the affirmative.

Mr Malan (Treasury) responded that the issues are quite far-reaching and complex, especially those relating to the burial industry. The issue is actually more complex than setting up a joint working group, as stated by the FSB. A discussion was engaged in by this Committee during its hearing on the State providing funeral benefits, which could be argued as a public good, but there a many implications to this.

Although the Minister of Finance would have to give thought to this matter and commence discussions on it in Cabinet and amongst government departments, it is not a Treasury issue. Perhaps an appropriate starting point would be to investigate an intergovernmental response to this problem, and from there a plan can be devised to deal comprehensively with this issue. It is a complex issue, and Treasury does not have any answers at this stage. Mr Malan stated that he would convey the guidance of this Committee to his principals in Treasury.

The Chair clarified that she is not necessarily saying that the State needs to add another benefit, which goes beyond the current old-age and pension benefits. It does however appear that a financial product is needed that would provide an affordable funeral benefit, but it does not necessarily have to be a State-sponsored fund.

The other issue is the provision of life cover for persons living with HIV/AIDS. Players in the insurance industry have stated that they are now looking at proving cover for HIV positive people that are on an Anti Retroviral (ARV) programme. But the problem here is that people only go on ARV programmes when their CD4 count drops below a certain point, and it is only at the end when this programme is engaged. The provision of being on ARV's as a qualifier to get life cover does not really help those who are still in the HIV phase of the disease, which could go on for about ten years at least.

The Chair stated that she is aware just how difficult this issue is, if one looks at the levels of profitability in the insurance industry and how complex the issue is. But some kind of research has to be conducted to look at this problem.

Mr Malan replied that various concerns have to be balanced if the issue of HIV/AIDS is to be tackled effectively. The primary concern from the insurer would be that some sort of risk premium would have to be attached to the fact that the client has a disability. There would also somehow have to be some cross-subsidisation of the healthier people, and there are a host of issues and counters involved in that type of situation. The answer does lie somewhere in between.

As far as the research is concerned, Treasury has been in consultation with the Finmark Trust which has proposed undertaking such as study. It has sent the terms of reference to Treasury, which Treasury is currently looking at, and it is an issue that Treasury would like to take further than just South Africa. The aim is to have a regional analysis of the response of the insurance industry to the "HIV factor" in the region, how the regulatory regimes are coping with it and what specifically can be done in each country to deal with the issue. But it is still early days for the study.

The Chair stated that the additional problem is that one cannot maintain a mortgage bond if one does not have life insurance. The result is that if both parents are to die and the house has a mortgage bond, the children would not only lose their parents but their house as well. Unless this issue is addressed the social problems arising out of HIV/AIDS would just be compounded. The Chair stated that she is pleased that a study has been initiated on this matter.

The Chair requested Mr Nico Marais, from Treasury's Parliamentary Office, to provide the Committee with copies of the FAIS Act regulations that have already been passed.

The meeting was adjourned.

Appendix : Draft Committee Programme

Portfolio Committee on Finance
Draft Programme
Third Quarter
(Dated 13 August 2003)

Friday, 15 August 2003 E 249
09:30 - 13:00 Progress Report of the implementation of the FAIS Act

Tuesday 19 August 2003 GHC
09:30 - 17:00 Joint briefing with PCOPLG on the Municipal Systems Bill

Wednesday, 20 August 2003 GHC
09:30 - 17:00 Joint Deliberations on the Municipal Systems Bill

Thursday, 21 August 2003 E249
09:30 - 17:00 Joint Deliberations on the Municipal Systems Bill

Friday, 22 August 2003 E 249
09:30 - 13:00 Joint Deliberations on the Municipal Systems Bill

Monday, 25 August 2003 E249
09:30 - 13:00 Joint Deliberations on the Municipal Systems Bill (to be confirmed)

Tuesday, 26 August 2003 E249
09:30 - 13:00 Formal consideration of the Municipal Systems Bill (to be confirmed)

Wednesday, 27 August 2003 E249
09:00 - 13:00 SOCPA - Hearings of the Auditor - General on the Accounts of STATS - SA

Tuesday, 2 September 2003 E 249
09:30 - 13:00 Deliberations & Formal Consideration of the GEPF and Special Pensions Bill
Formal consideration of the MFMB

( Monday, 1 September 2003 - Friday, 12 September 2003 - NO MEETINGS )

Tuesday, 16 September 2003 E 249
09:30 - 13:00 Briefing on National Treasury Annual Report (to be confirmed)
Briefing & Formal Consideration of Pensions Second (Supplementary) Bill (to be
confirmed)

Wednesday, 17 September 2003 E 249
09:30 - 13:00 Briefing on SARS Annual Report

Friday, 19 September 2003 E 249
09:30 - 13:00 Briefing on Statistics South Africa Annual Report

Tuesday, 23 September 2003 E 249
09:30 - 13:00 Legislation too be confirmed

Friday, 26 September 2003 E 249
09:30 - 13:00 Meeting with Governor of the SARB


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