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FINANCE SELECT COMMITTEE
8 March 2000
FINANCIAL SERVICES BOARD AMENDMENT BILL: BRIEFING BY THE FINANCIAL SERVICES BOARD
Documents handed out
Financial Services Board Amendment Bill
Memorandum on the Bill
The committee passed the Financial Services Board Amendment Bill.
Issues which arose in the course of discussions in the meeting:
- Consumer education of financial services: both the committee and the FSB agreed that this was an important matter which had to be addressed. The FSB suggested that public hearings at a provincial level would be a good idea to increase the public's awareness of available financial services.
- The Usury Act (specifically the issue of microlending which arises therein) - This has been placed under the control of the Department of Trade and Industry. The general feeling in the committee was that this was a mistake and that the Act should be transferred back to the Department of Finance.
The Chairperson said that they would like to look at these two issues again.
Mr Wessels and Mr van Zyl from the legislation and research department of the Financial Services Board (FSB) took the committee through the Bill.
Structure of the Financial Services Board
It is a statutory body which came into being on 1 April 1991. This meeting was about the amendment of the Act (FSB Act) which constitutes the FSB. Prior to the FSB Act, the Department of Finance (particularly, the office of the Registrar of Financial Institutions) handled this work. They had control over most financial institutions, including banks. In 1987, however, the area of banks was taken out of their realm and put under the control of the Reserve Bank (particularly, the Registrar of Banks).
Two commissions looked into the office of the Registrar of Financial Institutions and decided that an independent body should supervise financial institutions (excluding banks). This resulted in the FSB Act. The Act however, only establishes the machinery for the purposes of regulation (it is not a regulation Act). A registrar by definition means the executive officer of the FSB. Various financial acts have registrars, for example, there is a registrar of stock exchange and a registrar of insurance. Thus, through the executive officer (the registrar) the FSB can supervise all the individual acts. This is how the control of financial institutions is accomplished.
Section 13(3) of the principal act provides that, ''the executive officer shall, subject to the supervision of the Board'' perform certain functions. The word supervision in this section was problematic because the meaning was unclear. Mr Van Zyl said that it was not intended to mean ''absolute control''. The meaning of the word, in fact, was so unclear that litigation on the point ensued.
For this reason the meaning of the word was clarified in clause 1 of the Bill. Supervision is divided into three categories of functions:
1) Where the Registrar cannot function without the Board's prior approval;
2) Where certain functions are to be performed within guidelines; and
3) Circumstances where there is an open discretion.
The FSB expects that matters such as introducing new legislation will fall under the first category, matters such as granting new stock exchange licences will fall in the second category, and the third category will relate to ''run of the mill'' matters that the Registrar must do every day. The Registrar is only one person, trying to regulate about fourteen acts. For this reason, he can delegate his functions to those in his employ.
Clause 2 (Functions of the Board)
Section 3(a) of the Act was changed by deleting the words ''exercise of control, in terms of any law, over the activities of'' and inserting the words ''compliance with laws regulating financial institutions and the provision of''.
A whole new clause (clause (c)) was then added - This deals with the promotion of programmes which inform users of the financial services which are available. Mr Van Zyl said that this is given high priority in the activities of the Board.
Clause 3 (Constitution of the Board)
Section 4 of the principal Act is to be changed by deleting the word ''State President'' where it is referred to and replacing it with the word ''Minister''.
Thus, the function of appointing members to the Board has been transferred to the Minister. The word ''chairman'' is also deleted and replaced with the word ''chairperson''.
Mr Van Zyl noted that in practice the Minister makes recommendations to the President. Thus, the Minister already plays a role. Mr Wessels added that the amendment was ''just a matter of good logic'' and that the FSB would not be subservient to the will of the Minister.
Another proposed change to this section is that the words the board shall ''consist of'' be deleted, and replaced with ''be governed by''.
The panel noted that the section does not apply any limit to the number of members that the Minister can appoint. At the moment there are only six, but, because the industry changes, the needs of the Board will also change, and the number is therefore left open to the Minister's discretion.
Those are all the proposed amendments up to and including clause 6.
Here the word ''and'' between ''deputy executive officer'' and ''chief actuary'' is deleted and the words ''and such other officers or employees of the board as the board may from time to time appoint to the executive, on such conditions as it deems fit'' is inserted at the end of the clause.
The FSB deemed it necessary to make this amendment so that it would be possible to expand the executive to include as many other people as was found to be necessary. The additional people provided for in this clause will be appointed by the Board itself.
Clauses 8, 9, 10, and 11
Small amendments were made to these (sections 10, 13,14, and 15 of the principal Act):
In clause 8, the words ''Provided that the nomination and appointment of other persons to a committee of the board shall not cease upon the vacation of office of a member of the board who served on such a committee''.
Clause 9 - the old reference to the Public Service Act is deleted and replaced with ''Proclamation No. 103 of 1994''.
Clause 10 - the words after ''open market'' are deleted and ''with due regard to section 18(b)'' inserted.
Clause 11 - Repeals section 15 of the principal act. The repealed clause provided for certain pension rights. These rights have since become vested and confirmed, therefore the clause was redundant.
This clause deals with the fact that the Board is funded by levies raised by the industry. The effect of the amendment is that, before levies are imposed, there must be a proper consultative process (between the financial institution in question and the users of financial services by that institution), only then can the levies be fixed.
This provides that the Minister is entitled to a consultation process with the members of the executive (the Board) on any matter. Subsection (b) provides the board with the reciprocal right to consult with the Minister on any matter.
This deals with ''secrecy provisions''. The general idea is that the Board must keep its work secret. However, the amendments in this clause enable the board to exchange information in specific circumstances, example, to render assistance to international regulatory bodies.
Clause 16, 17, and 18
Clause 16 - The Act limits the liability of the FSB unless they acted grossly negligently.
In terms of clause 17 the FSB can authorise persons to use the FSB logo to say that they have been approved by the FSB.
Clause 18 deals with the appeal procedure. If a party feels aggrieved by the registrar's decision then the party can go to the independent appeal board. The board previously consisted of a lawyer, an accountant and one of the members of the board. Now, the third member no longer has to be a member of the board; rather, he must be someone who has been appointed on account of his or her wide experience and expert knowledge of financial institutions and financial services.
The reason for this change is that, because the appeal board must be an independent body, it was deemed to be unconstitutional to have a member of the board serving on the appeal board.
The orders which an appeal board can make have also been expanded. They can now also make costs orders.
Also, the reference to the Public Accountants' and Auditors' Act in subsection (c) was changed to read ''Act No. 80 of 1991''.
Schedule (laws amended, section 21)
An addition is proposed to the ''extent of the amendment'' column. Provision has been made for inspections, on the instructions of the registrar, for the purposes of various agreements.
Mr Van Zyl concluded by saying that the Bill has no financial, organisational or personnel implications for the State. Referring to the National Assembly's response to the Bill, he added, that they have had a successful course thus far, and hoped that it would be the same with the Select Committee.
A committee member asked who appointed the board of appeal, whether it was the same people who sat on this board every day, and, whether the person appealing had a say in who sat on the appeal board?
Mr van Zyl replied that the board of appeal is a standing body, appointed by the Minister. It is not a fluctuating body; the members provide a three year service. The person appealing does not have a say in who sits on the appeal board.
Another member asked if the appeal board's ruling is final?
Mr van Zyl replied that the appeal board's ruling was final. However, an applicant could take a matter on review to the High Court, but there was no further right of appeal.
The member then asked if there was any provision in the act relating to an ombudsman?
Mr Van Zyl said there is no such provision in the Act. There were however ''voluntary ombudsman arrangements''. In the Pension Funds Act, the Pension Funds Adjudicator ''sort of'' performed the functions of an ombudsman. Also, the Bank Council has recently introduced an ombudsman. Mr Van Zyl continued that the FSB is well aware of the need for an ombudsman and ''hopefully would come with a statutory ombudsman proposal to pick up complaints in the financial industry''. He then noted that this was an ''easy, cost-effective way of disposing of complaints'' (the industry bears this cost, not the complainant).
In response to other questions the following emerged:
The FSB, in terms of various Acts, raises levies and penalties. In terms of these, staggering amounts can be raised. These amounts go into separate reserve accounts.
Mr Wessels said that the FSB is aware of the need for consumer education. When a financial institution deals with a customer then that customer must make an informed decision, and understand the information that is disclosed to him. The industry realises that if customers are more educated about financial services, then it would mean less supervision is needed by the FSB. Thus, it will make their job easier. He said that they are utilising different avenues to inform the man in the street, and, that this is regarded as an official function of the FSB, and is in line with international trends.
Mr Wessels continued that consumer institutions in provinces are quite advanced. Mr van Zyl added that they must ascertain the needs of the less developed areas of the country and that they must make an input at a grassroots level, by inviting people to come and ask questions, and to see what needs there are. This will assist them in drawing up a plan of action. They suggested that the members should go back to their provinces, and try to arrange public hearings on a provincial basis. They also suggested that the UK should be looked at as an example. There, at high school level, subjects were taught that included understanding financial statements, concepts such as interest, short term and long term investment so that everyone could have basic financial knowledge.
Mr Durr (ACDP, Western Cape) raised the issue of microlending and commented that it would bring ''discredit to financial institutions'' and ''devalue the whole economic system''. He then asked the panel for their opinion of ''microlending''.
They replied that this was covered in the Usury Act which was now under the umbrella of the Department of Trade and Industry.
Mr Durr said that he thought it was a mistake to put this issue under DTI, and asked for the panel's opinion on the matter.
Mr Wessels replied that, in terms of microlending, transactions of less than ten thousand rand would be exempt from the Usury Act, provided that certain conditions were complied with. This (microlending) is only a temporary measure. He continued that the decision to transfer the Usury Act from the Department of Finance to the Department of Trade and Industry was a political decision, and, that, in his personal opinion, this was a mistake, as DTI did not have the infrastructure to deal with the Usury Act.
The Parliamentary Liaison Officer for Finance (Mr Shahid Khan) noted that there is currently dialogue between the Minister of Finance and the Minister of Trade and Industry to decide where the Act belongs. [It appears that government is also looking at changing what was formerly known as the Money Laundering Control Bill (now the Financial Intelligence Bill) to deal with the problem of money laundering. This legislation, which is a combined effort between Finance and Justice is still in the pipeline. As it is still with Cabinet, it is not in the public domain yet.]
The Chairperson said that the issue of consumer education would be discussed at their next meeting, and the committee would also look at the microlending issue further.
Formal consideration of the Bill
The Chairperson read the motion of desirability, which was agreed to by the committee. The Bill was put before the committee as a whole, and the committee agreed to it. The Chairperson then read the report, which was agreed to.
The Chairperson asked if the committee would like to debate the Bill in the NCOP Chamber, and the committee indicated that they would. Mr Durr specifically, indicated that he would like a short debate as they ''have so little opportunity to deal with things''.
The committee also plans to visit the Stock Exchange to ''expose'' the members to it so that they can better understand it.
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