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FINANCE PORTFOLIO COMMITTEE
5 September 2001
PENSION FUNDS AMENDMENT BILL, PENSION FUNDS SECOND AMENDMENT BILL: DELIBERATIONS; FINANCIAL INSTITUTIONS (PROTECTION OF FUNDS) BILL: BRIEFING
Documents handed out:
Pension Funds Amendment Bill [B22-2001]
Pension Funds Second Amendment Bill [B41-2001]
These bills available at http://www.treasury.gov.za
Financial Institutions (Protection of Funds) Bill [B23-2001]
Memorandum on the Submissions on the Pension Funds Second Amendment Bill
The Committee was taken through the changes effected to the Pension Funds Amendment Bill to ensure all changes requested by the Committee had been attended to.
The Financial Services Board (FSB) briefed the Committee on the Financial Institutions (Protection of Funds) Bill. The only change requested by the Committee is that the ten year prison sentence for offenders should be increased to fifteen years.
The FSB continued to take the Committee through the submissions in respect of the Pension Funds Second Amendment Bill.
Pension Funds Amendment Bill
Dr De la Rey (FSB) went through the amendments proposed in the previous meeting:
· There was an amendment to the long title of the Bill so as to take into account the request of the Committee to have fair value defined in the Bill. The only change is the insertion of the words "define fair value," after the words "so as to" in the first line of the Long Title.
· A new clause defining fair value is inserted. The definition is the same as the one used in the Pension Funds Second Amendment Bill.
· In Clause 1(a) Section 19(5)(c) is amended as follows:
The words "at the time it is granted or furnished" is inserted after the word exceed to clearly state at what time the amount that the member qualifies for is calculated.
- In S19(5)(c)(i) the word ‘immovable’ is inserted to have consistency throughout the Act.
- In S19(5)(c)(ii) the clause is split into two sub paragraphs to make it simpler and clearer. The first sub clause now refers to the lesser amount of the lowest benefit in terms of the rules which the member would receive on termination of membership, nett of income tax as envisaged in S37D. This amendment deletes the concept of only voluntary exit from the fund and deals with the concern of Mr Andrew (DP) that other members might be prejudiced and it cross references the section 37D dealing with the tax liability.
- In the second sub clause the words "whichever is the lesser amount is deleted."
- S19(5)(c)(iii) is also broken up into two sub clauses. In the first sub clause the words "if he the member were to terminate" is deleted and replaced with "on termination"
- In the second sub clause the words "whichever is the lesser amount is deleted."
· In Clause 1(b) s19(5A) is deleted completely.
· In Clause 3 Section 37D(a)(ii)(bb) is amended by the deletion of the words "of management". Sub paragraph (cc) is amended to read ‘after the board is satisfied’ as opposed to ‘and if the board of management is satisfied’.
Ms Hogan was satisfied that the amendments addressed all the concerns of the Committee and saw no need to go through it clause by clause. Ms Hogan apologised for not having a motion of desirability for the Bill after the Briefing the previous day. She asked the members now if this was a desirable bill. All the Committee members agreed that it was.
Financial Institutions (Protection of Funds) Bill: briefing
Mr Wessels (Head of Legal Department: FSB) noted that the Bill replaces the Financial Institutions (Investment of Funds) Act 39 of 1984. Chapter 1 reaffirms the common law position on trusts. Trust law as it applies to financial institutions is therefore codified. The first four clauses lay down the principles and is a repetition of the law as it stood for the many years. These clauses deal with the fiduciary duties of persons dealing with trust property and funds of a financial institution. They must act in good faith with proper care and diligence.
The 1984 Act was a regulatory tool that applied to all financial institutions under the FSB. The registrar successfully used the curatorship mechanism in the Act as was shown in the Masterbond matter. Amendments were needed to address the shortcomings in the previous legislation to enable the registrar to act more effectively in civil proceedings. Greater enforcement powers are needed for the registrar so that he can act against parties who are outside the regulatory net of the FSB. The Bill therefore gives the registrar locus standi to institute civil proceedings to interdict a party from contravening the law, to call for information, to call persons to appear before him and to restrain the conduct of a business. In the past the registrar would lose many cases on the basis of locus standi even if the wrongdoing was evident.
The registrar will be able to declare certain practices as irregular/undesirable and can publish the names of the transgressors but only after the Audi alterem principles are adhered to.
The Bill imposes a max imprisonment term of 10 years for transgressors and also provides for a fine and an order whereby the wrongdoer must return any profits made from illegal activity.
Mr Andrew (DP) wanted to know how situations like Masterbond could arise because by the time the registrar applies for curatorship, the public’s money has already been lost. Did this happen because of deficient legislation or due to the incapacity of regulators.
Mr Wessels replied that there are many laws in the whole process of regulation. It is often too late when the registrar applies for curatorship. The Bill will try and pre-empt a Masterbond occurrence by allowing the registrar to get an interdict at the first sign of abuse. What happened in Masterbond was that debentures were issued under the Companies Act when at the time there was little control over the issuing of these. Most of the Masterbond group was outside the control of regulators. Changes to the Banks Act and the way debentures are issued will hopefully prevent this from happening. He believed that the recovery by the curator of Masterbond was good, about 85 cents to the Rand.
Mr Andrew asked who would at this present moment regulate a creature such as Masterbond.
Mr Wessels said that there are problems if there is more than one regulator. A section of Masterbond was a part bond scheme under the control of the FSB. The issuing of debentures is regulated by the SA Reserve Bank. There are further problems with conglomerates. A possible solution is to have one regulator.
Dr Van Zyl ( Head of Research: FSB) took over from his colleague to go through the Bill clause by clause.
Clause 1: Definitions
The definition is one that includes a close corporation.
Mr Andrew (DP) said that company is not defined. All the definition says is that a close corporation is included in the ambit of a company.
Mr Van Zyl said that everybody knows what a company is. It is understood to be a company as defined in the Companies Act.
Ms Hogan said that it could not be assumed that everybody knows what a company is and that there has to be a reference to the Companies Act. She wanted a footnote included to reflect this.
This is broadly defined and the definition lists what an institution is. The definition widens the regulatory net and gives the registrar locus standi in matters where he would not have been able to successfully litigate in the past.
This is defined because in practice a company can be nominated to deal with trust property on behalf of the principal. The Bill prevents the principal from being accountable.
This definition is refined to close loopholes of the past.
Chapter 1 – Funds and Trust Property held by Financial Institutions
Clauses 2 to 4 are all refinements of current clauses in the 1984 Act.
Clause 2(a) and (b) outlines the duties of persons dealing with funds and trust property.
Sub (c) states that a person must use the funds and trust property for the benefit of the financial institution or the principal who advanced the funds or trust property. No person can directly or indirectly benefit from this property. It is important to note that there is a reference to funds and trust property. So even if the funds are the property of the financial institution, a duty is still created to deal with it correctly because the public has an interest in how the financial institutions use their money.
Clause 3 creates an obligation on persons dealing with trust property and funds to disclose any direct or indirect personal interest they might have. This conflict of interest must be minuted. This increases transparency.
Clause 4 states that trust property must be invested in terms of a trust instrument or by agreement. If there is no trust instrument the clause says how trust property cannot be invested. If the articles of association of a company prohibit the registration of debentures or shares in the name of a trust, financial institution or a nominee then it must be registered in the name of a director, member, partner or manager of that financial institution on behalf of the principle. If this is done the financial institution must furnish security. The financial institution must keep trust property separate from its property. The trust property can never form part of the assets of the financial institution.
Chapter 2 – Enforcement
Clause 5 – The registrar can apply to the High Court to appoint a curator to control and manage the business of an institution. The curator is provisionally appointed with a return date upon 48 hours notice to the registrar. The court can order that all legal proceedings against the institution is stopped, an order in respect of the powers and duties of the curator can be made and in respect of his remuneration. The curator acts under the control of the registrar. It was found previously that it could not be left to the court to control the curator.
Clause 6 – This spells out the locus standi of the registrar. The registrar can call on institutions to explain their actions. If the registrar has suspicions that a law is being contravened, he can apply for an interdict until further action can be taken. If the registrar has reason to believe that an institution is contravening a law, he can publicise the contravention provided the institution is given a chance to make representations. The registrar can also order inspections to see if institutions are complying with court orders.
Clause 7 – This is a new clause and enables the registrar to declare certain practices irregular or undesirable. The undesirable practices can be gazetted but the interested persons must first be given the opportunity to make written representations. The registrar must also first consult the advisory committee of the financial institution. After the practice is gazetted the financial institution must stop the practice.
Mr Andrew (DP) was concerned that the financial institution was not given a hearing.
Mr Wessels (FSB) said that the FSB Act provides for an appeal procedure to the FSB Appeal Board or they could go to court.
Clause 8 – The registrar cannot act against the stock exchange, financial exchange or stock brokers in terms of Clauses 5, 6 & 7 without consulting their executive committees and is satisfied that no other remedies are available.
Clause 9 – It is provided that the books of institutions are admissible as evidence. It is prima facie evidence of the transactions and accounts recorded therein.
Clause 10 – This outlines the penalties. A maximum 10-year prison sentence or a fine is provided for. The court can further order that the wrongdoer pay back any profit he has made and/or compensate for damages caused. The court can also order that a director, partner or manager of a financial institution be prohibited from serving in that capacity for a given time.
The drafters would attend to a few technical amendments. The only change requested by the Committee is that the 10-year prison sentence should be increased to 15 years. The drafters wanted to change the name of the Bill to the Financial Institutions Customer Protection Bill because it was part of consumer protection law.
The Committee was unhappy with the proposed name change and wanted it left as is.
Pension Funds Second Amendment Bill: deliberations
Mr Andrew (FSB) continued to go through the Memorandum outlining the public submissions.
Clause 15L Specialist tribunal
The rules of the fund can provide that disputes must go to an arbitrator. The Pension Funds Adjudicator (PFA) wants it legislated that the funds rules must provide for this. The process in section 15 after the arbitrator rules allows for the board to pass the scheme. The registrar will review the process. If there is a complaint or the scheme is not submitted timeously then the matter gets referred to the Specialist Tribunal who makes a recommendation. If the registrar is happy then he informs the stakeholders. If there is still complaints then the FSB Appeal Board can hear the matter and the full merits are considered. The Appeal Board can substitute a decision of the registrar.
Mr Andrew (DP) asked why the recommendation of the specialist tribunal cannot be made binding.
Mr Andrew (FSB) said that the registrar could accept the recommendation. However if the registrar is not satisfied that the tribunal considered all the issues, he can refer it back to them for a reconsideration of the issues and he can then accept the recommendation.
Mr Andrew (DP) wanted to know when a party could go to court.
Dr De la Rey (FSB) replied that the registrar can be taken on review as well as the Appeal Board but that there would be no re-hearing of the merits.
Ms Hogan referred to the submission of the Pension Funds Adjudicator who said that there must be an arbitrator who makes a decision that is final and binding. This idea made sense to her because it was neat and simple. What is proposed at the moment is very complicated and can take a long time before the matter is resolved. She wanted to go back to Section 15B so that the whole process is clear in her mind. In terms of 15B the board must submit a scheme to apportion the surplus to the registrar. Before the board submits the scheme to the registrar the stakeholders had to be given four weeks to complain to the board. The board submits the scheme along with the complaints to the registrar. The registrar must be satisfied that the scheme is reasonable and equitable. If the board fails to submit a scheme in terms of 15B(1) or the registrar is not satisfied that the apportionment is reasonable and equitable then the scheme is referred to the tribunal. Ms Hogan then said that "what we are looking at today is when we cannot approve the scheme".
Ms Hogan continued and said that the employer can lodge a complaint with the board. Also the employer can influence its representatives on the board and the required 75% will never be reached. The employer can also lodge a complaint to the FSB Appeal Board and to the High Court. So if the employer is unhappy it can tie the process up in knots for a long time because it is a wealthy litigant. The resources of the individual litigant or the trade unions are limited compared to the employer so the odds are stacked in favour of the employer. She posed the question if it was not more equitable to adopt a quick process as proposed by the Pension Funds Adjudicator.
Mr Andrew (FSB) said that the Bill provides a three-stage complaint structure. An individual can complain to the Board, tribunal and the FSB Appeal Board. This whole process costs nothing. To lodge papers with the appeal board only attracts a R500 charge.
Ms Hogan replied that for the disempowered this is a formidable number of hoops to pass through.
Mr Andrew (FSB) replied that with the arbitrator you only get one chance to have your case heard and the individual still has to make his case and has no means of appeal afterwards.
Ms Hogan repeated her wish that the scheme must not be bogged down in continuous litigation. She recognises the problems of the arbitration procedure as well but the Bill at the moment has far too many twists and turns.
Mr Malan (Treasury) said that the whole purpose of Clause 15B is that if there is a deadlock the tribunal can approve the scheme. He suggested giving the tribunal a final say in respect of the merits. It is also important to remember that the tribunal will have investigative powers so the power imbalance will be addressed.
Hs Hogan wanted to confirm with the drafters that the tribunal would be given the power to make a binding judgement.
Mr Malan said that it was a proposal to consider.
Mr Andrew (FSB) confirmed that he would be happy to accept that the decision of the tribunal is final and binding.
Ms Hogan said that this problem is one that they have to come back to. Moving away from tribunal, the Chair wanted to know how they are going to ensure that former members are contacted and made aware of the scheme.
Mr Andrew (FSB) said that the regulations state that if the records of a fund are insufficient then the board must look at the records of the employer, the fund that the former member transferred to and must also advertise.
Ms Hogan wanted the advertisement to be on a national level. The Chair was concerned about the dismissed members who cannot be tracked.
Mr Andrew (FSB) said that the only thing that can be done is advertise. Funds that have large surpluses can go through any process to track members. It is no use for funds with small surpluses to go through expensive exercises.
Mr Nene (ANC) up to now did not know where the surplus lies. It could be that only a few large funds have the majority of the surplus. So they do not exactly know the scale of the problem.
Mr Andrew (FSB) drew data from 1049 funds. Of these funds, five had a surplus in excess of R1 Billion. Five had a surplus in excess of R500 million. 146 funds have more than R25 million in surplus. They do not know how much money is in the employer reserve accounts of the Defined Contribution (DC) funds and therefore they cannot say if these funds are on a contribution holiday.
Ms Hogan asked if the Bill requires the DC funds to make available the details of their employer reserve accounts.
Mr Andrew (FSB) replied that the Bill states that the details of the transfer must be made available by the transferor and transferee.
Returning to the dispute resolution debate, Ms Hogan wanted to know why they are not using the Pension Funds Adjudicator.
Mr Andrew (FSB) said that the Pension Funds Adjudicator deals with disputes of right not disputes of interest. He knows that the Pension Funds Adjudicator would be prepared to mediate and conciliate if needed.
It was agreed that the specialist tribunal system needs to be changed and the dispute resolution process needs to be redrafted.
All that remained in the Memorandum on submissions was Clause 5, 6 & 7 but Ms Hogan suggested that it be skipped because it included nothing significant.
Mr Andrew (FSB) pointed out that in relation to Clause 5, the COSATU proposal denies the window period. This was a matter of principle that the Committee had to return to.
Ms Hogan summarised what was needed to be done:
· The principle issues raised by the trade unions need to be considered.
· Thought has to be given as to how certain regulations can be included in the Bill.
· Amendments need to be drafted and handed to the Committee.
· The proposed amendments Bill needs to be tied up in a new draft Bill in its amended form.
The meeting was closed.