General Financial Services Laws Amendment Bill [B21-2008]: briefing; Financial Intelligence Centre Amendment Bill [B18-2008]: adoption

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Finance Standing Committee

14 May 2008
Chairperson: Mr N Nene (ANC)
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Meeting Summary

National Treasury and the Financial Services Board briefed the Committee on the Financial Services General Laws Amendment Bill. The Bill proposed amendments to the Financial Services Board Act, the Financial Institutions (Protection of Funds) Act, the Pension Funds Act, the Financial Advisory and Intermediary Services Act and the National Payment Systems Act. The purpose of the amendments was to close regulatory gaps, effect improvement to provisions and provide for increased enforcement capabilities for the FSB.

Members’ questions pertained to the payment of pension fund proceeds in divorce orders, the exclusion from the National Payment Systems Act of the Post Bank and other entities conducting clearance activities, the optional transfer of funds to the beneficiary trust, the suitability of principal officers, the adequacy of FSB resources to implement the Bill, the regulation of administrative fees charged by trust administrators, the proposed code of conduct for financial service providers, the functioning of the Appeal Board, the visibility and effectiveness of the FSB and the conflict between the Pension Funds Act and the Labour Relations Act.

The National Treasury briefed the Committee on the amendments to the Financial Intelligence Centre Amendment Bill. The amendments followed on the submissions received during the public participation process. Members’ questions referred to the signposting to other Acts and the use of simpler language in Legislation. The Bill was accepted by the Committee with the amendments.

Meeting report

Financial Services General Laws Amendment Bill: briefing
Mr Nkosana Mashiya (Chief Director: Financial Sector Development, National Treasury) and Mr Baron Furstenburg (Director: Financial Markets, National Treasury) briefed the Committee on the background to the Bill (see attached document).

Mr Rob Barrow (Executive Officer, FSB) introduced the team from the Financial Services Board (FSB) and presented an overview from the perspective of the FSB as the Regulator (see attached document). He summarised the proposed amendments to the FSB Act and the Financial Institutions (Protection of Funds) Act (FIA).

Mr Dube Tshidi (Deputy Executive Officer: Investment Institutions, FSB) explained the concept of the enforcement committee, the proposed amendments to Section 22 of the FSB Act and the amendments affecting the Appeals Board.

Mr Jurgen Boyd (Deputy Executive Officer: Retirement Funds, FSB) gave an overview of the proposed amendments to the Pension Funds Act. The Fidentia debacle highlighted the fact that so-called ‘umbrella funds’ were not subject to administration. The amendments provided for the regulation of beneficiary funds, extended the powers of the Registrar to exempt a fund from certain provisions of the Pension Funds Act and included ‘fit and proper’ requirements for the appointment of a principal officer, auditor or valuator.

Mr Gerry Anderson (Deputy Executive Officer: FAIS and Consumer Education, FSB) presented the proposed amendments to the Financial Advisory and Intermediary Services Act (FAIS). Amendments were intended to improve interpretation of the Act, close gaps and increase supervisory and enforcement powers. The code of conduct of Financial Service Providers needed to differentiate between institutional and individual clients.

Mr Furstenburg provided further details of the problems and proposed amendments to the Pension Funds Act, the FSB Act, the FAIS Act and the National Payment Systems Act (NPS). Other affected legislation included the Collective Investment Schemes Control Act, the Securities Services Act and the Cooperative Banks Act. He explained the transitional measures intended to ensure the smooth implementation of the proposed amendments.

The Chairperson requested clarity on the name of the Bill. The published draft was named the Financial Services General Laws Amendment Bill but this was changed to the Financial Services General Laws Amendment Bill.

Ms F Omar (State Law Advisor, Office of the Chief State Law Advisor) explained that the Bill amended Financial Services Laws in general and not a General Law.

Mr K Moloto (ANC) said that previous discussions with the FSB indicated that if pension payments in divorce orders were applied retrospectively, it would be very complicated. The amendments to the Pension Funds Act now appeared to be applicable retrospectively.

Ms Ferreira replied that it was the intention of the Pension Funds Act to apply retrospectively to divorce orders. The wording in the Act was however not clear enough. There were two pending court cases on the matter even though the Pension Funds Adjudicator had ruled that the provision applied retrospectively in the case of divorce orders.

Mr Boyd added that the debate during 2007 was on whether payouts from pension funds to non-member spouses should include fund returns in the case of divorce orders granted before 13 September 2007.

Mr Moloto said that it could be a problem if amendments to the NPS Act were hidden in another Act. He asked why the Post Bank was excluded from the NPS Act and what the risks were if it was excluded.

Mr Mashiya explained that participation in the National Payment System was limited to registered banks. Institutions like the Post Bank and Itala Bank were not registered but were sponsored by a commercial bank. Due to the growth of the Post Bank, the daily clearance limits were being exceeded. Discussions were held with the Post Bank and with the South African Reserve Bank (SARB). It was decided to amend the regulatory framework to allow the Post Bank to process its own clearances.

Mr Moloto noted that allowance was made for optional transfers from trusts. He asked how transfers to the beneficiary fund would be enforced. He said that the Master of the Supreme Court administered certain trusts and he doubted if there was sufficient capacity to assess the soundness of any scheme. He requested the FSB’s views on the issue.

Mr Boyd explained that trust companies followed different models for umbrella funds. It was difficult to enforce the transfer of funds to the beneficiary fund because different stages of payments applied. The assets of the umbrella funds vested in the fund but the assets of the beneficiary fund vested in the beneficiaries.

Mr Moloto said that allegations of a conflict of interest were made in cases where the principal officer came from the company. He asked if the FSB had the power to object to such an appointment and if it can request that another person was appointed instead.

Mr Boyd replied that the FSB was not empowered to object to the appointment of a principal officer and was merely required to register the officer. The amendment would grant the FSB more power in the appointment of suitable persons to the position.

Dr D George (DA) asked if the FSB was sufficiently resourced to implement all the proposed amendments.

Mr Barrow replied that the FSB had sufficient resources to apply the administrative sanctions in addition to the criminal sanctions it was already dealing with. Initially, matters will be dealt with through the enforcement committee as well. In respect of the beneficiary trusts, he was confident that enough skills would be obtained to handle the 30 trusts expected to be brought in. The levies payable by the trusts were an additional source of revenue.

Dr George asked if the FSB would regulate the administration fees charged to administer trusts.

Mr Boyd replied that the FSB’s approach was not to regulate the fees charged by service providers for the administration of funds. The fees were agreed between the parties in the service level agreements entered into. There were currently 20 to 30 operators and the FSB felt there was sufficient competition to keep fees at an acceptable level.

Dr George said that proceeds from pension funds may be deposited into testamentary trusts for the benefit of a minor. Such trusts were not umbrella trusts and he asked if the transfer of pension fund proceeds into testamentary trusts would be disallowed.

Mr Boyd replied that it was his understanding that testamentary trusts would still be allowed. The amendments dealt mainly with the outsourcing of deceased members’ benefits.

Dr George noted that there was no provision for educational requirements to apply in the appointment of a principal officer.

Mr Boyd replied that educational requirements per se were not specified in the Bill but may by taken into consideration by the Registrar when he decides if a principal officer was found to be ‘fit and proper’ for the position.

Ms J Fubbs (ANC) asked if the presentation was based on a different version of the Bill that was circulated to the Committee. The transitional provisions in the Bill were dealt with under Sections 75 and 76 but the presentation referred to Sections 73 and 74.

Ms Jo-Ann Ferreira (Chief Director: Legislation, National Treasury) explained that the Bill was formally tabled that morning and her team did not have sight of the printed version in time to correct the references to the relevant sections in time. She apologised for the short timeframe between the briefing and the tabling of the Bill.

Ms Fubbs asked for clarity on the need to differentiate between ‘wholesale’ and ‘retail’ clients by Financial Service Providers. She asked how it would work in practice.

Mr Anderson explained that exemptions from the regulations under FAIS applied to dealings between large institutions. The exemptions were not extended to pension funds or individuals. The international norm to differentiate between institutional and individual clients by amount was rejected and the more cautious approach was taken by introducing the code of conduct for retail and wholesale types of clients.

Ms Fubbs asked for further details of the multiple approach to appeals that was mentioned in the presentation.

Mr Furstenburg explained that the Appeal Board currently comprised a chairperson and two other members. The Appeal Board could only operate in a linear manner. The proposal was to allow for the appointment of deputy chairpersons and a pool of experts. The deputy chairpersons would be persons of senior legal standing. The chairperson would be able to designate panels of three or more experts under the chairmanship of a deputy chairperson to deal with appeals. It would therefore be possible to process more than one appeal at the same time.

Mr B Mnguni (ANC) remarked that there appeared to be a general trend towards the use of enforcement committees in legislation. He noted the statement made by the FSB that it wished to avoid lengthy court proceedings and asked for the assurance that there was adequate provision for recourse to the courts.

Mr Mnguni asked what risks existed in the case of non-banking institutions that processed financial transactions but were not affiliated to the NPS.

Mr Mashiya replied that there were a number of non-banking organisations conducting clearance system transactions. For example, one can pay an electricity account at Pick and Pay. The payment risk occurred when money was paid but not paid over to the account by a non-banking entity. Rather than prohibiting the practice, National Treasury preferred to bring the non-banking participants into the regulatory framework. Guidance was issued but it was necessary to make provision for regulations and for clients to have recourse.

Mr M Mbili (ANC) asked for clarity on the comment made in the presentation that the FSB was not seen to be dealing effectively with contraventions.

Mr Barrow replied that much of the work was done in secret and resulted in the perception that the FSB was not effectively dealing with contraventions. By the time a case comes to court, interest had waned and little recognition was given to the work done by the FSB. Administrative sanctions would be applied much sooner and were opportunities for the FSB to be more visible.

Mr Mbili asked for clarity on the comment that the amendments to the Labour Relations Act (LRA) will take time. He asked if the LRA will be in conflict with the proposed amendments.

Mr Boyd replied that the amendments will not conflict with the LRA provisions governing bargaining council funds. The amendments suggested that LRA funds were exempted from the requirement to transfer pension fund contributions within seven days as required by the Pension Funds Act.

Mr Moloto asked if the Department of Labour was consulted about the conflict between the LRA and the Pension Funds Act.

Mr Boyd replied that a one-day workshop, facilitated by the Registrar of Labour, was held with the Department of Labour to discuss the issue of the bargaining council funds.

Ms Fubbs asked what the legal basis was for a single Bill to contain amendments to many Acts. She wondered if it would not cause problems if further amendments were necessary to the Acts.

The Chairperson remarked that the Bill was approved by the Office of the State Law Advisor.

Mr Herman Smuts (Principal State Law Adviser, Office of the Chief State Law Adviser) replied that it was common practice to use one Bill to amend a group of Acts. Once the Bill was passed, the principal Acts were amended.

The Chairperson asked if a penalty of R1 million was considered to be an adequate deterrent, given the substantial amounts that were potentially involved in contraventions.

Mr Tshidi explained that the R1 million penalty was payable on conviction of a contravention of the confidentiality provisions under Section 22 of the FSB Act.

The Chairperson thanked the presenters and Members for their input. He advised that the Committee would hear comments and submissions on the Bill on 16 May 2008.

Financial Intelligence Centre Amendment Bill: deliberations
Ms Jo-Ann Ferreira (Chief Director: Legislation, National Treasury) presented the proposed amendments to clauses 1, 2, 3 and 4, the new clauses 11 and 12 and the amendments to clauses 1 and 14 (see attached document).

The amendments arose out of the submissions received from interested parties on the Bill. Government’s responses to the comments were presented to the Committee on 13th May 2008.

The Chairperson asked if the amendments included the signposting to the Promotion of Administrative Justice Act (PAJA) referred to in the responses to the submissions.

Ms Ferreira said the matter was deliberated on and it was decided not to include any signposting to other legislation in the Bill.

Mr Smuts explained that it was not normal practice to signpost other legislation. When an Act is passed, it prevailed. The signposting to another Act could have unintended and undesirable consequences. Any reference to another Act may impact on the application of the Act.

Mr Moloto asked where the concern of the Law Society of South Africa (LSSA) over the legal privilege protecting client/attorney confidentiality was addressed.

Ms Ferreira explained that the issue was addressed in the new amendment to Section 37 of the principal Act. Subsection 1 removed the rights to secrecy and privilege but subsection 2 specifically re-inserted the protection of the legal privilege between attorney and client.

Ms Fubbs recalled that the Committee took the position to simplify legislation. She found phrases used in the Bill (for example “no action whether criminal or civil, lies against……” and “no duty of secrecy“) difficult to understand.

Ms Ferreira explained that the practice was to make the minimum changes necessary in the case of Amendment Bills. When drafting new legislation, efforts were made to simplify the language used to promote understanding. She offered to revise the Act should the Committee feel that this was necessary.

The Chairperson agreed that it would be inconsistent if some parts of the Act were changed but not others.

Ms Fubbs understood that the phrase “no duty” meant “no obligation”.

Mr Smuts gave the assurance that the Office of the State Law Advisor took the matter of simplifying legislation very seriously and tried to draft laws in clearer, more accessible language.

Mr Pieter Smit (Senior Manager, Financial Intelligence Centre) acknowledged the validity of the comments but cautioned against the re-phrasing of legislation. He warned that a change in the wording could send a signal of a different intention and result in unforeseen consequences.

The Chairperson took the Committee through the clauses of the Bill. The Preamble was accepted. Clauses 1, 2, 3, 13 and 14 were accepted, with amendments. New clauses to amend Sections 37 and 38 of the Act (to be inserted after clause 10) were accepted. Clauses 4 to 12 and 15 to 27 were accepted, without amendments.

Dr George remarked that the guidelines under the Bill were outstanding.

Ms Ferreira advised that provision was made in the Bill for the FIC to provide the guidelines.

Voting on the
Financial Intelligence Centre Amendment Bill
The Chairperson read the motion of desirability.

Dr George advised that the Democratic Alliance reserved its position on the Bill.

The Chairperson read the Committee’s report on the Bill.

The Bill was adopted by the Committee with Mr Moloto seconding the motion.

The Chairperson thanked the presenters and Members for their input.

The meeting was adjourned

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