Financial Services Laws General Amendment Bill [B21-2008]: public hearings

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Finance Standing Committee

15 May 2008
Chairperson: Mr M Nene (ANC)
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Meeting Summary

The Committee heard oral submissions on the Financial Services Laws General Amendment Bill and noted that the National Treasury response to all submissions would be given on 27 May.

The Banking Association was concerned about regulatory creep, and suggested amended wording to ensure that certain information sought was related to specific legislation. There was concern that the proposed amendments required banks also to satisfy the fit and proper requirements under other legislation as well as under the Banks Act. There should be better coordination and recognition of other regulators. It was proposed that certain clauses contain exemptions for banks, or that mechanisms for coordination be entrenched. Amendments to Sections 9 and 17 of the Financial Advisory and Intermediary Services Act were criticised as ignoring the current regulation by the Registrar of Banks, and suggested wording was given. The BASA agreed that non-bank institutions could be included in the National Payment Systems Act, but expressed a need for caution as non-banks were not regulated to the same extent as banks. Questions by Members related to the comments on cooperation between regulators, the effect of loss of a financial service provider licence, for instance, on the banking business, and the complaint that some of the requirements were too subjective. The Financial Services Board commented that the regulators had agreements of cooperation and these would continue.

The Principal Officers Association had interpreted the provisions in clause 4 to mean that the Registrar would have a greater role in making appointments of principal officers, and said this was not core to his functions. It agreed with the requirements set out for appointment but believed that there were gaps in that formats should be prescribed and the Registrar should consult on minimum requirements. There should be time periods in relation to the Registrar when objections to appointments were made. The criteria for fit and proper were supported in principle, but attention should be paid to the grouping and the burden of proof. Clause 4(5)(c) should be redrafted.
There was a need to make allowance for lack of formal qualifications, to deal with outstanding convictions and to avoid subjective assessments not based on set criteria. The FAIS advisory committee should be able to assist the Registrar. There needed to be clarity on the whistle-blowing provisions. Members queried the interpretation put on the appointments. National Treasury later confirmed that it was not intended that the Registrar would appoint, but only vet.

The Life Offices Association commented on the proposed amendments on appeals to the Financial Services Board Act, suggesting that the provisions be aligned, the FAIS Act amended and the reasons for decision stated. The enforcement committee in relation to the Financial Institutions (Protection of Funds) Act was supported but the Association took issue with the framework, the question of legal representation, the maximum penalty and inability to impose administrative sanction if a criminal charge had been laid. Suspension of decisions and penalties must be allowed when appeals were lodged. Clearer definitions were needed in relation to the FAIS Act and there should be reasonable grounds to suspect non-compliance before the Registrar could conduct an inspection. Licensing issues were raised. The grounds for debarring were criticised as too wide. Detailed comments were made on the amendments to the treatment of pension interest on divorce and the changes proposed to Section 37D of the Pension Funds Act under the clean break principle. It was feared that there would be administrative problems and cost implications, as well as a large financial burden on funds, and although the principle was supported it was suggested that instead of allowing access to cash, the award be preserved in the originating fund and that the pension interest be added to the non-member spouse award.  Members queried the comments in relation to reasonable grounds for site visits, how performance was currently evaluated, and what the situation was in regard to appointments. Further information was sought on the cost implications of the clean break principle.

The Association of Collective Investments supported the Bill but commented on clause 8, explaining that there seemed to be confusion about the difference between a commission and a fee, and about transfer between different types of funds, which were illustrated by diagrams. Various loopholes, which were described, had been identified by ACI, and it was noted also that there were administrative challenges. Clarity was needed whether the limits were to apply only to underwritten funds. ACI proposed an amended wording to section 14(7)(b) of the Pension Funds Act to clarify the position. Members asked for clarity on the advice fees in relation to portfolios.

The Association of Trust Companies had concerns on the effective date of the Bill. The duties of beneficiary fund trustees were set out and it was noted that they must have the power to make monthly and adult discretionary payments, as well as address the need for long and short-term approaches to the funds under their control. They should also be permitted to make capital payments. The proposal to vest assets in the fund was a fundamental change, and would have tax implications. It was not clear how the regulator would deal with transfers from a fund where the asset would not belong to a beneficiary, nor was it clear what transfers would be allowed for retirement funds. Clarity was needed in relation to licence requirements and also in relation to tax directives on capital payments out of funds. Exemptions must be looked at in relation to beneficiary funds. Members asked for further clarity on what exemptions would be required, how administrators were currently regulated and whether this was effective.

Meeting report

Financial Services Laws General Amendment Bill (the Bill): Public Submissions
Banking Association South Africa (BASA) Submission

Mr Cas Coovadia, Banking Association of South Africa, noted that a detailed written submission had been made and he would summarise the main critical issues. BASA believe that clause 45(5) of the Amendment Bill was too wide and outside the scope of the Financial Advisory and Intermediary Services Act (FAIS). It was concerned that there was regulatory creep. Amended wording was suggested to ensure that the information being sought was indeed FAIS related only.

In respect of onsite visits, it was submitted that the description referring to the details was too wide, and that the details must be more specific, and once again a suggested wording was given>

The fit and proper issues related to Clause 47, which again was amending the FAIS Act. The prime regulator of Banks was the Registrar of Banks and the Banking Act placed stringent fit and proper requirements on banks. There seemed to be a trend that insufficient attention was paid to the fact, in drafting Bills, that there were regulators already in existence, and BASA believed that there should be better coordination and recognition. It would recommend that the clause exclude banks, or at least that the clause impose some mechanism for coordination, so that further fit and proper requirements were not imposed on top of those already imposed under the Banks Act. Once again BASA had submitted a suggested re-wording in their detailed submission.

Further comments related to the substitution of Section 9 of the FAIS Act. The suspension or withdrawal proposed did not take into account the fact that banks were regulated already by the banking regulator, and it was submitted that there be an amendment to make it incumbent on the FAIS regulator to consult with the Registrar of Banks before taking any action. A suggested wording was again given.

The issue of compliance officers related to the amendment to Section 17 of the FAIS Act. Once again the reporting requirements were regarded as too wide. If the Regulator for FAIS had picked up any issues, then it was suggested that there be discussion rather than re-regulation. Suggested re-wording was given.

The Bill also contained amendments to the National Payment Systems Act (NPS Act), to facilitate entry of non-banks. BASA agreed that the area of financial intermediation had progressed to the stage where non-bank institutions should be considered. However, Mr Coovadia expressed the need for caution and consideration of possible risks to an internationally recognised and accepted national payment system. He was not suggesting that non-banks automatically meant risks, but made the point that the risks currently could be addressed effectively and efficiently because the banks were highly regulated. The non-banks were currently not regulated in the financial intermediation area and this non-regulation posed a risk. Banks had an international payment system that should be protected and enhanced. There were many regulatory issues to be considered in opening up the system. The playing fields needed to be levelled. Support for the entry of non-banks was contained in paragraph 1 of BASA’s detailed submission.

Finally Mr Coovadia noted that there was ongoing discussion with representatives of the Financial Services Board (FSB) although it had been difficult to arrange a more detailed meeting thus far.

Principal Officers Association (POA):
Ms Anna Marie d’Alton, Representative, POA, wished to elaborate a little on the role of the Registrar in relation to pension funds, as she felt that this would give some background to the submissions that she would make. The role of the Registrar was that he must supervise and regulate, but not interfere with the Board of Trustees. POA had some concerns with the amendments relating to appointments. If the Registrar were to assume responsibility for appointment in the way that the Bill seemed to suggest, then it would be easy for the Board to shift responsibility and blame in disputes with the Principal Officer (PO).  The Registrar was asked to monitor and this was not core to his or her functions. The Board was supposed to do the recruitment, selection, and appointment and performance management and termination of appointment of the PO. It was indeed in the best position to effect appointments in line with the needs and objectives of the Fund. The POA believed the Registrar should confine himself to the prescribed registrar role and that he could do so through the requirement that appointees meet the fit and proper requirements, and by compelling funds to notify him of appointments. It was suggested that the Registrar’s position remain as it was at present, to vary, cancel or confirm. He should legislate for the fit and proper criteria, and indicate also the process to be followed if there were disputes in relation to objections. The recommendations were contained in paragraph 3 of the written submission.

In relation to the requirements set out in clause 4 the LOA was in broad agreement, but felt that there were some gaps. There should be formats prescribed, and it was recommended that the Registrar consult on drafting the minimum requirements. The LOA agreed that nobody should have the opportunity to opt out of getting the confirmation of fit and proper. However, once again it was submitted that the power to terminate should not be with the Registrar, but with the Board of Trustees. The Registrar was not at grass roots level where selection was happening.

In relation to the objection to appointment, under subclause (5)(b), LOA suggested that there be some amendments. The Registrar would, once there was objection to an appointment, instruct that the employment be terminated within 14 days. No time period was set out, however, for a response by the Registrar to the submissions, nor was there anything in the Bill around the appeal processes, although it was assumed that such processes were in place. She asked what would happen to the principal officer while awaiting final determination, as the Fund would be in limbo. LOA suggested that the Registrar be required to submit a response within a set time, that an appeal process must be put in place, and that the time periods must be linked. Furthermore there should be provision made for good cause being shown if the time limits could not be adhered to.

In relation to the criteria around fit and proper, as set out in subclause (5)(c), LOA supported the notion of fit and proper criteria. There were three broad categories: good character, competence and capability, personal financial soundness. However, there was no logic in the grouping, and not all characteristics might be there, and nothing had been said about the burden of proof.

Ultimately it was confusing who would bear responsibility for the appointment. The Registrar would make the appointment, but the Board was doing recruitment and selection. If there was a dispute it would be easy to shift the responsibility. In the case of disputes, there was a question as to where the principal officer would go. The registrar might find himself lost in fighting appeals and objections.

The LOA therefore suggested an entire redraft of the subclause (5)(c) in their written submission. There were many principal officers needing to go through the process and it would be a huge task to get them all confirmed as fit and proper. There was no mention of a window period to meet the criteria. The Registrar should have an exemption provision in that if there were some exceptional circumstance, the Registrar should be able to vary the appointment.

LOA then returned to the circumstances to be considered by the Registrar, as set out in subclause (5). It agreed that (5)(c)(i) should be included. However, not all principal officers presently had formal qualifications and there should be transitional arrangements to allow that to continue. In addition it was suggested that diligence was part of competence, but it was impossible to determine whether a person was likely to fulfil his responsibilities. ,

Queries were raised over the circumstances set out in subclause (5)(c)(iv)(dd), because former principal officers had not been subjected to any actions in the past. It would be difficult to enforce and the role of the competent authority was not explained. There was no mention how outstanding convictions would be dealt with and actions of principal officers alone were unlikely to result in the fund not meeting its obligations.

There was a fear about subjectivity. Generally, if the assessment criteria were absent, the Registrar would get involved in unrelated investigations to try to find out if issues not declared. There were also cost implications. It was possible that people with malicious intent could just write to the Registrar, who would then have to make the investigation. The issue of competent courts and authorities was important to clarify.

In relation to subclause (5)(d), there was no indication of who was to do the investigation, nor whether the Fund and PO would have any say in the appointment of any person to assist with the assessment. There was also already a FAIS Advisory Committee in place, and it was suggested that this could assist the Registrar in making the fit and proper assessments.

Subclause (5)(6) included provisions on whistle-blowing, but these provisions could be interpreted in a number of ways. The drafting here needed to be clarified. It was not clear how enforcement would take place, nor the protection of principal officers who blew the whistle, and what would happen if the principal officer failed to say anything despite being aware of matters relating to the pension fund. It was suggested that this amendment be deferred until there had been a chance to properly consult with the industry.

Generally, when dealing with matters of good character, LOA felt that this was something that could only be demonstrated over time. This might include lack of convictions on criminal or dishonest offences, whether a person had been placed under curatorship, whether a person had been shown not truthful or fair, whether there had been a willingness to comply with legislation and other factors. There should be more objective ways to deal with the matter. It was possible to demonstrate competence to understand inherent risks, and a management process, through qualifications, expert knowledge, whether there had been any disciplinary steps taken or resignations from positions of trust. It was possible to state matters in the alternative.

In summary, the LOA supported fit and proper criteria for POs, disagreed that the Registrar should have authority to hire and fire, which should remain with the Board, and asked that the provisions on whistle-blowing be deferred. 

Life Offices Association (LOA) Submission
Ms Anna Rosenberg, Deputy Executive, Life Offices Association, noted that a lengthy written submission had been given and she would merely summarise the main points. She noted that the time for comment had been very short.

Her first comments related to the proposed amendments to the Financial Services Board (FSB) Act provisions on appeals. There was some confusion and the provisions must be aligned, and the FAIS Act also amended. The appeal should be lodged within 30 days, and it was suggested that there be specific reference to the fact that the person must be made aware of the reasons for the decision. The execution of the decision was not stated to be suspended pending the finalisation of the appeal, and it was further suggested that this be stated.

In relation to the proposed amendments to the Financial Institutions (Protection of Funds) Act (FIPF), LOA expressed support for the principle of the enforcement committee but had concerns around the framework. The panel must be independent and impartial, but this could be ensured by the way in which it was constituted. Legal representation should always be allowed. The burden of proof seemed not to be consistent, since the sanctions imposed equated to criminal sanctions, yet the burden of proof was merely
a balance of probabilities. There was no maximum stated in regard to the penalties, and LOA felt that this should be so, so that there was not an open discretion.

In relation to the proposed insertion of Section 6D(4) into FIPF, it was noted that the enforcement committee was not to impose an administrative sanction if the respondent had been charged with a criminal offence arising out of the same set of facts. LOA queried why this was so. In relation to the costs, LOA commended that an award of the entire costs of the proceedings could be too harsh, although it agreed that it would be reasonable for an award of legal costs to be made. Once again, LOA commented that the decision was not stated as suspended pending the outcome of an appeal, and it was suggested that there should be suspension of the decision, unless a Court, for good cause, decided otherwise.

LOA commented on the proposed amendment to the FAIS Act, particularly in relation to site visits. LOA suggested that
any suitable person must be clearly defined. The Registrar should have reasonable grounds to suspect non-compliance before carrying out an inspection. Access should be limited to documents relative to the investigation, not open access. There was no reference, in terms of clause 45, to the provider having to give any copy of documents. It was felt that the amended section gave too wide discretionary powers to the Registrar, without any guidelines, and that he might be able to stop the provider from conducting business.

In relation to clause 46, amending Section 7(3), LOA stated that it supported the principle but suggested clearer wording. This should also be extended to providers who were not financial services providers (FSPs), since insurers had a similar requirement.

In relation to the financial service providers, LOA asked why the proposed amendments required a check that the FSP was licensed in the correct product category, since every person licensed was within the FAIS network. If this proposal were to be pursued, then LOA stated that at least a year to eighteen months would be required to allow for alignment of systems in order to carry out those checks.

In relation to notifying the Registrar of changes, it was submitted that it should not be necessary to notify of any non-key individual changes, since the key individual in any event oversaw the provision of financial services, and the other directors would be regulated under the Companies Act.

LOA noted that any contravention of FAIS could be grounds for debarring. This was considered to be too wide. A contravention of an administrative section of FAIS would not affect the fit and proper requirement, but could nonetheless lead to debarring. It was suggested that the serious non compliance issues could be dealt with by expanding the definition of fit and proper.

In relation to clause 52, the insertion of a new Section 14ASection 14A,  LOA welcomed extension of the debarring power as there had been a gap. However, the grounds for debarment were too wide. Again, it was suggested that a maximum penalty be provided for in terms.

Ms Rosenberg noted that detailed comments of the LOA on the amendments to the Pension Fund Act (PFA) had been made via the Retirement Funds Association and it was therefore not necessary to deal with them here.

Mr Rod Stevenson, Retirement Fund Convenor, LOA, dealt with treatment of pension interest on divorce Section 37D of the PFA (referred to in clause 14 of this Bill)  had been  was amended last year to deal with the clean break principle. The Bill was allowing this to apply to pre-13 September 2007 divorce awards and cases. Although the clean break principle was supported, this had a number of unintended effects, and the words and process should be reviewed. There was a circularity in some of the provisions relating to the members awards.  LOA suggested that deductions be implemented on receipt of an election from the non-member spouse. It appeared that neither member nor non-member spouse would for a period benefit from Fund interest earnings, which could not have been the intention. There were provisions requiring the Fund to request the non-member spouse to make an election. Most funds did not have the details of non-member spouses and this would put an administrative burden on them. The request for election should be dependent on receipt of contact details from the non-member spouse. There were problems arising from the definitions. Divorce awards against pension funds would lead to nil interest.

The effect on vested rights of members was of concern, in that the divorce process would deal with the division of property, including pension benefits. Pre-13 September 2007, the parties would have taken into account the fact that the non-members' share would only have been paid out at a future date, and thus would have made certain assumptions providing for growth, in order to compensate the non-member spouse for the loss of interest earnings. This calculation would in due course have been considered in the final Order of Court. This new provision would have the effect of altering these arrangements without making provision for compensation back to the member spouse. This would have a negative impact. LOA therefore suggested that the member be allowed to approach the Court to show that it would be inequitable to allow retrospective application to his or her case.

The process set out in this amendment would furthermore have effects on the pension funds, who would adopt long term investment strategies to meet their commitments over time. If large numbers of non-member spouses were able to access their divorce awards immediately there would be a run on the asset of the Fund, which, depending on the awards anticipated, could have a damaging effect on the Fund. Huge sums may have to be paid out and expenses would also be incurred that were not originally anticipated, in setting up systems. LOA expected there to be both leakage and additional expenses for most Funds. Although it was impossible to estimate the extent, there was anecdotal evidence that some Funds would have to make large awards. LOA therefore proposed that the clean break principle be accepted, but that instead of allowing access to cash, the award be preserved in the originating fund and that the pension interest be added to the non-member spouse award. 

Mr K Moloto (ANC) was sympathetic to the views of BASA, but for different reasons than those they given. He understood that if one division of a Bank were to have its licence withdrawn, that put the credibility of the whole bank at stake. However, the withdrawal would in fact be confined, in the case of non compliance, to pensions or another field. The FSB would not be withdrawing the entire banking licence, but only that relating to the FSP aspects. The main issue was how the regulators would deal with each other. However, he pointed out that it was also quite possible that the withdrawal of a licence might be symptomatic of other concerning issues relating to the banking cycle.

Mr Coovadia said that he appreciated this, but the general public outside the bank would not separate out banking and FSP functions in their own minds. BASA was appealing that regulators must understand the impact of particularly types of regulation on particular types of business. A bank was a specific type of business that placed a significant onus on reputation. While regulators could separate out their areas of regulation, it was difficult in the business to say that the banking was in a separate field. That should be recognised, and he was calling for interaction.

Ms Adri Grobler, BASA representative, used the example of ABSA Bank, simply because it held a FAIS licence. The brokers did not hold a banking licence. It was not suggested that in the case of transgression, the FAIS licence should not be withdrawn, but rather that if the FAIS regulator wanted to suspend or withdraw, he should speak to the other financial regulator, the banking regulator. One of the points was that there might well be risk issues.

Mr Moloto, on the issue of fit and proper, disagreed with BASA. He understood that this was for the financial service provider or fund manager, but not for the banking licence. It would relate specifically to the FSP purposes.

Mr Coovadia said that the view of BASA was that if the banking regulations (the primary regulations for banks) had fit and proper requirements for the business of banks, then the FAIS and banking regulators should sit down and discuss what they wanted to achieve. The banker would report to the Registrar of Banks, under the Banks Act, on all fit and proper requirements, and that should satisfy other issues. If there was a requirement that the bank report to the Registrar of Banks, the National Credit Regulator and the FSB, and if all required system adjustments, this would become untenable for the bank. He called for a mechanism where, to get round a myriad of reporting requirements, there could perhaps be a report to a single regulator, who could then parcel out the requirements as necessary.

Ms Grobler added that the FSP was responsible for the appointment of fit and proper people. The amendments were, however, adding that the power would be given to the Registrar to declare the person not fit and proper. She said that the bank would have to get a form with declarations to satisfy the Registrar of Banks that the directors were fit and proper, and if a director, having been deemed by the Registrar of Banks, to be fit and proper was then deemed not to be so by another regulator, then he should not be automatically debarred, but there should be consultations.

Mr Moloto raised a query on the POA statement that the FSB would be making appointments of the principal officers. He did not see that in the Bill. He thought that the FSB could only object, and pointed out that he read the clause as saying that the Registrar could have regard to certain matters, but not that he would be responsible for appointment.

Ms d
Alton responded that the interpretation of the POA might be incorrect, but in their view subclause (5)(b) seemed to suggest that the decision on appointment was in the hands of the Registrar, who had to confirm the appointment. If the Registrar gave the instruction to terminate, then he was effectively being given the power to appoint. She suggested that perhaps there should be a change in the wording to make it clear that the Board of Trustees would have to act in a certain way.

Mr Moloto asked the LOA to expand on their comment that there would have to be a reasonable ground for a site visit. He said that a normal regulator would conduct on-site visits and inspections, even if there was no apparent problem, because that fell within the local and international normal practice. If there were not to be those powers given to a regulator, he would regard this as negative because investors would be reluctant to invest in a system that did not have these checks. He would like to see that the regulator would have wide powers to inspect, and he did not agree that there should be reasonable grounds shown before any inspection.

Mr Sagie Nadasen, Law Standing Committee Convenor: LOA, expanded on this point. He felt that there should be a
clean-up of the terminology, and that a regulator should not be able to arrive and inspect anything, but should attend for a particular purpose. LOA supported an effective regulator. However, the efficacy was based on a subjective discretion. LOA believed that this must be mediated by the principle of proportionality, and reasonableness would be effectiveness mated with proportionality.

The Chairperson said that even if the on-site visit was for purpose A, but a breach of B was picked up, surely that should be reported on. He would have thought that restricting the regulator to considering only breaches of A would not be sensible. That issue would need further discussion. The FSB had been accused of not being proactive, and he would imagine at the end of the day there should be a regulator who was proactively effective.
Dr D George (DA) noted that the POA had complained that powers of inspection was too wide.  He asked what the impact of this would be.

Dr George asked the POA how the performance of a principal officer was currently evaluated, and what was the current situation regarding appointment.

Ms d
Alton said that currently there was no formal process. In the industry, performance assessments were being taken up and implemented, but it was at the discretion of the Funds how they wanted to go about these.

Mr Tony Remus, Advisor, POA, said that currently there were not formal criteria, but the Funds Trustees did their selection on the basis of certain conditions and criteria, such as fit and proper, and would use the same kind of criteria in making an appointment. They would look at competence, financial skills and so forth, but would be guided by what was in the Pension Funds Act in relation to the statutory duties and compliance that a principal officer would have to carry out.

Mr B Mnguni (ANC) asked BASA to expand upon the fit and proper comments that they had made in paragraph 2 of their written submission. He asked how the personal character requirement was regarded as too onerous.

Mr Coovadia said that these qualities were often very subjective, and that criteria should be set out so that the assessment became more objective. The meaning of honesty could be regarded differently by two different people.

Mr Mnguni asked BASA what risks might be posed by entry of non banking institutions.

Mr Nicky Mohan, General Manager, BASA, said that a particular risk might be that they not be required to get from their customers all the requirements set out under the Financial Intelligence Centre Act (FICA), and that could pose one risk.

Mr Mnguni asked the LOA to expand upon point 7.2 of their written submission, relating to the leakage of pensions, which would impose a costly administrative burden on some pension funds. He asked for an indication of what those costs might be. He pointed out that surely only a small percentage of the members of a Fund would be likely to divorce and he thought that there was not likely to be so great a risk. He asked in whose interest the LOA was acting.

Mr Stevenson reiterated that it was difficult to come up with any definite cost effect because these were typically related to the funds and administrative systems, which differed. Even the post-13 September cases would require systems adjustment, meaning costs of manual adjustments, because these were numbered in the thousands and standard electronic systems would not be able to deal with them. It was costly to hire staff to do the manual adjustments, and only a short period was allowed. If one assumed that a fund had 50 000 divorce awards pre-13 September, and there was a fixed cost put to each one, this could exceed millions of rands of additional cost. It would differ from fund to fund. The draw on the investments would also carry costs. There would be a sudden leakage and liquidity need in the Fund, which would have to realise assets to meet the demand. It was difficult to say what percentage of total funds comprised those awards, but if one looked at the number of divorces over the last decade, there might be at least 35 000 per annum. This could represent anything between 5 to 10% of members in a Fund. This was a substantial number when looking then at the money involved. The numbers looked significant from any perspective.

Mr S Marais (DA) said that BASA had mentioned the creep by Regulators into each other's domain. He noted that it was necessary to have effective regulators but it was necessary also that there be no duplication. He asked if they believed there must be a re-evaluation of all regulations applicable to banks.

Mr Coovadia responded that regulators sometimes seemed to take the view that they were responsible for regulating one area, and had to do the best in that area, but did not worry about what other regulators ere doing. That was problematic. A suggested way forward on this issue would be for National Treasury, for instance, to take the lead in a process to pull together the different regulators and associations, to ask where the industry should be taken in the next ten to fifteen years, what role the industry should play in socio-economic transformation and how this should be regulated. That might lead elsewhere, but he would not expand on that at this meeting.

Mr N Singh (IFP) asked LOA about suspension of a decision pending appeal. He said that there was already provision that submissions could be made to the Chairperson or Deputy Chairperson of the Appeal Board. He pointed out that the nature of the offence might be so serious that decisions should be enforced as transgressions should not be allowed to continue.

Ms Rosenberg pointed out that in relation to appeals, if the Registrar had objected, it should be up to the Board to go back and prove that the Registrar was incorrect. The onus was currently being placed with the Registrar to clarify, instead of the Board having the burden of proof.

Mr Moloto asked National Treasury to note, from the BASA written submission, their comments about the financial year. The Regulator was speaking of a different financial year and that was a serious matter that must be addressed.
Association of Collective Investments (ACI) Submission
Ms Di Turpin, Chief Executive: ACI, said that ACI supported the broad principle of the Bill but wanted to comment on one area, being clause 8, in relation to section 14 of the Pension Funds Act. This section had been commented on by the industry before, but she would like to elaborate on some issues and hoped, in doing so, that she would also be conveying the views of many financial intermediaries.

ACI agreed that no payment be made on a transfer between Retirement Annuity funds and agreed also that no upfront commissions should be made on the new money. However, it thought that there was confusion in the circumstances where a payment was made by a client to an intermediary for ongoing advice on portfolio construction or management. This basically came down to the definition of “commission” and “fees”.

Ms Turpin said that she would be speaking of the regulated environment (long term) and unregulated environment (collective investments). When this section came before Parliament previously, there was a requirement to ensure that no churning happened. ACI was concerned that this provision was aiming at a smaller element of the group who might be doing things for the wrong reason, but instead it was affecting the larger group who were acting correctly. The wording in this Bill would have implications because there were loopholes that could be taken advantage of, and this was not in anyone's interest.

Most of the underwritten policies in South Africa operated in a regulated environment around fees, and may only charge what was stipulated - usually the maximum. In the unregulated environment it was more open and relied on disclosure principles. That was what had happened in the self administered policies that usually used unit trusts as underlying vehicles. The unregulated environment had the potential to be dangerous but because of disclosure in fact less was being charged. This worked well for clients.

Ms Turpin explained that clause 8 related to three different situations. It was possible to do transfers from underwritten to underwritten; underwritten to self administered, and self administered to self administered funds. It seemed that National Treasury was most concerned to ensure that two levels of charges did not arise, particularly in relation to the second instance of transfers from underwritten to self-administered funds. The view of the industry was that the commission would be charged for making the investment. Fees were different, and could be charged for making the sale, but then there was also a trail fee for advice on portfolio construction. This was charged annually and disclosed. It was not linked to the purchase of the product.

Clause 8 currently was worded in a way that it could be misinterpreted. Some of the loopholes might be that a product provider could continue to earn fees while the advice provider did not get anything, if the transfer happened before the maximum allowable fee arose. In many instances, particularly the self administered funds, trustees used investment advisors, because they could not take on any more work themselves, and they might not be allowed to pay these advisors. It would be difficult to work out what the allowable fee was. It was unsure how advisers would know what proportion of allowable charges had already been charged. The potential of creating "broker funds" to charge fees was available. There were administrative challenges of making partial payments of advice fees. If an advisor moved a client from an old-style to new fund, the advisor could continue to charge fees on the new money. Finally, the wording suggested that out of hand payments could be accepted for the advice. At the moment this was not acceptable, and it was questioned why the Bill should invoke this payment now, and whether there was a problem with facilitation of payment through another adviser, provided the client knew of this.

An advice fee should still be considered as an option against services delivered, as long as the client had signed and understood the financial implications of that decision. ACI was not sure if the limits were to apply only to underwritten funds and needed some clarity.

ACI proposed some amended wording to the proposals to substitute section 14(7)(b) of the Pension Funds Act.  The word "personal instruction" should be added. If the intention was to refer to underwritten funds, this should be stated specifically, and the word "fees" be removed, as it applied to the ongoing advice fee. The inclusion of this word was confusing the sales fee and advice fee. This was fully set out in the written submission.

Association of Trust Companies in South Africa (ATC) Submission
Ms Giselle Gould, Director, ATC, noted that the ATC was fairly new in the industry, having previously been regulated by the Trust Company Control Act. It was supportive of the legislation, seeing that there was a focus on beneficiary funds,

ATC represented various trust companies that employed benefits trust, which was estimated to be around R15 billion worth and covering around three to four thousand beneficiaries.

In relation to the commencement and transitional provisions, ATC had concerns in terms of implementation and around being able to register the beneficiary funds by the commencement date. It recommended that perhaps the wording read "as at January 2009" to allow licensing from that date.


In relation to the powers of beneficiary fund trustees, Ms Gould pointed out that they had the responsibility of evaluating monthly payments as well as adult discretionary payments. Currently there was no provision for them to make the payments and this needed to be addressed. In addition she stated that where deposits were made and there were ongoing needs, there must be a long term approach to investment for future needs as well as a short term view for the immediate needs.

The beneficiary fund trustees heeded to delegate powers to the administrators, to execute powers on a frequent and regular basis for beneficiaries. It became quite complex to deal with requirements and demands and to ensure these were sufficiently administered. She suggested that the PFA should make provision to allow beneficiary fund trustees to make capital payments.

Ms Gould stated that under the Trust Property Control Act the assets placed in the trust vested in the beneficiaries. The proposal was now that they vest in the Fund. That was a fundamental change. It was suggested that a separate vehicle be created to allow beneficiaries to own assets. That would have implications on tax for the fund if a beneficiary were to die before vesting, or was under the age of 16. She suggested that there needed to be resolution on this point.

ATC was concerned that it was not clear how the regulator would deal with transfers from a fund where the asset would not belong to a beneficiary, and it was not sure that the reversal of the vesting could be dealt with.

In relation to the transfer from one beneficiary fund to another it was not clear in what circumstances the transfers would be allowed for retirement funds. Costs, corporate governance and the interests of the beneficiaries must all be borne in mind. Assets were normally placed in trust because the guardians were not capable of managing them themselves, and the levels of financial literacy of the beneficiaries were not high.

In relation to the licence requirements for administrators, there must be clarity. Current trust companies would need sufficient time to gear up and obtain licences.

Ms Gould noted that currently, if capital were to be paid out from a retirement fund, tax directives must be obtained. Beneficiary funds could make between two and ten capital payments per annum. The onus on the Board of such Funds to apply for tax directives would be costly, problematic and could cause delays in getting the payments through to beneficiaries (bearing in mind that they were often paid to educational institutions that had time limits.)

In relation to costs, and bearing in mind the costs that were already applied, ATC proposed that they be exempt from FSB adjudicator levies.

In relation to exemptions, Ms Gould noted that there were many ways in which the beneficiary funds would be administered, and it was assumed that the Regulator would use the power in the Bill to make the administration of the funds as effective and workable as possible.

Mr Moloto asked ATC about the exemptions, because of departures from the norm. He asked for an illustration how a Fund might find it difficult to comply with the whole piece of legislation.

Ms Gould said that perhaps employee and employee relationship as defined in the PFA did not apply. She pointed out that if a beneficiary died, the trustees should be exempt from the requirement in Section 37C to search for dependents. Beneficiaries were often minors. Those kind of distinctions would not apply. Section 14 was not appropriate as there could not be liquidation of a beneficiary fund and therefore an exemption was needed for this.

Mr Moloto asked ATC how administrators were currently regulated and if their regulation was adequate

Ms Gould said that this had attracted much media attention in recent months because of the Fidentia saga. They were regulated by the Trust Property Control Act, under the Master of the High Court. The level of protection was insufficient. Although they would register certain initial documentation with the Master and trustees there had been insufficient supervision

Mr Richard Krepelka, Chief Executive Officer, ATC, said that they were FAIS regulated, and this was more compelling and demanding. All trust administrators performing investment had to be FAIS licenced.

Dr George asked a question of ACI in relation to the ongoing advice fee. He felt that the payment should surely depend on the portfolio. If it was changeable and was being changed, then surely it would be better to pay when the advice was given. If the portfolio was not changeable then surely no advice fee was appropriate.

Mr Pieter Koekemoer, Deputy Chair, ACI, said that this question went to the heart of why ACI was concerned about the difference between regulated and non regulated situations. In the underwritten environment, fees for retirement annuities were regulated and charged up front. That extended beyond the advice or commission for distribution, also to that earned by the product provider. There would be a bundled charge against the client that paid for a variety of services. That was charged up front, and a typical pension might have a twenty or more year term. In the self administered environment there was no bundling. It was clear what was being paid for the different components. The client, at any time, had the ability to vary the charges. The total costs over the term would be fairly similar, but in the self-administered environment the client had the option to terminate any component at any time. A significant part of the advice was ongoing review to ensure that the portfolio remained relevant for the client and a significant part of the value-add was to ensure that the portfolio was appropriate for client requirements. In the self-administered environment, the concepts of administration and investment were separated. All provided investment choice. That enabled the intermediary, as the financial situation of the client changed, to adjust the portfolio by using the variety of investment options available. Portfolio construction was not necessarily an issue of varying the exposure by "chasing returns", but also to ensure that it was appropriate to meet particular needs. The differentiation in treatment between product providers and intermediaries was of concern. If the same was applied to remuneration then the providers of self administered underwritten annuities should also not be allowed anything. The rationale as to the potential for double commission showed a flaw in the structuring. It was difficult to see why the two charges, which were essentially similar, should be dealt with differently. The intermediaries should be allowed to earn a fee.

Ms Turpin said that a good financial advisor could add particular value also in advising a client to stay with his current portfolio and not to move.

Mr Singh asked if it was normal for an advisor fee to be charged for an investment portfolio, which in fact was not getting "any advice"

Ms Turpin said that the product provider could remove the fee on request.

National Treasury (NT) preliminary responses

The Chairperson said that the full responses would be heard on 27 May.

Ms Jo-Ann Ferreira, Chief Director: Legislation, National Treasury, said that the Minister of Finance had launched a project to enhance coordination and ensure consistency of powers between regulators. However this was an ongoing process. Where the legislation could be improved in the meantime, this was being done, so that the process was not delayed. There could be the opportunity to entrench discussion between regulators in respect of fit and proper requirements. She noted that there had been some contradiction in the assertions of BASA as there were instances where they were reluctant for a sharing of information, but that coordination was a primary objective.

In regard to the financial year NT would assure congruency, that one regulator would inform the other so that two approvals should not be required.

Baron Furstenburg, Director: Financial Markets, National Treasury, said that many of the issues were very complex and only the surface would be scratched at the briefings, but NT would go into greater detail on all issues raised. There were a number of elements to the divorce issue. It was understood that there would be administrative costs. It was also understood that there could be leakage if the non-member divorced spouse chose to take the money out of the Fund. However, he pointed out that the current environment did not require preservation, and until that was changed, that option could not be denied to the non member spouse. An aspect not highlighted was that non members could not be referred.

In relation to concerns raised by POA, Mr Furstenburg said that there was a difference between vetting and appointment. The registrar was not given the power to appoint. There was only a vetting exercise. This was because the Registrar may be aware of some things that the appointing Trustee Board would not know

In relation to the comments of ACI, Mr Furstenburg said that the regulation of costs and commissions was not a first/best solution. Improving competition and disclosure would be better. The question was how to move forward from the unregulated environment, where some actors had not behaved properly. There was a parallel process of commission review, not only in relation to transfer, but also commission on endowments or annuities, and this went beyond the proposals in relation to Section 14(7) of PFA. The draft proposed to alter the way in which commissions were regulated and paid, so that if an advisory service was not given the commission could be redirected to someone who could give service

In relation to beneficiary funds, most of the issues raised by ATC were addressed in some way. The Bill did not intent to legislate for every minor detail. The detail would be filled in by the regulator. In relation to the tax issue raised by ATC, the NT would engage companies to engage with the revenue services and this must be addressed in the upcoming Taxation Laws Amendment Bills. In relation to the concerns around the effective date, he noted that the entire Bill, including the date of commencement, was up for debate, but NT would like there to be a definite date set.

Financial Services Board (FSB) responses
Mr Gerhard van Deventer, Executive Director: FSB, said that it would be irresponsible for the Regulator to operate "with its head in the sand" and there were arrangements of cooperation with all regulators. Section 22 of the governing legislation allowed the FSB to share information with fellow regulators and something that it picked up that would impact on another regulator would be reported. This would be continued.

The Chairperson asked if this was a formalised arrangement.

Mr van Deventer said that there were formal Memoranda of Understanding, and formal and ongoing meetings with other regulators.

The Chairperson noted that these were but a few of the submissions. National Treasury would be giving responses to all submissions on 27 May. He hoped that the legislation to come out of this would benefit both industry and consumers.

The meeting was adjourned.




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