ATC170510: Report of the Select Committee on Finance on the Financial Sector Regulation Bill [B34B – 2015], Dated 10 May 2017

NCOP Finance

Report of the Select Committee on Finance on the Financial Sector Regulation Bill [B34B – 2015], Dated 10 May 2017.

1.         Background

The Financial Sector Regulation Bill [FSR Bill], also referred to as the “Twin Peaks” legislation, is a comprehensive model for regulating the financial sector in South Africa. Its purpose is to address the shortcomings of the current financial legislation, given that South Africa has not changed its framework for financial regulation since the creation of the Financial Services Board (FSB) and the Office of the Registrar of Banks in 1990.

National Treasury indicated that current regulatory challenges in South Africa are that, too many regulators are involved with the financial sector; most financial firms are reregulated by different financial regulators and that there is a need to coordinate these regulators. Also, South Africa has learnt some lessons from the global financial crises that occurred in 2008/09 and the world’s responses to such crises. Furthermore, peer review of the current legislation had shown the impact of poorly designed regulations and increasing costs on society in general, amongst other things.

The “Twin Peaks” system seeks to strengthen financial stability; improve market conduct; widen access to financial services and combat financial crime such as money laundering. In simple terms, the Bill aims to make the financial sector safer and make it work more effectively in the interest of all South Africans. It intends to reduce potential threats to financial stability and better protect customers by ensuring that financial institutions treat customers fairly.

The main intents of the Bill or the “peaks” are the development of the Prudential Authority, a body that would promote and enhance the safety and soundness of the financial institutions; the Financial Sector Conduct Authority (FSCA) that would protect financial customers; the Financial Services Tribunal, which will hear and decide appeals in a transparent manner and financial stability through the South African Reserve Bank (SARB) and the Financial Stability Oversight Committee, a committee that would coordinate financial stability issues.

2.                                               Consultation process

The National Council of Provinces (NCOP) referred the FSR Bill to the Select Committee on Finance for consideration and reporting purposes, on the 06 December 2016. In order to meet the constitutional obligations, the Committee embarked on a rigorous process to honour the referral and give the Bill due diligence.

On the 24th of August 2016, the Committee received preliminary briefing by the National Treasury on the FSR Bill. The Committee conducted a study tour to Mexico between 27 August and 03 September 2016, to explore how the Bill was implemented and learn some lessons that could assist in processing of the Bill. On the 25th of January 2017 and 14th of February 2017, the Committee received further briefings from the National Treasury on the content of the Bill.

The Committee conducted public hearings in the Gauteng Province on the 28th and 29th of March 2017. Briefings were received from the National Treasury; the SARB; the Johannesburg Stock Exchange (JSE); the Banking Association of South Africa (BASA); the Microfinance South Africa; the National Consumer Tribunal (NCT); the Black Insurance Advisors Council (BIAC); the Association of Black Securities and Investment Professionals (ABSIP); the Progressive Professionals Forum (PPF) and the Black Business Council (BBC). Written submissions were also received from the Association for Savings and Investment in South Africa (ASISA) and the Credit Ombud. During the public hearings, the National Treasury and the FSB responded to the issues raised by the stakeholders.

The Committee then had clause by clause deliberations on the proposed amendments to the FSR Bill with the National Treasury and the SARB on the 03rd of May 2017.

2.1        Summary of submissions made during the public hearings

This section summarises the key issues raised by the stakeholders during the public hearings held in the Gauteng Province on the 28th and 29th of March 2017.

2.1.1              Submission by the South African Reserve Bank

The SARB fully supports the FSR Bill as it addresses the shortcomings in the current financial sector regulatory architecture. These shortcomings include duplication; poor coordination; unclear articulation of objectives and poor market conduct outcomes.

The SARB, in their submission emphasised that “…the SARB is now explicitly mandated to oversee and maintain the South African financial system’s stability”. The FSR Bill clause 11 requires that in protecting and enhancing financial stability, the SARB must act within a framework agreed between the Minister of Finance and the Governor.

The FSR Bill impacts on the SARB in the following manner. It:

§  Assigns systemic stability responsibility to the SARB;

§  Establishes the Prudential Authority, which replaces the Office for Banks;

§  Clarifies the scope and co-ordination or cooperation;

§  Gives rule making powers and enforcement framework; and

§  Strengthens risk-based supervision, conglomerates, significant owners etc.

2.1.2     Submission by the Johannesburg Stock Exchange

The JSE endorsed the consequential amendment to the Financial Markets Act, 2012, that was approved by the Standing Committee of Finance, but which was inadvertently excluded from the version of the FSR Bill that was passed by the National Assembly. This amendment provides the necessary clarity in respect of the functions of a central counterparty. The JSE requested that the Select Committee on Finance approves this proposed consequential amendment.

The JSE cautioned that the implementation of the “Twin Peaks” framework could result in unintended consequences. They proposed that it is critical during this phase that open dialogue between the law makers and stakeholders continues, to ensure that any issues identified are appropriately addressed. The JSE is also concerned about the cumulative effect that increased regulatory levies and fees will have on market participants; investors and financial consumers. This could also have an impact on the attractiveness of South Africa as an investment destination.

2.1.3     Submission by the Banking Association of South Africa

BASA supports the inclusion and intent of clause 106(3) (v), which addresses the need for disclosure to be provided to customers when an account is closed, or when a financial institution refuses to provide a financial product to a customer. BASA, however, is of the view that it would be better for the proposed clause to be included in the Conduct of Financial Institutions (COFI) Bill. The reason being that the COFI Bill will establish a regulatory framework for the conduct of financial institutions that will protect and promote fair treatment of customers.

They suggested that Parliament should consider measures to ensure that stakeholders are consulted on the efficiency and effectiveness of consultation and cooperation measures between regulators.

2.1.4     Submission by the Microfinance South Africa

The Microfinance South Africa raised several concerns in relation to implementation of the FSR Bill. These concerns included low access to credit;  the inability of the Bill  to drawing enough people into the market; the fact that the Bill is modelled on G20 and world standards that do not reflect the reality on the ground; expected harmonisation of  various departments, sectors, regulators; DTI and NT; definition of consumer protection in terms of financial services; educating consumers about their options to avoid a situation where consumers consult unregulated providers; making access to finance accessible and holding regulators accountable to Parliament  and reporting on the impact of financial inclusion.

They further submitted that institutions bear the brunt of the regulation while unregulated lenders act outside the law; causing harm to consumers; and little action is being taken. They requested that simple regulation applies to the sector as overregulation can be detrimental to the ability of small businesses to survive. It was also submitted that the presence of different regulators for the microfinance sector could add to the regulatory burden. Microfinance South Africa recommended that the processes followed by all stakeholders involved must be transparent and fully inclusive and further cautioned that the inefficiencies in the current model should not be repeated in future.

2.1.5     Submission by the National Consumer Tribunal

The NCT submitted that the status of the Financial Sector Tribunal decisions may be unclear. They raised a concern that clause 78 of the Bill applies to the NCT as an organ of state; but that it would not be appropriate for NCT to consult with the SARB in carrying out its functions.

They suggested that, for the purposes of absolute clarity, the Bill should contain a provision that specifically states that the Bill shall not affect any rights that any party may have to approach the Tribunal as contained in the National Credit Act or the Consumer Protection Act and will further not affect the Tribunal’s processes in any way.

NCT also indicated that no provision in the Bill provides interim relief measures to consumers. It then proposed that a method of interdicting action be included in the Bill.

2.1.6     Submission by the Black Insurance Advisors Council

The BIAC raised a number of concerns regarding the FSR Bill. They submitted that all institutions, big or small, including stokvels and funeral insurance, must be regulated and be transparent. Currently, some institutions and entities fall outside of the regulatory net and this causes harm to consumers.

The BIAC further raised a multiple market conduct issues, which include bank disclosures; pension and provident funds and practises at retail shops. Their major concern was on compliance requirements which disadvantaged insurance advisors in the sector, for example; Regulatory Examinations requirements.

The BIAC was perturbed by the regulations and the examinations that drive the financial advisors out of the industry. They proposed that profiling should be made and examination requirements should be reviewed to reduce the current pass rate of 65 per cent for non-matric holders, address the language issues and provide financial literacy to consumers. The BIAC recommended that the Financial Regulatory Reform Steering Committee (FRRSC) should establish a link with the stakeholders, through consultations.

2.1.7       Submission by the Associations of Black Securities and Investment Professionals

The ABSIP made a similar submission made to the Standing Committee on Finance on the FSR Bill tabled in October 2015. They want the Bill to make a clear distinction in terms of what is regarded as a Systemically Important Financial Institution (SIFI) as the Financial Sector institutions are hiding behind the “SIFI” label to justify lower obligations to comply with transformation requirements of the Broad-Based Black Economic Empowerment (BBBEE) generic regulations.

It further mentioned that the current financial sector regulators are perceived (and in practice) to be keeping out Black entrants from entering the financial sector. The Bill should make it clear that all the conduct authorities must take special care and make every effort to allow new Black entrants.

2.1.8     Submission by the Progressive Professionals Forum

The PPF submitted that the “Twin Peaks” framework as currently articulated in the FSR Bill is not suitable for the South African conditions. The PPF suggested that the Regulatory bodies should transfer all the intended law enforcement capabilities to the security cluster.

In their view, the new FSR Bill should find another appropriate Executive Authority to report to, in order to have a check and balance situation. The new FSB should be an independent body like an Ombudsman that would monitor the other “peak”, with customer protection in mind.

2.1.9     Submission by the Black Business Council

The BBC submitted that lack of transformation in the Financial Sector poses serious systemic risks. They have a concern with both the Prudential Authority and the FSCA reporting to the Ministry of Finance as this does not encourage independence between these two entities. Such independence is sought after to ensure that financial crimes and other objectives of the Bill are actively monitored and no regulator has a blind spot that another regulator cannot fill.

The BBC further made suggestions for clauses to be inserted, referencing transformation in chapters 2, 3, 4, 5, 7, and 14. It also submitted that, the following clauses should be amended, 10(1) (a); 13(3); 13(3) and 14(7) seem to contradict; 19(3); 68; 79(3) (g); and 19(3).

2.1.10     Submission by the Association for Savings and Investment South Africa

ASISA submitted that they are comfortable with the Bill as passed by the National Assembly (B34B-2015) and the amendments proposed thereto by the National Treasury, and have no concerns that need to be drawn to the attention of the Select Committee on Finance.

2.1.11   Submission by the Credit Ombud

The Committee engaged the Credit Ombud, together with the Ombuds for Long-Term Insurance; Banking Services; Short-Term Insurance and the Credit Bureau. The Ombuds briefed the Committee mainly on their office’s vision; history; roles; achievements; the governance structures, complaints related statistics and complaint trends.

The Credit Ombud, who represent all the other abovementioned Ombuds, identified five main themes which summarise the impacts which the enactment of the Bill could have on their respective offices. These are:

(a)   Continued Existence

Section 301(6) – under the heading Savings of approvals, consents, registrations and other acts provides for “An ombud scheme that, immediately before the repeal of the Financial Services Ombuds Schemes Act, 2004 (Act No. 37 of 2004), came into effect, was recognised in terms of that Act must be taken to be a recognised industry ombud scheme as if it had been recognised under this Act.”

This section ensures continuity of service to the financial customer with the least disruption.

(b)   Raising Awareness

The objective of promoting public awareness of ombuds and ombud schemes and the services they provide is enshrined in the Bill and will go a long way to promote much needed awareness of our offices.

The following sections, inter alia, underpin these objectives:

Section 196(3)(b)(ii) – provision that the governing rules of the industry ombud scheme require the members of the industry ombud scheme to inform financial customers about the scheme.

Section 209(1) – The Ombud Council must, as soon as practicable after this Part comes into effect, establish and operate one or more centres to facilitate financial customers’ access to appropriate ombuds.

Section 210(2) – A financial institution must disclose to its financial customers applicable ombud schemes, and how to contact and submit complaints to those schemes, in accordance with Ombud Council rules that may be issued in this regard.

(c)   Co-operation and Consistency

The ombuds support the approach that greater co-operation between the various offices and consistent processes and requirements, will ultimately benefit the financial customer. Hereunder are some relevant sections in support of the intended outcome:

·         Section 201(5) – Ombud Council rules must provide for a consistent approach and consistent requirements for all ombud schemes as well as co-operation and co-ordination between ombud schemes.

·         Section 213 – Collaboration between Ombuds and Ombud Schemes.

“The ombud schemes, and the ombuds, must cooperate and collaborate with each other regarding complaints about             financial institutions in relation to financial products and financial services, including by developing processes and             procedures to jointly hear and determine complaints, on their own initiative or as may be required by ombud council rules.” 

(d)   Effectiveness

An ombud scheme can only be effective if there is total buy-in from all the members from the relevant industry. The current voluntary ombud schemes will enjoy greater industry participation again to the benefit of all financial customers.

The following sections support the outcome:

·         Section 211(3) – “If a financial institution provides financial products and financial services and    there is a recognised industry ombud scheme that provides for the resolution of complaints about financial products or financial services of that kind, the financial institutions must be a member of that industry ombud scheme.”

·         Section 215 – Obligation to comply with governing rules of recognised industry ombud scheme. 

215(1) “A financial institution that is a member of a recognised industry ombud scheme must       comply with the governing rules of the scheme.”

215(2)”Without limiting any other right that a financial customer of a financial institution that is a member of a recognised industry ombud scheme may have, the financial customer may enforce the obligation in subsection (1) in relation to a financial product or a financial service as if the obligation were a provision of the contract in terms of which the financial product or financial service was provided to the financial customer.” 

(e)   Quality Control

The quality of services provided by an ombud scheme is imperative for the credibility of all the ombuds in the financial system.

The Ombud supports the provisions in the Bill that relate to quality control of the various offices in that it will ensure optimum service delivery by the Ombudsman offices.

Hereunder are a few relevant sections which ensure adequate quality control and oversight:

            - section 200 – Procedure for varying, suspending and revoking recognition

            - section 204 – Compliance with financial sector laws

            - section 205 – Debarment

            - section 206 – Administrative penalties

            - section 208 – Supervisory on-site inspections and investigations

The Credit Bureau Ombudsman indicated that the FSR Bill, will have an impact on the Voluntary Ombudsman Offices. The Office has a reservation about the naming of the Ombudsman Council office as “Chief” Ombudsman. Their preferred name is the Ombudsman Council Director. The Credit Ombud views the “Chief Ombud” as being responsible for the day-to-day management and administration of the Ombud Council, a function which is not in line with the functions performed by an Ombudsman. An Ombudsman’s main function, amongst other things, is to adjudicate on complaints submitted to the Ombuds Office and make determinations thereon.      

3.                                               Implementation of the FSRB legislation

This section is based on the impact study on the “Twin Peaks” reform done by the National Treasury in 2016.  According to the study, successful implementation of the Bill is expected to enhance cooperation and coordination between regulators through a legal framework. These regulators include the National Credit Regulator (NCR); Council for Medical Schemes, Competition Commission and the National Consumer Commission, under the umbrella of the Council of Financial Regulators. A crisis management and resolution framework will be established to better manage possible disruptions in the financial system that threatens financial stability.

The SARB, the Financial Stability Oversight Committee and the Financial Sector Contingency Forum will work together to ensure overall improved financial stability. The Prudential Authority under the auspices of SARB has been tasked with the responsibility of enhancing soundness of financial institutions and protect customers against the risk of failure of financial institutions.

The support systems established in terms of the Bill, such as the Financial System Council of Regulators; Financial Inter-Ministerial Council; Ombud Regulatory Council; and Financial Services Tribunal are expected to facilitate its implementation.

3.1          Outcomes

The legislation would support SA’s comparative advantage in financial services, as a prerequisite for developing an international financial centre for investment into Africa. It would also ensure a sound regulatory system consistent with international standards.

3.2          Stakeholders

The National Treasury expected the SARB; the FSB; National Credit Regulator (NCR); the Financial Intelligence Centre; the financial sector Ombud schemes; financial institutions and the financial customers to contribute towards a successful implementation of the legislation.

3.3          Beneficiaries

The beneficiaries of the Bill are the society in general including retail financial customers; financial institutions and their shareholders; poorest households; Small Medium and Micro Enterprises (SMMEs) and rural development programmes.

3.4          Financial implications

National Treasury expects the costs associated with the implementation of the Bill to be covered by the levies imposed on financial institutions and fees for services provided to regulators, while the general revenue of the SARB would fund the Oversight Committee.

Table 1 below, estimates the total levy and fee income under the “Twin Peaks” institutional framework to be R1.113 million.  

 

Table 1: Summary of total income of the proposed levies and fees by Institution

Reference	Institution/Cost Centre	Proposed Income
Schedule 1	Prudential Authority	R341m
Schedule 2	Financial Sector Conduct Authority	R611m
Schedule 3	Financial Services Tribunal	R22m
Schedule 4	Ombud Council	R14m
Schedule 5	Office of the Pension Fund Adjudicator	R44m
Schedule 5	Office of the Ombud for Financial Services Providers	R37m
	Financial Stability	R44m
Total estimated levy and Fee income		R1,113m

Source: National Treasury

The study done anticipated no significant implications for the national fiscus. It however, indicated that the National Treasury and other government departments and agencies might require additional resources to support policy development.

3.5          Risks

The following risks, associated with the implementation are anticipated:

·         Conflicts between financial sector regulators and the SARB;

·         Complexity of the regulatory framework;

·         Compliance burden for financial institutions, possible increase in costs for customers;

·         Failure to achieve better outcomes for financial customers; and

·         Mechanisms for responding to major financial shocks failing to prevent systemic crisis.

The mechanisms for mitigating the risks have been put in place. These include public consultation process; regular review of the scope of financial sector regulation by relevant new institutions put in place and strengthening the crisis management framework.

4.         Summary of lessons learnt from the Mexico and United Kingdom study tours

The Select Committee on Finance undertook a study tour to Mexico in 2016.  They met with the House of Parliament; Nacional Banking and Securities Commission; Institute for the Protection of Bank Services; the former Deputy Minister of Trade and Industry; and the National Commission for the Protection and Defence of Users of Financial Services (CONDUSEF) to discuss the Mexican Financial Sector reform processes and their general experiences since the implementation of the regulatory reform over the past four years.

Prior to that, the Standing Committee on Finance visited the United Kingdom between 07 and 11 December 2015. They met with the Bank of England; HM Treasury; Financial Conduct Authority; Parliament; London Stock Exchange; the Financial Sector Ombud; the Money Advice Service and a number of private financial institutions.

The purpose of these tours was to explore how Parliaments can more effectively ensure that regulators are held accountable; to better understand the role of Parliament, the Executive and the regulators in setting law, regulations and rules for the financial system; reduction of risks associated with cross-border transactions; measures to cushion the national fiscus from bank failure and utilizing the financial sector to achieve some developmental policy objectives.

The financial sector reform in Mexico has four pillars, which aim at promoting credit through development banks; increasing competition in the financial sector, financial inclusion and consumer protection; extending credit granted by private institutions and ensuring a sound and prudent financial system as a whole.

 

In further processing the Bill, the Committee can draw on lessons learnt from the Committee study tours conducted. These lessons are summarised as follows:

 

Mexico study tour lessons learnt, for South Africa

4.1          South Africa and Mexico share similarities in that their currencies gets negatively affected by a decline in commodity prices. The two countries face high levels of inequality; great debt levels in State-Owned Enterprise’s (SOEs) and a high likelihood of downgrades by credit rating agencies. In order to boost tax revenue, Mexico planned to, amongst other things, introduce a carbon tax and sugar tax; reduce the fiscal deficit; control public debt from provinces and municipalities; improve the quality of social spending and address corruption through greater transparency and accountability. The lesson learnt was that Parliament, post the 2013 Mexican Tequila financial crisis became actively involved in tax reforms (passing new bills, repealing and amending some tax laws) that sought to boost revenue; strengthen fiscal responsibility; facilitate compliance with tax obligations and promote growth and economic stability.

4.2          Mexico follows a similar inflation targeting framework like South Africa. A larger proportion of its financial sector is exposed to foreign banks, making the sector vulnerable to external shocks. Unlike South Africa, private credit in Mexico was only around 30 per cent of GDP compared to a figure close to 100 per cent in South Africa. The main objective of the Mexican reform introduced in 2014 was increasing access of financial services at lower costs to support economic growth; increase lending through Development Banks and private institutions and reduce costs of financial services for consumers. The lesson learnt was that there is a need to balance financial inclusion and credit expansion with prudential regulation that supervise capital and liquidity standards to ensure the soundness and solvency of financial institutions. Mexico implemented a structural reform package that included not only the financial sector, but the broader sectors of the economy including energy, telecommunications, labour, competition, education and public finance. The other lesson is that implementation of the reform package has not been without challenges and South Africa need to be cognisant of that during the implementation phase.

4.3          The Mexican authorities were in the process of developing the best infrastructure for banks to have the tools and information needed to make robust analyses that would allow them to make better decisions regarding the level of risk of their customers’ transactions. Banco de Mexico was developing and expected to operate a centralised transactional database, which will record all international operations that originate in Mexico with information regarding the sender and beneficiary. In addition to that, banks had been reporting all cross-border transactions on behalf of their clients since March 2016. Banco de Mexico was in the process of taking measures to standardise the quality of the information that banks had been reporting on and expected to be able to share aggregate information on clients by the end of 2016.

4.4          The prudential regulator, Nacional Banking and Securities Commission (CNBV), was established to supervise commercial banks; development banks; microcredit institutions and securities. The CNBV has the power to conduct investigations and impose sanctions to financial institutions when they do not comply with regulations. It resides within the Ministry of Finance and its finance depends on the Ministry’s budget. Even when the prudential regulation was disaggregated in various authorities, there was close coordination through committees and councils. The strict prudential regulation contributed to the stability of the Mexican banking system during the 2008 global financial crisis. In order to pass recent financial reforms in Mexico, the CNBV considered that it was important to work closely with the financial industry and provide as much information as possible to increase transparency and build trust. Regulators from the CNBV warned that tightening banking regulations could lead to growth in shadow banking services and that had to be closely monitored. South Africa needs to take note of this during the implementation phase of the Financial Sector Regulation Bill.

4.5          Mexico had very low levels of financial services penetration and very low levels of usage within those that had financial services. To address this, the National Council for Financial inclusion (CONAIF) was established, comprising of members of various financial sector regulators including the CNBV. The CONAIF had no additional budgetary requirements. It generated annual reports on the barriers for financial inclusion and progress made in that regard.

4.6          Financial reforms needed to accommodate the consumer’s interest, especially those in the lower and middle class and in rural or peri-urban spaces. This was important in order to prevent an increase of shadow banks in the informal sector. Development banks in Mexico played a substantive role in lending services, specifically for developmental agenda. These development banks were managed and supervised like the commercial banks. Development banks had special schemes and guarantees that distinguished them from commercial banks.

4.7          Institute for the Protection of Bank Savings (IPAB), an independent institute was established in 1998, with a mandate of protecting bank deposits of small and medium savers in an event that a bank experiences solvency problems. It had the power to directly inspect banks in order to assess financial health. Its creation was triggered by the badly managed bailout of banks during the 1994 crisis. It was mostly financed by the premium charged to banks to become members of the deposit insurance system. It could also issue a limited amount of debt in the market. In addition, it received a budget allocation from the Ministry of Finance that was used specifically to pay for the debt inherited from the 1994 bailouts. It had a board with four members that were nominated by the President and approved by the Upper House of Parliament (Senate). Their terms were staggered to ensure continuity and independence from the political cycle.

4.8          Before 2014, financial regulation in Mexico was skewed towards prudential regulation and had a weak market conduct authority. The Financial Reform emphasised the need to better protect consumers and granted more faculties to the national Commission for the Protection and Defence of Users of Financial Services (CONDUSEF). CONDUSEF had improved dissemination of information on financial institutions and services to the public. It created a Financial Entities Bureau where consumers could view the claims against financial institutions, resolutions and penalties. The portal included information disaggregated by financial products where consumers could compare conditions and fees across financial institutions. Making information more accessible had increased competition in the financial sector and reduced costs of financial services for consumers.

4.9          Another big part of the work that CONDUSEF do is in financial literacy. On their website they had videos that explained different financial concepts such as savings, interest rates, insurance, etc. They also opened their door once a week to provide free training courses for people. Financial users could submit claims through CONDUSEF or through financial institutions directly. Usually the financial entities dealt with claims, CONDUSEF supervised how claims were handled and grants graded on quality and timing of claim resolutions. If financial institutions mishandled claims they could also impose penalties. If a claim was not solved correctly, CONDUSEF could directly defend consumers against a financial institution. They have conducted a socio-economic evaluation to choose the most vulnerable individuals to defend.

4.10       The reform helped increase access and improve conditions of financial services by fostering competition and changing the mandate of development banks. These changes were accompanied by stronger regulation to maintain stability in the financial system. The success of the reform had a lot to do with the involvement of the entire financial industry through working closely together in making decisions in a transparent manner.  The adverse global environment after the financial crisis also contributed to banks’ willingness to collaborate in introducing reforms to ensure financial stability.

UK study tour lessons learnt, for South Africa

4.11       In the UK, Parliamentary oversight and accountability is key: The UK “Twin Peaks” Bill was highly contested and the focus of considerable public attention and Parliament undertook a lengthy process to finalise it, more than a year. The legislation is deemed complex, need to be thoroughly processed and require adequate consultation;

4.12       There is a need to strengthen Parliament’s oversight role of the financial sector: The UK Parliament has a strong oversight role over the financial sector regulatory bodies. The oversight includes answering questions from Parliamentary Committees and the HM Treasury office and having regular meetings with the Parliamentary Committees. This is despite the fact that some of the regulators are private companies, like the Financial Conduct Authority (FCA). Regular meetings are held in the House of Commons where entities are requested to answer questions and provide information at the request of the Members of Parliament In addition, Members of Parliament participate in the process of appointing key executives of the entities, though they may not veto a particular appointment. The Bank of England (BoE) Governor appears before the Committee at least eight times a year and his parliamentary mandate is to speak to the House of Commons on behalf of the BoE, present the financial stability report and all other inflation reports, and to report on other matters of relevance including the interest rate, mortgage criteria, transparency and openness. While the SARB does not in practice answer to Parliament the way the BoE does in the UK, SCOF needs to consider the SARB appearing before it more regularly.

4.13       Multiple accountability channels (Parliament or Executive or Regulators): Despite legislative oversight in the financial sector being the responsibility of Parliament, the layers of accountability become onerous for stakeholders. As a result, there was a need to clearly distinguish between the accountability roles played by Parliament, the HM Treasury, and the Regulators. There seemed to be a reasonable degree of clarity in the respective roles of the different institutions in the FSR Bill, but the Committee needs to take into account some of the experiences of the UK system in this regard. The demarcation between Parliament, the Executive and the Regulators respective powers needs to be carefully considered.

4.14       The process of holding the regulators accountable: To ensure that they achieve their mandate, regulators are generally given substantial powers. But it is important that they are also held to account, and that there is a process to ensure that they exercise their powers in a responsible and appropriate way. Parliament plays an important role in this regard – and in the UK system, there are regular hearings on the work of the regulators.

4.15       Appointment of key staff: In the UK system, Parliament can conduct hearings ahead of the appointment of key staff, but the appointment remains the prerogative of the executive.

4.16       The UK model is not a strict “Twin Peaks” model.  In the SA context, there are two additional set of responsibilities and related powers are created within the FSR Bill: The SARB’s responsibilities are extended to explicitly include financial stability, and the SARB is given additional complementary powers to monitor and respond to emerging systemic risks. Lessons from the failure of African Bank have underpinned new sections that give the SARB proactive financial stability powers. The first steps are taken to improve the fragmented ombudsman system. Ombudsman provide a simple and effective way for aggrieved customers to seek redress. However, there are multiple ombuds, both statutory and voluntary. The first step in this process is to create a Chief Ombudsman, and a unified Ombudsman’s Council.

4.17       Clear segregation of duties for regulators: The UK “Twin Peaks” model provides for Conduct and Prudential Authority responsibilities, however, in the early implementation phase, there were at times conflicts between the Prudential Regulation Authority (PRA) and FCA in their understanding of what their precise roles are and how they should be fulfilled. The conflicts may partly stem from the fact that the PRA may veto FCA decisions. According to both authorities, such conflicts are to be expected given that the regulators are still “finding their feet” in a process of re-establishing themselves after functional restructuring. But it was stressed that in developing a new policy and legislation it is important that conflicts in roles should be anticipated to ensure that they are better managed. The Committee noted that it needs to ensure that these conflicts in roles are minimised in the FSR Bill. While legislation can help in this regard, the oversight of the Committee and NT will also be crucial in this regard.

4.18       Fees are borne by the Sector: According to various UK financial sector stakeholders, the reform of the financial sector was welcomed, however the costs of the reform were high. Some of the financial institutions were already fined by either the EU Regulators or US Regulators or both for their role in the 2008 global financial crisis. Any further costs would, they argued, affect their ability to contribute to the economy. It seems that a significant part of the costs of the new system is being borne by the consumers. Given the lower levels of incomes and the material inequalities in South Africa, the Committee needs to be much more concerned than even the UK parliament about this.

4.19       Financial education of the public: The UK has a broad range of consumer protection bodies which inform the public about their rights and responsibilities in the financial sector. Some of these consumer protection bodies are funded from public finances, in return they play an important role in educating the consumers on financial products and services and the sector as a whole. Other consumer bodies are not publicly funded but funded by levies and fines, and they educate the financial sector service users and the public at large about the financial regulations. This need for financial education of the public is even more crucial in South Africa, and the Committee needs to give concerted attention to this.

4.20       Effects of Financial Service Ombudsman: The UK has a legislated Ombudsman who protects the financial sector services users and general consumers from unfair treatment by financial service providers. The Ombudsman office is financed by levies and fines imposed on financial service institutions guilty of wrong doings. The UK’s Ombudsman has been in place for more than fifteen years and is seen to be playing an important mediatory role between service providers and users. The Ombudsman’s decisions are binding and only the procedure on its decision could be judicially challenged. The role of the Ombudsman has become more important in recent years due to the effect of the 2008 global financial crisis, which left the consumers more vulnerable to financial sector services providers.

4.21       The ombudsman system in South Africa is comprised of six different ombuds – two statutory ombuds set up by law as public entities, and four non-statutory ombuds established by industry initiative. The FSR Bill attempts to begin streamlining this system by introducing a strong oversight body, reporting to the Minister of Finance, to coordinate and harmonise the actions of the ombuds, and increase customer awareness of the system. Consideration will need to be given to whether this approach is the most effective, and what further actions may be required to strengthen the ombuds system.  The relationship between the ombuds system and the court system may also need to be clarified.

4.22       Interpretation of the legislation: Legislation is subjected to various interpretations, and the UK’s Financial Sector Regulation is intended to limit different interpretations. However the UK “Twin Peaks” legislation makes provisions for the courts to be the main interpreter in cases of disputes between the Regulator and the financial Institutions. The FSR Bill provides for the establishment of a specialised Financial Services Tribunal to act as an independent arbiter in matters of dispute between financial institutions and the regulators. This is important as an accountability measure, given the powers of the new regulators. This is also intended to resolve issues in a speedy and efficient manner where possible, without needing to approach the courts, which can often take longer to resolve matters and where there is not necessarily expertise related to the financial sector. Importantly the Tribunal does not replace the court system and further recourse to the courts is still available.

4.23       Merger of Credit and Conduct Regulator: The credit and conduct regulation is a responsibility of the FCA in the UK financial sector. According to the FCA, in the current regulation regime, there are challenges with regards to having both the credit and conduct authority under one roof, especially due to the increase in number of institutions under its supervision,  however, it is better than having separate institutions to avoid a duplication of work.  In South Africa, the role of the National Credit Regulator and its location in the Department of Trade and Industry raises some challenges and will have to be addressed, in consultation with the Trade and Industry Portfolio Committee and the Department of Trade and Industry.

4.24       The “Twin Peaks” reforms aim to reduce regulatory fragmentation which allows for arbitrage and poor customer outcomes. A single regulatory view of all activities of a financial institution (including credit) is important to ensure all risks are identified. The FSR Bill attempts to harmonise the approach to credit regulation, including by providing strong cooperation mechanisms between the NCR and Financial Sector Conduct Authority (FSCA). SCOF saw it important to consider whether such measures are adequate. 

4.25       Potential and Unintended Outcome: Balance between economic growth, regulations and job creation: One of the key lessons from the UK authorities is that the legislatures need to manage competing policy objectives better. The UK “Twin Peaks” legislation was mainly motivated by the 2008 global financial crisis, however, some of the measures imposed on the financial sector were later seen to impede economic growth. In acknowledging this, the UK Parliament, Government and Regulatory bodies agreed to propose changes to the then implemented ”Twin Peaks” model to enable economic growth. These proposals were done in consultation with the sector players. Some of the financial providers, however, argue that the current financial regulations make it difficult for them to provide debt and other services needed by the economy. Similar challenges need to be considered in the South African context. The Committee needs to ensure that the FSR Bill does not serve to further exclude the poor and disadvantaged from the financial system and that the stricter regulatory requirements do not unnecessarily impede economic growth    

4.26       Market access by small players: Some of the arguments about the causes of the 2008 global financial crisis include concerns that some of the financial institutions were too big and their failures had devastating consequences on other players in the market. The UK ”Twin Peaks” model is also aimed at significantly reducing conduct that could lead to big institutions failure. It is also intended to ensure that the financial sector is accessible to small institutions. It is unclear whether this was achieved since the introduction of financial reforms in the UK.   Given that the four major banks have about 90 per cent of the market share, this is a very important consideration in the South African context.

4.27       Consumers may bear a disproportionate share of the cost of the reform: The UK financial services consumers are thought to be bearing a disproportionate share of the costs associated with reforming the sector. It is arguably inevitable that the part of the cost of the reform will be borne by the consumers, however, there should at least be a proportionate cost allocation between consumers and the industry. This is an even more important consideration in the South African context, given the higher proportion of the population in this country who are poor and disadvantaged and the significant profits made in the South African financial sector.

 

5.                            Committee observations, deliberations and resolutions

1. The Committee was particularly concerned about the impact of the new Financial Sector Regulations Model would have on the fees the financial institutions will charge customers and the disproportionate impact this would have on the poor and those with low incomes. In order to better protect the customers, the financial sector must be held to higher standards that generic consumer protection and standards must be applied consistently across the sector.
2. The Committee noted all the stakeholders concerns made during the public hearings, which are summarised in the report. The Committee requested the National Treasury and the FSB to respond to these concerns during the public hearings and they have duly done that.
3. The Committee noted that some of the issues raised by the stakeholders had been raised previously in the SCOF public hearings. These issues include transformation of the financial sector; increase of fees and levies and the FSRB implementation process.
4. The JSE and the BASA explicitly supported the objectives of the Bill in relation to financial inclusion and transformation of the financial sector.
5. The Committee noted BASA’s proposals that Parliament should conduct effective oversight, through hearings over the implementation of the FSR Bill; provide stakeholders with an opportunity for the stakeholders to present their practical experiences over the implementation period to Parliament and a framework on oversight; consumer protection and education as well as inclusivity.

5.6          In finalising and implementing the Bill, the Committee will liaise with the National Treasury to ensure that they take into consideration the lessons learnt from the Finance Committees study tours, related to financial inclusion; protecting the interests of the consumers, particularly those from poorer backgrounds as well as education campaigns.

1. The Committee will continuously engage with the National Treasury to ensure effective monitoring of the implementation of the FSR Bill, an approach that should facilitate an envisaged phased approach and to ensure government’s commitment to transformation of the financial sector.

5.8          The Committee will further engage with the BIAC, FSB and the National Treasury on the issues raised by the BIAC, on financial advisor challenges raised.

Having conducted its own study tour; taken into consideration the lessons learnt form the SCOF study tour report; engaged with the National Treasury and the Chief Ombudsman and held public hearings with stakeholders in the financial sector; the Committee reports the Bill with proposed amendments as follows:

CLAUSE 58

1. On page 41, in line 46, after “agreement” to insert “only”.

CLAUSE 79

1. On page 50, in line 35, to omit “Chief Executive Officer of the Council for” and to substitute “Registrar of”.

CLAUSE 106

1. On page 58, in line 4, to omit “and”.
2. On page 58, in line 5, after “customers;” to insert “and”.
3. On page 58, after line 5, after sub-paragraph (iv) to insert:

 

(v)    principles, guiding processes and procedures for the refusal, withdrawal or closure of a financial product or a financial service by a financial institution in respect of one or more financial customers, taking into consideration relevant international standards and practices, and subject to the requirements of any other financial sector law or the Financial Intelligence Centre Act, including—

(aa)   disclosures to be made to the financial customer; and

(bb) reporting of any refusal, withdrawal or closure to a financial sector regulator.

 

1. On page 58, from line 23, to omit subclause (5) and to substitute:

 

(5) (a) In relation to a credit provider regulated in terms of the National Credit Act, a conduct standard may only be made in relation to a financial service provided in relation to a credit agreement and matters provided for in section 108.

(b) A conduct standard referred to in paragraph (a) may only be made after consultation with the National Credit Regulator.

 

CLAUSE 129

1. On page 64, from line 17, to omit subclause (3) and to substitute:

(3)        In relation to the exercise of the powers in terms of this Chapter by the Council for Medical Schemes in respect of a medical scheme, a reference in this Chapter to—

(a)        a financial sector regulator or the responsible authority must be read as including a reference to the Council for Medical Schemes;        

(b)        the head of a financial sector regulator must be read as including a reference to the Registrar of Medical Schemes appointed in terms of section 18 of the Medical Schemes Act;

(c)        a financial sector law must be read as including a reference to regulatory instruments and to the Medical Schemes Act; and

(d)        a licensed financial institution must be read as including a reference to a medical scheme registered in terms of the Medical Schemes Act or an administrator of a medical scheme approved in terms of the Medical Schemes Act.

CLAUSE 132

1. To omit the clause and to substitute:

Powers to conduct supervisory on-site inspections

132. (1) A financial sector regulator may conduct a supervisory on-site inspection at the business premises of a supervised entity with prior notification to the supervised entity and, if the business premises of a supervised entity is a private residence, with the prior agreement of the occupant of the residence.

(2)        The purpose for which a financial sector regulator may conduct a supervisory on-site inspection of a supervised entity is to—

(a)check compliance by the entity with a financial sector law for which the financial sector regulator is the responsible authority, a regulator’s directive issued by the financial sector regulator or an enforceable undertaking accepted by the financial sector regulator;

(b)determine the extent of the risk posed by the entity of contraventions of a financial sector law for which the financial sector regulator is the responsible authority; and

(c)assist the financial sector regulator in supervising the relevant financial institution.

(3) (a) A financial sector regulator may determine the time and place of a supervisory on-site inspection, provided that the supervisory on-site inspection must be done at a reasonable time within ordinary business hours.

(b) A financial sector regulator must conduct a supervisory on-site inspection with strict regard to—

(i)         an affected person’s right to—

(aa)       dignity;

(bb)       freedom and security;

(cc)       privacy; and

(dd)       other constitutional rights; and

(ii)         decency and good order as the circumstances require, in particular by—

(aa)       conducting the supervisory on-site inspection  discreetly and with due decorum;

(bb)       causing as little disturbance as possible; and

(cc)       concluding the supervisory on-site inspection as soon as possible.

(4)(a) An official of a financial sector regulator, when conducting a supervisory on-site inspection, may do any of the following:

(i)         Request any person who has a specified business document that is relevant to the inspection in his, her or its possession or under his, her or its control to produce that document and examine, make extracts from and copy any business document on the premises;

(ii)         question any person on the premises to find out information relevant to the inspection;

(iii)        give the supervised entity a written directive to produce to the financial sector regulator, at a time and place and in a manner specified in the directive, a specified business document that is relevant to the inspection and is in the possession or under the control of the supervised entity;

(iv)        when a business document is produced as required by a directive in terms of subparagraph (iii), examine, make extracts from and copy the document;

(v)        if, as a result of the inspection, the official or the financial sector regulator suspects on reasonable grounds that a contravention of a financial sector law has occurred or is likely to occur—

(aa)       give a written directive to the supervised entity or the person apparently in control of the premises to ensure that no person removes from the premises, or conceals, destroys or otherwise interferes with, any business document; or

(bb)       take possession of, and remove from the premises, a business document for the purpose of preventing another person from removing, concealing, destroying or otherwise interfering with the document.

(b) A directive in terms of paragraph (a)(iii) or (v)(aa) is effective if given to a person apparently in control of the premises.

(c) The financial sector regulator must ensure that the person apparently in control of the premises is given a written receipt for the business documents taken as mentioned in paragraph (a)(v)(bb).

(d) The financial sector regulator must ensure that any business document removed as contemplated in paragraph (a)(v)(bb) is returned to the supervised entity when retention of the business document is no longer necessary to achieve the object of a financial sector law.

(e) The supervised entity from whose premises a document was removed as contemplated in paragraph (a)(v)(bb), or its authorised representative, may, during normal office hours and under the supervision of the financial sector regulator, examine, copy and make extracts from the document.

CLAUSE 135

1. On page 66, from line 32, to omit subclause (1) and to substitute:

135. (1) A financial sector regulator may instruct an investigator appointed by it to conduct an investigation in terms of this Part in respect of any person, if the financial sector regulator—

(a)        reasonably suspects that a person may have contravened, may be contravening or may be about to contravene, a financial sector law for which the financial sector regulator is the responsible authority; or

(b)        reasonably believes that an investigation is necessary to achieve the objects referred to in section 251(3)(e) pursuant to a request by a designated authority in terms of a bilateral or multilateral agreement or memorandum of understanding contemplated in that section.

 

CLAUSE 137

1. On page 67, from line 38, to omit paragraph (a) of subclause (1) and to substitute:

(a)        Enter any premises at any time—

1. with the prior consent of—

(aa)       in the case of a private residence, the occupant of the private residence or the part of the private residence to be entered; or

(bb)       in the case of any other premises, the person apparently in control of the premises,

after informing that person that—

(AA)      granting consent will enable the investigator to enter the premises and for the investigator to subsequently search the premises as referred to in paragraph (b) or (c), and to do anything contemplated in subsection (6); and

(BB)      he or she is under no obligation to admit the investigator in the absence of a warrant; or

(ii)         without prior consent and without prior notice to any person—

(aa)       if the entry is authorised by a warrant; or

(bb)       with the prior authority of the head of a financial sector regulator or a senior staff member of the financial sector regulator delegated to perform the function, if the head of a financial sector regulator or senior staff member on reasonable grounds believes that—

(AA)      a warrant will be issued under section 138(1) if applied for;

(BB)      the delay in obtaining the warrant is likely to defeat the purpose for which entry of the premises is sought; and

(CC)      it is necessary to enter the premises to conduct the investigation and search the premises as referred to in paragraph (b) or (c), and to do anything contemplated in subsection (6); or

(cc)       if an investigator believes, on reasonable grounds, that—

(AA)      a warrant will be issued under section 138(1) if applied for;

(BB)      the delay in obtaining a warrant or authorisation by the head of a financial sector regulator is likely to defeat the purpose for which entry of the premises is sought; and

(CC)      it is necessary to enter the premises to conduct the investigation and search the premises as referred to in paragraph (b) or (c), and to do anything contemplated in subsection (6); and

 

1. On page 67, from line 54, to omit subclauses (3) and (4) and to substitute:

 

(3) An investigator exercising powers in terms of this section must do so with strict regard to—

1. an affected person’s right to—

1. dignity;
2. freedom and security;
3. privacy; and
4. other constitutional rights; and

1. decency and good order as the circumstances require, in particular by—

1. entering and searching only such areas or objects as are reasonably required for the purposes of the investigation;
2. conducting the search discreetly and with due decorum;
3. causing as little disturbance as possible; and
4. concluding the search as soon as possible.

(4) An entry or search of premises in terms of this Part must be done, at a reasonable time within ordinary business hours, —

1. unless the warrant authorising it expressly authorises entry at night; or
2. in the case of a search contemplated in subsection (1)(a)(ii)(bb) or (cc) if the investigator on reasonable grounds believes that the purpose for which the entry and search is sought, is likely to be defeated by a delay, as close to ordinary business hours as the circumstances reasonably permit.

 

1. On page 68, in line 4, after “on” to insert “the”.
2. On page 68, in line10, to omit “in” and to substitute “on”.

 

CLAUSE 138

1. On page 68, from line 47, to omit paragraph (b) of subclause (1) and to substitute:

(b) The judge or magistrate may issue a warrant in terms of this section —

(i)     on written application by the investigator setting out under oath or affirmation why it is necessary to enter and investigate the premises; and

(ii)   if it appears to the magistrate or judge from the information under oath or affirmation that—

(aa)    in the case of an investigation under section 135(1)(a), that there are reasonable grounds for suspecting that a contravention of a financial sector law has occurred, may be occurring or may be about to occur;

(bb)    in the case of an investigation under section 135(1)(b), that there are reasonable grounds to believe that the investigation is necessary to comply with a request referred to in that section.

 

CLAUSE 140

1. To omit the clause and to substitute:

Protections

140. (1)(a) A person who is questioned, or required to produce a document or information, during a supervisory on-site inspection contemplated in section 132, or by an investigator in terms of Part 4 of this Chapter, whether in response to a notice contemplated in section 136, or when an investigator is exercising the powers contemplated in section 137(6)(a)(iii) to (v), may object to answering the question or to producing the document or the information on the grounds that the answer, the contents of the document or the information may tend to incriminate the person.

(b) On such an objection, the official of the financial sector regulator conducting the supervisory on-site inspection or the investigator may require the question to be answered or the document or information to be produced, in which case the person must answer the question or produce the document.

(c)  An incriminating answer given, and an incriminating document or information produced, as required in terms of paragraph (b), is not admissible in evidence against the person in any criminal proceedings, except in criminal proceedings for perjury or in which that person is tried for a contravention of section 273 based on the false or misleading nature of the answer.

(2) An official of the financial sector regulator conducting a supervisory on-site inspection or an investigator must inform the person of the right to object in terms of this section at the commencement of the supervisory on-site inspection or the investigation.

CLAUSE 160

1. To omit the clause and to substitute:

Designation of financial conglomerates

160. (1) The Prudential Authority may designate members of a group of companies as a financial conglomerate. 

 (2) A financial conglomerate designated in terms of subsection (1) must include both an eligible financial institution and a holding company of the eligible financial institution, but need not include all the members of the group of companies.

(3) Without detracting from section 3(3) and (4) of the Promotion of Administrative Justice Act, and despite section 3(5) of that Act, before designating members of a group of companies as a financial conglomerate in terms of subsection (1), the Prudential Authority must—

(a)        give the holding company of the eligible financial institution notice of the proposed designation and a statement of the purpose of and the reasons why the designation is proposed; and

(b)        invite the holding company to make submissions on the matter, and give a reasonable period to do so.

(4) The Prudential Authority must consult the Financial Sector Conduct Authority in connection with any designation in terms of subsection (1).

(5) A designation in terms of subsection (1) must be for the purpose of facilitating the prudential supervision of the eligible financial institution.

(6) In deciding whether to designate members of a group of companies as a financial conglomerate in terms of subsection (1), the Prudential Authority must take into account all relevant considerations, including at least the following:

(a)        The risk to effective prudential supervision of the eligible financial institution from the structure of the group of companies;

(b)        submissions made by or for the holding company; and 

(c)        any other matters that may be prescribed by Regulation.

(7) The Prudential Authority may designate members of a group of companies as a financial conglomerate in terms of subsection (1) without having complied, or complied fully, with subsection (3) if it is reasonable and justifiable in the circumstances as contemplated in section 3(4)(a) and (b) of the Promotion of Administrative Justice Act and the delay involved in complying, or complying fully, with that subsection in respect of a proposed action is likely to lead to material prejudice to financial customers, prejudicially affect financial stability or defeat the object of the designation.

(8) (a) If the Prudential Authority designates members of a group of companies as a financial conglomerate in terms of subsection (1) without having complied, or complied fully, with subsection (3), the holding company of the designated financial conglomerate must be given a written statement of the reasons why that subsection was not complied with.

(b) The holding company may make submissions to the Prudential Authority within one month after being provided with the statement.

(c) The Prudential Authority must have regard to the submissions, and notify the holding company, as soon as practicable, whether the Prudential Authority proposes to amend or revoke the designation.

(9) The Prudential Authority must continually reassess designations made, or any decision not to make a designation, in terms of subsection (1), and consider making a designation or reconsider the terms of any designation made if the Prudential Authority becomes aware of a change in the risk profile of the members of a group of companies or a designated financial conglomerate.  

(10) (a) Without detracting from section 3(3) and (4) of the Promotion of Administrative Justice Act, and despite section 3(5) of that Act, the Prudential Authority may amend or revoke a designation in terms of subsection (1) by notice to—

(i)         the holding company of a financial conglomerate; and

(ii)         any companies that are not currently designated as part of a financial conglomerate, but which it is proposed to include as part of a currently designated financial conglomerate.

(b)  A notice referred to in paragraph (a) must—

(i)         include a statement of the purpose of and the reasons why the amendment to or revocation of the designation is proposed; and

(ii)         invite the entities referred to in paragraph (a) to make submissions on the matter, and give a reasonable period to do so.

(11) The Prudential Authority must publish each designation made in terms of this section, and each amendment and revocation of a designation.

CLAUSE 161

1. On page 80, in line 2, to omit “14” and to substitute “30”.

 

CLAUSE 162

1.         On page 80, from line 10, to omit subclause (1) and to substitute:

162. (1)(a) The Prudential Authority may, by notice to a holding company of a financial conglomerate, require the holding company to be licensed in terms of this Act.

(b) A notice referred to in paragraph (a) must—

(i)         include a statement of the purpose of and the reasons why the requirement for the holding company to be licensed is proposed; and

(ii)         invite the holding company to make submissions on the matter, and give a reasonable period to do so.

 

CLAUSE 163

1. To omit the clause and to substitute:

Non-operating holding companies of financial conglomerate

163. (1)(a) The Prudential Authority may, by notice to a holding company of a financial conglomerate, require that the holding company be a non-operating company.

(b) A notice referred to in paragraph (a) must—

(i)         include a statement of the purpose of and the reasons why the requirement for the holding company to be a non-operating company is proposed; and

(ii)         invite the holding company to make submissions on the matter, and give a reasonable period to do so.

(2) A requirement in terms of subsection (1) must be for the purpose of managing more effectively risks to the safety and soundness of the eligible financial institution arising from the other members of the financial conglomerate.

(3) In deciding whether to impose a requirement that a holding company be a non-operating company in terms of subsection (1), the Prudential Authority must take into account all relevant considerations, including at least the following:

(a)  The risks to the safety and soundness of the eligible financial institution arising from the other members of the financial conglomerate;

(b)   submissions made by or for the holding company; and       

(c)   any other matters that may be prescribed by Regulation.

(4)        A holding company that is given a notice in terms of subsection (1) must comply with the requirements of the notice.

CLAUSE 165

1. To omit the clause and to substitute:

Directives to holding companies

165. (1) The power of the Prudential Authority to issue a directive in terms of section 143 extends to issuing a directive to the holding company of a financial conglomerate imposing requirements on the holding company to manage and otherwise mitigate risks to the prudent management or financial soundness of an eligible financial institution in the conglomerate arising from other members of the conglomerate.

(2) (a) Requirements that a directive contemplated in subsection (1) may impose include requirements with respect to restructuring the financial conglomerate in accordance with a plan submitted to the Prudential Authority by the holding company, and approved by the Prudential Authority within a period agreed by the Prudential Authority.

(b) The Prudential Authority may only issue a directive imposing requirements with respect to restructuring the financial conglomerate if the Authority is objectively satisfied that another type of directive will not achieve the result sought to be attained by requiring restructuring of the financial conglomerate.

(c) In deciding whether to issue a directive imposing requirements with respect to restructuring the financial conglomerate, the Prudential Authority must take into account all relevant considerations, including at least the following:

(i)         The extent to which the existing structure of the financial conglomerate is hindering or is likely to hinder the effective supervision of the financial conglomerate concerned;

(ii)         whether the restructuring of the financial conglomerate is reasonably necessary and appropriate to remedy impediments to the effective supervision of the financial conglomerate; and

(iii) submissions made by or for the holding company.

(3) The power of the Financial Sector Conduct Authority to issue a directive in terms of section 144 extends to issuing a directive to the holding company of a financial conglomerate requiring the holding company to ensure that a financial institution in the conglomerate complies with a financial sector law for which the Financial Sector Conduct Authority is the responsible authority.

CLAUSE 166

1. To omit the clause and to substitute:

Approval and prior notification of acquisitions and disposals

166. (1) (a) A holding company of a financial conglomerate may not acquire or dispose of a material asset as defined in prudential standards made for this section, without the approval of the Prudential Authority.

(b) A prudential standard made under this subsection must clearly identify what constitutes a material asset.

(2) The Prudential Authority may not give an approval in terms of subsection (1), unless the Authority is satisfied that the acquisition or disposal will not prejudicially affect –

(a)        the prudent management and the financial soundness of an eligible financial institution within the financial conglomerate;

(b)        the ability of the Prudential Authority to determine –

(i)         how the different types of business of the financial conglomerate are conducted;

(ii)         the risks of the financial conglomerate and each person that is part of that financial conglomerate; or

(iii)        the manner in which the governance framework is organised and conducted for the financial conglomerate.

(3) (a) If the Prudential Authority contemplates refusing to grant approval of an acquisition or disposal referred to in subsection (1), prior to taking a decision, the Prudential Authority must notify the holding company of the proposed refusal to grant approval.

 (b) A notice referred to in paragraph (a) must—

(i)         include a statement of the reasons for the refusal to grant approval; and

(ii)         invite the holding company to make submissions on the matter, and give a reasonable period to do so.

            (4) In deciding whether to grant or refuse a request for approval in terms of subsection (1), the Prudential Authority must take into account all relevant considerations, including at least the following:

(a)        Whether the acquisition or disposal will not prejudicially affect the matters referred to in subsection (2); and

(b)        submissions made in relation to the application for approval, including any submissions made in response to a request for submissions referred to in subsection (3).

(5) An acquisition or disposal in contravention of subsection (1) is void.

 

CLAUSE 214

1. On page 95, in line 46, to omit “it” and to substitute “the Ombud Council”.

 

SCHEDULE 4

1. On page 230, in item 31 of the amendments to the Financial Markets Act, 2012, which amends section 50 of that Act, to omit paragraph (f) and to substitute:

(f)  by the insertion after subsection (3) of the following subsection:

‘‘(3A) A central counterparty, in addition to the functions referred to in subsections (1), (2) and (3), must—

(a)        interpose itself between counterparties to transactions in securities through the process of novation, legally binding agreement or open offer system;

(b)        manage and process the transactions from the date the central counterparty interposes itself between counterparties to transactions, becoming the buyer to every seller and seller to every buyer, to the date of fulfilment of the legal obligations in respect of such transactions; and

(c)        facilitate its post-trade management functions.’’; and

 

 

Report to be considered.