Financial Services Laws General Amendment Bill [B29-2012] workshop continued

Meeting report

Introduction
Mr Olano Makhubela National Treasury Chief Director: Financial Investments and Savings, outlined the sequence of National Treasury's and the Financial Services Board (FSB)'s presentations.

Note: the sequence of the presentation did not strictly follow the sequence of the Bill itself

Long-Term Insurance Act (No. 52 of 1998)
Dr Reshma Sheoraj, National Treasury Director: Insurance in the Financial Sector Policy Unit, continued from where Adv Jo-Ann Ferreira, FSB Head: Insurance Regulatory Framework, had left off in the previous week's workshop. Dr Sheoraj continued with the amendments, from Section 39 of the Long-Term Insurance Act (No. 52 of 1998), on page 25 of the existing matrices that Members had.  

Clause 90
The purpose of the amendment to Section 39 was to authorise the Registrar to impose certain conditions in respect of transfers and amalgamations.

Clause 91
Section 40 related to approved transactions.  It also allowed the Registrar, instead of the court, to approve certain amalgamations, demutualisations or transfers. Similar powers currently existed in the Short Term Insurance Act. 

Mr T Harris (DA) commented that the presentation had been very quick on Section 40 and the new powers of the Registrar.

Clause 93
Dr Sheoraj said that with reference to page 29 of the existing matrix, the substitution of Section 41 was basically an alignment to the Companies Act. National Treasury was replacing the current judicial management processes with business rescue.

Clause 94
The amendment of Section 42 sought to extend the power of the Registrar to apply for the winding-up of an insurer, without first seeking the Minister's approval. The aim was to enable the Registrar to act swiftly when required to protect the interests of policy holders. 

Mr Makhubela added that it was justified to give the supervisor more powers. The supervisor did the long term visit and was quite close to the issue compared to the National Treasury. With some of these institutions one needed to move very quickly to protect members; therefore it might be a good policy to let the supervisor act rather than have to first obtain the consent of the Minister of Finance or the National Treasury.

Discussion
Mr Harris thought that Section 40 had been dealt with very quickly. The existing provisions seemed like a good balance of powers.  He was not convinced by the changes in Section 42. The existing checks and balances seemed to be of obvious value.

Mr Makhubela explained further. It was a fair question. While there was a delay, the company could be taking on new business. He gave the example of an urgent request from the Registrar. It was important to prevent such an institution from carrying on new business. Such instances arose largely because not all the full details were given to the National Treasury. The details could be quite extensive so one did not want to burden the Minister with full details. So National Treasury was away from the process because it did not itself do the on-site visits. This created a difficult situation for the National Treasury. The information from the supervisor had been accurate. So it was appropriate to delegate sufficient trust to the supervisor. The supervisor needed to act quite quickly as in a split second money could move around.

The Acting Chairperson pointed out that South Africa had to comply with international norms, and this requirement must be taken into consideration.

Ms Z Dlamini-Dubazana (ANC) had a problem with the word 'may' in substituted Section 42(2), in that the Minister was an accounting officer. An insurance company did not account to the Minister. The Act must show that there was a consultation with the Minister. The Registrar on his or her own must not just close down an insurer.

Mr Makhubela said that this was a good point and National Treasury would consider it. It might be in order not to require the Minister make the final approval but at least the supervisor must consult with the Minister before he or she, the Registrar, made that final call.  There was need for constant interaction between the Minister and the supervisor, and it was intended to include this in the Twin Peaks Legislation. However, it ultimately made good supervisory policy to let the supervisor make the final decision, particularly if there might not be implications to the fiscus.  Maybe one could craft it in such a way that it could be included in the Twin Peaks legislation but retaining the provision that the final decision would rest with the supervisor.

The Acting Chairperson asked what the concerns of the Financial Sector Assessment Programme (FSAP) were.

Dr Sheoraj said that one of the findings of the FSAP was that the regulator needed to move quickly if there was need to wind-down an insurance company. If there were unnecessary obstacles in the Registrar's path, that could impede the Registrar’s ability to protect policyholders. Given that the regulator or the Registrar was at the coalface on interacting with the regulated entity, the Registrar was in the best position to make that final call. She made a comparison with the amended Section 12. The final responsibility was with the Minister, but the Registrar was in a better position to take a decision as he or she had more ready access to the information needed to make the decision. 

Mr N Koornhof (COPE) referred back to his question when the workshop adjourned the previous week. There was quite a shift and he would like to hear the legal profession's views on National Treasury's intention to move away from court processes and giving all the power to the Registrar. This was a substantial change. Was he correct in thinking so?

Dr Sheoraj replied, with reference to the Section 40 amendment to allow the Registrar to be empowered to approve transactions relating to mergers, or demutualisation, or the transfer of assets between insurance companies, that similar provisions currently existed in the Short Term Insurance Act. This amendment sought to provide for the Registrar to have similar powers to those in the Short Term Insurance Act, as currently there was some discrepancy and fragmentation.

Mr Koornhof argued that it was quite a change.

Dr Sheoraj replied that it was a change, but, to the extent that ultimately in many examples that the FSB had experienced in the past, the court in the end relied on the FSB’s opinion on mergers or transferring of assets.

Mr Koornhof agreed.

Dr Sheoraj continued that the court would not decide without the FSB's opinion.

Mr Koornhof then wanted to ask Dr Sheoraj about the Long Term Insurance Act. He quoted from it. He asked if the Registrar of Long Term Insurance referred to was indeed appointed in terms of Section 1 of the Financial Services Board Act. Was that so? He then referred to the Financial Services Board Act to find a definition for the Registrar but did not find it. This was where the workshop had stopped last week. Was there an omission. He wanted to know as this man or a woman was becoming a court unto him or herself. Could this person make the necessary decisions? Maybe an amendment was needed there?

Ms Jeannine Bednar-Giyose, National Treasury Director: Financial Sector Regulation and Legislation had noted the concern of Mr Koornhof expressed in the last meeting. National Treasury would certainly examine it so that it was appropriately and carefully delineated in the legislation.

The Acting Chairperson noted an acknowledgement of the need for crafting of the amendment. He asked Members to move on to the next amendment. 

Clause 95
Dr Sheoraj said that the amendment to Section 43, on voluntary winding-up, was basically to achieve alignment with the Companies Act. A new subsection would clarify that voluntary winding-up provisions would also apply to a financially sound insurer.

Clause 96
Dr Sheoraj said that the substitution of Section 45 provided for the prohibition of inducements.  This amendment enabled the Registrar to prescribe what constituted an inducement. She gave details.

Discussion
Mr Harris said that inducements were currently very common. He was no expert on the insurance industry but, to him, it was such a large policy change. What was the international situation? Many insurance companies depended on such inducements to differentiate themselves and perhaps even make their products feasible.

Dr Sheoraj replied that there was a project underway between the FSB and the Registrar of Banks to review inducements in their totality. In essence this was an enabling provision to enable the Registrar to intervene against such practices in the interests of protecting consumers.  She was not aware of what the trend was from an international perspective.  

Mr Makhubela said that it might be useful to go back and check on the international trend in dealing with negative inducements and respond subsequently.

Clause 97
Dr Sheoraj said that the substitution of Section 49 related to the limitation of remuneration to intermediaries. This was to enable the Minister to issue regulations on what constituted an intermediary service and what remuneration could be paid for such a service. She gave details of the FSB's Retail Distribution Review. The effective date of implementation of this Section would be postponed until the regulations would come into effect.

Discussion
Mr Harris objected that if the law was passed in its present form, there was no provision for postponement.

Ms Bednar-Giyose said that at the end of the Bill National Treasury had included Clause 259(2) to the effect that different dates might be set for different provisions of the Bill to come into operation. Such a provision was not infrequently included in legislation.

Mr Harris asked when the FSB's internal process would be completed.

Dr Sheoraj replied that it would be completed in the second half of 2013.

The Acting Chairperson said that this was an overarching provision.

Clause 98
Dr Sheoraj said that the Section 50, on undesirable business practices, would be repealed. An equivalent Section currently existed in the Financial Institutions (Protection of Funds) Act (No. 28 of 2001), and hence it was a duplication in the Long Term Insurance Act. 

Clause 99
Dr Sheoraj said that the amendment to Section 51 was an alignment. It was a cross-cutting issue in all of the legislation. It was basically to facilitate the publication of the Registrar's actions on the FSB website.

Clause 100
Dr Sheoraj said that the amendment to Section 53 was to fill a regulatory gap. Its intention was that if the policy gave the value of a funeral service as R10 000 and the policy holder's executor opted to take the cash benefit, then the insurer must give that amount as cash benefit and not claim that a funeral could be had for a lower price, and on that basis refuse to pay the full cash value.

Discussion
Mr Harris read the new text. This was the most confusing clause that he had ever seen in any draft legislation.

Mr Koornhof said that lawyers would love it.

Ms Bednar-Giyose said that National Treasury would note that concern and review the wording.

Clause 101
Dr Sheoraj said that the amendment to Section 60 was also crosscutting in terms of the publication of the Registrar's actions.

Clause 102
Dr Sheoraj said that the substitution of Section 62 related to policyholder protection rules. She gave details.

Clause 103
Dr Sheoraj said that in the amendment to Section 63 one was removing an outdated provision. Its intention was that members' retirement annuities and savings should not be party to insolvency proceedings. This amendment was proposed by the Long Term Insurance Ombud. 

Clauses 104, 105 and 106
Dr Sheoraj said that in the amendments to Sections 66, 67 and 68 related to penalties. The amendment sought to align legislation across the FSB and remove fragmentation across the FSB registrars. She gave examples. There was an increase in the penalties proportionate to the offence that had been committed. It was a 'pink amendment' (see matrix document).

Discussion
Mr Harris thought that the increase in the fines was significant. How did National Treasury and FSB justify such a massive increase?

Mr Makhubela would provide a policy reason. One wanted penalties that served as a deterrent. This was linked to the justice system.

Mr Makhubela said that such cases on average ranged from three to four years. One needed to empower the supervisor to serve as a quasi-judicial system but not to replace the judicial system. However, it was necessary to acknowledge the challenges. People had lost their money in some of the longer cases. It was important to give the supervisor more administrative powers. There should be a significant penalty imposed on those who were caught. These penalties were set up years ago. Penalties of R1 million to R10 million were not enough.

Dr Sheoraj said that it was important to ensure that there was accountability and proportionality.

Clauses 107, 108, and 109
The subsequent amendments all sought alignment with the Companies Act. She did not give details.

Short-Term Insurance Act (No. 53 of 1998)
Clauses 111 to 147
Dr Sheoraj said that the amendments were similar to those proposed to the Long Term Insurance Act (above). She thereby concluded her presentation on the insurance amendments. She was not going to go through the matrix, as it was basically the same. She handed over to her colleague to take Members through the Pension Funds Act (No. 24 of 1956) amendments.

Pension Funds Act (No. 24 of 1956) amendments
Clause 1
Ms Alta Marais, FSB: Head of Department (HoD): Pensions Research and Policy, said that Clause 1(a) provided for a substituted definition of 'actuarial surplus'. The aim was to provide for a more consistent approach that an evaluator might use. The Registrar could now prescribe the base on which the assets and liabilities must be valued. There were other amendments related to this definition. Clause 1(b) provided clarity that an actuary must be a natural person. Clause 1(d) provided for the definition of 'advisory committee'. The process would now be done by consultation. Clause 1 (e) provided for alignment to the Companies Act.  Clause 1 (f) changed the definition of 'complainant'.  The 2008 amendments had included a provision whereby a spouse could have access to pension benefits, if they were part of the estate of the partner, in case of divorce.  But if something went wrong and the fund did not give effect to the provision, the spouse had not recourse to the Pension Funds Adjudicator Clause 1 (g) was the amendment to the definition of 'contingency reserve account'. She gave details of amendments to other definitions. (See documentation and the Bill). 

Definition of non-member spouse (Clause 1(p)
Ms Marais pointed out that a contentious definition was the definition of non-member spouse (Clause 1(p)). The concern in implementing the divorce order was that a fund would insist on a court order as to the division of assets. Traditional and Islamic marriages were not always dissolved by a court order. This made it impossible for those spouses to get access to benefits.

Ms Bednar-Giyose said that there was the need to provide for all types of relationships. In terms of the Pension Fund legislation it had been difficult to decide in respect of Islamic marriages; however, in terms of traditional marriages and civil partnerships, legislation had already been enacted. The Department of Justice and Constitutional Development had considered the matter of the dissolution of Islamic marriages quite extensively. The proposed amendment to the definition of non-member spouse would no longer potentially have a reference to a court order. Subsequent to the tabling of the Bill, National Treasury had been considering this issue, so it wanted to alert the Committee that what National Treasury would likely be proposing was a proposal to introduce some wording in Section 37D that could appropriately cater for this matter.  This was definitely an important issue. Potentially there might be even better ways to address it than through this amendment to the definition. National Treasury might propose retaining the requirement that there must be a court order so that the fund would have a definite document on which it could confidently rely upon for guidance on distribution of the assets on the dissolution of the relationship. If the pension fund did not have a clear direction, it could cause difficulty to the fund. 

Discussion
Ms Dlamini-Dubanzana said that this matter would be of very critical importance. 

Mr Makhubela referred to the clean break rule. The ex-spouse would no longer have to wait for the other partner to exit the fund before claiming his or her share.

The Acting Chairperson said that it was a contentious issue. That provision would be clarified.

Clause 1 continued
Ms Marries said that the amendment introduced by Clause 1(q) was just an alignment with reference to the FSB website.

Clause 1(r) provided for the definition of 'pension preservation fund'. This was an alignment to the Income Tax Act subsequent to the previous amendments.

Clause 1(s) provided for the definition of 'prescribed'. This was an alignment across all Acts.

She highlighted Clause 1(t) which provided for the insertion of definitions, including 'protected disclosure'. Whistle-blowers could not be prejudiced if they performed their duties on whistle-blowing. The definition of 'publish' was a cross-cutting issue.

Discussion
Mr Harris was worried about this definition of publish which might be to escape the more onerous process of gazetting.

Ms Bednar-Giyose said that 'published' was used when it was necessary to bring information to the notice of the public. It was not used in relation to subordinate legislation.

Clause 1 continued
Ms Marries said that in Clause 1(v) the definition of 'rules' had been simplified to align with Section 11 and Regulation 30 that was currently prescribed by the Minister.

Clause 1(w) on the definition of 'this Act' was a cross-cutting issue.

Clause 1(x) provided for a substitution of the definition of 'unclaimed benefit'.  This was to remedy an error contained in the 2008 legislation where there was a double-negative which excluded death benefits to be transferred to an unclaimed benefits fund. 

Clause 1(y) provided for the insertion of the definition of 'unclaimed benefit fund' to give clarity. 

Clause 1(z) provided for the substitution of the definition of 'value exempt'

Clause 1(zA) provided for the substitution of the definition of 'valuator'. This was to make it clear that a natural person was referred to.

Clause 2
This corrected an error in the previous legislation, in which 'registrar' had been referred to as 'registration'.

Clauses 3 and 4
These were cross-cutting issues.

Clause 5
The amendment to Section 4 was to address instances where some unregistered pension fund businesses operated for a long time before the FSB came to know of them. 

Mr Makhubela said that this related to consumer protection. It was a key principle in regulation to ensure that such businesses were licensed. All that one was trying to do was to require that before a fund began to take contributions from investors that the fund ensured that it was registered at the FSB and licensed.

Discussion
The Acting Chairperson asked how to justify that provision in that context of the outcry that South Africa's legislation did not help business efficiency, more especially the context of registering a business. How did one justify the two-months provision?

Ms Marais replied that the provision would enable a person to start doing business within the two months, but that within the two months the person must submit his firm's rules in order to obtain registration. 

Dr Sheoraj added that the principle was that, when a fund was taking policyholders' money, as part of their pension fund contributions, the risk was that anything could actually go wrong and the money could disappear. Therefore it was a matter of balancing and protecting member interests within a pension fund and ensuring that when employers set up these pension funds and the like, they ensured that their administration was in place in terms of applying to register the rules of the fund with the FSB and giving the FSB notification that this fund would be established. It was a sound push towards protecting members' interests.  These were people’s life savings. This was why the National Treasury and FSB needed to err on the side of caution.  It was a principle with insurance that before a person set up an insurance company, the person needed a licence to operate.  National Treasury and FSB and offered a two-month window of opportunity.

Ms Marais said that Clause 5(c) provided that if a pension fund failed to supply verify information requested, its application would lapse.

Clause 6(c) provided that for inclusion of an 'investment vehicle' in Section 6. This enabled the Registrar to consider new products that were not specifically catered for in the Act.

Clause 6(d) provided for an alignment with the Companies Act.

Discussion
Mr Koornhof asked why the Pension Funds Advisory Committee was 'taboo'.

Dr Sheoraj explained the rationale that there were numerous advisory committees – about 11 and the Minister must appoint members and must look around for members to fill vacant positions. It was necessary to streamline consultation. National Treasury was a strong advocate of proper consultation on any legislation, and emphasised that it should be broad consultation. This was linked to establishing a code of conduct for consultation. One did not see any value added in the current committee structure

The Acting Chairperson adjourned the meeting for a break.

When the meeting resumed, the Acting Chairperson asked delegates to emphasise the technical changes that were being proposed.

Mr Makhubela alerted the Committee that the National Treasury was proposing a slight tweak to the wording on the registration of pension funds, in particular, in relation to the period of two months, in which there should be, after providing notice, some form of supervision from the FSB while the firm worked towards the registration, as things could go horribly wrong during those two months (Refer back to Clause 5). National Treasury would propose wording for that. 

Clause 8
Ms Marais explained that the Minister had discussed the amendment to Section 7A quite extensively in the budget. From experience it was evident that the consolidation of pension funds from smaller, independent funds into umbrella funds required trustees to know what they were doing, to be trained and to be better qualified. Under the proposed amendment, the Registrar could now prescribe the required skills and minimum qualifications, not just on appointment but to be maintained throughout the period of appointment.

The amended Section 7A(4) was a proactive step for the Registrar to be alert to any issues that might be going on in a fund, in which case the National Treasury and FSB would compel a trustee, within 20 days of termination of his or her appointment to let the Registrar know if anything strange happening in the fund to occasion his or her termination. Similarly, if the trustee became aware of anything that might prejudice the fund or its members he or she was compelled to let the Registrar know, so that the latter could take timely action. 

Clause 9
The amendment to Section 7C provided clarification on the fiduciary duties and what was required of a pension fund. Also the Registrar could now prescribe the requirements of good governance. 

Clause 10
The amendment to Section 7D was just clarification on disclosure requirements of trustees to fund members.

Clause 11
The insertion of Section 7F provided for when a trustee would be held liable as a board member.   

Clause 12
The amendment of Section 8 provided for a deputy principal officer of a fund. This amendment was necessary in the case of the bigger umbrella funds. 

Discussion
Mr T Mufamadi (ANC) had joined the meeting but let Mr Van Rooyen continue as Acting Chairperson. He said, with reference to fiduciary responsibility, that the trustees (board members) of pension funds had serious obligations in the decisions on how funds were invested, and there had been a serious loophole in that regard. There should be a deterrent on how they exercised their mandate. Most of the decisions taken at that level were irreversible.

Ms Marais referred to amended Section 7D(g). (See Clause 10). She referred also to the Good Governance Document and to the current Regulation 28. There was an investment policy statement. She explained further.

Mr Mufamadi said that this was one area that could not be left as it was. 'The real players – their actions and activities are never reported publicly.'

Mr Makhubela said that a number of trustees struggled in governing and managing pension funds. The reason and answer was simple – pension funds were complex. It therefore required a set of diverse skills. Hence upon appointment, the fund should ensure compulsory training, at least within six months, in order to empower trustees. How dealing with crooked trustees was another matter.

Mr Mufamadi said that one should consider minimum penalties for people who were corrupt. He referred to the recent cable theft and the delay of the Gautrain. It was easy to characterise it as a petty crime but in fact it was economic sabotage of the economy of South Africa, and it related to the lenient sentences. One must protect the investments of ordinary people. The p penalties should be heavier.

The Acting Chairperson said that the Committee must focus on that area.

Ms Marais promised to strengthen the provisions and incorporate them into the Good Governance Document, which would be part of the subordinate legislation. 

Clauses 13 and 14
Ms Marais said that these provided for alignments on the whistle-blowing powers by auditors and valuators. 

Clause 16
Ms Marais said that this provided for an amendment to Section 12 to consolidate rules.

Mr Koornhof asked if it was now impossible for a pension fund to change rules.

Ms Marais explained the purpose of consolidation.

Ms Marais said that there was also a provision for the lapse of an application.

Clause 17
Ma Marais said that the amendment to Section 13A related to errant employers, who did not pay pension fund contributions over to pension funds. However, because of the long process of reporting to the police and follow-up through the National Prosecuting Authority (NPA) that employer typically disappears. This meant that the employees lost their jobs and their outstanding pension fund money. It was therefore necessary to hold specific people responsible for paying over pension fund contributions. She thought that this would be a contentious issue in the upcoming public hearings.

Discussion
Mr E Mthethwa (ANC) asked if there was any way to enforce the contribution of an employer into a provident fund. He also asked if, in the case of those funds with large surpluses, there was any way to intervene to ensure appropriate distribution of those surpluses.

Mr Makhubela replied that, if an employer was going to make a deduction on behalf of an employee, he or she must pay that money into a fund. The money could not remain in a company's bank account. The aim of the amendment was to make this requirement more explicit and to criminalise contravention. 

Ms Marais added that there were particular provisions in the Act for the distribution of future surpluses. Therefore no surplus should remain behind.

Mr Harris thought that government entities had potentially been left out of the amendments.

Ms Marais replied that National Treasury and FSB had discussed the matter.  However, government entities were not subject to the Pension Funds Act at present. They fell under the Government Employees Pension Fund Act.

Ms Bednar-Giyose confirmed that National Treasury had examined this provision and would examine it again.

Mr Mufamadi referred to the Companies Act. Was the liability not vested with the directors? Shareholders might not be involved. How could one determine if a shareholder was involved on a day to day basis in the running of the company?

The Acting Chairperson asked if a director could be a shareholder?

Mr Makhubela replied that it might be taking liability too far if one included shareholders. It might be better to reconsider the provision and limit liability to the directors. Usually when one pierced the corporate veil, one pieced it to the level of the directors, but hardly to the shareholders.

Clause 18
Ms Marais referred to Section 13B relating to the administration of pension funds. The reference to 'investments of such a pension fund' had been removed where it was necessary for the administrator to obtain approval from the registrar, as this was already regulated under the FAIS provisions. One did not want the excessive cost of dual supervision. The FAIS requirements were stricter. Most of the subsequent amendments in this Clause related to on-site visits. It had been found that administrators were not always acting in the best interests of funds.  This amendment would provide for the Register to prescribe the fit and proper requirement. Some administrators failed to keep records in an orderly manner and did not provide them to the pension fund on time to enable it to continue with a different administrator. A major issue expected to arise in the public hearings was the capital adequacy requirement, which would be aligned to the FAIS requirements. 

Clauses 19 to 27.
These were dealt with briefly. (See documentation and the Bill.)

Ms Marais noted that in a Section 14 transfer, the pension fund was obliged to make sure that the full liability of pensioner was covered. This was to achieve consumer protection.

Clause 21(e) addressed the minimum benefit if there was any amount set aside in any contingency reserve account. An unnecessary surplus could not remain in a contingency reserve account.

Clause 22(b) was to make clear that the surplus must be increased or decreased with the fund return.

Clause 23(c) provided for deletion of subsection (d) as it was already catered for in Section 15K.

Clause 23(e) recognised that it was very onerous for the Registrar to make sure that all complaints had been resolved, hence a substitution in subsection (9). The amendment gave the Registrar broader discretion. 

Clause 23(g) provided for the deletion of subsection 19 as it was a duplication.

Clause 23(h) enabled the Registrar to review an application and give a different finding.

Clause 26(a) provided for a technical change by replacing 'request' with 'require'.

Discussion
Mr Mthethwa asked how far back one could go, especially for those who left the fund without collecting their surpluses.

Ms Marais said that it went back to the apportionment date, which was after the fund had sorted out all its historic surpluses.  However, it was impossible now for the fund to build up excessive surpluses. However, one had to allocate proportionally to members who left the fund as and when they left.

Mr Makhubela added that the surplus issue was more a problem of defined benefit fund than a problem of a defined contribution fund problem. Most funds were now 'DC” [defined contribution].  

Clause 28
Ms Marais said that the amendment to Section 15 K fixed technical issues where tribunals had been appointed.  

Clause 29
These amendments provided clarity on how the valuation reports were done and submitted to the Registrar. 

Clause 30
The amendment provided for the deletion of Section 17 as its provisions were accommodated elsewhere.

Clause 32
Ms Marais noted that the business rescue was an overarching matter.

Clause 33
Ms Marais said that the new subsection 19(5D) was aligned with the Companies Act. She noted that a pension fund was not allowed to conduct any business except pension funds so it could not control any entity in which it invested.

Discussion
Mr Harris asked how many pension funds had controlling interests (ownership interest exceeding 49%) in entities in which they invested.

Ms Marais did not have the data on this subject, so could not say how many funds might be affected. No comments on the draft had been received. It did not seem like a real issue. 

Mr Makhubela said that if it were to become an issue, one might consider grandfathering those entities to avoid disruption.

Mr Harris said that the issue was whether one had control pursuant to a shareholder agreement.  35% was a random figure (see Clause 33(c) [line 43]. Why even specify that limit? Control began automatically at 50%.

Ms Marais offered to review that Clause.

Mr Makhubela said that there was need for tweaking that provision and taking out that number.

Clause 34
Ms Marais said that the amendment to Section 24 gave clarity on the Registrar's obtaining information from the regulated entities.

Clause 35
Ms Marais felt that inspections and on-site visits had already been dealt with in depth in the previous session of the workshop.  

Discussion
Ms Dlamini-Dubazana thought that Ms Marais wanted to escape discussion the amendment to Section 25, but pointed out that the Registrar had so much power to search and seize documents. This ‘any suitable person’ was a concern and she asked to flag it. The Treasury was overlooking ‘any suitable person’.

Ms Bednar-Giyose replied that these concerns were deliberated on in the proceedings on the Credit Rating Services Bill [approved by the National Assembly in November, 2012]. National Treasury acknowledged these concerns and would ensure that the Committee would be satisfied with the final wording.

Clause 36 
The amendment enabled the Registrar, as a temporary measure, to make appointments to the board if the board of a fund was not properly constituted.

Clause 37
The amendment was to provide clarity that all liquidation accounts and minimum benefits must be approved by the Registrar.

The substituted Section 28(12A) was to enable the liquidator to pay unclaimed benefits to the fund. Previously the liquidator could pay only to the guardians' fund. 

Clause 40
The insertion of Section 29A was to enable the Registrar 'to hang on to' [sequester] an unregistered pension fund where the Registrar might apply to the court to apply to liquidate such a fund. This was to make it clear that the Registrar could have supervisory powers over them. 

Clause 44
The amended Section 31 was to allow for the period after which a pension fund might do business.

Clause 49
Ms Marais, with reference to the amendment to Section 37, said that National Treasury and FSB had taken note of the concern raised earlier on penalties. She wanted to link this to the amendment of Section 13A on the outstanding contributions, where action could now be taken against the employer company. 

Clause 50
Ms Marais said that the amendment to Section 37A was to address the concern where benefits became payable while fund members were unable to open bank accounts. In this case trustees had therefore no way of paying benefits to such fund members. Thus the proposed Section 37A enabled trustees, by arrangement with and by the authority of the fund members concerned, to pay benefits into someone else's bank account.

Clause 51
Ms Marais said that the proposed Section 37C was to allow unclaimed death benefits to be transferred to an unclaimed benefit fund.    

Clause 52
Ms Marais said that there had been a disparity in the terms used in different sets of rules of funds on how to identify members' interests or members' individual reserves. So in the proposed Section 37D there was an alignment by including members' interests so that benefits could be identified within a fund. 

The Acting Chairperson said that other matters could be accommodated in the due process that the Committee would follow. The Committee at this stage was not taking any decisions. 

South African Reserve Bank (SARB) Act (No. 90 of 1989) amendment
Clause 53
Ms Bednar-Giyose said that there was a single proposed amendment which related to Section 13.The rationale for the amendment was to address a regulatory gap enhance the ability of the SARB to provide necessary liquidity to the banking system in the event of a financial crisis. In the subsection as it currently stood, paragraph (c), the SARB was currently restricted in its ability to lend or advance money on the strength of a mortgage of immovable property or other type of bond on immovable property. This had been identified in an international examination of the banking legislation in South Africa. This was an impediment to the SARB’s being able to provide effective liquidity in the event of a crisis. So it was proposed simply to delete that paragraph in order to provide another mechanism to enable the SARB to provide liquidity in an emergency situation. 

Dr Sheoraj observed that the Members were studying their matrices. The above amendment was not in that version of the matrices. It would be included in the revised pack to be provided to the Committee in due course.

Co-operative Banks Act (No. 40 of 2007) amendment
Clauses 239-255
Ms Bednar-Giyose explained that there were three major categories of amendments to this Act. The first type of amendment was to provide for a shift from currently having two supervisors for co-operative banks to having only the Registrar of Banks being declared as the supervisor of co-operative banks. This revision in the approach had been identified as being a more efficient way to provide for the supervision of the banks. Having a dual supervision had not proved to be efficient or the most effective way to provide for the supervision of the banks.   As there was a very small number of co-operative banks, it seemed to be most effective to have the Registrar of Banks oversee the supervision. A number of the amendments to Section 41 and 42 of the Co-operative Banks Act and Section 43 as well as Section 55(1) were all related simply to aligning the Act with that change.  

The other major regulatory gaps that were to be addressed were to clarify in a certain provision the role and scope of the supervisors and the Co-operative Banks Development Agency and the relationship between the Agency and the SARB, to ensure that these roles were appropriately defined and delineated. These changes related to Sections 23, 31, 36, 41, 48, 55, and 57 of the Act. Quite a number of those were very minor refinements.

There were also minor amendments to Sections 58, 61 and 83. These were amendments to enhance the governance and operations of the co-operative banks. These related to responsibility to provide reports and the term of the chairperson and deputy chairperson of the board, and to which documents should be certified.  

Medical Schemes Act (No. 131 of 1998) consequential amendment
Clause 257 (See also: Schedule: Laws Amended, second item, page 109 of the Bill)
Mr Makhubela said that the Department of Health had asked National Treasury to effect consequential amendments on medical schemes. This was a sensitive issue following a series of court cases where the definition and interpretation of the business of a medical scheme.

Dr Sheoraj said that National Treasury would include these very minor amendments as part of the revised pack to be sent to the Committee later.

Mr Makhubela said that the Department of Health wanted to make it clear and certain what constituted the business of a medical scheme. Currently there were certain activities listed and it was not clear whether by conducting any one of these activities a firm would be conducting the business of a medical scheme. The amendment sought to introduce the word 'or', to ensure that if a firm undertook any one of those activities listed in the Act or a combination of those, that would constitute the business of a medical scheme. Currently the lines were blurred, as the court had interpreted the lack of the work 'or' as meaning that to do the business of a medical scheme the firm needed to do both 'a' and 'b'. This meant that there could be some implications on health insurance products. There were certain products in the market, which seemed to be doing the business of a medical scheme. One acknowledged that there was a role for those health insurance products.  However, to ensure that those health insurance products did not compromise medical schemes one needed to put in place some parameters around how those health insurance products could operate. He gave the example of what was known popularly as gap cover. This was a policy with an insurance company which covered the client for any excess beyond what the client's health practitioner or hospital would have charged you. He explained how medical schemes covered up to a certain amount. Beyond that the client had to pay at his or her own expense. The gap cover tried to assist in this regard by providing individuals with some protection. National Treasury had engaged with the Department of Health which was in agreement with the consequential amendments.

Secondly National Treasury was going to introduce some regulations to enable both medical schemes and health insurance products to co-exist. National Treasury acknowledged that the health system had some challenges. So, in the interim, while one tried to fix the longer term challenges in the health industry one felt the need to accommodate those health insurance products, as they fulfilled a certain important and particular role. National Treasury was confident of an amicable outcome by way of these regulations.     

Dr Sheoraj said that those regulations had been published in the first briefing in 2012, and National Treasury had received 'an overwhelming response'. The National Treasury, the Department of Health, the Financial Services Board (FSB), and the Council of Medical Schemes had considered the comments. It was National Treasury's intention to release a second, revised version of these regulations, before the public hearings on the Bill. So comments would be expected on the consequential amendments during the public hearings. Members should be aware that the second, revised version of the regulations would be released for a further round of public consultations, and the revised version could be made available to Committee Members also.  

Discussion
Ms Dlamini-Dubazana asked about the removal of 'and' in subsection (1) and its replacement by 'or'. Did this mean that the text above would no longer be inclusive?  Would the court now focus only on the activities following 'or'?

Where did the definition of 'medical scheme' leave the alignment of the National Health Insurance (NHI)?

Mr Harris might have missed the context, but said that this amendment was not in the Financial Services Laws General Amendment Bill [B29-2012]. Was National Treasury planning to include it? 

Dr Sheoraj replied that the amendment was included in the actual Bill. It was a consequential amendment towards the end of the Bill (see page 109).

Mr Mthethwa asked to whose benefit was the removal of 'and' and its replacement by 'or'? He observed how medical schemes exploited their members. Would not the amendment open 'a can of worms'?

Mr Makhubela gave a technical, legal explanation. The judge had read that 'a' and 'b' meant together. Therefore, if a firm conducted 'a', it was in the clear – it was not doing the business of a medical scheme. The public felt that this opened a gap, and hence the emergence of these health insurance products. So by inserting the 'or', one began to qualify 'a' and 'b' to the effect that if even if a firm offered 'a' alone, that would still constitute the business of a medical scheme. Also, if the firm offered 'b' alone, that would constitute
the business of a medical scheme. Also, if a firm offered a combination of products, that would also constitute the business of a medical scheme. Thus the introduction of the word 'or' made a huge difference. The amendment was largely to the benefit of the medical scheme, because, in the absence of a clear definition, there would be products from the private sector entering that space. That in itself was not necessarily wrong. It was critical to preserve the principle behind a medical scheme. This principle was simply one of cross-subsidisation. The healthy members subsidised the old and sickly members. They did not discriminate. Anyone who could afford the premiums could apply to join. It was different with health insurance products, which did risk ratings of clients. Medical schemes did not do such risk ratings. He emphasised that it was important to preserve the character of medical schemes.

Mr Makhubela said that the NHI was a bigger, long-term reform. This amendment was just 'tweaking an existing provision'.

Mr Harris asked what the implications were of putting these three amendments in the schedule rather than the main body of the Bill.

Ms Bednar-Giyose explained that it was an amendment in another piece of legislation that was necessary to give effect to provisions that currently existed in the Short-Term Insurance Act (No. 53 of 1998) and the
Long-Term Insurance Act (No. 52 of 1998) to enable the promulgation of regulations in relation to certain matters, in particular, in this case, the demarcation of medical and insurance schemes business. In that sense it seemed to be a consequential amendment. Also the Department of Health specifically requested that this amendment be included as the Department was not expecting to be introducing any major amendments to its legislation in the immediate future. Because this issue was seen to be an important one, it needed to be addressed in terms of the insurance legislation and in terms of the health legislation, the Department of Health had requested that National Treasury addressed it in this particular piece of legislation.     

Mr Harris saw a problem even in the absence of the Bill. He was sure that there were consequential changes which impacted on it, but even if one was not processing this Bill, one would still want to amend the Medical Schemes Act. 

Ms Bednar-Giyose replied that, in order to address this particular issue, it would be necessary to amend the Medical Schemes Act. 

Financial Advisory and Intermediary Services Act (No. 37 of 2002) (FAIS Act) amendment
Ms Loraine van Deventer FSB Legal Adviser: FAIS Act, asked Members to note that this matrix had been updated. It would be distributed subsequently to Members.

Clause 175
She began with Clause 175(c). This Clause (or paragraph) introduced a new definition for the term 'continuous professional development'. The reason was that this term was now being used in a new Section 6A. The same applied to the insertion of a definition for certain 'proper' requirements by way of Clause 175 (f). In Clause 175 (h) the FSB proposed an amendment to the definition of 'product supplier' by making the definition broader by removing the requirement that the product be issued by virtue of a law. The reason was to ensure that a financial service rendered in respect of a product that was not issued in terms of a specific law, for example, the derivative instruments, did not fall outside the legislation. Clause 175 (I) introduced the proposed definition of the term 'publish'. The FSB had dealt with this before, as it was a crosscutting issue.  Clause 175 (n) introduced an amendment to clarify that a specific code of conduct would apply to deposits of a term not exceeding 12 months.

Clause 176
This was crosscutting.

Clause 177
This introduced an amendment to certain powers that Section 4 of the Act granted to the Registrar to request on-site visits or to request information from providers. The proposal was to extend those powers of the Registrar to compliance officers. The reason for that was that a compliance officer, although not defined as a financial institution, was approved by the Registrar, and had to comply with certain criteria. It was necessary to ensure that the Registrar was effectively able to supervise compliance officers. Most of the amendments introduced related to the inclusion of compliance officers. Also there was provision for an extension of the type of documents or information that the Registrar could request in an on-site visit. These powers would then be aligned with the rest of the FSB legislation on on-site visits and inspections. It was made clear that the Registrar might not make an order that a provider must pay a client a compensatory amount as that kind of order could be made though the FSB's Enforcement Committee.  

Discussion
Ms Dlamini-Dubazana asked if the definition of compliance officers was included.

Ms Van Deventer replied that there was no definition of a compliance officer. However, Section 17 of the Act dealt with compliance officers and provided for their appointment, duties, responsibilities and reporting obligations to the Registrar. It was a well-accepted term and it was not necessary to define it, as it was related to the functions performed by the person concerned.  

Ms Dlamini-Dubazana said that then there was a problem. These officers must be defined as to what qualified them to perform their duties.

Ms Bednar-Giyose replied that Section 17 of the Act would clearly define the appropriate functions that the compliance officers could perform and how they were appointed. There was thus a very stringent regulation in terms of that legislation as to who might be a compliance officer and that officer's purpose and function. This provision was more extensive than a mere definition.

Financial Advisory and Intermediary Services Act (No. 37 of 2002) amendment continued
Clause 180
Ms Van Deventer described Clause 180, which proposed the insertion of a new Section on 'certain proper requirements'.  This insertion should be read together with Section 8, as the enabling powers of the Registrar to determine certain proper requirements were basically removed from Section 8 of the Act and were inserted in a standalone Section. Section 8 basically related to the application process for a licence. As certain proper requirements had general applicability, it was felt that it would be more suitable to have a standalone Section and it would also provide more clarity to prospective applicants and financial service providers. It also provided further guidance as to what constituted competence. This was set out in paragraph 2(b) of the proposed amendment.

Clause 181
This provided further for a person when rendering financial services that such a person either had to be an authorised financial services provider or must be appointed as a representative. 

Clause 182
This related to the application for authorisation. Most of the amendments to this Section basically related to the removal of certain proper requirements or the determination of certain proper requirements, and what those certain proper requirements must entail to the proposed new Section 6A. Under paragraph (d) of this Clause, the FSB had clarified that the Registrar, when considering an application for authorisation, must also consider, when the 'key individual' asked a corporate entity, whether such person complied with the certain proper requirements. When the 'key individual' did not comply, that would be a reason for declining the application.  In Clause 182(e) the FSB had removed the reference to the advisory committee. In terms of subsection 4(a) the Registrar might impose conditions or restrictions on a licence, but he must have regard to the factors listed in this subsection. The FSB had proposed the insertion of guidelines on the conditions that the Registrar might impose and these should relate to the category of product. The same applied in Clause 182(f). There were some realignments in respect of the terminology used in Section 6A.  Clause 182(h) and Clause 182(j) proposed editorial amendments. Clause 182(i) corrected the reference. Clause 182(k) corrected the omission of the word 'and'. Clause 182(l) provided for the prohibitions that a person might not make use of a copy of a licence where that licence had been suspended, had been withdrawn, or had lapsed. The FSB had also made it an additional requirement that a provider was not allowed to render financial services if the provider's licence had lapsed, had been withdrawn or had been suspended. The FSB had also made it a prohibition that a person might not publish any statement, advertisement or communication relating to the rendering of financial services, the business of a provider or a financial product that was misleading, false or contrary to the public interest. The remainder of that Clause related to consequential amendments or corrections of references.

Clause 183
This proposed the insertion of a new Section 8A to make clear that the compliance with certain proper requirements were a continuous requirement and not just an ad hoc requirement at the licensing stage.

Clause 184
Clause 184(a) provided clarity as to the grounds and the terms for the withdrawal or suspension of a financial service provider licence. Clause 184(b) was consequential.  Clause 184(c) provided for additional grounds in terms of which the Registrar might suspend or withdraw a licence. Clause 184(d) and (e) provided that the Registrar might determine terms when he withdrew a licence, for example, in relation to business not concluded and its transfer to a new provider. Clause 184(f) was crosscutting. Clause 184(h) provided clarity that the reference to the provisional suspension should be provisional suspension or withdrawal.

Clause 185
This was crosscutting.

Clause 186
Ms Van Deventer said that it was very difficult to enforce the requirement of Section 13 of the Act. The amendment sought to ensure that a person, prior to rendering a service, must provide the client with certification that he or she was allowed to act on behalf of the provider. Such a representative must also meet certain proper requirements.

In Clause 186(d) the FSB proposed an amendment that a representative of a provider might not render financial services other than in the name of the provider. He or she must also not contract other than in the name of the provider when he acted on behalf of that provider.

Clause 190
This dealt with the compliance officers and the insertion of Section 6A. There was a deeming provision that irrespective of whether a compliance officer had failed to submit reports to the registrar this did not take away from the responsibility of the provider to submit that report.  

Clause 193
This was to clarify who the accounting authority for the FAIS ombud was and that the accounting authority must comply with the Public Finance Management Act (No. 1 of 1999) (PFMA).

Clause 196
This extended the prohibition that where a business practice had been declared that a provider might not continue to carry on that business practice through a representative.

Clause 198
This provided for an enhancement of the wording.

Clause 201
Clause 201 amended Section 38C by enabling the Registrar to issue directives in alignment with the other FSB legislation.     

Financial Institutions (Protection of Funds) Act (No. 28 of 2001) amendments   (Clauses 158 to 174)                               
Ms Retha Stander, FSB Senior Legal Advisor, said that this was the Act that gave the Registrar the teeth to do what he or she was required to do. She referred to 'part 6' of the Members' pack. She did not focus on the definitions (Clause 158), but described briefly the amendments to Sections 2 and 4 (Clauses 159 and 161). Those were duties of financial institutions to their investors. However, the present provisions applied only to natural persons representing those financial institutions. These provisions, under the amendment, would be extended to the financial institution itself.

Clause 162
The amended Section 5 would enhance the powers of the Registrar when he or she applied for a curatorship, which was a very important power of the Registrar. An important subsection was inserted which allowed the Registrar to appoint a curator by consent with the financial institution.

Clause 163
A new Section 5A dealt with the appointment of a statutory manager. After the comments received, the FSB was reviewing the wording of this proposed Section. The aim was to provide for a procedure that was not as drastic as the appointment of a curator which would take the control away from the institution. The current wording might not achieve that middle ground in the sense that the control of the institution was taken away and vested in the statutory manager.

Clauses 164 to 170
Section 6 allowed the Registrar to approach a court to apply for an interdict. FSB had added powers to allow the Registrar, in order to protect investors, to ask the court to stop the selling or liquidation of assets.
There were further provisions dealing with the referral to the Enforcement Committee. Most of these were editorial changes to provide clarity.  She did not go into detail.

Clause 173
The insertion of Section 9A allowed the Registrar, where he or she had to approve a person, that he might request any documentation concerning that person or require an investigation to verify the correctness of such documentation. 

She added that the definition of authorised representative was provided (See Clause 151(e)) by way of a substituted subsection (2) of Section 4 to provide, in effect, that the Registrar must approve outsourcing and that the Registrar had the authority to supervise an outsourced entity.

The remaining proposed amendments were to enhance the current powers of the Registrar, if he or she was concerned about the financial soundness of a scheme or the manager, trustee or custodian of a scheme. A substantial component of the remaining amendments were towards alignment with the Companies Act.                 

Conclusion
Mr Makhubela said that this concluded the presentations from National Treasury and the FSB. He thanked the Acting Chairperson on behalf of the team.

The Acting Chairperson said that the next phase would be the public hearings. Thereafter National Treasury would report to the Committee.  Then the Committee would deliberate Clause-by-Clause, before adopting its report on the Bill with or without amendments.

He adjourned the meeting.