Taxation Laws Amendment Bill [B29-15]; Financial Sector Regulation Bill [B34-15]: consideration

Meeting report

Chairperson's opening remarks
The Chairperson noted that there had been negotiations ongoing with the Trade Unions on the Taxation Laws Amendment Bill (TLAB), who were affected by some of the amendments and more time may be required to settle that process. He asked that the National Treasury (NT or Treasury) take the Committee through the responses now compiled.

Taxation Laws Amendment Bill: National Treasury Briefing
Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, National Treasury, said that National Treasury (NT) had, as was customary, compiled a draft Second Response document which deals with all the comments received by the Committee and comments directed to Treasury. For the purpose of amendment to a Money Bill, a response to certain criteria was included, in terms of sections 8(5) and 11(5), with a note. NT was ready to talk about a communications strategy. NT fully agreed that retirement was too important in people’s lives to be taken for granted, without full and proper communication with members of retirement funds. Even though some of this communication should be done by the Boards of Trustees, NT also does want to help in informing the public.

Mr Momoniat outlined the procedure. Usually, once the Committee had finalised its position, the response document prepared by NT would be updated to reflect changes to the Bill. NT needed to be guided by the Committee on the strong comments on retirement reform put forward by COSATU, and the number of letters submitted to the Committee. There needed to be clarity from the business constituency on who is speaking for whom, because there had been some “not so polite” letters addressed to him personally, one of which accused him of misleading the Committee; he wanted to state that upfront and assure the Committee that he was prepared to take on whoever was making that completely incorrect allegation. The facts would be presented as they came to light. His briefing now would cover the key points initially and subsequently raised, on content and the process of the amendments. It would now be up to the Committee to make the final decisions.  

Mr Chris Axelson, Director: Personal Income Tax, National Treasury, said the Draft Response Document set out the process which had been followed with the TLAB and the timeline. The amendments were first proposed in 2013 and further small amendments were made in 2014. This year Treasury published a draft TLAB which  basically kept the 2013 amendments as amended by the 2014. After some consultation, which showed a lack of agreement on provident fund members, a revised Bill was then put forward and tabled in Parliament, which made a different policy proposal, that followed a phased approach for annuitisation for provident fund members. A media statement was then released, saying that the TLAB was one of the options, but NT consulted on various options with industry. A list of responses in the consultation was set out in the Draft Response Document. About 25 written submissions were received and meetings were also conducted with industry.  

Mr Momoniat added that consultations were also held with union federations and any other interested parties. “The industry” should not be seen as one industry entity, for it includes representatives of employees, payroll companies and also those administering the funds.  There were distinct groupings consulted and often the discussion was around the logistics of the proposals, because it would not make sense to put forward a proposal which was impossible to implement. There was substantial consultation, and he would provide dates, with NEDLAC. It was said that agreement could not be reached within NEDLAC, and therefore the matter could not proceed. Most of the key players asserted that the TLAB cannot proceed until there is a social security reform paper. NT did not think there would be any different outcome if further consultations were had next year, even if such a paper was released. 

Mr Olano Makhubela, Chief Director: Financial Investments and Savings, National Treasury, said that the list of the meetings was contained in Annexure E of the Draft Response Document. 

Mr Momoniat said the dates of those meetings still were needed, but confirmed that meetings were held with all parties named.

The Chairperson asked if all the union federations were involved in the recent negotiations.

Mr Momoniat said that at NEDLAC three federations attended: COSATU, NACTU and FEDUSA. There were other unions outside the federations, such as NUMSA and Solidarity, who did not have direct membership of NEDLAC. Because things were not working in NEDLAC, consultations were also held with individual players. NT had encouraged all stakeholders to make submissions to the Committee to make their positions clear on the options presented. This led to the responses received by the Committee, and those responses sent directly to NT would be forwarded to the Committee also. These later comments flowed from the media statement, which was different to the previous consultation. 

The Chairperson asked the Members to give some guidance. Despite the fact that Treasury could present empirical evidence on the meetings having been held, there were still people who contested that the meetings happened, and also the nature of the meetings, saying they were purely for information, and no negotiation was allowed. He himself had received emails to that effect. He would forward them to other Members after this meeting. He asked if any Members felt that National Treasury had deliberately misled the Committee, in which case NT would have to respond on that point. If, however, it was clear that meetings were held, but there was a difference of opinion between NT and other stakeholders about the nature and quality of the meetings, it might not be necessary to explore that now. There was precedent – in a previous instance of dispute with the South African Local Government Association, a subcommittee was set up to enquire into the nature of the consultation. This situation was slightly different. The Committee needed to vote on the Bill. The Parliamentary workers' strike meant that there were limited administrative resources. Mr Momoniat must have the right to respond if his integrity was attacked in the public domain and then it would be the right of Members to decide on his integrity. He wanted to ask whether Members felt that Mr Momoniat in particular and National Treasury in general had deliberately misled the Committee. 

Ms T Tobias (ANC) said it was interesting to listen to Mr Momoniat, as a mathematician, trying to justify the meetings with numbers, while she, as a sociologist, was interested in thorough engagement. She did not believe National Treasury had deliberately misled the Committee, because “deliberately” implied a knowledge of presenting incorrect information. She agreed that there were probably misunderstandings between the interested parties regarding the position and presentation of NT. A point of compromise would be found, but this would not have to do with numbers of meetings, but how the parties could influence each other. This would be very frustrating for NT which had done this thorough work and she hoped they could bear with the situation. South African society was faced with particular challenges and that meant there would be differences. She suggested that the Committee should proceed on the points where agreement was shown, and postpone those points of dispute for further engagement.

The Chairperson said not too much time should be spent on the numbers of meetings held, but National Treasury had a right of reply. When he forwarded the emails to Members, he asked that they should research and consider what the vested interests of the authors of those might be. People should be able to agree to disagree robustly, without questioning people’s integrity. This was not about personal integrity, but about seeing matters from a particular vantage point with vested interests. He repeated that NT said that it held the meetings and engaged whereas others said that meetings were held but they were a “box-ticking” exercise with little engagement. 

Mr Momoniat said that NT had a strong principle not to mislead Parliament. In fact a Committee where there was robust debate, not rubber-stamping, was required as a good check on NT. The Committee played an important role to be played and getting other perspectives was useful.

The Chairperson said that unless there was clear evidence to the contrary, the Committee would accept that there had been misunderstandings about the nature of negotiations, and noted that the consultations had been ongoing since 2012. The Committee was not suggesting that there had been a deliberate distortion, and understood that the nature of the topic was likely to cause disagreement.

Mr Momoniat said there is a particular protocol for the process in NEDLAC, but matters had broken down to such an extent that this cannot even be embarked upon.  

The Chairperson said the NT has been using terms such as “no agreement”, “negotiations get nowhere”. NT had never said that there was any consensus. Members understood that point.

Mr Momoniat said the other point was that with tax proposals the role of lobbying was important. Some people came as individuals, some representing organisations. There were difficulties where an individual claimed to represent a particular organisation and then made further submissions in their own name, and it did not help when personal positions were put as the position of the organisation. It was important that a person raising an issue should not do so from a position of privileged information, and that would be addressed in the Response Document. He did not think it a good idea to respond to each submission individually, because that would lead into very intense discussions.

Mr Momoniat said there were 12 formal submissions through the Parliamentary process. Eleven dealt with retirement reform and one with insurance, which was not contested and had since been resolved. There had also been correspondence and more positions to the Committee, and to Treasury itself, as listed in the response document.

Definition of Pension Fund
Mr Axelson said the first submission concerned whether to go ahead with implementing the changes to the tabled Bill. Eight submissions were in favour of the proposal to align the tabled Bill with previous legislation, as it was felt that this would achieve the main aims of simplification, harmonisation and encouraging preservation. The current design would encourage consolidation of retirement funds, which would bring down costs and in effect help members. If substantial change were to be done at this late stage, they would require heavy IT costs as systems that had already changed would need to change again, and for this reason the submissions suggested that it would be preferable to proceed with what was originally proposed from March 2016. It was said that any delay would lead to diminished certainty for the public and industry, and diminished confidence in the retirement fund industry.

NT’s response agreed that this course of action would achieve the objectives. It was important to try and curb tax avoidance through the use of schemes where high income individuals could get very high deductions without being required to purchase an annuity. The new mechanisms would bring in a monetary cap, which NT felt would make the system more equitable. 

Social security reform
Mr Makhubela said the second submission was around the comprehensive social security reform paper. This paper had taken quite a while, but NT remained committed to finalising it. It had been difficult, because there were other Departments involved such as the Department of Social Development (DSD). There had mostly been agreement on key issues, leaving only minor details to be refined. The paper would then be submitted to the Minsters for their approval. NT would prefer a gradual approach to retirement reform, instead of waiting for everything to come together at a particular point. Effectively the country had already been waiting for ten years, which suggested that the best approach would be to identify critical areas for reform now. As long as incremental actions would all align to the ultimate objective of comprehensive social security. NT had had the benefit of seeing the social security reform paper, so it was happy with alignment. NT still wants to address the critical areas of preservation annuitisation, and dealing with the complex tax system for retirement schemes. Some of the challenges around cost and governance issues had been remedied to a large extent through the Financial Services Laws General Amendment Act.

Monetary Cap
Mr Axelson said the next submissions were around the monetary cap which it was felt would not encourage people to save further. High income individuals already faced high progressive tax rates and a higher overall tax burden. There had not been changes upward to the cap since 2013. However, NT felt that equity needed to be observed in this area and felt there were generous provisions for individuals to make use of roll-overs, not being taxed when they received that money. The value of the cap was initially at R200 000, increasing to R350 000 in the 2013 Act, but with full implementation only from 1 March 2015. There was therefore not a large leap and effectively the country was already a year behind the real value of the cap. It was a threshold and the Minister of Finance could announce differently every year in the budget. 

Mr Axelson said the media statement released on 16 October 2014 had indicated that if there was no agreement within NEDLAC, NT might consider moving the implementation date to 1 March 2017. The submissions stated that as there had not been agreement in NEDLAC the implementation date should be delayed to 1 March 2017. NT's response was that no firm commitment was made in the media statement, merely an indication that Treasury may consider moving the implementation date, so in its view it was not bound to that revised date; it was merely an option. The majority of submissions felt that Treasury should proceed straight away.

Government Employees Pension Fund (GEPF)
Mr Axelson said the last comment was on the Government Employees Pension Fund (GEPF) members being explicitly excluded from the scope of the amendment. This meant that civil servants will not be bound to the tax deductibility limits. The question was asked how civil servants could create  legislation to give themselves a favourable position. NT pointed out that this was not true since EPF members and all other members would fall under the tax deductibility limits in the Income Tax Act. NT merely explicitly excluded the GEPF from the requirement to purchase an annuity. This was because the GEPF is a defined benefit fund, and therefore it pays out as an annuity. Its members would receive 6.57% multiplied by their salary, and the rest would be received as a final salary scheme, which is an annuity. Because it is already an annuity NT did not believe there was a need to enforce the annuitisation requirement. This was not special treatment.

Mr Momoniat said the GEPF could have been included, because it already complies and there is therefore no issue. Government has direct control and things will not change. The reason why it was not included was because many of the resignations seen in government arose because of the GEPF. The legislation had not been changed before and would not be changed now, because there were no problems.  needing to be addressed. Even minor changes would be seen as an excuse for people to resign. Many people already resigned – particularly in categories of teachers, nurses and healthworkers – in order to cash out routinely. At the end of 2013 the GEPF started sending out benefit statements, which indicated how much cash people had, and warned them of the tax implications of cashing out. GEPF does not fall under the Pensions Funds Act, unlike other funds, like the Transnet Fund, and government does not have direct control to ensure they comply with the tax policy. 

The Chairperson interjected that many of these points had been made before; he could not see anything new which was being said. The key point was where to move from here.

Mr Momoniat agreed this was repetition, as he wanted to make sure that every point raised in the submissions or responded to in writing was put before the Committee.

Insurance
Mr Momoniat said that the last point dealt with the insurance question, which had been resolved. NT has moved back to the draft as tabled,. The attempt to amend it led to complaints from one insurer, and when NT last briefed the Committee it agreed that the amendments would be removed, reverting to the previous intention, to start from 1 January 2016.

He added that one annexure listed those responding to the NT media statement. Annexure E set out the meetings held.

Discussion
Ms Tobias said she was not changing her views from earlier, but she felt the core of the disagreement lay in the seemingly different treatment of Provident fund members and GEPF members. Perhaps there is a misunderstanding around this clause, and perhaps there was an impression that GEPF was being left out. She suggested that the matter maybe needed to be explained again. This raised the question of other federations being involved in the negotiations. She believed that if people at grass roots had the matter explained, they would not hold a contrary view.  

Mr A Lees (DA) asked how the tax deductibility cut-off would apply to GEPF, if it was excluded from the definition. It was said that the 27% cut off will apply, but he wanted to know through which Act or provision. He asked for an explanation of the implications of the lump sum paid out upon retirement exceeding the stipulated minimum.

Mr Momoniat said looking that the current law dealt with two issues. Firstly – how are contributions to retirement funds taxed? - This was changed in 2013, with further amendments in 2014. If the new TLAB was not passed, then those amendments would come into effect on 1 March 2015. All contributions from a similar base of income would be 27.5% of the total income as defined up until R350 000. Secondly, how was annuitisation dealt with? - The Pension Funds Act said that at the point of retirement, two thirds could be taken as an annuity and one third as a lump sum. This applied to pension funds and retirement annuities which also came with a tax deduction, even before the 27.5%, which was not capped. This was at 15% of non-pensionable income. Provident funds allowed employers' contributions to be tax deductible, and for the employee this was a non-taxable fringe benefit. However, if employees made their own contributions beyond the employer contribution, they would not receive a tax deduction on post-tax income. In return for that, annuitisation is not required. The change was now trying to give the same tax deduction to everyone, including members of provident funds. NT wanted everyone to annuitise. The only people who would be affected by the change were members of provident funds, because this already applied to pension funds and retirement annuities. GEPF falls within the scheme of pension funds and nothing was being changed for them.

Some loopholes were identified the previous year, as this was very difficult to understand and it had also been found that there were various kinds of categories which were not covered. Technical amendments were carried out to deal with the unintended consequences. There were still many loopholes. There was no “secret plan” to change preservation, but preservation will be put in to an extent. There was room for some balance between what could be taken out, but a person should not be able to take the full amount out at any time after resignation. At the moment, this could be done if the person resigned one month before retirement. This loophole had to be closed. It was not a tax issue and was not being changed in this Bill but would be corrected next year. NT would like to put forward a discussion document for the public to comment on the type of preservation they would like. He repeated that nothing needed to be changed in respect of the GEPF. The GEPF is the largest fund and has had its own issues, arising not so much from the unions, but from a query in the original submission made by Business Unity SA. It was suggested that GEPF was favoured because it was not included in the definition. As explained, this was done because it is already covered.

Mr Axelson said the tax deduction was in section 11K of the Act, which applies to all retirement funds. The annuitisation requirement is dealt with in the definitions in section 1. This was why the treatment could be split. GEPF was removed from the annuitisation requirement as it was already annuitised. All funds are included in the tax deductions for contributions. In regard to the lump sum, the annuitisation threshold was R247 500. If that was the amount in the fund, it could all be taken. If there was more, one third would be taken out, and two thirds would be taken as an annuity.

Mr Lees asked whether, if the one third exceeded the R247 500, it could be taken in the context of a defined benefit fund. 

Mr Momoniat said the way the GEPF would operate according to its own rules and these would need to align to the tax policy. 

Mr Makhubela said his understanding was that it depended on the employment period. A person working for less than ten years in government was entitled to a gratuity, which was a full lump sum. If employed for more than 10 years, the person would be entitled to a third, with the balance being received as an annuity. 

Mr Momoniat said the idea was for the GEPF to change its rules. Any change to the GEPF would require a change also to the GEPF Act.

The Chairperson said the Committee had requested the support staff to prepare a response to the written submissions, because they had a right to be heard. It may have to be accepted that NT has covered the point, but all submissions have been considered. He repeated that he would be sending Members all submissions received on the previous day, including an exchange between Mr Momoniat, an individual and the COSATU response.

Sections 8(5) and 11(3) Money Bills Amendment Procedure and Related Matters Act: NT briefing
The Chairperson asked Mr Momoniat to brief the Committee on what would be considered to be compliance with sections 8(5) and 11(3) of the Money Bills Amendment Procedure and Related Matters Act – which he thought would apply if the amendments proposed were to be pursued.

Mr Momoniat said there were five factors to look into when considering changes:
1. Does the amendment affect the revenue framework: NT believed the answer was no, because if no change was made, then the status would largely be what was in place at the time when the budget was presented.
2. Vertical and horizontal equity: the amendments move closer towards vertical equity and certainly horizontally
3. Certainty: By effecting the amendments certainty is being created, and as soon as the decision is made certainty would be restored.
4. These did not affect the composition between direct and indirect taxes, because there was no significant effect on revenue.
5. Consideration of regional and international trends: In the region, pension funds are not very developed and it is hard to say what the trends are. International trends are also hard to compare, because some countries have very advanced social security systems with the people contributing to a state pension fund. Other countries, like Australia, do not force people to annuitise. On the other hand, in the UK annuities were recently done away with, with effect from 1 April 2015. Two countries of similar levels of development are thus doing contradictory things. Ultimately the decision is for the country to make, considering whether there is a culture of saving and how vulnerable people are. This is why NT chose the option of a lump sum with an annuitisation, because it is not entirely one way or the other.

The Chairperson noted that this would be considered by the Committee. He requested each political party to consider everything presented, including the emails sent, and put forward their respective positions later that day. The ANC had a study group in the evening, and the Committee probably would not vote on the Bill today. It seemed there was some discussion between the NCOP and NA, on a variety of matters, not least of all the strike, with the possibility of having Parliament’s term extended by a week. This may apply only to the NCOP. Therefore, it may be that there was no need to rush to have the vote for the following morning.

The Chairperson therefore summarised that it was unlikely that the TLAB would be voted on today. Depending on whether there was an extension to the NCOP’s programme, the Committee may be able to postpone the voting until there was greater consensus on the proposals on retirement reform.

Mr Lees questioned what would happen if the Committee voted on the following day.

The Chairperson responded that in this case it would go to plenary on Friday. If there were questions to the House, nothing else could be put on the agenda. He had proposed that there was nothing stopping Parliament from adjourning for five minutes at the end of the question time, and then reconvening and if this happened, then the TLAB could be debated on Friday. This was not a decision of the Committee, but he was addressing this point so that those outside the Committee could get an indication of when Parliament was going to vote on the Bill, and what the outcome may be. The problem was that Parliament was short-staffed because of the strike, and may not be able to notify the necessary people.

Mr Lees said the Bill, as on the ATC, included amendments which he presumed were to be withdrawn. He asked if the Members would receive a final version before plenary?

The Chairperson said the DA’s programming whip would know this by the following day. Proposals would be given to the ANC’s programming whip, but he did not know whether the ANC would accept the proposals put forward on the Committee’s behalf. 

Additional submissions on the Bill
A Committee Support Staff member noted that there were five additional public submissions, which were not greatly different from what was covered by NT. These were from Andrew Crawford, BUSA, Towers Watson, and SAITP.

Andrew Crawford’s submissions raised the issue of leaving the GEPF out of the amendments and also touched on some of the issues not resolved in NEDLAC, which could expose government to constitutional challenges. Other payroll authors supported the amendment and proposed linking the R350 000 cap to inflation. Otherwise the proposals were generally in agreement with the amendments.

Mr B Topham (DA) asked who Andrew Crawford represented, or whether this was an individual submission.

The Chairperson asked for a response.

Ms Rosemary Lightbody, Senior Policy Advisor, ASISA, said she represented ASISA, which was one of the major members of Business Unity SA, which operated on a mandated basis. The views of Andrew Crawford, as expressed in the recent exchanges, were not the views of BUSA or ASISA. In some of the exchanges he had made it clear that these were his personal views. 

Financial Sector Regulation Bill (FSRB): NT further briefing and Committee deliberations

Mr Momoniat said that he wanted to make some further points about the Financial Sector Regulation Bill (FSRB).

Chapter 4: Key Characteristics of the Financial Sector Conduct Authority (FSCA)
Mr Momoniat said Chapter 4 deals purely with the FSCA, and there are no other issues around the South African Reserve Bank (SARB). It therefore shows what one of the peaks looks like. Clause 56 set out that the authority would be named the Financial Sector Conduct Authority (FSCA) and this would deal with how financial institutions conduct their business and how to protect customers of a financial institution. The Authority would have a Commissioner and two to four Deputy Commissioners. The model proposed had no part time board, but a set of full time Commissioners who would make decisions on everything collectively, and who would then delegate down. Below the leadership there are departments which are to be structured according to the Commissioners.

This was a decisive move away from the Board of the Financial Services Board (FSB), because it was felt that there are silos both within the regulator, and between regulators. Currently, in the Financial Services Board, the various deputy registrars would be equivalent to departments. One of the difficulties around retirement was that there would be one deputy registrar for retirement funds. However, a vital part of retirement is annuities. This, however, falls somewhere within insurance. There are concerns about the degree of coordination between the two regulators, particularly in the light of the aim of having a seamless approach to retirement. This was why it was strongly felt that there should be one place where everything was taken into account, rather than dealing with them as separate parts of a chain. A commission should not compromise the normal features of the Board. There would be an audit committee and a remuneration committee. The Director General of the National Treasury will appoint the subcommittees, which are to report to the Commissioners.

Clause 56 establishes the FSCA as a juristic person, subject to the Public Finance Management Act (PFMA). SA Reserve Bank has been excluded, because it has its own Act and is not covered by the PFMA. An added reason for this is that the SARB needs to move with real agility.

Clause 57 sets out the objective, and this can be compared with the Prudential Authority, which is an entity within the SARB, and has its objectives in clause 33. The Prudential Authority will deal with the safety and soundness of financial institutions, while the FSCA is to protect financial customers. This does not only cover fair treatment, but covers things such as financial education, while also assisting in financial stability.

Clause 33(a) and (b) covered the purely prudential function. Even within the Prudential Authority, there is an element of protecting customers. The Banking Supervisor will be charged with ensuring that the deposits of retail investors are safe. “Prudential”, by definition, means that the financial institution can meet its promises to the customer. The prime example is whether, if 100% of customers decide to withdraw 100% of their deposits at the same time, can the Bank cover this?

Clause 57 (a) requires the FSCA to protect the general efficiency and integrity of the system, which is market conduct regulation. Clause 57 (b) relates to fair treatment of customers. Both aim to assist with maintaining financial stability.

The Chairperson interjected with some comments at this point. Firstly, he suggested that if Members had questions on any particular clauses, they should raise them as NT went through the explanations. The Committee had requested NT to draft in plain language. He thought that the word “objectives” was more correct than “objective”.

The Chairperson said that there are substantial overlaps between the FSCA and Prudential Authority. He questioned what (f) meant, requiring a regular review of the “parameter and scope”. He asked for this question to be noted and responded to later; he did not want to engage in discussion on that now. The Bill also referred to “regulate” and “supervise”, but to what extent would this apply, as these institutions have to be, to some extent, independent. When they regulated, was there a framework which brought them within a broad Ministerial supervision? 

Mr Momoniat said it was important to differentiate between the powers of regulation and supervision. “Supervision” is synonymous with “inspection”. There was a debate about whether to call the authority a regulatory authority or a supervisory authority. “Regulate” tends more to imply a legislative power, which allows the production of subordinate legislation. The regulator is effectively the Minister, and the intention is to have major decisions formalised through regulations or legislation. The “gory detail”, such as the definition of capital, currently fell under the Minister and the regulator should be able to decide what the definition ought to be, particularly if there is no major economic effect. The regulation needs to be done in such a way that when there is a problem with a definition, the public knows who to hold responsible.

Mr Momoniat reminded the Committee that when the PFMA was drafted the main issue was not dividing responsibility, because if two people were stated to be responsible the effect was that no one took responsibility. When regulation was done n the FSCA Bill, the regulators will be fully responsible and this is stipulated in the Bill. It is also important to see how they regulate, because there are many regulators who have no intention of consulting properly. This cannot be allowed, so watching the process is important. 

The Chairperson said a common theme was to question the latitude for regulation and the framework in which this was done. Some parties may argue for greater or lesser autonomy. 

Mr Roy Havemann, Chief Director: Financial Stability and Markets, National Treasury, said that Chapter 7 set out the regulatory functions in detail. “Regulation” is setting the rules. “Supervision” is making sure that the rules are appropriately implemented. Chapter 7 set out the narrow scope for the two authorities setting standards, which are regulatory instruments.

Ms Tobias said the issue was more about defining in clear terms what was meant by “regulating”. These authorities are competent, and should not have too many powers removed. However, it was also important to think of and pre-empt any unintended consequences. If there was too much power, how would there be consistent monitoring of the authorities? It was important that the definition should not limit either the regulatory body or government from intervening. This issue must be flagged. The definition must not lead to unintended consequences. Perhaps there could be guidelines on what was meant, to avoid potential conflicts. 

Mr Momoniat said it would be important to determine what the powers of the Minister, as government, and what the powers of the regulatory authorities would be. The Committee had spoken the previous week about operational independence. When a regulator acts and there are fiscal consequences, then the Governor of the Reserve Bank has to consult with the Minister of Finance. A lot of his Bill was also premised on broader consultation. Once all the powers are seen, then it should be clear what the respective roles of the Minister and the regulators would be. There were some grey areas. He illustrated that clauses 58 and 34 covered some quite similar points. For instance, (b) of both clauses required the authorities to regulate and supervise in accordance with financial sector law, although it is spelt out in more detail for the Prudential Authority, which includes market infrastructure. Subclause (d) was slightly different in the two clauses, with the inclusion of the competition authority. The key issue was how is all of this would be funded. The FSCA would be the entity doing the collections. It would then transfer the Prudential Authority’s portion to the SARB. The question of how much would need still to be dealt with. However, NT was remaining, for the moment, with what the FSB was currently levying for different types of activities. For example there were levies for pension funds being registered or administered.

Mr Havemann added that currently, every single financial sector institution would be levied a fee on a different basis. For pension funds, the levy was R14 for every member of the fund, per year. This was done to fund the FSB to perform its supervisory functions.

The Chairperson asked if the levy would be substantially increased, following the amendments proposed.

Mr Havemann said the current projections indicated that it would not have to be increased substantially. A meeting was held with the FSB on the plans for the size of the organisations. As the Bill progressed, NT would update the Committee on the plans and costing of the new authorities.

Mr Momoniat explained that NT did not want the authorities to start levying a large amount and then not know how to spend it. The capacity of the regulator would develop. The scope of the regulators was currently increasing significantly, so it may be that entities would in future pay more to be regulated. It would depend how they were to be charged. In respect of the banks, SARB holds the capital and this does not bear interest, and SARB uses that money to fund its supervisory mandate. NT will want to develop a Paper as the Committee considers the Bill. The starting point will be the current levies. In the move to a risk-based approach, the regulatory fees will increase. The Committee would see how much the fees had increased in the UK when it carried out its study tour.

Ms Tobias suggested that this issue must be flagged.

The Chairperson said there were several themes emerging from the briefing. These should be noted and organised before the hearings in the following week.

Mr Momoniat said Treasury had been asked a question about the scope for savings, because rationalisation is important and should be looked at in future. The important aspects of clause 58 were found in subclauses (i) and (j), which deal with fair outcomes for customers and financial education strategies respectively. He wanted Members to continuously compare the clauses for each of the regulators, because they must, in a sense, be co-joined.  twin regulators have to be conjoined in a sense. The regulators cannot act in isolation, because their regulatory functions impact on each other. Regulatory co-ordination was important lest one regulator were to undo what the other did, with disastrous result.

Mr Havemann highlighted the similarities between clause 58(3) and clause 34. FSCA must exercise powers conferred upon it in terms of any other law. Subclause (4) dealt with the need for the FSCA to work closely with its counterparts in other jurisdictions. The Bill set out requirements in later clauses for FSCA to have memoranda of understanding with its counterparts outside South Africa. Subclause (5) required it to take into account the National Credit Act and its regulatory requirements. Clause 58(5)(b) required an outcomes and risk based approach to regulation, which means the FSCA is to prioritise its resources in relation to the risk. Regulators regulate all entities, and should differentiate their approach according to factors such as the size of the institution. This will also be seen in the Insurance Bill to be presented. Clause 58 (5)(c) requires the FSCA to take relevant circumstances prevailing within the Republic into account also. 

Ms Tobias said she hoped that there was not too much focus on setting rules, but also ensuring compliance and asked who would be looking at this, particularly with the smaller institutions?

Mr Havemann said that with smaller institutions the Prudential Authority would not be involved much, but this would be handled by the FSCA. With micro-insurers, the real concern was how the products were sold to the customers.

Mr Momoniat said that the risk-based approach meant that the Prudential Authority should not worry about individual players and ignore the big risks. Clause 58(6) indicates that the FSCA must perform its functions without fear, favour or prejudice, but this must be done within the framework of cooperation. These are all issues which must be taken into account when deciding on the extent of the regulators' independence. Previous experience of a single regulator's actions should not sink the entire system. Stability would be important and would moderate the manner of regulation.

Ms Tobias asked if this would be covered in the guidelines.

Mr Momoniat said guidelines should be produced. Chapter 5 deals with coordination and cooperation but applies to all regulators in the field.

Ms Tobias also asked for this to be added to the list of matters to be flagged.

The Chairperson asked what is meant by “outcome based”. He noted the references to the National Credit Act and the National Credit Regulator (NCR). In the previous week the question had been raised as to where the NCR should exist, and he wondered if Cabinet had discussed its location. He also asked for clarity on what was meant by “financial institutions” in clause 58(5)(a).

Mr Havemann said the outcomes based approach is intended to achieve the objectives of the Authority, as indicated in clause 58. The financial institutions are those which are authorised credit providers, and all credit providers are usually also financial service providers. This means that they also have a license from the FSB under the Financial Advisory and Intermediary Services Act.

Mr Momoniat said NT has not tried to focus on rationalisation. It does not want to try to address everything at once. On the regulatory side there is a lot of transition risk, which does not apply to the NCR alone. There is a plethora of concern. It is important to look into rationalisation from a cost point of view, because in theory one regulator might also cover others. The National Credit Act is important in relation to how the NCR coordinates with others. In the UK, regulation was done in stages, but NT is not doing that. He pointed out a corollary – that the Council for Medical Schemes may become obsolete if there is National Health Insurance, but medical schemes are a financial product. This Bill does not try to get involved in medical schemes, but adopts the idea of a Twin Peaks approach. There is a lot of confusion around whether regulators are prudential authorities or conduct authorities. The tools form twin peaks, and can be applied to many of the regulators. At a later stage, there may be discussion about improving the current arrangements, but Treasury did not want that as the starting point.

Ms Tobias said that personally, she would prefer all these regulatory bodies to belong under one organisation. Perhaps this should be examined further, and a comparative study should be conducted. At present the structure of government departments is very interesting – for instance, the Department of Trade and Industry has an initiative to grow black industrialists, but the bulk of the funding lies with Industrial Development Corporation, which falls under the Department of Economic Development. At what point should there be synergy? Perhaps it would be better to encourage effective coordination.

The Chairperson said rationalisation was another theme which the Committee could note. The Committee would like to hear whether the NCR was worried about any points, given its inclusion in so many parts of the Bill.

Clause 59
Mr Havemann said he would first explain the governance arrangements for the FSCA as contained in clause 59 and then illustrate how the Prudential Authority differed. Clause 59 requires the FSCA to manage its affairs efficiently and effectively. There is an executive committee, established under clause 60. Many powers reside with that committee, but certain of the powers have been given directly to the Commissioner. A governance committee would handle risk, remuneration and audit committee for the authority. Clause 60 set out the composition of the executive committee, basically the Commissioner and Deputy Commissioners, and a set of responsibilities for the executive committee. Clause 60(4)(a) requires the executive committee to generally oversee the management of the Authority. Clause 60(4)(b) states that the executive committee acts for the FSCA in a stipulated set of matters. He noted that the executive has certain responsibilities, while the Commissioner has other responsibilities. The executive committee can authorise the Commissioner with the power to sign, delegate responsibilities to the Prudential Authority, make and amend joint standards, adopt the  regulatory strategy of the authority, adopt the administrative action procedures of the authority and appoint any of the subcommittees it is required or allowed to appoint. It can also determine fees, which are different from the levy, for services. The executive committee can also make regulatory instruments under specific laws, where it is the responsible authority, and deal with any other matter assigned in terms of the financial sector to the executive committee. Each of these items was bolstered with further information; for example there is an entire Chapter on the making of standards.

The Chairperson noted that clause 60(4)(b)(vi) states that the executive committee can appoint subcommittees permitted or required by law. He asked if only these were allowed, or whether it could also appoint administrative subcommittees which are not permitted or required by law.

Mr Havemann said this was covered in clause 68.

The Chairperson asked for this to be added into clause 60, as it seemed relevant to that clause. 

Mr Havemann said this can be done. 

Ms Tobias asked about clause 60(4)(b)(vii) which allows the executive committee to make determinations of fees in terms of a financial sector law. She asked how this was done in other countries and whether this would be done in consultation with the sector?

The Chairperson asked for examples of the fees that were contemplated here.

Ms Tobias clarified that she was asking whether the fees would be determined in consultation with the sector.

Mr Jonathan Dixon, Deputy Executive Officer: Insurance, FSB, said at present the fees levied were akin to payment for use. For instance, if an insurance company made application to the FSB to transfer policies, change name or add a new class of business to its license, then the FSB would charge a fee for the time and resources spent on processing that application. The FSB believed that it was not right that other companies should pay for the time spent on applications which were not their own. This was also the international norm, where there was a general levy to fund general activities, but then fees for processing of specific applications. The fee is prescribed through a board notice, which would in future be a standard, so it was subject to consultation.

Clause 61
Mr Havemann said that clause 61 deals with the appointment of Commissioner and Deputy Commissioners by the Minister. NT had designed the Bill to cover between two and four Deputy Commissioners. Mr Momoniat had previously highlighted that this was a shift from the current position at the FSB, which had a hybrid of an executive board, which was the legal entity, and an executive officer who had certain responsibilities. NT planned to make this much clearer and have between three and five Commissioners who would head he organisation. This was modelled on the Securities and Exchanges Commissions in the United States and Australia and with some parallels to the Financial Conduct Authority in the UK. Most authorities internationally had an executive board which managed the entity. There were further provisions to cover the position if a post becomes vacant, providing for the usual grounds for disqualification, and also noting that the Commissioners must be resident in South Africa. Subclause (7) dealt with a performance management system, and required the Commissioner and Minister to agree on performance measures to guide performance.

Mr D Maynier (DA) asked what “appropriate experience in the financial sector” meant and how this could be objectively determined.

The Chairperson asked whether a foreigner, although resident in South Africa, could be appointed. The person would be of equivalent status to a Deputy Governor of SARB, and there were rules which governed that position.

Mr Momoniat said a foreigner could be appointed if certain financial sector skills may be required. When Tito Mboweni was the Governor of the SARB, one of his Deputy Governors was from the United Kingdom. Residency was required because the Deputy Commissioner would be full time. It might be desirable to have a foreigner not resident in South Africa to serve on the SARB’s monetary policy committee or the stability oversight committee, because it would be a distinct advantage to have someone who could understand what was going on in the foreign markets. He shared the concerns about “appropriate expertise” and agreed that this wording was not particularly meaningful; a person might have expertise in being a commissioner at another regulator, but would it be appropriate? Clause 61(4) allowed for the process for appointment of a Commissioner to be prescribed by regulations. He had said last week that the Committee should consider the SARB process for the board members here; it was particularly in a regulator to know that the right people were on board. The only way to do this was to formally interview them. He felt the SARB had a good process, and suggested that this should be outlined in the Bill, modelled on the SARB. He was not sure whether it would help to have Parliamentary involvement as that might make the appointment too politicised. A person must have passed the fit and proper test at least. If one Commissioner had banking skills, then it may be unnecessary to have another Commissioner with banking skills. As various forms of market conduct were being controlled, a broad set of skills would be required. This issue should be looked at later in the process.

The Chairperson said his experience was that phrases like this, once used once, tended to be repeated elsewhere. “Appropriate” could be dropped but “expertise” was still vague. If appropriate expertise could be explained that would be better.

Mr Dumisani said the issue of foreigners being appointed was raised in the discussion with the Governor of the SARB, and concerns were raised around the ability to get the requisite skills into the country. He wondered to what extent governing organisations were ignoring local skills.

Clauses 62 to 64
Mr Havemann said the Commissioner’s responsibilities are set out in clause 62. They are responsible for the day to day running of the FSCA and perform the functions of the Authority, in line with clause 60(4)(b). The executive committee may also assign specific responsibilities and implement the policies and strategies of the executive committee.

Clause 63 set the term of office as five years  with one term of reappointment. A Commissioner can also resign or be removed from ice. The Minister must give the Commissioner three months’ notice before the end of the term.

Mr Maynier asked whether, in clause 62(2), there was a specific reason to refer to “assign” instead of “delegate”.

Mr Momoniat said the intention is to have the Commission act collectively when making decisions, and the big decisions cannot be delegated. Another issue to be discussed later is whether there is enough protection to prevent delegation. The Deputy Commissioners will have specific skills and they may be assigned specific functions to administer, but ultimately decisions will be made collectively.

Mr Havemann said that under clause 64, the Commissioners hold office under terms and conditions as put in writing by the Minister and these may not change during their term of office.  

Ms Tobias said clause 64(2) provides that the terms of office cannot be changed during the term, but the Minister might decide this term was too long and want to review. Was this not limiting the powers of the Minister as and when they are required? 

Mr Havemann said to some extent removal from office dealt with this situation, but the intention was to protect the Commissioner from a random reduction in terms of employment and thereby uphold the independence of the office.

Mr Momoniat said that in the financial sector there are many potential conflicts. This goes back to the operational independence, despite the pressures. A real distinction must be maintained between the policy function and the operational function. The Commissioner should not have to worry that a decision made contrary to the Minister's own view would not lead to his / her removal by the Minister.

Clause 65
Mr Havemann moved on to removal from office under clause 65. On one hand the intention is to protect the Commissioner from the Minister, but on the other to ensure that a failure to do the job properly could be met by removal from office. The Bill followed other legislation in prescribing a procedure for the Minister to follow in removal. Essentially, there are a number of tests in subclause (3), including the Commissioner being unable to perform the duties of office for health or other reasons; failing to achieve the desired level of performance; failing to perform responsibilities; acting inconsistently with holding office. The same applies to the Deputy Commissioner, but the Deputy Commissioner reports to the Commissioner, and the Commissioner would in this case instigate the process.

The Chairperson asked why there was a report to Parliament, if Parliament was not appointing the Commissioners.

Mr Maynier asked why Mr Momoniat seemed to be sceptical about involvement of Parliament in the appointments.

Mr Momoniat said there are different models and South Africa needed to decide how it wanted to make appointments to certain posts. In the USA, appointments were made but Senate had to confirm them, which was a check to ensure that the wrong person would not be appointed. However, this became highly politicised. On the other extreme was the Minister making all the appointments, which also had its own pros and cons. The issue was how to get people with the best skills. He would argue that a financial regulator had to know how to do the job and this was less political than a person who was heading a state owned entity. There was no consistent approach to these matters in South Africa. In the financial sector, NT was looking at SARB as a model, for its processes seemed to have worked quite well. It appointed a panel of experts. When  the SARB Act was amended the issue was whether to extend this beyond the board, and the model developed was that the panel would assesses all candidates for fitness and propriety, before the names were put forward to the Minister.  

Mr Unathi Kamlana, Chief Director: Financial Markets and Stability, SARB, explained that in the SARB, the panel is chaired by the SARB Governor, has to have a retired judge and three persons nominated by NEDLAC. The judge and an expert are nominated by the Minister. The panel obtains all nominations from shareholders and other directors, and then makes a recommendation to the shareholders, who then vote on the shareholder appointed board members. The rest of the board is appointed by the Minister. 

Mr Momoniat said there are different processes for appointment to a board, but the present context does not have shareholders. He proposed that the system of the panel should be used; with a decision later on how best to populate the panel. The panel would ensure that the right kind of skilled candidates passed the first hurdle. If Parliament wanted to confirm these appointments, then that was a matter for Parliament to decide. Removals were specifically to come to Parliament to avoid them being hushed up. At the very least this should be publicly known if someone had been fired for the wrong reasons, and it was a further check.

The Chairperson said that another point to note and flag was then the role of Parliament in the appointment and removal of Commissioners.

Clause 66
Mr Havemann said clause 66 indicates that the Commissioners can meet as often as they need to, and can use conference call facilities. The quorum is set out and meetings are chaired by the Commissioner, or a Deputy Commissioner in his or her absence. The Commissioners can invite anybody to attend, including a member of the Prudential Authority, the SARB or NCR. They can regulate proceedings as they wish, but must keep minutes.

The Chairperson particularly liked clause 66(1)(b).  

Mr Havemann said decisions are made by majority, with the Chairperson receiving a casting vote in addition to a deliberative vote in the event of an equality of votes. 

The Chairperson said he wanted to withdraw his earlier comment on the need to include other committees under clause 60, now he had seen this in context.

Clause 68
Mr Havemann said clause 68 deals with governance and other subcommittees. These are appointed by the Director General, because it is not really a ministerial function. These are standard risk, remuneration and audit committees. 

The Chairperson said there was a grammatical error in clause 68(4). He asked about clause 68(5), and who would chair the committee if it was not to be chaired by the Commissioner, a Deputy Commissioner or a staff member of the FSCA. 

Mr Momoniat explained these were external committees, like the audit committee. 

The Chairperson said the Bill was beautifully drafted and he would like to know who had drafted it.

Ms Tobias took over as Acting Chairperson at this point.

Clause 69
Mr Havemann said clause 69 provided for the duties of Chairs of committees. They must, amongst others, be honest, act in good faith and in the interest of the FSCA. These were useful tests if there was a need to set up a Commission of Inquiry.

Prudential Authority Clauses: Clause 35
Mr Havemann then wanted to outline the clauses dealing with the Prudential Authority. This was a different body but many of the same principles applied. He would simply highlight the differences. He had previously taken the Committee through the Bill up to clause 35 (part 2 of Chapter 3).

The appointment of the CEO of the Prudential Authority is slightly different to that of the FSCA. The Governor of the SARB would initiate the process and appoint a new Deputy Governor, different from the Deputy Governor responsible for financial stability, as the CEO of the Prudential Authority. When the person is appointed. performance measures have to be determined. He particularly highlighted that the primary relationship is between Governor and Deputy Governor who can be seen as the non-executive Chair of the Prudential Authority. 

Mr Momoniat noted that the SARB dealt with monetary policy and with financial stability. The other twin peak was dealing with the Prudential Authority. The provisions are similar, but there is definitely a need to take into account that the SARB works in a particular way. The fact that the Head of the Prudential Authority is one of the SARB Deputy Governors means that it is not quite such an open process as when the Commissioners are appointed to the Commission. The Deputy Governors are appointed according to a particular process under the SARB Act. Much of this deals with the internal arrangements of the SARB and how it feels this would work. There will be one Deputy Governor for the Prudential Authority, the second who is responsible for financial stability and a third for financial markets. The aim at present is to show the similarity in the clauses.  

Mr Havemann said that the Prudential Authority would not have an executive committee, but the prudential committee, which has the same functions. The terms of office and removal process for the CEO is the almost same, except for the fact that it is initiated by the Governor of the SARB. 

Ms Katherine Gibson, Chief Director: Financial Sector Conduct, National Treasury, added that the leadership of the two authorities is similar in that the full authority vests within the Authorities, but the way the powers and functions are allocated differs. In the FSCA the full powers are exercised by the Commissioner and Deputy Commissioners on an executive basis. In the Prudential Authority, because it resides in the SARB, there is a split between the executive and non-executive functions. What Mr Havemann described as the CEO would be responsible for executing the executive functions, and that would be separated from the more non-executive functions of the SARB Governor. The reason for this was to keep a measure of independence between the Prudential Authority and the SARB.

Mr Havemann said both the Prudential Authority and the FSCA must have a regulatory strategy, which essentially a statement by the two authorities of what they are going to do, how they are to do that and how they are going to make decisions. It is a statement to the world about how they are going to function. There is already something similar in the PFMA, where government departments present strategic plans, but this will be more extensive. Australia has something similar, which is called a Statement of Intent, and other authorities also make statements on how they function. Clause 41 requires the Prudential Authority to do this, and clause 70 covers the requirements for the FSCA.

Adv Frank Jenkins, Parliamentary Legal Advisor, asked how the regulation strategy of the FSCA, which is a public entity under the PFMA, ties in with the requirement for a strategic plan. Both Bills contain clauses that negate anything in conflict with their own provisions.

Mr Havemann explained that the Prudential Authority is not a PFMA entity. Despite this, it is being required to have something akin to a strategic plan. 

Adv Jenkins said the FSCA would be a PFMA entity, and therefore in terms of the PFMA it must have a strategic plan, which will be submitted to Parliament under the Ministry of Finance. He asked if its plan in terms of this Bill would be the same plan that Parliament should look at. 

Mr Havemann said clause 70(6) states that if the Minister agrees, the two planning documents can be combined. 

The Chairperson asked if the Prudential Authority is defined as a juristic person.

Mr Momoniat said it is, as set out in clause 32(2), which makes this is a juristic person within the SARB. This was a point that he suggested should be discussed when the SARB Governor came to the Committee, since this would relate to how the Governor organises the SARB.  

Mr Havemann said when the UK set up its prudential authority within the Central Bank, it was made a full subsidiary of the Bank of England. In NT’s meeting with its UK counterparts it was indicated that that was a very ineffective model, which the UK was now seeking to amend, by combining the two more closely. 

Mr Momoniat said that would be something for the Committee to note on its study tour. There had also been some interesting ways of fostering coordination, such as having a Deputy Governor responsible for financial stability and the prudential authority. There was another discussion on whether the Prudential Authority’s CEO should also be a Deputy Commissioner and that too could be raised and discussed. In the Bank of England, the Bank's Governor is also on the board of the Financial Conduct Authority. Furthermore, the CEO of the Financial Conduct Authority is on the board of the Prudential Authority. The UK is now getting rid of its board structure but it had been useful to have members on multiple boards as they then had to take each other seriously. NT had not thought that the board approach worked with regulators, for a variety of reasons, and it seemed that the Bank of England had come to the same conclusion. 

Ms Jeannine Bednar Giyose, Director: Financial Sector Regulation, National Treasury, said she wanted to clarify the relationship between the Bill and other legislation. Clause 9 was not intended to be a general “override” to all other legislation but referred to the relationship between this Bill and other financial sector laws as listed in the Schedule, and subordinate legislation under those Acts which might conflict. Any standard to be issued under this Bill would override other subordinate legislation created under other financial sector laws.

The Chairperson suggested that this should be specifically noted, for clarity. 

Adv Jenkins said Parliament was currently reviewing its own governance structures, including the Draft Treasury Norms and Standards, and this may lead to requirements which were not captured in the Bill. There was no specific problem at present, but it would be an interesting interpretive exercise to ensure that, at the end, there was compliance with all applicable legislation.

The Chairperson asked if it boiled down to a question of interpretation. 

Adv Jenkins said the synergy between the Bill and the PFMA could be highlighted as a possible theme to follow up on, particularly in regard to the FSCA.

Mr Momoniat said NT was concerned that no entities should bypass the PFMA and certainly Treasury should not be setting as a precedent. He agreed with Adv Jenkins that the PFMA was reliant on Chapter 13 of the Constitution, which deals with Treasury norms and standards. The SARB is excluded, because it is also a constitutional institution, and the SARB Act applies to it. The PFMA says that a State Owned Entity or Schedule 3 entity does not require a full Board. There are two categories. Smaller entities do not need a Board fully compliant with King III. He would argue that the regulatory strategy is not really a strategic plan, but it will affect the strategic plan. 

Ms Gibson highlighted that the intention behind the regulatory strategy is not to displace the PFMA requirement but it will in fact set a higher standard and make it clear what is expected out of some of the PFMA deliverables.  NT is looking at something which is not just a governance requirement, but which is more accessible from a public governance perspective. This is a streamlined version, taking from the PFMA, which is of course of general application. The regulatory strategy takes some of the PFMA elements and more closely defines them, under this legislation. She reminded the Committee that the regulatory authority will not act in isolation but in line with a joint strategy, operating collectively with other regulators. The aim is to provide more cohesion across the field. 

The Chairperson asked whether the bar is being set higher than it is in the UK.

Ms Gibson said NT is trying, from its practical experience, to deliver best practice. The regulatory strategy is a good tool to keep the authorities honest.

Mr Havemann noted that clause 70(2) tries to give a framework for what the regulatory strategy should contain.  

Mr Maynier noted that the CEO must publish the strategy and each amendment. In practice, he asked how this would be done.

Mr Havemann said that a previous draft of the Bill had defined “publish”, and it essentially meant making it publicly available, by posting on the Authority's website. “Publish” no longer meant “publication in the Government Gazette”. The move was towards electronic publications.

Mr Momoniat said the Department of Justice was in a process to move towards e-gazettes, because of the R1 million cost to print some current Government Gazettes.

Mr Havemann added that clause 277 is an innovation, which provides for a register being created, on a centrally publicly available platform. It cannot currently replace the Government Gazette, but it is a quasi-gazette for the National Treasury. 

Ms Bednar Giyose said clause 277 clarified that if there was a requirement under the Bill or other financial sector laws to publish a document or information, or to gazette, this must be read as  “publishing on the register”. Something can also be published on the website of the regulatory authority, or in any other way deemed effective to bring it to the attention of the public or interested parties.

Clause 71
Mr Momoniat said the rest of the clauses were fairly standard. He just wanted to highlight clause 71, , which indicated those things which could not be delegated. For example the Commissioners cannot delegate the power to make standards.

Other clauses reproduced standard clauses from other legislation regarding the disclosure of interests, provisions for staff and resources and the submission of information. Clause 48 dealt with what the Prudential Committee may delegate. The staff and resources are provided by the SARB under clause 51. Furthermore, as the PFMA does not apply to the Prudential Authority, the Bill had to set out the financial reporting duties of the Deputy Governor, such as submitting financial statements and the accountability chain. 

Chapter 5: Cooperation and Coordination
Ms Gibson said the financial sector is broad and there are a number of regulators responsible, even though these are being streamlined. Furthermore, there are other organs of state which impact on the financial system, and there are various functions which need to be coordinated within the regulatory mandate.

Slide 16 of the presentation highlighted the creation of various bodies aimed at supporting the various responsibilities. The Financial System Council of Regulators brings together all regulators which affect the financial institutions. The Financial Stability Oversight Committee deals specifically with the stability issues and is chaired by the Governor. She emphasised that the Financial System Council of Regulators is a much broader platform, given the number of players. The Financial Sector Inter-Ministerial Council has been proposed to deal with coordination at a ministerial level, between the Ministers responsible for the Prudential Authority and the FSCA. These are the the Minister of Finance, the Minister of Health who is responsible for the Council of Medical Schemes, and the Minister of Trade and Industry who is responsible for consumer and credit affairs. These various entities are platforms for discussion. An extensive Memorandum of Understanding has been designed to ensure support between the various agencies. It must also be kept in mind that there are express legislative duties placed upon the regulators to coordinate and support each other’s regulatory functions. The function clauses expressly require this for both authorities. 

Clause 76
Ms Gibson moved on to specific clauses. Clause 76 fundamentally requires the co-recognition of another regulator's functions, when a regulator is exercising its powers. The financial sector regulators and the SARB must cooperate and collaborate when exercising their functions under the financial sector laws, as also under the National Credit Act, which is not included as a financial sector law. Sub-clauses (a) to (g) give greater clarity to what “cooperate” and “coordinate” means - such as general assistance, sharing information and consistent regulatory strategies. The reference to minimising the effort and expense, under subclause (e), is a recognition that the boundaries between the various regulators are blurred, even if the functions or objectives are not. Therefore, there must be flexibility and there is a requirement to cooperate, not only to minimise the potential for contradiction, but also to minimise the potential for the actions of one regulator to impede on the actions of other regulators. In financial institutions, it is important that regulatory and supervisory oversight is streamlined to minimise the compliance burden.

The Chairperson asked who determines collaboration and who determines the programme for collaboration,. It is easy to state this as a matter of principle, but there could be problems if there is no clarity about how many meetings there are, who convenes the meetings and the like. Perhaps regulation could clarify the position, but seeing that market conduct is being dealt with, he wondered who would convene meetings when such an issue arose.

Ms Gibson said it is very clear that the jurisdictional boundaries need to be set, so that the responsibility and execution of responsibility are clear. National Treasury has gone to significant lengths to stipulate this. It will then be a matter of dealing with the inevitable overlapping mandates. NT did try to map out, in more detail, how this should happen, but it should be recognised that the regulators are adults and can execute their responsibilities in a reasonable manner. The Bill was not crafted to try to dictate how each and every aspect of coordination is to happen, but rather to require that the conversation happens. This is provided for through the MoUs, which must expressly cover the aspects mentioned in clause 76. It is not for government to say that the regulatory authorities have to do certain things when they are about to take an action, but to have the flexibility to act appropriately, as every situation is different. 

The Chairperson asked whether, for example, there had been collusion in the bread industry and the public felt that this should be on the table of the regulators, public pressure could be taken into account.

Ms Gibson said this was an important question. NT had considered it, to not have an overly limited view of the supervisory function. This had been covered not so much here, but elsewhere in the Bill.  Earlier obligations placed on the authorities to review the regulatory scope and parameters were discussed. The focus was increasingly not only on executing the current law, but also looking forward and questioning where the prudential or conduct risks emanated, and then taking measures to address those risks. Too often, the avenues of engagement had been too narrow. NT had now provided for a broader reach for engagement. Consultation panels were provided for consumer groups and the like, which were important measures, and showed the expectation that  authorities should increasingly be reaching out and taking stock of public sentiment.

Clause 77
Clause 77 set out how the MoU would talk to how these cooperative relationships are to be described.  Clause 77(1) indicates that they should be introduced as soon as practicably possible, but not later than six months after the legislation came into effect. It also provided that delegations need to be described in the Memoranda. The MoUs must be updated and reviewed at least once every three years, in terms of clause 77(4). Subclause (5) provides for the sharing of the Memoranda with the agencies involved and ministers involved. The agencies need to publish the Memoranda in pursuit of transparency.

Mr Momoniat said the MoUs are relied upon. He suggested that the Committee, on its study tour, should check whether, in the UK, the MoUs between their various regulators had worked, for it seemed clear that overall, they had not. In one sense, the issue with regulators is to get the right culture. NT found that in the UK the coordination failures were so marked that the new legislation had to stipulate how they should cooperate. In Australia, however, there had been a culture of the regulators working together, helped by the fact that all their offices were within walking distance from each other. Often the law may say one thing, but the culture prevails and it is more important in the context of coordination. The provisions are put in as a minimum, with more being expected by the regulator. 

The Chairperson said the issue is how to inculcate this culture of collaboration.

Clause 78
Ms Gibson said clause 78 refers to other organs of state and requires any such bodies which have a regulatory or supervisory function in relation to a financial institution to consult the financial sector regulator and the SARB in the performance of that function. This is particularly to the extent that it may impact on the execution of the financial sector regulator mandate. Subclause (2) provides for requesting information from such an organ of state and subclause (3) requires compliance with such request.

Dr B Khoza (ANC) noted the wording of clause 78(1) “financial institutions… must to the extent practicable consult”. Who was to determine what was practicable?

Ms Bednar Giyose said this was intended to convey that the institutions must make an effort as soon as reasonably possible. It emphasised that they must take steps, under clause 77, as soon as reasonably possible, to agree to a Memorandum of Understanding. Clause 78 indicated that they must consult, but what may be appropriate in particular circumstances may vary. These words tried to convey that it is somewhat dependant on circumstances. A more appropriate term could be considered.

Dr Khoza said that if two parties are in conflict, each may consider different things to be practicable. “Reasonable” may also be too subjective. These terms opened up space for argument.

The Chairperson said the assumption is that the people in the regulators will be reasonable.

Clause 79
Clause 79 deals with the Financial System Council of Regulators. Subclause (1) establishes the Council, subclause (2) states the objectives of the Council as facilitating cooperation and collaboration. Subclause (3) is defined as including the Director Generals for all affected Departments and all the affected stakeholders. Other persons may be brought in as necessary.

Mr Momoniat said that initially, this was called the Council of Financial Regulators, but the aim is to include anyone who may impact on the financial sector. This is meant as a forum to discuss issues or form subcommittees. Some of the regulators, such as the Competition Commission, pointed out that they do not just regulate the financial sector. Therefore, NT changed the name to Financial System Council of Regulators. He was concerned by clause 80(3) which requires the Director General to convene if one member requests it, for both the Financial System Council of Regulators and Financial Stability Oversight Committee. 

Ms Gibson said it is important to flag that both bodies are discussion bodies, and do not make binding decisions on the agencies involved. This was a deliberate decision, to ensure the continued operational independence of the agencies involved. 

The Chairperson asked what the implication of the word “must” is in clause 80(3).

Mr Momoniat said he differed from his team in this respect, and felt it ought to be “may”.

Mr Maynier said he took the point about the forums being for discussion, but perhaps a specific clause stipulating that they may not interfere with the operations ought to be included, for there was seemingly nothing otherwise preventing them from doing so.

Ms Gibson said the Bill was aiming to balance operation independence, so that regulators were able to make operational decisions, which should be completely outside the scope of the executive. That was not to say that a particular regulator can operate completely unmindful of the effect of its actions on other regulations, or outside of a policy framework as agreed to through the legislative framework. Regulators must communicate and be mindful of each other’s objectives, but must take operational decisions independently. Specific clauses earlier in the Bill addressed this point. There will be times when the regulators, each with their respective interests, disagree, but it was critical that they should not hide behind closed doors and that the discussions must happen in a transparent and fair manner.

Clause 80
Ms Gibson said that clause 80 deals with meetings. These should happen at least twice a year, or more often as the Director General determines, and the Director General or an alternate must chair them. Subclause (3) requires the Director General to convene a meeting at the request of a member. She said that the Committee could discuss whether “must” or “may” was preferable, but the intention was to keep a balance of power between the various parties and that it is not a NT driven forum, given the overlapping functions.

Clause 81
Clause 81 deals with the establishment of working groups or subcommittees, because the nature of the meetings of the Financial Stability Oversight Committee or the Financial Services Regulatory Council is that these will not be where the spade work will be done. Clause 81(1)(a) to (g) describes at least where collaboration must happen, including policy and legislation, standard setting and financial inclusion.

Mr Momoniat added that with all financial legislation there were many advisory committees which the Minister was to appoint. This was an attempt to make the advisory side less prescriptive. It did not work to have legislation on how people must provide advice. This provision said that advice would be provided when needed.

Clauses 83 to 86
Ms Gibson moved on to Part 3, which deals with the Inter-Ministerial Council. Clause 83(2) provides for the objective of cooperation and collaboration. The members are the Minister of Finance, the Cabinet Member responsible for consumer protection and consumer credit, the Cabinet Member responsible for health and the Cabinet Member responsible for economic development.

Clause 84 describes how the meetings will take place.

Clause 85 provides that the Cabinet Member responsible for consumer protection and consumer credit can request the Council to consider whether standards are high enough and meet the baseline standard as provided for in the consumer protection laws.

Clause 86 provides for the Council to require an independent evaluation of the effectiveness of cooperation and collaboration between the financial sector regulators, SARB and the Competition Commission. 

Mr Maynier made the point that it was intended that there should not be interference with operational independence. He wondered whether the evaluation of collaboration did not present a danger of institutionalising some degree of interference.

Ms Gibson said it would not. The question was whether the operational decisions were being interfered with? The requirement for “independent assessment” also implied an arm’s length assessment of how the regulators were performing their collaborative function. This would look at how the regulators were performing, that they were not acting completely unilaterally but recognised that each had different roles and functions.

The Chairperson asked what Mr Maynier was worried about.

Mr Maynier said he was trying to deal with the issue of how far this might encompass interference in the regulator by the executive. What would happen if an independent evaluation determined that the regulators  were not cooperating effectively?

Ms Gibson said the Bill did not provide for definitive steps which the Council could take. It is not empowered, on an ad hoc basis, to tell the regulators what to do. It was expected, given that the regulatory agencies operate in an accountability structure, that this might be one of the tools with which to hold the regulators to account in a transparent way. NT is responsible for the policy and legal framework. The weaknesses need to be identified and tested. The aim is to not interfere, but to take the appropriate steps.

Chapter 6: Administrative Actions
Ms Gibson said this chapter provides for procedures, to ensure that administrative actions happen in a fair and consistent way. The Promotion of Administrative Justice Act will apply. These procedures should be consulted upon and provision is made for administrative action committees, which will be an additional source of expertise and independent decision making. “Independent” here implies that there should be space between those involved in the day to day supervising and the person who decides to take the administrative action, to ensure fairness. The administrative action committees therefore consider and make recommendations on actions referred to them by the agencies, to ensure fairness in decision making.

Clause 87
Ms Gibson said clause 87 provides for the establishment of the administrative action committees. Subclause (2) empowers the authority to delegate the power to impose administrative penalties specified in such delegation. Subclause (3) requires these committees to be composed of a judge, an advocate with experience and people who are not members of the executive committee or prudential committee. Subclause (4) deals with who may be appointed as chair of such a committee. Lastly, subclause (5) provides that a disqualified person may not be appointed to such a committee.

The Chairperson asked what will happen if a disqualified person is appointed to such a committee.

Ms Bednar Giyose said this was why the extensive definition of disqualified person was set out in the Bill and NT clearly stated that anyone disqualified could not be a member. If they became disqualified, their membership must be terminated. In some instances it has been expressly stated that they should be removed immediately, but the provisions can be double checked to ensure that the outcomes are very explicit.

The Chairperson asked how the practice could be curbed of using that institution's money to fight the disqualification objection.

Ms Bednar Giyose said there is a huge incentive for such persons to not remain there. If a disqualified person participated in an administrative decision the proceedings would be justiciable and reviewable on procedural grounds.

Mr Momoniat reminded Members of his suggestion that a panel be set up to handle the appointment process; this would be a way to deal with this. A person may be fit and proper but then become disqualified and he felt that a more automatic process of removal of such a person may need to be found.

Clauses 88 to 94
Ms Gibson said clauses 88 and 89 were procedural. Clause 88 dealt with terms of appointment and the terms of office. She noted that this is for someone who is not working for the regulator. Clause 88(2) deals with reappointment, stating that a person can be reappointed on expiry. Clause 89 deals with meetings and how they are held. Clause 90 deals with application to the Ombud. Clause 91 makes reference to the Promotion of Administrative Justice Act. Clause 92 provides for the regulator to determine procedures in a fair and transparent way aimed at promoting consistency. Clause 93 relates to the administrative action procedures. Clause 94 speaks to reconsideration of decisions, to ensure that the regulator may reconsider a decision it has made, without going through an entire administrative action procedure; this is meant to save time. Clause 95 deals with interpretation, and provides for an improvement on the present enforcement committee under the FSB.

Mr Havemann added on clause 94, saying that it is known as functus officio, and the wording follows certain requirements as laid down by the Constitutional Court, as to when decisions can be altered or subsequently revoked. 

Chapter 7: Regulatory Instruments

Mr Y Carrim (ANC) resumed the Chair. He asked NT to speak to the most important points of the Bill

Ms Gibson said the Bill provides for a streamlined and consistently applied rule-making power for the regulators. Presently all the registrars had different rule making powers, depending on what legislation was being considered. There are different levels for these powers, and consultation requirements differ as well. Under the Banks Act, subordinate legislation is made by Ministerial regulation. Under the Collective Schemes Investment Act, subordinate legislation is primarily made by the Registrar.

There has also been a somewhat ad hoc approach to the consultation process. Depending on which registrar is involved, a different interpretation of those consultation requirements may be applied. Chapter 7 is a particularly important Chapter, because it provides for the FSCA and the Prudential Authority to properly exercise the objectives and functions placed upon them and it does so in a way which standardises the approach to rule-making powers. These standards are an overlay to existing sectoral regulations, with the intention being to plug gaps. The Prudential Authority can issue standards, including those to maintain financial stability, for matters around liquidity, leverage and capital. The FSCA sets standards within its purview, which is the whole value chain, including the design of products, mediation and disclosure. One particularly important innovation being proposed is joint standards. There is a significant degree of overlap of functions, but viewed through a different lens. There is a need for both institutions to be involved, but this does not mean that there ought to be a completely different set of standards, due to the significant overlap. The process of rule-making is also being harmonised by prescribing the minimum consultation process.

Clause 97
Ms Gibson said clause 97 speaks to the minimum consultation process, which requires the Regulator, before publishing a regulatory instrument, to publish a draft, an explanation of the need and an invitation for submissions. An extensive consultation process is being put in place, because it is an important check to the extensive and meaningful powers given to the regulators. Clause 97(3)(a) again requires cooperation and coordination between the various agencies. Subclause (4) refers to the Ombud Regulatory Council. Subclause (5) requires the maker of the instrument to take into account all of the submissions.

Clauses 98 to 101
Clause 98 requires a similar process for the change of an instrument. Clause 99 refers to urgent regulatory instruments, because going through the extensive consultative process takes time and there will be urgent matters which will require immediate action. Clause 100 provides for the role of Parliament, requiring regulatory instruments to be submitted to Parliament with an explanation of the need and expected impact. Clause 101 requires a report of the consultative process, including a general account of issues raised and issues raised in the submission.

The Chairperson asked if there is a definition of “regulatory definition”. 

Ms Gibson said in effect they are standards being made in terms of the Bill, but there are a plethora of other regulatory powers under the sectoral Acts. What would be particularly important is the standardisation of the way in which those instruments are made. Whatever the instrument being made, these consultation processes should apply.

The Chairperson asked for an explanation of the difference between a regulatory instrument and regulations.

Ms Bednar Giyose said the term “regulation” is used to refer to subordinate legislation made by a Minister, and it is used consistently in that manner. “Regulatory instruments” are rules which are made by regulators under legislation. In this Bill, such instruments are termed “standards” and in other financial sector laws they are referred to as “rules”. The distinction is between subordinate legislation made by a Minister, as opposed to rules made by regulators. 

The Chairperson asked whether it is the Minister making all the regulations, which the regulators give instrumental expression to. He wondered if regulators also had latitude to make rules which are not inconsistent with the regulations made by the Minister.  

Ms Tobias asked whether the submission of the regulatory instruments to the National Assembly was intended purely for information, or whether there was an expectation that Parliament monitor the work done by the regulators.  

The Chairperson asked if the term “regulatory instrument” was used in any other Bill. This went to the broader theme of where the powers of the Minister end and where the powers of the regulators begin. 

Ms Gibson said it was not used in other bills, but that was deliberate. The Minister would have powers to make regulations, which are in effect law. Here, the regulators can make regulatory instruments which also essentially become law. It was possible to have a more nuanced discussion about the existence of a hierarchy, but that was the effect. The Committee might also want to discuss whether this was an appropriate power for a regulator to have. NT considered that it was in line with operational functions, and one that could allow the regulators to respond most rapidly to operational risk. NT preferred the route, which is acceptable internationally, that the authority have these powers. and while assessing its rules it should be judged as an authority exercising those functions in the appropriate way. The right checks and balances had been created to provide that the authority could work independently, but the consultation processes created additional transparency. A related question was whether the term “regulatory instrument” was the best term, and whether standardising the approach to rule-making required a term which had not been used anywhere else. Otherwise the term used adopted its meaning from where it had been used previously. “Regulatory instrument” was chosen to ensure that all these instruments would be absorbed within the framework. All these other instruments already in place and that did the same function were thus captured, no matter whether these might be Board Notices of the FSB, rules of the FSB or SARB directives. That meant that it had been difficult to harmonise the approach to these rules, but this term was chosen to replace all others used previously during the process of streamlining. 

Mr Momoniat emphasised that NT was trying to standardise but every Act had its own terminology. 

The Chairperson said he did not fully understand the response. He asked if the regulatory authorities did have the powers to make regulations as such.

Ms Gibson responded that they would not. Making regulations was a ministerial function.

Ms Tobias asked if “regulatory instruments” included rules made by regulatory authority. 

Ms Bednar Giyose spoke to the submission of such instruments to Parliament. NT did not want to regulate the process that Parliament was to use to interrogate the instruments. They would be submitted and Parliament must then determine its own processes to deal with them. This could include making comments, calling for submissions and considering the instruments themselves. Parliament may decide that some instruments are very important, while others may be less so.

The Chairperson said the question really went to whether Parliament had any power to amend the instruments. In the Second Parliament, the Speaker indicated that the executive would, if it felt that Parliament would not accept a particular provision, place provisions in regulations. Certain regulations were submitted to Parliament for noting, but the executive would not be obliged to accept the subsequent recommendations. In another type of regulations, they would remain drafts only until approved by Parliament. This distinction between the categories must be noted.

Mr Maynier asked if the term “submit” rather than “table” was intentionally used in clause 100.

Ms Gibson said the intention was that the regulatory instrument would be provided for scrutiny. NT would not have a problem with using “table”.

The Chairperson asked if there was a legal distinction between submit and table.

Adv Jenkins said only a Member may “table” something in Parliament, because according to the Rules of the National Assembly, the Speaker “tables” all other instruments submitted, including Bills. Therefore, Parliament determines what is tabled. Some legislation required Ministers to “table” a document, but in essence anything that came to Parliament and should be tabled by the Speaker and ATC’d.

The Chairperson said he thought that there is no difference between “table” and “submit”, regarding the powers of Parliament.

Mr Maynier said there may not be a legal distinction, but there was a practical implication. For many years the National Conventional Arms Control Committee “submitted” its reports directly to the Standing Committee on Defence, which then refused to distribute them to Members of the Committee or the National Assembly. 

Ms Tobias said when a report was “tabled” it would be placed on the ATC, and would then go to the NA to be considered if necessary. The connotation with “submit” was that the document was for information. Something would be brought to the NA in order to give effect to something else. If the intention of bringing that document was not made clear, different political interpretations could be applied.

The Chairperson said he felt there was a distinction between tabling and submitting, but said the wording used would depend on what the Committee wanted.

Mr Momoniat said he wanted to endorse that this was an important issue and the potential for abuse should be stemmed. At the time the Bill was presented, a document was published to explain the chapters, and this should be circulated. In respect of the financial sector, it was simply not sustainable that every time the regulators did something, it must come to Parliament. The Committee had to determine what must be in the primary legislation, what should be left for the Minister to regulate upon, and what could be left to the regulators. If it was clearly known who was responsible for what, they could be held to account.

Part 2
Ms Gibson moved on to part 2, which deals with the standard setting powers and the requirements which can be set through the Bill. The term “standards” is again deliberate, because the term “rules” tends to have a compliance focus. SA was moving away from mere compliance with rules, and towards overall compliance with the spirit of the law.  The prudential framework and the conduct framework were developing a set of binding principles and rules. Conceptually, it was being noted that it would not be enough just to be compliant with a rule, but that a minimum standard must be met. 

Clause 105 deals with the prudential standards, made by the Prudential Authority for financial institutions, market infrastructure, significant owners and key persons, aimed at ensuring safety and soundness, reducing the risk that those financial institutions could contribute towards financial crime, and assisting in maintaining financial stability. Subclause (2) then extrapolates on this.

Clause 106 is particularly important. Standards-setting powers are one of the main interventions a regulator can use to achieve its objectives. Clause 106 deals with FSCA standards, aimed at achieving the FSCA objectives. Again subclause (2) elaborates on what is meant and the type of standards intended, effectively governing the interaction between the financial institution and the customer. Subclause (3) provides that a specific form of conduct can be deemed to be unfair business conduct under certain parameters. Subclause (4) deals with standards relating to the National Credit Act, ensuring alignment.

Clause 107 deals with joint standards. Where there are overlapping areas of interest both regulatory authorities can make a joint standard. Governance requirements generally would be the obvious example. Clause 108 contains the standard setting powers which would apply to both the Prudential Authority and FSCA, such as operational requirements or control functions.

Clause 109 talks to the jurisdiction of the FSCA to make standards relating to make standards relating to payment services, which is a new area for the FSCA, and requires the concurrence of the SARB. Clause 110 is self-explanatory and allows different standards to be made for different categories. 

Ms Tobias said she had earlier asked about the determination of fees. She asked if SARB would get involved in the determination of such fees.

Mr Momoniat said the approach was still being finalised, but the two regulators will have to meet and decide on their respective budgets. Currently, each has a specific budget. SARB holds the capital from banks, interest free, and uses the interest from that to fund its supervisory functions. Part of the conversation concerns what part of the FSB should move over, given the fees it currently charges, as a function of the current Bill. The two authorities will need to work together to finalise this. The regulators will say that the executive should not interfere in that process, for independence reasons. However, the standards do differ. In Australia the market regulator gets its funding from the fiscus. The arrangements have not been finalised, but certainly the SARB will have to get more involved. 

Chapter 8: Licencing
Mr Havemann said at present there are multiple licencing authorities; with the main ones being the Council for Medical Schemes, the NCR, the SARB and the FSB. A slight reorganisation is now proposed. The Prudential Authority will take on the licencing responsibilities for certain legislation and the FSCA will take on licencing for other pieces of legislation. The Prudential Authority would take charge of the Banks Act, the Mutual Banks Act, the Cooperative Banks Act and the Financial Supervision of the Road Accident Fund Act. The Long Term Insurance and the Short Term Insurance Act are a bit difficult, because certain aspects relate to the health of the insurer, while others relate to the conduct of the insurer in relation to its customers. This ought to be remedied by the introduction of the Insurance Bill. The licencing requirements will remain as set by the industry-specific laws and therefore NT is not changing any of the licencing systems. New licencing requirements are being permitted, and most of the clauses apply to that. Other clauses apply to new licenses and renewals, with the dual key principle applying. That means that when certain licences are renewed, both authorities need to approve the process. 

The Chairperson asked what is meant by “The Bill delinks authority powers from licensing”.

Mr Havemann said that currently, almost all powers of banks re linked to the banks being licensed by the Bank Supervision department. The FSCA was now to have conduct standards which would indicate how the bank is allowed to sell its product. The powers would then derive from the standards, and not the licence. As the process moves forward the licencing requirements will be changed, but most industry stakeholders believe that these should not be changed at the moment.

Clause 111
Mr Havemann then turned to clause 111(1), which provides that an entity may not provide a financial service unless licensed to do so. There are also certain transitional provisions. Nobody may pretend to be licensed or allow another to infer the existence of a license. This related specifically to clauses seen in some advertisements that “this institution is a licensed financial service provider”. 

 

Ms Tobias said some retailers were still providing a financial service when they were unlicensed.

Mr Havemann said many retailers did have the requisite licenses.

Clause 113
Clause 113 provides that if a license is to be granted it must be in writing. Clause 114 allows the licensing agency to require additional information. Clause 115 indicates the factors to be taken into account when determining the granting of a licence, including the financial resources available to the applicant and whether it has made a false or misleading statement in the application. Clause 116 provides for the determination of the granting of a license and provides that the authority may not grant the licence unless satisfied that, among others, the applicant has sufficient resources to meet the requirements of the licence. Clause 117 provides that after a licence is granted the licensee must report to the licensing authority if it becomes aware that it is in contravention of a financial sector law, undertaking, court order, or has made a false statement in its application. Clause 118 provides that a licence is non-transferable and clause 119 provides for the variation of a licence, according to a procedure. 

 

Mr Topham asked if the non-transferability of licenses extended to the sale of shares, for example where a subsidiary of a bank is sold to another bank.

 

Ms Gibson said it would not, because there are specific provisions  relating to a change in the significant owners of an entity. In that instance the entity does not change, only the ownership.

Clauses 120 to 123

Mr Havemann said under clause 120 a licence may be suspended upon application by the licensee, on breach of a term of the licence or the contravention of a financial sector law or regulator’s directive, among others. Suspension would be preferred to revocation, because this gives an opportunity to the licensee to correct their behaviour. Even suspending a licence is a very extreme measure. A licence may also be revoked under clause 121 on the same grounds as clause 120, but also if the licensee no longer carries on the relevant business. The authority may refuse to revoke a licence if it is determined to be in the interest of financial customers or would frustrate the interest of financial sector laws.

Clause 122 provides for a person with a suspended licence to carry on conducting business for a certain period of time, because it would not necessarily be best to have a company stop operating immediately. Clause 123 provides for the process to be followed by the authority when suspending, revoking or varying a licence. Firstly, notice must be given with a statement of reasons, the licensee must be given a reasonable period of at least a month to make submissions, the submissions must be taken into account and it must be ensured that there is no prejudice to the customers. 

 

Mr Lees asked how long “a month” is. 

 

Ms Bednar Giyose replied that it is a calendar month, as defined in the Interpretation Act. 

Chapter 8 Part 3

Mr Havemann said part 3 of Chapter 8 deals with the dual key principle mentioned earlier. Clause 126 requires the concurrence of the other financial sector regulator when granting, suspending, revoking or varying a licence. If it is a systemically important financial institution, then the concurrence of the SARB is required.

 

Mr Maynier asked whether the Bill prescribes a minimum time for the authorities to respond to an application for a licence.

 

Ms Gibson said there is a clause saying that a licence can be applied for but if, after a certain period if where there has been no action taken by the Authority, it is taken as having not been approved. There were concerns as to whether this was fair to the financial institution, but this approach was deliberate, because it would allow the financial institution then to take the regulator on review. If the application time could merely be extended continuously, then the financial institution may be locked in a process with no concrete ground for review. 

 

Mr Momoniat said this concerned property rights as well. Clause 126 did require concurrence. For example it would prevent the NCR taking away a major bank’s licence, which would cause a systemic crisis.

Ms Gibson said the dual key currently speaks specifically to the FSCA and the Prudential Authority, because all of the powers and actions for those regulators are defined in the Bill. It would get more complicated when another regulator was brought in, whose powers were contained in an unrelated Act. However, this was an entry point and could be engaged on further. The National Credit Act was one such Act and it was specifically excluded, because it is not defined as a financial sector law.

 

The Chairperson asked for the statement that the National Credit Act was not regarded as financial sector regulation to be explained.

Ms Gibson said that in concept it did fall within financial sector regulation, but it was not defined in this way by the Bill. The reason was that if it were defined as a financial sector law, a whole lot of powers and functional responsibilities would be conferred on the regulators. For example this would empower the regulator to conduct on site inspections. 

 

Mr Momoniat said it is an important point. The biggest creditors are banks, and the Banks Act covers that. However, there is also credit by retailers, which it is not sought to cover. The harmonised system means that the system of appeals should be common. At the moment, NCR handles appeals through the Consumer Protection Tribunal. The question for the FSCA is how a regulator, in relation to financial institutions like banks, would work within the twin peaks system.

Chapter 14: Ombuds
Ms Gibson said National Treasury was moving towards a more integrated ombuds system. Currently, different ombuds for different parts of the industry are provided for, in different ways. Statutory ombuds such as the Pension Fund Adjudicator have their organisational structures provided for in statutes. Voluntary industry ombuds are funded by industry. Even within the two categories there are differences around the way the ombuds function and adjudicate. The current financial system is becoming increasingly consolidated, and this means there is an incredibly complex system for customers. A customer who has a concern with their product or service needs to know where to complain, how to complain and what kind of service to expect. This varies tremendously, and the customer has to firstly even identify the appropriate ombud. There is additional complexity, because of the bundling of financial products. She cited the example of a customer who purchases a loan which comes with credit insurance, and was given advice on the product to select. This transaction would be covered by several pieces of legislation. With the move towards a standardised system, the ombuds will operate on a minimum level of best practice. The Bill proposes repealing the existing ombuds legislation which provides for all these different things, but not the statutory ombuds at present. The Bill then proposes the establishment of an Ombuds Regulatory Council as a statutory body which will impose requirements on all these ombuds, thereby securing the minimum best practice. For example, it will standardise complaints processes, timeframes and information submitted to regulators regarding complaints. This is what the Ombuds Council is intended to do at the moment, but its powers are not defined very well and it has no power to enforce this. A Chief Ombud will be appointed to head the Council, and all ombuds schemes will be required to be registered under the Council and be subject to its standards. The Council will be able to issue directives, enforceable under the legislation. What is provided for in the Bill is seen as a stepping stone, because there has been a lot of discussion around whether industry ombuds or statutory ombuds work best. It is difficult to accommodate both industry ombuds and statutory ombuds, so one must be selected in future. The problem with having only an industry ombud is that there are products which may be developed in a sector which lie outside the scope of industry ombuds, and a mechanism is needed to cater for this. 

 

Mr Momoniat said part of the issue around market conduct would involve the FSCA checking how firms deal with complaints. When a matter goes to an ombud, it means that the company’s internal complaints processes have failed. The first objective is thus to ensure that companies have proper processes to deal with complaints. In relation to the debate of whether to prefer statutory or industry ombuds, he said that when there is an industry ombud, the industry comes together and agrees that the rulings of the ombud will be adhered to. Where there is a statutory ombud, people tended rather to take issues to court. There were pros and cons to both. If too many matters came to any ombud, this would be indicative of a problem lower down with the market conduct, which is dealt with by another regulator. There also needed to be better communication between these two authorities.

 

The Chairperson said generally the assumption could be that a statutory ombud is more likely to be fair and impartial, because the industry has a vested interest.

Mr Momoniat said that with a statutory ombud, there was not necessarily buy-in from the industry and the financial institutions did resort to the courts, making the whole process of contract content very formalistic. When dealing with market conduct the first question is whether the contract was fair to the customer to begin with. The ombud also meant that people would not be forced to use lawyers, and it did allow for a quicker process.

The Chairperson asked what most countries did who had adopted the twin peaks model.

Mr Momoniat said South Africa’s industry ombuds were too fragmented and it must be remembered that the funding also came from the industry. It must be ensured that there was no direct industry funding; this could be covered by a levy so that the ombuds did not feel under the influence of the industry. However, the industry must also feel that the ombud is not a consumer activist who will always rule against the industry. A balance was needed. The main problem at present was that customers did not know to which ombud they should apply. Having a Chief Ombud in one office would help. Another factor to consider is that the credit ombud will not be part of this and even if the Bill does not affect the NCR, it would still seem to be sensible to merge other related forums.

 

Mr Topham asked for a list of the ombuds.

Mr Momoniat said there were statutory ombuds of the FAIS Ombud and Pension Funds Adjudicator. There were also a banking ombud, the long term insurance ombud, the short term insurance ombud and the JSE’s mechanism. These were different from the Public Protector and the SARS Ombud. The approach that the SARS Ombud takes will necessarily be different from a financial sector ombud, because the context is different. 

 

Mr Topham said that in the longer term, consolidating the ombuds would likely save a lot of money. There is probably a lot of overlap. He asked if the intention is to have a ‘super ombud’ with specialist departments?

 

Mr Momoniat agreed and responded to the Chairperson by saying international practices with ombuds are very varied. In banking, they are more developed, but in market conduct the ombuds are not as developed. 

 

Ms Tobias asked about the timeframes given to ombuds for resolving conflicts. She asked if there are any regulations in this regard, pointing out that whilst the aim is to avoid courts, the process cannot be drawn out, making aggrieved customers either drop their claims or resort back to the courts. Maybe a hybrid approach could work.

Mr Momoniat said this Chapter had been included because the current ombud system does need to be improved. The Bill sets out the first step. Ideally, a research paper on the Ombud system would be needed; the Bill had an interim approach. He had been very critical of the short term insurance ombud although the long term insurance ombud had a better track record. There was, however, also the point that some consumers abused the process. This led to major issues.  The Committee would see criticism of the Twin Peaks model coming from people who held rabid free-market ideologies, which believed that the state ought not to interfere in people's contracts. The point of regulating market conduct was to recognise the large asymmetry of power between financial institutions and the consumer, so that matters could not simply be left to the market. Similarly it cannot simply be said that a contract is being applied correctly, as the question had to be whether the contract was fair in the first place. The aim is to find quick solutions and have processes which are accessible and speedy, otherwise people may only have court as an option. 

 

Mr Topham said it seemed that the ombuds will only cover the FSAC, because they only deal with the financial services of customers, so they could not presently cover a dispute with the Prudential Authority about whether to issue a licence or not. He had seen a comment about the regulator issuing the licence and then leaving the customer to interpret the terms of that licence. Should an ombud not be extended to cover such a situation?

 

Mr Momoniat said ombuds functioned between customers and institutions. If an institution had a problem about not being issued with a licence, it would go to a tribunal.

Ms Gibson said there is a distinction between the relationship of financial institution and its customer, and financial institution and the regulator. The ombud is intended as a quick and easy dispute resolution mechanism for financial customers, given the heavy asymmetry of power between financial institutions and customers. Fair and available justice for financial institutions would be provided by the tribunal mechanism. However, it must be recognised that there are smaller institutions, and how to ensure that the access to the tribunal did not become prohibitively expensive. In foreign jurisdictions, there was a move towards a single ombud model, which was statutory and system wide, with panels of expertise. The South African experience has been mixed and therefore it is not a simple decision, because when the industry ombuds have been working well, they were the best system. In relation to whether there should be both a Prudential Ombud and FSCA Ombud, it would be preferable to have   a single ombud, unless the industry ombud route was taken, in which case there will be several. In this case then there would have to be much more flexibility in how the ombuds work together. On the point that financial institutions were able to take statutory ombuds to court, this happens because of the way the law is drafted at present. In the UK, this cannot happen. The ombud would still be held accountable, but by going through the usual review mechanisms. Depending on what the Committee perceived as the best outcome, the Bill could be drafted to suit that preference. In answer to questions on timeframes, the Ombuds Council could not set standards at present, but the Bill would allow for the setting of standards.

Clauses 173 to 186
Ms Gibson said clause 173 establishes the Council, clause 174 prescribes the objectives of the Council, namely, ensuring that financial customers are able to access affordable and independent alternative dispute resolution mechanisms. Clause 175 describes the functions which include standardising, imposing sanctions and encouraging best practice. Clauses 176 through to 191 deal with the governance framework of the Council and in effect replicate those of the FSCA and Prudential Authority. Clause 177 establishes the board of the Ombuds Council and the Minister makes the appointments. The terms of office are described in clause 179, the service conditions under clause 180, and removal under 181. The role of the board under clause 182 is to generally oversee the management of the Ombud Regulatory Council. The reason why a board model was adopted was to streamline the executive versus non-executive functions as much as possible. Clause 186 describes the role of Chief Ombud, which is accountable to the Minister. 

Part 2

Ms Gibson said Part 2 contains the crucial clauses out of the Financial Services Ombud Schemes Act, with improvements, and provides for two industry ombuds to be recognised. Clause 192 deals with applications, clause 193 with the requirements and determinations of applications. Clause 194(2) is important because it requires the Ombuds Regulatory Council to not recognise an industry ombud scheme unless certain requirements are fulfilled, including ensuring there is no industry fragmentation. Clause 194(2)(b) sets the requirements for  the governing rules of an Ombuds scheme and this speaks to the issue of standardisation, because these are the rules which govern how the scheme is to be operated. The requirements include identifying the products which are within the scheme, making adequate provision for complaints and that the scheme is legally binding on its members. Clauses 195 to 198 deal with the varying or revocation of the removals. 

Part 3
Ms Gibson said Part 3 deals with the powers of the Ombud Regulatory Council and the making of rules or either the industry or statutory ombuds. Clause 199(2) gives the parameters for the making of rules which includes the qualifications of ombuds, governing rules, the definition and types of complaints to be dealt with by specified ombuds. She noted that an issue which has eroded the effectiveness of ombuds relates to who determines which case when, and the coordination between different ombuds. There had also been cases where an industry, knowing that one ombud is more lenient than another, may extend the scope of that industry ombud to ensure it has jurisdiction, thus ensuring greater leniency.

Clauses 200 to 206 deal with the general administrative action type powers such as the issuing of directives, enforceable undertakings and administrative penalties. She noted that an enforceable undertaking is the power to have an ombuds scheme commit to a certain practice. 

 

The Chairperson said this is quite an important Chapter, and Members needed more time to consider it more carefully.

Part 4
Ms Gibson said Part 4 contains general provisions. She noted that there are particularly important clauses, such as clause 207, which speaks to the Council needing to establish a centre to facilitate a  customer’s access to the appropriate ombud. 

Summary: Committee Procedure on the Bills presented
The Chairperson said there would be no discussions presently on the retirement reform. The opposition parties’ whips would be approached the following day, not only because of a wish to find consensus around the TLAB, but also because Parliament’s programme was proving difficult to finalise at present partly because of the strike. The ANC was proposing a vote on the following Wednesday, in the House, on this Bill. The Committee would be given more time to negotiate with the aggrieved stakeholders in an attempt to reach consensus on disputed points. This meant that the ANC was proposing voting in the Committee on the following Tuesday morning in the Committee. However, he was unable to give a definitive timeline at present.

Mr Lees asked whether it was definitely decided that there would not be a vote in plenary the following day.

The Chairperson said if the whips did not agree, then it could be that the Members voted in the morning in Committee, and in plenary in the afternoon. The other option was to leave the vote over to a newly-convened session, after question time to the President. Another option was Friday, but that was unlikely, or Thursday or the following week.

The meeting was adjourned.