The committee visited the Registrar of Banks on 10 June 2003, the Financial Services Board on 12 June 2003 and the Financial Intelligence Centre and Financial and Fiscal Commission on 11 June 2003.

The delegation consisted of the following members:

Ms B A Hogan (Chairperson)

Mr F Fankomo

Ms R Joemat

Dr G Koornhof

Mr M P Lekgoro

Mr B A Mnguni

Ms L L Mabe

Mr K A Moloto

Mr N Nene

Ms S Nqodi

Mr M Tarr

Ms R Taljaard

Mr W A Odendaal

The following matters were discussed:

The Registrar of Banks:

• An overview of the operations of the Registrar of Banks
• An overview of the Corporate Governance Report commissioned by the Registrar of Banks
• Access to information held by the Registrar of Banks, particularly in relation to requests for information on the Saambou Report
• Views on the restructuring of the regulation of the financial services industry

Financial Services Board:

• An overview of the operations of the Financial Services Board
• Report on the implementation of legislation, especially the Pension Funds Second Amendment Act 39 of 2001
• An report on investigations into the marketing of funeral insurance
• Views on the restructuring of the regulation of the financial services industry

Finance and Fiscal Commission:

• An overview of the FFCs activities

Financial Intelligence Centre:

• Progress report on the setting up of the Financial Intelligence Centre
• An overview of the operations of the FIC

The Committee received the following documentation:

• The Banking Stability Report (March 2003), which is released every month and looks at various risk areas and how these impact on the banking sector
• A presentation on Illegal deposit-taking by Michael Blackbeard
• Banks Act Circular 13/2002 dealing with Implementation of anti-money-laundering measures
• Section 7 Review - Corporate Governance – Review of the major South African Banking Groups
• Presentation document on the new Basel Capital Accord
• Consultative document – Overview of the new Basel Capital Accord (April 2003)
• Consultative paper on the proposed implementation of a deposit insurance scheme for South Africa
• Flowchart tool with annotations to assist high-level decision making for handling liquidity and systemic weaknesses in banks.

The Deputy Governor of the Reserve Bank, Ms Marcus, briefed the meeting on the international economic, banking and insurance conditions and the impact thereof on the South African markets. She noted that we are dealing with a fragile world economy due to slow economic growth in the US and the impact this has had on retarding growth in other countries. The Deputy Governor then went on to give the Committee a short overview of the conditions in various countries.

Status of the Banking Sector (Refer to Banking Stability Report)

The then Registrar of Banks, Mr Christo Wiese, gave an overview of the Banking Stability Report for March 2003. A banking stability report is released every month and looks at various risk areas and how these impact on the banking sector.

One of the matters raised by the Committee was the impact of the demise of smaller banks on competition in the banking sector. It was noted that this has had two important impacts on the sector. Firstly, it has meant that there is less competition in the banking sector. Secondly it has also meant that it is even more difficult for the poor to gain access to banks and therefore to finance.

The Registrar said that it is important to have a diverse market as opposed to a more concentrated banking sector, because diversity would mean that there would be more competition in the market. Existing foreign banks provide the necessary competition for the big banks, however he felt that with regard to access to finance, there is a gap in the market for low risk, low capital banks which will provide financial services to the poor. For example, Post banks or banks that operate like the old building societies.

However, the banking sector alone should not be responsible for the funding of small and medium sized enterprises. It is therefore necessary to expand the capital markets to more efficiently meet the needs of small and medium sized enterprises.

The regulatory requirement that a minimum of R250 million is required to open a bank, which amount cannot be borrowed has meant that there are greater hurdles to entry for smaller banks. The Banking Registrar is looking at proposals to assist the entry of smaller banks into the market, which should be ready by the end of 2003. The Registrars view is that banks are generally in better shape than they were this time last year and their liquidity has improved.

One of the effects of not having smaller banks to provide access to finance to the poor is that a number of illegal deposit-taking schemes have emerged and this has come to the attention of SARB. The number seems to be increasing, with 13 schemes identified in 2000, 19 in 2001 and 25 in 2002. In the Registrar’s view the reasons for these schemes are perhaps the absence of second tier banking services, as well as greed and ignorance. These illegal schemes come in a variety of different forms, namely pyramid schemes, abuses in the trade of 2^nd hand insurance policies, foreign exchange, so-called "venture capital" to fund other legitimate companies, fraud and theft.

The Registrar of Banks has been given investigative powers in order to combat unfair competition with banks. Inspections are conducted in terms of the Financial Institutions (Protection of Funds) Act, 28 of 2001 with the aim of stopping the illegal deposit-taking, taking control of the assets, repaying funds illegally obtained and then reporting the matter to South African Police Services (SAPS) for criminal investigation.

These illegal deposit-taking schemes drain disposable income, lower standards of living and affect South Africa’s international image.

The Registrar has started a number of public awareness initiatives to protect consumer interests, in the form of an information booklet, website warnings, radio talks and a joint initiative with the FSB.

The Committee notes with appreciation the Registrar’s awareness of the gap in the banking sector to service the poor and wishes to encourage the Registrar to expedite proposals for improving accessibility.

Corporate Governance Review

The Committee was informed that a corporate governance review was conducted on the five major banking groups, namely: ABSA Group Limited, FNB Holdings Limited, Investec Limited, Nedcore Limited and Standard Bank Group Limited.

The purpose of the review was to investigate compliance with corporate governance best practices; to establish to what extent an adequate and effective corporate governance process has been established and maintained in the banking groups; and to establish the extent to which the overall effectiveness of the process is monitored by the board of directors.

Various best practices were examined in the course of the Review: The current Banks Act of 1990; Regulations in terms of the Banks Act; King Report of March 2002; Proposed Banks Amendment Act dated September 2002; New York Stock Exchange Report of 6 June 2002 and the Higgs Report of 20 January 2003. Board minutes of the banking groups from January 2000 were also studied.

Questionnaires were compiled and completed by various parties and 133 interviews were conducted. One of the key debates throughout the review was that of form versus substance. The conclusion was that the form of corporate governance alone is not sufficient and that substance is even more important.

The Review made the following findings:

• Banks are committed to the adherence of high standards of corporate governance
• Banks, on their own initiative, review corporate governance from time to time, to ensure compliance with accepted corporate governance principles
• No serious breaches of corporate governance were found to exist
• The corporate governance of banks is sound
• However, vigilance is still necessary, especially given the continually evolving standards of governance
• The compliance function and company secretary function are adequately resourced
• Non-executive directors are generally people of integrity who are usually independent of management. They found a mix of retirees and executives from other businesses. These directors generally have time to prepare for and attend meetings; they combine diverse skills, perspectives and experiences and add a lot of value to the board and committees.

Recommendations arising out of the review are as follows:

• The board should comprise of 16 members and of those, not more than 4 executive directors. The majority should be independent non-executive directors
• Non-executive directors should meet without the executive directors at least twice a year, to look at issues they may not want to raise with the executive directors (for example, issues of competence)
• Each non-executive director should serve on at least one board committee
• There should be induction programmes and continuing education
• Non-executive directors fees should be increased, given their increased responsibility
• The number of board appointments should be monitored by the chairman
• Reports to the board must be given timeously and the quality of the information must be satisfactory
• The roles of Chairperson and CEO should be separate and there should be a three-year waiting period before the CEO can become Chairperson. An independent non-executive director should preferably chair the board
• With regard to board committees, there should at least be the following committees: audit committee, remuneration committee, directors’ affairs and a risk committee
• Independent non-executive directors should preferably chair these committees
• On the audit committee, members should be financially literate and the majority of members should be independent
• On the remuneration committee, the majority of members should be independent
• On the risk committee there should be at least three directors, two of which must be non-executive directors
• On the directors’ committee, there should only be non-executive directors and there should be a defined number

A number of questions arose in relation to corporate governance. Firstly, the Minister is looking at the issue of rotation of auditors, and the question arose whether it is appropriate for auditing firms to offer both auditing and consulting services to a client at the same time. The Banking Supervisor believes that although accounting firms do have a distinction between their auditing and consulting departments, which mostly is sufficient, the larger firms should not contract out the internal audit function.

Secondly, there was discussion regarding the failure of Saambou and the subsequent investigation. In this regard, there was a court application for access to information contained in the report on the investigation on Saambou. However, SARB explained that it was not possible for the public to gain access to this information. They explained that in terms of section 6 and 7 of The Banks Act, the SARB is able to obtain access to certain information held by banks. In terms of section 6, SARB is able to obtain access to information relating to internal investigations conducted by banks, and in terms of section 7, SARB has access to information held by banks relating to outside audits.

The information disclosed has to be kept confidential. Access to this kind of information is critical to the functions of the Banking Supervisor. The ability of the Registrar to use its section 6 and 7 powers would be severely impaired if this information was to be made public, as has been demanded in the Saambou case.

A distinction needs to be drawn between the consumer’s right to know and the ability of the Registrar to do his job. As a result, the Registrar is able to disclose to the public the generic problems with Saambou, but not specific details about the institution.

In particular, the Committee was interested in the regulatory amendments that will be required arising out of the investigation. Banking Supervision said that the Saambou report did not deal with corporate governance issues but with capital adequacy requirements. Nevertheless they acknowledged that there are gaps that need to be closed, but said that it is important that the regulatory framework is not too onerous. There has been a rise in the cost of regulation, as well as an expansion in the services provided by banks therefore it is not always clear what one should regulate.

One of the important regulatory matters raised in the aftermath of the Saambou case was the practice of giving loans to staff to buy shares in the bank. Regulations relating to these kinds of incentives should apply to all companies, including the insurance industry.

It is also necessary to look at better ways of interacting with management. In this regard the ability to remove directors is important. The best way to deal with corporate governance is through the Companies Act. If this issue is dealt with in the Banks Act there will be problems within companies because some areas of a company will fall under banking supervision, but others will not and then different corporate governance rules will apply to different areas of companies’ activities.

Ms Barbara Hogan, Chairperson of the Portfolio Committee on Finance, briefed the Banking Supervision Department on the background to the committee’s interest in the Single Financial Regulator. Since the announcement of the possible establishment of a Single Financial Regulator in 2001, the committee has undertaken a study tour to England and held extensive discussions with the Bank of England, the Financial Services Authority, HM Treasury and with the private sector. Different institutions had different perspectives and three essential issues were identified:

1. The relationship between the single regulator and the central bank should be clearly defined
2. The interest of consumers should be paramount
3. The complexity in establishing a single financial regulator must not be minimized

Banking Supervision said that round table discussions about a single regulator began in South Africa in 1999. No concrete recommendations arose out of those discussions. As yet, Cabinet has not made a decision in favour of a single financial regulator. The view of the Bank there is not a universal best model to adopt. One would have to look at the specifics of a country, such as the political and institutional make-up of a country; the skilled resources available; prevailing financial stability and the presence of trust and confidentiality between the various institutions, which would have to be amalgamated.

The practice of banking is very different from the insurance industry, most particularly because SARB is a lender of last resort. This gives the Bank unique access to confidential information via its continual monitoring of the payment systems of banks. This gives the Bank an ability to respond swiftly as and when the need arises. As a result, a good model may be to retain banking regulation/prudential regulation within SARB, so that it acts both as the banking regulator and as lender of last resort. Conduct-of-business regulation (protection of the consumer) could be transferred to the Financial Services Board. Banking, insurance and market/securities regulation are all quite different and easily separable. Banking Supervision would welcome more effective conduct-of-business regulation within the banking sector, as it is most often not in a position to exercise this function fully.

As regards the process of integrating financial regulation, the Bank is of the view that it may be wiser to have the various agencies work together to develop the capacity for a single regulator instead of adopting the big bang approach as was done in the United Kingdom.

Institutional form is less important than the requirement that the regulator should have institutional authority and be completely independent so that it has the authority to implement its decisions. Parliament should exercise a critical oversight role, as it places enormous power in a single institution.

It would be prudent for all the role-players, including the FSB, SARB and the Minister of Finance to regularly meet and reach consensus on the future structure and functions of financial regulation in South Africa.

It is apparent to the Committee that communication between these agencies on this matter has been inadequate and the Committee wishes to encourage all parties to better engage with one another on this critical issue.

It is also critical that the matter be resolved as quickly as possible as there is evidence that there is growing demoralization amongst staff in the various institutions concerned.

It is the Committee’s view that the question of the restructuring of financial regulation is an urgent matter that requires attention and has already made comments in this regard (see above). It notes that presently, there is an inadequate framework for the accountability of all regulators within the financial services industry. Should there be a move towards a single regulator, the issue of accountability and the role of Parliament therein must become a critical issue for debate.

The Committee received the following documentation:

• Address to the Portfolio Committee on Finance by the Deputy-Chair WJ Haslam
• Human Resources Department document outlining the staff complement, employment equity and training and development
• Document outlining a presentation on The financial Advisory and Intermediary Services Act
• The Consumer Education Initiative of the FSB – The final Strategy of 14 Oct 2001

The Deputy-Chair of the FSB, Professor Bill Haslam welcomed the committee and gave a brief background to the structure of the FSB. He then went on to discuss the discussions which had taken place in the past regarding the advisability of a single financial regulator. In 1999 the SARB organized a number of workshops to discuss this matter. The issues were complex but it was recognised that SARBs ability to deal with systemic risk as a lender of last resort could be weakened by the loss of a banking supervision department.

The FSB as an organization does not yet have a view on the desirability of a single financial regulator. Individual country circumstances render comparisons with other jurisdictions of limited value, because the industry structure is very different in each country. The FSB felt that the manner in which it is implemented is more important than the specific model that is chosen. In the words of the chairperson: "In my opinion, therefore, it is not the destination we should be concerned about, but the journey to the destination and whet we do when we get there."

The FSB commented that high levels of skills are necessary for a regulator, because the regulator is pitted against an industry, which is hugely well resourced particularly with regard to skills. A single regulator would have to be on the same footing as the industry. Even presently the FSB has enormous problems with recruitment of appropriate personal. Therefore the implementation of a single regulator should be carried out so as to minimise the loss of expertise. Uncertainty must be resolved as quickly as possible because good people leave first and there has already been some delay.

The Board has indicated that they would like to be involved as much as possible in the debate. Up to now they have not been meaningfully engaged by National Treasury. There was however a decision by the executive management of the FSB not to become directly involved in this debate because it is a policy matter and policy formulation is in the domain of the executive. The National Treasury did some investigation about eighteen months ago to investigate their budget and structure and requested the executive of the FSB to draw up a budget for a single regulator.

It is however felt that the National Treasury could be more inclusive. It could involve the FSB and other parties that will be affected in the debate.

The FSB said that defining the form of a single regulator should take was very important. They said that since SARB functions as the lender of last resort, its operation would be severely impacted if supervision of banks (prudential regulation) were taken away.

The FSB went on to say that they already do extensive conduct-of-business (protection of the consumer) regulation. SARB is not doing much of this presently and is happy for this to be the responsibility of the FSB. With regard to process, they also felt that perhaps a phased approach would be better than a big bang approach. Then one could later review whether prudential supervision should leave SARB.

The FSB reiterated the point made by the Bank that the single regulator should be accountable to Parliament.

See recommendation under the section on "The Regulatory Environment" under the Registrar of Banks on page 6 of this Report.

One disturbing matter drawn to the Committee’s attention was with regard to the tenure of the Policy Board. A Policy Board for financial services and regulation was formed in terms of its own Act, The Policy Board for Financial Services and Regulations Act of 1993. It comprises of 30 people who make recommendations to the Minister on policy issues. The board meets either to respond to queries on the request of the Minister or on the Committee’s own initiative. However, since the end of 2002 the Policy Board lapsed.

The Committee recommends that Cabinet review whether this body should continue to operate or not.

The Pension Funds Act of 1956 is very old and therefore creates regulatory problems on a daily basis. There is agreement that there must be a fundamental change to the Retirements Fund Act, however the FSB cannot do this without a policy directive from Government. As a result the FSB is doing technical research in preparation.

The FSB said that if the Policy Board had been in existence they might have referred this matter to the board. In the absence thereof, the FSB is operating directly with the National Treasury, who has said that they will address this issue. However, the National Treasury’s capacity to engage on these regulatory issues is limited since there is a large amount of work to be done, and this lack of capacity is felt not only by the FSB but also throughout the banking sector.

Mr Jeff Van Rooyen spoke about the FSBs strategic plan and the widening scope of the FSBs functions. He said that this widening scope is putting enormous pressure on the resources of the FSB.

There is currently a debate about oversight of auditors. It is possible that this oversight may be made the responsibility of the FSB. This would form part of their ever-widening scope. There is no framework or model for the current or future work of the FSB. Responsibilities have been introduced on an ad hoc basis and this is of concern to the FSB.

The FSB has asked a senior advocate to review all the FSB legislation to determine what the authority of various parties is, namely the Executive Officer, Registrar and the FSB Board.

Due to time constraints, it was decided that more information and a briefing would be given to the committee on the "trends in the regulation of the capital markets", when the Committee deals with the Securities Services Bill.

Communication between National Treasury, SARB and the FSB is good at an executive level. The FSB said that having the Deputy Governor of SARB as chairperson of the FSB is good for the relationship between SARB and the FSB. However, the relationship between the National Treasury and the FSB at board level is not as good and the Deputy Minister has undertaken to resolve this matter.

The Committee received the following documentation:

• Strategic Plan and the Budget of the Financial and Fiscal Commission for the fiscal year 2003-4 and the MTEF period 2003/04-05/06
• Memorandum of Agreement made and entered into between the FFC and the Minister of Finance

The FFC outlined its key legal obligations and objectives of the Commission, which are the following:

1. Develop and submit annual recommendations for the MTEF budget cycle, as set out in the Fiscal Relations Act.
2. Develop and submit annually recommendations on the annual Division of Revenue Bill as set out in the Constitution and in terms of the Intergovernmental Fiscal Relations Act.
3. Respond to requests from stakeholders, and on other policy issues, and to fulfil the FFC obligations as set out in the prescripts of the relevant legislation and in that respect investigate policy options, make proposals and recommendations on and give advice to stakeholders on fiscal matters.
4. Submit annually to Parliament and the relevant legislative bodies as set out in the relevant legislation an Annual Report and audited Financial Statements.

The FFC further identified key supporting activities that would enhance the functioning of the institution and also ensure compliance with legal obligations, which are the following:

1. To conduct wide and extensive consultation with key stakeholders on FFC recommendations before they are submitted to Parliament, the NCOP and National Treasury.
2. The establishment of a strategic system of relationships with stakeholders through agreement and consensus on protocols.
3. To ensure full and comprehensive compliance with the relevant statutes.
4. To establish and implement a capacity building and human resource development programme during the financial year.
5. Establish and implement workshops and seminars to involve Commissioners in recommendations on the research programme.
6. Build and develop and update database on financial and other relevant statistics, including a set of models for financial analysis and interpretation.
7. Establish a long-term perspective for an optimal organisational structure best suited for the future role of the FFC in intergovernmental financial and fiscal matters.

The identity and role of the FFC, with regard to how it fits into the intergovernmental function needs to be clarified. The interim constitution was more specific than the final constitution. The FFC Act assists the situation, but it is still unclear whether the FFC should initiate the budget process or whether it should be informed about what the cycle is. It is unclear whether the FFCs role is to assess and evaluate the budget; or whether it should be a referee in terms of budget allocations.

The cost implications of policy decisions need to be more extensively explored. A difficulty arises when it is unclear whether a government issued statement has indeed been adopted as policy or not.

Protocols on the relationship between the FFC and Parliament, and in particular, the Budget Committee and NCOP Select Committee should be discussed at a later stage. The FFC agrees that it is vitally important to clarify these protocols.

The Committee received a booklet containing 7 documents:

1. Presentation: FICA Implementation
2. Background, with a list of member Countries, Observer Organizations and the NCCT list
3. International standards for Anti-Money Laundering and Combating the Financing of Terrorism
4. FATF Special Recommendations on Terrorist Financing
5. The Financial Action Task Force (FATF) revised set of (forty) Recommendations
6. Background to the Eastern and Southern African Anti-Money Laundering Group (ASAAMLG)
7. Memorandum of Understanding (MOU) among member Governments of the Eastern and Southern Africa Anti-Money Laundering Group

The FIC provided the Committee with an extensive overview of the implementation of the Financial Intelligence Centre Act, no 38 of 2001 since it was presented to parliament a year ago.

The FIC told us that the Act creates two institutions, the Money Laundering Advisory Council (MLAC) and the Financial Intelligence Centre (FIC). The MLAC was launched on the 18^th of October 2002. And the FIC has been largely set up since then.

The functions of the FIC are that it receives suspicious transaction reports from accountable institutions, it then processes, analyses and interprets this information and then makes it available to law enforcement authorities.

Accountable Institutions are institutions, which are most vulnerable to money laundering, such as banks, insurance industry, stockbrokers, casinos, accountants, lawyers, estate agents etc. The obligations of accountable institutions are that: from 3 February 2003 they were required to submit suspicious transaction reports (STRs) to the FIC; From June 2003 they were required to keep records for 5 years, identify and verify clients, appoint a compliance officer and train their staff. In the second quarter of 2004 further requirements regarding cross border transactions will be introduced. Cash threshold transactions above a certain threshold still need to be set and this should occur in the fourth quarter of 2004. There is also the possibility of adding more accountable institutions to the existing list, for example, diamond/gold dealers.

Supervisory Bodies are listed in schedule 2 of the Act: FSB, SARB, Registrar of Companies, Estate Agents and Agency Board, Public Accountants and Auditors Board, National Gambling Board, JSE Securities Exchange, Law society.

Supervisory bodies are obliged to monitor compliance by these Accountable Institutions and the FIC also gives guidance to these institutions. The FIC said that there is a need to amend the legislation of these Supervisory Bodies to reflect that they have the responsibility as is granted to them in schedule 2 of the FIC Act. There is also a need to create capacity in these bodies. Therefore, this regime will only be fully operational in about three to five years time once the necessary capacity has been built.

With regard to the Law Enforcement Authorities to which the FIC makes referrals, we were told that there is a complete lack of capacity in these authorities with regard to financial investigations. The FIC said that there should be multi-disciplinary training to create a larger pool of skilled financial investigators. It is also very important to train prosecutors in this regard because it is no use conducting investigations if they do not end in prosecutions.

The FIC suggested the placement of secondees within the FIC to enable the exchange of information. It will also be necessary for Law Enforcement Authorities to appoint authorized officers in their offices to protect the integrity of information, which is received.

With regard to the international linkages of the FIC, they told us that an Egmont mission had successfully assessed them. The Egmont Group consists of 58 financial Intelligence Centres (FICs), which will rise to 135 by the end of 2004. It has been recommended that South Africa join the Egmont Group at their annual meeting in July 2003. Membership benefits include: the ability to share information with other FICs; law enforcement links; Access to the Egmont secure website and the exchange of technical skills.

With regard to legislation and policy, the cross-border movement sections of the Act will be put into effect in the second quarter of 2004. The Cash transactions sections of the Act will be put into effect in the fourth quarter of 2004.

The information technology for the FIC will be fully implemented during 2004.

The FIC’s aim is to expand its staff from 20 to 55 by the end of 2004. They want to develop a core of 15 analysts with specialized areas of expertise, and then also have secondees from law enforcement and supervisory bodies to enable "special interest areas".

With regard to capacity building, the aim is that there will be 5 courses, which will train financial investigators. There is also a need for task teams and database access to databases of law enforcement agencies. A Multi-disciplinary approach is necessary.

A further goal of the FIC is to shorten the turn around time for reports and feedback on information received. In addition, Memorandums of Understanding will be signed with all Law Enforcement Authorities by the end of 2003.

Although the FIC is not yet fully operational, it will be by the end of 2004. The Committee is satisfied that due progress has been made. The Committee is highly impressed with what has been achieved to date as well as with the level of enthusiasm and dedication of the employees of the FIC. The Committee looks forward to the FIC becoming fully operational.