Financial Markets Bill [B12-2012]: Clause-by-Clause deliberations

Meeting report

A standing apology had been received from the Chairperson, Mr T Mufamadi (ANC) who was assigned on duties of national importance. Mr D van Rooyen (ANC) was Acting Chairperson.

Due to a special memorial service to be held in commemoration of the 34 miners who had tragically been shot dead by police at Lonmin's Marikana platinum mine on 16 August 2012, the Acting Chairperson deferred adoption of the Bill, together with the Credit Rating Services Bill until next week [29 August 2012: meeting to begin at 09h00 - venue to be confirmed].

The Acting Chairperson emphasised the importance of the Financial Markets Bill B12-2012 in the light of the UK House of Commons Treasury Select Committee's report on the London Interbank Offered Rate (LIBOR) published on 18 August 2012. This report indicated the need to strengthen South Africa's regulation of its financial markets. The report pointed fingers at the UK's Financial Services Authority, the regulatory authority in that country. In contrast, South Africa was on course. Regulation of the financial markets was a critical aspect in order to stabilise the financial sector.

Financial Markets Bill: Clause-by-Clause deliberations
Members had already been provided with copies of the latest draft of the Bill. The Acting Chairperson led the Committee in its Clause-by-Clause deliberations. He worked from the the latest draft of the Bill [for Members only] and the Standing Committee Amendments to the Financial Markets Bill [for Members only]

Clause 1 Definitions and interpretation
Mr D Ross (DA) asked for clarity on the powers of the Minister versus the powers of the Regulator. Did the amendment speak to that issue?

The Acting Chairperson asked if Mr Ross was referring to its conclusion in Clause 1.

Mr Ross replied in the affirmative.

Mr Roy Havemann, National Treasury Chief Director: Financial Markets and Stability, replied that National Treasury, since the previous meeting of 08 August, had proposed slightly amended changes to Clause 5, and preferred to respond under Clause 5.

The Acting Chairperson agreed.

There was no further discussion on Clause 1.

Clause 2 Objects of Act
Mr T Harris (DA) proposed the insertion, that the Act promote 'competition in South African financial markets' that had been discussed at length on 08 August.

The Acting Chairperson pointed out that the proposed Act was intended to ensure that South Africa's markets were competitive internationally. He did not want to confine competitiveness to the South African market.

Mr Harris distinguished 'competition' from 'competitiveness' (Clause 2(e)).

His insertion would be as a new Clause 2(b)(3) which would speak to the inherent competition within South Africa's financial markets. It was very important in the cause of keeping prices down and ensuring that consumers got the best deal. The insertion would not contradict the existing Objects.

Adv S Swart (ACDP) said that Mr Harris had a valid point. There was a distinct difference between the two terms. The insertion would be a useful addition.

Mr N Koornhof (COPE) asked if the Bill would increase costs for the banks. Was it an Object of the Act to make financial services cheaper for consumers?

Mr Havemann replied that National Treasury had held considerable discussion on this subject and acknowledged that Members had made an important point. National Treasury was open to suggestions as to improved wording better to reflect these two concepts – 'competition' (internally) and 'competitiveness' (internationally). However, the drafting committee's view was that the Competition Act (No. 89 of 1998) covered competition. There should not be an overlap as it might cause uncertainty.

Mr Harris thought that the concept of competition was not limited to the Competition Act 1998. It was simply a principle of how markets should function. Including 'competition' evoked the notion that one was heading towards twin peaks, which was about balancing competition and stability. The market conduct component spoke to competition, while prudential regulation spoke to stability.

The Acting Chairperson ruled that Mr Harris's proposal was considered, and the drafting team should insert it appropriately.

Mr Havemann suggested obtaining a legal opinion from the Committee's legal advisor, particularly on the overlap issue.

The Acting Chairperson agreed.

Mr Harris asked when would the legal opinion be available.

The Acting Chairperson replied that the legal opinion would be provided before 'final verification'.

Adv Swart understood that there were two options: the new Clause 2(b)(3), as suggested by Mr Harris, and an amended Clause 2(e) as suggested by Mr Havemann. The legal adviser would need to consider those two options.

The Acting Chairperson said that final legal verification would be at the meeting on 05 September.

Ms Jeannine Bednar-Giyose, National Treasury Director: Fiscal and Inter-governmental Legislation, observed that it was important in this kind of legislation to define clearly the respective jurisdictions of regulators to avoid overlaps and even tensions between them. It was important to be aware of all the other relevant legislation that might impact on that same subject area.

The Acting Chairperson noted this observation.

Clause 3 [Application of Act and rules]
The Committee agreed to this Clause without changes.

Clause 4 [Prohibitions]
The Committee agreed to this Clause without changes.

Clause 5 [Powers of the Minister]
Mr Ross reiterated his first question on the powers of the Minister versus the powers of the Regulator.

Mr Havemann referred to the new Clause 5(1) on the powers of the Minister. This referred specifically to Clause 107(2) which had always prescribed requirements regarding what the Minister might do, but Clause 5 sought to make sure that the intention was clear.

The change strengthened the Minister's powers relative to those of the Minister's and specified the relationship.

There had been a change to Clause 107, which must be read in conjunction with Clause 5, and which now had a much more extensive section the due process that the Minister must undertake in order to undertake any regulations. This process included consultation and the Minister's applying his mind. If the Minister failed to do so, those regulations could be overturned by a court. This was an important check and balance. 

Ms Bednar-Giyose added that National Treasury wanted to ensure that in the making of regulations there were substantial provisions to ensure appropriate consultation will all relevant parties, that the Minister's powers were not unfettered, and moreover that there was substantial provision for parliamentary oversight and engagement with key parties who would be affected by the regulations.

Mr Havemann said that it had been added that a copy of the promulgated regulations, and draft regulations, must be tabled in Parliament.

The Acting Chairperson asked for confirmation that this provision had been inserted.

Mr Havemann confirmed that it had, under Clause 107.

Clause 6 [Registrar and Deputy Registrar of Securities Services]
Mr Harris proposed a new Clause 6(3)(c) to avoid conflict of interest. The Registrar must be given formal powers to ensure that market infrastructure ensured that conflicts of interest were avoided, eliminated, disclosed or otherwise managed.

Mr Koornhof asked for an example of conflict of market interest.

Mr Harris gave the example of the JSE, as had arisen in the public hearings.

The Acting Chairperson wanted to be sure that Mr Harris's concern was not already provided for in the Bill.

Ms Z Dlamini-Dubazana (ANC) thought that Clause 6(4)(a) covered Mr Harris's concern.

Mr Havemann replied that both comments were correct. He referred to Clause 62 which had a provision on conflict of interest that addressed Mr Harris's concern. This referred to market infrastructure and 'in the manner prescribed by the Registrar'. National Treasury would not be against making it a general power of the Registrar, if it would clarify the Bill. The change would mean that all regulated persons would have to think about their conflicts of interest. It would shift the responsibility to the Registrar to ensure that there were no conflicts of interest.

The Acting Chairperson asked if the submission was in order.

Mr Havemann replied in the affirmative.

The Acting Chairperson assured Mr Harris that his submission would be incorporated under the responsibilities of the Registrar.

Mr Harris wanted to make his insertion more elegant and sought help.

The Acting Chairperson replied that the wording of the insertion would be finalised at an appropriate time.

Mr Havemann advised that the new insertion would be closely modeled on Clause 62.

Adv Frank Jenkins, Senior Parliamentary Legal Adviser, indicated that National Treasury's drafting team drafted the content, with the assistance of the State Law Advisers. It was his particular responsibility to ensure that the role of Parliament and constitutional issues were accommodated. He saw his particular task at this stage to give a legal opinion on the overlap between Mr Harris's suggested insertion and the 'suggested draft'. He would suggest that the specific wording be determined after his legal opinion.

Adv Swart asked about Clause 6(f). Why was it necessary to emphasise that the Registrar must act in accordance with the Promotion of Administrative Justice Act (No. 3 of 2000) (PAJA)? Surely that spoke for itself.

Ms Bednar-Giyose agreed that the Registrar was definitely bound by the Promotion of Administrative Justice Act 2000. However, although not strictly necessary, the emphasis in this Clause provided clarity and comfort to members of the public.

Mr E Mthethwa (ANC) asked if the Committee was not falling into the trap of redrafting the entire Bill.

The Acting Chairperson said that he would allow the process of robust engagement to flow.

There was no further discussion on Clause 6.

Clause 7 [Application for exchange licence]
The Committee agreed to this Clause without changes.

Clause 8 Requirements applicable to applicant for exchange licence and licensed exchange
The Committee agreed to this Clause without changes.

Clause 9 Licensing of exchange
The Committee agreed to this Clause without changes.

Clause 10 Functions of licensed exchange and power of registrar to assume responsibility for functions
The Committee agreed to this Clause without changes.

Clause 11 Listing of securities
Adv Swart questioned the sufficiency of the fine not exceeding R5 million prescribed in Clause 11(1)(g) – the penalty Clause. The Portfolio Committee on Justice and Constitutional Development, on which he served, had been setting very high fines, up to R100 million. He assumed that any other penalty, as provided for in Clause 11(5), would be a jail sentence.

Mr Havemann replied that this was essentially an amendment bill. Certain provisions [of the Securities Services Act (No. 36 of 2004)] flowed through without amendment. He pointed out that this was a fine imposed by the exchange on its members. This meant that the exchange was not a regulator. Perhaps the fine could be prescribed by the Registrar or the Minister, if the Committee wanted a flexible fine. It was up to Parliament to set the limit.

Adv Swart now understood that it was an administrative fine. The distinction, from a court fine, was very important. With an administrative penalty, there was no question of a jail sentence. He was now happy with the prescribed fine. However, other penalties, imposed by the courts, might need to be reconsidered.

Mr Koornhof thought that, in accordance with inflation, the penalty should be increased.

The Acting Chairperson asked if it was possible to incorporate into the Bill the possibility to take account of inflation in prescribed penalties.

Mr Havemann strongly agreed with this proposal.

Clause 12 Removal of listing and suspension of trading
The Committee agreed to this Clause without changes.

Clause 13 Application of amended listing requirements to previously listed securities
Mr Koornhof said that many of the amendments were purely technical because of changes in numbering, and, to save time, he wanted National Treasury to point out clearly which provisions were already in the Securities Services Act 2004.

The Acting Chairperson insisted on following procedure, so that the Committee's processes would not be questioned afterwards. He remarked, humorously, that if Dr M Oriani-Ambrosini (IFP) were present, Members would be deliberating sentence-by-sentence.

The Committee agreed to this Clause without changes.

Clause 14 Disclosure of information by issuers of listed securities
The Committee agreed to this Clause without changes.

Clause 15 Maintenance of insurance, guarantee, compensation fund or other warranty
The Committee agreed to this Clause without changes.

Clause 16 Funds of mutual exchange
The Committee agreed to this Clause without changes.

Clause 17 Requirements with which exchange rules must comply
The Committee agreed to this Clause without changes.

Clause 18 Restriction on borrowing against and repledging of securities belonging to other persons
The Committee agreed to this Clause without changes.

Clause 19 Marking of or recording details of securities
The Committee agreed to this Clause without changes.

Clause 20 Restriction on alienation of securities
The Committee agreed to this Clause without changes.

Clause 21 Segregation of funds
The Committee agreed to this Clause without changes.

Clause 22 Segregation of securities
The Committee agreed to this Clause without changes.

Clause 23 Use of designation ‘‘stockbroker’’ and related designations
The Committee agreed to this Clause without changes.

Clause 24 Buying and selling listed securities
The Committee agreed to this Clause without changes.

Clause 25 Reporting of transactions in listed securities
The Committee agreed to this Clause without changes.

Clause 26 Definitions [in relation to Central Securities Depositories]
The Committee agreed to this Clause without changes.

Clause 27 Application for central securities depository licence
The Committee agreed to this Clause without changes.

Clause 28 [Requirements applicable to applicant for central securities depository licence and licensed central securities depository]
The Committee agreed to this Clause without changes.

Clause 29 Licensing of central securities depository
The Committee agreed to this Clause without changes.

Clause 30 Functions of licensed central securities depository and power of registrar to assume responsibility for functions
The Committee agreed to this Clause without changes.

Clause 31 Authorisation of participant
Mr Koornhof, referring to the Standing Committee Amendments, said that this Clause must have more than one Sub-Clause.

Mr Havemann explained that there was a problem of numbering. The 'proposed changes document' referred to the previous numbers. The version in front of Mr Koornhof referred to the current numbers. So there was a difference of one clause.

Ms Bednar-Giyose explained that the Clause references in the 'A' version of the Bill had to refer to the Clause number in the version of the Bill as tabled. She acknowledged that the necessitated changes in numbering of Clauses in some places [in the latest draft of the Bill] could give rise to confusion.

Clause 32 to Clause 61
The Committee agreed to each of these clause without change.

Clause 62 [Review of licence of self-regulatory organisation (exchange)]
Mr Harris thought it would be better for the Registrar to conduct the review rather than for it to be self-conducted by the market infrastructure.

Mr Havemann said that, after much discussion, self-review had been replaced by an annual assessment in the manner prescribed by the Registrar. The Committee, however, could still consider the option of an independent assessment. National Treasury did not favour a self-assessment and had thus removed it, but felt that provision should be made for the option of an independent assessment. The Registrar could still conduct the assessment by him- or herself if the Registrar so decided.

Mr Harris inferred that this Clause gave the Registrar the power to set out the requirements. He thought that it might be desirable to tighten the Clause to prescribe an independent assessment.

Mr Havemann said that National Treasury's view was that the Registrar should make the assessment or that it should be conducted externally. It should not, however, be a self-assessment.

Adv Swart said that this Clause delegated powers to the Registrar in terms of subordinate legislation to decide how the assessment should be conducted, and those regulations had to come back to Parliament. It must be clearly expressed that National Treasury would draw up the regulations. There was no harm in tightening the Clause.

The Acting Chairperson noted the Committee's consensus that there must be a tightening of wording as to the approach to assessment.

Mr Havemann offered that National Treasury could provide new wording for the next meeting: National Treasury would prefer a proposal that either the Registrar must conduct the assessment or a proposal that there must be an independent assessment.

Mr Harris thought that the redrafting should be in line with the latter proposal. It was better to be specific in the legislation itself, rather than in the regulation.

Mr Koornhof asked who would pay for the assessment if done independently.

Mr Havemann replied that the exchange would pay.

Mr Koornhof interpreted this to mean that eventually it would be the consumer who paid.

The Acting Chairperson asked what the effect would be if the assessment was made by the Registrar.

Mr Havemann replied that the Registrar obtained his income from fees from the exchange. 'Everybody pays in the end.'

Adv Swart said that all bills must be properly costed as to their financial consequences. He feared massive costs if independent assessment was the only option, and felt that assessment by the Registrar should be retained as the other option.

Mr Harris now thought that it would be useful to know the costs of both options, although his preference remained for an independent review.

The Acting Chairperson feared that waiting for a cost analysis would delay the Bill.

Mr Koornhof proposed, without using the microphone, that the Committee adopt both options – independent assessment and assessment by the Registrar.

Mr Mthethwa seconded, clearly and audibly, that the Committee adopt both options – independent assessment and assessment by the Registrar.

The Acting Chairperson noted that the proposal was accepted. However, as the Committee moved forward, it might come to a different conclusion.

Mr Harris dissented, thinking this was lazy legislation. If the Committee thought that an independent review was better, then it should ask for it.

The Acting Chairperson pointed out that Members had suggested the two options, because of the possible cost implications of independent assessment. It was not 'lazy legislation'.

Ms Dlamini-Dubazana supported the Acting Chairperson.

Mr Havemann explained that a thorough independent review was envisaged once every five years, which would cost a great deal of money. Then, in the interim, the Registrar would ensure that everything was well. However, he was not sure that it would be advisable to make the legislation too prescriptive.

The Acting Chairperson inferred that Mr Havemann was supporting what Members had said.

Adv Swart was concerned that Parliament often overlooked subordinate legislation. He thought that the Committee had achieved broad consensus on this issue.

Mr Havemann explained the two types of subordinate legislation in terms of this Bill – regulations (from the Minister) and rules (from the Registrar). Clause 6(5) required the Registrar to provide a copy of the published exemptions or directives to Parliament. However, it did not apply to notices.

Adv Swart said that Parliament did not have any power to amend the Registrar's rules, even though they would be provided to Parliament, as opposed to regulations from the Minister, that, prior to their being accepted, must be tabled in Parliament and which Parliament could change. This was a huge difference. He did not want every notice to be tabled in Parliament. The Committee needed to take a decision now on Clause 62(b).

In view of the fact that Parliament would not be able to amend the Registrar's rules, Mr Harris wanted legislative provision for an independent assessment alone.

Adv Jenkins said that the Minister's regulations did not have to be approved by Parliament. After tabling in Parliament, Parliament had about 30 days to comment on them, not change them. Many of the empowering provisions in legislation were similar. It was an oversight function. However, if the Minister ignored Parliament's comments, there could be consequences in terms of the budgetary allocation. The same applied to those [rules] prescribed by the Registrar, except that the Registrar did not need to table them. The Registrar's rules had to comply with the Promotion of Administrative Justice Act 2000. However, Parliament still had oversight, as it did over any organ of state in the national executive, and the Registrar was such an organ. Parliament could still request a copy of the rules, examine them, and express a view. Parliament was not powerless.

The Acting Chairperson, taking note of Adv Jenkins' view, thought that the Committee's earlier view, to retain both options, was to be preferred.

Adv Swart pointed out that in other contentious pieces of legislation Parliament had required that it must approve the regulations. Parliament was the final lawmaker, including subordinate legislation. Why had the word 'scrutiny' been used, instead of 'approval'.

The Acting Chairperson thought that this was a new angle.

Adv Swart agreed that it was a separate issue, to be discussed in relation to 'page 191'.

Mr Norman Müller, Head: Department of Capital Markets, Financial Services Board (FSB), said that the FSB believed that an annual independent assessment would be very costly and inappropriate. It would be better to give the Registrar some discretion.

The Acting Chairperson saw this as a reinforcement of the common view.

Ms Dlamini-Dubazana rejected any decision to adopt an independent assessment alone. She affirmed the earlier proposal to adopt both options for now – an independent assessment or assessment by the Registrar.

Adv Xoliswa Mdludlu, Principal State Law Adviser, recommended allowing both options as viable.

Clause 63 to Clause 70
The Committee agreed to each of these clauses without change.

Clause 71 [Manner in which rules of self-regulatory organisation may be made, amended or suspended, and penalties for contraventions of such rules]
Mr Koornhof raised the need for ensuring that the penalty was aligned with that prescribed in Clause 6(a)(4).

The Acting Chairperson said that Mr Koornhof's submission was in order.

Clause 72
Mr Harris felt that the negligence requirement went too far. Absolving market infrastructure from negligence gave it too much protection.

Mr Havemann offered to draft a formal response and circulate it to the Committee.

The Acting Chairperson agreed.

Clause 73 to Clause 78
The Committee agreed to each of these clauses without change.

Clause 78 Offences for insider trading
Adv Swart said that this Clause did not refer to an administrative offence. These were the serious offences Clause 109 was the corresponding sentencing Clause and penalties might need to be revised upwards.

Ms Bednar-Giyose said that it was appropriate to consider also the nature of the body authorised to impose those penalties. The Enforcement Committee of the Regulator was quite a different entity from the Johannesburg Stock Exchange (JSE). The Enforcement Committee was an organ of state and so might be afforded the power to impose higher penalties.

Clause 79 to Clause 81
The Committee agreed to each of these clauses without change.

Clause 82 Liability resulting from insider trading
Adv Swart pointed out that there was an administrative penalty, which would need to be increased for the sake of consistency. In addition there was later reference to a criminal sanction.

Mr Havemann noted that this was a new provision. It had not been in the Securities Services Act 2004. He explained in detail. There was a penalty of up to R1 million, and in addition one could be fined three times the profit made (if any). This was to cater for cases where no profit on insider trading had been made, and for cases where a profit had been made.

Ms Bednar-Giyose said the authority empowered to impose the penalty would have to apply its mind in determining what was appropriate.

Clause 83 to Clause 106
The Committee agreed to each of these clauses without change.

Clause 107
Adv Swart said that the Committee needed to deliberate on Clause 107(7) on submitting regulations to Parliament. He wanted to change 'scrutiny' to 'approval'. He recommended a deeming provision.

The Acting Chairperson hoped that Adv Swart's proposal would not delay the processing of the Bill.

Dr Z Luyenge (ANC) seconded Adv Swart's proposal. It was Parliament's duty to approve legislation.

Ms Bednar-Giyose explained National Treasury's approach to regulations. Not only the draft regulations but also the final regulations would be tabled to Parliament.

Mr Harris supported Adv Swart and suggested that he tabled amendments one by one.

Mr Havemann said that from a practical perspective there have to be a deeming provision. It had to be determined exactly would be meant by approval by Parliament. Practically it was a complex process. Regulations were not usually very urgent, except those in Clause 5(1)(b), which were designed to allow the authorities to respond quickly to abuses in the market.

Adv Swart asked the Principal State Law Adviser for her opinion on what was an acceptable length of time for a deeming provision.

Adv Mdludlu advised that there was nothing wrong with a deeming provision. Making regulations was a power delegated by Parliament in plenary session to the Executive for purposes of effective governance. So the Committee should not shy away from putting such a provision.

Mr Koornhof recommended that the deeming provision be for three months and that it would be the Standing Committee on Finance that should adopt the regulations.

Adv Jenkins advised against a deeming provision. There was no need for it. He suggested the words 'it comes into operation within three months', since the Constitution had certain requirements as to how the National Assembly and the National Council of Provinces (NCOP) approved legislation. It would be ill-advised to include a provision that the Standing Committee on Finance should adopt the regulations, since the names of committees could change. Also it was required to obtain the permission of the Joint Rules Committee or the National Assembly Rules Committee before inserting such a provision into a Bill. Moreover, a committee had only the powers given to it by the National Assembly or the NCOP, and this proposal would prescribe to Parliament how it must exercise its powers. The Constitution instructed Parliament, whenever it passed legislation, to consider the extent to which delegated legislation must be tabled in Parliament or approved by Parliament.

Adv Swart found this opinion very helpful and asked if the Principal State Law Adviser could take note of it in the drafting to avoid the use of a deeming provision.

Mr Havemann agreed, and suggested that the Committee agree on what it was trying to prevent. It was not desirable to constrain the executive unnecessarily, but only to prevent possible abuse of powers.

The Acting Chairperson said that the intention was not to give away the legislature's powers to oversee the executive, but to enable an expeditious response from the executive when required.

Ms Bednar-Giyose asked whether the Committee wanted sight of draft regulations or just to approve the final regulations.

Dr Luyenge said that Parliament's role was primarily in the crafting of law. He cautioned against stifling the work of Government departments by over-involvement in the details of regulations. He preferred just approving the final regulations.

Adv Swart supported Dr Luyenge's view.

Clause 108 to Clause 112
The Committee agreed to each of these clauses without change.

The Acting Chairperson postponed adoption until 29 August 2012 [subject to confirmation].

The meeting was adjourned.