Financial Sector Regulation “Twin Peaks” Bill [B34-2015]: deliberations

Meeting report

The Chairperson asked if there have been any issues raised by the Johannesburg Stock Exchange (JSE) which have been passed by in the Committee’s clause by clause reading thus far.

Ms Kathy Gibson, Chief Director: Market Conduct, National Treasury, said the only issue they had raised are the definitions of ‘financial service’ and ‘financial customer’. What Treasury would suggest, in line with the previous day’s discussions, is that these definitions be returned to in the next phase to allow issues like transformation to be dealt with.

The Chairperson said that should be noted, but the Committee would not repeatedly come back, because there is also the NCOP which is to supervise what the National Assembly does.

Ms Gibson said the Chairperson had indicated that those definitions are something which the Committee would be coming back to.

Chapter 3: Part 2 – Governance
Clause 45
The Chairperson said he had heard mention by a Member that the Committee was rushing through the Bill, with no public scrutiny and that was totally dishonest. He asked to continue with the clause by clause reading from clause 45. Receiving no response on clause 45(1)(a), he asked to move to clause 45(2).

Ms Gibson said clause 45(2) only saw a re-ordering of words.

The Chairperson said that was agreed and moved to 45(8) and asked if there was not an inconsistency with subclause (7).

Ms Gibson said this relates to the governance of the Prudential Authority (PA) as a whole.

Ms T Tobias (ANC) said she needed to understand what is meant by determined, because minutes are supposed to be a reflection of the meeting.

Ms Gibson said this is the practices relating to the keeping minutes; including the processes, how they are kept and where. The distinction relates to the functioning of the different committees.

Ms Tobias said so this does not mean the CEO would be able to determine the contents thereof.

Ms Gibson said in accordance with any meeting that should be a collaborative record of the people present, to ensure it is an accurate record.

Clause 46
The Chairperson said Ms Tobias’ point is that presumably determined here does not mean the CEO can alter the contents of the minutes. The issue is the form of the minutes, it could be bullet points or electronically stored, as long as they are an accurate reflection. On clause 46, was it correct that the Banking Association of South Africa (BASA) wants performance measurement for members of the prudential committee. It is remarkable that at every turn that the Bill requires performance management, setting performance criteria at the outset which have to be met, which is very good. In his view this submission was going a bit too far. Receiving no response from Members, the submission was rejected. On clause 46(2), he asked how could one cause proper detriment?

Ms Gibson said if a regulator in performing its duties holds a regulated entity accountable, it might have to pay a fine, which is causing detriment, but that is appropriate. Treasury has received comments around what detriment means and how it would apply, so this has been introduced for clarity.

Ms Tobias said Ms Gibson juxtaposes improper detriment with appropriate detriment and did this have any significance. Would inappropriate detriment be a more appropriate term?

The Chairperson said he felt that improper is probably more appropriate. He felt it was fine having heard Treasury and as it is not a major policy issue the point should not be belaboured. He moved to clause 47: regulatory strategies, here BASA argued that here as in the other Bills elements or aspects of what a regulatory strategy is should be given. Why did Treasury reject what was said?

Ms Marguerite Jacobs, General Manager: Legislation and Regulatory Oversight Banking Association South Africa (BASA), said this section has already been addressed in the redraft.

The Chairperson said then it should be accepted, but noted that it is for the Committee to determine whether it agrees or disagrees. He asked how Members feel.

Mr Unathi Kamlana, Deputy Registrar of Banks: South African Reserve Bank, said he was not clear about what has been changed and it has not been substantially changed from the previous version of the Bill.

The Chairperson said Members had no view, so the Committee will move on.

Clause 47
Mr D Maynier (DA) said in clause 47(4)(a)(ii) there is an obligation to invite comments from the Minister and others. Then in subclause (5) there is an obligation to have regard to all comments made in the draft. He would have thought that the PA would have to consider all comments. Was there any difference between having regard and considering?

Ms Jeannine Bednar-Giyose, Director: Financial Sector Regulation and Legislation, National Treasury, said she did not feel it had any substantial difference.

The Chairperson asked why ‘consider’ was not used.

Mr Maynier said the intention is to receive comment and have the PA formally consider these.

The Chairperson said he understood something different. Consider to him was a lighter reflection on the comments, while ‘have regard to’ is a weightier obligation, but Treasury was saying it is interchangeable. He did think that there is a distinction, but the Committee was not presenting a view. There surely is a difference between consider and must have regard to, with the latter impose a weightier obligation.

Dr M Khoza (ANC) indicated that she agreed with the Chairperson.

The Chairperson said he felt what Treasury had in the Bill was preferable. He asked to move to clause 47(2)(ii), he said the ‘to’ is unnecessary.

Ms Bednar-Giyose agreed.

The Chairperson asked if ‘administrative action’ has been defined in the beginning of the Bill.

Ms Gibson said it is the first definition.

The Chairperson asked to move to clause 47(c) which had been changed to give effect to section 34(4), which referred to the international standards. This was a good simplification and Treasury should be commended.

Clause 48
The Chairperson asked to move to clause 48, saying here assigned and referred were an issue. In clause 42(b)(viii) the Bill reads “any other matter assigned under a financial sector law”. However, here it reads “delegate any power or function referred”. Was this the correct word?

Mr Lees said he felt referred was correct, because it was referred to in section 42(b)(viii).

The Chairperson said he agreed, but legally was it correct.

Ms Bednar-Giyose said in clause 48(1)(a) was a cross reference and indicates where the powers are defined.

The Chairperson said according to clause 48(2)(a) the CEO may delegate any power, except the power to delegate referred to in this section. Why was that?

Ms Gibson said it is the power of delegation itself, as opposed to other powers which can be delegated. A licencing power be delegated, but cannot delegate the power to make delegations on one’s behalf.

Clause 48(4) – Delegations by the Prudential Authority
The Chairperson agreed and moved to clause 48(4), saying when the Committee was in the UK this came up, that a conduct authority and prudential authority could delegate powers between each other. What criteria will Treasury use to allow this. In the UK it was said that as there are thousands of institutions to cover, there were no clear criteria which made policy sense. Should there not be some form of regulation over this delegation, because do not want the authorities to become too blurred.

Ms Gibson said Treasury has deliberately not followed the UK approach. In the UK they have set up the authorities far more definitively. So the prudential authority is in the main agent responsible for the prudential oversight of systemic entities; whereas the conduct authority is responsible for all institutions’ conduct, but also prudential oversight over a number of non-systemic institutions. This is not just for small institutions which do not have complicated business.

Mr Ismail Momoniat, Deputy Director General: Financial Sector and Tax Policy, National Treasury, said the UK conduct authority does all market conduct of the banks.

Ms Gibson said the UK conduct authority is implementing the Basel requirements for non-systemic institutions, including some of the banks. This means they have to have a highly sophisticated regulatory arm for its prudential oversight. Treasury took the view that it wants more flexibility in our system. The PA should be responsible for all prudential risk and the Financial Sector Conduct Authority (FSCA) would be responsible for all conduct risk. This has benefit of ensuring that prudential frameworks are not misaligned. Further, the FSCA has enough work to do anyway and overloading it with prudential responsibility dilutes its ability to focus on dealing with the conduct of the sector. With this clause Treasury has intentionally not specified what to take into consideration, because delegation is different from an assignment of a power. With an assignment the power is no longer your responsibility, but with a delegation it is still your responsibility. Therefore, even where powers have been delegated from the PA to the FSCA, the PA will still need to have strong oversight of how those powers are being exercised. So with the aim of flexibility and the other checks and balances, NT felt this was sufficient.

The Chairperson said Ms Gibson was not answering the question, because the concern was that Members do not want the PA to unduly burden the FSCA. He understood that legally with delegations the nominee is free to say no. It would be nice to have the authorities cooperate, but the FSCA should have its focus on the financial customer, the poor and so on. What happens in the UK may be okay there, but South Africa is a developing economy. It is also about the credit regulator and the intention is for the FSCA to be far more effective than the Financial Services Board. He read from the Committee’s Report on the Study Tour to the United Kingdom at 5.2(a): a limited twin peaks model in the UK, “the UK model is not a strict twin peaks model and a focus on systemic stability seems to have been an overriding factor in setting up the new regulatory architecture.” South Africa is a bit more nuanced, because it aims for financial inclusion and customer protection. He continued reading: “the prudential authority was therefore given a much more focused mandate and prudentially regulates the banks and insurers. The conduct authority has a much broader set of authorities, including conduct regulation of all financial institutions and prudential regulation for all non-systemic financial institutions. The number of firms which the conduct authority regulates from a prudential perspective actually makes it the largest prudential regulator in Europe. This approach carries the risk of diluting the focus of conduct regulation. The UK structure may over the longer term compromise the prudential and conduct framework if the conduct authority is not equipped to monitor and address both conduct and prudential risks adequately.” This paragraph was consistent with what Treasury was stating. He was asking, while not being over regulatory, does the Committee not want to in some form have a loose framework for delegation of powers from the PA to the FSCA.

Ms Tobias said the National Credit Regulator (NCR) is within a different government Department and the Chairperson has raised how to deal with conduct in the context of the developmental state. She liked the flexibility, but there is the challenge of building synergy between authorities. In her opinion that would be done through regulations and guidelines to determine the relationship between the two authorities. The way the clause stands to her could provide enough flexibility for that.

Mr F Shivambu (EFF) said in a meeting which he had attended dealing with the FSRB he had heard reflections that the Committee is not engaged with ‘twin peaks’ regulation. The UK system is not a ‘twin peak’ model, the Bank of England made this clear. The UK has a prudential regulatory authority, a conduct authority and a financial ombuds. The Bill is going culminate in the PA, the FSCA and an ombuds council, leaving the NCR to exist. And it is also leaving the Financial Intelligence Centre (FIC) as a separate entity. That is not a twin peak model and that needs to be clarified in the finalisation of the Bill, including defining the functions of each authority so that it does not cross the borders on issues.

The Chairperson said a lot of that work has been done and he was sympathetic to Mr Shivambu’s being a whip of a smaller party. The Committee support staff had done some work on this matter and all the issues raised have been covered. The decision was to use the phrase ‘twin peaks’ in a limited sense, as a label. So the Committee agrees with Mr Shivambu and looking at the Committee’s Report on the Study Tour to the UK it states as much. He ruled that there is nothing to respond to, because the ground has been covered.

Mr Shivambu said he did not get a sense that that was the case. In the concluding remarks of the Report of the Study Tour it reads “even while the contents and aspects of the financial system are different in the UK, there were many valuable lessons learnt for the processing of the proposed South African ‘twin peaks’ model.” There is still insistence on the twin peaks.

The Chairperson said twin peaks was in inverted commas and the EFF’s position was noted.

Mr Shivambu said what then becomes important is when functions of each regulatory authority are defined, none of those should have overlapping functions.

The Chairperson said the Committee is not disagreeing.

Mr Maynier said the overall architecture is a substantive issue and he had previously raised the matter of the third enforcement peak, which still interested him.

The Chairperson said Mr Maynier had indicated this previously and if he had something in writing he ought to submit it to the Committee.

Mr Maynier said this was related to his question previously about who investigates the South African Reserve Bank (SARB).

The Chairperson said Mr Maynier raises an interesting point, that Mr Andrew Tyrie, Chairperson of the United Kingdom Finance Committee, has a new enforcement peak. He asked the Mr Maynier to submit a position; Treasury and the Committee support staff would do further work.

Mr Momoniat said whatever it is called, it will never be accurate on the system, but the key issue was that while South Africa is good at prudential regulation Treasury wanted to create two regulators/ One for each of the dedicated functions: prudential where there is the SARB and the market conduct authority would focus on market conduct. Part of the reasoning was that prudential regulators always prioritise prudential aspects and ignore market conduct. The blood of a central banker is good on prudential, but lousy when it comes to market conduct. Treasury felt there needs to be two dedicated regulators and force coordination. The Committee would need to allow delegation from one to the other, because with pensions for example the SARB has had to put in place expertise to deal with the prudential aspects of pensions, but there are also market conduct issues. It may well be that initially both the prudential and market conduct remain with the FSCA, being the FSB, , until such time as the prudential regulator is fully prepared. Treasury did not want to legislate that, because it is a discussion to be had. The Chairperson was correct that permanent delegations are not what is wanted. To the extent that the FSCA is so overburdened that it does not focus on conduct work. He felt there was need for such a clause, especially in the early years. Treasury was not taking a pure approach and saying twin peak for the sake of it, clearly distinguishing the PA and FSCA. That would be nice, but the world is not so pure and we must allow for reality. On the twin peaks Bill, the two focus areas are prudential stability and market conduct. Financial integrity is deal with in a sense through the FIC in a sense does not deal only with the financial sector, which is why when it comes to performance it gives the responsibility for money laundering in banks the SARB. So the focus here should be on the prudential responsibility and market conduct. The delegation section is quite critical for the early years.

The Chairperson suggested that the delegation be limited to being within a framework determined by the Minister or something along those lines. This would allow for flexibility and the Committee could put in its report, note clause 48(4), but there are reservations about how it will work in practice. The matters about South Africa’s model not being a pure twin peaks model, will be stated in the beginning of the report. He would like to leave this clause in abeyance and come back to it in the next round, but consider something like a framework. This would limit the executive’s discretion, while still providing latitude and allowing the Committee to scrutinise the delegations. If this is over-prescriptive, then he was prepared to forego.

Mr S Buthelezi (ANC) agreed.

Ms Jo-ann Ferreira, Head of Department: Insurance Regulatory: Framework, Financial Services Board, said through the lifetimes of the two regulators there will be very different circumstances which could lead to the regulators delegating to each other. Once the Committee considers the Insurance Bill, it will note the introduction of a micro-insurance framework. Many of the new micro-insurers will be in an incubation phase and will have prudential requirements, but a lot of conduct requirements. The thinking was the FSB could negotiate with the PA to deal with the prudential aspects of the micro-insurers during the incubation phase to play a developmental, support role. The FSB is thinking about a new regulatory framework for funeral parlours which also have prudential implications, but it might be appropriate to leave them with the FSCA for a while, because by its nature it is more developmental than central bankers. Those are examples, so it will be difficult to prescribe a framework within which to do that. It is also sometimes difficult to draw a distinct line between prudential and conduct, which is why the FSB would prefer the wording as it is.

Ms Tobias asked if the prudential authority has capacity to look at conduct matters, so that it does not look at minute things which are to be dealt with by the FSCA. She would assume there are a lot of institutions which would have to be regulated and that would mean many SARB subcommittees will have to be established.

The Chairperson asked if the conduct authority would be able to do prudential work, because this is more technical; as this clause deals with delegating from the PA to FSCA. The Committee was not saying it would be easy to do a framework, but there are other options such as saying in a way which is sensitive to the important respective role of the PA and FSCA. The Committee recognises that there have to be delegations and the point Ms Ferreira was making was made in the UK, because it is not clear where prudential ends and conduct begins. The Committee recognises fluctuating circumstances and what is required now could be different from what is required five years from now. However, the Committee was saying that it does not want the conduct authority to be unduly burdened with prudential issues, bearing in mind that South Africa is a developing country and its authorities may not have the requisite skills. Whether the word framework or the clause itself is tightened, something must be come up with and the Committee would come back to the clause.

Mr Momoniat said the FSB currently does a bit, but largely does not do prudential regulation. They have begun to change to enable themselves to do that and capacity will need to be built. Many of the institutions it regulates are small and there are developmental issues about wanting them to also act in the prudential space. These smaller institutions may not be very prudentially relevant, but that needs to be done and they must deliver what they have promised to their customers. So, the prudential issue does come up. He remarked that the proposals in the FSRB were quite revolutionary and in the initial presentations the banks were pushing against the imposition of market conduct requirements, as they were not used to it. The way it is going to be implemented has a role for the Committee, looking at what progress has been made. Government should be coming back to the Committee to indicate what it intends for year one and going forward. Once there is certainty about the legislation government can really start looking at what happens initially much more seriously. With the financial sector, like with tax laws are changing so often and there will probably need to be an annual Bill. This would allow Treasury to g //not something which can be cast et assisted with the challenges it encounters, because these rules should not be set in stone. The intention with the FSRB is to try to get the big vision in place and yet have the enabling mechanisms for the transition.

Mr Kamlana, on the Chairperson’s concern about overburdening FSCA with prudential issues, looking at the scope of the PA this covers large banks, insurers, market infrastructure, securities services providers and the like. He did not think there was any way, given the systemic importance of these institutions, that those kinds of functions would be delegated to FSCA. However, there are prudentially relevant firms, but where the balance of conduct issues versus prudential is in the favour of the conduct aspects. Often, even if there are prudential requirements they are basic and do not need the kind of prudential capacity required by the PA. Where the conduct risks are greater it is important for FSCA to be closer to those firms. On being developmental, micro-insurers and cooperative financial institutions are basic institutions where people’s savings are held. However, the prudential requirements on them are much simpler than with a large bank. It can also be argued that the approach of a PA located in a central bank may not be suitable to a basic, start-up cooperative financial institution. That is the motivation behind the clause, not that the PA would ever get to a point where it over-delegates to the FSCA and hamstrings its operations.

The Chairperson said Mr Kamlana had provided a possible framework, in the balance of conduct matters or prudential matters. If that could be put into a few words and added to the clause that would remedy his concerns.

Ms Gibson said Treasury would be cautious of trying to hard code matters, even in the example given. This may work in this example, but it may not work in another example. She agreed with the risks presented by the Chairperson and was why Treasury elected this model. She proposed coming back with improved drafting.

The Chairperson agreed,

Dr Khoza said she was not sure whether Treasury has presented a high level institutional arrangement architecture, to give Members a sense of what will happen practically. It is one thing to consider a Bill and another to take into account the real operational issues which could compromise efficiencies. The reason this bothered her was that she did not think the SARB would have no expertise in areas like pension funds or short term insurers, as they have largely been focussed on banking. The FSB may suffer some system shock, because it has not been dealing with banks. It is important for Members to at least get a feel of how it will look, because she was envisaging a situation where there is going to be a massive migration of skills between the regulators. Also need that high level architecture, because the different sectors are specialised and she did not think it would be a good idea to have an institutional arrangement where banking is lumped with short term insurers. Especially, as the standards and procedures which would be used for a bank, may not be compatible with banks or pension funds. It is important for Members to process this information from a very informed perspective, allowing them to contextualise the provision. As much as the Committee delineates prudential and conduct issues, the FSRB is going to bring a big shock to both aspects. She was unsure whether the Committee had already pursued these operational issues, but Members need to understand the effect of their legislative decisions.

The Chairperson said Members may recall that NT provided an overview and architecture. He suggested Treasury provide this to the Committee again, as Members receive volumes of documents. Perhaps, it would be useful to relook at the original architecture or organogram provided to asses where the Bill had gone, being sensitive to the Committee’s concerns. This could try to answer some of the questions Members had been raising in recent sessions. All that was requires was a one page document, with a diagram explaining things.

Ms Gibson said that is very doable and asked if this should also include the transitional arrangements.

The Chairperson agreed and said this could help resolve some of the concerns Members had. He summarised that there ought to be delegations and the input from the FSB and SARB have been very helpful. At the very least, the clause should include something like ‘bearing in mind the need to ensure the specific roles of the authorities are kept in mind’ and perhaps have this regulated by the Minister.

Mr B Topham (DA) asked if the powers or duties being delegated were defined in the Bill or whether only the objects and functions of the authorities were stipulated.

Ms Gibson said the powers and duties are defined in the Bill. These are the powers given to exercise these functions, including the inspections, investigations and standard setting powers.

The Chairperson asked why subclause (7) was inserted and why in this draft.

Ms Gibson said it is because this Bill is going to run alongside other sectoral laws already in place, some of which do give delegation powers and this Bill does not intend to interfere with these powers.

Clause 49 - Disclosure
Mr Lees said clause 49(3) requires disclosure of conflicts of interest, unless it is agreed that it is not material. What is not dealt with is to deal with is non-disclosure which has already occurred and later been discovered. What are the consequences of this, not just for the person concerned, but for the decisions made?

Adv Frank Jenkins, Senior Parliamentary Legal Advisor, said it lead to a voidable decision, but it would depend on circumstances and it difficult to form a blanket outcome, but if there is no disclosure it is challengeable by the person affected by the decision. The consequences of the non-disclosure for the person affected could be put into the clause. Looking at supply chain management bid adjudication committees which are in a sense analogous, their decisions under the new regulations can be declared void by the Minister on such grounds. So, something of that nature could be put into the clause.

The Chairperson said previous legal advice has indicated that the consequences for the person involved would be they would face the rules of conduct, including discipline or censure. The consequence for the decisions is that the action is null and void. Further, disadvantaged parties are likely to take the decision on review, to nullify the decision. So, the consequences are covered in ordinary law.

Ms Bednar-Giyose said she would agree with what Adv Jenkins has said and there could be some additional wording suggested. In clause 281 dealing with regulations and guidelines, it has been provided that the Minister will issue guidelines relating to the disclosure of material interests. Perhaps that could be specified.

The Chairperson said if that is done, then similar wording will have to be inserted wherever there is non-disclosure.

Ms Ferreira said if this is read with clause 46, then the disclosure requirement is part of one’s duties and contravening these is a criminal offence. So there is already a consequence for the person who failed to disclose.

Mr Lees said he understood what was being said, but his only concern would be that the aggrieved party is not made aware of that, as they may not be part of the committee. The disciplinary action may be taken against the non-disclosing person, but the aggrieved party cannot take the common law action available.

Dr Khoza said she was not sure if clause 49(2) has been clarified with regard to what as soon as practicable, because that to her sounded wide and ambiguous. What sort of parameters would be used to determine what is practicable.

Ms Bednar-Giyose said as soon as practicable is meant to convey that the person is required to make an effort and disclose the interest promptly. Treasury did not specify a specific timeframe, because circumstances would vary. This was not an exact term, but it is intended to require prompt reporting as soon as they become aware of the conflict.

Adv Jenkins said he did not think the judge would be look at this subjectively and would take it to mean as soon as reasonably possible, depending on the circumstances. If Members remembered the first floor crossing legislation, this was found unconstitutional as it was not passed within a reasonable time. Parliament gave reasons for the delay, but objectively viewed these were insufficient.

Mr Maynier asked why clause 49(6)(a) had been included,

Ms Gibson said this was to prevent disclosing run of the mill interests such as having an insurance policy or having a bank account, as opposed to an ownership interest

Mr Maynier asked for clarity on clause 49(6)(a)(ii).

Ms Gibson said they would all be employees of the SARB, so it would not be necessary to disclose this.

Ms Tobias said she has an issue with how to measure materiality. What are the standards of an issue being material?

Adv Jenkins said it has reasonable and depends on whether it is material to the decision. A court will ultimately decide.

The Chairperson said similar concerns had been raised around the use of the word fairness in legislation and these words are not able to be precisely defined.

Dr Khoza said she understood the explanation by Ms Gibson, because simply because she was a customer of a bank did not mean it was necessarily going to raise any conflict.

Adv Jenkins said the reason material is in clause 49 is because any interest is used in subclause (1), which must be qualified to limit the scope. If someone wanted to challenge a decision then they would be able to point to any interest, allowing for frivolous challenge.

Chapter 3 - Part 3: Staff, resources and financial management
The Committee accepted clauses 50 and 51 without discussion.

Clause 52
Dr Khoza said why the wording was it removed and then re-inserted.

Ms Bednar-Giyose said the words were highlighted and this is the way the tracking works.

Clause 53 – Financial Management Duties of the CEO
Mr Buthelezi said the clause speaks to delegation of authority to the CEO, looking at governance generally there are types of delegations. For example within the PA should be certain committees such as an audit committee. That committee gets delegated authority from the authority itself, but he did not see where the PA was empowered to do these governance type delegations. Clause 53(d) requires disclosure of material facts relating to the affairs on request to the minister or governor. The CEO should know who they report to and it should not be both. The governor or commissioner should be requesting information which the CEO had provided PA. He was unsure whether the audit committee was provided for, but these matters come through delegations from the main entity.

Ms Gibson said those are all covered and there are different clauses dealing with this. The Bill has Public Finance Management Act requirements built in. The powers vest in the prudential authority and are exercised by the executive, which is the CEO. It then provides for delegation and that can happen unless specified otherwise. With the PA this is retained for the exercise of duties by the committee itself. The Bill also provides for various governance arrangements including financial management in clause 53 and annual reporting in clause 45.

The Chairperson raised the issue of costs, which had been a recurrent theme, saying clause 53(a) allows the PA’s CEO to recommend the fees for prudential supervision and later subclause (g) talks about collecting revenue. He asked to be reminded how are these fees decided, who are they from, what are they for and what are the implications for the customer.

Ms Gibson said these fees are not the levies. The main costs are the costs of supervision which will come through in the levies which a money Bill will have to be submitted on. This is for fees relating to trivial administrative matters, like photocopying.

The Chairperson said costs were one of the Committee’s big themes. In the UK the Committee was told that actually the customer bore a significant part of the costs, although they did eat into profits. The levies would come in phase two, there does not have a Bill necessarily, but Treasury can tell the Committee about the key elements. As the Committee in its report to Parliament intends to make it clear that the FSRB will be passed, on condition that in phase two certain things will be done.

Dr Khoza said she was unsure what the Committee was being told was true, because having worked in the retirement industry she knew there were fees paid to the FSB. These were for all manner of things including training, but it was not known how they are determined. All key individuals and compliance officers have to write certain exams, which the FSB charges for. So, she did not think it is limited to making photocopies and was much more than that. It was important that the true reflection of what was being spoken about was put forward.

Ms Gibson said she incorrectly minimised this and Dr Khoza was correct. It is correct that the main costs being spoken about are the costs of supervision which will go through the Money Bills process. But it was not as minimal as just photocopying. There were for example costs attached to an institutions’ licence application, which can be more sizable. With insurance this can be in the region of R500 000.

The Chairperson said he was very concerned about this and for Ms Gibson to reply like this required a censure. Ms Gibson had been dealing with this Bill for very long and could not say she did not understand what the fees were for. If Dr Khoza had not raised it, the Committee’s understanding would have been that it was for minor things like photocopying. He was concerned whether Ms Gibson should be addressing the Committee and he would speak to Mr Momoniat outside the meeting. The weight is on her to show that it was a negligent, human failure on her side, but he found that astonishing given the quality of her responses. So the question arises how much is Treasury taking the Committee for a ride, because that was a completely inaccurate answer.

Mr Momoniat said there is a line between fees and levies. Ms Gibson was not part of the tax team and he was going to correct the position on fees.

The Chairperson asked why he did not, before Dr Khoza asked. Mr Momoniat should have intervened before.

Mr Momoniat said his point was that not everyone is an expert on every aspect. The issue really is how we define a tax. This is an unrequited payment made, by definition nothing is gotten in return. A fee paid to an institution is for a specific service, such as for a licence application. Mr Maynier had asked this question about wanting to see the financial structure and the levies. Treasury had responded that it did have a Money Bill, which would only deal with the levy part. The fees are not presently covered by the Money Bill, so there does need to be a framework for the entire thing. With the FSB for example there is some approval, with it writing to Treasury annually indicating what it charges for and its intended increases. He felt there should be more transparency in the system, because we do not want any institutions to determine its own fees and levies. There may be inefficiencies and governance issues. Regulators argue they must determine their own budgets, because of transparency. Treasury’s response is that as we live in a democracy they must justify their budget. It is a bit different being the SARB, because this happens within the SARB. The FSB currently charges fees and levies, but he did not think it was very transparent. This matter is not settled even amongst government and there was a draft Bill in 2015. The financial sector team did it and he felt it did not deal with the Money Bill issues sufficiently. For example, the first attempt was to mimic what the FSB currently does which is charge for specific activities.

The Chairperson said Mr Momoniat was giving a long response, but essentially the point was he was responsible for the Treasury team and he ought to intervene. If people respond in the manner which Ms Gibson had, it makes Members suspicious.

Mr Momoniat apologised and said it was a mistake.

Mr Kamlana said to clarify the current arrangements for the Banks Supervision Department, there are regulations 58 to 60 which prescribe all manner of fees which SARB can charge banks, including annual licence, licence applications and the like. That is in term of regulations and there are certain formula used to apply to various kinds of banks or services that the regulator offers. That was the understanding of what that clause covered, separate to the levy.

Mr Buthelezi said having listened to the quality of the response from the team and Ms Gibson, he felt the Committee should give her the benefit of doubt. The Committee has been dealing with this Bill for some time and he had been quite impressed with her. It was a material stumble, but the benefit of doubt should be given.

Ms Tobias suggested that the Committee should look at the levies dispensation and how fees are charged presently, so that it can deal with how levies are structured in the Money Bill process. The Committee would not be able to deal with the levies presently, because it is not covered by the legislation. This should be noted, to be investigated without pre-determining how levies are to be charged.

The Chairperson said the point is not ultimately about whether Ms Gibson intentionally fumbled, it is more about the group coming to the rescue of someone who has not presented full information. Secondly, given the Committee’s limited resources it is not able to evaluate some of the more concrete answers given regarding financial matters especially. Thirdly, if Dr Khoza had not raised the question it is doubtful whether the clarity would be secured. The Committee agreed to look at the matter of costs in all its dimensions, which is not only about the average customer who simply banks. It is also about the emerging entrepreneurs, because licence fees seem to be very prohibitive and seem to be based on the existing monopolies and big players in the sector. In many sectors government encourages emerging entrepreneurs and new entrants, but there are huge fees they have to pay which disadvantages them. He was pleased to hear Mr Momoniat saying that there was some supervision, but if we are talking about transformation then the Committee will have to find some way of dealing with this in this Bill. If it is shown to be impossible to deal with it in this Bill, something will have to be put in the Committee’s report.

Ms Ferreira said it is important to understand how the FSB sets fees. Specifically in insurance a detailed work study was done on licence applications, what in addition to normal supervisory duties and how much time and effort, which levels within the organisation need to work on that application. So there is a formula which incorporates salary levels, time required and other factors. It is not simply that the authority arbitrarily decides on an amount. The fees vary quite a lot, so a licence application may be quite a lot, but simply wanting financial statements of a regulated entity this could be far less. Currently under the fee provision, the FSB also allow for exemptions, for research purposes and the like. Also in the FAIS environment there is a dispensation for new entrants. As part of plans going forward and the FSCA, inclusion and transformation have been key issues.

Dr Khoza said she accepted that Ms Gibson may have understated the importance, but Members need to acknowledge that the fee structure is a major barrier to entry into the financial sector for black people in particular. The insurance sector is a ‘no no’ for previously disadvantaged people, because of the fee structures. Here she understood the reference to be to supervision fees, but it also talks about other services provided. For example, FSB may pick up an issue in a regulated entity and for doing that they charge it. Then something else is found and they charge again, so before you know it the Bill is ballooning and there is no way to budget, especially around issues of compliance. Compliance is another key area where emerging players in insurance and pension funds industries face, especially with regard to fees for training senior executives. The pass marks for these examinations are also not realistic for many employees, the key individual examination requires 65%. She had seen employees who had gotten 60% and had to go there more than four times, having to pay a lot of money. So there was a lot hidden under this and that is why she interjected. She had been involved in that sector and knew very well that it was a major barrier to entry.

The Chairperson said these issues have been raised previously and he was drawing starkly to Treasury’s attention that the concern was not only financial customers, but also emerging entrants. He did not want an elaborate discussion, because it was not germane to this Bill. However, the Committee did want to put something into this Bill and NT should bring a considered, reflective opinion taking into account what Members had indicated. So the fee structure should be more sensitive to creating the space for emerging players. Treasury must deal with this political matter politically.

Mr Topham wanted to put on record that as soon as Ms Gibson had made her statement he had seen that she had realised her mistake. This clause is not talking about FSB fees, these are PA fees. The discussion earlier does not slot in here and most of these fees are not new fees, they exist. Having in the past tried to get a banking licence, he wanted to caution that those barriers to are there for good reasons and they are not colour barriers, because many white people cannot afford the millions necessary. South Africa is falling on many lists around the world, but our banking and financial services sector are among the best in the world for good reason. If we take the American approach of making a banking licence cheap, we are going to have a much bigger social problem when pyramid scheme type banks fail. Members must understand that if banking licences are given out there are problems.

Mr Maynier said he felt the Chairperson’s response to Ms Gibson was disproportionate and it was an honest mistake. The Committee has identified the financial implications as a substantive issue, which will be revisited. The present discussion was testament to that. However, he had been under the impression that the Committee had had a commitment from Treasury to receive the Money Bill concurrently with the FSRB. Given the discussion, he felt there may be merit in the Committee having a special session on the financial implications of the Bill.

Dr Khoza said the Committee is discussing the prudential supervision fees and other services provided by the PA under the FSRB. There is a long list of charges and the way Mr Topham speaks, she did not think he had sufficient appreciation of the evolution of the banking industry in South Africa and what has happened with standards. Most of them started off as cooperative banks and then became commercial banks. Now if one wants to establish a bank it is almost impossible, because of the standards required. That is why it will always be a difficult thing to transform the financial sector and that is why ANC Members were interested in these matters. One cannot divorce the evolution of the banking sector from the racial segregation of the country.

Ms Tobias asked have a separate discussion, so that this is not debated. Members are debating and are moving from an uninformed position. This matter is crucially important and the Committee has agreed it needs to look at the developmental agenda.

The Chairperson said that was agreed to and the Committee was setting the framework.

Clause 54
The Chairperson asked what STRATE’s concern was.

Ms Gibson said the comment was on the information which can be provided. Clause 54(1) requires the CEO to provide NT with information. STRATE’s concern was that this could lead to an executive intervention and somehow threaten the independence of the institution. Treasury believes there is certain information which is necessary on aggregate for it to effect policy decisions.

The Chairperson agreed and no Member raised an objection.

Clause 55
The Chairperson asked what had been done with clause 55(1)(b).

Mr Kamlana said when the SARB had deliberations on its internal auditors, they requested that this wording be aligned with the financial reporting prescripts which already apply to the SARB. /Some aspects would have meant requiring the PA to have different auditors and a different auditing process. That would not be necessary given that the SARB is already required to do. So this is an alignment and the annual report of the PA is retained, but the rest of the financial reporting and statements will form part of the annual report of the SARB.

The Chairperson said the subclause (1)(c) requires submission to the Minister for tabling, but in any case the SARB tables its report and the PA is a substructure of the SARB. So what is the effect of the PA tabling its report separately and why does it not do this with the SARB.

Mr Momoniat said the intention is for the PA to be a separate unit within the SARB and it is accepted that some of its financial reporting will be part of the SARB’s In the next chapter which is FSCA, there is no need for such a clause, because the PFMA covers it. The SARB is not in the PFMA and to the extent that some annual reporting is wanted on its activities there should be a clause to that fact.

Ms Gibson said this goes relationship between the PA and the SARB. The intention is to have the PA as a separate, independent entity. With accountability taking place there. On the levies side, banks currently have not paid levies this has been through their reserving with the SARB. Even these processes are shifting to a place where it can be seen how much money is being raised from industries and what it is being used for.

The Chairperson said he felt this was fine and asked why subclause (2) was removed.

Ms Gibson said this is part of what Mr Kamlana, where it is better aligning to the SARB processes.

Chapter 4: Financial Sector Conduct Authority
Clause 56
The Chairperson asked why the words in clause 56(2) were deleted.

Ms Gibson said who the accounting authority was for the FSCA was subject to a lot of debate. The preference, even though it is being deleted, is to restore this provision to put accountability squarely in the hands of one person.

The Chairperson said he would personally prefer that, as it was the way it was done under the PFMA.

Mr Momoniat said at times there will be boards which will be the accounting authority, but with the South African Revenue Service for example it is the Commissioner. The issue here is that at the top the executive committee is made up of a group of four or five people, should it be treated as a collective entity which is the accounting authority. Or should it be the Commissioner. His personal preference was for the Commissioner. However, there was a view within NT that it should be collective responsibility, so that the Commission is not significantly more powerful than the other deputy commissioners. When decisions are made of a regulatory nature the intention is for them to act collectively, rather than have one person in the FSB as the registrar and break silos which are in the present current system. He felt that where there was money responsibility it was better to have a single person.

Dr Khoza asked if there were any comments from the sector.

Ms Bednar-Giyose said that in the PFMA for public entities (as distinct from a department with an accounting officer), there are accounting authorities. This is generally a collective as either a board or other governing body of the entity. That is why the wording was included which was proposed to be restoring, because if it is a single individual it has to be specified in line with the PFMA.

Ms Ferreira said the FSB’s position is that it should be the collective. In its internal engagements it proposed to Treasury that it would prefer the collective, because the planned path of the institution is towards collective decision making. It is also felt that if the Commissioner is allowed to take all the money decisions, that undermines the collectively. However, Treasury is the authority and the FSB would defer.

The Chairperson asked what NT’s current position was.

Mr Momoniat said he was open to either and he had a preference for a single person. Like Ms Bednar-Giyose said, if the intention is for the single person the deleted wording must be restored.

Adv Jenkins said it is correct that the PFMA does state that if there is a controlling body for the public entity that is the accounting authority, if not it is the CEO. Treasury in exceptional circumstances may designate another person, so it can be done. For him it was better for governance to have a single person, because in a committee it is very difficult to place blame where people say they disagreed and were overruled by the majority. Rather than having an exception with regard to the PFMA, if the FSCA wants to it can apply to have its preferred position.

Mr Maynier said on the face of it appears that it should be one person, because at the end of the day it was about deciding who has power. Whoever controls the purse is going to have power and governing by collective is no government at all.

Dr Khoza said she preferred an individual, because this is an accounting authority it might affecting operational efficiency if things are left to a body.

The Chairperson suggested that if there was not major disagreement, the Committee accept what Dr Khoza and Mr Maynier stated.

Clause 57
Dr Khoza said with subclause (a) financial system and market are completely different things, because it looks like the intention is now being changed.

Ms Gibson said the market is a subset of the system and that is the point. It should be kept in mind that integrity in this context is not the FIC type, it was not referring to financial crime. It is about the integrity of the market infrastructure. The concern raised about financial system was that it was so wide that it then includes the payments system. That leads to a conflict in jurisdiction with the national payments system which the SARB is responsible for and what the conduct authority handles. Going forward, those two frameworks should align, but this cannot be done under this law.

The Chairperson on clause 57(b)(ii) and financial literacy, said in South Africa these are key things and the Committee must stress in its report the need to intensify these programmes and monitor progress. He quoted the Committee’s report on the Study Tour “the UK has a broad range of consumer protection bodies, which inform the public about their rights and responsibilities in the financial sector. Some of these consumer protection bodies are funded from public finances, in return they play an important role in educating consumers on financial products and services and the sector as a whole. Other consumer bodies are not publicly funded, but are funded through levies and fines, and educate the financial sector service users and the public at large about the financial regulations. This need for financial education of the public is even more crucial in South Africa and SCOF needs to give concerted effort to this”. What Members found was a very impressive organisation, which seemed to suggest that even a literate society like the UK there are astonishing levels of ignorance and consumers make very stupid, impulsive decisions. He felt that this matter ought to be raised in the Committee’s report and monitor what is being done. On financial education, the Committee would like some sort of discussion when it comes to implementation of the Bill, but did NT have anything in mind on what it expects from the FSCA.

 Ms Gibson said there is an existing committee which brings together all the different stakeholders in the financial education area, which Treasury is chairing and the FSB participates in. Currently there is a scenario which is overly fragmented. So there is money being allocated and programmes happening, but that is happening differently across financial institutions. Between the FSB and financial institutions there is some overlap and duplication, but also underlap. Presently NT is developing a plan to refine the responsibility of all these relevant categories of institutions. Treasury’s role would be the policy framework vis a viz the regulator which is best placed to be taking forward initiatives which the financial institutions cannot; such as getting financial education more concretely into the school syllabus. The financial institutions, being the more frontline, can take education opportunities to customers. The resources are available, a lot of good work is being done and it is about leveraging off the resources better. Also, how do we take the learning from what has been implemented incorporated to make sure that the programmes which follow benefit from the experiences.

Ms Buthelezi said agreed with the need to focus on this matter. Perhaps the Committee should have a way of measuring the effectiveness of these programmes.

Ms Ferreira said the FSB also does consumer education. A recent survey was done on financial literacy on the FSB’s website. For example, on the FSB website there is a coin character which is a programme called “My Money, My Life”, which explains critical things about saving, different types of polices and the like. Together with Treasury and the Department of Basic Education there is work to introduce financial literacy within the school system. There is a lot of work being done and the FSB’s annual report has a whole chapter on that. What is good about the new clause is that it makes consumer education part of its fundamental mandate. It would allow more to be done, as the FSB was only required to assist other institutions.

Mr Momoniat said sometimes he differed with the FSB on how successful these efforts have been, because education and literacy does not come from only one source. Events may trigger it, such as going through the process of acquiring a bond. In the UK, the Money Advice Service gives generic type information. It requires quite a disciplined approach, looking at all the techniques. It is an important topic and warrants a dedicated discussion, going beyond the conduct authority. NT intends the levy to cover these activates.

The Chairperson said in the UK they use a lot of internet and also have a call centre, but this may not be as applicable in South Africa. Secondly, there they also require the banks to provide a certain level of literacy, with requirements on them. Does the same apply here? For example if a loan was provided.

Mr Momoniat said one must also differentiate between financial advice and financial planning. South Africa has a financial planning institution which is not a public body, because a financial advisor will advise on how best to finance a car, but a financial planner will ask if you really need the car. In South Africa financial advisors currently covered by FAIS, which is what gets them intermediaries, but do they have an incentives to sell those because of commission. There are a lot of conflicts which come with advice and banks today will say they do not generally provide advice. All of these have become separated, but the bank clerks do not do this.

The Chairperson noted that this is an important aspect and the Committee would pursue it. With due respect to the FSB, the last time it had presented the Committee was not very warm towards the work being done. With the new Bill more must be done.

Clause 58
Mr Momoniat asked for the “subject to this Act” in clause 58(1)(a) to be moved to the end.

The Chairperson noted no dispute and agreed. Here BASA was raising quite a big theme about how to get coordination between the National Credit Regulator and FSCA.

Ms Gibson said to highlight that there was an additional comment from ASISA on clause 58(2). On coordination, what NT tried to do in conjunction with the FSCA, NCR and Department of Trade and Industry has been refining the provisions to make that more clear. Those provisions supported by the coordination mechanisms as provided for in the memorandum of understanding. Those initial definitional lines are important in the beginning.

Mr Topham said reference to section 108 in clause 58(2) does read awkwardly.

Mr Gibson said there is improved drafting even post the draft Members had and that would be deal with all together being clause 58(2-3), read together with clause 106 and 108.

Mr Topham said wanted to check whether section 108, because he was not sure what that was.

The Chairperson said the cross referencing was to be checked by the support staff for now and in phase 3 the NCOP would pick it up.

Mr Maynier said this is a substantive issue and he asked for an indication of how the Chairperson intends to deal with substantive issues.

The Chairperson said it was not him, the approach was collectively agreed. There was nothing new, unless there was a new proposal on how to proceed.

Mr Maynier said he might not have understood.

The Chairperson said the Committee started by looking at the overall policy issues, then it proceeded to a clause by clause reading and consideration of NT’s Response Matrix. The Committee decided that the 16 themes identified by the Committee, one of them is the relationship between the NCR, the FSCA and other relevant authorities. The Department of Trade and Industry was given 14 days to come back to inform Members of whether they found synergy. Basically once the Bill has been gone through and Members get a better understanding, then it will look at those 16 themes checking whether clauses need to be strengthened. Then the Committee will do the formal clause by clause processing. If there is any better or more effective method it should be put forward.

Mr Maynier said he was comfortable with that proposal. He however had not seen a compelling reason from the NCR or DTI as to why they should not be included under the second peak and would still like to be persuaded. So he would like to see it included.

The Chairperson said issue of synergy between the NCR and regulators was a theme which the Committee had already picked up and was considering it because it is objectively necessary. Old debates about collapsing the entities would not be opened without the majority’s concurrence. There is a chapter about cooperation there a better sense can be gotten of how it will operate. He then declared the meeting adjourned.