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GENERAL FINANCIAL SERVICES LAWS AMENDMENT BILL

(2008)

BRIEFING TO THE SELECT COMMITTEE ON FINANCEBRIEFING TO THE SELECT COMMITTEE ON FINANCENATIONAL TREASURYNATIONAL TREASURY

25 JUNE 200825 JUNE 2008

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STRUCTURE OF PRESENTATION

• BACKGROUND

• OVERVIEW OF MAIN PROPOSED AMENDMENTS

Approach in the presentation will generally be as follows:

(1) Issue for review

(2) Brief summary of law governing the issue

(3) Problems / motivation for amendment

(4) Outline of proposed amendment

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BACKGROUND

• General Financial Services Laws A/B (GFSLAB) amends a number of

financial sector laws under the administration of the FSB and SARB. In broad

terms, the amendments are proposed to bolster the enforcement of a

number of laws and to tighten existing law.

• Some amendments follow from issues such as Fidentia.

• Abuses have indicated that there are a number of areas in our financial

sector laws which could be strengthened.

• A thorough review of all financial sector laws and the co-ordination between

different regulators is on-going. Process commenced in 2007.

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BACKGROUND

• Requires interaction and co-ordination between bodies such as the NCR,

statutory ombuds (eg. Pension Funds Adjudicator & FAIS ombud), Master of

the High Court, FSB, SARB etc.

• Has been collective agreement to work together to identify weaknesses in

our financial regulatory system and methods by which to address them.

• But a number of interventions can already be implemented (through

weaknesses already identified). The amendment Bill addresses these.

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BACKGROUND

• Most proposed amendments concern laws administered by the FSB.

• Section 3 of the FSB Act provides that the functions of the Board are:

– (a) to supervise the compliance with laws regulating financial institutions and the

provision of financial services;

– (b) to advise the Minister on matters concerning financial institutions, either of its

own accord or at the request of the Minister; and

– (c) to promote programmes and initiatives by financial institutions and bodies

representing the financial services industry to inform and educate users and

potential users of financial products and services.

• Should be clear that supervision is not merely reporting non-compliance but includes

the ability to take action. Enforcement is a crucial aspect of successful financial

regulation.

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BACKGROUND

• Financial Services Authority (FSA) in the UK, for example, has wide enforcement

powers under the Financial Services and Markets Act. Section 6(3) makes it explicit that

“The Authority must also maintain arrangements for enforcing the provisions of, or made

under, this Act.”

• The FSA can impose fines and penalties, conduct investigations, withdraw licences,

serve injunctions against those non-compliant, “name and shame”, and even prosecute

criminal offences.

• In the South African context, an “enforcement committee” already exists under the

Securities Services Act administered by the FSB. This committee has the power to

impose administrative penalties and grant compensatory orders. The committee

however only deals with insider trading and market abuse cases, and not across all

laws administered by the FSB.

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BACKGROUND

• Amendment Bill’s broad proposal is to extend the existing concept of

the enforcement committee, in order to deter financial crime, protect the

consumer and empower financial regulators.

• The amendment Bill also gives effect to a number of technical and

editorial amendments, but has enforcement as its nexus. It is an

important step forward in South Africa’s financial regulatory architecture.

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OVERVIEW OF PROPOSED

AMENDMENTS

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SIGNIFICANT PROPOSED AMENDMENTS

1. Pension Funds Act

2. Financial Services Board Act

3. Financial Institutions (Protection of Funds) Act

4. Financial Advisory and Intermediary Services Act

5. National Payment Systems Act

6. Amendments to other Acts

7. Transitional provisions

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PROPOSED AMENDMENTS:

Pension Funds Act

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PENSION FUNDS ACTCurrent law:

• Amendments passed in September 2007 significantly increased powers of

registrar; provided for the “clean break” principle on divorce; and attempted to

prevent “churning” of underwritten retirement annuities [section 14(7) ]

• Monies paid into trust under section 37C (mostly to minors) are not subject to the

Pension Funds Act once transferred out of the pension fund concerned.

• No “fit and proper” requirements provided for concerning fund officers (the principal

officer, the valuator and the auditor).

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PENSION FUNDS ACTProblems:

• Some argue that divorce orders granted prior to 13 September 2007 need not be

actioned and paid to the non-member spouse as the provision does not explicitly state

such (despite a ruling by the Adjudicator)

• Registrar cannot remove a fund officer if such individual is not fit-and-proper.

• Insufficient protection over monies paid into trust for benefit of minors (Fidentia matter).

• Lack of clarity regarding fees payable for intermediation in the case of transfer out of a

retirement annuity fund. [section 14(7) ]

– Debate on this issue in PCOF in 2007 (commission already earned on the amount

transferred out of an underwritten RA)

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PENSION FUNDS ACTProposed amendments:

• Provide for establishment of “beneficiary funds”. Payments to minors / beneficiaries can be

made into these funds. Will provide oversight by the Registrar of Pension Funds, improved

governance and reporting.

- Current monies relating to section 37C in trust will have option to transfer into a

beneficiary fund

- As from 1 January 2009, 37C monies will not be permitted to be paid into a trust, but

must, unless the fund wants to administer the benefit, be paid into a registered

beneficiary fund.

• For practical reasons, provide registrar power to exempt certain types of funds from certain

provisions of the Act where deemed necessary.

• Strengthen the provisions concerning a fund’s principal officer, valuator and auditors with

respect to their appointment, removal and qualifications. Proposed amendments also give

such officers “whistle-blowing” rights and obligations. Any removal of such officer by the

Registrar must follow due process.

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PENSION FUNDS ACTProposed amendments:

• Clarify recent amendments to the Pension Funds Act regarding transfers

between retirement annuity funds. ie. If paid commission under the long-

term insurance act regulations, commission on the money transferred will

not be permitted.

• Divorce orders granted prior to 13 September 2007 must be paid or

transferred in accordance with the wishes of the non-member spouse (as

would happen with divorce orders granted post 13 September 2007).

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PROPOSED AMENDMENTS:

FSB Act and Financial Institutions

(Protection of Funds) Act

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FINANCIAL SERVICES BOARD ACT

Current law:• No FSB-wide enforcement mechanism exists. An enforcement committee already

exists under the Securities Services Act but only has a mandate to look at market abuse & insider trading matters. Some registrars have the power to impose penalties.

• The FSB Appeal Board hears appeals against a decision of the registrars within the FSB. The Appeal Board has 3 primary members (and one alternate for each).

Problems:• The lack of ability to impose penalties or take strong action jeopardizes the goal

of a culture of compliance and undermines the objectives of the laws under the administration of the FSB. The regulator is therefore seen as a “toothless tiger” in certain instances.

• The current structure of the Appeal Board is not optimal. Following the promulgation of laws, such as FAIS, it was inevitable that the number of appeals would increase. The turn-round time of the Appeal Board could to be improved. This would lead to a more efficient appeal process.

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FINANCIAL SERVICES BOARD ACTProposed amendments: Enforcement Committee• Establish an FSB-wide enforcement committee, which is an extension (in

concept) of the enforcement committee already created under the Securities Services Act. The committee will have the power to impose administrative sanction and grant compensatory orders.

• The committee’s purview does not extend to criminal proceedings and that aspect is to be referred (as currently) to the prosecuting authorities. A determination of the enforcement committee may be taken on appeal to the High Court. The enforcement committee therefore does not impinge upon the right of access to court, or the court system itself.

• The proposed amendments provide for the committee’s establishment, composition, functioning and powers to impose administrative sanction and grant compensatory orders after due process has been followed.

• The committee will be chaired by a person with legal expertise (eg. Judge, advocate or attorney of senior standing). The committee is to be structured so that multiple hearings can be conducted concurrently.

• The provisions regarding referral to the enforcement committee; proceedings and hearing; determination of the committee; enforcement; and right of appeal are dealt with in proposed amendments to the Financial Institutions (Protection of Funds Act) – section 42 of the amendment Bill.

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FINANCIAL SERVICES BOARD ACT

Proposed amendments: Appeal Board• Appeal Board (section 26 of the FSB Act) is distinct from the

proposed enforcement committee. The Appeal Board hears appeals against decisions of the registrars under the FSB and the FAIS ombud. It does not deal with the enforcement of statute against those non-compliant (which is a supervisory rather than appeal function).

• Broaden the Appeal Board into a panel of individuals with expertise, which will be chaired by a retired judge, advocate or attorney of senior standing. Multiple hearings could therefore be held concurrently with appropriate experts assigned to specific cases.

• The proposed amendments also intend to bring clarity to the appeal process. These procedural matters are laid out in section 28 of the amendment Bill.

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FINANCIAL SERVICES BOARD ACT

Other proposed technical amendments include:

• Improving the provisions regarding the disclosure of information by the FSB to the public and to other regulators.

• Allowing the Minister to appoint an acting Executive Officer when necessary (eg. When a vacancy arises or the executive officer is unable to act)

• Providing for a standard limitation of liability clause that applies to all legislation under the administration of the FSB. (Such clauses already exist in a number of laws administered by the FSB).

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PROPOSED AMENDMENTS:

FAIS Act

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FAIS ACTBackground:• Financial Advisory and Intermediary Services Act (FAIS Act) was promulgated

in 2002. FAIS Ombud’s office became jurisdictionally competent on 30 September 2004. Both the Act and FAIS Ombud have had a significant impact on how intermediaries conduct business and provide advice to clients.

• Large initial focus by FSB on licensing thousands of intermediaries. Greater focus now on enforcement. A number of the Act’s provisions can be improved and measures introduced following experience with the implementation of the FAIS Act.

• A number of cases have highlighted certain weaknesses which can be remedied in order to improve consumer protection; act against those who operate without a licence; and tighten the fit-and-proper requirements for financial services providers.

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FAIS ACT

Proposed amendments:

• Provide the registrar with the ability to conduct an on-site visit of the business of a provider or representative [A formal inspection is provided for under the Inspection of Financial Institutions Act. This aspect is also catered for in the proposed amendments]

• An authorised financial services provider (FSP) or representative can only conduct business with a person licensed to provide financial services.

• Where a FSP is a corporate or unincorporated body, trust or partnership, the FSP must ensure that its directors, members, partners or trustees meet certain fit-and-proper requirements.

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FAIS ACTProposed amendments:

• Amendments deal with the process of suspension, withdrawal of a licence, and debarment of an FSP in greater detail.

• Provide the registrar the ability to make known publicly FSP’s who are debarred, or whose licence is suspended or withdrawn (“name and shame”).

• Extending the scope of the code of conduct that may be drafted under the Act, by providing for control or limitation of the incentives which may be given or accepted by a FSP. (This is to assist in curtailing the “churning” of policies).

• Provide for the removal of a compliance officer, if the officer does not comply with the criteria for compliance officers (which criteria to be determined by the Registrar after consultation with the FAIS advisory committee).

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PROPOSED AMENDMENTS:

National Payment Systems Act

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NPS ACTCurrent law:• NPS Act does not make provision for certain participants that are in the

payment and clearing arena currently

Problem:• The SARB has no oversight over such participants (eg. Third party

providers and system operators).

Proposed amendments:• Cater for new participants in the clearing environment and seek to bring

these participants within the supervisory reach of the SARB and the Payment System Management Body.

• The amendments specifically cater for the inclusion of Postbank which operates under an exemption of the Bank’s Act and for non-bank participants that are currently in the payments realm.

• Definitions are amended to provide legal clarity.

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PROPOSED AMENDMENTS TO OTHER LAWS

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AMENDMENTS TO OTHER LAWS

Proposed amendments:

• There are a number of smaller amendments to other laws. These include:

- clearer process requirements regarding the power of the registrar to impose fines under the Collective Investment Schemes Control Act.

- repealing provisions in the Securities Services Act that concern the enforcement committee; and clarifying matters relating to the enforcement of the Financial Intelligence Centre Act that must be provided for in the rules of exchanges (such as the JSE).

- clarifying which cooperatives should register under the Cooperative Banks Act.

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TRANSITIONAL PROVISIONS

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TRANSITIONAL PROVISIONS

Proposed amendments:• Flexibility is needed to ensure smooth implementation of the proposed

changes. The Bill therefore provides that the amendments may take effect on a date determined by the Minister, and that different dates may be determined for different sections. [section 72 of amendment Bill]

• Section 73 deals specifically with transitional matters. For example, cases currently before the Appeal Board will still be heard to conclusion by the current Appeal Board as though the amendment Act had not come into operation.

• A similar approach is taken with matters being considered by the Enforcement Committee under the Securities Services Act. This will prevent cases having to be re-heard from scratch.

• The broadened scope of “representative” under FAIS and requirements for directors, members, trustees or partners of FSPs, as well as other provisions will take effect only 12 or 18 months after a date determined by the Minister. This approach will allow market participants time to adjust (as well as the regulator time to provide participants with the necessary information, criteria and assistance).

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CONSULTATION PROCESS

• Published in the Gazette and placed on the NT’s website inviting interested parties to comment to Parliament

• Public hearings in PCOF

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AMENDMENTS EFFECTED BY PCOF: A-BILL

• Technical amendments to clarify the intent of provisions and to further entrench the jurisdiction of the Enforcement Committee

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END OF PRESENTATION CONTACT DETAILS:

NATIONAL TREASURY:

Nkosana Mashiya, Jo-Ann FerreiraChief Director: Financial Sector development Chief Director: LegislationNkosana.Mashiya@treasury.gov.za Jo-Ann.Ferreira@treasury.gov.za(012) 315 5825 (012) 315 5263

Baron Furstenburg Raadhika SookooDirector: Financial Markets Director: Financial IntegrityBaron.Furstenburg@treasury.gov.za Raadhika.Sookoo@treasury.gov.za(012) 315 5953 (012) 315 5601