Financial Sector Regulation Bill B 34 -2015 National Assembly Standing Committee on Finance Presented By: Cas Coovadia, Yvette Singh and Wendy Dobson 24 November 2015
Table of Contents ■ ■ ■ ■ Introduction The Banking Association South Africa Regulators’ Powers Supervision Significant Owners Compulsory Disclosure of Licenses Key Person Financial Markets Act (FMA) Consequential Amendments 1
The Banking Association South Africa 2 ■ BASA is the industry representative body for commercial banks which consists of 32 local and international member banks. ■ BASA promotes and contributes to the enablement of a conducive, competitive and sustainable banking sector, within which banks do sustainable, responsible and profitable business. This includes policy, legislative and regulatory advocacy and formulation with Government, Parliament and regulators. ■ BASA continually engages our members on the way banks conduct their business and are confident our members, by and large, do business in a manner that promotes the rights and obligations of customers and banks. Our members also conduct their business in a way that ensures a safe financial sector. We are thus very supportive of Government initiatives to regulate, protect and promote a safer financial sector to serve South Africa better. ■ The SA banking sector is highly rated in the WEF Global Competiveness Report of 2015 -2016 (Out of 140 countries): • 12 th for financial market development; • 6 th for availability of finance; • 21 st for affordability of finance; and • 8 th for soundness of banks.
Introduction 3 ■ BASA commends National Treasury on the stakeholder consultations undertaken and the feedback provided on the comments received in respect of the second draft of the FSRB. We believe the approach to consulting adopted by National Treasury produces positive outcomes and should be replicated across government. ■ BASA submitted extensive comment on the second draft of the Financial Sector Regulation Bill (FSRB) which National Treasury, by and large, addressed. ■ BASA notes that the third draft of the FSRB is a sizeable bill, which is of significant importance to the banking industry and which requires due attention and consideration. ■ BASA understands and supports Governments initiatives to regulate, protect and promote a safer financial sector to serve South Africa better. Therefore it is our view that the reform of the financial sector needs to be balanced, gradual, transparent, clear and beneficial to all impacted stakeholders. ■ Therefore, we require more time to consider the detail of the third draft and in order to substantively participate in and inform the Parliamentary consultation and deliberations on the Bill.
Parliamentary process on the Bill 4 ■ BASA appreciates and commends the Standing Committee on Finance for its commitment and undertaking to a thorough and in-depth review of the Bill, having recognised and understood the substantive nature and impact of the Bill on the banking industry, as well as the detailed and robust industry consultation, engagement and input that this necesitates. ■ We therefore welcome and support the Committee’s endeavour to undertake an international study tour to examine comparable legislation in key jurisdictions, including the benefits that will be derived from exchanging information and experience with our industry peers, Parliament’s counterparts and regulators in these markets. ■ We further implore the Committee to give serious consideration to establising a Technical Sub-Committee on the Bill to further assist and support this process within an already constrained Parliamentary and legislative programme. This will facilitate the Committee engagement with our industry experts on the dynamics of the Bill in the banking sector and with respect to specific technical provisions requiring more detailed attention.
Financial Sector Regulation Bill 5 ■ Theme of 2015 Banking Summit (26 Nov): “Twin Peaks Implementation” ■ Our presentation today will supplement the detailed written submission to this committee, and will address the salient issues at a high level. ■ Our written submission addresses, at a detailed level, the key and non-key issues stemming from the third draft of the FSRB on a chapter-by-chapter and section-by-section basis. ■ The FSRB provides the opportunity to streamline the current complex regulatory architecture with multiple regulators, which the Bill unfortunately have only partially addressed.
Regulators’ Powers … to interfere in commercial decisions and operations 6 ■ Issue: • The FSRB grants the Regulatory Authorities extensive powers to intrude into the commercial decisions and operations of banks, including: ü rule-making powers outlined in Chapter 7 are extensive; ü power to make binding interpretations of law and enforce compliance with these (Clause 141); and ü power to direct a conglomerate to restructure (Clause 163(2)). • There are significant implications of the exercise of these powers for: ü financial customers; ü investors in financial institutions, including the pension funds and the PIC; ü employees of financial institutions; and ü confidence in the financial system and financial stability. • As such, these powers must: ü be subject to strict checks and balances; ü adhere to the principals of administrative justice; and ü not breach the separation of powers and extend into the spheres of making new policy which is the responsibility of the executive; or making new law which is responsibility of the legislature; or interpreting the law which is the responsibility of the courts.
Regulators’ Powers … to make rules and issue standards ■ 7 Issue (Chapter 7): • Chapter 7 grants the regulators extensive powers to issue Regulatory Instruments which are to be known as ‘Standards’ • These Regulatory Instruments will replace the current plethora of Board Notices, Guidance Notes, and Codes of Conduct. • The range of issues on which the regulators may issue Regulatory Instruments is extensive and covers almost every commercial aspect of operating a financial institution: ü product design; ü product marketing and distribution; ü disclosure of information to customers; ü outsourcing arrangements; ü recordkeeping and data management; and ü “the operation of, and operational requirements for financial institutions” (Clause 108(c)). • The consultation mechanisms in respect of these instruments is welcomed, nevertheless, the powers are extensive and may potentially generate moral hazard.
Regulators’ Powers … to make rules and issue standards ■ 8 Recommendation: • The range of matters on which the regulators may make rules should be limited. • New rules must be subject to a regulatory impact assessment before finalisation thereof.
Regulators’ Powers … to issue binding interpretations of law 9 ■ Issue (Clause 141): • The clause grants regulators the powers to issue binding interpretations of law. • The stated intention of this power is to “promote clarity, consistency and certainty in the interpretation and application of financial sector laws”. • This clause is not supported as: ü it is a breach of the principle of the separation of powers; ü only the courts can issue biding interpretations of the law; and ü legislation should be drafted in such a way that its meaning is clear and certain at the outset. ■ Recommendation: • The clause must be deleted in its entirety, alternatively the Standing Committee on Finance must refer Clause 141 for a legal opinion as to whether the issuing of binding interpretations of law is an administrative action which may be performed by a regulator, or a judicial action which may only be performed by the courts.
Regulators’ Powers … to restructure financial conglomerates 10 ■ Issue (Clause 163): • Clause 163 in Chapter 12 on Financial Conglomerates permits the regulator to direct the holding company of a conglomerate to alter its structure. • Corporate restructurings have potentially massive implications for employees, customers, and investors. • Such an intervention should be used only as a last resort, and must be subject to strict administrative justice procedures. ■ Recommendation: • It is recommended that the following provisions be inserted into clause 163: ü the right for a financial conglomerate to make representations regarding the benefits of the conglomerate structure; ü the right for a financial conglomerate to make representations regarding the costs, impacts and consequences of changing the conglomerate structure; ü a duty on the Prudential Authority to demonstrate objectivity, and to provide reasons why the structure of a financial conglomerate impedes the safety and soundness of any of the financial institutions that are part of the financial conglomerate and impedes the ability of the Prudential Authority to effectively supervise the conglomerate; and ü an appeal process for a financial conglomerate to appeal the decisions made by the regulatory authorities in regards to the financial conglomerate structure.
Supervision … a risk-based approach ■ 11 Issue (Several Clauses): • A risk-based approach must be adopted throughout the FRSB. • Although the FSRB requires of the Prudential Authority and the Financial Sector Conduct Authority to follow a risk-based approach in performing its functions and to prioritise the use of its resources in accordance with the significance of risks, there are numerous provisions in the FSRB, where a risk-based approach is absent. • There are several examples where provisions in the FSRB are not subjected to a materiality and/or reasonableness test. • The consequence of this will be that regulators will be stretched, possibly missing the material risks and breaches, as outlined below: • Examples: ü Clause 1: ‘Financial stability’ means that financial institutions generally provide financial products and services without interruption: The clause should be rephrased to read without substantial or significant interruption, otherwise all IT system downtime - which is inevitable within complex IT systems - can be regarded as a systemic risk and a threat to financial stability.
Supervision … a risk-based approach • 12 Examples (continue): ü Clause 120(1)(d): If the financial institution contravened a law, in a foreign country, that corresponds to a financial sector law in South Africa its license can be suspended: The clause must be rephrased to read material contravention of the law, in a foreign country, otherwise it can generate systemic risk, especially if the foreign jurisdiction’s regulatory authority acts in bad faith. ü Clause 120(1)(g): If the financial institution has not paid its licence fees or levies for at least 14 days its license can be suspended: This is unreasonable and could present a risk to financial stability if implemented – the failure to pay license fees over an extended period of time (e. g. 6 months) will be a more material reason to suspend a license. ü Clause 144: The removal of key persons from positions for contravening a financial sector law: The financial institution can suffer severe reputational damage and systemic risk can arise if a key person, such as a Chief Executive Officer, is removed due to a minor contravention of a financial sector law. Removal must therefore be restricted to a material contravention of such law.
Supervision … a risk-based approach • 13 Examples (continue): ü Clause 151(2)(a): The High Court, on the application of a regulatory authority, may make an order in relation to conduct that contravenes a financial sector law: The clause must be rephrased to read material conduct, otherwise orders can be issued in respect of a minor contravention of a financial sector law which can cause reputational damage and systemic risk. ü Clause 157: All acquisitions and disposals must be approved by the regulatory authorities: This section must be rephrased to read that all material acquisitions and disposals must be approved, otherwise every single acquisition and disposal can be regarded as material which could lead to lag time for investors in the approval process and a loss of profit. ü Clause 266: Every member of the governing body (for example each director of a Board) of a financial institution can be held vicariously liable for offences and contraventions of financial sector laws: The vicarious liability must be restricted to material contraventions, otherwise qualified persons will be further discouraged from serving as non-executive directors of financial institutions.
Supervision … a risk-based approach ■ 14 Recommendation: ü It is recommended that the FSRB be revised to make specific provision for the inclusion of the word material in relation to all relevant matters.
Significant Owners … and investor certainty ■ 15 Issue (Clause 155): • The section is unnecessarily cumbersome, complicated and repetitive and can result in unintended consequences, e. g. creating uncertainty for investors (existing and potential) on whether or not they are regarded as significant. • Example: ü a person who, directly or indirectly, alone or together with a related or interrelated person holds at least 15% or a lower % of the issued shares is deemed a significant owner. • International standards, e. g. Basel requires that laws and regulations should contain clear definitions of significant ownership and controlling interests. Investors will as a minimum require legal certainty on whether they will be regarded as a significant owner; and whether the investment will require regulatory pre-approval. • Investors that are regarded as significant owners will carefully consider and deliberate their investment decisions. Any uncertainty in this regard will be detrimental to the financial sector and will impact on the ability of financial institutions to attract the desired calibre of significant investors.
Significant Owners … and investor certainty 16 ■ Issue (continue): • Clause 155(1) and clause 156 are inconsistent and creates confusion and further uncertainty because clause 155(1) factually defines a significant owner whilst clause 156 states that a regulatory authority may declare whether or not a person is a significant owner. ■ Recommendation: • It is recommended that clause 155 be rephrased to read: “A person is a significant owner of a financial institution, unless otherwise declared in writing by the responsible authority for the financial sector law in terms of which a financial institution is required to be licensed, if the person, directly or indirectly, alone or together with a related or interrelated person, holds more than 15 per cent of the total nominal value or the voting rights in respect of the issued shares of a financial institution. ”
Compulsory Disclosure of Licenses ■ 17 Issue (Clause 127): • The disclosure requirements regarding licenses pose practical challenges. • Financial institutions , such as banks, are required to hold a large number of licences, including, amongst others, a banking licence, a financial services provider license, a credit provider license, a payment system licence, etc. • From an operational perspective, it is impractical and will be impossible for financial institutions, such as banks, to: ü disclose all of the licences that it holds and/or that a license has been suspended in all of its business documentation (i. e. letter heads, deposit slips, other stationary), its advertisements (i. e. radio, television, billboards, newspapers, sms messages) and other promotional material (i. e. calendars, clothing items, diaries) relating to the licensed activity; and ü make available its licenses or a copy of its licenses at all places and to any person on request at no cost due to the large number of licenses that a bank holds and the large infrastructure of banks (i. e. the number of offices and branches). • Referencing the objectives of the FSRB, a balanced, fair, practical and executable solution must be found.
Compulsory Disclosure of Licenses ■ 18 Recommendation: • It is recommended that clause 127 be rephrased to read: “(1) A licensed financial institution must, subject to the standard made by the responsible authority for the financial sector law in terms of which a financial institution is required to be licensed, (a) identify the licence that it holds in all its business documentation, and in all its advertisements and other promotional material, relating to the licensed activity; and (b) make its licence or a copy of its licence available at no cost to any person on request. (c) In instances where a financial institution’s licence has been suspended, the institution must, during the period of suspension, identify the licence, and state that it is suspended, in all its business documentation, and in all its advertisements and other promotional material, relating to the licensed activity.
Key Person ■ 19 Issue (Definitions): • The definition is no longer limited to key persons linked to financial products and services as was the case in the second draft of the FSRB and is therefore too wide. • The definition of key person, read together with the definition of ‘governing body’ is problematic. The definition of governing body includes the trustees of a trust which unintentionally results in the inclusion of persons, such as: ü the trustees of testamentary trusts; ü the executors of deceased estates; and ü the trustees or directors of shell companies, dormant companies or property-owning companies, by way of example. • It is clearly incorrect to include such persons as key persons in relation to a financial institution/group since they have no material or strategic significance.
Key Person ■ 20 Recommendation: • It is recommended that the legislature clearly distinguish between an act requiring a position, e. g. the Financial and Advisory Services (FAIS) Act requiring the appointment of a Compliance Officer and a Key Individual and an act licensing a person to operate, e. g. the FAIS Act licensing a Representative to operate to ensure that persons licensed to operate do not form part of the definition of key person. • The concepts ‘strategic, significant or material impact’ need to apply to all components of the definitions. It is recommended that clauses (a) and (f) of the definition of “key person” be rephrased to read: “key person”, in relation to a financial institution, means each of the following: (a) members of the governing body of the financial institution where such members have a material, strategic or significant impact within the definition of a governing body; (b) … ( e) (f) a person performing a function in or for the financial institution that a financial sector law requires to be performed where such a person has a material, strategic or significant impact;
Financial Markets Act (FMA) Consequential Amendments 21 ■ General: • BASA supports the policy that provisions relating to the OTC derivative framework are provided for in primary legislation rather than subordinate legislation. ■ Issue: • BASA supports the distinction between a central counterparty and a clearing house, however the distinction raises questions of application of the law in respect of the functions and the licencing requirements of the two types of market infrastructures: ü the functions of a central counterparty are not specifically defined; however this can be inferred from the definitions of “clear” and “central counterparty”; ü it is clear that a central counterparty must be an independent clearing house, but the corollary is not true; a clearing house may not perform all the functions of a central counterparty. Consequently, a reference to a clearing house in the FMA cannot be read as a reference to a central counterparty; and ü the consequential amendments to clause 47(3)(c)(v) and 47(4)(b)(ii) of the FMA imply that a juristic person that performs the functions of a central counterparty does not necessarily need to be licensed as both an independent clearing house and a central counterparty, i. e. it can be licenced as a central counterparty only.
Financial Markets Act (FMA) Consequential Amendments 22 ■ Recommendation: • Consistent consequential amendments have not been made to relevant provisions in Sections 47, 48 and 50. (See specific comments section). ■ Issue: • BASA supports the policy that a central counterparty should be an independent clearing house and we welcome NT’s proposal for a period of five years, to minimise disruption to the financial system, for the existing licensed associated clearing house (JSE Clear) to transition to an independent clearing. ■ Recommendation: • This amendment should explicitly provide for the five-year transition period.
Questions 23
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