Financial Advisory and Intermediary Services Bill: hearings

Meeting report

FINANCE PORTFOLIO COMMITTEE
3 October 2001
FINANCIAL ADVISORY AND INTERMEDIARY SERVICES BILL: HEARINGS

Chairperson: Ms Hogan (ANC)

Documents handed out:
Financial Advisory and Intermediary Services Bill [B52 - 2001]
South African Chamber of Business submission (see Appendix A)
Free Market Foundation submission
Free Market Foundation Powerpoint Presentation
[document awaited]

SUMMARY
SACOB is in agreement with the Bill and only raised issues of principle. SACOB would prefer that the rationale behind the Bill is consumer confidence rather than consumer protection as micro-lending services rather than the financial services industry is in greater need of being singled out. It cautioned that regulation must be capable of being enforced and done so efficiently; the playing field for those regulated must be level and regulation should not become an unnecessary barrier to entry for new financial services providers.

The Free Market Foundation was opposed to the Bill and submitted that it is unnecessary and leads to over-regulation. Concerns were raised about the thoroughness of the cost benefit analysis and also about the constitutionality of certain provisions. The Committee will instruct the Parliamentary Law Advisers and the FSB to consider the constitutionality of the Bill.

MINUTES
South African Chamber of Business submission
Adv Abri Meiring, Chairperson of the SACOB Parliamentary Liaison Committee, intorduced SACOB as representing 40 000 businesses that range from large multi-nationals to small one-person brokers. The financial services sector is well represented within SACOB. Because of the diverse membership the presentation focussed on matters of principle and policy as opposed to the effect of the Bill on specific businesses. SACOB asked the Committee to take into account the consequences of the Bill lower down and measure it against the fundamental principles that SACOB discusses.

The Financial Services Industry
The presenter found it strange that the financial services industry was singled out as needing regulation if the rationale is consumer protection. The Bill creates an anomalous position in that the Bill tackles investment and risk protection but not lending services where many abuses take place especially in the micro lending industry. SACOB would prefer that the real rationale be consumer confidence and urged the FSB to make it clear in the legislation that consumer confidence is the driving force behind the legislation.

Nature of Regulation
SACOB submitted that there was extensive common law principles applied by our courts that amounts to a non statutory form of regulation. The Bill moves away from the common law position and provides for a regulatory regime that is high intensity and compliance driven. The focus should be on developing a robust complaint driven regime because if complaints cannot be handled promptly and at low cost then all the regulations become meaningless.

Cost v Benefit
Adv Meiring noted that a cost benefit analysis is becoming an international norm for new legislation and commended the FSB for commissioning a professional cost benefit analysis. Unfortunately SACOB has not been able to study it yet.

Pro-Competition
He submitted that the best from of regulation was pro-competition combined with the provision of regulation. If the Bill can enhance competition then the consumer benefits and the industry.

SACOB provided three fundamental requirements for well managed pro-competitive regulation:
- Regulation must be capable of being and must be effectively and efficiently enforced.
- The playing field for those regulated must be level in order to underpin fair competition
(It was submitted that a holistic approach is needed and that possible exemptions must be vigorously analysed.)
- Regulation should not become an unnecessary barrier to entry for new/alternative financial services providers.

Discussion
Prof Turok (ANC) said that he endorses the three requirements presented by SACOB but failed to understand the distinction between consumer confidence and consumer protection. Also in one paragraph it submits that making financial service accessible is a primary consideration and yet later it states that consumer confidence is the overriding factor. These points were contradictory.

Adv Meiring replied that a compliance system must go hand in hand with a strong complaint system. Also if there is no consumer confidence then accessibility is not an issue because the consumer will not want to use the service.

Ms Hogan asked if SACOB is saying that the Bill is biased in favour of consumer protection or consumer confidence?

Adv Meiring replied that the Bill enhances consumer confidence by institutionalizing consumer protection.

Ms Hogan expressed her agreement with 3.3. of the SACOB submission in that if complaints are not adequately dealt with, then the purpose of the Bill is defeated. She asked if SACOB had concerns about the complaints mechanism in the Bill.

Adv Meiring said that at the beginning the Policy Board thought about having several Ombuds persons and in fact to have an extended Ombuds system. The Bill provides for a complaints mechanism but it cannot be said how it will work.

Ms Hogan commented that the complaints mechanism is an issue that needs to be considered.

Mr Mguni (ANC) felt that SACOB was protecting the interest of business and not consumers.

Adv Meiring replied that consumers are vital for business and that confident consumers are even more vital. If the Bill is really about consumer protection then why is the micro lending sector excluded?

Ms Hogan asked the FSB for comment on micro lending.

Mr Wessels (FSB) said that the principle was correct and that with a small change to the Bill lending transactions can be included. The important consideration is that the FSB will not have the resources and infrastructure to enforce it.

Ms Hogan said that this was a issue that needs to be looked at in the future.

The Char asked the FSB to present the Cost Benefit Analysis to the committee and asked about the implementation plan for the Bill.

Mr Wessels said that the target date for implementation is April 2001. Subordinate legislation was well on track. The Ombuds office still needs to be set up but this depends on the acceptance of the Bill.

The Free Market Foundation
Mr Nolutshungu summarised the view of his organisation as wanting to loosen the strings to allow for easy entry into the economy. The Foundation has serious concerns about the Bill and is of the opinion that the Bill is not needed. If the rationale is that the consumers need to be protected then evidence will be presented that shows that Bills of this nature are not only detrimental to the industry but also to consumers. Regulations are an additional cost to business that are passed on to the consumer. Consequences will be that it will be difficult to go into business, difficult for new businesses to get off the ground and consequently job creation is affected.

It was submitted that the regulation in the Bill is excessive and the impact on black people will be considerable. Those selling to black people are themselves black and are normally housewives, university dropouts, that is, with little qualification. Under apartheid there was no regulation except for excluding black people from the industry. The characteristic of the industry is that it is white dominated. The regulations should therefore not have unintended consequences such as the effect of the Bill on black people.

Evidence suggests that legislation does more harm than good. Nigel Cook, an actuary in the UK, states that legislation has had little tangible benefits because:
- More information is given but more vulnerable purchasers are not reading it.
- Policy values have not improved
- Complaints are not declining as a proportion of sales
- Overall lapses have not declined
- Sales have declined

He emphasised that sales have declined and that it is important to study the impact of the Bill.

Mr Leon Louw continued the presentation covering the following main points:
- Over regulation reduces prosperity
- UK and Australian Experience
- Impact on Black South Africans
- Flawed logic in the Bill - Flaw with the Cost Benefit Analysis
- Constitutionality

He said that the more regulation that exists, the less prosperous the country is. It seemed as if most groups support the overall objectives of the Bill but the Free Market Foundation cannot see what the objectives are. It does not know what the Bill is supposed to achieve. The British counterpart of this Bill is being repealed precisely because it was not known what it was supposed to achieve. The Bill does not avoid the Masterbond crisis but is in fact an annual Masterbond because of the cost of compliance.

In South Africa all the fundamentals are in place - economic policy, government expenditure lowered - but yet there is no growth. It was submitted that there is no growth because of over regulation.

After the financial adviser regulations were adopted in Australia in 1993 it was reported that:
- The number of agents in the life insurance industry fell from 20 000 to 4 500.
- Annual premiums have fallen
- No company recruits new advisers, the old ones simply recycled.
- Full-time career life agents dropped by almost 70%

It is the poor that suffers because they will simply not have access to services.

The Foundation works with hawkers, very small business, stokvels etc. The impact on black people who need access and advice about financial services needs to be taken into account. It seems as if these people are not considered.

The logic is flawed because there is not an absence of existing law. The common law does exist and the problem is that the common law is not enforced and the Bill does not do anything to change this. The Bill does not say what it is intended to achieve one cannot see if it is working. The common law protection is compromised because it is included in the Bill. The Courts will interpret it to mean that the legislature intended to do something different than what the common law does.

Mr Louw started to talk about the flaws of the cost benefit analysis but the Chair indicated that the Committee could not engage in a discussion about the cost benefit analysis because the full report has not been seen yet. She ruled that discussion on this should not take place now.

Moving to the constitutionality of the Bill, Mr Louw advised that a detailed opinion from counsel has been requested. The Constitutional Court has set out guidance principles as to how power is delegated. The principle is that power must be delegated with clear guidance on how it is to be enforced. It was submitted that this was not done in the Bill. Examples of problem areas are:
- the definition of financial product allows the registrar to add to the list but no guidelines are given
- 'fit and proper' is undefined
- separation of powers is blurred. That is, it should not be necessary that the Committee first see the regulations before passing a Bill. Regulations is an administrative function. Its seems as if the FSB is making law.
- the Ombuds can make a judgment and award damages.

Finally the Bill is not clear on who is included and affected by its provisions. Stokvels, trade associations, trade unions, employers and many more entities give some sort of financial advice.

Discussion
Ms Hogan asked for a copy of the PowerPoint presentation to be made available so that the Committee can have a look at the comments on the Cost Benefit Analysis and the constitutional issues. She asked how the Ombuds in this Bill differed from the Ombuds in other Bills.

Mr Louw replied that in this Bill the Ombuds can pass judgment and award damages. In the others, the Ombuds makes recommendations and the Minister acts on the recommendations. There is even a constitutional problem with the Minister acting on such problems.

Dr Rabie (NNP) commented that the financial services industry is as sophisticated as UK and Australia and they have regulatory laws and noted that the reduced number of brokers was a worldwide phenomenon. He asked why the Foundation did not want the Bill.

Mr Louw replied that what the UK and Australia had done, has failed. The UK is halfway through repealing the existing legislation. The new law will have separate provisions for different types of products. Australia has no official decision on the whether to repeal the legislation but debate does exist. Also the legislation is eight years younger in Australia. In response to the comment on the number of brokers he said that the reduction worldwide is slow but the reduction in numbers in Australia was distinctive and on a large scale.

Ms Hogan asked the FSB to comment on the UK position.

Mr Wessels said that Mr Louw's comments are dated and it seems that he is commenting on one of the first drafts of the Bill and not the one before them. The FSB has had the privilege of being on an international panel where the UK was the chair and the FSB does not agree with the submissions that are made about what is happening in Australia and the UK. Mr Louw is not aware of the latest developments.

Mr Louw replied that he had visited the UK recently and is aware of the latest developments. He can confirm that the current law is being repealed. He said that the institutional changes will be fully supported i.e. the need to have a court and a complaint resolution process that is accessible and efficient.

Ms Joemat (ANC) commented that she thought that she was dealing with a different Bill because it is clear that the Bill is about consumer protection and everything in the Bill is geared for that.

Mr Nene (ANC) said that it was an insult to blacks to suggest that they can only flourish if there is no regulation.

Mr Nolutshungu replied that they are not suggesting that there are racial motivations for the Bill but that there are racial implications.

Mr Louw replying to Ms Joemat's comments said that the Bill is vague and that everyone assumes the Bill is for consumer protection but nowhere is this stated.

Ms Hogan in closing said that the constitutional issues were important and that she was going to refer it to the Parliamentary Law Advisers for comment. She also instructed the FSB to consider the constitutionality of the Bill.

There were no further questions and the meeting was closed.

Appendix A
SOUTH AFRICAN CHAMBER OF BUSINESS (SACOB)
SUBMISSION ON THE FINANCIAL ADVISORY & INTERMEDIARY SERVICES BILL, 2001

1. INTRODUCTION
1.1. The South African Chamber of Business (SACOB) represents some
40 000 businesses who are members of our local Chambers across South Africa. These businesses range from large multi-nationals to medium and small enterprises. Numerically the small and medium enterprises form the bulk of the membership

1.2. In the context of the draft legislation before us, viz. the Financial Advisers and Intermediary Services (FAIS) Bill, it is worth noting that the financial services sector is well represented within the SACOB membership, ranging from the country's largest financial institutions to single person broker operations. It would accordingly be inappropriate to deal with the impact that the proposed FAIS Bill will have on specific businesses - in the absence of canvassing our members and taking their views to our National Convention (scheduled for later this month)

1.3. There are of course matters of policy and principle where SACOB's collective views have been informed and distilled over many years, and it is at this level that we would like to engage with the draft legislation before us. (We are convinced that industry bodies, such as the LQA and SAIA, COSAB and many others are in the best position to address the specific impacts of the draft provisions on their members).

What we as SACOB would like to do, is essentially to respectfully ask this Honorable Committee to measure the down stream effects of the specific provisions against the fundamental principles dealt with below.

2. THE AFFECTED INDUSTRY: FINANCIAL SERVICES
2.1. It is well known that the South African Financial Services industry is a highly regarded industry when seen in a comparative context. It is indeed a source of global competitive advantage which puts South Africa way beyond most developing countries in this respect.

It is also true that many financial services are essential services and that the primary policy consideration should be to make these services more accessible to South African consumers.

2.2. SACOB must ask the fundamental question as to why it was deemed necessary to focus on highly regulated consumer protection in the financial services arena. Why should financial intermediaries be regulated and others not?

We submit that if consumer protection is the rationale (see e.g. p1 of the F.S.B.'s presentation last week) then it is difficult to see why financial services and financial intermediaries should be singled out.

2.3. SACOB would, however, be much more comfortable with this approach if the real rationale is enhanced consumer confidence in the safety of their investments and the quality and integrity of financial advice they receive.

We urge the Financial Services Board, the Policy Board for Financial Services and, with respect, Parliament to make it clear that enhanced investor confidence is the real driving force for this draft legislation. This is not just a matter of semantics.

3. NATURE OF THE REGULATION
3.1. Much has been made of the statement that "there is almost no law regulating financial intermediaries in South Africa" (see e.g. F.S.B.'s presentation p1). The fact is that while there are not many statutory provisions in this regard, the common law position of those who call themselves financial advisers, either as principals or agents, has always been clear and has been fairly consistently applied by the High Court, as well as the Supreme Court of Appeal.

3.2. The nature of the proposed draft legislation is such that there will be a drastic move from a reliance on common law principles to a regulatory regime which can be described as high intensity and compliance driven. We must question whether a robust complaints driven regulatory regime would not have provided more efficient and better targeted consumer assistance.

3.3. We are aware of the fact that the issue of a complaints driven vs. a compliance driven regime has been the subject of wide consultation and debate (and that this is not an "either I or" issue). We remain convinced, however, that unless legitimate complaints can be handled speedily and at low (or no) cost to the consumer, the stated ideal of consumer protection may remain elusive in a compliance driven regime. SACOB therefore supports the principle that accessible Ombudschemes, with informal and cost effective procedures, coupled with an correspondingly appropriate appeals procedure, should be an integral part of the new regime.

4. COST VS BENEFIT
4.1. The kind of Government regulation implied in the FAIS Bill is a prime example of a candidate for a robust cost benefit analysis (C.B.A). In the U.K. (where hard lessons have been learned about the cost of regulating financial services since the early 1980's) the undertaking of a C.B.A. to underpin all new regulation in this field, has become a legal requirement. SACQB strongly endorses this as the "best practice" benchmark for financial services regulation

4.2. We have noted with acclaim that the Financial Services Board had decided to commission a professional C.B.A. in respect of the FAIS Bill. SACOB would like to commend the C.E.O. (Mr. van Rooyen) for adopting this exemplary approach.

4.3. SACOB unfortunately did not have the opportunity to study the C.B.A., but we rely on this Honorable Committee to interrogate the findings on behalf of consumers, taxpayers and business. (We believe that the value of our Parliamentary process - on which we have commented frequently - would be enhanced even further if a C.B.A. could become a feature of all regulatory and new fiscal legislation serving before this Honorable Committee).

5. PRO-COMPETITION
5.1. SACOB believes that the best regulation is by pro-competition and combined with provision of information. We are also aware of the fact that the F.S.B. has, as part of its overall Parliamentary mandate, a philosophy which is stated to be pro-competition in regulating the financial services industry.

5.2. The FAIS Bill will only be able to enhance competition if there are demonstrable benefits for the consumers of financial services. We believe that those benefits are potentially present in the greater consumer confidence that could result from well managed regulation in this field.

5.3. There are three fundamental requirements for well managed pro-competitive regulation which we would like to put on the table:

5.3.1. Regulation must be capable of being and must be effectively and efficiently enforced.
5.3.2. The playing field for those regulated must be level in order to underpin fair competition.
5.3.3. Regulation should not become an unnecessary barrier to entry for new / alternative financial services providers.

In conclusion
SACOB believes that the vast majority of our members will welcome the increased professionalism arising from accreditation and consumer confidence which could flow from this new regulatory regime. Business (in the form of our strong and dynamic financial services industry) will indeed turn regulation into sustainable competitive advantage. This will happen if the principles we have put before this Honorable Committee are adhered to.

Cape Town
Tuesday 2 October 2001