Companies Amendment Bill: Comments from the Financial Services Board

1. Companies Amendment Bill: Comments from the Financial Services Board Nonkumbulo Tshombe & Jo-Ann Ferreira 1 December 2010

2. This presentation Who is the Financial Services Board? What is the nature of the financial services regulated by the FSB? Specific comments

3. Who is the FSB?

4. Who is the FSB? The Financial Services Board (FSB) is established by the Financial Services Board Act No. 97 of 1990 and is accountable to Parliament FSB is a statutory regulator similar to the Registrar of Banks FSB is a public entity & Minister of Finance is the executive authority of the FSB

5. Who is the FSB? FSB regulates the following financial industries in the public interest: insurance industry retirement funds financial markets [JSE and STRATE] collective investments financial advisory and intermediary services

6. Who is the FSB? Primary Mandate: To supervise and enforce compliance with laws regulating financial institutions and the provision of financial services Mission:To ensure the - protection of consumers of financial services and products integrity of financial markets and institutions financial soundness of financial institutions systemic stability of financial services industries

7. What is the nature of financial services regulated by the FSB?

8. What is the nature of the financial services regulated by the FSB? The institutions regulated by the FSB invests and manages consumer’s funds not own and shareholder funds only the investment and management activities do not always take place through trusts or similar structures

9. What is the nature of the financial services regulated by the FSB? The institutions regulated by the FSB are different from institutions that do not deal with consumer funds or investments The general legislative framework & specific legislative framework must facilitate a regulatory regime that is appropriate, effective and efficient to achieve the objects of financial regulation

10. Specific comments

11. Specific comments Rationale for treating Banks differently than other non-bank financial services institutions (insurers, pension funds, CIS) unclear also prudential entities that manage other people‘s money FS legislation as a rule requires financial services institutions to meet stricter requirement than those provided for in the Companies Act [see pages 4 and 5 of written comment for examples] SUMMARY

12. Specific comments Financial sector legislation includes specific requirements to address international standards that SA committed to through G20 and Financial Stability Board FSB must be able to act swiftly and decisively to protect assets and funds in the interests of consumers where institutions – are not complying with legislation run into financial difficulties poses a systemic risk  SUMMARY

13. Specific comments FSB requests that the CA is amended to – allow for financial sector specific legislation to prevail over the CA in the event of a conflict between these laws (Banks Act already accommodated) ensure that regulatory actions under the laws administered by the FSB not stayed by business rescue proceedings make any approval of a merger, acquisition or transfer under the CA subject to approval of the FSB (Banks Act already accommodated) SUMMARY

14. Section 5

15. Specific comments: Section 5 S5 provides that the Companies Act (CA) overrides all other legislation in case of a conflict except for Banks Act limited provisions of the Securities Services Act

16. Specific comments: Section 5 Rationale for blanket exemption of Banks Act, but not allowing same for other financial services sector legislation not understood Risks posed by banks & other financial services sectors to consumer protection and financial stability the same Rationale for specific referral to listing requirements of an exchange not understood Listing requirements made under Act that CA overrides

17. Specific comments: Section 5 CA is a general law that applies to all companies Financial sector legislation relies on the CA to provide for basic regulatory requirements that financial sector institutions must comply Financial sector legislation, however, in respect of a certain issues, must provide for – stricter requirements the approval, involvement or notification of FSB in respect of certain processes and procedures regulated under CA divergence from the CA where essential to comply with international standards SA committed to This can be done through CA or Sector specific legislation depending on nature of issue important for legislation to allow for both these instances Section 5 as it reads currently will give rise to lengthy and costly legal debates and litigation, where the FSB wishes to ensure compliance with financial sector specific requirements that elaborates on or differs from the requirements of the Companies Act and may even negate any provisions of the sector specific legislation to the detriment of financial services consumers. It is impossible to foresee each and every instance where financial sector legislation need to provide for the matters referred to in the previous paragraph, however, the following are specific examples of matters already identified that may assist in further clarifying the need to allow financial sector legislation to prevail over the Companies Act: The Companies Act does not require a subsidiary to appoint an audit committee. It allows a subsidiary to use the audit committee of its holding company. This is inappropriate in respect of an insurer whose holding company is not also an insurer or an insurer of the same type as the subsidiary as the audit committee will lack the necessary experience and expertise resulting in or increasing the risk that consumer finds and investments are appropriately managed. It is therefore important that the Short-term and Long-term Insurance Act, require that despite the provisions of the Companies Act, that each registered insurer must have its own audit committee. The Companies Act regulates the processes and procedures that must be complied with in respect of business rescue, liquidation and significant transactions (such as acquisitions, amalgamations, transfers, offers and the like). It is critical that a financial institution must inform or secure the approval of the regulator prior to entering into these transactions so that the latter can ensure that the transaction and the consequences of the transaction serves the interests of consumers, and will not negatively impact on the financial soundness of the institution or sector. Further, specifically in respect of the Short-term and Long-term Insurance Acts, the test for insolvency (i.e. when liquidation proceedings may be instituted) must be different from the test that applies in respect of other institutions. Where an insurer is financially unsound – i.e. it does not meet the capital adequacy and asset spreading requirements imposed by the Acts – the Registrar must be able to institute liquidation proceedings to ensure that available assets are preserved in the interest of policyholders. International standards require or will in future require financial services institutions to test for or report on solvency in a manner and in accordance with standards that differ from the financial reporting standards prescribed under the Companies Act to ensure that all relevant risk are adequately addressed. Similarly, international standards require or will in future require the FSB to regulate group structures on a consolidated basis. Where these standards are incorporated in financial sector legislation, the latter legislation must prevail over the Companies Act. Further to the above, it is also important that – any resolution by a company which is a financial institution supervised by the FSB to begin rescue proceedings is subject to the approval of the FSB to ensure the regulatory objective of promoting and maintaining a sound financial services industry and that the interests of all stakeholders, in particular clients of the financial institution, have been duly taken into account. Also, the FSB should be notified of business rescue applications to court, have the power to intervene in court proceedings and that the courts must consider additional specified matters in business rescue proceedings; the FSB is afforded locus standi to bring a matter before court, the Companies Ombud, the Takeover Regulation Panel or the Companies and Intellectual Property Commission (CIPC) without having to first obtain leave of the court before it may act in public interest. To obtain leave of the court is a time-consuming and costly exercise and cannot be justified in the case of a regulatory authority established by law with the inherent duty to act in the public interest; more onerous requirements in respect of personal character qualities of honesty and integrity of directors of institutions regulated by the FSB may be provided for in financial services legislation; no amendment or changes to the memorandum and articles of association may be made without the consent of the FSB; and a reduction in share capital or the acquisition of own shares by a financial services institution must be approved by the FSB. Proposals for amendment of the section The Portfolio Committee is requested to consider the following two proposals for the amendment of section 5 of the Companies Act: Unconditional exclusion Advice or intermediary services that are subject to regulation in terms of FAIS Act Conditional exclusion Any service to the extent that it is regulated in terms of the LTIA & STIA [until 28 October 2011] No exclusion SSA, PFA, CISCA

18. Specific comments: Section 5 If s5 remains as is, FSB may not be able to protect financial services consumers  Specific examples: Audit committees Business rescue, liquidation and significant transactions test for insolvency International standards onerous fit and proper requirements Changes in shareholding and directors

19. Section 133

20. Specific comments: Section 133 S133 provides for a moratorium on legal proceeding, including enforcement action, against the company or property belonging to the company during business rescue proceedings Exclusions provided for, but these do not assist FSB

21. Specific comments: Section 133 Precise parameters of “legal proceedings” and “enforcement action” not clear Likely that an action taken by the FSB would be interpreted to be a “legal proceeding” or “enforcement action” and fall within the ambit of this moratorium, such as – withdrawal of authorisation Curatorship Institutions regulated by FSB manage other people‘s money

22. Specific comments: Section 133 Ambiguity creates legal uncertainty Undermines the ability of the FSB to exercise its legislative mandate CA must be clear as to the meaning of “legal proceeding” and “enforcement action” FSB should not be in a position where it cannot take swift enforcement action against an entity in business rescue Lengthy and costly legal debates and litigation on meaning of terms must be avoided

23. Section 116

24. Specific comments: Section 116 S116 Act provides that a notice of amalgamation or merger must include a confirmation that transaction has been approved by the Minister of Finance under the Banks Act

25. Specific comments: Section 116 The FSB, in certain instances, must also approve a amalgamation or merger to ensure a sound financial services industry and the protection consumers important that approval is secured prior to issuing a public notice Rationale for affording Banks Act preferential treatment, but refusing to allow same for other financial services sector legislation not understood risks posed the same

26. Other comments

27. Other comments No consultation Definition of “securities”: Implications unclear

28. Questions & discussion