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The Financial Services Board (FSB) is to be given significantly increased powers to protect your savings, but, at the same time, the regulated financial services industry is to be granted a total exemption from the Consumer Protection Act (CPA).
The proposals to increase the FSB’s powers and to side-line the CPA from the financial services arena are contained in draft legislation that is due to go before Parliament shortly.
The 280-page Financial Services Laws General Amendment Bill, which was published for public comment last week, covers a wide range of issues, including:
* Action to stop employers from stealing your retirement fund contributions;
* Giving the FSB’s registrars of pension funds, long- and short-term insurance, and collective investment schemes increased powers to investigate any suspicious activity that could place your money in jeopardy;
* The rights of divorcees to a share of their former spouse’s retirement savings;
* Giving members of retirement funds a say in how future retirement fund surpluses are to be divided; and
* Measures to make life assurance companies and short-term insurance companies treat you better.
The bill also aims to halt a looming turf war between the National Consumer Commissioner (NCC) and the FSB.
The amendment bill states that the CPA “does not apply to any person, function, act, transaction, goods or services” that are subject to any of the regulated financial institutions, such as retirement funds, collective investment schemes, and short-term and long-term insurance companies.
When the CPA was promulgated in 2010, financial services companies were granted a temporary exemption until April 2012 on condition that the legislation and regulations governing the financial services industry would afford consumers the same protection as did the CPA.
At the time the exemption was granted, Nomfundo Maseti, director of consumer and competition law at the Department of Trade and Industry, said the exemption did not mean that insurers and life assurers could wait until April 2012 to comply with the CPA.
She said companies had to take steps in the interim to change their processes so that they complied with the CPA. The intention was for the Long Term and the Short Term Insurance Acts to give consumers exactly the same level of protection as the CPA, and April 2012 was the cut-off date for this to happen.
If this was not done by April 2012, the CPA and the insurance Acts would apply concurrently to the insurance industry, and the CPA would take precedence where the insurance legislation did not give consumers sufficient protection, Maseti said.
However, the omnibus amendment bill states that the financial sector legislation will take precedence over and will not be concurrent with any other legislation.
The bill also states that the financial sector legislation will prevail over non-financial sector legislation if there are inconsistencies, or if the financial sector legislation has stricter standards, or provides for the implementation of an international standard, or facilitates information-sharing and co-operation between financial regulators to ensure the stability and the soundness of regulated financial institutions.
A turf war similar to that between the NCC and the FSB is in the offing between the Council for Medical Schemes and the NCC, with the consumer commissioner launching an investigation into schemes’ failures to comply with the CPA.
STRICTER LICENCE CONDITIONS FOR ADMINISTRATORS
Licence conditions for retirement fund administrators are to be toughened up following a number of administration failures to the detriment of retirement fund members.
The failures include administrators making secret profits by bulking retirement fund bank accounts, assisting employers to plunder retirement fund surpluses and failing to administer funds properly.
Examples of administrator failure are:
* Glenrand MIB Benefit Administrators was placed in liquidation by its holding company, Glenrand MIB, after it made a mess of the administration of about 200 retirement funds, leaving the funds to pay for the same service twice.
* About 11 000 members of four umbrella funds face losing 2.3 percent of their savings to pay for sorting out the administrative mess left by Dynam-ique Consultants & Actuaries. The administration of the funds was taken over by Aon Hewitt South Africa.
* Aon Hewitt South Africa, which is part of global financial services group Aon, is also in trouble. Late last year, pension funds registrar Dube Tshidi told the company that it was not allowed to accept new clients and that it must get its act together by this year. Aon was warned that if it failed to adhere to the directives, the registrar might take further action, which could include suspending or withdrawing its administrator licence.
* The biggest failure was the implosion of Fedsure 10 years ago, which resulted in members of various building industry retirement funds having 12 percent of their fund values (R600 million) deducted by Investec when it took over the funds.
In terms of the Financial Services Laws General Amendment Bill, applicants for retirement fund administration licences will have to meet stricter requirements for honesty and integrity, competence and operational ability, and financial soundness.
One of the proposed requirements is that retirement fund administrators must hold reserves to cover the costs of appointing a replacement administrator should the administrator fail in its obligations to a fund. The only exception will be life assurance companies, which must hold other reserves.
The level of the reserves will be prescribed by the registrar of pension funds.
The reserves will have to be ring-fenced and kept separate from other company assets. If the registrar gets wind of maladministration or administrative failure, the registrar can order that the administration of the fund concerned is handed over to another administrator, with the costs being met from the reserves held by the errant administrator.
In terms of the amendment bill, administrators will also have to:
* Acknowledge that all retirement fund documents held by an administrator, including documents created by the administrator, belong to a fund and may not be destroyed without the permission of the fund; and
* Report to the registrar of pension funds any matter in the affairs of a fund that may prejudice the fund or its members.
EMPLOYERS TO BE PERSONALLY LIABLE IF CONTRIBUTIONS NOT PAID OVER TO RETIREMENT FUNDS
The government is going on the attack to stop the growing plunder of retirement fund savings by employers who deduct contributions from wages and then do not pay the money over to a retirement fund.
Employers’ non-payment of both their and fund members’ contributions is a major problem for financial services, trade union and umbrella retirement funds. Apart from reducing retirement savings, the non-payment also results in the loss of group assurance benefits for death and disability, because the premiums are not paid.
To stop the fraud, the Financial Services Laws General Amendment Bill proposes making a wide range of people personally liable for paying the contributions if an employer fails to ensure that retirement fund contributions are paid timeously into a retirement fund’s bank account. These people include:
* Companies: employers, shareholders who control a company and directors involved in the overall management of a company’s finances;
* Close corporations (CCs): all members of a CC; and
* An employer that is neither a company nor a CC: every person, including trustees or partners with “whose directions or instructions the governing body of the employer acts”.
TRUSTEES MUST PLAY BIGGER GATE-KEEPING ROLE
Retirement fund trustees, particularly of funds sponsored by the financial services sector, will have to do a better job of protecting your retirement savings in terms of the Financial Services Laws General Amendment Bill, which places a wide range of new obligations and duties on trustees.
And the bill gives the registrar of pension funds the power to remove any trustee considered no longer fit to hold office.
The requirements proposed for retirement fund trustees include:
* Placing specific requirements on trustees to act independently. Although the legislation does not state this, there have been a number of court cases and complaints to the Financial Services Board in recent years about the lack of independence of trustees. The two main problem areas have been:
* Financial services industry-sponsored retirement funds, such as retirement annuity funds, umbrella funds and preservation funds, where a financial services company appoints the trustees, who are often tied into accepting services, such as asset management, administration and risk assurance, provided by the sponsoring company, to the detriment of fund members.
* Trade unions have attempted to dictate to trustees how they should vote and behave. In some cases, this has resulted in fund members suffering losses.
Trustees are already required to act with due care, diligence and good faith, avoid conflicts of interest, act impartially and take all reasonable steps to ensure your interests as a fund member are protected at all times.
* Requiring trustees to notify the registrar of pension funds if they become aware of any matter that, in their opinion, “may seriously prejudice the financial viability of the fund or its members”.
* A trustee who leaves a board of trustees for any reason, except because his or her term of office expired or because of he or she resigned, must within 21 days of his or her departure submit a written report to the registrar of pension funds that gives his or her perceived reasons for the termination.
* Any vacancy on a board of trustees will have to be filled with 30 days.
If the legislation is promulgated, the registrar of pension funds will be able to instruct your retirement fund what it must tell you about your fund and how often it should do so.
And the registrar will be able to intervene to halt, or to have amended, any fund communication that is “misleading, confusing or contains incorrect information of fact”.
FUND MEMBERS TO HAVE A SAY ON SURPLUSES
Retirement fund members are to be given a say in the distribution of future retirement fund surpluses to ensure that fund surpluses are equitably divided.
With the major 10-year surplus apportionment surplus exercise almost completed, the legislation on new retirement fund surpluses is to be improved in terms of legislation published last week.
Earlier this year, the Financial Services Board (FSB) reported it had approved pension fund surplus apportionment schemes totalling R47 billion, of which R27 billion went to members and former members of the Engineering Industries Pension Fund and the Metal Industries Provident Fund.
However, the Pension Funds Act set very few conditions for any new surpluses that may arise in mainly defined benefit funds.
In terms of the Financial Services Laws General Amendment Bill, any future surplus apportionment will have to be proposed by a board of trustees and agreed to by the majority of the stakeholders. Any surplus has to be identified when a fund undergoes a compulsory actuarial valuation at least every three years.
Until this amendment, which also clearly states that former members have a right to a surplus if they left a fund between surplus apportionment dates, the apportionment was left to the discretion of the fund trustees.
The Registrar of Pension Funds will be able to appoint a special ad hoc tribunal to decide on a fair and equitable apportionment between all stakeholders, including members, former members and employers, if, among other things, no agreement can be reached on an equitable split; if the registrar believes the apportionment is not fair and equitable; or if the registrar does not agree with a claim that a fund does not have a surplus.
The tribunal members may be selected by the affected retirement fund but must consist of at least one lawyer and one actuary selected from a panel provided by the registrar.
DIVORCE PENSION RIGHTS DISPUTED
Government is planning to extend the rights of non-member former spouses and to clear up various court disputes over when and how a retirement fund must pay over pension benefits.
The proposals are contained in the financial services draft legislation.
The proposals include giving non-member former spouses the right to claim a divorce settlement from the pension fund benefits of a deferred member or a pensioner member of a retirement fund as a capital amount and not a percentage of a pension in the case where a pensioner member is receiving a pension.
If the non-member former spouse does not claim the divorce settlement share of the retirement fund benefit within 24 months the money will be transferred to an unclaimed benefit fund.
However, Karin MacKenzie, a pension lawyer at law firm Herold Gie and a former senior member of the Pension Funds Adjudicator’s office, says that unfortunately the present wording of the bill will not achieve the intentions of government.
MacKenzie says there has to be a better definition of a “pension interest” of a non-member former spouse.
She says the Divorce Act currently focuses on the source of assets that may be deducted in a divorce settlement. What is needed is a change to the definition of a pension interest by including things such as when a fund member has become a deferred member.
She says the amendments to allow a non-member former spouse the right to claim part of a pension would apply only when a pension fund is paying the pension.
“A claim for a share of a pension cannot be made against an annuity (pension) bought from a financial services company,” MacKenzie says.