1. A SAFER FINANCIAL SECTOR TO SERVE SOUTH AFRICA BETTER (“RED BOOK”) Rosemary Lightbody September 2014

2. TWIN PEAKS (Financial Sector Regulation Bill 2013)

3. TWIN PEAKS Financial Sector Regulation Bill, 2013 3 “FSB”: Market Conduct Regulator Banks, Insurers, CISs, Pension Funds RESERVE BANK: Prudential Regulator Banks, Insurers, CISs (where guarantees), FMIs COUNCIL OF FINANCIAL REGULATORS Financial Services Tribunal Tribunal with powers to hear major cases  Bill not submitted to Parliament yet, although NT would like it to be passed this year.  Revised Bill being prepared – NT plan to publish simultaneously with its release, 2x documents: reg framework for MCR and PR.

4. RETAIL DISTRIBUTION REVIEW (“RDR”)

5. Key FSB proposals  Started with FSB letter to industry bodies dated 11/11/11.  No further official documents yet, but various FSB presentations have indicated their thinking as it develops:  Move to a component/activity-based approach to regulating advice and intermediation, with remuneration linked to activity  Will have to charge separately for each component of advice and intermediary services: o Financial planning/risk planning o Up-front product advice o On-going advice  Possible exception: Commission for “access” products  NOTE: Risk products – commission (adjusted) & advice fees

6. Key FSB proposals (cont)  Clarify intermediary contractual relationships - avoid consumer confusion: o Independent Financial Advisor (No product supplier allegiance/commitments) o Multi-tied agent (Can advise on a range of products - most of current so- called “independent advisors) o Tied agent (Limit to one supplier/group only - remove current “hybrid” models)  Address conflicted remuneration  Review FAIS framework  Will introduce reforms incrementally where required.

7. Incremental changes  Co-administration agreements: FSB Information letter 29 August 2014 – affects funeral administrators  FSB proposed amendment to FAIS General Code issued 1 September 2014 (comment by 16 September 2014) – outlawing sign-on bonuses for intermediaries

8. Sign-on bonuses  New section 3A(1A): “A provider or representative may not directly or indirectly, through a third party or otherwise, offer to or receive a sign- on bonus from any person.”  Definitions: “outsourced”; “sign-on bonus”; definition of “third party” amended to include “any person to whom a product supplier has outsourced a function”.

9. NATIONAL TREASURY’S TAX-FREE SAVINGS PRODUCT (2 nd Taxation Laws Amendment Bill 2014 – inserting s12T )

10.  Overriding principles: Simplicity, transparency, suitability  Types of products: Long-term insurance policies; units in CISs; bank accounts; Treasury Retail bonds; JSE authorized users (ETFs). Can be on a LISP platform.  Tax status: After-tax investment; Tax-free build-up (no income tax, CGT, dividends tax); tax-free pay out. Forms part of dutiable estate on death.  Maximum contributions: R30 000 pa; R500 000 lifetime limit.

11.  Transfers between products tax-free, including growth.  Disinvestments cannot be re-invested in the same tax year.  Over-contributions – on assessment, penalty of 40% of the amount over-contributed. Can then leave the amount in the tax-free product.  No limit on number of accounts as long as the total is within the maxima.  SARS will consolidate all contributions per individual on assessment.

12. SARS Reporting – NT initial thinking (SARS BRS to be developed)  Product suppliers will have to submit reports to SARS per individual taxpayer per account held: o ID numbers o Contributions o Withdrawals o Transfers in/out o Earnings by type (capital gains realized, interest income, dividends income) o Market Balances  Do not need individuals’ tax numbers.  Reporting to be done through IT3 system – a new form to be developed.  Long-term insurer products will be dealt with under the untaxed policyholder fund and will need to be reported as such.

13. Product rules Regulations will set out required product characteristics – consistency across product licences:  Adequate diversification across underlying asset classes – all products to align with CIS Board Notice 80.  Liquidity - Market value of the savings/benefit must be paid out on request of investor at any time. Long-term insurance products – no five-year rule for purposes of this product.  Exit charges – ‘reasonable’ exit charges need to be determined. Probably either fixed Rand amount, or capped percentage of value of the investment, but not as high as current 15%.  Portability - mandatory

14. Product rules (cont)  No contractual arrangements – no obligation to keep making payments for any period of time that will attract penalties. Regular debit order arrangements do not fall foul of this requirement – as long as the termination of the debit order does not result in any charge other than the exit charges referred to above.  No performance fee charges – fees can be based on aum but not any benchmarks of any nature  Use of derivatives – derivatives may only be used for hedging purposes if they are held in underlying CIS’s or linked insurance policies  Sales commissions and disclosure requirements – these must comply with RDR and KIDS requirements  Complex pay-off structures - Products with non-linear or complex payoff structures not permissible

15. Product rules (cont) Long-term insurance products –  Risk products not permitted. No premium waiver benefits within the TFSA. (Can offer alongside the TFSA policy, but must not be marketed as being part of the TFSA, and termination of the premium waiver policy cannot affect TFSA policy.)  Guarantees: No decision yet whether guarantees will be permitted. Initial launch will be with simple, clear, transparent products. Possibly linear guarantees can be also be allowed at a later stage.  Where smooth bonus portfolios do not adhere to the three principles because of market value adjusters, etc, and do not comply with requirement to pay market value on exit at any time, will not be permitted.  Submit to the Registrar of Insurance on a “file-and-use” basis. Where Registrar disapproves – penalty; no further contributions allowed into product; specific SARS reporting re that product.

16. Regulations required  LTI regs – NT and FSB currently working on these  FAIS – ASISA members have asked for RE 1 exemption until appropriate exams developed to better enable entry-level market distribution  Possibly CISCA although it may be that all CISs will be acceptable  Banks?