Issue: June 2012 / August 2012
FINANCIAL SERVICES BILL
Dangers in the small print
A seemingly trivial change, to protect FSB officials who act in bad faith or negligently, isnít trivial at all. If passed by parliament, it will deserve Conscourt attention.
A saving grace of this government is the sagacity of National Treasury. Suddenly, it’s clouded.
Gordhan . . . peculiar amendment
Hard on the heels of its double-whammy humiliation over Sanral, in a High Court judgment and a behind-the-scenes ANC/Cosatu manoeuvre over e-tolls, comes a vein of poison in the 280-page Financial Services Laws General Amendment Bill to be tabled in parliament.
Almost lost in the volume of good intentions is a provision, tiny in words but ominous in impact, that removes “bona fide, but not grossly negligent” from a section of the Financial Services Board Act. It immunises the liability of the FSB and its officials from “any loss sustained by, or damage caused to, any other person as a result of anything done by or omitted by that person in the exercise of any power or the carrying out of any duty or the performance of any function under or in terms of this Act”.
Bluntly, it means that there’s to be no recourse against FSB officials when their bad faith or negligent actions allow financial loss to people they’re supposed to protect from financial loss. The draft bill was approved by cabinet in February. If this limitation of liability provision isn’t scrapped as a result of the subsequent consultation process, and is ultimately enacted, it’s almost certain to invite Constitutional Court challenge.
Most immediately, the SA Clothing & Textile Workers Union should catch a wake-up. Some 20 000 members of five Sactwu provident funds lost more than R300m in the debacle over Trilinear Asset Management. This happened once the FSB had not only investigated Trilinear but also, shortly after lifting its suspension and giving Trilinear a clean bill of health in 2008, allegedly not acted on information from a whistleblower (TT March-May ’12).
If the Sactwu funds believe that they have a cause of action, they’d better launch it promptly. The draft bill doesn’t say whether the amendment will have retrospective effect. Neither does it specify whether “any person” refers to juristic persons (the FSB itself) or only to individual persons (FSB officials). Individuals would have lesser resources to fight a legal dispute and pay compensation unless the FSB, funded by levies from financial institutions including retirement funds, picks up their costs.
Other litigation possibly on the radar is by Simon Nash, criminally accused of stripping certain pension funds of their surpluses. He alleges bad-faith collaboration between the fund curators and the FSB in his prosecution, and in a related civil matter.
The motivation for the proposed amendment, published with the draft, explains that the purposes are to remove “an unnecessary burden in litigation matters” and “to align” the section with “similar provisions relating to other financial regulators”.
However, it paradoxically adds that the current phrasing of the section is unique to the FSB in that “it does not appear in legislation relating to the liability of other regulators”. A variety of other SA regulatory statutes, from the Labour Relations Act to the Electoral Act, specifically include “good faith” provisions. And since even the Director of Public Prosecutions can be held personally liable if he exercises power in bad faith, then surely the same should apply to officials of the FSB as well.
Also, the motivation identifies two international standards requiring “the supervisory authority to have adequate legal protection to exercise its functions and powers”. But the one includes a “good faith” provision and the other refers to the “integrity of supervisory actions”. Both have rules on accountability.
The draft bill draws its inspiration from the National Treasury document A safer financial sector to serve SA better. In the chapter on strengthening the regulatory framework, it sets out 15 principles and cites these two international standards. “To the extent that there are any contradictions or inconsistencies in the above principles”, it recommends, “the international standards will apply”.
Then, in the memorandum on the objects of the bill, it’s stated that there are no constitutional implications. Perhaps this is fanciful in so far as the FSB provision is concerned. Any person has a constitutional right to administrative action that is lawful, reasonable and procedurally fair.
Highly debatable is whether protection of FSB officials from claims, regardless of whether the claims arise from the exercise of powers in bad faith or gross negligence, can justify a constitutional limitation of this right.
On a benign interpretation, this seemingly insignificant amendment slipped past National Treasury and Minister Pravin Gordhan. By acting quickly, they can prevent another possible humiliation.