THE long arm of the law was given more extensive reach over the financial services sector last year as the Treasury attempted to close legal loopholes, address legislative weaknesses highlighted by the global financial crisis, and begin to lay the foundations for a new architecture of regulation that will be phased in over the next few years.
Treasury officials were frequently heard to say during their briefings to Parliament’s standing committee on finance that in line with international trends there was a need for greater "intrusiveness", and "draconian" laws were the order of the day.
Treasury deputy director-general for tax and financial sector policy Ismail Momoniat said the financial crisis and its aftermath had prompted an international move away from "light-touch regulation".
This trend dovetailed with the planned introduction of the "twin peaks" model of regulation of the financial services sector, in which the regulation of market conduct is institutionally separated from prudential regulation, which will, among other things, concern itself with the systemic soundness of the sector as a whole — a gap in the existing system.
Mr Momoniat said the draft legislation providing for the twin peaks regime will be introduced into Parliament this year.
It will touch on about 11 financial sector laws but only in relation to which aspects of the law will fall under which regulator, rather than introducing fundamental amendments.
One of the likely elements of the twin peaks proposals will be the introduction of a single entry point for the licensing and registration of service providers.
This would prevent cracks developing between the regulators, prevent regulatory arbitrage, and ensure that business leaders had the integrity, honesty and qualifications to run their enterprises. In the meantime, other legislative deficiencies had to be addressed. Two important bills were passed last year — the Financial Markets Bill and the Credit Ratings Services Bill, both characterised by officials as "draconian". Pending for consideration by Parliament early this year is the Financial Services Laws General Amendment Bill, likely to generate controversy.
This bill proposes to give financial regulators and supervisors stronger, more intrusive and tougher powers, including the power by the registrar of insurance to make policyholder protection rules without ministerial approval to ensure customers are treated fairly.
This would include requiring improved disclosure in insurance contracts and the use of standardised definitions for concepts such as disability or dread disease so that policyholders can make comparisons between the products different companies offer. Furthermore, regulators will be given emergency powers so that they can respond quickly to systemic risks in the financial system. The Financial Services Board would also be protected against liability for its actions, even when these were deemed to be "negligent".
Mr Momoniat told Parliament’s standing committee of finance that it was necessary for the liability of regulators to be limited to ensure effective rather than "light-touch" regulation.
Regulators and supervisors would also be given enhanced powers to conduct inspections and on-site visits, and to summon people to provide documents required for inspections.
Other financial sector bills dealt with by Parliament last year included the already adopted Financial Markets Bill, which updates the regulation and supervision of securities services and replaces the Securities Services Act, which governs the regulation of securities exchanges, central securities depositories, clearing houses and their members. It broadened the scope of the definition of insider trading.
The Credit Rating Services Bill, also adopted, controversially gives notices, directives, exemptions, determinations and other requirements imposed by the regulator the same status as the law itself without these being overseen by Parliament.
Mr Momoniat told MPs this was necessary because regulators needed to be able to act with speed to avert disasters.