Staff Reporter
NAMFISA CEO, Kenneth Matomola, addresses frequently asked questions on the Financial Institutions and Markets (FIM) Bill:
Q: Why regulate the non-bank financial sector?
A: The financial sector requires regulation for the purpose of consumer and industry protection. The extent and form of the regulation will differ between different financial institutions, stage of development of the financial sector and jurisdictions. The principal aims of regulation of the financial sector are to:
i) Correct market inefficiencies and promote efficient and orderly markets in financial services. This is of paramount importance in Namibia and other developing countries where information between the consumer and providers of financial services are mostly poor. Consumers of financial services lack information and expertise to fully understand the details of the increasingly complex financial services traded.
ii) Protect consumers of financial services. The consumers of financial services, collectively, assume that the financial sector is sound and operates in a fair and transparent manner. Individually, a consumer of financial services has limited bargaining power when dealing with a financial services provider and this is compounded by the information asymmetries. The regulator aims to ensure that the financial sector is sound and operates in a fair and transparent manner.
iii) Maintain confidence in the financial system. From a macroeconomic point of view, it is necessary that there is confidence in the financial system. In recent times, confidence in the financial systems of developed countries has suffered and has had considerable effects on the real economy. Developing country financial systems are not immune from loss of confidence. Regulators should monitor the financial system to ensure that confidence is maintained. In particular, regulators should monitor and correct systemic risks and deter the occurrence of financial crime.
Q: Who are the participants in the non-banking financial sector?
A: The participants in the non-banking financial sector consist of Pension Funds, Friendly Societies, Microlenders, Money lenders, Asset Management Companies, Unlisted investment Managers, Special Purpose Vehicles, Collective Investment Schemes, Linked Investment Service Providers, Stock Exchange, Medical Aid Funds, Short-term Insurance Companies, Long-term Insurance Companies, Brokers and Agents, inter alia.
Q: What is the FIM Bill?
A: FIM is an abbreviation for the Financial Institutions and Markets (FIM) Bill.
The object of the FIM Bill is to consolidate and harmonise the laws regulating financial institutions, financial intermediaries and financial markets in Namibia; and to provide for incidental matters. In particular, the Bill seeks to foster:
(a)the financial soundness of financial institutions and financial intermediaries;
(b)the stability of the financial institutions and markets sector;
(c) the highest standards of conduct of business by financial institutions and financial intermediaries;
(d) the fairness, efficiency and orderliness of the financial institutions and markets sector;
(e) the protection of consumers of financial services;
(f) the promotion of public awareness and understanding of financial institutions and financial intermediaries; and
(g) the reduction and deterrence of financial crime.
Q: What are the benefits of the proposed legislative framework under the FIM Bill?
A: The benefits include:-
An integrated approach to supervision and regulation of the non-banking financial sector, in particular uniformity and consistency of rules and provisions, resulting in elimination of silos and elimination of conflicting provisions and regulatory arbitrage;
Greater regulatory responsiveness, i.e. flexibility in adapting standards and regulations to market movements under the risk based approach;
Preserving Parliamentary powers to set the overriding framework for the financial sector (i.e. fixed policy on issues that need to be certain);
Enabling the Minister to issue regulations (i.e. variable policy on issues that are likely to change); and
Greater consumer awareness and protection.
Q: Does the FIM Bill give the Minister of Finance and NAMFISA more powers?
A: The FIM Bill enables the Minister of Finance to make regulations and the Authority to make standards. The manner in which the division of powers has been split between Parliament (FIM Bill), the Minister of Finance (Regulations) and the Authority (Standards) is based on the following:
i The FIM Bill incorporates those aspects that define the overall financial market structure, sets policy that is unlikely to change frequently and prescribes those aspects for which both consumers and providers of financial services need certainty;
ii The Regulations will enable the Minister of Finance to use policy variables to achieve specific Government objectives; and
iii The Standards will enable the Authority to determine operational, prudential and market conduct rules related to the non-bank financial sector, this will enable rapid response to crisis and continuous review of rules as the operating environment changes.
Further, note that the aspects from the national, regional and international principles that are relevant to the functioning of the non-bank financial sector are incorporated at the appropriate level of legislation (FIM Bill, Regulations or Standards).
Q: Why a new legislation governing the non-bank financial sector?
A: The current legislative framework for the regulation and supervision of the non-banking sector is outdated. The Acts administered by the Authority are in some cases more than 50 years old and do not adequately provide for the regulation and supervision of modern financial institutions and, in some cases, hamper the development of the non-bank financial sector.
i The regulatory measures contained in the current legislation are disjointed, inconsistent and exacerbate the cost of regulation. It is imperative that a consistent and uniform regime be created - designed to suit Namibian market conditions - in order to provide for economies of scale in the institutional regulatory structure of the Authority. The inconsistencies in current legislation also create the opportunity for arbitrage within the non-bank financial sector where regulations for the same activity under different Acts are divergent.
ii Legislation does not take into consideration changed circumstances and do not encourage innovation and entrepreneurship. Reform is required to meet the demands of not only the Namibian economy, but also to align our financial markets to compete both regionally and internationally. Through the envisaged amendments, opportunities will be created for the deepening and broadening of trade in financial services in Namibia, which could in turn stimulate entrepreneurial development.
Despite various piecemeal amendments to the legislation, these amendments were not sufficient to remove these impediments. Therefore, it is necessary not only to devise modern legislation, but also to have a flexible legislative framework that addresses the deficiencies and avoids or lessens the adverse effects of inadequate legislation on consumers and on the efficient provision of financial products and services.
Q: Tell us about the regulatory reform process.
A: In 2008, the NAMFISA devised a strategy to bring about the necessary change in the supervision of the non-bank financial sector. This strategy has since been refined and culminated in the strategic objective to develop an efficient and effective regulatory and supervisory framework as stated in the NAMFISA’s 2011 and 2012 annual reports. This framework is set to promote a safe, stable and trusted non-bank financial sector. The framework is intended to be sound and robust, adhering to international standards, principles and practices of financial supervision.
Because of this initiative, the NAMFISA proposed a first draft of the FIM Bill and held consultations with the industry on the FIM Bill during 2008. These consultations are in line with the NAMFISA’s stated commitment to consult with industry on pertinent issues. However, some policy and practical issues remained unresolved.
In early 2011, the NAMFISA reviewed the FIM Bill and proposed a redrafted FIM Bill. It held consultations with the industry during 2011 on the FIM Bill. The FIM Bill contained provisions relating to NAMFISA, financial institutions and intermediaries, and the complaints adjudicator or the ombudsman. After the consultations, provisions relating to the NAMFISA, usury and credit agreements, and the ombudsman were taken out of the FIM Bill and proposed to be drafted separately. As a result, the NAMFISA redrafted the FIM Bill and the NAMFISA Bill for consultation during 2012. The FIM Bill only contains provisions relating to the supervision of financial institutions and intermediaries.
The International Monetary Fund (“IMF”) provided assistance to the NAMFISA in the review of the FIM Bill. The IMF procured consultants who participated in the industry consultations, and provided valuable input on the FIM Bill. In particular, the IMF consultants provided input on the Bill to assure that they are technically sound and meet the requirements of modern financial services law including consistency with international standards.
The resulting FIM Bill establishes a holistic and integrated framework for the regulation of non-bank financial institutions and intermediaries. The regulatory requirements as set out in the different financial services laws are harmonized and consolidated in the FIM Bill, and address the aforementioned deficiencies.
Q: Kindly run us through, and chronologically set out the proposed FIM Bill as well as explanations thereof.
A: The FIM Bill is a comprehensive legislation with various Chapters, providing for the regulation of the different but interconnected sub-sectors of the non-bank financial institutions and intermediaries under separate chapters:-
Chapter 1 provides for definitions of key concepts in the Bill. The definitions are now comprehensive and more precise.
Q: What does Chapter 2 of the FIM Bill address?
A: Chapter 2 focuses on the Insurance industry and looks at the usage of plain language. Chapter 2 of the FIM Bill repeals the Long-term Insurance Act, 1998 (Act No.5 of 1998) and the Short-term Insurance Act, 1998 (Act No. 4 of 1998) (LTA and STA). The insurance chapter deals with both long-term insurance and short-term insurance to ensure consistent requirements for the industries. It however does not mean that it is now possible to conduct both long-term and short-term insurance in one company; they still need to be distinct institutions.
More often chapter 2 looks at the use of uncommon, legal terminologies in insurance marketing materials and policyholders’ contracts result in disputes between consumers of financial products/services and the financial services providers. The current Acts do not make provision for enforcement of use of plain language on policies, certificates of coverage, related documents and any other documents for simplicity. The new provision in the Bill compels insurers to adopt plain language in all policies, certificates of coverage, related documents and any other documents specified in the standards. This is for the purpose of enhancing the understanding by the consumers and avoids conflicts/disputes resulting from misunderstanding of insurance terms and conditions.