FIMA bits and bites – NAMFISA provides consultation feedback
I have repeatedly expressed my concern and reservations in this newsletter about the procedures followed in formulating the Financial Institutions and Market Act (FIMA). At least the Act went through the parliament, even though it received no technically founded attention. Unfortunately, the Act extends legislative powers to NAMFISA, making it the judge, the jury, and the executioner!
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It was given the power to penalise its subject unilaterally, which not even the parliament has. Under these powers, NAMFISA may issue standards, directives, guidelines, rules, or other subordinate measures. If NAMFISA is satisfied that any subject failed to observe any such standard, directive, guideline, rule, or another subordinate measure, it may impose an administrative sanction of diverse nature on any financial institution, financial intermediary, or another person to whom this Act applies, including a financial penalty of not more than N$ 10 million! Note that such a penalty must be paid to NAMFISA, creating a self-interest for NAMFISA! The delinquent can only appeal a penalty to the Appeal Board.
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At the beginning of April, NAMFISA informed the public that it had completed phase 4 of the consultation process, which it chose to employ. It uploaded representations from industry participants together with its response. It either accepted or rejected the representation. Where it accepted a representation, it amended the relevant standard. It now uploaded the final standards on its website.
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Now, when one is required to comment on complex technical matters in a prescribed, written format, and NAMFISA responds to them, three possible scenarios can arise. Scenario one is that the commentator and NAMFISA, in its response, did not say what they meant to say. Scenario two is that one party misunderstood what the other wanted to say. Often the commentator would have brought the practical impact into his comment that NAMFISA will unlikely have. However, since NAMFISA is ‘at the top of the food chain,’ its wish prevails and ends up in the final standard as the new law, based on its understanding.
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To exemplify what these scenarios can lead to, I cite a few examples from the comments on Chapter 5 and NAMFISA’s responses that lead to the final standard.
Industry representation:
Clause 7 requires that late payment interest is to be credited to the affected members’ records.
Late payment interest (LPI) should be recorded separately from the members’ interest earnings and should be credited to the fund’s reserve account instead of to the affected members’ records due to the following:
Currently, even if the employer pays late, contributions are updated and invested as if the employer paid on time (as per the Funds’ Rules). As a result, late payment of contributions does not impact the member negatively.
LPI could be much higher or lower than the actual investment return. Crediting the affected members’ records with the LPI thereby causes inequity among those members and the other members participating in the fund.
NAMFISA response:
Rejected - The interest is paid as a result of the late transmission of contributions which if the contributions were timely received by the fund and invested, same would have seen growth. Thus, it’s just fair that interest be credited to the affected member’s records.
Suffice also to note that a fund reserve account is generally an account that members have no absolute entitlement to receive credit.
Editor’s comment:
Since the Minister issues regulations, I was surprised that NAMFISA decided not to entertain the industry representation.
A pension practitioner will have noticed that NAMFISA’s response ignores the issue raised in the industry representation, possibly for not understanding the comment made or not understanding how pension fund administration systems handle contributions. It creates an untenable situation for fund administration systems. The standard would now force fund administration systems and processes to be changed at substantial costs without any benefit to the member. It is doubtful if administration systems can accommodate such changes. Manual workarounds that introduce risks, time delays, and costs must be devised. Had the industry been able to discuss its concern with NAMFISA and a technical expert in the line ministry, acting as an adjudicator, one should have been able to come to a reasonable solution.
2. RF.S.5.26 – Governance of Retirement Funds.
Industry representation:
The clause prescribes that the board must evaluate its performance annually and this would place extra duties on time-constrained boards. It is proposed that evaluations should be conducted every 2 years.
NAMFISA response:
Rejected - The point of departure is why board evaluation is important. Annual board evaluation will ensure that the board is able to address its shortcoming so as to ensure that it delivers on the mandate.
Editor’s comment
The industry representation is reasonable and based on practical experience with board business. NAMFISA rejects it out of hand and makes no attempt to compromise without a substantive reason.
3. RF.S.5.26 – Governance of Retirement Funds
Industry representation:
The standard requires the board to continuously have and maintain skills and understanding of the fund’s business to be able to fulfill their role as trustees.This is not always practically possible in practice, especially when dealing with members elected Trustees who might not have the knowledge or skills to fully discharge their duties as required but were nonetheless elected to the board by the members of the Fund. On the flip side of the coin, the appointment of independent trustees would increase the costs of the board fees for the fund, and this might have a major impact, especially for smaller standalone funds.
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NAMFISA response:
It is expected that all Board members to be trained and gain the required skills, where trustees do not themselves have the required expertise, they must ensure they get appropriate, and experts advise.
Editor’s comment:
NAMFISA expects all board members to be trained or to get appropriate and expert advice. I am unaware of any efforts being made to offer training on the skills the FIMA requires. There cannot be experts until appropriate graduate and post-graduate training is made available. Once such training is available, the first experts will be produced only after at least three years. In the interregnum, trustees are placed in the unenviable position of being held accountable for acting without the required skills and training.
4. RF.S.5.26 – Governance of Retirement Funds
Industry representation:
The language used in the standard, in general, is not plain and simple as required by the FIMA.
The Standard should therefore be written in a language and with the use of ordinary words that would enable the general public to understand and make sense of the provisions contained in the standard when reading the standard.
NAMFISA response:
Rejected - Clause 2 of the Description of Plain Language provides for Funds to whom it is applicable, the same is not applicable to legislation.
Editor’s comment:
NAMFISA expects trustees to produce everything in plain language. Should it not consider it as its obligation, too, to promote understanding and to lead by example?
5. RF.S.5.26 – Governance of Retirement Funds
Industry representation:
The clause makes reference to the following specific terms: “legitimate interest”, “expectations”, and fund’s “stakeholders” which are not defined in the definitions clause of the standard.
The concepts highlighted should therefore be defined in plain and simple language for any reader of the standards to be able to understand whether they would fall into any categories highlighted therein.
NAMFISA response:
The words used should be understood in the context and given their dictionary meaning. Words with special connotations are the ones defined
Editor’s comment:
Stakeholders are concerned that they may fall foul of so many requirements based on undefined terms, which would place them at the mercy of NAMFISA. NAMFISA as the legislator of standards can hand down administrative penalties up to N$ 10 million. It seemingly wants to keep a free hand by not defining the expected outcomes but listing the required inputs in vague terms.
Conclusion:
The issuing of standards and regulations is an administrative process and, in my humble opinion, should meet the requirements of administrative justice. In many cases, NAMFISA overruled reasonable suggestions on standards and regulations without offering substantive reasons or affording the industry to be heard. As Judge Thomas Masuku stated in a recent case dealing with administrative justice, “Decision makers are not allowed to intern the reasons for impugned decisions in the bosom of their souls or the vaults of their esteemed offices. Reasons for decisions must be furnished at the time a decision is made.”
I would argue that this principle should equally apply to the process of issuing standards and regulations as the industry will be affected by the decisions, in some cases severely affected!
The legislative process regarding standards does not provide for an unbiased expert reviewing representations and NAMFISA’s response to them. In contrast, NAMFISA instigated the FIMA, the Minister reviewed it (in theory) and tabled it in the parliament. The parliament had the power to amend it. In the case of NAMFISA-issued standards, there is no Minister and no parliament or other party fulfilling similar roles. NAMFISA is the instigator, the Minister, and the parliament in one party regarding the standards.
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With the changes and new standards issued, the?number of compliance requirements we identified increased from just over 600 to 758!?It goes beyond anyone’s imagination and substantiates the fact that FIMA does not constitute a move from compliance to risk-based supervision but rather the opposite!
Something has gone seriously wrong with this monstrous new law. We should stand back now and ask ourselves, “Is this what Namibia can afford and needs and what we want to achieve?” I fear that we have gone so far down the path and have invested so much energy and resources that we will rather close our eyes and carry on, whatever the consequences may be!
Tilman Friedrich?is a chartered accountant and a Namibian Certified Financial Planner? practitioner, specialising in the pensions field. He is co-founder, shareholder, and Chairman of the RFS Board and retired chairperson, and now a trustee of the Benchmark Retirement Fund.