In 1999, South African Mark Shuttleworth sold the rights to Internet Security software that his firm, Thawte, had developed to American firm Verisign, in a deal worth R 3.5 billion. He became one of the world’s youngest billionaires.
However, he now resides in the Isle of Man, mainly because of taxation considerations and South Africa’s regime of exchange control. Exchange control limits the movement of wealth across borders, and has largely become defunct in most of the economies of the world. In South Africa, it was reintroduced by the Apartheid government after Sharpeville to prevent the flight of capital from that country, and it is still in force for the same reason, even though South Africa is now a free democracy.
When Mr Shuttleworth decided to take his money out of South Africa, an “exit charge” of R250 million was imposed on him by the South African Reserve Bank. Mr Shuttleworth subsequently sued the government for return of his property. The case as recorded as Shuttleworth v South African Reserve Bank and Others (30709/2010) [2013] ZAGPPHC 200 (18 July 2013).
The court found against Mr Shuttleworth, deciding that the policy of keeping exchange control is important for the national interest. However, the judge then proceeded to strike down certain of the provisions of the Currency and Exchanges Act 9 of 1933 (Act) and its Regulations. In particular, the provisions of s9(3) of the Act, which gives the President sweeping powers, simply by regulation, to suspend any law, including an Act of Parliament, affecting currency, banking or exchange finding this to be inconsistent with the Constitution of South Africa. Of great importance is the finding of the judge that regulation 3(1)(c), which prohibits payments abroad without approval, offends constitutional rights of freedom of expression and privacy.
I do not intend to dwell on the merits or otherwise of exchange control in this article, but what interested me in reading the judgement was that, in the Shuttleworth case, we again find the construct in the formulation of law whereby the actual Act itself sets out the broad ambit of the legislation, and then mandates a government functionary to vary the application of the Act in its detail by means of regulation. This is of course also the manner in which the Insurance Acts have been constructed, and the Minister of Finance, through the Financial Services Board and the National Treasury, also has sweeping powers to decide on a wide scope of matters affecting the South African Insurance industry. There does not really appear to be any need for consultation with interested parties. This construct of law allows the functionaries to act in the rather one-sided and apparently arrogant manner to which we have become accustomed. They act like this because the law allows them to.
For the South African insurance industry, the powers that the regulator and the Treasury have obtained through this structure allow them to determine, amongst other matters the remuneration that insurance intermediaries earn in the form of commission. In the case of commission regulation, this is of course not new.
Introduced by the previous government, for nearly four decades since 1976 South Africa has endured insurance commission regulation. At the time, one Willem Swanepoel was Registrar of the Financial Institutions Office (FIO), the forerunner of today’s Financial Services Board (FSB), although with just 12 members of staff, it had nothing like the size, power and scope of today’s FSB with its 485+ employees and a budget exceeding half a Billion Rand! The FSB today, like the FIO from which it emerged, has the power to make and interpret its own laws, administer them, adjudicate transgressions and impose fines and penalties, all in terms of the legal construct where Parliament had handed over its control of the execution of the Insurance Acts to the Regulators.
Unable to obtain any form of agreement from the insurance industry as to whether or not commission regulation should be introduced, whether or not it would be beneficial, what the limits of such regulation might be, or even how it should be administered, Swanepoel went ahead and announced arbitrary arrangements by means of what amounted then to little more than an edict – by means of the Regulations that the Insurance Act allowed him to make.
His stated purpose was to reduce premiums in the interests of policyholders. Whilst the industry had pointed out much that could go amiss by attempting to regulate any element of insurance pricing, neither the industry nor Swanepoel could ever have predicted the colossal array of unintended consequences that his edict would ultimately spawn.
Swanepoel’s entirely random commission limitations, the precise numbers of which continue to apply, quickly rendered vast swathes of the broking industry wholly unsustainable. This rapidly undermined the vital distribution systems of most insurers and inevitably gave birth to several new institutions including underwriting managers (UMAs). In numerous cases this had the effect of creating conflicts of interest between broker and client, the very opposite of what Swanepoel had hoped for, and leading to the perceived need for yet more complex regulation.
In almost four decades of one amended or supplemented regulation after another, none of it has served either to reduce premiums or even to prevent premium escalations. On the contrary, the gigantic costs now associated directly and indirectly with this aberration have served instead to drive costs up significantly. The latest in this long series of developments is the introduction of the so called “Binder Regulations” in terms of which an attempt is made to micro-manage insurer’s expenditure by stipulating precisely how much is to be paid for the production of product wording, policy documentation and claims services, to mention but a few! Swanepoel would no doubt be greatly distressed to know just how badly it has all gone awry.
Even the Treasury’s own 2009 document “A safer savings environment for SA” speaks of the necessity for commission regulations ultimately to be done away with. The Policy Board in 1999-2000 recommended the regulations be abolished and regulations to achieve this were prepared and actually signed by the previous minister of finance. Also, commission regulation has long been done away with in virtually every jurisdiction internationally where which it was tried. As with ours, the experiments proved futile, leading to great uncertainty, confusion, expense, red tape, loss of jobs and micromanaged incomprehensible legislation.
Why have we chosen not to follow the simple disclosure rules of other jurisdictions that place no limit on any of the cost elements of insurers, other than that limitation which is enforced through fierce competition? Instead, we now have an array of regulations, each more complex that the next, all of which are frequently changed and ‘updated’ in a mesmerising barrage of “Board Notices”, explanatory memorandums and “Guidance Notes”.
A recent (July, 2013) Price Waterhouse Coopers survey shows that this tsunami of words has now taken on such gigantic proportions as to be considered the greatest single risk to the industry, its executives requiring now to spend upwards of 65% of their productive time dealing with it! Surely Parliament needs now to get involved and demand a complete review, reduction and simplification of the legislation, the plethora of “sub-ordinate legislation” and the regulation to which our financial services industry is expensively subjected? This should be done long before any further legislation is passed and any more risk added to the industry. Certainly, it needs to be completely reviewed before we steam ahead with yet more failed foreign ideas such as “twin peaks”, Sam and TCF, and before it too becomes the soap opera comedy of errors that commission regulation has become?
Getting back to Mark Shuttleworth – he had deep enough pockets to take on the constitutionality of the largely arbitrary rules that the exchange controls impose on the citizens of South Africa in the Courts. He did not win on the aspect of getting his “exit charge” refunded, but the ancillary judgment striking down the powers of the authorities to make their own one-sided regulations without considering their constitutionality may be more useful to us in the long run.
The good intentions of regulation are more often than not negated by unexpected and unintended consequences, and the attempts by our rulers to centrally control every aspect of the economy are often not informed by the rights and duties provided by the Constitution, but by myopic political objectives. We need more people like Mark Shuttleworth to get the focus back on our rights to function as a free democracy.
