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Explanatory Memorandum to the
Financial Institutions Act 1999 |
The purpose of this Bill
is to repeal and replace the Financial Institutions Act of 1973 in
order to strengthen the supervision and regulation of financial
institutions (banks and non-banks), agents of financial institutions
and ancillary financial service providers.
The Bill establishes a clear and consistent framework for
supervising licensed institutions by the Commissioner of Financial
Institutions who shall have the operational independence to respond
quickly and decisively to problems and issues confronting the
financial system. The proposed legislation also allows sufficient
flexibility in establishing minimum capital, liquid assets and other
prudential requirements to cope with latest developments in the
financial community and to align regulations with international
supervision standards.
Notes on Sections
Section 1 Short title and commencement
This section provides for the citation of Financial Institutions Act
1999.
This Act takes effect on the date of publication in the Gazette.
Section 2 Interpretation
This section provides for the definition of terms used in the Act.
Section 3 Application and exemptions
This section provides that the Act shall apply to all licensed
institutions, which include financial institutions, agents of
financial institutions and ancillary financial service providers.
The Act shall not apply to insurance companies and other
institutions which may be exempted fully or partly by the
Commissioner of Financial Institutions by notice published in the
Gazette.
Section 4 Licences
This section restricts the conduct of banking or credit business in
Lesotho to financial institutions licensed by the Commissioner and
provides a penalty for unauthorised conduct of such business. All
existing licensed banks on the date on which the Act comes into
operation shall be deemed to have been issued a licence under this
Act.
Section 5 Licensing of Financial Institutions
This section enumerates the documents which an applicant for a
financial institution’s licence must submit to the Commissioner. If
the applicant is a foreign financial institution, the requirements
include a statement from the supervisory authorities of the home
country that the management team is fit and proper and that the
institution is subject to comprehensive supervision on a
consolidated basis. The Commissioner may refuse to grant a license
and may amend the terms and conditions of the licence so issued on
every anniversary thereof.
Section 6 Fees
This section sets out the fees to be paid by an applicant for a
licence.
Section 7 Inquiries
This section authorises the Commissioner to conduct investigation
and inquiries to determine whether the applicant is fit and proper.
Section 8 Minimum Capital
This section requires applicant to meet minimum capital requirements
which the Commissioner may prescribe by regulations.
Section 9 Decision of Commissioner
This section requires the Commissioner to act on the application
within 90 days and to inform the applicant of the reasons for his
decision in case of refusal.
Section 10 Conditions
This section authorises the Commissioner to impose conditions on the
licensee which in the case of a foreign financial institution shall
include the appointment of an agent in Lesotho.
Section 11 Licensing of agents of financial institution
This section sets out the requirements for licensing of agents of
financial institutions and the penalty for engaging in unlicensed
activities.
Section 12 Licensing of ancillary financial service providers
This section provides that the licensing requirements for ancillary
financial service providers shall be prescribed by the Commissioner
through regulations.
Section 13 Licence and other fees
This section requires the annual payment of licence fees the amount
of which may be amended by the Commissioner by notice published in
the Gazette.
Section 14 Use of word "bank" in title
This section restricts the use of the word "bank" to licensed
financial institutions or agents thereof and provides for certain
exemptions.
Section 15 Revocation of licence
This section enumerates the grounds for revocation of licence and
the procedural requirements for instituting such action by the
Commissioner.
Section 16 Names of institutions not to be similar
This section prohibits the use of names in licences which closely
resemble the names of an existing licensed institution and requires
a licensed institution to secure the prior consent of the
Commissioner for using a name different from the name under which it
is licensed.
Section 17 Place of business
This section requires licensed institutions to display a copy of the
licence in its places of business and to secure prior written
consent of the Commissioner in opening a new place of business or
changing the location of or closing an existing place of business.
Section 18 Capital shares and general conditions
This section provides that voting shares in a local financial
institution shall be in registered form and that prior approval of
the Commissioner is required for acquiring such voting shares in
excess of 10% of the total. It also requires local and foreign
financial institutions to get prior approval of the Commissioner in
undertaking specified corporate activities such as mergers or
consolidations, assets transfers, capital reductions, changes of
names or amendments in memoranda or articles of associations.
Section 19 Investigations of unlawful business
This section authorises the Commissioner to call for and examine the
books of accounts and records of any person whom he believes to be
engaging in unlicensed business and provides for the return of
moneys or property held by such unlawful operators to the depositors
or owners concerned.
Section 20 Capital
This section requires all financial institutions to maintain
unimpaired at all times their minimum required capital and to make
transfers to reserve account out of their net profits each year at
specified percentages. It prohibits financial institutions from
declaring, crediting or paying any dividend or making any other
transfer from profits whenever there is impairment in capital.
Section 21 Capital accounts according to risk
This section enables the Commissioner to prescribe a capital
requirement based on risks taken by financial institutions.
Section 22 Provision to be made for certain items
This section requires financial institutions to make certain
provisions for such items as depreciation of assets, bad and
doubtful debts and operating losses when calculating their capital
position.
Section 23 Minimum local assets
This section enables the Commissioner to prescribe a minimum amount
of local assets against such liabilities and capital accounts as may
be specified by regulations.
Section 24 Minimum liquid assets
This section authorises the Commissioner to require financial
institutions to maintain liquid assets against such liabilities as
may be specified by regulations.
Section 25 Limitations on specified operations and activities
This section prohibits a financial institution from undertaking the
following activities, directly or indirectly –
(a) granting credit facilities or guarantees to any person in excess
of more than 25% of its capital and reserve accounts at any time
except in certain specified transactions;
(b) granting credits against the security of its own shares or those
of any licensed financial institution;
(c) granting unsecured credit facilities to directors, officers and
other related interests, of an aggregate amount in excess of 1% of
capital and reserve accounts;
(d) granting unsecured credits to its employees in excess of one
year’s emoluments of such employee;
(e) engaging in wholesale or retail trade, including import or
export trade, except as may exceptionally be necessary in the course
of banking or credit business or in the course of debt settlements;
(f) investing in any financial, commercial, agricultural, industrial
or other undertakings except in certain specified cases such as the
acquisition of voting shares of a local financial institution which
shall be subject to the prior authorisation of the Commissioner;
(g) acquiring or leasing real property except as may be necessary
for the purpose of conducting its business, future expansion, staff
housing, or such other circumstances as the Commissioner may
approve; and
(h) granting any advance or credit to any of its shareholders
holding at least 10% share.
This section also provides that where the interests of a group of
two or more persons are so inter-related that they should be
considered as a unit, the total indebtedness of that group shall be
combined for purposes of computing the single borrowers limit in (a)
above.
All financial institutions which entered into any transactions
incompatible with this section prior to the commencement of this Act
are required to submit a statement thereof within three months after
the commencement of this Act and shall, subject to agreement with
the Commissioner, liquidate all such transactions as soon as
possible.
Section 26 Secrecy
This section prohibits the Commissioner, officer, employee or agent
of the Commissioner’s office, including any examiner authorised by
the Commissioner, from disclosing to any person any information of
non-public nature acquired in the performance of his duties or the
exercise of his functions except in certain specified circumstances.
Section 27 Disclosable information
This section provides for further exemptions from the prohibition
contained in section 26 and enumerates those information which the
Commissioner may disclose such as the nature of a financial
institutions licence and any conditions and limitations attached to
such licence.
Section 28 Scheduled offences and penalties for them
This section provides penalties for any person who contravenes any
provision of this Act set out in the First Schedule of the Act. This
section also enables the Commissioner to amend the First Schedule
from time to time by notice published in the Gazette.
Section 29 General penalty
This section provides for a general penalty for any person who
contravenes any other provision of this Act or any regulation,
specification or requirement made pursuant to any provision of this
Act.
Section 30 Offences in relation to entries in books, documents
This section provides penalty for any person who, with intent to
deceive, makes false entries, omits to make entries or alters,
conceals or destroys entries in any book or record of a licensed
institution.
Section 31 Offences by institutions, servants and agents
This section provides that where a person who committed the offence
was a director or officer of a licensed institution, he shall be
guilty of that offence unless he proves that the offence was
committed without his consent or connivance and that he exercised
all such diligence to prevent the commission of the offence. The
principal shall likewise be held liable for any action, omission,
neglect or default of his clerk, servant or agent committed in the
course of the latter’s employment.
Section 32 Joinder of offences
This section provides that where a person is accused of more than
one offence under this Act, he may be charged with and tried at one
trial for any number of such offences committed within the space of
any length of time.
Section 33 Power of the Commissioner to compound offences
This section authorises the Commissioner to make a written offer to
any person who committed an offence under section 28 or 29 to
compound the offence by paying to the Central Bank a sum of money
which shall not exceed 50% of the amount of the maximum fine to
which that person would have been liable if he had been convicted of
the offence.
Section 34 Attempts, preparations, abetments and conspiracies
This section provides that any person who attempts, abets or is
engaged in criminal conspiracy to commit any offence or does any act
preparatory to or in furtherance of the commission of any offence
shall also be liable to the penalty provided for such offence.
Section 35 Failure to maintain minimum requirements
This section authorises the Commissioner to impose penalties on any
financial institution which fails to maintain the minimum local
assets and the minimum liquid assets.
Section 36 Appointment of auditors
This section requires every financial institution to appoint
annually an independent auditor, subject to the approval of the
Commissioner and sets out the duty of this auditor and prohibits
certain persons from being appointed as such.
Section 37 Auditor to inform the Commissioner
This section requires the auditor to inform the Commissioner of any
matter relating to the affairs of a financial institution which in
his opinion may be of concern to the Commissioner and to provide
written information relating to any matter specified by the
Commissioner.
Section 38 Audit Committee
This section requires the board of directors of a financial
institution to appoint at least three of its members to form an
audit committee, of whom at least two shall not be employees of the
institution.
Section 39 Functions of Audit Committee
This section enumerates the functions of the Audit Committee which
includes assisting the board of directors in its evaluation of the
adequacy and efficiency of internal control systems, accounting
practices, information systems and auditing processes applied within
the financial institution in the day-to-day management of its
business.
Section 40 Financial statements
This section requires every financial institution to prepare its
financial statements in accordance with the requirements of
internationally accepted accounting practices.
Section 41 Financial records
This section requires every financial institution to keep such
records as are necessary to exhibit clearly and correctly its state
of affairs and to enable the Commissioner to determine whether it
has complied with the provisions of this Act, and to preserve such
records for at least 10 years from the date of the last entry
therein.
Section 42 Annual accounts
This section requires every financial institution to submit audited
financial statements within three months from its financial
year-end, to publish a copy of its audited balance sheet in the
Gazette and, where possible, in at least one newspaper of general
circulation in Lesotho, and to exhibit a copy of such balance sheet
in its every place of business.
Section 43 Qualifications of director and officers
This section enumerates a list of those persons who are not
qualified to be elected or appointed as directors or officers of a
licensed institution and those who are required to cease being
directors or officers.
Section 44 Duties of directors and officers
This section requires every director or officer of a licensed
institution to be a fit and proper person, to act honestly and in
good faith and to exercise the care, diligence and skill of a
reasonably prudent person.
Section 45 Conflict of interest
This section requires a director or officer of a licensed
institution to disclose the nature and extent of his material
interest or relation in certain circumstances and sets out the
manner for making such declaration. It also requires a director to
leave any meeting at which any matter in which he has an interest is
being discussed and to refrain from voting on such matter.
Section 46 False and misleading statements
This section provides penalty for any director, officer, employee or
agent of a licensed institution who with intent to deceive makes any
false or misleading statement or entry, omits any statement or entry
that should be made in the book, account, report or statement of
licensed institution or obstructs or endeavours to obstruct the
performance of an audit or examination.
Section 47 Suspension of director or officer
This section authorises the Commissioner to suspend from office for
any period not exceeding one year any director or officer who fails
to take all reasonable steps to secure compliance by the licensed
institution with the requirements of this Act provided that the
director or officer concerned shall be given a reasonable
opportunity of being heard in his defence.
Section 48 Appointments of directors, officers and branch
managers
This section requires every licensed institution to notify the
Commissioner of any appointment of its directors, officers and
managers of its branches.
Section 49 Responsibility for supervision
This section vests upon the Commissioner the responsibility for
supervising financial institutions and other licensed institutions.
Section 50 Returns
This section requires all licensed institutions to submit monthly
and quarterly financial statements within specified time periods.
Section 51 Extensions of time
This section authorises the Commissioner to extend the time within
which licensed institutions may submit required document or
information.
Section 52 Examinations
This section requires the Commissioner to appoint examiners to
examine any licensed institution including any office outside
Lesotho of a local financial institution and any of its affiliates,
from time to time r upon application made by one-fifth of the total
number of depositors or creditors, or by any number of depositors or
creditors holding not less than one-third of the liabilities of the
public in Lesotho of that licensed institution.
Section 53 Production of records and information for examiner
This section requires a licensed institution or any affiliate of
such institution to produce for the inspection of a duly authorised
examiner all books, minutes, accounts and any other information
relating to its business. This section also requires the
Commissioner to forward a summary of the examiner’s report to the
management of the licensed institution concerned and enables the
Commissioner to charge a licensed institution for all expenses of,
and incidental to, an examination.
Section 54 Power to issue orders or directions
This section provides that where in the opinion of the Commissioner,
a licensed institution, or any affiliate, director, officer, or
employee thereof is conducting its business in an unsafe or unsound
manner or that it is an unsound financial condition, or in violation
of this Act, the Commissioner may require such institution to take
remedial measure or he may appoint a person to advise the
institution on measures to be taken to rectify its situation.
Section 56 Exceptions to Companies Act
This section provides for the application of the provisions of the
Companies Act relating the winding-up and judicial management of
companies, the winding-up of unregistered associations, or the
winding-up of external companies to institutions licensed under the
Financial Institutions Act which are companies, unregistered
associations or external companies.
Section 57 Acceptance of deposits or funds by insolvent licensed
institutions
This section makes it an offence for a licensed institution and its
director, officer or employee who knows of, or who should know of
its insolvency, to receive deposits or funds and prescribes a
penalty therefor.
Section 58 Seizure of licensed institution
This section prescribes circumstances under which a person or
persons may be appointed to take possession of any licensed
institution.
Section 59 Notice of seizure
This section provides for the procedure to be followed by the
Commissioner when a licensed institution is being seized.
Section 60 Appeal for termination of seizure
This section prescribes the procedure which a licensed institution
shall follow to have the seizure lifted.
Section 61 Powers and duties of Commissioner’s appointee upon
seizure
This section describes the extent of the powers of the
Commissioner’s appointee after taking possession of a licensed
institution, including the power to continue or discontinue its
operations, payment of obligations, employment of officers or
employees and the making of an inventory of the assets and property
of the institution.
Section 62 Effects of seizure
This section outlines the effect that seizure of a licensed
institution shall have on:
(a) any term, statutory, contractual or otherwise, on the expiration
of which a claim or right of the institution would expire or be
extinguished;
(b) any attachment or lien;
(c) any transfer of an asset or property with intent to effect a
preference.
Section 63 Restriction of rights of creditor as to execution in
seizure
This section restricts execution against the assets or property of a
seized licensed institution only to judgement rendered prior to the
date of seizure.
Section 64 Limitation on duration of seizure
This section limits the duration of seizure of a licensed
institution, unregistered association and external companies to a
maximum period of 60 days counting from the effective date of
seizure and prescribes options available to the Commissioner’s
appointee during that time.
Section 65 Unclaimed funds and property
This section prescribes items held or owing by a licensed
institution which shall be presumed to be abandoned and provides for
occasions when unclaimed funds and property shall not be presumed to
be abandoned.
Section 66 Reports and disposition
This section prescribes the manner in which a licensed institution
and the Accountant-General shall deal with funds presumed to be
abandoned.
Section 67 Failure to make a report or payment
This section makes it an offence for any licensed institution to
wilfully fail to file the report to the Commissioner, or to pay
funds presumed to be abandoned into the custody of the
Accountant-General and prescribes a penalty therefore.
Section 68 Reserve for losses due to negligence or dishonesty
This section requires all licensed institutions to maintain a
special reserve account or to insure itself for losses resulting
from the negligence or dishonesty of any of its officers and other
personnel.
Section 69 Restriction on payment of dividends
This section prohibits a licensed institution from paying any
dividend until all its capitalised expenditure has been completely
written off and requires such institution to notify the Commissioner
of its dividend declaration.
Section 70 Credit requirements
This section prohibits a director or officer of a licensed
institution from granting any credit facility in excess or outside
the scope of his authority. This section also enables the
Commissioner to direct a financial institution to submit its credit
policies and procedures or make amendments thereto.
Section 71 Power to issue guidelines
This section empowers the Commissioner to make such regulations,
notices and issue such guidelines, determinations, or instructions
implementing this Act and to specify general or specific prudential
requirements pertaining to such aspects as maintenance of reserves
for bad or doubtful debts, classification of loans and overdrafts,
debt write-offs, credit concentration and foreign exchange risk.
This section also allows the Commissioner to require a licensed
institution to report currency transactions of its clients including
large currency deposits and similar matters.
Section 72 Financial holidays
This section authorises the Commissioner to declare any day to be a
financial holiday and requires all licensed institutions to remain
open for business on such days, other than public and financial
holidays, and during such hours as may be prescribed by regulations.
Section 73 Substitution for depositor’s signature
This section allows a depositor who is unable to sign to use his
thumb impression when opening, depositing into or withdrawing from
his deposit account.
Section 74 Immunity
This section provides that the Commissioner or any officer, employee
or agent of his office shall not be liable in damages for anything
done or omitted in good faith when carrying out their functions.
Section 75 Reference to "this Act"
This section explains that reference to "this Act" includes any
regulations, determinations, instructions or notices made under this
Act.
Section 76 Appeals
This section establishes a Tribunal where any person aggrieved by a
decision taken by the Commissioner under a provision of this Act may
appeal within the prescribed period and in the prescribed manner and
upon payment of prescribed fees.
Section 77 Repeal
This section repeals the Financial Institutions Act of 1973.
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