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The Changing Regulatory Environment

Thursday, 08 July 2010   (0 Comments)
Posted by: Author:Anton de Bruyn,Karin Rathbone,Farzana Badat
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The Changing Regulatory Environment
Over the past few years, most businesses have in some form (either through industry associations or by way of submissions to the relevant government department) participated in the progression of the new Companies Act, the amendments to the Competition Act and the Consumer Protection Act (CPA) through the Parliamentary process.The Parliamentary process was finally completed in 2009 meaning that the time for full compliance by organisations is imminent. In fact, the CPA comes into effect in October this year.

As each piece of legislation (as highlighted above) will have far-reaching implications on the way in which organisations do business, there is a strong drive within most companies to ensure compliance.This has involved organisations assembling task teams comprising of technical experts and representatives from business for each act as well as engaging external consultants. At the same time, the new privacy legislation (i.e. the Protection of Personal Information Bill or the PPI Bill), which will also have a significant impact on business, is making its way through the Parliamentary process.
With Parliament currently in recess, further developments on the PPI Bill are likely only when the next session commences at the end of July.However, many organisations have already begun forming specialist task teams in order to understand the practical impact of the proposed legislation on their businesses.As it is not possible for an individual to be an expert or specialist on each act or the PPI Bill, we have set out some of the key features of each of the Competition Amendment Act, the CPA and the PPI Bill. The Companies Act will be discussed in a separate article at a later stage.
The Competition Amendment Act
Anton de Bruyn
Director: Competition Advisory Practice

The main feature of the Competition Amendment Act (which is still awaiting an effective date) is the introduction of criminal liability on directors and managers of firms involved in cartel conduct.The word ‘cartel’ is actually some what misplaced as it is not found in the Competition Act, notwithstanding that it is a well understood concept in anti-trust law worldwide.The Explanatory Memorandum to the Competition Amendment Bill expressed the intention to provide for the criminal prosecution of directors and managers of companies involved in hard core cartels.

What is a cartel? Simply put, a cartel comprises two or more competitors secretly agreeing to substitute co-operation for competition with the result that volumes are restricted, prices are increased and consumer choice is reduced.A hard core cartel refers to a cartel which has intentionally been set up to create maximum benefit for its members through price, supply, market or territorial restrictions to the detriment of consumers and the markets involved.
The Competition Amendment Act does not refer to cartels or hard core cartels at all.It refers to price fixing, the division of markets and collusive tendering.While this type of conduct is associated with cartels, it can also be found in ordinary commercial agreements; for example, non-compete clauses in joint venture agreements or consortium agreements where two or more competitors jointly bid for a tender.Although certain con-compete clauses can contravene the Competition Act and should  be amended or removed, ordinarily such clauses do not support a cartel but rather some or other commercial interest between seller and buyer or licensor and licensee.For these cases, criminal liability for directors and managers may be harsh and inappropriate, considering that a personal fine of R500 000 and imprisonment of up to 10 years may be imposed.One would hope that a proper distinction will be drawn by the Competition Commission and the National Prosecuting Authority when these provisions are applied.

The Consumer Protection Act
Karin Rathbone
Director: Corporate Law Advisory Practice

While South Africa has a whole range of consumer related legislation (some of which will be repealed once the CPA comes into force in October this year), it seeks to create one standard for consumer protection across the entire purchasing cycle, i.e. from the marketing stage through to when goods are already in the possession of the consumer and need to, for example, either be recalled, repaired or returned.In addition, its product liability provisions can have implications for participants in the supply chain such as manufacturers, distributors and importers.


Generally, the CPA regulates transactions and the marketing of goods or services.Certain transactions will, however, be exempted, i.e. transactions between two large organisations do not require the protection afforded by the CPA.It also specifically regulates franchise arrangements.Businesses that operate in different industries and in different parts of the supply chain could find the CPA more cumbersome to implement than other legislations because its impact is both industry and business specific. For example:

•Generally, where an organisation enters into a credit agreement governed by the National Credit Act (NCA), the CPA would not apply in terms of the credit agreement.However, organisations would still need to evaluate the implications of the CPA in respect of the supply of goods or services that are the subject of the credit agreement as well as other aspects of their business, such as promotional competitions or loyalty schemes.
•The manufacturing division of a large group of companies would have different obligations under the CPA to the retail division.
Gap analysis

Whenever new legislation is to take effect, it is advisable to conduct a gap analysis, i.e. what are the existing practices of the organisation and how these differ from the requirements of the new legislation. In terms of the CPA, most organisations will have complied with regulation (acts, common law,industry rules, etc.) governing consumer protection.In addition, many organisations that ascribe to the international principle that treating customers fairly makes good business sense, will have sought to meet international standards around consumer protection.It will still be crucial to (a) assess how the act changes the current body of consumer protection regulation (which it does); and (b) what areas of the businesses need to be adjusted to meet the requirements of the CPA.For example, while a code of good practice for a particular industry or the marketing policy of the organisation itself may already provide that misleading or deceptive marketing is not permitted, the provisions of the CPA regarding "general standards for marketing of goods or services” will still require assessment.

The Protect ion of Personal Information Bill
Farzana Badat
Manager: Information Protection Advisory Services -

The PPI Bill aims to regulate how companies process personal information.It also attempts to maintain a fair balance between the right to privacy and other important business interests such as the free flow of information within and across the borders of South Africa.Overall impact of compliance Companies will be expected to implement well-defined information management methodologies that include the identification and categorisation of information, updated system access protocols, practical and ongoing training and effective monitoring and review mechanisms.

The risks of failing to implement effective information protection controls are not merely theoretical.A number of high profile organisations have suffered significant reputational damage because of personal information breaches.Globally there have been a record number of breaches, with financial institutions most heavily impacted.It is therefore critical for organisations, which process large amounts of personal information, to initiate organisation-wide privacy programmes to minimise reputational damage and potential exposure to hefty regulatory sanctions.Recently the Information Commissioner’s Office in the United Kingdom announced initial penalties of £500 000 for non-compliance irrespective of whether any actual loss or damage occurs as a result. In addition, non-compliance that results in actual damage is likely to attract further penalties and civil awards amounting to millions.

The proposed legislation covers the processing of personal information in electronic and paper-based format.Personal information may generally only be processed for specific, explicitly defined and lawful purposes in a fair, responsible and secure manner.Certain additional safeguards are required for special categories of personal information.
Companies will have to adopt an integrated approach to information protection compliance.This will require the support and enablement of stakeholders from the information technology, governance, risk, compliance, legal , human resources, marketing, sales, strategic and finance disciplines of the business.Currently, the bill allows companies one year to align their information management processes.Many companies remain sceptical about the practicality of such a limited transitional period. Several large institutions have estimated the cost of implementation to be up to R200 million over a period of three to five years for sustainable compliance.It is unlikely that full compliance will be attainable on the effective date.However, companies that do not demonstrate an attempt to align their processes with the proposed legislation could be perceived as lagging behind the curve.This could result in increased regulatory scrutiny and unfavourable media exposure in the future.
Source: By Anton de Bruyn, Karin Rathbone, Farzana Badat (TaxTALK)



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