The National Treasury (NT) reported back on submissions received for the Banks Amendment Bill. Most stakeholders agreed with the need for a Bill, even if they differed on the approach. It was to be expected that stakeholders would attempt to elevate their own interestests above those of other stakeholders. It was currently known what the differences and agreements were. There were constitutional challenges related to property rights. The Reserve Bank and the NT had to talk to all classes of creditors. Any class of creditor could put a spike in the curatorship.
Key themes from submissions were related to a very specific series of bonds. Senior and junior creditors were concerned that amendments would grant extensive discretion to the curator and the Minister. It was submitted that the ability of the curator to transfer liabilities of the bank would impact on creditor rights. Creditors wanted provisions to ensure that creditor approval be sought prior to the transfer of liabilities. Junior creditors were concerned that the amendments would result in them being subordinated to senior creditors. Stakeholders proposed that all creditor classes be treated the same. The NT held the view that property rights were protected in the Constitution. It proposed to introduce section 155 of the Companies Act into the Banks Act.
Creditors wanted to ensure that assets and liabilites were transferred at fair market value. The NT maintained that the value of liabilities was nearly impossible to establish in the context of financial stress and bank failure. Retrospectivity was a key issue. Legal opinion solicited by the NT stated that there was no limitation of retrospectivity with respect to civil matters. The Reserve Bank took care not to execute intervention plans for African Bank before amendments were accepted into law. In that respect, the actions of the curator would not be retrospective.
In the discussion which followed the briefing, there was agreement that the Committee process had to be separated from that of the NT process of receiving submissions and responding to that. The Chairperson insisted that the SC had to sanction discussion between the NT and stakeholders, and had to provide a framework. Yet he also made an impassioned plea for active engagement with stakeholders that could even include responses from stakeholders to each other. There had to be vigorous engagement with civil society. The Chairperson asked Members to reflect on stakeholder requests to make further submissions. A DA Member felt that different ways of dealing with property rights issues had not yet been given a full hearing. Another Member cautioned that it was not appropriate to discuss merits of stakeholder concerns during the Committee process. There was a question about how the failure of the Natal Building Society (NBS) had been resolved. A DA Member opined that there had to be more input from the Bank Association of South Africa (BASA) and ASISA. The Chairperson remarked that the NT was edging towards reconciliation with creditor concerns. The Chairperson concluded that the Committee had to know about any alternatives suggested by stakeholders.
The Treasury led a clause by clause deliberation of proposed amendments. Amendments related to the introduction of section 155 of the Companies Act into the Banks Act were considered, as were those related to the disposal of assets and transfer of bank liabilities by the curator. Another amendment considered was the insertion of section 89A in Act 94 of 1990, in the principal Act after section 89. Under the heading of “Fair administrative action”, section 89A stated that any administrative action taken by a curator in terms of the Act was subject to the Promotion of Administrative Justice Act (Act No 3 of 2000). Under the short title, there was an insertion stating that if a bank was under curatorship immediately before the Act took effect, the provisions of the Act would apply to the curatorship.
In discussion, it was asked if the proposed amendments were consistent with what the NT was seeking to do. As two major Acts were involved, the Chairperson suggested that the Committee Researcher and a Parliamentary Senior Legal Adviser advise the Committee. Gaps in the proposed legislation had to be identified. There were questions about the relative powers of the Minister and the Registrar of banks. A DA Member protested that amendments were vague with regard to powers of the Registrar and the Minister. It was asked what would happen if the Minister and Registrar took action without informing each other. The Chairperson concluded that there had been engagement with issues, not only in order to amend. A discourse had to be shaped for future discussion of issues. The Committee Researcher was asked to prepare an initial response.
Report back by the National Treasury on submissions received for the Banks Amendment Bill [B17—2014]
Mr Ismail Momoniat, National Treasury Deputy Director General, said the protection of property rights was bound to cause heated debate. There were people who represented funds, who had fiduciary responsibilities. The Treasury had received response documents, and had held hearings. An initial draft response was prepared. Hearings were considered. As with most bills, various players were engaged with once comments had been received. There was as yet no total agreement, but at least it was known what the differences and agreements were. Senior and junior creditors had been met with. The way forward was for the NT to propose amendments to the Bill.
The Treasury had obtained a constitutional opinion. Counsel solicited had opined that the Bill could pass constitutional muster. Creditors also had their counsellors. There were constitutional challenges related to property rights, and the onus was on the Treasury to prove that the Bill was in accordance with the Constitution.
The Bill had two clauses that dealt with the current curatorship. If the clauses related to curatorship were to be removed, there would be less heat about affected rights. Banks could not go through normal liquidation processes. Banks were systemically important financial institutions (SIFIs). A bank run could be caused simply by the perception that a bank was in trouble. Submissions had to be carefully considered. There were some arguments that took on the notion of curatorship. There would always be differences between different classes of creditors about curatorship. The reserve Bank and the Treasury had to talk to all classes of creditors. Any class of creditor could put a spike in the curatorship. It had to be understood that no-one would be getting 100 percent. Government had to follow through with the process. The Bill offered options to the curator.
Mr Roy Havemann, NT Chief Director, continued that the Bill had to provide for the best possible option. The NT sought to facilitate a market based, least-cost resolution which did not subordinate public interest to private ones. South Africa needed more resolution options. In the case of African Bank, the option folowed was to reorganise the bank with some losses to creditors. Almost every country that experienced bank failure had to resort to emergency legislation. In the highly interconnected South African financial system, the position of African Bank was extremely risky.
With regard to key themes arising from public submissions, it was noted that submissions with accompanying legal opinions were related to a very specific series of bonds. Protection of creditor rights was a key issue. Senior and junior creditors were concerned that proposed amendments to the Bill would grant extensive discretion to the curator and the Minister. The ability of the curator to transfer the liabilities of the bank could impact on creditor rights. Creditors sought provisions which would ensure creditor approval prior to any transfer of liabilities. Junior creditors were concerned that proposed amendments would result in junior creditors being subordinated to senior creditors in curatorship. Stakeholders had proposed that all creditor classes be treated the same in curatorship, or that creditors be financially compensated who would have been subordinated in liquidation. The view of the NT was that property rights were protected in the Constitution, and that any unconstitutional resolution was subject to challenge. The rights of creditors had to be balanced against broader public policy objectives. The Treasury believed that there were sufficient checks in other areas of law. As a mitigating factor, it was proposed to introduce section 155 of the Companies Act into the Banks Act.
Senior and junior creditors desired to ensure that assets and liabilities were transferred at fair market value. Proposed amendments would allow the curator discretion in terms of which assets to transfer and at what value. The NT maintained that the value of liabilities and contingent liabilities was nearly impossible to establish in the context of financial stress or bank failure. The Minister had to behave in a way that would result in no creditor being worse off than they would be under liquidation.
Retrospectivity was a key issue. Subordinated (Tier 2) creditors believed that proposed amendments were retrospective in nature, and wanted all regulatory powers that would affect current creditors rights, revoked. The NT solicited legal opinions which stated that there was no limitation of retrospectivity with respect to civil matters. The Bill fully met all constitutional requirements. The Reserve Bank had been careful not to execute the intervention plan for African Bank before the amendments to the Banks Act had been accepted into law. In that respect the actions of the curator would not be retrospective.
Most stakeholders agreed with the need for a Bill, even if they differed on the approach. It had to be expected that stakeholders would attempt to elevate their own interests above that of other stakeholders.
The Chairperson noted that the NT had received submissions by creditors. The creditors also knew the NT response to those submissions. But the Bill was currently before Parliament. Adv Frank Jenkins (Parliamentary Senior Legal Adviser) had to give guidance. Discussions had to be sanctioned by Parliament. It was commendable that the Treasury realised the sensitivity of the issues. The question was whether stakeholders could be allowed to submit again. If so, the SC would have to be represented at submissions. When the Municipal Support Bill was processed, civil society had been allowed to come to Parliament until a few days before the bill was voted on. There had been 68 stakeholders. With the Property Rates Bill, submissions were received until a week before voting. There was a strong agricultural lobby. Formerly stakeholders were allowed to respond to each other during public hearings. There was debate. The conveyor belt system did not apply. There were civil society committees. It had to be asked why creditors could not claim opportunity because of material interest. Members had to think about allowing a second round of presentations from stakeholders. There was nothing in Parliament opposed to actively engaging stakeholders. If Members were to say no to that, he would be prepared to take his cue from the majority.
It was crucial to engage in vigorous debate with civil society. Previously it was easier, when Parliamentary committees were larger. Sub-committees could be formed to debate issues. Members had to decide what to do about stakeholders wanting a second bite.
Dr D George (DA) remarked that the Bill was now on the table and there was a big noise made about it. The question was why it had taken so long to respond to a crisis that had loomed since 2008. Investec was concerned about property rights. He had asked if there was a different solution and had been told that any other course followed would lead to the collapse of African Bank. If there was another way Parliament had to hear about it. There had to be more interaction with other parties.
Mr Momoniat responded that there were difficulties with the curatorship. The Treasury did not run African Bank and did not know everything. The curator would have to obtain relevant information. The curator could identify assets and liabilities. It was possible that a lot of money could be recovered. Curatorship was for the purpose of preventing liquidation, which was the other option. The curator would produce a report, make recommendations and talk to stakeholders. The process could take years. The NT was trying to accelerate it. Other options would be accommodated in the process. It had to be considered before amends were finalised.
The Chairperson asked if alternatives to dealing with issues other than those suggested in the Bill, had been suggested. If so, the SC would want to hear about it.
Mr Momoniat responded that curatorship had to be separated from the Bill. Assets and liabilities had to be looked at. The Bill clarified the separation of Good and Bad banks as an option. The Bill provided a bigger set of options. Whatever the curator did, there had to be a lot of talking about it. Once the law was in place, the curator would have more options, but he would still have to consider submissions. There were different interests in different classes of creditors. It was essential that taxpayers not be made to pay.
Mr D Van Rooyen (ANC) asked about the relation between options and proposed amendments. He asked how amendments would address problems, and to which amendments the Treasury was linked.
Mr Momoniat replied that the questions could be dealt with when the proposed amendments were gone through.
Mr Van Rooyen remarked that the SC had to allow enhancement of public participation. But the two processes had to be separated. It was not appropriate to discuss the merits of stakeholders while the Bill was in the Parliamentary process. He advised that the next step be to listen to the responses of the NT to submissions. There could be a meeting at another time to decide how to process the Bill.
The Chairperson remarked that he was not suggesting that interaction with stakeholders should not proceed. The first question was whether the NT could meet stakeholders while the Bill was before Parliament. If the answer was yes, the SC would have to provide a framework. The second question was whether it was advisable for the SC to hear replies from the stakeholders to the NT. Members had to apply their minds to it and come back with inputs in the following week.
Adv Frank Jenkins, Parliamentary Senior Legal Adviser, noted that the Constitution was not clear about facilitating public involvement. There was room for discretion. There had to be reasonable and meaningful discussion. Parliament could decide on the level of engagement. Flexibility was allowed. It was up to Paliament to decide if there had to be continuous involvement of the Executive.
The Chairperson said he did not agree. When a bill was in Parliament and the Executive was talking to stakeholders, Parliament had to supply a framework. Once the bill was being gone through clause by clause, there had to be a firm framework.
Adv Jenkins replied that when the SC started to deal with the Bill, it could be asked where questions were coming from. He agreed that the SC had to set the framework. It was a Committee process.
Mr Momoniat added that once a bill was in Parliament it belonged to the SC, not the Executive. When meeting with stakeholders, it had to be decided what was consultation and what was lobbying. Submissions were treated as proposals, but lobbying had to be watched out for. The Treasury was open about who it had met with. It had to safeguard the integrity of its own process.
Mr Momoniat continued that big corporate investors would lose out. But progress had been made. When curatorship was instituted, bondholders could count on 40 or 50 cents, but currently they were looking at 90 cents. The aim was to stabilise the ship and get it back into the revenue stream. Revenues were turning out to be better than expected. Government did not want the taxpayer to pay a cent. There had to be no payment from the fiscus. In negotiation between players, care had to be taken that one player did not wreck the process.
Mr Michael Blackbeard, Special Legal Counsellor, Reserve Bank, added that senior creditors could receive 90%. Everything depended on making the Good Bank viable.
Mr Francois Groepe, Reserve Bank Deputy Governor, remarked that the process was attracting much attention.
Mr Momoniat said the NT was interested in all who had invested in African Bank, and would try to balance out rights. He suggested that proposed changes to the Bill be gone through.
The Chairperson asked for views from Members.
Dr B Khoza (ANC) remarked that she was inclined to the historical perspective. She asked how the collapse of Natal Building Society (NBS) had been handled. Many municipalities had invested in it. The global environment was currently different, but it was important to consider past examples as creditor inputs were being processed. African Bank would not be the first bank with a risky business model.
Mr Blackbeard replied that the NBS was subject to a different kind of legislation. The Building Societies Act did not provide for curatorship. A building society was a society of members, not a company. Building societies could be taken over by banks. NBS was dissolved and taken over by banks in 1993. SA Permanent Building Society was allied into Absa. SAAMBOU was registered as a company. NBS was at first part of BOE, then Nedbank.
Mr Groepe noted that ABIL had 3.5 million clients. In the SAAMBOU aftermath 17 small banks closed. The collapse of even a small bank could have a contagion effect. African Bank lending had been high, but under Reserve Bank supervision growth rates were brought down in 2013. Supervision had been going on for 20 months, and was currently being intensified. Supervision was pro-active. Senior managers had to provide updates to the Reserve Bank. The bank had to be supported by collateral, which could be public money.
Mr D Ross (DA) said the African Bank business model relied on unsecured lending. There had been a lack of oversight and state intervention. The Banking Assiciation was not involved, nor ASISA. Inputs were needed. He thanked the Chairperson for his reasonable stance, but asked what would be done about BASA and ASISA. There had to be more submissions, to provide guidance.
Mr Momoniat replied that banks were like neutron bombs. People overlooked doing their job. One explosion could have broad repercussions. Concerning the quality of supervision, it had to be asked when failure had started to happen. In the case of North Rock Bank, 10 questions were asked. Questions were related to when failure first became known, and why it had not been detected earlier. It was easy to point out after the event that there was a lack of oversight. In fact the Reserve Bank and the National Credit Regulator (NCR) had monitored the situation for a long time. Creditors were still making lucrative returns at a late stage. There were expert asset mangers who got it wrong, and were surprised. It was necessary to put out the fire, before there could be analysis. Before 2008 there was a different approach, but currently the IMF insisted that supervision had to be intense, intrusive and effective. Not only of the bank itself. There was a weakness in supervision of the entire African Bank Investments Ltd (ABIL) group. There were loans contracted between the holding company and its subsidiaries. There had to be engagement with regulators to address gaps when the Twin Peaks legislation was done. The current amendments moved in that direction.
Mr Havemann added that BASA could have made a presentation, but did not want to submit as an association.
Mr Van Rooyen asked if any submission by Tier 2 creditors had been tabled.
Mr Havemann replied that Tier 2 creditor proposals were interrogated.
Mr Ross referred to the R7 billion provided as backstop amount in case of unforeseen crisis. He asked who would pay if the bank had to be rescued.
Dr Khoza noted that it had been said the IMF had identified certain gaps. She asked what those gaps were.
The Chairperson said he was getting the sense that the NT was edging towards reconciliation with the concerns of creditors. Things were currently looking better than when public hearings were held. The NT input was encouraging.
The Chairperson suggested that the draft amendments be gone through, with responses to every point. Some issues had fallen away since submissions were made. The NT had compiled a summary and had acted in good faith. Parliament could not bank on a summary by the Executive. The Committee Researcher had to look at documents and make a submission. Parliament had to speak to Parliament on what the Executive had done.
Clause by clause deliberations on proposed amendments
Mr Havemann read out an insertion referring to section 155 of the Companies Act, to the effect that an arrangement or compromise between a company and its creditors shall not apply to a bank unless it is under curatorship in terms of section 69 and empowered by the Minister, and that references to the board, liquidator or authorised director of a company in section 155 of the Companies Act shall be regarded as reference to a curator.
The Chairperson asked with reference to section 155 of the Companies Act, who could help the SC understand if what the NT was doing was consistent with what they sought to do. Two major Acts were being brought in. The Committee Researcher and Adv Jenkins had to help in that regard.
Adv Jenkins responded that Legal Services would look at reasons for insertions.
The Chairperson remarked that it was not a problem for the NT. Parliament had to deal with it. He suggested that the Committee researcher and Adv Jenkins be given a month to look into the matter.
Mr Havemann responded that the NT would welcome that.
The Chairperson asked if members were tentatively in agreement with the first amendment.
Mr Momoniat said comments from other parties could identify inconsistencies.
The Chairperson suggested that the ANC study group meet to identify gaps. All parties agreed with the majority party that the taxpayer was not to pay. He asked that Members mull it over.
Mr Havemann took the Committee through the amendment referring to assets, liabilities and transfers. When the curator transferred assets and liabilities he had to follow procedure and report on it. A written report had to analyse implications for creditors. Tests were imposed on the curator and the Minister. Comments had implied that wide discretion was being handed to the curator, but the NT maintained that discretion was limited.
Dr George objected that he did not like the formulation. It was vague. More detail was needed about tests.
The Chairperson asked about the powers of the regulating authority in other countries. Powers were sometimes granted to the Minister, and sometimes to the Registrar. Their specific powers had to be spelled out. The SC was just getting a feel for the amendments. Eventually it had to understand the reason for every comma and point.
Mr Momoniat responded that the advanced economies had granted draconian powers to regulators. There had to be a Registrar with powers related to property rights. Banks were based on trust. There were no real assets to value. The Financial Stability Board (FSB) had to engage with the accounting profession about what constituted fair value. When a bank was in trouble there was zero value. Clause (2) on page 4 had to be written vaguely. The curator in the current system did not make decisions, but rather made recommendations. The Minister could consider what the Registrar said, but only the Minister had power. There were clauses that could facilitate quick actions in a crisis of confidence or contagion. The key to the resolution regime was that registrars had to be accountable. The Twin Peaks approach gave power to regulators, but they had to be held accountable.
Mr Havemann noted that section 54 prescribed a schedule for transactions. The registrar was responsible for small ones, and the Minister for big ones. Process had to be followed. Tests could be added to contain the powers of the Minister and the Registrar. Legal counsel maintained that tests were sufficient.
Mr Van Rooyen said he still wanted to know how things would be concretised.
Mr Havemann responded that clauses were taken from FSB principles, and tested by legal advisers. Changes based on concerns from stakeholders would have to go back to senior counsel.
Mr Momoniat added that changes were forward looking and not meant to be contentious. Some banks knew that the same principles applied in other jurisdictions. If regulators did not have power, there were more hazards in the system. A bank did not have to be too big to fail, to cause systemic risk. Shadow banking had to be guarded against.
Mr Havemann referred to page 4. The curator could take resolutions on behalf of the bank. The curator had powers with respect to control of a company. The curator also had powers to manage a bank (page 5).
Mr Havemann pointed out that stakeholders found (d) on page 5 contentious because it granted too much powers to the curator. The curator could borrow money on behalf of the bank. Stakeholders were saying that if the curator could only raise money from the Reserve Bank, there would be no prejudice to existing rights.
Mr Hvemann referred to (k) on page 5. The curator had powers to negotiate a deal with creditors. There had to be a consensual, agreed upon approach.
Mr Momoniat said public disclosure could have a long lag. People had to be prevented from running.
The Chairperson asked if the Promotion of Administrative Justice Act (PAJA) applied in all spheres of government.
Dr Khoza asked what would happen if the Minister and the Registrar took action without informing each other.
The Chairperson noted that the NT was saying that it had the legal responsibilities of the Minister and registrar covered.
Mr Van Rooyen asked about provisions for retrospectivity.
The Chairperson remarked that it was generally considered unfair to bring retrospectivity into a bill, on philosophical grounds. However, in the current situation it could be fair.
Mr Momoniat responded that it was a once-off effect that applied to the curatorship currently in existence.
The Chairperson remarked that it was sometimes necessary to engage with an issue, not only to amend. There had to be discourse that could be returned to in future. A discourse had to be shaped for the future. Issues had to be discussed further. The Committee researcher had to provide an initial response.
The meeting was adjourned.
- Response to Public Submissions on Banks Amendment Bill: National Treasury briefing
- Draft: Comments on Banks Amendment Bill (No. 17 of 2014) by National Treasury
- David Unterhalter SC and Steven Budlender opinion
- Investec submission
- Alfred Cockrell SC and Isabel Goodman opinion
- Precedents in Bank Resolution Legislation