The deliberations covered four major themes raised by the public submissions and a general concern raised by Members on urgency of the Bill and its interface with the ‘Twin Peaks’ resolution legislation.
The submissions argued that the Bill provides a wide discretion to the curator and Minister to dispose of bank assets and liabilities and therefore creditor approval in this process was sought. Treasury responded that the private interests must be subsumed to public interest in this context and the Promotion of Administrative Justice Act (PAJA) and Constitution provide sufficient constraints on the powers of the Minister.
Members wanted to know if there were any further constraints on the actions of the curator such as a pre-determined process for the disposal of assets or other legal protections.
Treasury and the African Bank curator’s legal representative responded that there was a process required for lawful action by the curator under PAJA , requiring an information dossier to be compiled, reasonable public comment allowed and rational consideration of any viable alternative proposed. This process is flexible with what is reasonable changing to the exigencies of the particular bank failure.
Valuation of Transferred Assets
Here commentators had argued that a fair market value should be received for transferred assets. Treasury accepted the point, however the problem with setting down a rigid mechanism for valuation is that the time taken to do this may adversely affect the curatorship process and, further, normal market conditions are absent in a banking crisis. Therefore, again the PAJA and Constitution would be a sufficient constraint on the curator, requiring them to act reasonably.
Equal Treatment of Pari Passu Claims
The subordinated tier two creditors argued that as curatorship is distinct from liquidation, these creditors should not have their claims subordinated to senior creditors. Treasury’s response was that these creditors had bought subordinated claims, taking on a greater risk for a higher yield. Just because public interventions are being made to save the bank does not mean that the risk they accepted should be done away with.
Members asked for an explanation of the difference between curatorship and liquidation. The response they received was that aside from arising from two distinct sections in the Banks Act, curatorship considered a broader range of interests with the ultimate aim of rescuing the bank; while liquidation merely considered realising the highest value for creditors in winding up the bank.
Constitutionality of Retrospectivity
Here the submission was that as the Bill’s provisions will apply to the case of African Bank and such a retrospective application is unconstitutional. Treasury’s response was that retrospective application is fine in civil matters and as the African Bank matter is currently ongoing this was not truly a case of retrospective application.
Urgency and Relation with Twin Peaks Legislation
Members asked for elaboration on a point raised by the tier two creditors, who were concerned about legislating short-sightedly, specifically for the African Bank situation, when the provisions would apply to all future bank curatorships. The Committee also asked about its relation to the forthcoming Twin Peaks legislation.
Treasury responded that the bare minimum had been introduced in this Bill, to enable the processing of the African Bank curatorship. However everything introduced is in line with Financial Services Board guidelines. Further, this Bill can be seen as a preview to the twin peaks resolution legislation.
There will be opportunity for more public input but the Committee aims to finalise the Bill around the 18 to 22 April 2015.
The Chairperson requested that National Treasury go through the submissions and provide Treasury’s responses. As the Committee were not all technical experts, he wanted Treasury to take the Members through the issues carefully, partly because of the nature of the Banks Amendment Bill, but also because of the nature of the relationship between the Executive and Parliament. The Executive has a wide range of technical staff and so the balance of power is skewed. The Committee would not like to pass a Bill which it does not fully understand and would like to be helped by Treasury.
National Treasury response to public submissions
Mr Roy Havemann, Chief Director: Financial Markets and Stability: National Treasury, reminded the Committee that the senior creditors have about 90% of the available debt. They had sent a letter the previous day stating they had had a chance to consider Treasury’s responses and they now support the Bill. The presentation comprised of these responses.
Mr Vukile Davidson, National Treasury, said the presentation consisted of a summary of comments and responses on the Bill, although they have not been formally approved by the Minister yet.
Prudential Investment Managers, who formed part of the senior creditors of African Bank, was concerned that the Bill provided almost unfettered discretion to the Minister on how to dispose of assets or liabilities. Treasury’s response was that the Promotion of Administrative Justice Act provided enough of a limitation on the Minister’s power. As all actions would have to be reasonable and consistent with the PAJA and also the Constitution. This was a general concern, highlighted by many of the commentators.
Future Growth’s submission was broadly supportive of the Bill with the exception of wanting to have section 165 of the Companies Act included. This allows for a coordination mechanism between creditors for them to be able to reach a compromise. Treasury agreed with this proposal and it is now included in the latest version of the Bill.
Investec Asset Management tier two creditor submission covered a wide range of issues, including concerns about the retrospective change of property rights and how this will hurt pensioners and the economy at large. They were also concerned about the pre-determined instruments being contractual subordinated, which means that the old style tier two debt has much more protection than new style tier two debt. Their other concern was that curatorship is not equivalent to liquidation. They also had a broader macro concern that the Bill would result in losses of pensioner higher interest rates and foreign direct investment (FDI) in the economy. Treasury had obtained a senior counsel’s opinion on the matter and it is Treasury’s view that retrospective changes to property rights in civil cases is not a constitutional matter. On the new style tier two debt versus old style tier two debt, when the instruments had been bought they had not expected them to be bail-in-able. However, tier two debt has always been regulatory capital. It is Treasury’s view that regardless of when it was issued or what the narrow contractual clauses of the instruments, these were always subordinated to senior debt.
The Chairperson was concerned that the manner of the presentation was time consuming, because there were certain major issues and would they be dealt with afterwards. He asked for Members to propose a way forward.
Dr D George (DA) said he felt the issues should be dealt with as they come up. From the DA’s standpoint, having gone through the submissions and responses, they have certain views which they will raise at the appropriate time.
The Chairperson asked if this meant that after each submission Members should raise their concerns. He noted that he had asked for the issues to be grouped under themes, with all organisations which raised the same matter having their input placed under the relevant head. This had been clearly requested and if it was done the way requested it would be far more productive. He asked, seeing as Treasury has such a good grasp of the issues, whether the presentation could take a thematic form.
Mr Havemann said a document has been prepared along those lines internally and this could be presented to the Committee.
The Chairperson agreed that this should be done. He noted that Parliament used to, when dealing with submissions, assign different weighting to groups which represent large numbers of people, than an individual’s submission. Here the submissions carry roughly the same weight, with two categories of creditors. He made it clear that the Committee is seeking to get a firmer technical grasp on the Bill and the implications of the proposals. This is the informal stage of processing a Bill where no party political stances have been taken as yet. Therefore, when Members ask questions or offer views they are tentative, as in a brainstorming session. Members should feel free to pose whatever questions they like and make contributions to enhance the quality of their understanding of the issues. It will only be in the next quarter when parties will begin to come forth with formal positions. The value of the process is to identify the major policy issues which the ANC needs to take a decision on. If these are not explored in this open session then it will be more difficult to identify the six or seven policy issues which need consideration in the party study groups.
Dr M Khoza (ANC) asked for more substantiation on urgency and timing which was raised by the tier two creditors, because when she had read the submission she was made cautious about how reactive the Bill was. It would not be wise to legislate for this particular situation, only for it to create problems in the future. The senior counsel opinion also spoke to this concern, linking it to the powers of the curator. She was unsure whether the powers being given to the curator were for this particular situation or whether they were indeed well thought out. Investec Asset Management had also commented that the powers were not substantiated, although their submission did not contain the data needed to verify this point. This data must be found, so the Committee can be confident that whatever decision is being made can soundly apply to the future and is not merely a short term fix. She therefore asked for further substantiation on the point, because it did not sit well with her. Even on Treasury’s own admission, it has not done enough work to verify what other commentators have said on the point.
The Chairperson said this is a valid point and is related to what the interface is between this Bill and the Twin Peaks Bill, because the Twin Peaks Bill is meant to be more comprehensive.
Ms P Kekana (ANC) agreed with both the Chairperson and Dr Khoza, because as Treasury goes through the Bill, Members should be able to see the relationship between the two Bills. Her thinking from the previous day’s session was whether the amendments are reacting to the African Bank situation or are of broader application and able cover future incidents. It will be helpful to see whether some of the amendments speak to the separation which the Twin Peaks Bill going to introduce.
The Chairperson said Ms Kekana’s point was helpful and that the aim was not an endless academic discussion, but was aimed at being clear on what the practical challenges are. Most Members will accept that African Bank and the current challenges do require amendments to the Banks Act. Therefore the Committee should do what is required to address these challenges. However, the Committee should not lock in to a dispensation for the financial sector as a whole, beyond what is needed. If the challenges regarding African Bank are separated from the rest of the Bill it will be fine, but less helpful. The Committee ought therefore to say there is a need for the Bill, but issues relating to the whole banking sector which could be addressed in the Twin Peaks Bill ought to wait for that point.
Dr George said his understanding from yesterday was that there was speculation about whether the Bill came up because of African Bank. However, the fact of the matter is that it did come about because of African Bank and the Bill should not be looked at as simply affecting one party, because it applies generally. The Committee is not able to ring fence it in that way. He agreed that the big issue is in fact African Bank and the Committee should ensure this is remedied. He also agreed that the Bill should be kept as tight and as short as possible.
The Chairperson said this was Dr Khoza’s point.
Mr D van Rooyen (ANC) said if the objects of the Bill are looked at, it is clear that it was triggered by the developments in African Bank, but also compliance with global standards is also coming into play. The amendments were mainly directed at managing the specific issues, to avoid a broader problem and it cannot only be relegated to one institution. Therefore, he felt that the approaches suggested by Dr Khoza and Dr George are what the Committee should focus on.
The Chairperson said Treasury should go through the issues and return to the broader issue at the end, because going through them will give Members greater clarity on where the Bill should begin and end; bearing in mind that the Twin Peaks Bill is looming.
Mr Havemann agreed and said it was an issue which had been bothering Treasury as well.
Mr Davidson said the first major theme is creditor protection, because the Bill will provide extensive discretion granted to the curator and the Minister. The ability of the curator to transfer liabilities of the bank will impact on creditors’ rights and Treasury agrees with this assertion. The contemplated amendments limit creditors’ participation in this process and therefore creditors generally sought provisions which require creditor approval before the transfer of any liabilities. Treasury’s initial views were that to allow creditor approval of the disposal of assets and liabilities, would essentially amount to a private sector veto over public interests. This was the guiding principle and inspired Treasury to seek a middle ground. This was found in the current framework as provided for in the PAJA. Therefore, Treasury cites PAJA and the Constitution as a reasonable way to balance the competing interests of private creditors and public interest.
The Chairperson asked if the contributors still disagree with the argument.
Mr Davidson replied that there are some differences among the contributors and generally they seek greater protection than what is currently offered by PAJA and the Constitution. Treasury does not necessarily agree with that position.
The Chairperson said as he understood the point, it was that ultimately the public interest has to take precedence over private interests in this particular circumstance.
Mr Davidson said that in instances of resolutions and bank stress which could have catastrophic implications for broader society, private interests should not be elevated above the public interest and this was Treasury’s guiding principle. This is a principle which is consistent with international best practice as cited in the Financial Service Board’s (FSB) Key Attributes.
The Chairperson said, while the senior counsel of the second tier creditors is unavailable, the question which needs to be asked is why South Africa should detract from the position that public interest takes precedence over private interest. Particularly as this is international best practice. He asked the Committee staff to note this question, in case Members forgot to raise it with the senior counsel.
Dr Khoza agreed with Treasury that PAJA and the Constitution are sufficient. She wanted to know if there is a pre-determined process for the curator to follow in the disposal of the assets, because the fears of the creditors may be justified if the curator is free to dispose of the assets in a way which is detrimental to the ultimate value of the assets.
Mr D Ross (DA) asked if there was any other legal aspect which could strengthen the position if this was a concern.
Mr Davidson replied to Dr Khoza saying that he would hand this over to Mr Peter Bradshaw, Attorney for the African Bank curator, because there is an extensive framework to ensure that there is indeed a reasonable, clear and equitable process for the disposal of assets and liabilities.
Mr Peter Bradshaw, Attorney for the African Bank Curator, said there are two parts to the answer to this question. Firstly, that the Bill itself contemplates a process. The first being the preparation of a report, which will have to be made public given that PAJA applies to any action or decision of the curator. Once the curator has determined what is the best alternative to rescue African Bank, they will prepare a report of the impact of the decision on all relevant stakeholders, which is sent to the Minister. The Minster then calls for comment and having received comment will make a decision. Section 54 of the Banks Act does not permit the transfer of the assets of a bank outside the ordinary course of business, except with the consent of the Minister if it is a large transaction or the Registrar if it is a smaller transaction. The public official who makes that decision has to consider the public interest. From the curator’s perspective, each bank crisis will be different and to hardwire an inflexible process may be appropriate in the African Bank context, but this process may well not work for the next bank failure. To the extent that creditors believe that PAJA does not provide them sufficient protection, the legal advisors of the curator have taken the view that PAJA requires procedural fairness and substantial fairness. The advice given to the curator so far regarding the African Bank situation is that PAJA will require a full dossier of information, assuming he has the power to do the transaction which the Governor of the Reserve Bank announced last year and is dependent on the passing of the Bill. Further the curator will put together a full information briefing and a reasonable time will be provided for input to be given, which is likely to be around four weeks. Only after having received that input will the curator be in a position, under PAJA, to make a decision. It is important to highlight that what the Reserve Bank announced is not the only option to rescue the bank, but it is all that is currently on the table. Through the PAJA process, people will then be able to make informed contributions and if any of these are better for all stakeholders, then PAJA will constrain the curator to implement that option. At present the Bill simply provides more options on how to save the Bank.
Mr van Rooyen said time is of essence for this process, mostly because the key objective is to avoid permeation into the sector. How is this going to be factored in given that four weeks will be needed for consideration of the input on the information? What happens in a situation where immediate action is required to avoid negative repercussions?
Ms Bridgette Diutlwileng, Parliamentary Senior Researcher: Finance and Public Accounts, said looking at the issues, creditor protection does come up quite significantly. Looking at section 25 of the Constitution she felt that the public interest does take precedence in this case. It may be useful for the Committee to have access to the contracts signed, because this is the only way to know exactly what the constitutional issue may be. As some creditors enjoyed greater protection, while others did not. While Treasury may not be concerned about the narrow contractual clauses, she was not sure whether it had looked at these contracts to try and determine the possible constitutional issues which could arise. If Parliament could look at these as well, then it may help the final decision to be made after the constituency period.
Mr Bradshaw said he had applied his mind to the issue raised by Mr van Rooyen and the four week period is not set in stone. The curator must consider how much information needs to be processed by the interested public, the complexity of the information and the urgency of the resolution. In balancing these factors will lead to different times being required for each bank. If the bank has no liquidity at all then waiting four weeks will not be reasonable in the circumstances, but in more complex and less urgent cases perhaps six weeks would be reasonable. This is the flexibility he had spoken to earlier, because of the complexities of each bank failure, hardwiring a particular period or process may work in the African Bank situation, but not preserving the current level of flexibility may be later regretted. In his view the flexibility does not impact negatively on creditor rights. Any stakeholder has the ability to challenge the decision that the curator makes under the PAJA. He noted that the curator is acutely aware of the scrutiny which he is going to be under and the period of time and level of engagement is fundamental to getting any deal done. Nobody wants the transaction to be derailed due to an inappropriate decision leading to months or years of court action. On the access to the contracts, he said most of the documents are public and he would be happy to gather these and make them available to the research team. While the trading notes are public, there are however, certain bi-lateral agreements which are subject to confidentiality. While it will be useful for the research team to look at the contracts, if the Committee gets tied up in the contracts and applies their wording to the Banks Act, then it will be closer to tailor making an African Bank response, rather than something which will be able to stand on its own for the curatorship provisions to be applied to the next bank failure.
The Chairperson summarised the tentative view of the ANC as being the case that Treasury makes is reasonable, being that the public interest trumps private following FSB guidelines. There is nothing exceptional about this as it is part of international financial governance. People have access to PAJA and therefore the curator would be foolhardy to make decisions which result in torturously long court processes. It will be good to hear from the creditors, but he could not see them bringing something so overwhelmingly strong as to change the Committee’s mind.
Mr Havemann said a letter was submitted by the senior creditors and they are present to present their view.
Ms Tamara Burnell, Old Mutual Specialised Finance, said it was recognised that the process could not be done perfectly the first time round, in an emergency. It is accepted that this is a reasonably pragmatic middle ground, between trying to expedite the African Bank scenario and setting some of the key principles for future application. While it is not perfect, from their perspective, on balance, the Bill could be supported as an interim piece of legislation.
Valuation of Transferred Assets
Mr Davidson said many of the contributors had wanted a fair market value for the transferred assets. Treasury in principle agrees with this, but their concern was rigidly setting down mechanisms for determining what the value of those assets should be. The complexity around doing so is twofold. Firstly, when an incident happens there is little time to determine what a fair market value for assets would be, because the longer one waits for a determination, the more the assets could deteriorate in value. Therefore, it is better to act quickly in determining the value of the assets or allow the curator the authority to act in an efficient way. Allowing for too much flexibility or a narrow, set methodology for determining what the value should be, would result in the assets deteriorating. The second issue is normal market conditions, to determine the value of assets, which are often complex and security instruments require normal market conditions and in a crisis that very element is absent. Therefore, to be pragmatic and to not unduly constrain a curator or resolution authority, Treasury is of the view that the only constraint on a curator is to act reasonably and in good faith, again under PAJA.
Dr Khoza felt this is really reasonable, because the fact that curatorship is underway means there is already a crisis and as much as the market value would be optimal, this is undermined by the crisis; which may add to the need to dispose of the assets urgently.
The Chairperson asked Treasury to play devil’s advocate and to state what the contributors’ replies were to Treasury’s responses.
Mr Havemann said his understanding was that the contributors are fine with this clause and their big issue was the ‘no creditor left worse off’ clause, which they felt may adversely their interests.
The Chairperson summarised the position saying that at this stage on valuation of transferred assets what is contained in the Bill is fine. As the contributors would like to have the market value imposed, but how do you determine normal values because of time constraints and the absence of normal market conditions. Therefore, the curator will have to apply his/her mind and be fair and reasonable – with those who are unhappy being able to rely on PAJA. He turned to the Senior Parliamentary Legal Advisor, and repeated the question raised by Mr Ross about alternatives to PAJA and the Constitution should second tier creditors be aggrieved.
Adv Frank Jenkins, Senior Parliamentary Legal Advisor, replied that the situation is that South Africa does not have administrative tribunals which deal with reviews of officials in government who exercise delegated powers under legislation. Therefore, the problem is that one would have to go through normal court procedure which may take time and be expensive, although not necessarily. While there is a review process under the Minister and the registrar, this is still on the executive side of the line and what would be optimal is an independent review of executive action. However, PAJA is a very strong mechanism and the grounds set out in PAJA are very broadly worded and some commentators have said they constitute appeal grounds dealing with the merit of a decision, rather than review which deals with the procedure. His personal view was that PAJA is strong enough, however there is nothing else at present.
Dr Khoza said this matter will have to be escalated when the Twin Peaks legislation is dealt with. She was aware that with pension funds there are a range of structures which can be appealed to outside of PAJA.
Mr Ross said, on creditor protection, he felt there was too much power given to the Minister, although this has been dealt with. On determining the asset value, this is where the curator comes in and he gets the sense that there are too many powers for the curator in terms of determining the value.
The Chairperson asked if the curator’s powers in South Africa would be inordinately greater than under FSB guidelines.
Mr Peter Bradshaw replied that advice has been taken from international restructuring firms and this has indicated that what is being proposed is not at all out of kilter with international best practice. As was pointed out, banks are different creatures when they are in crisis to other businesses. He was sensitive to the criticism that the curator has too much power and in another industry he would agree. However when dealing with such systemically important industries, the more tape one ties up a curator in, the less likely there is to be a speedy resolution and restitution of the status quo. As advisors to the curator, he urged that Members consider the administrative justice provisions which would apply, because each situation would be different. If an inflexible set of rules is set, then they are likely to not suit future situations.
The Chairperson said he understood both PAJA and the Promotion of Access to Information Act to be considered advanced by global standards. Whether they are implemented properly is another question.
Adv Jenkins agreed with the assertion, although the legislation is not perfect.
Mr Havemann said the other difference between banks and other industries is that a lot of money is at stake. Banks are also very sophisticated entities and will without issue instruct senior counsel to pursue the mechanisms available.
Equal Treatment of Pari Passu claims
Mr Davidson said this issue was raised by subordinated creditors and in their view the curatorship process is not the same as liquidation.
The Chairperson interjected asking for the term pari passu to be explained.
Mr Davidson replied that here it means equal treatment of claims which are similarly ranked. As liquidation is not being undertaken, the subordinated creditors should not have their claims subordinated against other classes of creditors, namely senior creditors. Treasury’s view here was that creditors bought subordinated instruments resulting in a higher yield, commensurate to the higher risk they were taking. It does not make sense that once the entity runs into trouble, these creditors simultaneously having received a greater yield, enjoy increased protection under public action; particularly as there may be public interest considerations.
The Chairperson asked Treasury what the reply was to Treasury’s position.
Mr Havemann said this is the bulk of the argument, that because curatorship is not a liquidation process they should not subordinated and should rank pari passu with the senior creditors. He then read from the legal opinion obtained by the subordinated creditors: “arguable that the proposal is irrational, as it provides for arbitrary differentiation, authorises arbitrary deprivation of property and this would be the position where the Minister approves the transfer after forming the opinion that unequal treatment of creditors is reasonably likely to promote a stable banking sector or public confidence in the banking sector. When such an opinion is at variance with the facts it is not vitiated by reviewable irregularity. The mere possibility that such a decision may be made in the future may conceivably undermine public confidence in the banking sector and the stability of the banking sector to the extent that the proposal is not rationally related to its stated purpose”. Essentially what is being argued is that the Minister might make a decision to subordinate them and this may be unconstitutional. It is important to note that the Minister has not done so and the Bill merely opens the mechanism for this possibility. Treasury’s legal opinion was of the view that while the Minister may make an unconstitutional decision, he would likely be advised against doing so and if he made the decision regardless it would be open to them to take the Minister to the Constitutional Court.
The Chairperson said the fact that a Minister may act unconstitutionally is surely a potential challenge to every Bill and he doubted whether this could be the full extent of their argument. As this would mean that any Bill could be challenged on this ground.
Mr Havemann said the Reserve Bank, with Treasury as second respondent, is already in front of the Constitutional Court in the Shuttleworth matter. His point is that any decision is reviewable and can be challenged, therefore Treasury would be hesitant to make an unconstitutional decision.
Ms Kekana asked for an explanation of what pari passu claims were.
Mr Havemann replied that the Latin roughly translated means ‘of equal value’ and so what is meant here is that the creditor’s subordinated debt should be of equal value to the senior debt.
The Chairperson said the subordinated creditors were taking more risk for a higher yield, as compared to the senior creditors.
Dr Khoza asked how legislation makes a distinction between the liquidation and curatorship processes, because she felt this is where the problem lay in this instance. This was particularly as both processes could lead to the same end result. She asked because this may be overlooked and Members would not be able explain the difference between the two concepts.
Mr Haveman said perhaps the curator’s lawyers would be better placed to answer. Essentially, there are two distinct processes: a section 68 liquidation and a section 69 curatorship. Treasury has no view on the subordination issue and therefore it has not accepted a request from the senior creditors that a clause subordinating creditors be inserted. Treasury does not think the law should make this decision and rather a court ought to handle this complex decision.
Mr Bradshaw said the two processes are both in the Banks Act and both are in the hands of the Registrar of Banks; who decides to intervene deciding either on liquidation or curatorship. Liquidation is the end of the entity, with the same rules applying that apply to any other company and the liquidator has essentially one aim: to realise the best value for the creditors. Because banks are at stake, curatorship was introduced and here the registrar will consider the public interest. If they feel the public interest is strong enough then they will appoint a curator. Curators have a wider brief in that they are to rescue the bank and must look after the interests of employees, creditors, the financial system and public interest. It is possible that the two processes end in the same place, but that depends on the facts before a curator. A liquidator must wind up the entity, but a curator attempts to rescue it, whether in the present entity or by creating another and by realising assets all in protection of the broader interests at play.
Dr Khoza said creditors maintain the two processes are distinct and therefore they expect a different outcome. This is why she felt it absolutely important that Members are clear about what the outcomes of the two processes are likely to be for the creditor. It is therefore important not to overlook the matter, because fine details matter in the final analysis.
Mr Havemann said his understanding was that at present, if the bank is liquidated, the subordinate creditors will get nothing, but if it goes under curatorship then there may be some value for those creditors depending on how well the curator does his job. In liquidation everyone loses, but with curatorship there is an attempt to keep the entity alive and therefore there may be some value for subordinated creditors. This is why the test is that no creditor should be left worse off than had the bank gone through liquidation.
Mr Bradshaw agreed with this proposition and it is the Bill which introduces this test. The way he understood it, when a bank is in trouble there are only two options. It would make no sense to go under curatorship if it will not produce a better result than liquidation. There is a public interest override in the Bill and although some creditors may be left worse off, because there is a much wider range of stakeholders if the Minister decides that the public and banking sector would benefit, he may decide on curatorship regardless. However, this would only happen in truly extraordinary circumstances.
Constitutionality of Retrospectively
Mr Davidson said this was raised by the subordinated tier two creditors, who believe that because the amendment applies in the case of African Bank, the law will apply retrospectively and this is unconstitutional. Treasury’s view is that in civil cases, laws can have retrospective application, even if it affects property rights and this view is supported by a legal opinion from Adv G Budlendar SC. Further, it is not inconsistent with a range of regulatory interventions such as tax laws or environmental laws.
Dr Khoza asked what the rationale is for the retrospective application.
Mr Davidson replied that in crafting the amendments an additional tool has been come up with, which would be applied in future curatorships , but this would apply in the African Bank case. In effecting the best, least cost outcome this tool will be required. This tool is accepted internationally and has been used extensively internationally.
The Chairperson asked if it was correct to say that if there was no retrospectivity then the Bill would not be helpful, seeing as the African Bank crisis came about in August 2014.
Mr Havemann said in the latest Bill put forward to the Committee, it is clearly stated that the Bill applies to curatorships which are currently underway. The legal opinion indicates that this is fine and is not even sure if this is true retrospectivity or retroactivity, because the curatorship is still underway.
The Chairperson asked Adv Jenkins what the difference is between retrospective and retroactive.
Adv Jenkins replied that retrospective means not changing the past, but changing the results of the past. Retroactivity means the legislation applies to something which happened in the past, changing that event. To him it sounded very similar and he questioned if this was a very important distinction to make, because the Constitution allowed a law to operate retrospectively in certain circumstances, unless it is a criminal matter.
Ms Kekana said if it is said that the Bill is retrospective, how far back will it apply. She understood that it applied to current curatorships, but does this mean that it applies back to August.
Dr Havemann replied that it applies to a curatorship currently underway.
Adv Empie van Schoor, Chief Director: Legislation: National Treasury, said if the President signs the Bill into law on 1 June 2015, then any curatorship currently underway immediately before, that is 31 May 2015, then the Act will apply. If the curator manages to resolve everything, then they would not acquire the new powers, which the Bill gives curators.
Mr van Rooyen quoted form the last paragraph of Treasury’s response on this point: “Reserve Bank has been careful not to execute the intervention plan for African Bank, before the amendments to the Banks Act have been accepted into law. In this regard the actions of the curator will not be retrospective”; asking what this meant.
Mr Havemann said this meant that none of the proposed powers have been used, because it is Parliament’s decision to give them the powers and further they will only use the powers after they have been granted. In this respect some legal opinions indicate that the powers are not retrospective.
Mr van Rooyen said in the letter written to the Chairperson by the curator, it is indicated that changes will not be effected if the amendments are not agreed to which may lead to the unfortunate situation of liquidation. From his perspective, he wanted to understand how this affects the curator’s performance now. As the situation is urgent, the object is to avoid liquidation and given that there is still a parliamentary process underway, how will this affect the ultimate outcome?
Ms Kekana said she had found the letter profound, because the curator has indicated that if the amendments do not go through there will be a reduction in the amount available for payment to creditors. She did not know the reason for this and therefore felt Mr van Rooyen’s question important as it spoke to understanding the urgency and implications thereof.
Mr Havemann quoted the letter of the curator: “in the absence of the changes, the aforesaid changes cannot be implemented and if no other proposal for the resolution of the bank is forthcoming, it will probably result in the failure of the bank and its liquidation”. He then asked Mr Bradshaw to elaborate.
Mr Bradshaw said in the previous day’s session there had been questions about alternatives and at present the only alternative on the table, backed up by real capital is the proposal by the consortium of the six banks and the Public Investment Corporation. This will see the injection of up to R10 billion worth of new capital into the business of African Bank and because of the level of distress of the bank, he understood that new capital is absolutely essential for the bank to be able to continue and to avoid winding up. At present his view and the advice given to the curator is that the current drafting of the curatorship provisions in the Banks Act do not permit the curator to dispose of assets and liabilities of the bank into a new entity. However, the consortium will not put the R10 billion into African Bank Ltd, the current vehicle. There are a number of reasons for this, one being that members of the consortium who were involved with the last bank failure, Saambou Bank, who are to this day dealing with liabilities claims in court. With this experience, the consortium is saying the money must go into a new entity, because the new entity will not have the historic liability attached to African Bank. If the money goes into African Bank then the money does not go into improving the business of the bank, it goes into settling claims of the as yet unknown creditors. This is the most credible option on the table and the curator requires the powers to give effect to this deal. If someone were to be happy to put R10 billion or more into African Bank, then the curator will have to apply his mind and give effect to that deal. Therefore, at the moment there are two scenarios a new good bank in a new entity or liquidation and liquidation would mean 4 500 people lose their jobs. If the new entity is created and the transaction implemented, then all the employees would be transferred to the new bank and this is an important consideration, because it is a factor the curator is required to consider.
The Chairperson asked for the initial question of Dr Khoza concerning the urgency of the Bill and how much could be left for the Twin Peaks legislation to answer.
Mr Havemann replied that Treasury has included the bare minimum in the Bill. Treasury would have preferred not to bring this Bill, as a full Bill would be preferable. However, this Bill was required to deal with the curatorship of African Bank. This is essentially a preview of the resolution Bill.
Dr George asked about the wide powers of the Minister and Registrar to act in the interest of a stable banking system in the Republic and public confidence in the banking system. He was troubled by this and asked for information on what other jurisdictions do.
Mr Havemann replied there has been a peer review of what other jurisdictions do and this will be forwarded. In short, there is a range with some allowing very broad discretion depending on their constitutional system, while others do not allow as broad a discretion. Treasury has simply put forward what it believes is constitutional in South Africa and this is why so much money has been spent on the legal opinions to ensure that what is proposed is consonant with the Constitution. Some jurisdictions allow the Minister complete discretion to rearrange, without administrative review, while there are administrative tribunals in others.
The Chairperson asked if there was a set of FSB guidelines on the matter.
Mr Havemann replied that there was a set of key attributes, which indicate what should be aimed for. To him the most important one was that a system must be built which as far as possible puts no tax payers’ money at risk, also the hierarchy of creditors must be respected and the system should be relatively quick and painless.
Mr Davidson said the FSB says “the objective of an effective resolution regime is to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions which make it possible for shareholders and uninsured creditors to absorb losses in a manner which respects the hierarchy of claims in liquidation”.
The Chairperson asked if there was a specific set of guidelines for the powers of the Minister.
Mr Davidson said the FSB guidelines were outcome based.
The Chairperson asked what the DA position on the Bill is at present.
Dr George replied that while it will have to be discussed in caucus, the position for now is that the DA does not want to see the bank fail or taxpayers pick up the tab for the failure. Further, it is interested to see if there is another solution to the one proposed, but nothing else has been seen and if this is sustained, the question becomes how is this implemented. Therefore, enabling legislation is needed, but the content of the legislation will have to be seen first as it affects everything else.
The Chairperson said broader party consultation also applies to the ANC. He said going forward, if the second tier creditors wish to make a submission this should be done and fairly soon. He said the Banking Council approached the Chairperson asking if the Committee requires a further submission, although they have written indicating their acceptance of the Bill. He did not know what value would be added, but if the Members want this, it would be fine.
Mr George said the issue is the timing and he would like to know what sort of timing is in mind. He did not feel there was anything wrong with the Banking Council submitting further comment, but this could be done in writing and he did not feel another hearing was necessary. It would be best if as much information, from as many interested parties as possible, could be collected, before the Bill is processed, bearing in mind the urgency.
The Chairperson said as he understood it the following week the Annual Performance Plans of the South African Revenue Service and Treasury will be dealt with. Therefore, there is not another meeting this session. The first week after the constituency period, the Committee is going on a study tour. As he understood it the week after the first week of the second quarter is a Committee week. It will therefore be possible to sit for an entire day and complete the Bill. In order to facilitate Parliament and Treasury’s work, he wanted to see if it would be possible to slot in the tier two creditors sometime the following week. Secondly, he was also going to suggest that the Banking Council provide a further written submission.
Mr van Rooyen said the Committee should be cautious about how stakeholders are treated, because if one is allowed to present, a precedent is set and chances are there will be more responses. Therefore, the Committee must be clear about why they are being allowed to present or not. If some are allowed to present then, there must be compelling reasons why others are disallowed. His advice is that they should also be allowed and hope that there are not further submissions.
The Chairperson said Parliament should not fear civil society. Personally he did not have a problem with people bringing last minute submissions, as long as they were helpful. What should not be done is hold up the process. He understood that there had been a specific request from the tier two creditors who have a direct, vested interest to make representations. It is therefore possible that this could lead to litigation. As far as the Banking Council, they did not ask to make a submission. A Member had asked why the Banking Council was not saying anything, but the Banking Council had written stating their support for the Bill. The Banking Council then offered to make a submission if necessary. Therefore the different categories of commentators are at play. However, if the Banking Council wishes to make a submission this will be allowed.
Ms T Tobias (ANC) said when all sectors are engaged she believes in amicable solutions and agreeing in principle on what will be adopted as the law. It is fair if people are allowed to present opinions, equally there is nothing wrong with allowing re-engagement if there are valid reasons. The advantage of re-engagement is that it is an opportunity for clarity to be given to either party. So that when the law is adopted, even if there is disagreement, interested parties can be content that they are aware of the reasons that informed the decision. She therefore suggested that the Committee should not be rigid and if there is a grey area, submissions should be allowed, to cater for the event that parties wish to take Parliament to task. This is important. Everybody will view an issue according to what is an advantage to their own cause. If there is an area in this context which requires further engagement, she would urge that the submissions are allowed. At no point should people be able to say that they were not given an opportunity to have their arguments heard. She urged the Committee to be flexible enough to allow the flow of engagement. At the end of the day a decision must be made and it will be left to the Chairperson and the Management Committee to decide how to proceed.
The Chairperson agreed, but it seems that in the previous fourth term, public hearings were being thought of as a conveyor belt. He had spoken to Mr C Frolick (ANC), the House Chair Responsible for Chairpersons, and he had raised his concerns about the way public hearings are conducted. Mr Frolick had agreed to give him time to speak at a meeting of the Chairpersons of Committees to speak about three Bills which had been adopted in line with the agreement on public hearings of 2004. He said there is a new public participation model, which is aimed at making sure Parliament is not seen as distant from the people and it is remarkable that only eight submissions were received on the budget. One thing is clear, Parliament decides and therefore there will not be endless discussions. He then ruled that if the Banking Council wished to make written submissions or appear before the Committee for a short oral presentation, either would be fine. He then suggested the process for when the Committee returns on the second Tuesday of the second quarter. Adv Jenkins would go through the legal issues, Ms Diutlwileng would summarise the position of Parliament and then Treasury would be heard. Then hopefully the very next day the political positions could be put forward and the formal processing of the Bill will begin, meaning clause by clause deliberation. If there is time, then both the Banking Council and the Tier Two creditors would be invited to make representations on Wednesday 25 March 2015. If the Committee sits all day on second Tuesday and Wednesday of the second quarter, then it may be possible to vote on either that Friday or the following Tuesday. Given where the Committee is and presumably the stakeholders are watching, nothing stops Treasury from trying to find common ground with the relevant commentators.
The Chairperson declared the meeting adjourned.
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