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FINANCE SELECT COMMITTEE
6 September 2000
FINANCE BILL; BANKS AMENDMENT BILL; BILLS OF EXCHANGE AMENDMENT BILL; SOUTH AFRICAN RESERVE BANK AMENDMENT BILL: BRIEFING
Banks Amendment Bill
South African Reserve Bank Amendment Bill
Memorandum on the South African Reserve Bank Amendment Bill
Bills of Exchange Amendment Bill
- A delegate from the National Treasury was present to take the committee through the Finance Bill. Primarily the Bill deals with the authorisation of certain unauthorised expenditure by various government departments for a past financial year.
- Delegates from the South African Reserve Bank explained the clauses in the Banks Amendment Bill, the Bills of Exchange Amendment Bill and the South African Reserve Bank Amendment Bill to the committee.
Advocate De Jager from the South African Reserve Bank noted that:
- the Portfolio Committee had suggested one amendment to the Banks Amendment Bill. This is in respect of subclause 8(c) of clause 4 which deals with the review procedure of the Registrar's decisions.
- the Portfolio Committee had requested substantial changes to be made to the Bills of Exchange Amendment Bill, and
- the South African Reserve Bank Amendment Bill contains one amendment.
The Chairperson reprimanded the members for poor attendance of NCOP committee meetings. This is a serious problem which exists in all parties. It gives a very bad impression to people who come to make briefings. She noted that she was going to raise the matter with the ANC Chief Whip and suggested that other parties raise the matter with their respective whips. The bad attendance is especially problematic in light of the fact that they are trying to identify and develop the role of the NCOP. They cannot do this if they do not engage with issues. She said that the Finance Select Committee specifically complains that it wants to play a bigger role in the MTEF and the budgetary cycle yet the members do not even want to attend meetings.
Mr Du Plessis of the National Treasury noted that the Standing Committee on Public Accounts (SCOPA) in Parliament had made resolutions that certain unauthorised expenditure be authorised. These resolutions were tabled and adopted by Parliament. The Finance Bill gives effect to SCOPA's recommendations.
Basically the Bill deals with two issues:
- authorising certain unauthorised expenditure, and
- closing off the revenue funds of the former territories
Clause 1 - this is an authorisation of unauthorised expenditure. These expenditures have been repaid by the Departments to the National Revenue Fund. As the expenditures have now been authorised, the National Revenue Fund must repay the amounts to the various Departments.
Clause 2 - this is the same as clause 1 except that this deals with funds which were not deposited into the Exchequer Account. This means that the National Revenue Fund was not paid therefore there is no repayment. The spent amounts now simply become authorised.
Clause 3 - this deals with the former TBVC states. Bad administration has resulted in the situation where proof of expenditure is not always possible. No documentation means that it is an anauthorised expenditure. An amount here has also been authorised by SCOPA.
Clause 4 relates to the closing off of the revenue funds of the former TBVC states. The aim of this clause is to close off these funds and to transfer any balances in the funds into the National Revenue Fund.
Clause 5 deals with the right of recovery. SCOPA recommended that legal entitlement regarding the potential recovery of any losses to the State which result from the unauthorised expenditure in question must remain. Therefore a right of recovery was put into the Bill in clause 5. Mr Du Plessis said that while recovery is possible, he does not think that it will be successful in most cases.
Ms Fubbs (ANC, Gauteng) asked why there were no dates in the Bill (the period/year of the unauthorised expenditure referred to).
Mr Du Plessis explained that these were contained in the schedules and the Bill refers to the Schedules.
Mr Raju (DP) asked if a particular time frame had been set before giving up a hope of recovery.
Mr Du Plessis replied that no such time had been set. The Exchequer Act said that the unauthorised expenditures must be recovered. These processes still go on.
The Chairperson asked if recovery was the responsibility of the respective provinces and if so why this was not specifically mentioned in the Bill.
Mr Du Plessis said that he would check on this and send a reply to the committee.
Ms Fubbs was displeased that there were no dates in the Bill. She said that the periods for which the unauthorised expenditures had been authorised should be noted in the Bill. Mr Du Plessis said that the Bill had gone through the state law advisors who noted that putting this information in schedules was acceptable as all the detail was covered in the annexures. The important thing here was that the reference to the Auditor-General's reports were in the Bill.
To address Ms Fubbs concern, the Chairperson said that they should get a legal opinion on this at the stage when the Bill must be formally passed.
Bills of Exchange Amendment Bill
Advocate De Jager of the of the South African Reserve Bank (accompanied by Advocate Blackbeard, and Mr Malan) said that the Bill was going to undergo some changes because the Portfolio Committee had requested them to do so. Since changes were forthcoming, he did not give a detailed explanation but only a brief overview of the Bill.
One example of a change being made was to remove the word ''banker'' and replace it with bank. The reason for this was simply because the word is outdated and people do not refer to their ''banker'' anymore.
Another change is that the courts have increased the duty on the collecting bank to prevent fraud from occurring. Previously the bank was not liable for fraud (in the instance where someone presented a cheque for payment and the bank paid him and it turned out that he was not the legal holder of the cheque). Now the position is that if the bank was in a position to detect the fraud then the bank is liable.
Banks have responded to this by saying that they want cheques crossed in a very particular way so that it is easy to recognise the instructions of the drawer.
Amendments relating to this are contentious because issues such as public consideration and public interest come into play. They are trying to address these issues.
Ms Fubbs said that she had heard via the radio that banks were opposed to this amendment relating to liability in respect of cheque fraud.
The reply was that banks support the amendment. The amendments dealing with fraud provide them with protection. For example, where there was a perfect forgery they are protected. The banks are simply saying that they should not have to take full risk in certain circumstances. They feel that big businesses should take some responsibility in looking after their cheques (for example, where an entire cheque book gets stolen from a big company).
Ms Fubbs corrected herself saying that she did not mean banks were opposed to the amendment, she meant the ''consumer''.
Advocate De Jager replied that the individual would never be expected to share risk with the bank in the event of fraud.
The Chairperson asked what percentage of risk sharing was envisaged and what the response of ordinary people was to the legislation.
The reply was that they were not sure about how the risk would be shared.
They had held hearings on the matter and the Consumer Council had indicated that they support the amendment. Some academics opposed the amendment because of the legal implications that they say it has.
Banks have indicated that they want one uniform way of crossing a cheque. In this way they can be sure when they are paying out a cheque that they are following the drawer's instructions. The problem is that if words which have a particular effect in the normal course of business are given a new meaning, then the drawer's intention may conflict with the instruction on the cheque. How does one negotiate a cheque further if the words prevent it but it was not the intention of the drawer to do so. If one deals with the cheque differently then one will act contrary to the drawer's instruction. This is a problem that the academics have highlighted.
Ms Fubbs commented on the time it takes to clear a cheque. She asked where the money was between the drawers account and the payee's account and who collected the interest accrued on the money during this time.
The reply was that the Bill does not deal with this. The question relates to internal banking practice and is beyond the scope of the Act. All the Bill says is that a cheque may be cancelled at any time before the cheque is presented to the drawee bank for payment.
Mr Durr (ACDP) asked if the Bill was in line with international practice.
The reply was that the decisions of South African courts on this subject are much the same as the decisions of foreign courts. The laws are very uniform. There had been some input from academics from Glasgow University.
Advocate De Jager commented that he was not sure whether the Bill would be published again for public comment after the changes were made. The preferred route would be not to have public comment again. They would rather meet with the academics on a more informal level and discuss it with them ''at the table''. He also could not comment on how substantial the changes would be. He noted however that the framework of the Bill would remain the same.
South African Reserve Bank Amendment Bill
There is only one amendment to this Act. In 1991 SARB decided that a minimum reserve balance was part of the monetary policy. The minimum reserve is that amount, as a percentage of its exposure to the general public, the bank must hold in an account with the Governor of the Reserve Bank. Currently the percentage is 2.5% of the banks exposure held in a non-interest bearing account. In determining the amount of the bank's exposure, certain assets of the Bank may be counted in. One such asset is vault cash.
Vault cash is the amount that the bank has available at any point in time. The problem is that vault cash is not easy to calculate at one particular time because they need an averaged amonut (they would have to send someone in to physically count it each day for about a month to determine an average).
The law is now amended according to a recommendation of the IMF and the World Bank. In terms of the amendment SARB will not allow the vault cash to be added to the minimum reserve balance. The Governor can determine the percentage of vault cash to be taken into account to calculate the minimum reserve balance. The Governor can even decide on 0%.
There was no discussion on this Bill.
Banks Amendment Bill
Section 1(a) - Definitions of 'banking group', 'branch', 'branch of a bank'
'Banking group'', ''branch'', and ''branch of a bank'' have been created for the first time therefore they had to be defined. Banks have cross-border establishments therefore there is a need to define the concept of banking groups as opposed to only defining single institutions. There is a need to define branches of foreign banks in South Africa (this definition of branch brings in branches not registered as separate companies) and to define branches of South African banks in foreign countries. The effect of the new definitions is that the section 73 safeguard in the principal Banks Act is extended so that it also applies to branches of a bank.
Section 1(b) - the term ''board of appeal'' is removed and it is replaced with the term ''board of review''. This is to clearly define that there may be a review of what the Registrar did and whether the Registrar acted in accordance with administrative law or not. The process is a review as opposed to the current process of appeal against the decisions of the Registrar.
Section 1(c) - amendment of the definition of liquid assets. The limitation period of three years to redemption date of securities (which relates to credit risk) is done away with in respect of public stock. Thus, the phrase ''with a maturity of not more than 3 years to the last redemption date'' is deleted. With the amendment there is no longer a 3 year limit. It is now easier for the State to raise capital.
Section 1(d) and 1(f), which deals with the definitions of primary share capital and secondary capital have been shifted to section 1 of the Act from section 70.
Section 1(g) - definition of the expression ''tertiary capital''. Broadly speaking primary capital refers to share capital. One calculates a bank's capital by adding the share capital and the reserves. Secondary capital refers to loan capital. In terms of the Banks Act primary capital may not exceed secondary capital. This concept of tertiary capital has been introduced and needs to be defined. If a bank traded for their own account then they should trade tertiary capital. Tertiary capital refers to those amounts of profit in terms of trading that have not been set aside, or, unsecured subordinated loan (USL) (payable when all other creditors in the institution have been paid). Introducing tertiary capital was necessitated by the increased participation in trading in financial instruments by banks.
Amendment of section 4(2) (Clause 2)
Currently the Banks Act only provides for one officer as the deputy Registrar of Banks. This is not sufficient to cope with the workload. The Registrar will be able to designate a maximum of four employees as Deputy Registrars (with the approval of the Minister of Finance).
Amendment of section 7 (Clause 3)
This was explained by means of an example. If a banking institution was in trouble and another banking institution wanted to take it over then they could commission a chartered accountant to assess the position of the bank in difficulty. This assessment is referred to as a due diligence report. The information in this report belongs to the institution who commissioned the chartered accountant. If the information is leaked and the market responds then the institution in trouble will be in a weaker position because it can be sold for a cheaper price. The amendments have the following effect:
If an institution wants a due diligence report from a chartered accountant working for another institution then:
- the Registrar must be informed.
- a copy of the due diligence report must be given to the Registrar.
- the information is not to be disclosed to anyone else.
Amendment of section 9 (clause 4)
This deals with the review of the decisions of the Registrar. Various amendments were made to clarify an ambiguity caused by the previous draft. It is now clear that a review committee can review the decision of the Registrar to determine whether the decision should be set aside or not. The Portfolio Committee has made a further amendment to subclause 8(c) by inserting the words ''and such a person may be legally represented at his own cost''.
Amendment of section 22 (clause 5)
In terms of section 22 a bank could only use its South African authorised name and the Banks Act is very rigid in this regard. The purpose of the amendment is to cater for overseas banks. For example: an institution is registered in Switzerland as XYZ Bank. It establishes a branch in South Africa and has a representative office in SA called D Bank. Previously if it was registered as a bank in SA it would have to register as D Bank. Now it has a choice. It can register either as XYZ Bank or as D Bank.
Amendment of section 31and 49 (clause 6 and 7 respectively)
The word 'appeal' is changed to 'review'.
Amendment of section 64 (clause 8)
They have followed the King's Commission recommendation. The chairperson of the audit committee must be non-executive. There must be a minority of executives.
Amendment of section 68 and 69 (clause 9 and 10 respectively)
Section 68 relates to the liquidity of the bank and placing the bank under judicial management. Section 69 deals with curatorship. When banks are in financial trouble they had the option of either judicial management or curatorship. Judicial management does not work and therefore it is never used. They have decided to do away with it. Liquidating a bank under the format of curatorship is a less formal procedure. The curator must inform the Registrar that the institution is no longer viable (when this becomes apparent) then the Registrar can apply for sequestration.
Amendment of section 70 (clause 12 (b))
The entry level amount (needed to start a bank) has been upped to 250 million rand. This will not affect existing banks.
Insertion of section 70A (clause 13)
The Registrar can ask an institution to hold capital as a buffer. The controlling company in a banking group is given the responsibility to ensure that a minimum capital and reserve fund is held by the entities making up the banking group.
Amendment of section 72 (clause 14)
Section 14 will allow a bank to use liquid assets as collateral for payments. Thus the Registrar of Bank's discretion to allow a Bank to pledge or otherwise encumber its assets has been broadened.
Substitution of section 73 (clause 15)
In terms of international standard banks must have a spread (large exposure). The amendment is aimed at trying to control the exposure of banks to single entities - which could constitute credit risks. It ensures that if an amount is loaned and it is equal to 10% of the Bank's capital and reserves then a committee in the Bank (the board of directors or a committee appointed for this purpose) must authorise the loan. If all the exposures are counted together and it amounts to more than 8% of the banks capital then the Registrar may require the bank to hold more capital. If the exposure is more than 25% of the bank's capital then the Registrar must approve such a loan.
The Chairperson commented that the language of the Bill was sexist and not gender friendly as it referred to ''him''.
Advocate De Jager said that the Interpretation Act provides that ''he'' must also be interpreted to mean ''she''.
Ms Fubbs noted that Section 1(b) makes reference to stocks issued under the Exchequer Act and asked if this Act had been repealed and if so, did the PFMA replace it?
Advocate De Jager replied that if it was repealed then one must look to the Interpretations Act which says that the new Act will apply automatically.
A member of the ANC asked why the entry level for banks had been increased.
Advocate De Jager replied that if one considered inflation then the increase was not that much. If a bank does not have enough capacity to meet this entry level then they will not be able to compete with other banks anyway. He added that there were other mechanisms in SA to enter into the banking environment at a different level. Examples of these are mutual banks which have an entry level of R50 million. Other options are credit unions, village mutual co-operatives and even stokvels.
Ms Fubbs said that because of inflation they will have to keep changing the amount of the entry level anyway. She asked why they did not rather legislate on a percentage basis or put the amount in the regulations instead of in the Act.
Advocate De Jager said that if the amount was in the regulations then it would be easier to amend. However this was precisely the problem as there would then be an uproar with people would say that they are trying to make the process easier for raising the entry level.
Mr Durr (ACDP) asked how they take into account a banks credential requirements when the bank is exposed to soft markets.
Advocate De Jager replied that they look at the financial statements of the banks and they consider all the variables. For example, they will look at a mortgage bond that the bank owns. The Registrar will determine where the mortgage bond is located and a certain risk weight will be attached to it. They also look at the markets to which the bank is exposed. In this regard there is such a thing as a country-risk.
The Chairperson referred to the specific exclusions to the definition of a ''private sector non-bank person'' in clause 15(3)(b)(i). In terms of this clause provincial governments are excluded from the definition. The Chairperson asked if there was a good reason for the exclusion.
Advocate De Jager replied that he was not sure whether there was a good reason for this or whether it was merely an oversight. He said that he would check and forward a reply to the committee.
The meeting was adjourned.
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