Capitec and VBS Mutual Bank briefing

Meeting report

Opening remarks
The Chairperson welcomed everyone and welcomed the President’s decision to suspend the South African Revenue Service (SARS) Commissioner, Mr Tom Moyane, and read a statement as follows:

The Committee urges the President to establish the Commission on SARS as soon as possible. Part of its mandate should include an investigation into how SARS has managed the allegations against Mr Jonas        Makwakwa and Ms Kerry-Ann Elskie. It should also investigate the legitimacy of SARS’ disbandment of the High Risk Investigation Unit (the so-called “rogue” intelligence unit), including through considering the significance of KPMG’s withdrawal of its recommendations on this unit. While the Committee fully supports representivity in SARS senior management and more generally within the organisation, and have been constantly focusing on the need for this, the Committee thinks the Commission should also look into the exodus of senior staff in recent years. Thus, the Committee wrote to the President and Finance Minister Nhlanhla Nene last week, asking them to consider its request.
 
Although the Committee understands that revenue targets have not been achieved in recent years because of the slowdown in economic growth, it believes that if SARS had been more united, efficient, effective and credible, it would have raised more revenue than it did, despite the adverse conditions. The Committee has repeatedly raised this in its quarterly meetings with SARS to no avail.

The Committee felt strongly that in view of the role SARS plays, it is very important that senior officials are not just beyond reproach, but are seen to be beyond approach. This is especially important in view of the need to achieve revenue targets, and tackle declining compliance and tax morality.

The Committee repeats its call that consideration needs to be given to the SARS commissioner answering to a SARS board, as proposed by the Davis Tax Committee. It also reiterates the view that government should consider strengthening the independence and powers of the Tax Ombudsman.

The Committee wishes the new Acting Commissioner, Mr Mark Kingon, well. Among the issues that the Committee believes Mr Kingon should focus on and work closely on with other agencies is decisively tackling the staggering amounts of money flowing out of the country illicitly. The Committee encourages Mr Kingon to work with his colleagues in SARS to also ensure that officials are above reproach; all taxpayers, whoever they are, pay the taxes due to the people of South Africa; and value added tax (VAT) returns are processed in terms of clear, open and transparent policies. 

While the President appoints the SARS Commissioner, after consultation with the Minister of Finance, the SARS Commissioner should answer to the Minister directly within a clear framework, which includes ensuring that the Minister does not unduly politically interfere in SARS’ internal matters. The Committee will continue to pursue the same issues with Mr Kingon that would have been addressed with Mr Moyane.

Mr F Shivambu (EFF) said emphasis should be given to the need to establish a regulatory board that would oversee SARS going forward. A robust accountability mechanism to the Committee had to be found. In many instances, SARS had cited confidentiality clauses in the Tax Administration Act as a basis for withholding information from Members. This had to be brought to a stop. The Committee had to learn from its experiences with SARS under the “misguidance” of Commissioner Moyane.

The Chairperson agreed and indicated the Committee believed that there was a need for tax legislation to be amended to ensure greater accountability of SARS to Parliament while maintaining the confidentiality of taxpayers. The Committee had mandated Parliament’s Legal Services Unit to prepare proposals in this regard, including through doing research on how parliaments in other open democracies hold their revenue collection bodies to account.

Capitec and VBS Mutual Bank matters
The Chairperson pointed out that the VBS Mutual Bank curator from SizweNtsalubaGobodo Audit, Advisory and Forensic Services was not in attendance. On the Capitec matter, Viceroy had been invited but indicated it could not make it. 

Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, said regulators were expressing concern that a lot of the parliamentary hearings on the VBS Mutual Bank were taking place at a very early stage. They had no problem with coming to Parliament but felt it compromised their strategy as it was too early into the investigations. The curator had just started his work and did not really know what had happened.

The Chairperson said the concerns were well-understood. The Committee would not want to supplant the role of regulators. However, Members were not convinced that the regulatory bodies were performing as effectively as they should. The Committee wanted to understand what was being done to rescue VBS as well. On allegations by Viceroy, it would be remise for Parliament not to hear from Capitec and, in the same vein, find out what was being done by Capitec. The public had a right to feel that their monies were safe.

Capitec presentation
Mr Gerrie Fourie, CEO, Capitec, took the Committee through a presentation addressing allegations by Viceroy Research. He said a full audit had been conducted related to the Viceroy allegations and the results would be released with the publication of the bank’s annual results the coming week. Capitec was quite convinced it had nothing to hide. He stressed the need to handle the allegations very carefully to maintain the trust of depositors. Also, Capitec had laid a formal complaint with the Financial Services Board (FSB) against Viceroy. Capitec is selling trust, hence it was extremely important that all allegations are dealt with. He urged the FSB to do a full investigation on Viceroy.

Mr Fourie briefed the Committee on the way the bank functions and its client profile. The bank would reach about 10-million clients by mid-April, up from 9.2-million. The bank had about 25% of the unsecured market. The bank provided credit to clients responsibly, and only granted credit through a model based on client behaviour, affordability and revenue source. He maintained that the South African unsecured market was still very young but that banking in the country was generally well regulated.
Mr Fourie questioned the structure of Viceroy Research as an institution. Viceroy looks for companies with a very high price to earnings ratio and shorts the company to make profits. He put paid to the fact that key individuals at Viceroy Research were two Australian citizens (Aidan Lau and Gabriel Bernarde) and a British citizen (Fraser Perring). The group was linked to at least three hedge funds and had no known or disclosed regulators. Viceroy was not regulated, did not have its structure disclosed and was not audited. Viceroy Research engaged in among others shorting the stock of a company before issuing a report on it and insisting on independent investigation. Viceroy had attacked seven international companies, and used Steinhoff report for credibility. In contrast, Capitec was already sufficiently regulated by at least seven state and sector organisations, including the South African Reserve Bank, the FSB, the Johannesburg Stock Exchange and the Financial Intelligence Centre. He indicated that Capitec had spoken to Viceroy several times and asked to meet with them in USA but they had not responded. Also, former Capitec employees were approached to do ‘financial research’ for Viceroy and then paid R5000 an hour to write about Capitec.
South African Reserve Bank presentation
Mr Kuben Naidoo, Deputy Governor and Registrar of Bank, South African Reserve Bank (SARB), took the Committee through a presentation on the Viceroy allegations against Capitec. Based on the data that the SARB had, the key allegations raised in the Viceroy report were not correct. The bank’s provisioning model met legal requirements. Capitec was well regulated and has adequate capital and adequate liquidity. The bank’s capital adequacy ratio of 34% was 2.5 times what a normal bank had. Its liquidity coverage ratio was well over 1 000% compared with the required 100%. Rescheduled loans at Capitec were not used to hide non-payment and boost new lending, and the provisioning model met the legal requirements. However, this did not mean that the regulators were not concerned about the allegations and had not taken them seriously. He added that Capitec was considered a systemically important bank and it was therefore crucial that the SARB had to move to settle the market as it did very quickly after the Viceroy report was released. The Reserve Bank was continuing to monitor the situation.

On VBS Bank, Mr Naidoo said the bank’s board and management failed to manage its rapid growth, its funding and liquidity. He referred to questionable governance and risk practices. VBS was first warned in September 2015 about relying on municipal deposits and again a year later when it had liquidity problems. However, the advice was ignored. Not only did VBS not heed SARB’s advice and reduce the concentration risk that it faced, the bank actually went in the other direction. It increased the number of municipal deposits after the Treasury had issued a circular, both in terms of volume and the quantum of money. He pointed out that banks fail due to their strategic choices, not as a result of regulators’ actions.

Major issues of concern raised by SARB in relation to VBS Bank were as follows: inadequate and questionable governance and risk management practices; a deficient compliance function and culture; aggressive growth strategy in balance sheet amidst funding challenges; weak asset and liability management practices (high liquidity risk); possible illegality of municipality deposits accepted by the bank and the legal developments in that regard; volatility in financial performance as well as regular and significant losses caused by high operating expenses due to aggressive infrastructure expansion plans; negative media coverage of the bank (reputational risk); lack of proactive communication with the regulator on significant developments and delayed responses by management to crises; poor quality of regulatory reports and other information submitted to the regulator among others.
 
SARB had put VBS bank under curatorship not because it wanted to. The Reserve Bank was not happy that VBS bank had failed. He reiterated that the bank had failed because the board and management repeatedly refused to heed the Reserve Bank’s advice and recommendations that they reduce the concentrations on the deposits side. A very fragile liquidity position was now being managed. Based on the data that the bank gave SARB, the thinking was there was a certain amount of cash in the bank. Upon arrival, the curator found that there was far less in the bank and so liquidity had to be managed very tightly. Consequently, limits had been put on withdrawals. Curatorship was the only way to save VBS Bank.

National Credit Regulator presentation
Ms Nomsa Motshegare, CEO, National Credit Regulator, highlighted VBS Bank’s compliance status. Since registering as a credit provider in 2007, the National Credit Regulator (NCR) was not aware of any complaints received from consumers. Also, no issues of non-compliance were identified through compliance monitoring, and no formal investigations or enforcement action had been taken against VBS. VBS Mutual bank only has 0.05% share of the banks’ credit book and lends to consumers in rural areas and townships.

Ms Motshegare addressed Capitec issues. She noted that Capitec Bank has 3.24% of the banks’ share of debtors’ book. On Capitec compliance, during 2017, 90 complaints were received from consumers, and 86% of these complaints were resolved. In general the nature of complaints against banks relate to reckless lending, dispute on outstanding balances and terminations from debt review. Further, during 2017 the NCR conducted a compliance monitoring on the banks to establish whether any of them may have conducted business as was highlighted in the “Wells Fargo” saga. In Capitec, multiple loans being issued to a consumer within a short space of time were discovered. This conduct was not necessarily in contravention of the National Credit Act, but concerns raised were about potential risks to consumers and the bank. The NCR advised the bank to stop the practice and this information was shared with the South African Reserve Bank.

On investigations and enforcement, two matters had been handled relating to Capitec. One matter resulted in a referral to the National Consumer Tribunal (NCT), and the NCR lost the case on technical grounds. The NCT ruled that the NCR did not have reasonable suspicion to investigate Capitec. This was further confirmed by the High Court on appeal. The second matter investigated revealed no issues of non-compliance.

Financial Services Board (FSB) presentation
Mr Jurgen Boyd, Deputy Executive Officer, FSB, pointed out that the FSB has jurisdiction to investigate whether any person may have contravened the Financial Markets Act. In the event that a transgression was identified, the FSB could impose a penalty dependant on contravention, at the discretion of the Enforcement Committee as per Financial Institutions Act. A matter could also be referred for criminal prosecution where a fine not exceeding R50 million or imprisonment for a period not exceeding 10 years, or both such fine and such imprisonment could be imposed. The outcome of regulatory action was always published, and there were no exceptions.

On the status of Capitec investigations, FSB investigations involve: studying the Viceroy reports and Capitec’s responses; studying information provided by the complainant, as well as analyst reports, media reports, and social media interactions; analysing trading activities in Capitec shares, derivatives and bonds from December 2017 to date; issuing summons and interrogating persons of interest; and liaising with fellow regulators. The investigations were meant to establish whether there had been any contravention of the Financial Markets Act. The investigations were still underway and FSB would report back upon completion.

Mr Olano Makhubela, Deputy Executive Officer: Retirement Funds, FSB, commented on the VBS Bank curatorship. He said FSB had done preliminary assessments on the exposure of retirement funds at VBS. The exposure in the form of pension funds was limited. Only one fund with a sizeable amount was under curatorship.

National Treasury input
Mr Momoniat gave an input on the Viceroy Report on Capitec. He told the Committee that regardless of whether the issues it raised were valid or not, Viceroy’s approach in releasing its report on Capitec raised serious concerns. The way it released the report was very reckless. If it was really concerned about the credit practices of Capitec it would have taken it up in a different, more constructive way without bringing risk to the bank. Furthermore, Viceroy’s own admission that it had a financial interest in the price of Capitec securities falling could not simply be ignored. Though Viceroy said that it acted in the public interest, it placed an emphasis on the price decline. Viceroy Research’s aim was to make sure shareholders lose value, in which case they make money. An additional concern was at the time that it released the report, Viceroy was essentially an anonymous entity. It was done anonymously. Not only was Viceroy not regulated, its people were unknown. He emphasised that Treasury or regulators were not making attempts to defend or attack Capitec or Viceroy. Treasury was not saying Capitec is innocent of this or that transgression. He hoped the regulators were doing their work and dealing with the issues.

On VBS Mutual Bank, it was not correct that Treasury only got to know about the bank’s challenges recently. Treasury was concerned that there appeared to be governance issues and conflicts of interests within the VBS board for a period of time. The curator was expected to identify the real issues together with all regulators looking into the VBS Bank matter at the moment. The curator would give the full picture, and on whether fraud was committed along the way, after concluding the process. Treasury was also concerned about lending practices in South Africa. It felt regulations are not tough enough. There was need for a more intrusive approach.

Discussion
Mr Shivambu said the presentations on Capitec were not helpful as there were no engagements with issues raised in the Viceroy report. The presentations were largely dramatising the lack of integrity on the part of Viceroy, without dealing with substantial issues. He believed Capitec was purely a loan shark and that was unsustainable. Capitec makes multiple loans to same lenders, operates like a "pure mashonisa" in poor mining communities. Capitec approves loans without checking people could repay. The Viceroy report was not inventing things, it cited court papers, affidavits and other relevant sources. Regulators had to deal with the substance of the report. He suggested a follow-up meeting on Capitec issues, which would also invite former employees to testify about some of the bank’s practices in terms of the National Credit Act. There were certain practices which were questionable. He was not convinced that Capitec must exist with its current management. Had it been that Capitec was not 'insulated' by billionaire owners, it would have landed in same situation as African Bank.

Mr Shivambu commented on VBS Bank. He emphasised the need for the curator to protect depositors’ interests. He indicated that the curatorship was not done with due diligence. Members were dealing with a reckless Reserve Bank which did not analyse the consequences of the insulation. The process was not handled properly. He queried whether the Minister of Finance did give a go-ahead for the bank to be placed under curatorship or it was SARB’s kneejerk response. He asked why the Reserve Bank could not inject the money to ensure depositors wishing to make withdrawals in the meanwhile were not inconvenienced.

Ms T Tobias (ANC) pointed out that the limitation of VBS Bank engagements at this point was that there was inadequate information as investigations were still underway. Regulators and all stakeholders would have to sieve through a plethora of information in the public domain.

Mr A Lees (DA) asked about the impact of VBS Bank curatorship on the 16 municipalities which held deposits with the bank. Which were the municipalities and how much are they invested with VBS Bank? He asked if some form of loan from the State, to deal with the situation, should be anticipated. He noted that the Capitec presentation was mainly focused on attempting to discredit Viceroy Research. However, there were allegations of debit order runs in the public domain. Was there any element of truth in these? What proportion of credit checks were done by computer scans?

Ms G Ngwenya (DA) argued that it was important to separate any issues at Capitec from any wrongdoing on the part of Viceroy. However, if Viceroy had acted unlawfully, regulators have to deal with it effectively as there was a wider reputational risk to South Africa. The risk was not just on listed companies, but also around the efficacy and ability of regulators. If there was indeed wrongdoing, it was important to take it up because there may be danger of systemic reputational damage where a report like this in future gains that much more traction because it was already believed that there is a lack of credibility.
 
Mr M Hlengwa (IFP) felt regulators were making efforts to demonise Viceroy without interrogating the substance of its report. This was problematic. He asked about the extent to which the decision to put VBS Bank under curatorship was communicated to rural people having deposits at the bank. What were the implications of the collapse to the VBS board members? What was their status and recourse? Could there possibly be a different narrative?

Ms P Nkonyeni (ANC) emphasised the need to assist VBS Bank as a means of spearheading transformation. She commended the intention to save the bank and identified the need for it to become a commercial bank.

Mr Fourie agreed on the need to take the Viceroy reports seriously, despite concerns about how they were written and released. He insisted Viceroy’s calculations and assumptions are incorrect, and that the rescheduling of loans and consolidated loans was based on prescribed criteria. Capitec had replied to every point raised by Viceroy on SENS. Personally and with a team of 20 to 30 people he had investigated and evaluated every allegation to make sure that the bank was compliant and doing things correctly. Capitec’s biggest concern was that if one looked at other companies that Viceroy had attacked, these were companies selling retail products so the consumer could decide if they want that product or not. On the other hand, a bank sells trust. If uncertainty is created for a depositor they will ask questions about their money, and that was why Capitec had to handle it carefully and answer all allegations. He noted that only 20% of loans were consolidated and in each case a full affordability assessment was conducted. He stressed that the bank adopted very conservative policies and priced for risk. Credit is only provided to formally employed, salaried individuals. The system centrally controls the credit granting model and the model is dynamic and easily updated with economic variables. 

Mr Momoniat replied Treasury was not in some quest to attack Viceroy or defend Capitec. Viceroy was not a whistle-blower; it was using available information, some of it which was with the courts. In response to the VBS Bank questions, the number of municipalities would be verified after the curator’s report is made available to Treasury. However, Treasury was worried that these were municipalities with limited revenue as the money might only be available after the VBS situation is normalised. This might affect service delivery. A preliminary report would be issued to communicate way forward. He agreed that regulators had to be decisive.

Mr Naidoo indicated he was pretty sure funds would be requested to save VBS Bank. He gave the firm assurance that action would be taken against those found to be responsible for any malfeasance or fraud uncovered, no matter how long it took, as it was critical that consequences were seen to result from remedial action. He reiterated that the curatorship had brought to light matters of which the Reserve Bank was previously unaware of. However, it was not true that SARB had no intention to protect depositors. The Reserve Bank was working flat-out and was making progress every day, and plans were in hand to ensure 99.8% of depositors would be protected. He conceded that hardship would result from the lack of liquidity, but emphasised that the curator was working hard to resolve these issues within the next few days. The situation at VBS was very fragile and precarious. Liquidity had to be managed very carefully as there was less cash in the bank than initially thought. He fully agreed that financial transformation was crucial. SARB had been out of its way to save the bank but at the end of the day, supervision does not amount to running the bank. Also, he believed a commission of inquiry and a forensic investigation into the collapse of VBS Bank was likely.

The Chairperson said no decisions would be taken as there was need to give Members time to internalise what had been said and at the same time give regulators space to do their work. He suggested a follow-up meeting on both issues. The Committee was very concerned about VBS and recognised the complexities. The right balances had to be found. On Capitec, Members had to think carefully about the issues. Some of the issues Capitec was being accused of also applied to other banks. Therefore, if Capitec was to be cross-examined, it would then only be fair to call all banks. Capitec would be treated no different from any of its competitors.

The meeting was adjourned.