VBS Mutual Bank and Capitec follow-up meeting

Meeting report

Opening remarks
The Chairperson welcomed everyone and indicated that the Committee wanted to know about progress regulators were making in relation to the Viceroy allegations about Capitec as well as the VBS Mutual Bank matter. He cautioned against the identification of individuals who could be involved at VBS as investigations were still underway. The Committee urged the expeditious resolution of the two matters. He pointed out that the Committee had invited the previous VBS board members but they had failed to avail themselves.

Mr F Shivambu (EFF) said he had spoken to the Venda King and had expressed his interest in the VBS matter as the bank’s shareholder. The King also expressed his intent to brief the Committee together with other interested parties if the Committee extended an invite to them. This would be fair as it would give the Committee a more holistic perspective on the bank’s situation. The factors which led to the bank’s collapse must be fully interrogated so as to bring it back to financial stability.

Ms T Tobias (ANC) sought clarity about the role of the Venda King in relation to VBS matter as the bank’s curator would be in a position to give an account about the challenges. She believed there could be Members who had personal interests in the developments at VBS. Members should declare their interests upfront. She, for one, had no personal interests. The Committee would need to deal with the VBS matter within the confines of its mandate.

Mr Shivambu put it on record that he and the EFF as a collective were not conflicted on the VBS matter. The King was an interested party as one of the principal shareholders and owing to his involvement in meetings with the reserve bank during the curatorship. In addition, protection of ordinary depositors’ funds was paramount. The Committee should make exhaustive efforts to reach VBS board to have it appear before it.

The Chairperson said the issues raised by Members would be taken into account. The Committee would look into whether to invite the King to appear before Parliament. Was the King a board member or a shareholder? If a shareholder, should then all shareholders at VBS be invited? What precedent would be set by the invitation? These were all considerations the Committee would have to deal with. Furthermore, VBS must be rescued as far as possible, as the country could not afford the collapse of an African-owned bank. However, the bank could not be rescued at the expense of the poor and disadvantaged. If there had been corrupt practises preceding the collapse, those involved would have to be held fully accountable.

Briefing on Capitec Bank
The Chairperson said a letter was sent to Capitec outlining issues the Committee wanted to be briefed on. Capitec was thus familiar with the issues.

Capitec presentation
Mr Gerrie Fourie, CEO, Capitec, gave a presentation on progress made on addressing allegations made by Viceroy in several reports released early this year. He explained that the bank had done its part in responding to allegations. Capitec serves the lower-income market and has recently provided an insurance offering. Among the allegations made by Viceroy was that the bank operates as a loan shark. Capitec responded quickly to these allegations, having held media briefings to assure the market, such that the Viceroy report did not dampen the group’s financial results released near the end of March 2018. Auditors PwC, which signed off on the results, also looked into allegations made by Viceroy. Their fees were higher because of the service. The bank offers credit to low income earners in a responsible way, compliant with regulations. The bank ensures the affordability of clients before issuing loans. Since releasing financial results in March, Capitec met up with several asset managers and analysts where they could ask Capitec questions. Capitec had met with over 120 analysts across the world since the release of financial results. However, Viceroy, which Capitec treats as an asset manager, had not interacted directly with Capitec and only “attacks” the bank through the media.

He indicated Capitec’s availability to explain things in detail to Viceroy if they want to talk to the bank. He further pointed out that in his interactions with asset managers in Boston and London, nobody could say who Viceroy was. This was an important point and important for the Financial Sector Conduct Authority to understand. Of the lessons learned from the Viceroy report, it was important to respond quickly and communicate to market. Capitec had done that well. Capitec as a bank was selling trust, not a product or a brand and thus it had to ensure that the Capitec brand is trusted. Capitec’s liquidity ratio was one of the highest in the banking sector.

South African Reserve Bank input on Capitec
Mr Kuben Naidoo, Deputy Governor, SARB, indicated that there had not been any new developments on the Reserve Bank’s side since the last briefing. The Reserve Bank takes the allegations made in the Viceroy report seriously and had engaged with Capitec and its auditors (both internal and external) and will continue to engage with Capitec on the matter. At this stage the Reserve Bank did not believe the Viceroy allegations have validity. The Reserve Bank has confidence in data from the bank and confidence in audited financial statements of Capitec. The substantive allegations (of Viceroy) were not accurate. The provisioning model that Capitec applies was prudent given the nature of their business. The Reserve Bank believed rescheduled loans were a relatively small portion of their overall loans and were insufficiently large in magnitude to artificially inflate either loan repayments or new loans. He reassured that the Reserve Bank’s interactions with Capitec had been intensive and would continue as part of ongoing supervisory processes.

National Credit Regulator (NCR) presentation
Ms Nomsa Motshegare, CEO, NCR, said NCR conducted a compliance monitoring exercise in 2017 which revealed that Capitec was issuing multiple loans to consumers within a short space of time. Subsequently, concerns about potential risks to consumers and the bank were raised. Capitec was thus advised to stop the practice. Reviews on Capitec’s lending practises were thus intensified, and NCR would continue closely monitoring the bank and would raise any issues identified with the Reserve Bank.

Financial Sector Conduct Authority (FSCA) presentation
Mr Solly Keetse, Head: Market Abuse, FSCA, said the FSCA’s mandate on the Capitec matter was limited to market abuse namely: insider training; price manipulation; and false reporting. The FSCA made efforts to identify whether the allegation levelled by Viceroy fell within this ambit. Accordingly, FSCA had interviewed a banking analyst, and based on this evidence in particular, the conclusion was that the Viceroy report was hogwash. He added Mr John Perring of Viceroy was in contact and had given FSCA a week to meet up in New York to which he was advised that it would be practically impossible for FSCA to travel to New York in a week’s notice. The next step for FSCA was to therefore evaluate whether it would be practicable to travel to wherever Mr Perring may be to meet him.

National Treasury input
Mr Ismail Momoniat, DDG: Tax and Fiscal Sector Policy, National Treasury, said Treasury expected regulators to gather information and establish the veracity of the allegations. However, Treasury believed if Viceroy was indeed interested in their case, and had the interest of consumers at heart, they would fly to South Africa rather than having the FSCA travelling to New York. He reiterated Treasury’s position expressed during the initial briefing, that Viceroy was a short seller and was self-interested.

Discussion
Ms Tobias said Viceroy had put Capitec on the spot as market sensitive information pertaining to their products, which could be used against it by its competitors, was being discussed publicly. She hoped this would not happen again as it did not set a good precedent. Viceroy’s status within the financial sector had to be clarified and put to test as a systemically important financial institution (SIFIs) was being challenged. The Committee should give consideration to strengthening legislation this does not happen again.

Ms G Ngwenya (DA) referred to input by the NCR. She cautioned against the overemphasis that Capitec would be carefully monitored going forward. She felt there was no justification for additional monitoring of Capitec on the basis of available information. Such assertions might inadvertently be prejudicial to the bank as investors might think it was under some kind of ‘extra’ monitoring’, thus they had to tread cautiously. From what had been gathered, this might not be warranted. She asked why Capitec had reduced exposure (lending) to the lower end of the market by R1 billion.

Mr D Maynier (DA) said the principal concern should be the stability of the financial sector. He made reference to a statement issued by the Reserve Bank in January to the effect that Capitec was well-capitalised, had adequate liquidity and was compliant. He asked if this statement was still valid. Secondly, despite the Viceroy report, it was highly likely that certain individuals collaborated with Viceroy and also possibly benefited from the report through short selling. Do the investigations seek to identify such a possibility?

Mr Shivambu said there was a problem of collective naivety within the Committee. He suspected some Members had not read the Viceroy report. For instance, it was a fact that in Amplats Mine in Rustenburg, Capitec approved 150 000 loans to 10 500 workers in less than 12 months. How could that be responsible lending? Were Capitec’s banking practices consistent with the NCR Act? The regulators were trying to protect a loan shark extending loans to ineligible individuals. The Committee was not doing justice in interrogating these aspects. Predictably, Treasury was on Capitec’s side as it was in support of a white-owned establishment. The Viceroy report was an accurate observation of Capitec practices. Ganging up against Viceroy without fully interrogating contents of the report was incorrect. He advised the Committee not be obsessed with protecting Capitec. The EFF was even considering taking ownership of the Viceroy report and await to be taken to court so that Capitec gets to testify under oath.

Ms P Nkonyeni (ANC) said Capitec seemed to imply that it was insulated from conducting its business in an unlawful manner. She asked what could then have prompted the attack if indeed Capitec felt it was a victim.

Mr Fourie, in response, said Capitec was one of the few banks making credit more affordable and accessible to the unsecured lending particular market. However, the R1 billion reduction in exposure to the lower end of the market was owing to the state of the economy and reflective of industry wide trend. Capitec would continue monitoring these trends. On why Viceroy attacked the bank, the short-seller looks for opportunities to attack South African companies, and at the time Capitec’s share price was trading well. Viceroy appeared to have credibility after it issued its report on Steinhoff, but this happened a few days after the announcement of Markus Jooste’s resignation over accounting irregularities and 80% of the content of the report was based on a German analysis released six months before. It was not only Capitec under attack, there would be many others as well.

Mr Fourie emphasised that Capitec provides lending responsibly. Capitec was definitely not a loan shark and it was not true that it extended loans without assessing eligibility. Eligibility assessment processes are strict as only 10 out of every 100 low-income earners applying for loans receive them. Clients must afford loans as per NCR guidelines, and Capitec was 100% compliant. He reiterated that Viceroy was not subject to any prudential regulations and its business was dependent on capitalising on falling share prices.

Mr Naidoo said the reports such as Viceroy’s were nothing new. It was not unusual for credit analysts to write reports on bank operations. However, attempting to make money out of such reports was a different matter and bordered on criminality. The role of big banks in the unsecured lending space needed to be explored further as there were a number of dynamics in this market.

Mr Momoniat said reckless lending and indebtedness was a broad issue and a big problem which was partly being dealt with through the Twin Peaks model. Treasury certainly did not appear before Committee to defend any institution or trivialise any wrongdoing. Regulators were expected to act without fear or favour and they were certainly doing their jobs.

The Chairperson said, ultimately, Capitec was operating in an open-market system. However, what was at issue was the extent to which Parliament could go in dealing with market conduct issues. The balance between the role of regulators and Parliament in dealing with these issues had to be clear. It was not fair to accuse some regulators of partiality. The Committee was utterly clear that there was still a lot to be done within the financial sector. The sentiments expressed by Members on indebtedness was a reflection of wider problems in the country. It was not fair to solely target Capitec- all banks must be addressed equally. Regulators needed to do far more to regulate the banking sector. Although Viceroy might be discreditable, regulators ought to primarily look into the substantive issues it raised. However, if Viceroy had such strong views, the Committee found it wholly unacceptable that its people were not willing to avail themselves to discuss the issues it raised.

Briefing on VBS Mutual Bank

SARB input
Mr Naidoo gave an update on the status of VBS bank. In 2017, the Reserve Bank issued a directive that it was not permissible for municipalities to place deposits into mutual banks. SARB started engaging VBS on this matter even before the matter was raised in Parliament. VBS was advised to reduce its reliance on municipality deposits but effectively ignored and went on to issue long-term loans on the back of these municipal deposits.
Following two months of curatorship and preliminary investigations, the probability that the bank could be salvaged was lower- but this was not to say that it was zero. The Reserve Bank had provided a guarantee to retail deposits under R50 000. He explained that it had taken a long time to put a mechanism in place to refund these depositors because to date the Reserve Bank had not been able to establish the veracity of their assets, to make determinations whether there was adequate security to be able to put in money. He expressed the hope that within the next two to three weeks, the Reserve Bank would have found a mechanism to make these repayments to retail depositors. No explicit guarantee had been provided for municipal deposits and it was highly likely that municipalities that deposited funds with VBS would lose a significant portion of that money. Talks were under way with the Treasury and the Department of Co-operative Governance and Traditional Affairs to deal with this but it was not within the powers of the Reserve Bank to refund the municipalities. Even in the unlikely and highly optimistic scenario that it was possible to recover all the loans granted by VBS Mutual Bank to pay off all depositors, it would take between seven and 10 years to accomplish.

Mr Naidoo said the curator, Anoosh Rooplal of SizweNtsalubaGobodo, would have to restate the financial statements of VBS at least for the last financial year. This would also determine whether VBS could be salvaged. The information provided by VBS to the Reserve Bank and its financial statements were not a true reflection of its financial affairs. Fake deposits had been entered into the VBS system, which enabled the bank to make loans, in many cases to related parties. The cash from municipal deposits to some extent covered this up. A forensic investigation was launched in April to see if fraud had taken place, to determine the accuracy of the information supplied to the Reserve Bank, to see whether there were related party loans to directors, shareholders or executive management and if these loans were dealt with in terms of the regulations.

VBS Bank Curator input
Mr Anoosh Rooplal, SizweNtsalubaGobodo, said the objective was to restore the bank to viability as soon as feasible. However, the misstated financial statements had complicated the curatorship and all attendant processes. He was one of 12 people working tirelessly to ensure that the interests of ordinary depositors were protected. In terms of the mandate, the curator was required to routinely provide progress reports to the Reserve Bank of which this was being diligently. He expressed their commitment to mapping the best way forward for VBS bank.

National Treasury input
Mr Momoniat said since its enactment in 2003, the Municipal Finance Management Act (MFMA) only allows municipalities to bank with commercial banks, and not with non-commercial banks like mutual or co-operative banks. VBS actively flouted the law, and focused on municipal deposits which comprised almost 75% of all its deposits. Despite being aware of the restrictions on municipalities, VBS continued to accept new municipal deposits even after it started engaging with Treasury on phasing out its past municipal deposits in order to comply with the MFMA. An initial assessment indicates that it accepted R1 billion more in deposits after August 2017 when an email was sent by the MFMA help desk advising municipalities that they were in breach of the law. VBS ignored the basic fact that municipal deposits are short-term in nature. VBS management did not appear to consider that municipalities (if they are to deliver) should be spending all their funds within a municipal fiscal year, and hence that municipal deposits are by their nature short-term deposits, and that these municipalities would need to access their cash to make payments a few months after been deposited.

The basic structural flaw in the VBS business model was to make long-term loans when their funding is a few lumpy short-term deposits. VBS made long-term loans, knowing that their primary funding was short-term in nature, and lumpy. Hence the business model was almost certainly designed to generate liquidity problems when a few municipalities withdraw their funds to spend on budgeted programmes. There was evidence of deep mismanagement at VBS, and there may be corruption. Moreover, up to R900 million was missing. This money appears to have disappeared due to fictitious deposits and/or untraced lending. Treasury expected the forensic investigation under way to determine what went wrong.

FSCA input
Ms Caroline Da Silva, Executive, FSCA, explained the issues identified in regulatory monitoring of curatorship. The curator provides progress reports to the Registrar on a monthly basis and the reports were available on the FSCA website. The curator had reported to the Registrar on inter alia the following relevant matters:

-At the time of the curator’s appointment, Bophelo Beneficiary Fund (BBF) and the trusts administered by Bophelo Benefit Services (BBS) were funded up to a combined level of 30%
During August 2017, Vele Investments purchased the holding company of BBS, Mvunonala Holdings, and as a term of the purchase agreement a portion of the purchase price would be utilised to recapitalise BBF and the trusts administered by BBS
-The amount apportioned for recapitalisation brought the funding level of BBF and the trusts up to 88%.
-The recapitalisation amount was paid into a VBS bank account held in the name of BBF on 29 August 2017
-Between the periods January 2018 to March 2018, several attempts have been made by the curator to transfer the monies held in the VBS bank account to a First National Bank account held in the name of BBS. The curator’s attempts, in this regard, have culminated in a letter of demand being issued to VBS on 7 March 2018
-Notwithstanding the demand, the recapitalisation amount remained in the VBS account.
The curator commissioned SizweNtsalubaGobodo to conduct a forensic audit to verify some of the areas where possible criminal or civil litigation may be warranted in respect of recoveries for BBF. The forensic audit was still in progress.
-The amount held in the VBS bank account represents 57% of the total funds available to pay beneficiaries of BBF and the trusts administered by BBS. These beneficiaries represent some of the most vulnerable in society consisting of minor children of deceased members whose financial needs pertaining to school fees and other monthly expenses are paid for from the funds held by BBF and the trusts.

Discussion
Mr Maynier asked about the current status of former President Zuma’s home loan with VBS Bank. He asked how the loan would be dealt with by the curatorship. Was a commission of inquiry similar to the African Bank one being considered? Also, the indication is that Treasury was aware of malpractices as far back as 2016 and no action was taken for 13 months. It appeared, from the little information Members had, that Treasury and the Reserve Bank had dropped the ball badly.

Ms Tobias said VBS financial statements might have to be restated for as far back as 2015 to get a much clearer picture. She emphasised the need to have clear mechanisms to verify information which banks provides to regulators as part of their periodic oversight.

Mr Shivambu said the Reserve Bank did not insulate depositors as per requirements. He asked when it became aware of the concentration of municipal depositors and why no decisive action was taken at that time. VBS curatorship primarily lies on the negligence of Treasury and lacklustre prudential oversight by the Registrar of Banks. That VBS was taking money from municipalities when it was not supposed to should have had been detected far much earlier. Ordinary depositors must be saved and this should be the primary responsibility of the Reserve Bank. If there was any wrongdoing, those involved should be dealt with decisively and be prosecuted if need be.

Mr Rooplal said bank-client confidentiality would not allow him to comment on former President Zuma’s home loan with VBS. Managing rescue under immense time constraints was a challenge which they were managing. There were aspects which were coming into the fray on a daily basis. The processes were transparent and monitored by the Reserve Bank itself.

Mr Naidoo said it was the full intention of the SARB Governor to set up a commission of inquiry to identify what went wrong. The commission would look at whether the regulator was asleep at the wheel. It was a legitimate question and a commission of inquiry should establish where regulators erred, whether the legal framework erred and whether there was fraud. He reiterated that the curator would have to restate its financial statements, at least for the last financial year, because they did not reflect the true state of affairs of VBS. The curator had so far not been able to establish the veracity of the loans advanced by the bank. The restatement would determine whether VBS could be salvaged.

Mr Momoniat said Members were raising important issues which, at the very least, help in identifying areas where regulatory mechanisms ought to be strengthened. He strongly agreed with the proposal to establish a commission of inquiry to look into the broader issues and on who had to be held accountable. There were different perspectives and conflicting objectives which led to the delay in Treasury taking action against VBS. For instance, the withdrawal of funds by municipalities would have had to be managed properly to ensure the bank’s survival. The commission should look at other issues as well as there was no doubt that VBS at some point acted like it was politically untouchable and enjoyed protection. When VBS people once interacted with Treasury, their arrogance was unbelievable. He indicated that even some Members within the Committee were lobbying to stop the curatorship. Even after the curatorship, Treasury was maligned. There were weaknesses in the systems but there was the role of political influence and pressures which had to be looked into. He urged Mr Shivambu not to jump into conclusions and wait for fair processes.

Mr Shivambu said regulators were expected to ensure compliance of banks at all times. What if other banks were selling the Registrar of Banks dreams just like VBS? What mechanisms were in place to reliably regulate banks? Also, Treasury must not attempt to scandalise this matter. The EFF issued a public statement and even asked for a meeting with the Governor to understand its position in relation to VBS. After the curatorship process was explained to the EFF by the Governor, the need to protect the interests of ordinary depositors was emphasised by the party. This was far from clandestine. When did Treasury become aware that a mutual bank was holding municipal deposits when it was not permissible? Treasury should be responsible and should not attempt to shift blame. There should ultimately be a commission of inquiry to get into the bottom of the issues. As it stood, even GBS Mutual Bank in the Eastern Cape was holding municipal deposits.

The Chairperson said what had happened should not have happened, but it was hoped VBS Mutual Bank may still be rescued to the extent that monies could be recovered for the municipalities. The Committee urged co-operative governance to take decisive action against senior managers who may have had a hand in this. He further urged the expeditious completion of ongoing investigations on both Capitec and VBS matter.

The meeting was adjourned.