Financial Matters Amendment Bill: Treasury response to stakeholders; Banks Amendment Bill

Meeting report

Deliberations on the Banks Amendment Bills
The Chairperson welcomed everyone and indicated that following engagements on amendments to the Banks Act the previous day, the ANC was opposed to Parliament having a role to play in the licensing of state banks. There were two Banks Bills before the Committee, Mr F Shivambu (EFF) and Treasury’s, and both needed to be processed. He invited comments from Members.

Ms P Nkonyeni (ANC) agreed and added the ANC was against the idea of having Parliament playing some role in the licensing of state banks. 

Ms N Ntantiso (ANC) said although the Committee majority was in agreement with Mr Shivambu’s Banks Bill in principle, they felt Treasury’s bill was more comprehensive and robust and opted to go for the latter.

Mr A Lees (DA) proposed that a motion of desirability be done for the Private Member Bill, and the Financial Matters Bill be processed further.

The Chairperson said the Committee would vote on the Financial Matters Bill the following day. The motion of desirability for Mr Shivambu’s Bill had been drafted and would be considered and put up for adoption the next day. The motion of desirability would note that the majority in the Committee agreed with the approach in the Private Members Bill, but decided that the Financial Matters Bill was better because it provides for more qualifications and checks and balances on the formation of a state-owned banks and is drafted in the context of other applicable legislation that National Treasury is responsible for including the Public Finance Management Act and the Financial Sector Regulation Act. He invited Treasury responses to public submissions on the Financial Matters Bill. 

National Treasury responses to submissions on amendments to the Banks Act
Ms Empie Van Schoor, Chief Director: Legislation, National Treasury, took the Committee through responses to public submissions on proposed amendments to the Banks Act.

Comments were received from COSATU expressing its support for the provisions of the Banks Amendment Bill. However the federation was concerned that the Bill does not include checks and balances or public accountability provisions beyond those already provided for in the Banks Act. Given the explosion of corruption and collapse of good governance in many and especially the largest state-owned entities (SOEs), such anti-corruption, accountability and transparency measures are badly needed and must be included. Treasury, in response, believed the Banks Act contains sufficient checks and balances to require companies operating as banks to operate within the law, and for the Prudential Authority to apply to a competent court for the cancellation of the registration of a bank if the bank engages in criminal activities (including corruption). For example, in terms of section 25(4) (d) of the Banks Act, the Prudential Authority can apply for the cancelation of registration as a bank if the bank employs undesirable business practices.

The Banking Association of South Africa (BASA) submitted that the proposed amendments only address the technical requirements of changes required to the Banks Act, in order to cater for certain state-owned companies to be considered for registration to operate as a bank, or become a controlling company in respect of such a bank. They do not state the rationale and reasoning why the Bill has sought this amendment, and the purpose or objective for a state-owned company to operate or own banks. Treasury’s response was government has previously set out the policy rationale for state banks. For example, in National Treasury’s policy document “A safer financial sector to serve SA better”, it was envisaged that state banks would assist in expanding access and enhancing financial inclusion.

BASA acknowledged the proposed amendment which seeks to provide for inconsistencies between the Banks Act and certain other legislation with respect to state-owned companies. However, it needs to be considered as to who the main regulatory/governing body of state-owned companies who are registered as banks shall be. The roles of the National Treasury and the SARB need to be re-looked at in instances where there is overlap insofar as such state-owned companies are concerned. Treasury’s response is that the Bill (once enacted) will amend the Banks Act, and will result in state-owned banks being prudentially regulated by the Prudential Authority.

BASA commented that the extent to which the Reserve Bank, on one hand, and National Treasury, on the other, will be required to regulate and supervise such state-owned companies will be unclear in the absence of amendments to other relevant legislation. To illustrate by way of example, section 7 of the Public Finance Management Act (PFMA) provides that “National Treasury must prescribe a framework within which departments, public entities listed in Schedule 3 and constitutional institutions must conduct their cash management”. Public entities listed in Schedule 3 of the PFMA fall within the definition of SOEs as contemplated in the Bill and will therefore be subjected to the prescribed framework, notwithstanding that they may be registered as banks. Treasury’s response was that the PFMA regulates financial management in the national government and provincial governments so as to ensure that all revenue, expenditure, assets and liabilities are managed efficiently and effectively. The requirements for the efficient and effective management of revenue, expenditure and liabilities are not in contrast with the requirements in the Banks Act for banks to operate profitably, efficiently and with enough capital.

BASA further commented that the PFMA would need to be amended to stipulate the specific expenditures of state-owned companies (registered as banks) that may be funded from the National/Provincial Revenue Fund or statutory money. It could not be in the interests of the public for such funding to be utilised for fines which may be imposed for any legislative/regulatory non-compliance, for example. Treasury’s response was any expenditure in accordance with applicable legislation should be defrayed from the funds of bank regardless of the source.

BASA highlighted that the current legislative/regulatory landscape applicable to state-owned companies may need to be amended or enhanced to enable specific types of state-owned companies to be registered and operate as banks. Treasury’s response was the Bill only applies to national and provincial state-owned companies which have the prior approval of the Minister of Finance and the relevant executive authorities and which are financially sound according to the auditor’s declaration. This provides safeguards to ensure that specific types of state-owned companies are registered and operate as banks.

The Chairperson appreciated the presentation and invited inputs from stakeholders present.

Mr Gary Haylett, General Manager: Strategic Projects, BASA, expressed BASA’s full support to the amendments to the Banks Act that would allow state-owned entities to establish banks. He appreciated the responses from Treasury. He added that BASA had requested further clarity about how such banks would be set up. However this could be made available at a later stage. 

Deliberations on amendments to the Insolvency Act
The Chairperson said as explained during previous engagements, there was no policy issue in respect of the amendments to the Insolvency Act. He pointed out that parliamentary authorities had ruled there will be no time before Parliament rises to deal with the proposed amendments, which form part of the Financial Matters Amendment Bill. They had given the approval for only two matters in the Bill to proceed: one relating to the establishment of a state bank by SOEs; and the other providing for equality in the payments of military pensions. Treasury officials had attempted to get the authorities of the National Assembly and the National Council of Provinces to agree to the inclusion of the amendments to the Insolvency Act as part of the Financial Matters Bill.
He insisted that the Committee wanted to deal with the insolvency amendments and was prepared to sit extra hours to do so but had no control over the matter. He had discussed the issue with Deputy Reserve Bank Governor, Kuben Naidoo, earlier in the day and told him that the Committee could not do anything because it was beyond its control. It was a position taken by the decision makers of the National Assembly and the National Council of Provinces on the basis of the limited time available. Processing the proposed amendments to the Insolvency Act very swiftly could be challenged in a court of law on the grounds that the Committee did not give adequate attention to it. He questioned why the Treasury introduced the insolvency amendments to Parliament only in January.

The Chairperson stated the Committee had received letters from the Reserve Bank Governor and BASA on the urgent need for amendments to the Insolvency Act. He asked an SARB official and BASA to give brief inputs.

South African Reserve Bank Input
Mr Unathi Kamlana, Head: Policy, Statistics & Industry Support, SARB, said the letter sent to the Committee by Governor Lesetja Kganyago stressed the need for the amendments to the Insolvency Act if SA is to comply with international banking requirements. If the proposed amendments to the Insolvency Act are not processed as part of the Financial Matters Amendment Bill there will be serious ramifications for local market participants and SA financial markets more broadly. This failure would have major implications for the ability of SA entities to transfer risk offshore instead of concentrating it in SA financial markets. The proposed amendments to the Insolvency Act would protect financial obligations under derivative contracts from automatic incorporation into an insolvent estate. The Reserve Bank and the banking sector regard the amendments as key in order to secure existing international banking relationships.

Mr Haylett explained that the amendments will provide the international banking partners of SA banks with certainty regarding contractual arrangements in the event of insolvency. These are international contracts that financial markets use between parties to guarantee these payments will take place. From September 2019, SA banks will be required to provide a guarantee of repayment under derivative contracts. If they are unable to provide this, international banks might decide not to transact with them on these particular contracts, or charge much more for them. This would mean that SA banks will not be able to provide these products to their corporate clients who want to transfer their risks (related, for example, to commodity prices, exchange rates and interest rates) onto the banks, which then hedge this risk with offshore banks. It is customary for the parties to provide security for their obligations under these hedge transactions.

The Chairperson stated that the Committee was always keen to finalise the insolvency provisions in the Financial Matters Amendment Bill and, indeed, the bill as whole. The Committee agreed with the insolvency provisions but was not allowed to deal with them because the Bill was only introduced in late January, and the decision-makers in the National Assembly and National Council of Provinces decided that as Parliament ends in March for the May elections, there just was not enough time to finalise the Bill in both Houses. Permission was initially only granted to process the provisions on the Banks Bill and the Military Pensions Bill. He urged Treasury to submit Bills on time in future. The Committee is loath to process Bills without the fullest consideration of them. However, as the insolvency issues were largely technical the Committee was able to process them fairly quickly and would not have come to any other decisions had it had more time.

National Treasury responses to submissions on the proposed amendments to Insolvency Act
Mr Langelihle Nkabinde, Directorate: Financial Markets and Competitiveness, National Treasury, took the Committee through Treasury responses to submissions on the proposed amendments to the Insolvency Act.

Comments were received from BASA stating that as the proposed amendments were currently drafted, the Insolvency Act will allow the secured creditor immediate access to its Initial Margin (IM), but the proposed section 83(10B) then allows any other creditor or the Master to dispute the preference, and after considering submissions from both parties, if the Master is of the opinion that the dispute is well founded the secured creditor is obliged to pay the proceeds of the IM to the trustee. This effectively negates the right of immediate access. In the association’s view, and in the view of its legal counsel, if such a process exists, it could not be said that the collateral is immediately available to the secured creditor. Treasury’s response was BASA should refer to the proposed new draft in the Annexure. Clause (10B) (e) has been inserted to further clarify that the role of the Master will be an administrative function and not to resolve disputes on substantive issues.

BASA and its legal counsel was happy that other creditors’, the trustee’s and the Master’s rights to approach a court for an order overturning the preference should not be curtailed, but allowing the Master to opine on the issue would not be acceptable with reference not only to our domestic legislation but also to the laws of the jurisdictions of its major international counterparties. Treasury’s response was BASA should refer to the proposed new draft at the Annexure. The Bill does not confer powers on the Master that are not already in the Insolvency Act and it is aligned with section 45(3).

Allen & Overy made submissions noting that the Bill provides for the insertion of subsections 10A and 10B of section 83 of the Insolvency Act which provides that a secured party may retain the proceeds of the realisation of secured property for the settlement of a secured claim arising out of a “master agreement” as defined in section 35B of the Insolvency Act. The secured party is required to notify the trustee or the Master of the proceeds of the realisation of collateral and confirm the terms of the relevant master agreement, the nature of the claim, the nature and particulars of the realised security and the calculation of the net amount. Subsection 10B provides further that a creditor or a trustee may object to the realisation of the collateral after which a defined dispute resolution procedure must be followed as a consequence of which the Master may determine that objection is well founded in which case the secured creditor must pay over the realisation proceeds plus interest to the Master. Only after the secured creditor has paid over these realisation proceeds may the secured creditor then challenge such decision in court. Treasury’s response was Clause (10B)(f) had been re-drafted to allow for a court to direct a creditor under a Master Agreement to re-pay the net proceeds of the realised collateral following the Master’s decision after the trustee has applied to court. Furthermore the trustee is required to serve notice on the Master Agreement creditor.

Lastly, BASA in commenting on Section 83(10B) indicated that during its discussions with Treasury, the association had been advised that it was not the intention of the legislature that the Master adjudicate on the validity and enforceability of the creditor's claims and security interests. BASA had been advised that the powers which would be conferred upon the Master would be limited to: assessing the documents submitted by the secured creditor; determining whether a "master agreement" and security document had in fact been provided; and providing a prima facie determination on whether the creditor is a secured creditor or not. Treasury’s response was that the adjudication of disputes by the Master will only be related to disputes of preference in terms of clause (10B)(a) and the settlement of disputes by the Master will be in terms of the submitted documentation under clause (10A)(a)(i) in terms of the new clause (10B)(e).

The Chairperson appreciated the engagements. Treasury and parliamentary legal staff would tie up loose ends on the Financial Matters Bill for finalisation and voting the following day.

The meeting was adjourned.