Financial Sector Law Amendment Bill: public hearings & National Treasury responses

Meeting report

The Select Committee on Finance met in a virtual sitting for public hearings on the Financial Sector Law Amendment Bill (section 75), responses by National Treasury, and for the consideration and adoption of outstanding minutes from previous meetings in the last quarter.

The Chairperson made brief introductory remarks and welcomed all present in the meeting before moving on to the presentations.

Mr Jacques Botes from the Banking Association of South Africa presented to the Committee.

(Refer to presentation slides.)

Mr Matthew Parks, Deputy Parliamentary Coordinator, COSATU, also presented to the Committee.

(Refer to presentation slides.)

Ms Paula Conway, Legal Representative, COSATU, contributed.

(Audio was not recorded due to technical issues.)

Mr Gary Haylett, General Manager: Strategic Projects, BASA, on behalf the Free Market Foundation (FMF), made a presentation to the Committee. (Refer to presentation slides)

The following points were raised by Mr Haylett:

• “Resolution” is not clearly defined and Chapter 12 A(d) does not clearly state what resolution is.

• The memorandum on the Bill’s objects describes the Resolution, but the Bill does not explicitly state it.

• From 2007-2009, governments bailed out “systemically important” banks which relieves banks from market discipline creating a moral hazard. Knowing governments will bail them out gives banks the incentive to undertake risky investments.

• The Bill will not remove the moral hazard as bank deposits must be insured, which leads to a moral hazard as there is a possibility of government bail-out.

• The Bill fails to define creditors who first bear losses due to a bank’s failure.

• The Reserve Bank has the power to recommend resolutions if it believes a given bank will be unable to meet its obligations which is subjective and violates the rule of law.

•It is unclear when a contract is unreasonably onerous.

• There is unequal treatment in claims of creditors and shareholders of a bank in resolution that have the same ranking in insolvency. Here the Reserve Bank has discretion to treat parties unequally.

• It is unclear whether a bank should hold or issue flac instruments

• A bank may never come out of resolution.

• Some expressions are redundant, “by written order” / “by notice”.

(See slides for more detail)

The following points were raised in the presentation, per the presentation outline:

• Meaning of “Resolution”

• Slow pace of Bill

• Moral hazard

• Who first bears losses

• Cost of covering deposits

• Financial stability

• Reserve Bank’s powers 

• flac instruments 

• Resolution can fail 

Discussion

Mr D Ryder (DA, Gauteng) said the Bill was complex and many nuanced comments had come through. He said some of the comments from the FMF took into account South Africa’s relationship with the big five banks. He felt the banks were perhaps given too much credit on their compliance levels. He asked if there would be any benefit in the further stratification of the banks, and the applicability of the roles was pointed out as potentially problematic. Would stratification solve any of the concerns raised? He said the issues around the definitions raised by the Banking Association of South Africa (BASA) were particularly compelling. He asked if it would not be easier to give the definition within the Bill as opposed to referring to an older Act. The comments on transactions were somewhat limiting. He asked Ms Conway why she only spoke about transactions and not derivative instruments. He asked about giving the Reserve Bank power to define things.

Mr Parks said the more the Reserve Bank’s hand is strengthened, the more benefit can be derived. The provisions are well thought out. When African Bank collapsed and VBS employed it, it moved quite fast. The Reserve Bank should be given space to do its work so that processes are not unduly lengthy. He said pensioners at VBS were left with nothing and their savings were looted. In the bigger scheme of things, the amount of money pensioners had was small, but it may have been all they had as some even committed suicide given the devastation. Insurance did not cover everything. Workers at VBS and African Bank were not fully covered either.

The Chairperson said he was interested to see a response from the National Treasury on a resolution. He said after the 2019 elections, the country was hit by the COVID-19 pandemic, but Parliament managed to get back on track at a reasonably fast pace. There were also many special appropriations bills which disrupted various processes. It seemed like the entities were stuck in a pre-2008 bill. He said it was clear that legislation needed to be brought into play given the horrendous outcome of the 2008 economic crisis. Some issues raised deserved serious consideration. He said Parliament, but not the National Treasury, would accept any consensus. The issues raised by COSATU had come up in different forms. An explanation should be offered from the National Assembly on what happened after COSATU raised its issues. He said the Committee would not be rushed and would not vote on any Bill that members did not understand.

Ms Conway said that BASA’s stance was very supportive of the Bill. This support was needed for the G20 commitments and the security around banks failing. The authorities, since Twin Peaks, have been working hard to restrict some of the G20 commitments. What is important is that financial transactions can be concluded quickly when trading with banks and other large companies. This will ensure that there is no systemic effect in the market and will prevent banks from failing. The most important thing is for the bank to remain functioning and operational to effect payments. The concern was around how long provisions lasted and the duration for a moratorium on contracts, because the idea was to conclude transactions on a speedy basis. Certain types of transactions should not be eliminated from the Bill.

The Chairperson addressed the FMF saying that the Foundation seemed to be implying that some of the regulations were intrusive. The private sector is needed. Given the 2008 crisis and what has happened with VBS Bank, and the disproportionate effect this crisis has had, the majority of the Committee felt that legislation was needed. Very specific suggestions were made, and the Committee will wait for a response from the National Treasury before it applies its mind on the Bill, because, again, it will not make a decision on something it does not understand.

Mr Moore said he would also wait for a response from the National Treasury.

The Chairperson said that the Committee had limited powers and could not amend the Bill because it was a Section 75 bill which affected the provinces. 

Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, National Treasury, said the Bill was complex and that Treasury was not saying it had all the answers, but the submissions have been useful as it raised issues from various perspectives. This is quite an essential part of the Twin Peaks architecture. The word “reduction” means to reduce. Deposit insurance means that the organisation is attempting to help secure people’s savings.

Most people have a R100 000 limit which covers only certain savings. Regardless of the rule, there will always be gaps. For example, someone who has purchased a house for a R1 million might find that their financing bank becomes bankrupt. It is about continuously improving the system for depositors. At the moment, insolvency can be used, but this will cause long queues at the bank. The insolvency mechanism can only be used after other mechanisms have been tried out, for example, curatorship. The mechanisms include resolution, curatorship and insolvency.

There is a very long legal tradition to determine the standing of stakeholders. Secure creditors generally come first. Depositors are paid out almost immediately (within days or weeks). It is impossible to cover everyone. Depending on the hierarchy, if this is changed, it will affect funding. We are dealing with an ecosystem and the question is what the best way is to balance these issues.

COSATU raised questions on wages and salaries which is important, but if arrangements are changed there are implications. For example, the cost of funding. This requires consultation with the Department of Justice as they are in charge of the Insolvency Act. A formal response document would be provided to the Committee. Some submissions have been raised in the National Assembly and have been dealt with there. The National Treasury does not fully accept BASA’s stance. Some of the issues raised by BASA and the FMF is new and was not raised with the National Assembly.

Mr Vukile Davidson, Director: Financial Stability, NT, agreed with Mr Momoniat’s comments. He said this outcome was much better than waiting for an insolvency process which was long.

Mr Botes said the FMF’s allegation about compensation of losses to creditors is not dealt with in the Bill. He clarified that the Bill sets out those losses should be dealt with according to the creditor hierarchy. The Bill also includes certain amendments. It is important to note that there are two different sets of issues. The issues in BASA’s current submission have not yet been engaged on. There was no undertaking that these issues would be addressed in the legislation. The reason for this is because of differences in points of view. In principle the organisation does not agree with BASA. The purpose of insolvency is to close down the entity, which is different from resolution, where the purpose is to protect financial stability. COSATU’s submission states that it does not want the most vulnerable to have to wait for their deposits. The creditor hierarchy might make it seem like there will be a delay given its ranking, but it must be taken into account that the deposit insurance will be paid within a very short period of time.

Mr Haylett said he understood and acknowledged the points made by Treasury. He asked if any issues raised by the Foundation may lead to amendments in the Bill.

The Chairperson said a written reply from Treasury would be sent to all stakeholders.

Mr Momoniat said Treasury was not convinced that the points raised by the Foundation would lead to amendments in the Bill, aside from language changes. Legislation changes happen quite often, but for now the Treasury does not see the need to change the Bill.

Mr Botes said the Reserve Bank published a discussion paper on flac, which may be amended.

The Chairperson said he hoped there was not a subconscious inclination to ignore what people were saying. He asked the Committee’s research team to consider this.

Ms Conway said the current curatorship in the Banks Act allows for netting, repose and securities lending. There is no intention to change this. The way the Bill is carved out, does not allow for securities lending and repose actions. The easiest way to amend this is to mention that it is not only derivatives held by either party. This should be a simple fix. She asked whether securities agreements and repurchase lending would be treated differently from derivative transactions. This means that the green netting status for these product types would be lost.

Mr Parks said the responses were helpful. He raised concerns over the employees of a bank whose salaries become liquidated.

The Chairperson said the Committee would consider the points made.

Mr Ryder said he was not convinced by National Treasury’s counter arguments. He welcomed the submissions made and said he was not convinced National Treasury had responded properly on the more nuanced definition changes. This was important because of the changing space of derivative transactions and online offerings that are coming to the fore. Our fingers must be kept on the pulse and today’s insights should be considered.

The Chairperson said civil society had every right to be present and that their contributions were valuable. He said there was an element of truth to what Mr Momoniat has said. He found it hard to believe that the National Treasury could dismiss the consistent use of terms and asked it to reconsider this. He asked why the Department of Justice was opposed to changes on the Insolvency Act. He said that civil society is correct when they are concerned that National Treasury continuously says issues will be dealt with in the next Bill. He asked what the difference was between BASA and the Reserve Bank. He asked the National Treasury to meet with BASA and submit a report on the differences and how this will be bridged.

A National Treasury legal representative gave her input on the matter. (Recording stopped due to technical glitches; ten minutes missed.)

Mr Momoniat said there are better ways to deal with technical issues and the process needs to be improved with industry associations. He said these issues would be considered and dealt with.

Mr Ryder said he did not think Mr Momoniat was getting the point. One can negotiate with BASA, but there is an opportunity available for an entity to come to a forum like this if it feels its issues are not getting the recognition they deserve. The National Treasury has been accused of being arrogant before. Politicians have a very different role from administration and can decide which way it feels the Department should be going. This is exactly the correct environment for stakeholders to intervene. This process needs to be respected in its current form and BASA can use the opportunity to influence the thinking of the Committee so that it goes through Parliament. He emphasised that this process must be respected.

The Chairperson said he agreed with Mr Ryder.

He thanked all present from civil society and National Treasury for attending the meeting.

Committee minutes

The Committee considered its draft minutes for 17 and 24 August 2021.

The minutes were adopted.

The Chairperson made brief closing remarks.

The meeting was adjourned.