Banks Amendment Bill; SA Reserve Bank Amendment Bill; Financial Services Board

Meeting report

PORTFOLIO AND SELECT COMMITTEES ON FINANCE
16 August 2000
BANKS AMENDMENT BILL; SOUTH AFRICAN RESERVE BANK BILL: BRIEFING; FINANCIAL SERVICES BOARD: ANNUAL REPORT

Documents handed out
Banks Amendment Bill
South African Reserve Bank Amendment Draft Bill
Presentation by the Financial Services Board
Annual report by the FSB

SUMMARY
Delegates from the SA Bank Council took the committee through the Banks Amendment Bill, now tabled in Parliament, and the South African Reserve Bank Amendment Bill.

The South African Reserve Bank Bill has not been certified by the law advisors yet. Only one amendment is being proposed to the principal Act. The Deputy Governor of the South African Reserve Bank is going to visit the parliamentary committee to explain the proposed amendment to the South African Reserve Bank Act.

The Financial Services Board highlighted a few upcoming Bills in their presentation.

MINUTES
Advocate Blackburn (from the SA Bank Council), Advocate De Jager (head of Legal Services of the SA Bank Council, and Mr Malan (from the Department of Finance) were present to take the committee through the two amendment Bills.

Banks Amendment Bill
This Bill has been certified by the law advisors. There was not a separate discussion session as committee members raised questions as they arose.

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.

Banking group
The panel provided an example: there is a controlling company in terms of the Banks Act. There are other companies (such as an insurance company) under this controlling company. They could have establishments throughout the world which are controlled by the home country supervisor.

Questions:
1) Dr Davies (ANC) related his question to the above example: a SA bank has subsidiary banks in other countries. Does the SA bank have control over all of the subsidiary banks? Do these subsidiary banks have capital? What if the head office is in Europe, do they have to meet the requirements of both regulators.

Adv Blackburn replied that the SA bank will be the home country supervisor. The branch of the SA bank in the other country will accept responsibility as the host supervisor. They must meet the requirements set out in the regulations of the banking council. If it is a foreign bank with a branch in SA then SA will accept the host supervisory position.

Capital will be calculated on the basis of the banking group. In the example the capital base of the insurance company will also be part of the minimum basis for the calculation. (The insurance company will also be regulated by the FSB).

2) Mr Andrew (DP) referred to the definition of banking group, specifically the requirement in the definition that the group must be ‘’predominantly engaged’’ in financial activities. An example of the problem it can create: a big mining house (the holding company) has a smaller insurance company subsidiary. The group is predominantly involved in mining but two or more juristic persons are engaged in financial activities. Therefore the group is not ‘’predominantly engaged in financial activities’’. What happens then?

He also asked what would happen to the subsidiaries (in light of the fact that they are also juristic persons [their own legal entities]) if the majority shareholder gets into trouble. Does the bank also get into trouble?

He then referred to the definition of ‘’banking group’’ and its wording ‘’financial difficulties’’ and ‘’all ……adversely affected’’ in clause 1(b). Mr Andrew thought that the effect of this clause was that if the bank is in difficulty then ‘’all’’ (meaning depositors, clients with overdrafts, and even other companies which are customers of the bank) could be adversely affected. He asserted that the phrasing was very wide.

Finally he commented on the term ‘’branch of a bank’’. He said that ‘’branch’’ has a definition, and ‘’bank’’ has a definition. The two terms are often used independently of each other but now [two separate concepts] were linked to make one definition. He asked if they could not ‘’handle it in a different way’’.

Advocate Blackburn replied that risk is part and parcel of financial activities. Shareholders put in risk capital when they buy shares. Whatever happens to the shareholder does not affect the institution because the money that the shareholder has invested in the institution is already there. The only effect on the shareholder in the event of an institution going down is that the shareholder will get no returns. Thus, if the bank gets into trouble it will not affect shareholders in the way that Mr Andrew was suggesting.

Section 37(7) of the principal Banks Act gives a clear definition of ‘’interconnected persons’’. An example of such a link is control and shareholding. These are the persons who will be adversely affected. Thus, there must be a link as envisaged in section 37 for the other institution to be ‘’adversely affected’’.

3) The Chairperson asked what effect there would be on the banking company if the shareholding company went under.
The panel replied that if the bank loans to its holding company as a customer then the bank goes down if the holding company goes down. There is a major financial risk.

Mr Andrew noted however that with many banks their holding company is not their main customer (the amount they can loan to a holding company is limited).

The reply was that the definition of banking group was inserted to control risk.
With this definition they can put down in the regulations that the bank should set some money aside in the event that financial difficulties arise.

The Chairperson said that the purpose of the Bill is to set money aside in the event a shareholding company of the bank goes under. She said that she did not want to dwell on this issue and the panel continued with the briefing.

Branch of a bank
The panel drew a distinction between a branch of a foreign bank in SA and a branch of a SA bank abroad. Prior to 1994 a foreign bank in South Africa had to register as a separate company (from the holding bank). Since 1994 it has been possible for them to operate as branches of foreign based banks or as separate companies. In light of the option, banks seem to prefer operating as branches.

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.
The 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.

Question : Dr Davies asked what the motivation was for doing this.
Advocate Blackburn replied that he did not understand it well enough to explain it. He suggested that the committee get an economist to explain it to them. He did say however that the grounds for doing this were ‘’good grounds’’
The USL is safe because it is only paid at the end if there is money over.

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.

Questions:
Mr Andrew noted that the wording seemed to exclude the potential buyer who asked for the report from having access to the information.
Adv Blackburn replied that disclosure necessarily entails giving the information to the party who commissioned the chartered accountant. He said that if the committee wished they could draft it more clearly.

Dr Rabie (NNP) asked if the due diligence report was in line with international standards (specifically in light of corporate takeovers).
Adv Blackburn replied that the procedure of asking for due diligence was international practice. It is only done with the consent of the institutions involved. Therefore with a hostile takeover one will not have this report. It usually takes place between consenting parties.

Ms Taljaard commented that the Promotion of Access to Information Act had precedence over the present Act and in terms of its horizontal application one could access information. She asked for an opinion on this.

The reply was that to every rule there is an exception to the rule. The exception applies in this case. No person has the right to all information where the pubic good may be impeded. One cannot go into an institution’s due diligence report simply because one is a depositor in that institution.

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. 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.

Question: Dr Davies asked what would happen if a dubious international bank operated in SA under a different name. How would the consumer be protected.
The reply was that the Registrar will take such a background into consideration before allowing a bank to operate here.

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.

Questions:
Mr Andrew asked if it was desirable that the consent of the CEO and Board members was necessary for liquidation.
The response was that liquidation is an administrative action therefore there must be consultation. Section 69 works well except for the above needed amendment. Board members always accept that they are in difficulty. If they decline consent, then Section 60 (a liquidation order) is applicable.

Professor Turok asked how many banks have been liquidated in the past.
Adv Blackburn replied that there have been six in the recent past. These are advertised in the Government Gazette.

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.

Question: Dr Davies commented that the amount of 250 million rand would be a heavy deterrent to new entrants and asked why it was chosen. He asked if the amount was simply a random figure.
The reply was that if a bank is badly run then no amount of capital is enough. In the past the entry level amount was 50 million rand but in reality the Registrar did not register the bank unless there was more. Lack of capacity is not usually an impediment to a new bank.

Banks are public companies. They need infrastructure and personnel which are expensive. At grassroots level there is a more informal structure. Stokvels and community banks do not need this type of infrastructure applicable to formal banks. A mutual bank for example has an entry level of 10 million rand.

The Chairperson commented that it was disturbing that the 250 million rand amount is not linked to anything. She said that the Registrar of Banks should send a note to explain the rationale behind choosing this figure.

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.

Summary of points the committee wants clarity on
- how activities of holding company can impact on the bank
- how the 250 million rand entry level is arrived at

South African Reserve Bank Amendment Bill
It has not been certified by the law advisors therefore the briefing was informal. There is only one amendment.
In 1991 SARB decided that a minimum reserve balance was part of the monetary policy. The minimum reserve is that the bank must hold a percentage of exposure to the general public in an account with the Governor of the Reserve Bank. At the moment it is 2% cash in a non-interest bearing account. In determining monetary policy they can ask banks to put more in the account because they can increase the 2% (to adjust cash flow in the country).

Cash in vault is the amount that the bank has available at any point in time. The amendment allows government to calculate the percentage of vault cash from the amount held [in reserve]. It provides for flexibility for the Governor to arrange the spread of cash in the market and to organise the cash flow in market more efficiently. Banks have been negative in their response. They do not want any control by government of the flow of cash.

The deputy governor of SARB will come to Parliament to explain the amendment. on the 23 August. The committee agreed that they would also inform the banks of this meeting. They may make submissions if they wish to.

Question: Mr Feinstein (ANC) asked if it was international practice to calculate reserve amount in this manner.
The response was that internationally, vault cash is not even allowed to be subtracted (so the new SARB rule is not as strict as the international standard).

Financial Services Board
The Deputy Minister of Finance, Mr Mandisi Mpahwla, introduced Mr Jeff van Rooyen who has been the new Executive Officer of the FSB since the first of July. Mr Rick Cottrell, the previous EO was present as a member of the delegation from FSB.

In their presentation (see document), the Financial Services Board highlighted some upcoming bills. These include:
- Financial Advisory and Intermediary Services Bill – this will regulate the activities of financial services providers.
- Investment Services Bill – this will effectively consolidate and update all legislation relating to securities trading.
- Financial Institutions (Protection of Funds) Bill – this will replace the replace financial institutions (Investment of Funds) Act. It repeats some provisions of the existing Act but additional provisions aimed at consumer protection have been added.

The meeting was adjourned.