Cooperative Banks Bill [B13-2007]: National Treasury response to public hearings

FINANCE PORTFOLIO COMMITTEE
31 August 2007
COOPERATIVE BANKS BILL: NATIONAL TREASURY RESPONSE TO PUBLIC HEARINGS

Chairperson: Mr M Nene (ANC)

Documents handed out:
Summary of responses by National Treasury to public comments
Proposed Tax Dispensation For Co-Operative Banks
Co-Operative Banks Bill [B13-2007]

Audio recording of meeting

SUMMARY
National Treasury detailed the comments made in oral and written submissions to various clauses of the Cooperative Banks Bill and gave their responses to these. The submissions had been wide-ranging, although some organisations had repeated similar comments, and this was indicated in their response document so that it was not necessary to respond to each point individually.

National Treasury confirmed that coop banks would have to comply with other banking legislation if they reached certain thresholds, but the principle was that the coop banks would know their customers, that all were members, and that some leeway would be given. They would be given taxation exemptions and be able to apply for assistance with deposit insurance premiums and audit fees while they were still building up.
The primary purpose of the Agency was to give viability and support. The primary purpose of this Bill was to deal with cooperative banks, and therefore other comments in relation to coops generally, or to regulations under other Acts, would not be addressed in this Bill.

Clarity was given on the primary, secondary and tertiary banks, which could not convert from one to another. There was confirmation that no payroll deductions would be allowed. In line with comments received, Treasury would be amending the definition of members and Executive Officer, as well as the phrase "sustainable market conditions" wherever this appeared. The name of the "supervisory committee" would be changed to "governance committee" but both it and the audit committee would run together. There would be some amendments to the National Payment Systems Act. Clause 23(1)(a) would be deleted, and clauses 24 and 25 amended. Proposals made by the Reserve Bank were agreed to. There would be an amendment to Clause 14(1)(c) to clarify that borrowing did not include deposits. There would be a consequential amendment to the Competition Act to allay the burden that would otherwise be placed in respect of mergers. The functions of the Agency in the Bill would be amended.

Members raised queries on the application of other legislation, deposit insurance, appropriate exemptions, the possibility of a ceiling for these, remuneration being decided by the coop banks themselves, and conversion of private to cooperative banks, and the powers of the Supervisor. Further queries were raised on suspensions and de-registrations, the application of the National Credit Act, affordability of premiums. It was noted that the Portfolio Committee on Trade and Industry was also following discussions, in relation to any changes that affected the Cooperatives Act.

MINUTES
National Treasury (NT) responses to public submissions
A representative team from National Treasury tabled a summary of responses to the public comments on the Cooperative Banks Bill, given both during oral and written submissions. Mr Nkosana Mashiya, Chief Director, Banking Department, Ms Jo-Ann Ferreira, Chief Director, Legal Services, Ms Olaotse Matshane, Director, Banking Department, Ms Koko Monama, Senior Executive, Banking Department and Ms Raadhika Sookoo, Director, Financial Stability, addressed the various clauses and discussed the responses. Mr Mashiya noted that many of the comments had been useful in identifying possible loopholes or areas for improvement.

Business Unity South Africa (BUSA) / Chambers of Commerce and Industry South Africa (CHAMSA) noted that the regulations must be strong and not dilute good governance or accountability measures.

The Banking Association and other bodies had asked if Cooperative Banks (coop banks) would have to comply with the Financial Intelligence Centre Act (FICA) the Financial Advisory and Intermediary Services Act (FAIS), and the National Credit Act. NT confirmed that they would have to comply with FICA, and the National Credit Act, according to prescribed thresholds, and that FAIS would apply if a coop bank rendered financial services as defined in that Act. A query was also raised on taxation. NT explained that before 2006 cooperatives were taxed like other businesses. In 2006 it was proposed that their status follow small businesses, so that simplicity, fairness, economic efficiency, revenue and buoyancy were being taken into account. Coop banks were unique because of the deposit taking, which involved a risk. Therefore they were subject to the same prudential requirements as commercial banks, to strengthen solvency and give them support and NT recommended an amendment to Clause 55. However, while the banks were still building up to solvency, NT believed they should be tax exempt, and not allowed to distribute. Once the prudential requirements were met, they coop banks should be taxed like other cooperatives. The reserve fund stipulated under Clause 20(d) would be related to the provisions of the Cooperatives Act. Not all the money would be kept by the Bank - a portion would go to the Agency, and this proposal would be submitted to SA Revenue Services for a tax policy.

The Chairperson asked if these comments would apply to all those who had raised the tax issue.

Mr Mashiya confirmed this was correct. He would not deal with every comment individually but would refer to these comments whenever this issue was raised subsequently.

Ms Ferreira added that the primary purpose of the Agency would be to ensure viability and support.

The Congress of South African Trade Unions (COSATU) and National Education, Health and Allied Workers Union (NEHAWU) had queried the relationship between the cooperative banks and the general cooperative set-up, and pointed out that the Bill only referred to natural members and did not include stokvels and agriculture cooperatives. NT accepted the comment and suggested the definition be changed so as not to limit members to natural persons. The definition of Executive Officer would also be amended, in response to a query by COSATU, to clarify that the Executive Officer would be employee of a coop bank reporting directly to the Managing Director, and that they be appointed and not elected. It also agreed that the word "market" be removed from the phrase "sustainable market conditions" wherever this appeared.

COSATU was s concerned that stokvels and village banks would not be able to register, but NT indicated that it was not their intention that they must register, although they were welcome to approach the Agency who should support them. In response to the suggestion that coop banks should set up an internal democratic way to operate, NT indicated that this Bill was already cross referenced to the Cooperatives Act.

COSATU suggested that there should be provision in Clause 28 for the conversion of a primary into a secondary, and secondary to tertiary bank. NT believed that the concept of secondary and tertiary cooperative banks was misunderstood. There was in fact no conversion process; secondary banks were formed by two or more primary banks. A further comment that representative bodies should not have to be cooperatives was supported and the registration requirement would be removed by NT. COSATU requested no, or a small, fee for application, and fees to support organisations. NT confirmed the fees would be kept low, and would only cover administrative costs.

COSATU questioned the benefit and support to attach to a representative body, and NT clarified that there was no benefit to the representative body, but the Bill was intended to create protection to the coop banks represented. COSATU suggested the Bill should include the promotion of relationships between coop banks and the cooperative sector. NT stressed that the purpose of the Bill was specifically for coop banks and the Agency was obliged only to look after this sector. COSATU also suggested that appointments to the Board should include representivity from registered representative organisations. NT felt that the Minister calling for nominations from the public was sufficiently transparent.

COSATU suggested that coop banks should be able to deduct from payrolls. NT wanted to remove payroll deductions in the long term. The entire scope of this legislation was seeking to promote responsible lending practices by the banks, and the fact that taxpayer money was being put into training was enough to assist them.

Savings and Credit Cooperative League of South Africa (SACCOL) had also requested a change to the definition of executive officer, and suggested that "appointed" contradicted the principle of election of members. NT said that the definitions between this Bill and the Cooperatives Act were aligned. SACCOL queried the position of stokvels. NT said it was not the intention of this Bill to register every stokvel or small savings club, unless they wanted to become a coop bank, in which case they could apply and be assisted in meeting minimum requirements. Those minimum requirements were there for protection and should not be lowered.

A suggestion was made by SACCOL that "audit committee" be substituted with "supervisory committee". It was true that this had not been defined. However, NT felt that there was a need for two separate and defined committees, as the supervisory committee would not deal only with regulations. It would be renamed the “governance committee”. Both were necessary. Further concerns about the cost of registration were not applicable because the certificate need not be registered.

Ms Ferreira noted that NT would accept proposed amendments to the National Payment Systems Act (NPS) to meet the concern that there was no provision in the Bill for secondary and tertiary banks to access and participate in services provided by accept to the NPS.

SACCOL had commented that clause 20 should deal with treatment of shares, but on treatment of shares, and Ms Ferreira explained that the regulations would prescribe that a certain proportion could not be withdrawn. SACCOL also commented on large exposures under Clause 23(1)(a). NT recommended that clause 23(1)(a) be deleted, but Clause 23(1)(b) would not need to protect the bank from large investors. One person, one vote would apply. The supervisor could stop capital withdrawals that threatened the stability of the banks. The suggestion that Clause 23(3) and (4) be amended was also not necessary.

SACCOL proposed that clauses 24 and 25 should stipulate simply that the deposit insurance contributions as prescribed by the Minister should be paid. The remainder was a duplication. NT agreed to amend this.

SACCOL also said the distinction between a representative body and support organisation was not distinct. The Bill should clarify this. NT believed that clause 55 already covered this, and this was explained in the summary. Insurance schemes that were working well would not be precluded.

SACCOL then suggested that regulations not be based on rand values of R20 million as a threshold. NT did not agree. The Bill sought to regulate functions and nothing else. Under prudential regulations, a primary coop savings bank would not be bound by the regulations, as they did not apply to one who did not trade in financial instruments. A secondary coop bank that had a licence, but chose not to trade, would not have to comply with the regulations. The same kind of principle was being applied here.

Under Clause 32 and 37, SACCOL suggested that there could be proliferation of support organisations, and that five coop banks should form a representative organisation. NT did not agree; there was a practical reason why only two were named. SACCOL suggested that the regulatory authorities be compelled to negotiate agreements. NT felt clause 42 adequately dealt with this.

SACCOL then suggested that there must be separation of duties. The Bill said that the Agency would be a wholesale agency. This could lead to practical difficulties, and thus NT proposed that there should remain the option to obtain private service providers.

SACCOL had also suggested amendments to Clause 55, but NT pointed out that some primary coop banks did not belong to secondary or tertiary banks, and thus these would not be assisted if clause 55 were amended. The circumstances of failure would also need to be looked at; NT took the view that if a bank failed to use the opportunities for assistance or training, NT should be under no further obligation to them.

Further comments on registration, representation and on clause 55 had already been addressed. SACCOL suggested that 49% of the Board form representative bodies, similar to other suggestions. NT did not agree and said the nomination purpose must apply. A suggestion that the remuneration of the Board be in the Bill was not supported.

SACCOL also suggested taxation dispensations to assist banks to reach the minimum prudential standards. NT indicated that although taxation dispensations should be available, the notices were issued under the Banks Act, and could not be dealt with under this Bill. Similar comments to COSATU were also raised under payroll.

Discussion
Mr S Asiya (ANC) said that on 4 September the Committee should be dealing with the Bill. A crucial issue was that of FICA and the Department had indicated that this was still under discussion. It was not clear what was going to be recommended. There seemed to be nothing to indicate whether this would be in the Bill.
National Treasury had said that coop banks would become accountable institutions but the specifics of compliance were still being discussed.

Mr Nene pointed out that the schedule would cover the cooperatives.

Mr M Johnson (ANC) believed that there were other processes too that were inconsistent with this. The Committee programme did not reflect other new laws coming up that dealt with deposit insurance, and this Bill related to that. He wondered how this would be balanced against the other new amendments.

The Chairperson said that all the proposed amendments would be contained in the new draft. Those relating to other Bills would require consideration whether this Bill should await other amendments.

Ms Ferreira added that the FAIS legislation would apply. The regulatory regimes of FICA would apply if the financial institution was registered, but because these were coop banks, the members of the bank would be known to each other, and thus NT did not believe that it was necessary for members to have to produce utility bills, especially since many would be based in rural areas. The Minister had authorisation under FICA to prescribe details. The consequential amendment to the NPS Act would ensure that this legislation fitted into in the broad legislative scheme. All amendments had also been discussed and negotiated with the Department of Trade and Industry (dti) who administered these Acts, and with SARB, who was involved in implementation.

The Chairperson indicated hat deposit insurance was not included.

Mr Mashiya noted that NT was creating a different tier of cooperative banks in this Bill. One the one hand would be commercial banks and on the other deposit banks. One system would not cover both. Built into the concept of coop banks would be built-in insurance. Coop banks having their own members must have their own deposit insurance, and commercial deposit insurance would not be used to bail them out.

Mr Asiya felt strongly that there should be compliance of cooperative banks with FICA. If one coop bank was not complying, then there should not be a loophole. It would need to be legislated for in the near future, if not included now.

Mr D Gibson (DA) asked, in relation to the FAIS question, what kind of exemptions would be appropriate, and why it would be unnecessary for cooperative banks to apply.

Ms Ferreira replied that it was important to note that there were specifics on how compliance with the other Acts would occur. Once the Bill was promulgated into law, the Minister would be requested to list in Schedule 1 the details alluded to here.

Mr Johnson asked again when the new laws were likely to be introduced to the Committee.

The Chairperson indicated that the Committee would look at this Bill, with or without amendments, on 4 September.

Mr Johnson referred to the comments on the COSATU submissions. COSATU was more interested in savings and requested clarity on deductions from payrolls. The response from NT spoke to responsible risk management policies.

Mr Mashiya said that this was correct; however the difficulties around allowing savings for deposit taking was that the long term insurance association had also been seeking payroll deductions for life insurance, which NT had consistently refused. If payroll deductions were allowed here, then they must also be allowed for life insurance. There would be massive administrative responsibilities, and NT still maintained that payroll deductions should not be allowed. He took the point that responsible risk management was perhaps not entirely relevant to this issue, as the comment might have seemed to suggest.

Mr N Singh (IFP) referred to the proposed tax dispensation. He said that although it was necessary to have a favourable tax regime for a development Agency, he wondered if there would be particular time frames, or if this was merely open-ended. In Spain there was a ten-year ceiling.

Mr Matshane noted that the Agency would have an important role in developing village banks and assisting them to become self-supporting. This would be discussed still with SARS. If they were able to work well, then there was no reason why they should not be given assistance. Perhaps a cap of three years should be put on the special dispensations.

Mr Singh also said that this was a new Agency and maybe in its evolutionary stages it needed sector specific representation.

Mr Singh also wondered whether remuneration should be decided by the coops themselves.

Mr Mashiya said that the remuneration of the Board must be clarified. The remuneration referred to was that of the Agency. Private coop banks must determine their own remuneration, and this would be dealt with in their own constitutions. There seemed to be some misunderstanding.

Mr K Moloto (ANC) noted that there seemed to be a question by COSATU not responded to. COSATU had suggested that there should be provision made for conversion of a private bank into a cooperative, especially for those private banks in trouble that needed to be assisted. The response by NT had spoken only of conversion of primary to secondary banks.

Mr Mashiya said that there was seemingly misunderstanding concerning conversion of a private to coop bank. There seemed to be not a thorough understanding by COSATU. There were different systems that applied to private and coop banks. One type of bank wanting to convert to the other would have to first de-register, and then apply for a licence under whichever legislation applied. The governance requirements and supervisory frameworks were different and one would not be imposed on another.

Mr Moloto agreed with NT's response to SACCOL in relation to large exposures, that the supervisor could stop withdrawals that would threaten the security of the Bank. He wondered if Clauses 23(b) would empower the supervisor to do this, or if it was covered under general powers.

Mr Mashiya said that it was not specifically mentioned that the supervisor would have the power to stop withdrawals, but he was given a wide discretion. No thought had been given to whether it would need to be specified that he would have the discretion. NT was comfortable with the broad powers and this was enough. It was in his interests to stop huge withdrawals and he would have that power.

Mr Asiya raised the question of the governance committee.

Mr Gibson also noted that the supervisory committee would be renamed as the "governance committee". He wondered if the references to the "supervisor" would also be changed.

Mr Masiya said that the Bill had not set out the position of supervisory and governance committees clearly. The supervisory committee would be a board committee to oversee that the board performed its functions under the constitution of the Bank, the Cooperatives Act and this Bill. Therefore the term supervisory" was confusing, and its name would be changed to "governance committee", which was a more descriptive name. In that clause, the functions of the governance committee would also be spelt out so that it was clear that it filled an oversight role. Current practice at the moment was that because there was no regulator, the Boards of the Cooperative Banks had been running a long time without governance. Although COSATU suggested that the audit committee and the supervisory committee be merged, NT believed that they had separate functions.

Responses to submissions: continued
Standard Bank had also enquired whether it was not intended that Coop Banks should comply fully with FICA, whether information furnished by the Supervisor in relation to suspicious transactions would be subject to or excluded from FICA confidentiality provisions. Standard Bank also queried whether coop banks could enter into joint ventures with commercial banks, and what would be the impact of failure. NT confirmed that they could, and that the NPS could exclude the bank to minimise failure. Standard Bank queried the definition of a secondary cooperative, and NT confirmed that coop banks could register as tertiary coop banks. Suspension of a bank was queried, and NT noted that this was already included in the definitions and addressed under Clause 11. A further query related to the opening of a foreign currency account, and whether the Exchange Control Regulations would apply. NT was proposing an amendment to state that the coop bank should open an account with a commercial bank. If accounts were held for coop banks, it was queried whether this Bill should not cover the question of fees charged to the coop bank. NT did not believe that this provision belonged in this Bill, which was intended only to cover charges by coop banks to their own members. It was confirmed again by NT that in an intermediary role the coop banks would be subject to FAIS Act. Queries raised under clauses 25 and 26 were already answered by the responses to SACCOL.

The South African Reserve Bank (SARB) had also made proposals, and NT and SARB had already discussed these and had agreed that all the amendments proposed by the SARB would be included in a new draft. These related to the definition of the different tiers.

The University of Pretoria had raised a number of points of principle. NT had responded to their fears on the frailty of coop banks by confirming that the Agency and the support organisations would assist banks, would be able to carry their audit costs for a limited period on a case by case basis. In respect of the deposit insurance, the Agency would also fund the premium on a reducing sliding scale. Queries raised by the University in relation to Clause 7 and 3 had already been addressed, and the call for speedy dissemination of regulations was supported. Various technical comments were made on the wording of the Bill (see pages 18-20 of attached document. NT would also effect an amendment to clause 14(1)(c) to clarify that borrowing did not include deposits. NT supported the suggestion that limits be imposed on loans to directors, but thought this should be in the constitution and not in the Bill. The delegation should not be restricted to those in the same organisation, and there were sufficient checks already in answer to queries raised under Clauses 46 and 57. Amendments for further clarity would be made to clauses 73 and 77(2).

Yebo Cooperative Ltd's queries had mostly been dealt with in other responses. It submitted that there was too much regulation and that coop banks would find it difficult to comply with the Bill. NT did not agree; it believed the Bill was proposing only such regulations as were necessary in terms of cooperative principles and prudential regulations. Appropriate regulation would protect depositors while enhancing the growing coop banking sector. The Bill did not exclude the banks from decision-making. Comments on Chapter III and clause 13 were not clear. The suggestion that the bill allow for deposit taking from non-members was not supported as it ran counter to the principle of a member-based bank. Questions on governance and supervisory boards had already been answered. NT stressed that this Bill was intended to be limited to the coop banks only and would not address other questions already covered in the Cooperatives Act.

Thomas Mathew suggested that NT seek assistance from the department of cooperatives, Kerala State Government, India and had also offered to assist.

The Competition Commission hoped that the Bill would increase competition in the banking industry. It raised a query under clause 8(2) but NT believed that clauses 7 and 8 sufficiently guided the exercise of discretion of supervisors, which was closely allied to the Registrar of Banks' discretion and the Financial Services Board. Other queries related to proposed amendments under the NPS Act, offering of transaction services, and conducting of additional services under clause 14. The Commission also called a good working relationship with the Supervisors, recognising that the Commission's own jurisdiction over banks was limited. Clause 53 already covered this point. It also suggested that a consequential amendments to the Competition Act would align the position for banks and coop banks in respect of mergers, as the requirement to pay R250 000 to the Commission for a merger could be very burdensome on coop banks. The Commission had asked if coops could enter joint ventures, and the answer was that they could, but levels of infrastructure and capacity must be raised. Activities stipulated under clauses 14 (1)(g) and (h) could only use a joint venture. The nature of the NPS had also been raised and it was pointed out that the impact of failure was the same as that of the commercial banks.

Mr de Villiers had made several comments, but he may have misunderstood the purpose and objectives of the Coop Banks Bill, as it appeared that he had conceived of the Agency as a coop bank that would operate in a similar way to Land Bank. Some of his comments were valuable, and had been taken into account from a principle point of view.

Discussion
Mr Asiya asked for further clarity on the submissions of the University of Pretoria, and whether the response by NT would be included in the Bill or in regulations.

Ms Ferreira that NT supported the comment that the Agency should assist and this would be done by amending the functions of the Agency in the Bill.

Mr N Singh (IFP) asked about publication, raised by Standard Bank, in relation to suspensions. He pointed out that all official notices were published in the Government Gazette, but this would not necessarily reach rural areas. He wondered if publication in a local newspaper should not be included.

Ms Ferreira noted that there would be a distinction between suspension and de-registration. De-registration was not of concern. The conditions of suspension would be determined individually, and consideration would be given to other interests, whether the bank would be able to continue taking deposits, and other matters. It was important to retain discretion and not to be too prescriptive in the Bill. The Interpretation Act stated that all decisions of government must be published in the Government Gazette. An additional requirement for publication elsewhere might be too onerous. The Agency had support and regulatory functions and it could make the members of the coop bank aware of the situation.

Mr Singh noted that mention was made of a limit of 10% in relation to lending, but he asked what would happen in the case of reckless lending. A commercial bank would have large reserves to fall back on, but this would not apply to a coop bank.

Ms Ferreira noted that the Bill would be subject to the National Credit Act, so that the coop bank would be prevented from lending more than 10%, but still subject to the National Credit Act. If the deposit base was R1 million and one depositor wanted to borrow R101 000 he would not be allowed to do so. If he wanted to borrow R100 000 he would be allowed, provided that the other conditions were met.

Mr Singh wondered if the premiums for the insurance would be affordable.

Ms Ferreira noted that the coop banks would be exempt or given assistance until fulfilling the three requirements to prove liquidity. It was accepted that reserves would be built up over time, and only then would the coops become fully responsible for expenses. The premiums for insurance were in any event not large, being around 3% to 5% of deposits.

Mr Johnson wondered if a presentation should be made by the SA Reserve Bank

The Chairperson said that the SARB had given a written submission so the request for an oral submission was withdrawn.

Mr Johnson asked if the Committee should not also meet with the Department of Trade and Industry or the Portfolio Committee on trade and industry in relation to the Cooperatives Act and its correlation with this Bill.

The Chairperson indicated that the Trade and Industry Portfolio Committee was being kept fully abreast of discussions in this Committee, and he felt it was important to confine discussions to this Bill. Any changes to the Cooperatives Act were contained in schedules. If there was a need to clarify the relationship between the Bill and that Act, this would be done ad hoc.

The Chairperson said that the Committee would meet the following Tuesday to commence clause-by-clause deliberations.

The meeting was adjourned.