ATC150625: The Report of the Standing Committee on Finance on the oversight visit to the Johannesburg Stock Exchange and the South African Reserve Bank on 14 and 15 April 2015, dated 23 June 2015
The Report of the Standing Committee on Finance on the oversight visit to the Johannesburg Stock Exchange and the South African Reserve Bank on 14 and 15 April 2015, dated 23 June 2015
The Standing Committee on Finance has identified the reform of the financial sector as one of its main areas of focus for 2015. Key aspects of this include the Banks Amendment Bill, the processing of which the Committee has finalised, and the Financial Sector Regulation Bill, which is expected to be introduced later this year.
In light of the above, as well as the Committee’s duty to perform oversight over the entities that it is responsible for, the Committee resolved to conduct an oversight visit to the Johannesburg Stock Exchange, the South African Reserve Bank and the Financial Services Board between 14 and 16 April 2015. Due to the fact that the presence of Members was required in the House on 16 April 2015, the visit to the Financial Services Board had to be postponed to another date, still to be confirmed.
The delegation was made up as follows: Mr DDD van Rooyen (ANC) (leader of the delegation); Ms PS Kekana (ANC); Ms DG Mahlangu (ANC); Dr DT George (DA); Mr DC Ross (DA); Mr NF Shivambu (EFF); and Ms SJ Nkomo (IFP).
The delegation was accompanied by the following parliamentary officials: Mr A Wicomb (Committee Secretary); Ms E Grunewald (Committee Secretary); Ms O Siebritz (Committee Assistant); and Dr D Jantjies (Analyst: Parliamentary Budget Office).
- Johannesburg Stock Exchange (JSE)
- Engagement with Ms N Newton-King, CEO
The Committee was briefed by the Chief Executive Officer of the Johannesburg Stock Exchange, Ms N Newton-King. She reported that, for the past five years, the World Economic Forum’s annual World Competitiveness report has ranked South Africa first out of 144 countries in the areas of regulation of securities exchanges and the strength of auditing and reporting standards. The same report ranked South Africa second and third in the areas of the protection of minority shareholders’ interest and financing through the global equity market, respectively. According to the CEO, National Treasury and the Financial Services Board deserve some of the credit for this success. The delegation expressed concern that the report ranked South Africa only sixth in both the areas of the soundness of banks and of the availability of financial services, but was assured by the CEO that it was still an exceptional achievement for South Africa to be ranked sixth out of 144 countries. She added that, because of the scale and sophistication of banks globally, it would be extremely difficult for our banks to be ranked first. The CEO was of the opinion that our local banks were very well capitalised and well run. She found it problematic, however, that so few large banks serviced such a large population; and also that South African banks’ non-interest income (bank charges) were very high compared to the interest income they earned.
South Africa is in vigorous competition to attract investment, as this is a requirement for growth. South Africa has recently slipped from 52nd to 53rd place out of 148 countries in terms of global competitiveness. The CEO believed that being the gateway into Africa is an opportunity that should not be missed; and that it would be very unfortunate if another country, like Nigeria, unseated us while we have all the necessary infrastructure. She was of the opinion that policy certainty was needed in order to attract investment – “the more uncertain our regulatory environment, the less people will invest here.” In this regard, she believed that a very real commitment to the implementation of the National Development Plan was needed from each ministry, instead of each government department taking its own direction. Other impediments to investment included the energy situation; perception about our labour legislation and the onerous requirements or “red tape”, making it difficult to operate a b in South Africa.
Programmes like the Top 40 CEO Dialogue, the SA Tomorrow Conference, and the Building African Financial Markets seminars, all form part of the collaborative approach between the JSE and the industry to promote South Africa as a viable investment destination. The JSE plays the role of an enabler, bringing together business and government in a dialogue about positioning the country and tackling issues facing the country together.
The importance of finance in economic growth was also emphasised. Sustainable economic growth is core to achieving our country’s developmental goals. A growing economy means more jobs, more income, less poverty and a better standard of living for all. All sectors of the economy need capital to grow and government also needs capital to balance the national books and to invest in infrastructure, schools, hospitals and other public services. The financial sector links the need for capital to the supply of capital in all sectors.
During discussions around black ownership on the JSE, the CEO explained that the issue of ownership was nuanced. Shares on the JSE are predominantly owned by pension funds, with the GEPF being the largest investor in South Africa. These “mandated investments” or retirement funds own 29% of shares; while 39% of shares are held by foreigners and a percentage is owned by individuals and BEE schemes. Although share registers are completely open and transparent, shareholders can register in the name of any club and one has to double click on each of these to find out who owns it. The JSE team had gone line by line through 16 million entries in the share registers to determine black ownership and the CEO is confident that their statistic of 23% is accurate.
They had spent a lot of time with the National Economic Forum (NEF) discussing the different figures that each had come up with – 23% by the JSE and 3% by the NEF. The conclusion had been that essentially they had been measuring different things, but calling it the same thing. There had been agreement on what the makeup of the different answers were. The CEO indicated that she would value the opportunity to come to Parliament and talk the Committee through the maths and that the head of the NEF would most likely feel the same.
The CEO felt that transformation was not about changing ownership of a pie that does not grow, but rather about growing the pie. And at the moment, the pie was not growing.
The CEO further reported that they were working towards growing black-owned stock broking firms. Initially, stock brokers had not been included in the tax free savings plan introduced in the 2015 National Budget; but due to work done by the JSE, stock brokers were now included in this. They are ensuring that they are educating the public around investing in the stock market through, amongst others, games played by learners at schools and now also the general public. The participation rate of the general public in the stock exchange is probably less than 5% in SA, where in a country like Australia, it’s 45%. The CEO believed that one could increase the level of involvement significantly with a little education and financial incentive, due to the wide use of cell phones for example. There had been many good ideas around this, but they had not been followed through.
With regard to the impact of the African Bank failure on the banking sector, the CEO indicated that the ripple negative effect on other banks’ growth had been relatively small, as African Bank represented a very small share of the market. In the scheme of the banking environment, Capitec is much bigger and much more systemic, and even more so with the other four big banks.
- Listing on the JSE and market highlights
The Committee was briefed by Ms Z Jacobs, Director: Marketing and Corporate Affairs and Mr R Karuaihe, Manager: Commodity Derivatives.
The benefits of a listing on the JSE include access to deep pools of capital (debt and equity); a diversified shareholder base; increased visibility through research coverage and increased investor interest; inclusion in indices; and the fact that shares listed on the JSE are recognised internationally as valuable acquisition currency. There are two equity boards on the JSE: the Main Board and the AltX – the latter being established in 2003. The differences between the entry criteria for the two boards include the share capital (R50 million for the Main Board and R2 million for AltX); shareholder spread (20% for the Main Board and 10% for AltX); compulsory publication in the press for the Main Board, whereas it is voluntary for AltX; a smaller annual listing fee for AltX than for the Main Board; and the fact that all directors of companies on the AltX must attend the Directors Induction Programme, whereas there are no similar requirements on the Main Board.
Since the inception of the AltX, 117 companies have been listed there. There are currently 60 companies listed with a total market capitalisation of R22.4 billion. 28 Companies have been delisted, mostly due to the fact that they had been bought by other companies. Only three companies have been delisted because they could not comply with the regulations. The remaining 29 companies have migrated to the Main Board, and this was reported to be more than anywhere else in the world.
There has been a steady increase in raising capital since the economic crisis of 2008. The JSE saw 14% more capital raised in 2014 compared to the previous year and there was a 65% increase in equity capital raised for 2014. According to the World Economic Forum, the JSE was ranked third in the world for “financing through the local equity market”. The financial industry, which includes banks, insurance, real estate and financial services, accounted for 35% of the total capital raised in 2014. This was followed by consumer goods, contributing 24% of the funds raised.
Fas-track listings make provision for an accelerated process for international companies who have already been admitted to certain other accredited major stock exchanges for at least 18 months. The benefits include minimal once-off and annual costs and a streamlined process of joining the JSE which can take between three to six weeks. The process includes applying via a JSE sponsor and issuing a prelisting announcement.
A fairly recent development, is the listing of special purpose acquisition companies (SPACs) on the JSE. A SPAC is a company that lists publicly with a specific mandate to acquire or merge with other companies. It has no operations of its own at the time of going to market, so it is effectively a clean public shell. The benefits include minimised operating business risk; it effectively creates valuable acquisition currency for merger and acquisition transactions; it enables an attractive environment for risk-tolerant investors to promote the formation of capital; and it increases profile visibility and deal flow opportunities. Regulatory safeguards are incorporated that protect all parties throughout the SPAC process. The time frame for acquisitions is 24 months. If no acquisition is made, the net assets, ie cash, are redistributed to the shareholders.
The JSE has a large and active debt market. The World Federation of Exchanges has ranked the JSE the fourth biggest bond market by value traded in US dollars for 2012, 2013 and 2014. It was also the first African government bond market to be included in the Citigroup Bond Index in October 2011.
The derivatives market is only 20 years old. White and yellow maize are traded most on the commodity exchange. Approval has been granted by both Zambian and South African authorities for the JSE to partner with the Zambia Agricultural Commodities Exchange (ZAMACE) to offer commodity derivatives to the Zambian market.
- Issuer and Market Regulation
Mr A Visser, General Manager for Issuer Services and Mr S Davies, Director for Market Regulation, made presentations to the Committee on Issuer and Market Regulation.
- Issuer regulation: The JSE’s listing requirements are strongly biased towards investor protection. The aim is to ensure that full, equal and timeous public disclosure is made regarding matters that are price sensitive; to ensure fair and equal treatment between holders of the same class of securities; and to ensure that the requirements promote investor confidence. The enforcement of the requirements is both pro-active (approval of circulars and other documents prior to publication and pro-active monitoring of annual financial statements) and reactive (post-publication review of financial statements and announcements and investigation of complaints received or breaches identified.) The investigations unit’s mandate extends only to a breach of the requirements of the JSE. If a case goes beyond this, for example in the case of fraud, it is handed over to other law enforcement agencies, with which the JSE has a relationship. With regard to the African Bank situation, it was reported that debt would take precedence over equity. Senior debt holders had a lower yield for lower risk, and thus had earned their place ahead of subordinated debt holders. This is the way it works across the world. With regard to employment equity (EE), the unit has been fortunate in attracting new staff as the unit provides them with a very solid training ground and they are meeting all their EE requirements. The challenge is retaining the staff, as they are very mobile.
- Market regulation: In terms of the Financial Markets Act, the JSE is required to make arrangements for the efficient and effective surveillance of all transactions on the exchange; for the supervision of its members to identify possible market abuse and ensure compliance with the Act and the rules and directives; and for the efficient and effective supervision of its members to ensure compliance with the Financial Intelligence Centre Act. The key market regulation activities performed by the JSE are market surveillance; reviewing membership applications; monitoring capital adequacy; monitoring the safeguarding of client assets; reviewing business conduct; investigations and enforcement; facilitating dispute resolution; supervising anti-money laundering measures and making rules and directives. The JSE only has regulatory jurisdiction over its members in relation to its rules. Less serious offences are considered by a JSE disciplinary committee and serious offences are referred to an independent disciplinary tribunal. An Urgent Issues Committee can suspend a member’s activities pending a full investigation if the member poses a threat to the market or its client. The JSE, together with the Reserve Bank, are also represented on the Directorate for Market Abuse. The Directorate could refer cases for criminal prosecution and/or handle it administratively by imposing a fine.
- Public policy engagement
The Committee was briefed by the JSE’s Head of Public Policy, Ms N Labuschagne, on the JSE’s engagement on public policy, both nationally and internationally. On a national level, it was reported that the JSE has regular and constructive engagements with the Financial Services Board, National Treasury and the South African Reserve Bank. Internationally, the global financial crisis has led to an attempt to harmonise global regulatory responses overseen by the G20, and the establishment of the Financial Stability Board and the Basel Committee on Banking Supervision, among other global standard setters.
The Financial Sector Regulation (Twin Peaks) Bill, the G20 reform of over the counter derivatives markets and cross-border regulation and extra-territoriality was identified as the three most important policy issues the JSE is currently dealing with.
- Twin Peaks: The JSE believes that there is a mismatch between the intent of the policy and the way the Financial Sector Regulation Bill has been drafted. Part of the JSE’s problem with how the Bill is constructed, is that it doesn’t recognise the self-regulatory organisation (SRO) model, and that there is potential for duplication of regulations. According to the JSE, there has also been no real discussion on how all the new bodies and subcommittees envisaged in the Bill will be funded. The JSE made a submission on the Bill to National Treasury on 2 March 2015 and the engagement was very constructive. Another meeting to discuss the JSE’s comments has been scheduled for 7 May 2015. The JSE remains hopeful that there will have been proper consultation between the main stakeholders by the time the Bill reaches the Committee. However, they did express concern that the Bill is being fast-tracked, limiting the time to interact with all concerned. The CEO was of the opinion that a Bill of this size should not be fast-tracked.
- G20 reform of OTC derivatives markets: The G20 Leaders Statement, following the Pittsburgh Summit of 2009, stated that all standardised over the counter (OTC) derivative contracts should be traded on exchanges or electronic trading platforms; should be cleared through central counterparties (CCPs) and should be reported to trade repositories. Derivatives not cleared through a CCP should be subject to higher capital requirements. These reforms have required extensive engagement with National Treasury. The first draft of the subsequent regulations to the Financial Markets Act were released in July 2014 and the second draft is expected to be released soon.
- Cross-border regulation and extra-territoriality: The JSE had to apply for third country recognition with the European Securities and Markets Authority (ESMA) and were in a situation where they had to address frequent queries to ESMA around clarity regarding the application process. Very little information filtered through to the CCP in relation to the work being done by the European Commission (EC) once the application review was in progress. Despite its best efforts to engage with the EC, the FSB was kept at arm’s length during the EC’s equivalence assessment process. However, the EC and ESMA did acknowledge the appropriateness of our CCP design and risk management processes in terms of the functioning of the market it is meant to serve. An informal group comprising the JSE and South African banks engaged with the EC to highlight the negative impact that its regulation on indices used as benchmarks in financial instruments and contracts could have; and recent regulatory proposals have been made more flexible.
- South African Reserve Bank (SARB)
- Key points from Quarterly Bulletin
The Committee was briefed by Mr J van den Heever, Economist at the South African Reserve Bank (SARB), who highlighted the following key points from SARB’s March Quarterly Bulletin:
Global growth decelerated in the final quarter of 2014 as activity in the United States and India slowed significantly. International oil prices fell considerably in the second half of 2014 and January 2015, but recovered to around 60 US dollar per barrel most recently.
In South Africa, growth picked up in the final quarter of 2014, as mining and manufacturing output recovered from the lows caused by strike action. In the fourth quarter of 2014, final demand growth was subdued as household consumption growth continued along a slow path. Household spending on durable and semi-durable goods rose more firmly than on non-durable goods and services. There has been a modest increase in the household debt service burden, but it remains moderate compared with previous peaks.
Real gross fixed capital formation levelled off in 2014, with a modest pick-up in the second half of 2014 following a contraction in the first half of the year. There were modest increases in real inventories in the second half of 2014. Industrial action has been a significant hurdle to growth, with almost 12 million workdays lost in 2014. Underlying job creation remained disappointing, while the average remuneration per worker most recently rose at a year-on-year rate of 6.9%, which is higher than inflation. Petrol and food price developments most recently brought inflation down to 3.9%, but underlying inflation remains just below 6%; while inflation expectations as polled in the fourth quarter of 2014 remained close to 6% per annum. Looking ahead at South African grain prices, the food price developments will be less favourable.
Export proceeds have been impaired by weaker commodity prices. Nevertheless, South African export volumes have recently increased more rapidly than import volumes. The lower oil price has been helpful in reducing South Africa’s import bill, contributing to a narrowing of the deficit on the trade account, which also contributed to a smaller shortfall on the current account of the balance of payments.
Financial inflows were sufficient to allow for modest increases in foreign reserve assets in the final quarter of 2014, resulting in the official international reserves reaching a level equal to 4.7 months’ worth of imports most recently. The foreign financing obtained is reflected in an increase in South Africa’s foreign debt. The recent rand weakness is partly due to US dollar strength.
The March Quarterly Bulletin includes a section on structural and regulatory changes in the financial system. South Africa remains well below the average for upper middle-income countries with regard to the number of commercial bank branches per 100 000 adults; while we are well above the average with regard to the number of ATMs per 100 000 adults. Bank credit growth remains moderate, with firm growth in credit extension to companies but subdued lending to households. Benchmark interest rates have been stable since the increase of the repurchase rate in July 2014.
Bond yields fell in January 2015 as the oil price declined, but rebounded in February and March as some of the inflation-reducing forces reversed course. South African share prices remain in high territory. There is less stress in the real-estate market, but the conditions are still fairly quiet.
The weak economic growth is reflected in the sluggish collections of corporate income tax. Mindful of the need to contain government debt, the 2015 National Budget provides for expenditure limits and additional tax revenue. The public sector borrowing requirement is peaking and is projected to start easing relative to nominal GDP – government debt is projected to level off at less than 50% of annual GDP.
- Impact of currency volatility on economy
Mr J van den Heever also briefed the Committee on the impact of currency volatility on the economy. He reported that the demand and supply of foreign currency fluctuate with changes in, amongst others, export and import prices; export and import volumes; swings in international investor sentiment towards South Africa (often correlated with sentiment towards emerging-market economies generally); and speculative activity. Because currency volatility leads to corresponding volatility in the rand prices of imported and exported goods and services, the profitability of local production versus imports, fluctuates. This creates uncertainty which can lead to paralysis. It detracts from domestic capital formation, undermines the growth of businesses and holds back job creation. However, it is now possible to hedge against currency volatility up to several years into the future, through foreign currency forward contracts.
SARB uses the exchange rate of the rand against a basket of currencies to track the external value of the rand. The basket contains 20 currencies, the largest being the euro (29%); the Chinese yuan (21%); the US dollar (14%); and the Japanese yen (6%). Weights are based on trade in and consumption of manufactured goods. The index of the external value of the rand is called the effective exchange rate of the rand; and it is used by SARB to track changes in relative competitiveness of South African manufacturers over time. If the rand depreciates by 4% against other currencies, but South Africa had 4% inflation and the rest of the world 0%, the relative competitiveness of South African producers hasn’t really changed. The lower the real effective exchange rate of the rand, the more competitive South African producers are.
Although all currencies have fluctuations in their exchange value, the rand is more volatile than the US dollar and the euro. The rand volatility is, however, comparable with that of its peer group currencies, like that of Brazil, Chile, India, Korea and Turkey. Over time the volatility in the real effective exchange rate of the rand has moderated somewhat.
The market for foreign currency is very deep and liquid. The total turnover in the rand foreign exchange market in South Africa is 20 billion US dollar per day. The total forex reserves of SARB, built up mainly over the past 12 years, is just below 50 billion US dollar. The total stock of reserves is therefore equal to less than three days of trading in the South African foreign currency market. Furthermore, a lot of rand currency trading happens in foreign financial centres such as London and New York. South Africa’s experience has been that direct intervention in the foreign exchange market to stabilise the exchange value of the rand, was not successful. Reasons for this include the fact that the market is very big; participants may gang up against the authorities; and intervention can be very expensive.
However, no longer having an oversold dollar position in the forward market and having accumulated a significant quantity of gross reserves over the past 12 years, the local forex market is less jittery and has more balanced views, contributing to less volatility. Maintaining adequate reserves is an important element in promoting exchange rate stability, but reserve accumulation comes at a cost.
- Financial stability
The Deputy Governor of SARB, Mr F Groepe, made a presentation to the Committee on financial stability and the Reserve Bank’s mandate in this regard. Financial stability refers to a financial system that is resilient to systemic shocks, facilitates efficient financial intermediation and mitigates the macro-economic costs of disruptions in such a way that confidence in the system is maintained. Traditionally, the objective of the central bank has been price stability; with financial stability as the implicit objective. Following the global financial crisis, the bank’s mandate has been expanded to include the explicit objective of financial stability. According to the Twin Peaks implementation document, “… the South African Reserve Bank is now explicitly mandated to oversee and maintain the South African financial system’s stability.” The Financial Sector Regulation Bill, which is expected to reach the Committee before the end of the year, will give effect to this. In terms of this legislation, the SARB will share this responsibility with other regulators and stakeholders.
The key challenges for SARB in implementing the above, as well as plans to address them, include the following:
- Operationalising financial stability mandate
The framework for financial stability monitoring will have to be expanded and a toolkit of macro-prudential instruments developed for the Financial Sector Conduct Authority (FSCA). Research projects are underway on financial stability issues like interconnectedness and shadow banking.
3.3.2 Interconnectedness of financial sector
Spill-overs from the African Bank curatorship to money market funds have confirmed the interconnectedness of the financial sector. SARB has contracted an external consultant to construct a measure of this. The two deliverables of the project are the mapping of the linkages between banks and non-bank financial institutions in the sector; and developing a real-time monitoring tool for interconnectedness in the sector. The objective is to provide crucial information on financial linkages to the FSCA on a real-time basis.
3.3.3 Developing a top-down stress testing model
As part of the implementation of the IMF Technical Assistance Programme’s recommendations, a top-down stress testing framework must be developed. The technical capacity needs to be recruited and developed, including staff training. The liquidity and interconnectedness risks need to be integrated into the systemic risk surveillance framework. The stress testing model needs to be applied to the insurance, household and corporate sectors and Financial Management Information Systems (FMIs).
3.3.4 Establishing a systemic crisis resolution framework
Internal and external resolution policy working groups (including SARB, National Treasury and the Financial Services Board) have produced a Resolution Framework Policy Paper, which will be published as a discussion paper by National Treasury. This will be followed by workshops and consultations with the industry and other stakeholders. A Resolution Bill is expected to be published by the end of 2015.
3.3.5 Interaction between monetary policy and financial stability
Coordination with monetary policy is vital; as is the appropriate deployment and efficacy of macro prudential instruments.
3.3.6 Building necessary human resource capacity
Staff need to be recruited in critical areas and focused development and training of staff must take place. Staff will be seconded internally and externally for developmental purposes.
- Banking supervision
The Committee was briefed by Mr K Naidoo, Deputy Governor of SARB, on the Twin Peaks process and the African Bank situation.
The Deputy Governor indicated that the Financial Sector Regulation Bill was a very comprehensive piece of legislation of about 230 pages, and that its implementation was necessitated by the 2008 global crisis, where it became evident that many countries had insufficient regulatory systems. In terms of the Bill, the insurance supervision part of the Financial Services Board will move to the Reserve Bank and, together with the current banking supervision group, will form the heart of a new prudential authority. The CEO of the prudential authority will be a deputy governor appointed by the Minister of Finance, and the authority will have the following four divisions:
- Conglomerate supervision;
- Smaller banks and non-bank financial institutions;
- Policy, legislation and frameworks; and
The Deputy Governor expressed the hope that the legislation would be passed relatively quickly, but accepted that it was the most comprehensive architectural reform of the sector since the 1970s when the Financial Services Board was created.
With regard to African Bank, the Deputy Governor reported that in 2011 the Reserve Bank started seeing a significant increase in unsecured lending, by all banks, at high interest rates. Late in 2012, and early in 2013, year on year growth approached 11% of total bank lending. This rate of increase was worrying, so steps were put in place to slow it down with banks that the Reserve Bank regulates. There were also a lot of unscrupulous lending practices, which were not being adequately addressed. The Reserve Bank started forcing the banks who do more unsecured lending to hold more capital. In 2012, they started seeing rising losses in African Bank and Ellerines; which were owned by African Bank Investments Limited. The Reserve Bank then put African Bank under intense supervision; meeting with them on a monthly basis from August 2012. They couldn’t take over the management of the bank; but could only instruct it to do certain things and raise the level of capital it must hold.
SARB’s role with the collapse of African Bank, was to try to limit the fallout in the financial sector. Almost all banks and funds had debt or equity in African Bank. To limit the damage, African Bank was placed under curatorship and a statement was issued that it was going to be separated into a good bank and a bad bank – with a better probability of debt being collected by the good bank. Existing equity and debt holders were forced to contribute to the writing off of the bad book. People who had equity would lose about 90% and senior creditors about 10%. The subordinated debt holders would get 10 – 30% back. The amendment of the Banks Act will enable the separation of the good and bad banks and the movement of assets. The Deputy Governor expressed the hope that this will come into effect by July or August so that the good bank can be listed by the end of August. An application for a banking license has already been received from the good bank, but it cannot be processed as no list of directors is available yet. A consortium of five other banks, including Capitec, and the Public Investment Corporation has offered to buy half of the shares if they are not sold on the open market. The Reserve Bank will buy the other half.
So far people are paying their debts to African Bank relative to what was expected (40% for the bad bank and 85 -90% for the good bank). Government had to put up a guarantee, but so far there has been no need to draw on it. It will be another three to five years before the risk becomes apparent.
- Training programmes offered
Ms N Postma, Head of the SARB Academy, made a presentation to the Committee on the creation of the Academy; its purpose; guiding principles and learning philosophy; and the SARB skills framework.
Before the Academy was created, training was provided via the SARB College, which focused on central banking programmes and used lecturing as the primary delivery vehicle. This included the cadet programme. In addition, there was a Learning and Development Unit in the Human Resources Department which focussed on “soft skills”. An organisational review led to a rethink of this strategy, and ultimately to the formation of the Academy.
The purpose of the Academy includes the following:
- Equipping future leaders to navigate the Bank through its expanding mandate and the questions regarding the role and independence of central banks globally.
- Developing managers to be equally adept at optimising the motivation and development of the people who report to them as they are at managing the technical work of their functions.
- To develop a strong pipeline of well-rounded specialists in critical Bank roles with deeper specialist knowledge and skills; able to contextualise their role based on a firm understanding of the role of the Bank in a rapidly changing socio-economic and political context.
- Providing all employees of the Bank with opportunities to master their current roles and to grow and develop new skills that enable them to take up opportunities for progression as and when these arise.
The following are the principles guiding learning and development (L&D) at the Academy towards achieving the above-mentioned purpose:
- A strategic learning agenda for the Bank, across departments and branches.
- Effective coordination and integration of L&D across the Bank, while assuring responsiveness to the skills need of different departments and branches.
- Effective alignment of learning with business and specific role competencies.
- Increased accountability for L&D across the value chain – employees, line managers, senior management and the L&D function of the Bank.
- Strengthening of line managers’ and specialists’ participation in training and learning.
- Efficient and high quality learning delivery – modern approaches to learning delivery and assessment: simulated learning, structured on-the-job learning, blended learning, e-learning and self-directed learning.
- Skills planning and ongoing feedback loops from operations to training – demonstrable benefits by evaluating training impact for commitment and continuous improvement.
- Expanding on already established strategic learning design and delivery partnerships – universities, universities of technology, industry experts and the like.
The SARB skills framework can be set out as follows:
- Core leadership competence (School of Leadership).
- Core specialist competence (School of Central Banking):
- Economic research and policy
- Bank supervision and risk management
- Regulation and legal advice
- Reserve Bank systems
- Currency management systems
- Portfolio management.
- Enterprise and support/vocational competence (School of Operations).
- Core central banking competence (School of Central Banking).
- Core organisational competence (Various).
With regard to a previous undertaking by the Governor that SARB could structure training opportunities for Members, it was confirmed that Members could look at the Academy’s calendar and indicate what they would be interested in. If there is a specific training need that is not covered by current academy programmes, Members could indicate that.
- Exchange control and Mark Shuttleworth case
Mr E Mazibuko, Head of the Financial Surveillance Department (previously the Exchange Control Department), made a presentation to the Committee on exchange controls in South Africa and the Mark Shuttleworth claim.
The purpose of exchange controls is to prevent the loss of foreign currency resources through the transfer abroad of real or financial capital assets held in South Africa; and to constitute an effective system of control over the movement into and out of South Africa of financial and real assets, whilst simultaneously avoiding interference with the efficient operation of the commercial, industrial and financial system.
The Currency and Exchanges Act of 1933 and Exchange Control Regulations form the legal framework of exchange controls. The Exchange Control Rulings and Manual is the guideline document for each commercial bank licensed to deal in currency - also called Authorised Dealers (ADs). The purpose of the Department is to administer the exchange control system on behalf of the Minister of Finance and to supervise compliance by Authorised Dealers in foreign exchange with limited authority (ADLAs) in terms of the Financial Intelligence Centre Act (FICA).
With regard to the Mark Shuttleworth case, it was reported that an exit levy of 10% had been introduced on 26 February 2003, and subsequently withdrawn on 5 November 2010. Mr Shuttleworth emigrated in February 2001 and externalised capital in a number of tranches. He objected to the payment of a levy of R250 million on the last tranche. In a High Court application, he sought to have declared as unconstitutional a section, or alternatively certain subsections, of the Currency and Exchange Act; the entirety of the Regulations, or alternatively specific Regulations or sub-regulations; and the Orders and Rules under the Regulations. The following orders were granted in favour of Mr Shuttleworth:
- Certain sub-regulations of the Regulations were found to be unconstitutional, but the Court suspended the operation of its order for a period of 12 months in order for SARB and National Treasury to address this matter.
- Section 9(3) of the Currency and Exchanges Act was found to be unconstitutional, subject to confirmation by the Constitutional Court.
- The declaration was suspended for 12 months to enable the cause of constitutional invalidity to be corrected.
Salient details of the judgment delivered, included the following:
- The request to have the exit levy refunded with interest and/or to review the decision to impose the levy was dismissed.
- Section 9 of the Currency and Exchanges Act, the empowering section under which the Regulations were made, was upheld.
- The attack on the Regulations and Orders and Rules in its entirety, was dismissed.
- The administration of exchange controls via the Authorised Dealer network was found to be in order.
Mr Shuttleworth appealed to the Supreme Court of Appeal (SCA) and the State (the Minister of Finance and the Presidency) appealed directly to the Constitutional Court. An order by the Constitutional Court directed that the matter be stayed pending a determination of the Supreme Court of Appeal, where the judgment was delivered on 28 October 2014, as follows:
- Mr Shuttleworth’s contention that he was acting in the public interest was rejected insofar as he was attacking Regulations which did not affect him directly.
- The Court upheld SARB’s cross-appeal against the findings by the High Court of constitutional invalidity of the Act and Regulations.
- The Court upheld Mr Shuttleworth’s appeal in respect of the repayment of the exit levy on the narrow basis that it constituted a tax and could therefore not be lawfully imposed as a condition under Regulation 10(1)©.
SARB appealed the SCA judgment and resisted cross-appeal on the following grounds:
- The wrong decision was set aside by the SCA – the decision to impose the levy as taken by the Minister.
- The SCA made the order to repay against the wrong party – against SARB as opposed to the Minister.
- Imposition of the levy was not invalid as it did not constitute a tax and therefore did not have to follow the “money bill” procedure.
- The exchange control regulatory framework is not inconsistent with the Constitution.
Mr Shuttleworth appealed the SCA judgment and resisted the SARB/National Treasury appeal on the following main grounds:
- The Regulations as a whole, or alternatively certain specific Regulations and sub-regulations, are unconstitutional.
- The imposition of an exit levy constituted a tax and could therefore not be validly imposed under the Regulations.
- The exchange control regulatory framework is inconsistent with the Constitution.
The case was argued before the Constitutional Court on 3 March 2015, and judgment was reserved. The material portion of the argument was spent on whether an exit levy is a tax or not. The indication was given that the order to repay Mr Shuttleworth was incorrectly made against SARB.
- Our local banks are very well capitalised and well run. Of concern, however, is the fact that so few large banks service such a large population and that South African banks’ bank charges are very high compared to their interest income.
- Attracting investment is crucial for growth in South Africa. Impediments to investment in the country include policy uncertainty; the energy situation; perception about our labour legislation; and the onerous requirements or “red tape”, that make it difficult to move a business here.
- The JSE have had extensive discussions with the National Economic Forum (NEF) on their differing figures with regard to black ownership on the JSE (23% compared to 3%); and would welcome the opportunity to appear before the Committee together with the NEF, and talk the Committee through the numbers.
- The participation rate of the general South African public in the stock exchange is extremely low compared to a country like Australia (5% compared to 45%). The level of involvement could be increased with education and financial incentives.
4.5 The ripple negative effect of the failure of African Bank on other banks’ growth had been relatively small, as African Bank represented a very small share of the market.
- Even though it’s being fast-tracked, the JSE is hopeful that there will be proper consultation with the main stakeholders by the time the Financial Sector Regulation Bill reaches the Committee. The JSE’s concerns with the draft Bill in its current form, include that it doesn’t recognise the self-regulatory organisation (SRO) model; that there is potential for duplication of regulations; and the fact that there has been no real discussion on how all the new bodies and subcommittees envisaged in the Bill will be funded.
- The volatility of the rand is comparable with that of our peer group currencies, like that of Brazil, Chile, India, Korea and Turkey. Due to currency volatility, the profitability of local production versus imports fluctuates. This creates uncertainty which can lead to paralysis, detracting from domestic capital formation; undermining the growth of businesses and holding back job creation.
- Direct intervention in the foreign exchange market by government, in an effort to stabilise the exchange value of the rand, has not been successful. Reasons for this include the fact that the market is very big; participants may gang up against the authorities; and intervention can be very expensive.
- Maintaining adequate reserves is an important element in promoting exchange rate stability, but reserve accumulation does come at a cost.
- The Deputy Governor of the South African Reserve Bank expressed the hope that the amendment of the Banks Act would come into effect by July or August 2015, enabling the separation of the good and bad banks and the movement of assets in the curatorship of African Bank.
- A consortium of five banks and the Public Investment Corporation (PIC) have offered to buy half of the shares of the good bank if they are not sold on the open market. The Reserve Bank will buy the other half.
- People are paying off their debt to African Bank relative to what had been expected (40% for the bad bank and 85 to 90% for the good bank). Government had to put up a guarantee, but so far there has been no need to draw on it. It will be another three to five years before the risk becomes apparent.
- While acknowledging the fact that the Financial Sector Regulation Bill will be the most comprehensive architectural reform of the financial sector since the 1970s when the Financial Services Board was created, SARB is hoping that the Bill could be processed relatively quickly.
- In order to implement the Financial Sector Regulation Bill, SARB will have to recruit, develop and train staff in critical areas.
- The South African Reserve Bank has offered to provide training opportunities for Members; either through participation in courses currently on the SARB Academy’s calendar, or through addressing a specific training need Members may have that is not on the current Academy calendar.
- Transfer pricing is currently a big challenge for government. Although South Africa is not a member of the Organisation for Economic Co-operation and Development (OECD); certain guidelines have been taken from this organisation to address the issue.
- As a result of the Mark Shuttleworth case, a process has been started to rewrite the entire legislative framework for exchange control to deal with all possible future constitutional challenges. This draft is currently with the legal advisors. The court has been asked to allow for sufficient time to remedy the situation, should the regulations be found to be unconstitutional.
5.1 National Treasury should ensure that sufficient consultation with all stakeholders takes place before the Twin Peaks legislation is tabled in Parliament. The Committee will continue to have regular interaction with the Johannesburg Stock Exchange and the South African Reserve Bank, particularly during the processing of this legislation and will thereafter monitor the impact of the legislation on the future functioning of these institutions.
- All relevant role players should work towards the transformation of market participants on the Johannesburg Stock Exchange. The Committee will continue to monitor this.
- While the Banks Amendment Bill has been processed by the Committee, the Committee will continue to monitor developments around African Bank.
Report to be considered.
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