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ATC210819: Report of the Standing Committee on Finance on the Financial Sector Laws Amendment Bill [B15-- 2020], Dated 02 June 2021

Finance Standing Committee

REPORT OF THE STANDING COMMITTEE ON FINANCE ON THE FINANCIAL SECTOR LAWS AMENDMENT BILL [B15-- 2020], DATED 02 JUNE 2021

 

The Standing Committee on Finance, having considered the Financial Sector Laws Amendment Bill [B15 - 2020] (National Assembly- section 75), referred to it, reports the Bill with amendments [B20A – 2020] as follows:

 

  1. INTRODUCTION AND BACKGROUND
    1. The Financial Sector Laws Amendment Bill (“the Bill”) seeks to establish a framework for the resolution of banks, systemically important non-bank financial institutions (non-bank SIFIs) and the holding companies of these institutions.
    2. Resolution refers to a process during which the Resolution Authority, which the Bill proposes to be the South African Reserve Bank (SARB), takes over control and management of the affairs of a designated institution that is failing or is likely to fail in order to restructure or resolve it with the use of resolution tools in a manner that seeks to protect financial stability and minimize the reliance on public funds.
    3. The aim of creating a resolution framework is to ensure that the impact of a failure by these institutions is managed in an orderly manner.
    4. The Bill proposes that the process of resolution be managed and controlled by the South African Reserve Bank (“SARB”), as the Resolution Authority.
    5. The Bill also makes provision for certain amendments to the Financial Sector Regulation Act, 2017 (“FSRA”). A new Chapter 12A is, through this Bill, to be inserted in the FSRA in order to deal with the resolution objectives, powers and functions of the SARB.
    6. This new Chapter also provides for the establishment Deposit InsuranceFund (“the Fund” or “DIF”) and the establishment of the Corporation for Deposit Insurance (“the Corporation” or “CoDI”) toadminister the Fund.
    7. The Bill will amend to the Insolvency Act, 1936 (Act No. 24 of 1936)(‘‘Insolvency Act’’), the South African Reserve Bank Act, 1989 (Act No. 90 of1989) (‘‘Reserve Bank Act’’), the Banks Act, 1990 (Act No. 94 of 1990)(‘‘Banks Act’’), the Mutual Banks Act, 1993 (Act No. 124 of 1993) (‘‘MutualBanks Act’’), the Competition Act, 1998 (Act No. 89 of 1998) (‘‘CompetitionAct’’), the Financial Institutions (Protection of Funds) Act, 2001 (Act No. 28of 2001) (‘‘Financial Institutions Act’’), the Co-operative Banks Act, 2007(Act No. 40 of 2007) (‘‘Co-operative Banks Act’’), the Companies Act, 2008(Act No. 71 of 2008) (‘‘Companies Act’’), the Financial Markets Act, 2012(Act No. 19 of 2012) (‘‘Financial Markets Act’’), the Financial SectorRegulation Act, 2017 (Act No. 9 of 2017) (‘‘Financial Sector RegulationAct’’), and the Insurance Act, 2017 (Act No. 18 of 2017) (‘‘Insurance Act’’), in order to give effect to the objectives of this Bill.
    8. This Bill is part of a suite of measures aimed at financial sector reforms and regulation that began after the global financial crisis of 2008. In 2011, South Africa published a broad policy document titled “A safer financial sector to serve South Africa better” which outlined cross-cutting reforms for the regulation of systemically important financial institutions. These culminated into what is referred to as the “Twin Peaks”.
    9. The proposed reforms included the improvement of South Africa’s resolution and crisis management framework aimed at managing systemic failures in the financial sector, which this Bill is about.
    10. In 2015, the National Treasury, SARB and the Financial Sector Conduct Authority (FSCA), then known as the Financial Services Board, published a policy document entitled “Strengthening South Africa’s Resolution Framework”, which formed the basis of proposals contained in this Bill. Among these were measures in which banks and non-bank SIFIs should be resolved, the powers and functions of SARB as the Resolution Authority and the establishment of a Deposit Insurance Fund.
    11. In view of the risk of serious disruptions and potential outright systemic failure to the financial system caused by the failure of a bank, a speedy resolution of designated institutionswas viewed to be a more appropriate action than the current framework which primarily entails curatorship, business rescue proceedings and judicial management to a lesser extent.
    12. Resolution in an orderly fashion, managed and controlled by SARB, affords greater protection to depositors, and taxpayers, who might otherwise have to bail-out financially distressed institutions as happened in many countries during the global financial crisis.
    13. Section 12 of the Financial Sector Regulation Act, 2017, already specifically tasks the SARB to monitor risks to financial stability and take steps to mitigate those risks. The framework provided for in this Bill adds to that framework. It also proposes the establishment of the Fund, which would help to ensure that holders of covered deposits at a bank in resolution will have access to their funds. This in turn will limit severe financial hardship for bank depositors and limit the exposure of public funds to rescue designated failing financial institutions.
    14. The Bill further proposes that the Funds be financed by premiums from licensed banks, which will be members of the Corporation (CoDI) that will administer the Fund.  

 

  1. PUBLIC PARTICIPATION
    1. The Committee was briefed on the Bill by National Treasury (and SARB) on 16 March 2021, after the Minister tabled it in the National Assembly in August 2020. After receiving the initial briefing, the Committee called for public comments and received submissions from the Congress of South Africa Trade Unions (“COSATU”), Betweenity and South African Institute of Stockbrokers (“SAIS”) and the Banking Association of South Africa (“BASA”).
    2. On 18 May 2021, the Committee held public hearings and received oral submissions only from COSATU and Betweenity. The National Treasury and SARB responded to all the written and oral submissions on 26 May 2021, clarifying further questions and comments from Members and stakeholders. A final updated response document was sent to the Committee by the National Treasury and SARB on 27 May 2021.
    3. On 02 June 2021, the Committee deliberated on the Bill and adopted this report and the Bill with some technical amendments.

 

  1. OVERVIEW OF KEY OBJECTIVES AND AMENDMENTS
    1. The key objectives of the Bill are to:
      1. Provide a framework for the resolution of banks and non-bank SIFIs,
      2. Designate SARB as the Resolution Authority with commensurate powers and functions,
      3. Establish the Deposit Insurance Fund and the Corporation for Deposit Insurance
      4. Create a creditor hierarchy that ensures the protection of (vulnerable) depositors when banks undergo a resolution process.
    2. Clauses 1 to 50 of the Bill makes various technical and insolvency amendments in order to achieve the objectives of the Bill.
    3. Clause 51 introduces a new Chapter (Chapter 12A) in the FSRA, 2017, which establishes the country’s resolution framework (proposed sections 166A-Z) and Deposit Insurance (proposed sections 166AA-166BH).
    4. Clause 52 to 63 are other general amendments, and the long and short title of the Bill.
    5. The key proposals of the Bill:
      1. aim to enhance SARB’s financial stability mandate and to expand its objective for depositor protection;
      2. affect all banks, non-bank SIFI and holding companies of these institutions;
      3. create stabilization powers to include bail-in, transfer of certain assets and liabilities as well as the creation of bridge institutions
      4. include a Resolution Authority to be responsible for the development of resolution plans for all designated institutions (SIFIs); and
      5. entail safeguards to include a new proposed creditor hierarchy and adherence to the ‘no creditor worse off’ principle.
    6. The Resolution Framework is aimed at: maintaining financial stability; the protection of depositors; the orderly resolution and management of affairs of designated institutions;ensuring that the critical functions of designated institutions continue; resolution planning and;empowering the Minister of Finance to place designated institutions in resolution.
    7. As a Resolution Authority, the Bill gives powers and functions to the SARB which include:
      1. the power to remove and replace management and recover monies from those responsible;
      2. the power to terminate or assign contractual agreements
      3.  the appointment of Resolution Practitioners with delegated powers;
      4. the power to establish bridge institutions and transfer selected assets and liabilities and;
      5.  the Power to take bail-in action while respecting the hierarchy of claims in liquidation;

 

  1. KEY ISSUES RAISED DURING THE PUBLIC HEARINGS
    1. The submissions generally supported the Bill but raised technical amendments and a few substantive issues. The substantive issues were regards to the protection of depositors and competition issues as a result of the powers and functions that will be given to the SARB as a Resolution Authority.

 

COMPETITION ISSUES- CLAUSE 19

  1. Clause 19 of the Bill amends section 18 of the Competition Act, 1998. This clause proposes a new subsection to exclude transactions envisaged in the proposed section 166S of the Financial Sector Regulation Act from the ambit of sections 13, 14 and 16 of the Competition Act.The proposed section 166S deals with the resolution actions that the SARB may take in relation to a designated institution in resolution, including actions to write off or convert the liabilities of the institution and transfer its assets and liabilities.
  2. A stakeholders proposed a review of the amendment in Clause 19 of the Bill (section 166S of the FSRA) in order to avoid removing the oversight function of the Competition Commission when dealing with mergers and amalgamations of designated institution in resolution.
  3. Clause 19, the stakeholder submitted, as articulated in the Bill, “has the effect of permanently removing the oversight function of the Competition Commission…in relation to such a merger. This leaves the possibility that a merged entity that has recovered may dominate and act abusively in relation to customers in certain market segments without swift regulatory recourse.”
  4. The stakeholder proposed that Clause 19 of the Bill should contain a provision that: “Within six months after a merger has been implemented…the Competition Commission shall commence with an investigation into the merger in accordance with section 12A of the Competition Act in the normal course.” The stakeholder further submitted that conditions to address any anti-competitive concerns with the merger be imposed in consultation with the Governor of SARB.
  5. In response to this submission, the National Treasury and SARB responded that they held consultations with the Department of Trade and Industry and Competition and the Competition Commissionon the clauses pertaining to mergers and amalgamations in the Bill. They stated that the agreement was to include the Competition Commission in the consultation phase of a proposed merger or amalgamation of a designated institution in resolution. The National Treasury and SARB stated further that the SARB will be in communication with the Competition Commission when it decides to effect a merger or amalgamation during a resolution.
  6. The National Treasury and SARB clarified further that the powers assigned to the Resolution Authority will be applicable from the moment a designated institution is placed in resolution to the moment it exits resolution. They explained that once the designated institution exits resolution, the Competition Commission will not be precluded by any provision contained in the Bill to act in terms of the Competition Act should that designated institution act abusively towards customers or the financial sector.
  7. They however clarified that any action after the resolution that is contrary to the financial stability mandate of the SARB or that would undo any resolution action that is already taken by the SARB would be unlawful. They stated that, for example, section 166S (1) of the FSRA renders action taken by the SARB to be lawful and legally binding even if it ordinarily would not have been permissible in law. National Treasury and SARB further clarified that the purpose of 166(S)(1) is to ensure that the Resolution Authority is unencumbered in the execution of its resolution powers.
  8. They also explained that this clause would enable the Resolution Authority to act speedily and with enough flexibility to ensure that the financial system is stabilized as quickly as possible, especially if a systemic event has occurred.
  9. The stakeholder was given an opportunity to comment on whether its concerns were accommodated in the National Treasury and SARB’s response, but was unavailable to comment.
  10. The Committee believes that the concerns raised by the stakeholder are accommodated as the Competition Commission will not be precluded in playing its oversight role when a designated institution exits resolution. 

 

CREDITOR HIERARCHY – CLAUSE 51 (Proposed S166W OF FSRA)

  1. Clause 51 inserts a new Chapter in the FSRA, Chapter 12A. The proposed section 166W of that Chapter, makes provision for the ranking of claims against the designated institution in resolution.
  2. A stakeholder however raised issue with the ranking provided in proposed section 166W. The stakeholder submitted that the ranking needed to be amended to ensure that the most vulnerable depositors, namely pensioners, the unemployed and workers are prioritised when banks are wound up and assets disposed of. The stakeholder stated that South African law to date has failed to ensure that these vulnerable categories of creditors are prioritised in such instances.
  3. The stakeholder noted that the Bill appeared to propose that secured lenders are ranked first and that unsecured creditors such as ordinary depositors are ranked fourth. It submitted that this, in essence, meant that in the event of the collapse of a bank, secured lenders e.g. other banks or companies who have lent monies to the bank will be paid out first. It noted that unsecured creditors such as ordinary workers, pensioners, SMMEs will be ranked fourth.
  4. The stakeholder submitted that these unsecured creditors cannot afford delays in accessing their meagre savings. It asserted that pensioners, workers and many other ordinary South Africans do not have other sources of income. It added that too often this approach to liquidation and the disposal of assets has left workers and pensioners with nothing. It submitted that it was wrong, immoral and in contravention of the Constitution’s requirements for legislation to be equitable, fair and rationale. It added that itcannot be argued that this approach meets these Constitutional requirements.
  5. The stakeholder submitted that the ranking of creditors must be amended to ensure that unsecured creditors such as pensioners, the unemployed and workers are ranked first in the creditors’ hierarchy. It submitted that it was not acceptable or moral for pensioners and workers to be left waiting for months and often years to access what is left of their meagre savings.
  6. The National Treasury and SARB explained that the Bill ensures that in the event of the failure of a bank, a government bail-out using taxpayer funds will no longer be the solution and instead, a bail-in strategy will be implemented whereby creditors and shareholders will bear the losses. They explained that the general ranking of creditors in an insolvency is set out in the Insolvency Act. At a high-level, the Insolvency Act ranks creditors as secured, preferred and then unsecured. This is the existing creditor ranking and the Bill has not changed this.
  7. They explained that the Bill proposes changes to the existing hierarchy for designated institutions to provide for resolution and deposit insurance. They further explained that the Bill also recognises depositors explicitly, adding that the proposed changes to the creditor hierarchy set out in the Bill is historic in nature as it is the first of its kind in South Africa to recognise qualifying depositors as a distinct category of creditors and more importantly it has moved depositors from the present concurrent ranking to third just below secured and preferred creditors.
  8. The National Treasury and SARB explained that the purpose of the proposed deposit insurance is to protect vulnerable depositors. In this respect, they said, it is important to note the two processes which are:(1)the process of winding up the estate where creditors receive their claims according to their ranking and,(2)the process of paying out depositors from the Deposit Insurance Fund.
  9. They explained further that when a bank is placed into resolution by the Minister of Finance and a payout strategy is followed which aims to ensure that depositor funds are safe and available, the Corporation for Deposit Insurance will use the Deposit Insurance Fund to pay out the bank’s covered depositors (up to R100 000) holding simple accounts (accounts in the name of the depositor) within (initially) 20 working days provided that the depositor has been identified.
  10. They explained that because the Corporation pays out the covered depositors of the failed bank, it takes the place of the covered depositors in the creditor hierarchy. They further explained that the Corporation will then wait to recover from the estate of the failed bank to replenish the Fund. The National Treasury and SARB explained that this addresses the legitimate concerns that depositors who are workers and pensioners no longer have to wait for a payout, or have limited access to their funds when a bank is placed in resolution by the Minister.
  11. The National Treasury and SARB further explained that the covered depositors of a failed bank will also not need to wait for the liquidation proceeds to get access to their funds held at the failed bank which can take years. Access will now be within a reasonable 20 days. The National Treasury and SARB further explained that the Corporation will use the monthly deposit insurance submissions by banks to improve the quality of depositor data over time to shorten the payout period for these accounts to the international standard of 7 working days. They explained that complex accounts where the depositors have not been identified, or where there are concerns with the account or account holder, may take longer to be paid out by the Corporation.
  12. The National Treasury and SARB further clarified that when a payout strategy is not followed and an open-bank resolution is implemented, where the bank operates as per normal whilst it is being resolved, the depositors of the bank are not impacted as the bank remains open and depositors have immediate and normal access to their funds.
  13. The stakeholder who raised concerns with this hierarchy issue was given an opportunity to reflect on the response by National Treasury and SARB and stated that the concerns of the organization he represented were allayed by the scheme that will be put in place in ensuring vulnerable depositors are paid by the Corporation within 20 days.

 

TECHNICAL AMENDMENTS

  1. A number of technical amendments that were raised by stakeholders were agreed to and effected by the National Treasury and SARB, particularly in clauses 6, 8, 32, 33, 34, 35 and 51 of the Bill, as reflected in (see [B20A-2020]).
  2. The National Treasury and SARB however did not agree to some amendments proposed in clauses 19 and 27-31. The response document of National Treasury and SARB, dated 27 May 2021, has got more detailed reasons for this.

 

  1. COMMITTEE OBSERVATIONS
    1. The Committee notes that this Bill is historic in nature as it introduces the Deposit Insurance Fund and the Corporation for Deposit Insurance, which will administer the Fund in South Africa. The Committee believes that this scheme is long overdue and will eliminated reliance on public funds to bail-out failing banks and non-bank SIFIs.  It will also provide the much needed protection for depositors.The Committee warns that the presence of this Fund should not cause banks to operate recklessly simply because there is this insurance. The Committee further urges for there to be effective oversight over the Fund and the Corporation.
    2. The Committee notes that this Bill aims to fill a number of legal gaps in the protection of depositors of banks and financial stability in the country. Thelegal gaps/ shortcomings,when banks fail,have been that the Banks Act, the Companies Act and, the Insolvency Act were inadequate in protecting the customers/depositors of banks.
    3. The Banks Act provided for curatorship,which is limited in scope and did not allow for resolution planning. The Companies Act, on the other hand, provided for business rescue proceedings which do not give due regard to the nature and complexities of large banks which had critical functions of allowing the payment system to continue to operate. The Insolvency Act only applied to liquidation and does not recognise depositors as preferred creditors. The Committee notes and welcomes that the Bill seeks to mitigate against these lapses by introducing a consolidated resolution framework under the management of SARB.
    4. The Committee further notes and welcomes that the Bill establishes resolution planning for non-bank SIFIs.

 

  1. CONCLUSION 
    1. The Committee adopted the Bill with amendments.

 

Report to be considered.


 

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