JohnRawls wrote:What does US have to do with anything right now? Or the Europeans?
We are talking about SA which basically overthrew the chains of apartheid but had little relative success after that economic, socially and so on. Partly it is due to apartheid, legacy of which still remain. Partly it is due to the corruption and mismanagement of the ANC. Not sure what are we discussing right now?
That it is all US/European fault? US has nothing to do with SA almost at all. SA was independent for a long time now so European also have very little to do with it unless you consider SA white South Africans as Europeans which they are not, they are South Africans.
God, it is very easy to deal with your lack of connection. Why did they have very little success? Did you read Pants explanations? I did. Can you extrapolate what he said and figure out what that means for South African economic problems? Who controls capital in South Africa? Again. Banks. Where is the money for new credit, new construction and new jobs and growth? Where is investment?
In the hands of who? Historically the black South Africans were prohibited from owning property. Or even having businesses in the same district as the white South Africans. Have the whites said, {here is your lands from the past. Here is your money back from the hundreds of years of exploiting the mines (British) and the money from your ancestors. You guys are not using it. We made it what it is. Finders keepers losers weepers.
Who has control of the cash flow in South Africa? Follow the money trail and you figure out very quickly why the average Black and white South African who is poor is not getting anywhere. And it is capitalistic.
Do you think Mandela did not know who had economic might in that old Apartheid system? The ANC got democracy finally after a very bloody history of torture, repression, jailings, and legal and political fights that were very very hard.
Now, they have control. But you are saying they are incompetent and no good. What is the alternative? Letting the old conservative white-only apartheid regime return to govern the masses to prosperity. No one is going to go back to the past.
The answer in my opinion is very simple. Act like senior partners and be pragmatic and they have to make good on finding a way out of being denied investment. Because the real challenge are the banks and international banking and economic problems. And unless the international banks give you money for you to invest in your own society and remain without being blackmailed by the economic hitmen in the world--you will be in the position of the ones who said no to the hitmen.
Nothing changes for a reason John Rawls.
The SARB regulates the banking system in South Africa.
Here are the players there with money:
An appointed auditor can also furnish any information provided to the PA relating to affairs of the bank to the chief executive officer of the bank. Auditors therefore assist the PA with the supervision of banks and controlling companies.
SARB is also a member of and contributor to various international governance bodies such as the G20, the International Monetary Fund (IMF), the Bank for International Settlements (BIS) and the Committee of Central Bank Governors (CCBG) in the Southern African Development Community (SADC). SARB can develop the financial sector, in accordance with member commitments to global regulatory regimes.
In January 2019 the SARB became member of the Global Financial Innovation Network (GFIN) with a view to promoting responsible financial innovation. GFIN acts as an intermediary between financial institutions and regulators to assist them in implementing new ideas between different countries. By joining GFIN, the SARB will receive the benefit of insight from foreign regulators in their bid to enable innovation.
Bank Licences
3. What licence(s) are required to conduct banking services and what activities do they cover?
An entity cannot conduct the business of a bank unless it is a public company registered as a bank under the Banks Act (section 11(1), Banks Act).
To register, the relevant entity must:
Apply to the PA for authorisation to establish a bank.
Apply for registration as a bank.
A bank must also obtain an annual licence.
Once an entity has been registered and licensed as a bank under the Banks Act, it can carry out "the business of a bank" as defined in section 1 of the Banks Act, in particular to conduct deposit taking business in South Africa.
A public company cannot be formed under the Companies Act, 2008 (Companies Act) to conduct the business of a bank without the PA's approval (section 15(1), Banks Act). The PA will grant approval if it believes that the company will probably be eligible for registration as a bank (section 15(2), Banks Act). The Companies and Intellectual Property Commission (Companies Commission) cannot register a company's memorandum of incorporation unless the application for registration is accompanied by the PA's approval (section 15(3), Banks Act).
A branch of a foreign bank can also register to conduct the business of a bank in South Africa, under section 18A of the Banks Act. The Banks Act and the Banks Regulations apply equally to branches, unless stated otherwise.
The Banks Act provides for the registration of representative offices of foreign banks. Representative offices cannot conduct the business of a bank (section 34, Banks Act).
4. What is the application process for bank licences?
Application
An application for authorisation to establish a bank must be made in the stipulated manner and form, and contain the information prescribed by the Banks Regulations (section 12, Banks Act) and any further information the PA requires.
Provided an applicant's authorisation to establish a bank has not been revoked, it can apply to the PA for registration as a bank during the 12-month period following the date of the authorisation (section 16(1), Banks Act). The application for registration must be made in the stipulated manner and form, and contain the information specified in section 16(2) of the Banks Act and any further information deemed necessary by the PA.
To obtain authorisation as a branch, the applicant must under section 18A of the Banks Act submit a completed form (as prescribed by the PA) accompanied by the prescribed fee. The PA can request such further information and documentation as it deems necessary.
Requirements
The PA can grant or refuse authorisation to establish a bank or grant it subject to conditions it can determine (section 13(1), Banks Act). The PA will only grant an application if the criteria in section 13(2) of the Banks Act have been met. These include that the:
Establishment of the proposed bank is in the public interest.
Business the applicant proposes to conduct is that of a bank.
Applicant will conduct the proposed business of a bank as a public company incorporated and registered under the Companies Act.
Applicant is able to establish itself successfully as a bank.
Applicant has the financial means to comply, as a bank, with the Banks Act.
Business of the proposed bank will be conducted in a prudent manner.
Authorisation can be revoked if the PA believes that either (section 14, Banks Act):
False or misleading information was provided pursuant to an application.
A bank has not been formed in accordance with the proposals in the application, within 12 months of the granting of authorisation.
For the PA to grant an application for bank registration, all the following must be met:
The business the applicant proposes to conduct is that of a bank.
The applicant does not propose to adopt undesirable methods of conducting business.
The memorandum of incorporation of the institution is consistent with the Banks Act and is not undesirable for any reason.
(section 17(1), Banks Act)
The applicant must also provide the PA with proof that it complies with the minimum share capital and unimpaired reserved funds requirements in section 70 of the Banks Act (section 17(5), Banks Act). Section 70(2)(a) provides for calculations of minimum share capital and unimpaired reserved funds relating to common equity tier 1 capital, additional tier 1 capital and tier 2 capital relating to the specific business which the bank conducts, for example trading in financial instruments. The calculation formulas required to be implemented by banks differ, depending on the bank's activities. Specifically, section 70 distinguishes between banks which trade solely in financial instruments, banks which trade in financial instruments as part of their business, and banks which do not trade in financial instruments.
Foreign Applicants
A foreign applicant wishing to establish a branch in South Africa must comply with the additional requirements set out in the regulations relating to foreign applicants (Regulations Relating to Conditions for the Conducting of the Business of a Bank by a Foreign Institution by means of a Branch in the Republic) (Branch Conditions):
The applicant must for the 18 months before the application have held net assets of at least USD1 billion, or if belonging to a banking group, that banking group must have net assets of at least USD1 billion and that branch net assets of at least USD400 million.
The applicant must have a long-term investment grade debt rating acceptable to the PA.
The branch capital must at all times be at least the greater of ZAR250 million or 8% (or such higher percentage prescribed by the PA) of the amount of assets and other risk exposures of the branch.
The branch must maintain a minimum reserve balance in an account with the SARB.
The value of the unencumbered assets of the applicant cannot be less than the percentage of liabilities stipulated by the PA.
The applicant will be required to comply with the minimum liquid assets requirement as set out in section 72 of the Banks Act.
The PA must be satisfied that the applicant lawfully conducts the business of a bank in a foreign jurisdiction.
The PA must also be satisfied that the foreign regulator:
has authorised the establishment of the branch;
accepts and complies with the proposals and guidelines of the Basel Committee;
ensures that the members of the board of the bank and the executive management consist of fit and proper persons;
maintains suitable risk management procedures; and
is committed to keeping the PA informed of any material information regarding the financial soundness of the applicant.
Timing and Basis of Decision
The PA will provisionally register an applicant as a bank and issue it with a certificate of registration, if its application succeeds and it pays the prescribed fee (section 17(4), Banks Act). A registration can be made subject to certain conditions.
In practice, registration can generally take between ten and 14 months from the date of the application. The timing varies on a case-to-case basis.
Cost and Duration
A bank, a branch and a representative office must obtain an annual business licence from the PA and pay the prescribed licence fee (section 35, Banks Act).
5. Can banks headquartered in other jurisdictions operate in your jurisdiction on the basis of their home state banking licence?
Banks headquartered in other jurisdictions can operate in South Africa through a representative office or a branch of that foreign bank. Each is subject to the Banks Act and the regulatory oversight of the SARB.
A representative office promotes and assists the business of the foreign bank but cannot conduct the business of a bank in South Africa.
A branch of a foreign bank established in South Africa must meet the requirements set out in section 18A of the Banks Act. This includes prior written approval of the PA. A branch of a foreign bank must comply with capital adequacy requirements provided in the Banks Act and must register as a company under the Companies Act.
The consent of the PA is required for registration as a representative office or as a branch of a foreign bank. Therefore, a foreign bank cannot operate as a bank in South Africa solely because it holds a foreign banking licence.
Both representative offices and local branches of foreign banks are subject to the same standards of supervision or oversight by the PA as domestic banks. The Bank Supervision Department (now replaced by the PA), a department within the SARB, is responsible for the supervision of banks and provides consolidated supervision of banking groups and their cross-border establishments. The standard of supervision is in line with the minimum standards prescribed by the Basel Committee on Banking Supervision.
In terms of regulation 58 of the Banks Act, the prescribed fee payable in respect of an application to establish a representative office is ZAR6,840 (including VAT), while the application fee in respect of a branch ZAR20,520 (including VAT). Once authorisation has been granted by SARB to operate as a local branch of a foreign bank, an annual licence fee will also be payable.
There is no regime which expressly caters for reverse solicitation or which allows foreign banks to operate on a reverse basis only. However, in very limited circumstances, it may be possible for a foreign bank to respond to a reverse enquiry without triggering any banking licensing requirements. The reverse enquiry must relate to a specific financial product or transaction and must be genuine and not solicited in any way. The foreign bank must not use the reverse enquiry to "open the floodgates" and discuss their product offering generally and so is urged to respond to the specific enquiry only. There is very limited scope for such an allowance and foreign banks are advised to exercise caution.
Forms of Banks
6. What forms of bank operate in your jurisdiction, and how are they generally regulated? Does the regulatory regime distinguish between different forms of banks? Are there any specific requirements for banks or banking groups in your jurisdiction in relation to the scope of business or organisation?
State-Owned Banks
There are no state-owned banks in South Africa.
Universal Banks, Commercial and Retail Banks
Takeovers and mergers, as well as organic growth fuelled by deregulation, have led to large banks with many interests and services. Labels traditionally given to different banks are becoming increasingly meaningless. However, it is useful to distinguish the typical labels used by different kinds of banks according to their main type of activity.
Investment Banks
Investment banks buy and sell corporate and government securities issues, and also advise companies on raising capital, but do not accept deposits or make loans in the traditional sense. The term investment bank is increasingly used by any bank offering a wide range of financial services and advice to corporate clients.
Private Banks
This term usually refers to banks which act for high net worth individuals rather than businesses. Private banks are usually owned by commercial or investment banks.
Other Banks
Land Bank. The Land and Agricultural Development Bank of South Africa (trading as the Land Bank) is a legal person operating under the Land and Agricultural Development Bank Act, 2002. The state is the sole shareholder of the Land Bank, and the Minister for Agricultural Land appoints a board of directors to manage its business. One of the objectives of the Land Bank is to increase the ownership of agricultural land by historically disadvantaged persons, by providing financial services. The Land Bank is exempt from other laws specifically governing banks, unless the other law expressly provides for its application to the Land Bank.
Development Bank of Southern Africa. This is a legal person under the authority of the Department of Finance. Its function is promoting economic development and growth in the Southern African region in an integrated financial development system, which aims at the efficient deployment of scarce resources. The MoF can by notice in the Government Gazette apply any provision of the Companies Act, the Banks Act or other law to this bank.
Mutual banks. These are governed by the Mutual Banks Act, 1993. A mutual bank is defined as a legal person registered as a mutual bank whose members qualify as such by being shareholders entitled to participate in exercising control in a general meeting. Certain provisions of the Banks Act apply to mutual banks. The regulator for the administration of the Mutual Banks Act is the PA under the Banks Act.
In respect of each form of bank set out in this section, the scope of business which these registered banks are approved to undertake is limited to conducting "the business of a bank", as defined in section 1 of the Banks Act. To provide any other business in South Africa, a registered bank will need to ensure that it is appropriately licensed in respect of those particular activities (for example, a bank wishing to provide financial services needs to be appropriately licensed or exempted under the FAIS).
Regulation of Systemically Important Financial Institutions (SIFIs)
Loosely defined, SIFIs are financial institutions that are deemed systemically important to the economy, in that their failure would have significant spill-over effects that could destabilise the financial system. The prevention of the collapse of an SIFI is important, as it is a means of protecting the economy.
The FSR Act provides that the Governor of the Reserve Bank (Governor) can, by written notice to a financial institution, designate the institution as an SIFI. This power cannot be delegated (section 29, FSR Act). Once the relevant section of the FSLAA becomes effective, section 29 of the FSR Act will become section 29A, and section 29B of the FSR Act will allow the Governor to designate systemically important payment systems.
In deciding whether to designate a financial institution as an SIFI, the Governor must take into account at least the following:
Size of the institution.
Complexity of the financial institution and its business affairs.
Interconnectedness of the institution with other financial institutions within or outside South Africa.
Whether there are readily available substitutes for the financial products and financial services that the financial institution provides or, in the case of a market infrastructure, the market infrastructure.
Recommendations of the Financial Stability Oversight Committee (as defined in the FSR Act).
Submissions made by or for the financial institution.
Any other matters that may be prescribed by regulation.
The Governor can also designate a financial institution as a SIFI without complying with sections 29(2) and (3) of the FSR Act where the Governor has determined that a systemic event has occurred or is imminent. A systemic event is an event or circumstance, including one that occurs or arises outside South Africa, that may reasonably be expected to have a substantial adverse effect on the financial system or on economic activity in South Africa, including an event or circumstance that leads to a loss of confidence that operators of, or participants in, payment systems, settlement systems or financial markets, or financial institutions, are able to continue to provide financial products or financial services, or services provided by a market infrastructure (section 1, FSR Act).
SIFIs will be regulated by prudential standards made and regulator's directives issued by the PA. These prudential standards and/or regulator's directives can impose requirements applicable to specific SIFIs or to SIFIs generally in relation to solvency measures and capital requirements (which may include requirements in relation to countercyclical capital buffers), leverage ratios, liquidity, organisational structures, risk management arrangements (including guarantee arrangements), sectoral and geographical exposures, required statistical returns, recovery and resolution planning, or any other matter prescribed by regulations made on the recommendation of the Governor (section 30, FSR Act).
In 2019, the SARB designated six of South Africa's largest banks as SIFIs, namely Absa Bank Ltd, The Standard Bank of South Africa Ltd, FirstRand Bank Ltd, Nedbank Bank Ltd, Investec Bank Ltd and Capitec Bank Ltd.
Organisation of Banks
Legal Entities
7. What legal entities can operate as banks? What legal forms are generally used to operate as banks?
Only public companies incorporated under the Companies Act can register as banks in South Africa (section 11(1), Banks Act). However, to register as a branch of a foreign bank in South Africa, an institution is not required to be a public company under the Companies Act. The institution must be a legal entity established in a country other than South Africa, and lawfully conduct in the other country a business similar to the business of a bank (section 18A, Banks Act). A branch of a foreign bank will also be required to register as an external company with the Companies Commission. The Banks Amendment Bill proposes to amend section 11(1) of the Banks Act to include state-owned entities incorporated under the Companies Act, however, there has been no further developments on this bill to date.
8. What requirements apply to the structure of banking groups?
SARB defines a group of companies as a holding company and all its subsidiaries. The holding company is registered in South Africa and controls the subsidiaries of the group. A company that exercises control over a bank is termed a "controlling company". A controlling company is subject to certain requirements. The Banks Act provides that, unless a person is a public company registered in terms of the Banks Act as a controlling company in respect of a bank, no person other than a bank or an institution which has been approved by the PA and which conducts business similar to the business of a bank in a country other than the Republic can control a bank.
A controlling company must, among other requirements, be financially sound and able to establish control of the bank, and all its directors or executive officers must be fit and proper to hold office and have sufficient experience and knowledge.
In addition, the Banks Act sets certain minimum requirements for the capital and reserve funds of a controlling company.
Restrictions are also in place for shareholding in banks. In this regard, see Question 19. Further, the banking group must submit a group structure to SARB identifying interest held as at the 31 March and the 30 September of each year. In addition, the bank is required to submit such a group structure where a major change in the structure has occurred.
Other than outlined above, there are no further requirements relating to the structure of banking groups in South Africa. There are no requirements similar to, for example, the ring-fencing requirements in the UK.
Corporate Governance
9. What are the legislative and non-legislative corporate governance rules for banks?
The board of directors and executive officers of a bank must establish and maintain an adequate and effective process of corporate governance (section 60B(1), Banks Act) with the objective of achieving the bank's strategic and business objectives efficiently, effectively, ethically and equitably (within acceptable risk parameters) (section 60B(2), Banks Act) and ensuring compliance with all applicable laws and realisation of the listed goals (section 60B(2)(a)-(i), Banks Act).
The board of directors is responsible for ensuring that governance includes the maintenance of effective risk management and capital management (regulation 39(1), Banks Regulations). The process must be consistent with the nature, complexity and risk inherent in the bank's on-balance sheet and off-balance sheet activities, and able to respond to changes in the bank's environment and conditions. The board can appoint supporting committees to assist it (regulation 39, Banks Regulations). Under section 1(4)(d) of the Branch Conditions, the management of a branch of a foreign institution is responsible for compliance with regulation 39 of the Banks Regulations.
10. What are the organisational requirements for banks?
The composition of the board of directors of a bank or controlling company is prescribed by the PA. An employee of a bank or its subsidiary, controlling company or other subsidiary of the controlling company cannot be appointed chairperson of the board of that bank (regulation 41(1), Banks Regulations), nor can the chairperson be a member of the audit committee of the bank or its controlling company (regulation 41(2), Banks Regulations).
Similar provisions apply to the chairperson of the controlling company. The chairperson must be neither an employee nor a member of the audit committee (regulation 41(4), Banks Regulations) of the controlling company, or any bank in respect of which that company is registered as a controlling company.
At least two members of the board must be employees of the bank, unless the PA directs otherwise on application by the bank on the basis of special circumstances (regulation 41(5), Banks Regulations).
11. What is the supervisory regime for management of banks?
In terms of the FSR Act, South Africa's supervisory regime follows a "Twin Peaks" model of regulation. Banks are regulated by the PA, a juristic person under the administration of the SARB, in respect of their prudential activities. The FSCA regulates market conduct in respect of financial services (other than banking activities contemplated in the Banks Act). Banks conducting such financial services will also be regulated by the FSCA. In respect of banking activities, and because the PA supervisor cannot take over the management of a bank, the approach is to conduct the PA's activities in a way that promotes sound risk-management practices by all key players in the risk-management process. The key players include the banks' shareholders and boards of directors, managements, internal and external auditors, the general public and the supervisor. The approach consists primarily of qualitative assessment and quantitative analysis.
The qualitative aspects of supervisory work are undertaken mainly onsite at the premises of banks and consist of assessing the corporate governance and internal control systems of a bank. In view of the daily volumes of transactions in the banking system, great reliance is placed on the ability of the system to ensure automatically that good risk-management principles are applied. The PA's onsite work is aimed at forming a high-level opinion about the adequacy of a bank's risk management and controls. The more detailed evaluation of the quality of a bank's systems is formally delegated to the bank's external auditors.
The quantitative analysis is performed offsite at the PA's offices, based on comprehensive statutory data provided by banks on a monthly basis. The data, certified as correct by the external auditors of a bank, is electronically entered into a database and converted into meaningful information by various techniques, such as ratio analysis, time series analysis, peer and sector comparisons, and graphic analysis. Relevant information from other sources, such as published annual financial statements, the media, and rating agencies, is also considered. Any deviation from what is expected is subject to specific discussion at the bank. Apart from frequent informal contracts between analysts and their allocated banks, formal interaction includes a quarterly prudential meeting with the executive management and various risk managers of each bank, a pre-audit planning meeting with the external auditors, annual trilateral discussions with the management and auditors, and annual presentations to the bank's board.
Foreign-owned banks, whether subsidiaries or branches of the foreign parent, are subject to the same standards of licensing and prudential supervision as domestic banks. Branches are not permitted to accept retail deposits, and representative offices cannot accept deposits at all.
Since South African banks also operate in overseas countries, the PA conducts consolidated supervision of banking groups and their cross-border establishments. This is in line with the minimum standards set by the Basel Committee on Banking Supervision. These standards aim to ensure that the cross-border operations of banks can be supervised effectively by the supervisory authorities in the home country and the host country, and that there is an adequate flow of information between them.
12. Do any remuneration requirements apply?
Compensation practices at large financial institutions are regarded as one of the factors that contributed to the financial crisis that began in 2007. The FSB recommended that regulators and supervisors work with market participants to mitigate the risks arising from remuneration policies and was tasked with a mandate to draft sound practice principles for large financial institutions. In April 2009, the FSB issued Principles for Sound Compensation Practices as part of a call by the G20 at the Pittsburgh Summit to set global standards as part of pay structure reforms.
During 2008, the Bank Supervision Department of the SARB (now replaced by the PA) included a discussion on the involvement of the board remuneration subcommittee in banks' incentive schemes, in its topics for meetings with banks' boards.
In 2012 the FSB launched the Bilateral Complaint Handling Process (BCHP). The BCHP establishes a mechanism for national supervisors from FSB member jurisdictions to bilaterally report, verify and, if necessary, address specific compensation-related complaints by financial institutions, based on level playing field concerns.
To undertake ongoing monitoring, the FSB has also established a Compensation Monitoring Contact Group (CMCG) comprising national experts from member jurisdictions with regulatory or supervisory responsibility on compensation practices. The CMCG is responsible for monitoring and reporting to the FSB on national implementation of the principles and Standards. The ongoing monitoring exercise is based on the input provided in a survey by CMCG members.
13. What are the risk management rules for banks?
It is recognised in the Banks Regulations that the conduct of the business of a bank entails the management of risks (regulation 39(3), Banks Regulations). The bank must put in place comprehensive risk-management processes and board-approved policies and procedures to address these risks (regulation 39(4) and (5), Banks Regulations).
The bank's management must ensure that the risks are managed appropriately (regulation 39(6)(b)(i), Banks Regulations). This requires management to:
Set capital targets commensurate with the bank's risk profile and control environment (regulation 39(6)(b)(ii), Banks Regulations).
Implement robust and effective risk management and internal control processes (regulation 39(6)(b)(iii), Banks Regulations).
Develop and maintain an appropriate strategy that ensures that the bank maintains adequate capital and an internal capital assessment process that responds to changes in the business cycle (regulation 39(6)(b)(iv)(A), Banks Regulations).
Management must also conduct stress tests to identify events or changes in market conditions that may have an adverse impact on the bank (regulation 39(6)(b)(vi), Banks Regulations).
Directors of banks must have a basic knowledge and understanding of the conduct of the business of a bank and of the laws and customs that govern the activities of such institutions (regulation 40(1), Banks Regulations) and perform their duties with diligence, care and competence (regulation 40(2), Banks Regulations). It is their duty to ensure that risks are managed prudently, particularly since banks administer money loaned to them by the public (regulation 40(3), Banks Regulations).
South Africa has adopted International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. The directors of a bank must make annual reports to the PA (regulation 40(4) (a)-(c), Banks Regulations). These reports must address, among other things:
The integrity of internal controls.
The maintenance of ethical standards.
Material malfunctions as defined and documented by the board of directors that have been identified.
Whether there is reason to believe that the bank will not be a going concern in the year ahead.
The framework for domestic contingency planning has also been strengthened. An example is the Financial Sector Contingency Forum (FSCF). This was created to facilitate cross-sectoral co-operation in identifying threats to the stability of the South African financial sectors, obtaining approval for appropriate mutual plans and structures to mitigate such threats, and co-ordinating responses to resolve crises. The SARB is currently reviewing its contingency planning and crisis management strategies and policies as part of the work of the FSCF.
Liquidity and Capital Adequacy
Role of International Standards
14. What is the capital adequacy framework that applies to banks?
Section 64A of the Banks Act provides that the board of directors of a bank and its controlling company must appoint at least three of its members (of which at least two must be non-executive directors) to a risk and capital management committee. However, if the committee is appointed in respect of a holding company able to assume these responsibilities for the bank, the PA may exempt the bank from this requirement.
In consistency with Basel III, the Pillar 2 requirements as set out in Directive 5 of 2021 (which has replaced all previous capital framework directives that have been issued by the Prudential Authority) is a principles-based set of requirements and as such the Prudential Authority expects banks in South Africa to develop their own internal capital adequacy assessment process which the Prudential Authority will review.
Share Capital and Unimpaired Reserve Funds
Chapter 6 of the Banks Act sets out the prudential requirements for a bank. In this regard, the Banks Act differentiates between banks whose businesses:
Does not include the trading of financial instruments (section 70(2)).
Consists solely of the trading of financial instruments (section 70(2A)).
Includes the trading of financial instruments (section 70(2B)).
Accordingly, the Banks Act imposes different minimum requirements for the share capital and unimpaired reserve funds of each of the above banks.
In addition, the Banks Act sets certain minimum requirements for the capital and reserve funds of a controlling company. It also provides that any regulated entity included in a banking group and structured under a controlling company must comply with the minimum requirements for its capital and reserve funds set by the relevant regulator (section 70A, Banks Act).
Concentration Risk
In addition to the above prudential requirements, the Banks Act limits the investments, grant of loans, advance or other credit that a bank, controlling company, branch or branch of bank can undertake (section 73, Banks Act). In particular, the Banks Act sets the following limitations:
An entity cannot make investments with or grant loans, advances or other credit to a person that exceeds 10% of its prescribed capital and reserves without the prior approval of the board of directors or committee specifically appointed (section 73(1)(a)).
If an entity's investments, loans, advances and other credit contemplated above and relating to any private sector non-bank person exceeds 800% of its prescribed capital and reserves, it will be subject to additional capital requirements (section 73(1)(b)).
An entity cannot make investments with or grant loans, advances or other credit to a private sector non-bank person if the transaction, alone or together with previous transactions with the person, results in it being exposed to the person to an amount exceeding 25% of the prescribed amount, without the prior written approval of the PA (section 73(2)(a)). If the PA grants this approval, the relevant entity can be subject to additional capital requirements (section 73(2)(c)). If an entity enters into such a transaction with any person other than a private sector non-bank person, it must report this to the PA (section 73(2)(b)).
An entity can be subject to additional capital and reserve fund requirements if it is exposed to an industry, sector or geographical area that exceeds the prescribed amount (section 73(2)(d)). Accordingly, an entity must report any investment in or loans, advances or other credit exposure to a specific industry, sector or geographical area, which alone or together with any previous such transactions results in it being exposed to that industry, sector or geographical area, in an amount exceeding the prescribed percentage of capital and reserve funds (section 73(2)(e)).
However, the PA can exempt an entity from the above with the consent of the MoF and as they can determine (section 73(4)).
Failure to Comply
If a bank fails to comply or is unable to comply with section 70 (minimum share capital and unimpaired reserve funds) or section 72 (minimum liquid assets), or a controlling company fails to comply or is unable to comply with section 70A (minimum capital reserve funds in respect of banking group) of the Banks Act, it must report the failure or inability, together with reasons, to the PA (section 74(1), Banks Act).
In addition and despite the power of the PA to impose a penalty under section 91A of the Banks Act, the PA can take action against an entity or condone a failure or inability, if it deems fit. If the PA condones a failure or inability, it can give the entity an opportunity to comply with the relevant provisions within a specified period, and subject to conditions it can determine (section 74(2), Banks Act).
The PA can fine an entity, irrespective of whether criminal proceedings have been brought against it (section 74(3), Banks Act).
Returns
A bank must provide the PA with returns, to enable the PA to determine whether it is complying with sections 70 and 72 of the Banks Act and section 10 of the SARB Act, and to determine the extent of its assets, liabilities and contingent liabilities (section 75(1), Banks Act). In addition, a bank must provide the PA with returns relating to the extent and management of risk exposures in the conduct of its business (section 75(3), Banks Act).
Returns must conform to the financial reporting standards issued under the Companies Act and must be submitted in the form and at the times prescribed (section 75(3A) Banks Act). The returns which most nearly coincide with the financial year end of a bank are to be accompanied by a report by the bank's auditor, stating whether the returns fairly, and in compliance with the reporting standards, present the affairs of the bank (section 75(5), Banks Act).
The Banks Act also regulates that in a group of banks the holding company must, in addition to other prescribed returns, provide the PA with a consolidated return in the manner and form prescribed (section 75(4)(b), Banks Act).
Special requirements for SIFIs
Not applicable.
Main Prudential Requirements
15. What liquidity requirements apply?
Section 72 of the Banks Act provides that a bank is to hold liquid assets in South Africa to a value which is at least 20% of its prescribed liabilities. Further, a bank cannot pledge or otherwise encumber any assets which are held by it in compliance with this liquidity requirement, unless the PA has provided an exemption (section 72(3), Banks Act).
16. What leverage requirements apply?
Under the Basel III framework, SARB introduced a leverage ratio in the Banks Regulations to serve as a backstop to the risk-based capital requirement, and to prevent build-up of excessive leverage in the financial system. Regulation 38(15) of the Banks Regulations provides that every bank and every controlling company must calculate a leverage ratio in accordance with the relevant requirements specified in that sub-regulation (15), to supplement the bank or controlling company's relevant risk-based capital requirements.
Regulation 38(15)(c) of the Banks Regulations provides the leverage ratio formula, and Regulation 38(15)(d) and (e) of the Banks Regulations set out that this formula must be used and the relevant amounts determined.
A bank must calculate its leverage ratio in accordance with the above described formula, provided that:
The bank must calculate the relevant amount of qualifying capital and reserve funds in accordance with the requirements specified in paragraph (d).
The bank must calculate the relevant exposure measure in accordance with the requirements specified in paragraph (e).
In all relevant cases, the requirements specified in sub-regulation (15) apply on a solo and a consolidated basis.
On 1 April 2018 the SARB issued Banks Act Directive 1/2018 pursuant to the standard entitled Pillar 3 disclosure requirements- consolidated and enhanced framework issued by the Basel Committee on Banking Supervision (BCBS). This directive obliges all banks, controlling companies, and branches of foreign institutions to disclose their capital adequacy and leverage ratios on a quarterly basis as provided by the standard issued by the BCBS.
Consolidated Supervision
Role and Requirements
17. What is the role of consolidated supervision of a bank in your jurisdiction and what are the requirements?
Role
Effective governance measures need to be maintained to strike a proper balance between the rights and interests of the public and of banks.
To ensure the soundness of the banking system, efficient and effective supervisory standards have been developed by the Basel Committee. Under the implementation of Basel II and Basel III in South Africa, the Banks Act and the Banks Regulations were amended to:
Clarify the responsibilities of banks, banking groups, boards of directors of banks and banking groups.
Increase the reporting responsibilities and provide comprehensive disclosure requirements for banks and banking groups.
Facilitate the options available to banks and banking groups in calculating minimum capital requirements for credit risk, market risk and operational risk exposure.
Strengthen risk coverage of the capital framework.
Reduce risks from securitisation and off-balance sheet activities.
Strengthen senior management oversight in banks and banking groups.
Elaborate on the supervisory review process to, among other things, assess the capital adequacy and control environment of banks and banking groups.
Requirements
See above, Role.
Shareholdings/Acquisition of Control
18. What reporting requirements apply to the acquisition of shareholdings in banks?
Every bank and controlling company of a bank within 90 days of its registration and annually thereafter must, within 30 days of 31 December of each year, provide the PA with a return regarding its shareholdings, as at the date of registration or as at 31 December of that year (section 59, Banks Act). In this regard, a specific form (BA 125) must be completed and submitted to the PA.
In addition, reporting obligations relating to significant owners are provided for under Joint Standard 1 of 2020, Fitness, Proprietary and Other Matters Related to Significant Owners (Joint Standard 1/2020) (see Question 19).
19. What requirements or restrictions apply to the acquisition of shareholdings and of control of banks?
Section 37 of the Banks Act deals with the acquisition of shares in a bank or controlling company.
No person (other than the bank's controlling company) can acquire shares in a bank or controlling company amounting to more than 15% of the total value or voting rights of the bank's issued shares without having obtained the permission of the PA or the MoF. This includes an acquisition which, together with shares already held by that person or an associate of that person, amounts to more than 15% of the total nominal value or total voting rights of the bank's issued shares.
Subject to the permission of the PA or the MoF:
A person who has for 12 months, or any shorter period the PA determines, held 15% of shares or voting rights in respect of issued shares can, with the PA's permission, acquire more than 15% but no more than 24% of the shares or voting rights in a bank or controlling company.
If that person has for 12 months, or any shorter period the PA deems fit, held 24% of shares or voting rights in respect of a bank's issued shares, that person can, with the PA's permission, acquire more than 24% but no more than 49% of those shares or voting rights.
If that person has for 12 months, or any shorter period the MoF deems fit, held 49% of those shares or voting rights in respect of a banks' issued shares, that person can, with the MoF's permission, acquire more than 49% but no more than 74% of those shares or voting rights.
If that person has for 12 months, or any shorter period the MoF deems fit, held 74% of the shares or voting rights in respect of a bank's issued shares, that person can, with the MoF's approval, acquire more than 74% of those shares or voting rights.
Such permission will not be granted unless the PA or MoF is satisfied that the proposed acquisition is not contrary to the public interest, and not contrary to the interest of the bank or its depositors, or of the controlling company.
In light of the provisions above, it is clear that:
A non-bank can acquire a minority interest in a bank.
One bank can acquire a minority interest in another bank if it has obtained the approval of the PA or MoF.
Section 42 of the Banks Act provides that, subject to the provisions of section 37 of the Banks Act, no person other than a bank or an institution which has been approved by the PA and which conducts a business similar to the business of a bank in a country other than South Africa can exercise control over a bank unless such person is a public company and is registered as a controlling company in respect of such bank. Therefore only banks or foreign public companies conducting a business similar to the business of a bank can acquire a controlling interest in a bank.
Banks can invest in non-banks but their ability to do so is regulated and restricted in section 76 of the Banks Act. A bank can invest in shares of any company (excluding preference shares which are not convertible into ordinary shares) on condition that the sum of the amount invested in those shares does not at any time exceed a prescribed amount. Under regulation 22 of the Banks Regulations, the amount invested in any shares of a company must not at any time exceed a bank's qualifying amount of common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds relating to risks other than market risk.
Significant owners. In addition to the above, Chapter 11 of the FSR Act also contemplates approval and notification obligations relating to significant owners. Since banks fall within the definition of an "eligible financial institution" as defined in the FSR Act, a bank is subject to the approval and notification requirements relating to significant owners under section 158 of the FSR Act. Accordingly, a person must not effect any arrangement that will result in the person, alone or together with a related or inter-related person, becoming a significant owner of a bank, without the prior written approval of the PA (section 158(1), FSR Act).
A person is a significant owner of a financial institution if they, directly or indirectly, alone or together with a related or inter-related person, have the ability to control or influence materially the business or strategy of the financial institution (section 157(1), FSR Act). Such a person has this ability if any of the following applies:
The person, directly or indirectly, alone or together with a related or inter-related person, has the power to appoint 15% of the members of the governing body of the financial institution.
The consent of the person, alone or together with a related or inter-related person, is required for the appointment of 15% of the members of a governing body of the financial institution.
The person, directly or indirectly, alone or together with a related or inter-related person, holds a qualifying stake in the financial institution. Qualifying stake means a person who, directly or indirectly, alone or together with a related or inter-related person:
holds at least 15% of the issued shares of the financial institution;
has the ability to exercise or control the exercise of at least 15% of the voting rights attached to securities of the financial institution;
has the ability to dispose of or control the disposal of at least 15% of the financial institution's securities; or
holds rights in relation to the financial institution that, if exercised, would result in that person directly or indirectly, alone or together with a related or inter-related person having the effect of items (i) to (iii) above.
(section 157(2), FSR Act.)
A significant owner of a bank which has been designated as an SIFI must not, without having obtained the prior written approval of the PA, effect any arrangement that will result in the person, alone or together with a related or inter-related person, ceasing to be a significant owner of the financial institution (section 158(3)(a) of the FSR Act). Banks which have not been designated as an SIFI, must not, without prior notification to the PA, effect any arrangement that will result in the person, alone or together with a related or inter-related person, ceasing to be a significant owner of the financial institution (section 158(3)(b) of the FSR Act).
Further, a person must not effect any arrangement that will result in the person, alone or together with a related or inter-related person, increasing or decreasing the extent of the ability of the person, alone or together with a related or inter-related person, to control or influence materially the business or strategy of the financial institution without having obtained the prior written approval from or prior notification to the PA (as applicable) if such approval/notification was required for any such increase or decrease.
New Joint Standard on fitness. On 1 June 2020, the FSCA together with the PA (collectively, the Authorities), published Joint Standard 1/2020, under sections 107 and 159(1) of the FSR Act.
Joint Standard 1/2020 sets out the criteria that must be met by significant owners to be considered fit and proper with a greater focus on factors that would constitute, on a prima facie basis, evidence of the absence of fitness and propriety.
To assist the authorities to have oversight of the fitness and propriety of significant owners, Joint Standard 1/2020 also places certain reporting obligations on financial institutions, to the extent practical and appropriate. This includes a positive obligation on a financial institution, such as a bank, to notify the authorities, in the manner and form determined by them, within 30 days of it becoming aware of significant ownership/potential significant ownership in respect of a financial institution as well as of non-compliance with the Joint Standard or a change in the fit and proper status of the significant owner.
Joint Standard 1/2020 further specifies that an increase or a decrease of 5% or more of the 15% thresholds specified under section 157(2) of the FSR Act, as set out above, constitutes an increase or decrease in the extent of the ability of a person, alone or together with a related or inter-related person, to control or influence materially the business or strategy of a financial institution.
20. Are there specific restrictions on foreign shareholdings in banks?
The Banks Act does not prohibit foreign investments in banks, and the approval requirements may apply (see Question 4).
Section 38 of the Banks Act requires that any shares held in a bank must be registered in the name of the intended beneficial owner, and prior approval from the PA is required for registration in the name of a nominee. This requirement is triggered whenever shares in a bank are registered or allotted in the name of a nominee shareholder.
As discussed in Question 19, section 42 of the Banks Act confirms that a foreign financial institution that conducts a similar business to that of a South African bank in another country may acquire a controlling interest in a South African bank if it is a public company and is registered as a controlling company in respect of such bank.
Liquidation, Resolution and Transfer
21. What is the legal framework for liquidation of banks?
The Companies Act provides for the liquidation and winding up of companies registered in South Africa. Section 5(4) of the Companies Act must be read with section 51(1) of the Banks Act. This provides that a company registered as a bank or controlling company will continue to be a company in terms of the Companies Act, and the Companies Act will continue to apply to it to the extent it is not inconsistent with the Banks Act.
Section 68 of the Banks Act provides that despite any other provision in the Banks Act and anything to the contrary in the Companies Act:
The PA has the right to apply to a court for the winding up of a bank under the Companies Act, and to oppose an application by any other persons.
No person other than a person recommended by the PA can be appointed by a Master of the High Court (Master) as a provisional liquidator or liquidator of a bank.
The Master will appoint a person designated by the PA (who, in the PA's opinion, has wide experience of and is knowledgeable about the latest developments in the banking industry) to assist the provisional liquidator or liquidator of the bank.
When the winding up of a bank is presented to a court, a copy of the application and every affidavit confirming the facts in it must be lodged with the PA and with the Master. The PA or the Master can report to the court any fact they ascertain which appears to justify the court postponing the hearing or dismissing the application (section 68 (2A)(a), Banks Act.)
In the application of the voluntary winding up of a bank, a copy of every special resolution for the winding up must be provided to the PA (section 68(3)(b), Banks Act).
22. What is the recovery and resolution regime for banks? Does your jurisdiction have any specific mechanisms for the transfer of banking business in a resolution scenario, for example to a bridge bank or a regulatory agency?
If in the PA's opinion a bank will be unable to repay when legally obliged to do so deposits made with it, or will be unable to meet any of its other obligations, the MoF can if they deem it desirable in the public interest appoint a curator to the bank (section 69, Banks Act).
The management of the bank will then vest in the curator subject to the PA's supervision, any other person vested with management of the bank's affairs will be divested of the management, and the curator will recover and take possession of all the bank's assets.
The curator can then dispose of any of the bank's assets and/or transfer any of its liabilities in the ordinary course of the bank's business, provided that the disposals or transfers are in accordance with section 54 of the Banks Act. In terms of section 69(2C)(c)(i) and (ii) of the Banks Act, in seeking consent for such a disposal or transfer, the curator must report to the MoF or PA on the expected effect on the bank's creditors, and whether:
The creditors are treated in an equitable manner.
A reasonable probability exists that a creditor will not incur greater losses, as at the date of the proposed disposal and/or transfer, than would have been incurred if the bank had been wound up under section 68 of the Banks Act on the date of the proposed disposal and/or transfer.
The MoF or the PA must, in addition to the requirements of section 54 of the Banks Act, consider the curator's report in making their decision under section 54. However, the MoF or PA can consent to the disposal or transfer, even if the above effects are not achieved, if it is reasonably likely to promote the maintenance of either:
A stable banking sector.
Public confidence in the banking sector.
(section 69(2C), Banks Act)
The disposal must not be effected unless a reasonable probability exists that the disposal will enable the bank to pay its debts or meet its obligations and become a successful concern.
If at any time the curator believes that there is no reasonable probability that continuation of the curatorship will enable the bank to pay its debts or meet its obligations and become a successful concern, the curator must inform the PA in writing.
While a bank is under curatorship, all actions, legal proceedings, writs, summons and other legal processes against the bank are stayed.
In May 2017, the SARB's Financial Stability Department released a discussion document containing proposals for the resolution framework and a deposit insurance scheme (DIS) for South Africa. As a member of the G20, South Africa has agreed to adopt the FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions, one of which requires jurisdictions to have a privately-funded depositor protection and/or a resolution fund in place. The paper advocates the need for an explicit, privately-funded DIS for South Africa, the main objective being the protection of less financially sophisticated depositors in the event of a bank failure. The paper also refers to the discussion paper titled Strengthening South Africa's Resolution Framework for Financial Institutions, published by National Treasury on 13 August 2015 which sets out proposals for the introduction of a resolution framework in South Africa.
The proposed resolution framework, incorporating the DIS, is expected to form the comprehensive regulatory architecture for reducing the social and economic cost of failing financial institutions.
In January 2022, the Financial Sector Laws Amendment Act (FSLAA), which will insert Chapter 12A (Resolution of Designated Institutions) into the FSR Act (the Resolution Framework), was passed. However, most of the FSLAA, including the Resolution Framework, will only come into effect on a date still to be determined by the MoF.
The Resolution Framework sets out the broad principles for the resolution of banks, systemically important non-bank financial institutions and holding companies of banks, while the FSLAA includes the various legislative amendments required to ensure the Resolution Framework is enforceable and that the actual and potential impacts of a failure of a branch or an SIFI on financial stability are managed appropriately.
Detailed elements of the Resolution Framework are subject to finalisation, which the MoF has indicated will be set out in subsidiary legislation still to be drafted and published. Once such subsidiary legislation is ready for publishing, the effective date of the relevant provisions of the FSLAA, including the Resolution Framework, will be announced.
The Resolution Framework will allow the PA to prepare for an event for which the institution's recovery actions have failed or are deemed likely to fail. Bank resolution plans will be owned and maintained by the Resolution Authority (a new unit in SARB) but will require a significant amount of bilateral engagement and input from individual banks to enable the PA to develop a customised plan that is most appropriate to each bank.
Once the relevant provisions of the FSLAA become effective, the curatorship provisions in terms of section 69 of the Banks Act will be repealed and replaced with the Resolution Framework.
The SARB released a discussion document titled "Ending too big to fail: South Africa's intended approach to bank resolution" in August 2019 for comment. The purpose of this discussion paper is to provide an overview of how the SARB intends to perform its functions as the resolution authority, as well as some of the requirements that may be imposed on designated institutions under the Resolution Framework.
The SARB stressed in the discussion paper that while recovery and resolution are interrelated, resolution could be triggered before all recovery actions have been depleted, if the SARB regards the recovery options at the designated institution's disposal as insufficient to deal with the event, or if a designated institution can only be resolved with the use of statutory resolution powers.
The trigger for placing a designated institution in resolution builds on the existing triggers for statutory management processes, such as curatorship under the Banks Act. The relevant provisions of the FSLAA create a point of resolution (POR), which is deemed to be the point where:
A designated institution is or will probably be unable to meet its obligations (including its regulatory requirements).
It is necessary to trigger resolution to protect or maintain financial stability.
The SARB, as the resolution authority, can at any time recommend to the MoF that a bank enters resolution if the triggers have been met and the SARB believes that recovery actions have failed or will not be successful. If the MoF agrees, the resolution process and resolution powers will be invoked.
Statutory bail-in. The Resolution Framework introduces a number of powers to support an orderly resolution of a designated institution, the most significant being the power of statutory bail-in. Under the statutory bail-in provisions, the SARB is empowered to take one or more of the following actions in relation to a designated institution in resolution:
Write down the shares of the designated institution.
Issue new shares in the designated institution.
Write down, subject to exclusions, the liabilities of the designated institution.
Convert debt instruments to equity.
Statutory bail-in is aimed at enabling the SARB to recapitalise a designated institution at the point of entry into resolution. Requiring banks to maintain a specified level of liabilities that are designated for bail-in in resolution, where creditors are aware of and compensated for the inherent risks, makes it possible for the SARB to first assign losses to shareholders and creditors with sufficient capacity to also restore the capital of a bank in resolution.
The relevant provisions of the FSLAA will introduce a new tranche of loss-absorbing instruments, referred to as "Flac" instruments, which will be subordinated to other unsecured liabilities and be clearly intended for bail-in resolution.
Statutory bail-in is distinct from regulatory (contractual) bail-in. Under statutory bail-in, share capital and liabilities (subject to exclusions) of a designated institution can be written down and/or converted to equity, thereby increasing the absolute amount of capital of the bank.
Statutory bail-in can only be applied in resolution and must strictly follow the statutory credit hierarchy and safeguards set out in the relevant provisions of the FSLAA. By contrast, regulatory bail-in can occur before or outside of resolution as a recovery option, and can be applied only to additional tier 1 and tier 2 regulatory capital instruments, without any realised losses (apart from dilution) imposed on common equity tier 1 (it is the contractual write-down or conversion of additional tier 1 and tier 2 regulatory capital instruments at either the point of non-viability as determined by the PA or at a specified level of common equity tier 1 is required to prevent bank failure).
Regulatory bail-in does not follow the statutory creditor hierarchy but imposes losses on creditors who have contractually agreed to it. Regulatory bail-in changes the composition of capital from debt instruments to equity but does not increase the total amount of capital.
The SARB recognises that two frameworks for bail-in increases uncertainty for investors about their credit risk and relative position in the creditor hierarchy under different scenarios. Such uncertainty could reduce investor demand and/or cause the higher pricing of loss absorbing instruments (both for regulatory and resolution purposes). In the light of this as well as a number of other factors, the SARB views statutory bail-in as more appropriate for banks designated as SIFIs where recapitalisation through statutory bail-in is the key element of the resolution strategy.
There is no specific bank bail-out regime in South Africa. Further, there is no precedent in South Africa of any government bail-out of a bank, as was seen for foreign banks after the 2008 financial crisis.
Obligations to Prepare Recovery Plans
The Resolution Framework requires the SARB, on the basis of a risk analysis, to take adequate and appropriate steps to plan for the potential need for the orderly resolution of each bank.
Powers of the Regulator
The powers of the Resolution Authority (SARB) are set out in the Resolution Framework. Among other things, in respect of a bank in resolution the SARB has the power to:
Manage and control the affairs of the bank.
Convene meetings of and negotiate with creditors.
Propose and enter into arrangements or compromises.
Cancel agreements.
Suspend:
legal and arbitration proceedings;
obligations under agreements;
Prohibit the commencement of legal and arbitration proceedings.
Introduce a stay for up to 48 hours.
Enter into:
transactions transferring assets and liabilities;
amalgamations, mergers or arrangements;
Cancel and issue new shares of the bank.
Reduce amounts due by the bank.
The regulatory framework relating to Total Loss-Absorbing Capacity (TLAC) Holdings was implemented by the PA in respect of all banks with effect from 1 April 2022.
Although not yet in effect, the FSLAA empowers the SARB to enter into memoranda of understanding with a body in a foreign jurisdiction with resolution powers similar to those of the SARB with respect to how they will co-operate and collaborate with, and provide assistance to, each other in connection with their functions in relation to a resolution in terms of the Act or the law of the foreign country
Transfers of Business
The FSLAA grants the SARB, in consultation with the PA, power to enter into transactions for the amalgamation, merger, scheme of arrangement or transfer of business in connection with a resolution regime.
23. Are there any mechanisms for the transfer of banks' business?
The mechanism for the transfer of a bank's business is contained in section 54 of the Banks Act. The requirements vary depending on the percentage of assets, liabilities or both transferred.
Where an amalgamation, merger or arrangement involves a bank as a principal party, or where more than 25% of the assets, liabilities or both are transferred from a bank to another person, the Minister of Finance must consent to the transaction. This consent must be in writing and conveyed through the PA.
Where 25% or less of the assets, liabilities or both are transferred, the prior consent of the PA is required. However, where only assets are transferred and the transferred assets amount to less than 10%, the PA must merely be notified but need not grant consent.
Where a transaction effects the transfer of assets, liabilities or assets and liabilities of one bank to another bank or a person, confirmation at a general meeting of shareholders of the transferor bank and the bank or person taking transfer of such assets, liabilities or assets and liabilities is required.
Where the transfer is effected in accordance with a duly approved securitisation scheme, the above provisions are not applicable.
The above provisions do not apply to a bank in resolution.
24. Are there any requirements governing the continuity of banks' business?
On 30 November 2021, the SARB published a discussion paper relating to operational continuity in resolution (OCIR). Other than resolution, there is currently no framework in place dealing specifically with the continuity of banks' business. However, when applying for authorisation to establish a bank or branch or registration as a bank or branch in terms of the Banks Act, the entity must submit an outline of the proposed strategic and operating or business pans in the short, medium and long term. This must include sufficient detail on the entity's systems relating to corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, and the oversight of proposed outsourced functions.
Conduct of Business
25. What conduct of business standards apply to banks' deposit-taking and lending activities?
There are various conduct standards that apply to banking and lending activities in South Africa. These include the:
Conduct Standard for Banks, published by the FSCA on 3 July 2020 (Conduct Standard).
Code of Banking Practice (Banking Practice Code) issued by the Banking Association of South Africa (BASA).
The Conduct Standard requires banks to prioritise the fair treatment of financial customers. It includes standards relating to advertising, complaints, governance and additional requirements in respect of retail financial customers.
The Banking Practice Code regulates the relationship between the bank and its customers. It includes conduct standards relating to confidentiality of a customer's personal information, equal treatment of customers, advertising, handling of accounts, provision of credit and payment services and principles of dispute resolution. The Banking Practice Code, which is based on the principles of fairness, transparency, accountability and reliability, is voluntary and only binding on member banks of BASA.
The NCA:
Sets the conduct standard for lending activities provided to natural persons or to certain juristic persons.
Regulates marketing and credit information and prohibits unfair and reckless credit practices.
Does not apply where the:
customer is a juristic person with an asset value or annual turnover greater than ZAR1,000,000; or
principal debt under the credit agreement is greater than ZAR250,000.
In addition, the Minister published the second draft of the Conduct of Financial Institutions Bill (COFI Bill) in September 2020. The COFI Bill will form the pillar of the conduct peak in the Twin Peaks regulatory regime and is aimed at consolidating the conduct standards relating to various pieces of legislation into one statute.
It intends to entrench the Treating Customers Fairly (TCF) principles and to ensure better financial customer outcomes. This will include the promotion of the fair treatment and protection of financial customers by financial institutions and the support of fair, transparent and efficient financial markets. However, while comments on the COFI Bill have closed, there has been no further update on the status of the Bill. If it is signed into law in its current form, new lending activity licence requirements will be introduced and the entity will need to comply with the TCF principles.
Complaints Handling
26. Do any requirements apply to the handling of complaints to banks concerning their deposit-taking or lending activities?
The Conduct Standard (see Question 25) prescribes the requirements in relation to the handling of complaints. Under section 8 of the Conduct Standard, banks must:
Establish, maintain, operate and regularly review an effective framework for the management of complaints.
Establish and maintain an appropriate internal complaints escalation and review process.
Keep accurate, efficient and secure records of complaints.
The complaints management framework of a bank must be transparent, visible and accessible and must use plain language. The bank must acknowledge receipt of the complaint and keep the complainant informed of any delay and of the decision of the bank in relation to the complaint.
The FSR Act established the Ombud Council to oversee statutory and industry financial sector ombudsmen.
Where a customer has followed the complaints procedure of their bank and is dissatisfied with the handling of a complaint or has received no response, they can approach the Ombudsman for Banking Services (OBS). The OBS is entitled to mediate or make a determination based on the Banking Practice Code or on the law where the law is reasonably certain. It can make a recommendation in other circumstances including those based on equity. OBS only has jurisdiction over complaints against member banks.
The customer can also approach the Office of the Ombud for Financial Services Providers (FAIS Ombud). The FAIS Ombud can mediate, conciliate or make a determination of complaints relating to a product or services that falls under the FAIS Act and the FAIS Rules.
In relation to a bank's lending activities, a customer can lodge a complaint with the NCR.
Regulatory Developments and Recent Trends
27. What are the regulatory developments and recent trends in bank regulation?
South Africa is currently phasing in Basel III. Transitional arrangements for the implementation of Basel III were phased in until 1 January 2019. After the implementation of Basel III in South Africa the BCBS issued revised requirements in respect of:
Capital disclosure requirements.
Revision of liquidity coverage ratio.
Liquidity disclosure requirements.
Requirements related to intraday liquidity management.
Public disclosure requirements related to leverage ratio.
As discussed in Question 24, on 14 December 2021 the FSLAA was passed, and then signed into law by the President of the Republic of South Africa on 28 January 2022.
The FSLAA amends, among others, the FSR Act to introduce a framework for the orderly resolution of designated institutions (including banks as well as non-banks which are SIFIs) and establish a DIS. The MoF has yet to set dates for the effectiveness of the substantive provisions of the FSLAA.
On 29 September 2020, the second draft of the Conduct of Financial Institutions Bill (CoFI) was published for public comment. CoFI proposes to establish a consolidated, comprehensive and consistent regulatory framework for the conduct of financial institutions. CoFI therefore supplements a series of legislative reforms aimed at strengthening the regulation of the financial institutions and more specifically the way customers are treated in the course of providing financial services. CoFI, once finalised, will replace provisions dealing with conduct requirements in existing financial sector legislation.
In response to the COVID-19 pandemic, the South African Government declared a national state of disaster under the Disaster Management Act, 2002 on 15 March 2020. It implemented a number of measures to mitigate the impact of COVID-19 in South Africa, but has since largely repealed those measures. The government, as well as business, asked the banking industry to continue to extend credit to sectors in need, particularly households and small businesses, and to provide relief measures to reduce the strain on these sectors in an effort to sustain the local economy and maintain financial stability in South Africa.
The PA has since repealed a number of directives that were issued to provide temporary relief to banks, branches of foreign institutions and controlling companies during this time of financial stress. The measures implemented through these directives were aimed at reducing the minimum liquidity cover ratio of banks from 100% to 80% and reducing the minimum requirement of capital and reserve funds (including Pillar 2A and capital conservation buffers) to be maintained by banks, to provide temporary capital relief to enable banks to counter economic risks to the financial system as a whole and to individual banks. The measures have since been repealed by Directive 5 of 2021 and Directive 7 of 2021.
Contributor Profile
Kelle Gagné, Counsel
Allen & Overy (South Africa) LLP
T +27 10 597 9857
E
[email protected]W
www.allenovery.comProfessional qualifications. New York and Massachusetts, Attorney, 2003; South Africa, Attorney, 2018.
Areas of practice. Banking and finance; regulatory; derivatives; securities lending and repo; margin lending.
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