1 BANKS AMENDMENT BILL, 2003 PRESENTATION TO THE PORTFOLIO COMMITTEE ON FINANCE 31 MARCH 2003...

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BANKS AMENDMENT BILL,BANKS AMENDMENT BILL,20032003

PRESENTATION TO THE PORTFOLIO COMMITTEE ON PRESENTATION TO THE PORTFOLIO COMMITTEE ON FINANCE FINANCE

31 MARCH 200331 MARCH 2003

NKOSANA MASHIYANKOSANA MASHIYA

DIRECTOR OF BANKING DIRECTOR OF BANKING DEVELOPMENTDEVELOPMENT

NATIONAL TREASURYNATIONAL TREASURY

http://www.gov.za/_vti_bin/shtml.dll/symbols/coatofarms.htm/map

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BANKS AMENDMENT BILL,BANKS AMENDMENT BILL,20032003

OVERVIEWOVERVIEW

1.1. Profile of the South African Banking IndustryProfile of the South African Banking Industry2.2. The nature of the Regulatory Framework The nature of the Regulatory Framework 3.3. Improving access to financial services: policy Improving access to financial services: policy

intentionsintentions4.4. The rationale for the current amendments to The rationale for the current amendments to

the the Banks Act, i.e purpose of the Banks Banks Act, i.e purpose of the Banks Amendment Bill, Amendment Bill, 20032003

5.5. Key Amendments to the BillKey Amendments to the Bill6.6. SummarySummary


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PROFILE OF THE SOUTH AFRICANPROFILE OF THE SOUTH AFRICANBANKING INDUSTRYBANKING INDUSTRY

Financial stability and growthFinancial stability and growth

Stable banking system compared with most emerging markets.Stable banking system compared with most emerging markets.

Banks are well managed and most have sophisticated risk-management Banks are well managed and most have sophisticated risk-management systems and corporate-governance structures in place.systems and corporate-governance structures in place.

As at 31 December 2002, the banking system in South Africa consisted As at 31 December 2002, the banking system in South Africa consisted of 31 registered banks and mutual banks, 14 local bank branches of of 31 registered banks and mutual banks, 14 local bank branches of foreign banks, and 53 representative offices of foreign banks.foreign banks, and 53 representative offices of foreign banks.

The total assets of the banking sector amounted to R1 100.8 billion The total assets of the banking sector amounted to R1 100.8 billion ($134.2 billion) as at 31 December 2002. The “big four” banks ($134.2 billion) as at 31 December 2002. The “big four” banks constituted 74,2 percent (December 2001: 69,3 percent) of the total constituted 74,2 percent (December 2001: 69,3 percent) of the total banking sector.banking sector.


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PROFILE OF THE SOUTH AFRICAN PROFILE OF THE SOUTH AFRICAN

BANKING INDUSTRY BANKING INDUSTRY

SOURCE:SOURCE: BSD:2002 Annual Report BSD:2002 Annual Report


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PROFILE OF THE SOUTH AFRICAN PROFILE OF THE SOUTH AFRICAN BANKING INDUSTRYBANKING INDUSTRY

Consolidation in local and international banking industriesConsolidation in local and international banking industries

Throughout the world, the banking industry is undergoing a rapid Throughout the world, the banking industry is undergoing a rapid and sometimes startling process of consolidation, spurred and sometimes startling process of consolidation, spurred occasionally by hostile take-over bids, but more often by friendly occasionally by hostile take-over bids, but more often by friendly mergers between institutions and this has also taken place in the mergers between institutions and this has also taken place in the South Africa’s banking sector.South Africa’s banking sector.

One direct result flowing from consolidation is a more One direct result flowing from consolidation is a more concentrated banking sector. The big four bank’s market share concentrated banking sector. The big four bank’s market share had increased to about 74 percent of total banking sector assets had increased to about 74 percent of total banking sector assets as at the end of 2002 compared to about 69 percent a year before.as at the end of 2002 compared to about 69 percent a year before.

High levels of concentration in any banking system means less High levels of concentration in any banking system means less competition and could result in higher margins and higher prices competition and could result in higher margins and higher prices for banking services.for banking services.


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PROFILE OF THE SOUTH AFRICANPROFILE OF THE SOUTH AFRICANBANKING SECTORBANKING SECTOR

A before-tax return equivalent to approximately 0,8 percent of total A before-tax return equivalent to approximately 0,8 percent of total assets (2001: 1,1 percent) were reported for 2002.assets (2001: 1,1 percent) were reported for 2002.

An after-tax return equivalent to approximately 0,5 percent of total An after-tax return equivalent to approximately 0,5 percent of total assets (2001: 0,8 percent) were reported for 2002.assets (2001: 0,8 percent) were reported for 2002.

An after-tax return equivalent to approximately 5,6 percent were An after-tax return equivalent to approximately 5,6 percent were reported on net qualifying capital and reserves (2001: 9,0 percent).reported on net qualifying capital and reserves (2001: 9,0 percent).

The banking system in South Africa is well capitalised.The banking system in South Africa is well capitalised.

Capital provides a safety net to depositors and other providers of loan Capital provides a safety net to depositors and other providers of loan finance against losses that a bank might incur. finance against losses that a bank might incur.

Important that only banks that are adequately capitalised be authorised Important that only banks that are adequately capitalised be authorised to accept deposits from the public. to accept deposits from the public.


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As at the end of December 2002, the average capital As at the end of December 2002, the average capital and reserves held by the banking sector amounted to and reserves held by the banking sector amounted to R97.8 billion (December 2001: 89.7 billion), R84.4 billion R97.8 billion (December 2001: 89.7 billion), R84.4 billion (December 2001: 77.6 billion) of which constituted (December 2001: 77.6 billion) of which constituted qualifying capital and reserves for purposes of statutory qualifying capital and reserves for purposes of statutory capital adequacy.capital adequacy.


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PROFILE OF THE SOUTH AFRICANPROFILE OF THE SOUTH AFRICANBANKING SECTOR BANKING SECTOR

The average adequacy ratio for the year ended The average adequacy ratio for the year ended December 2002 was 12,6 percent (2001: 11,4 percent).December 2002 was 12,6 percent (2001: 11,4 percent).

An analysis of the percentage distribution of banks in An analysis of the percentage distribution of banks in terms of capital adequacy at the end of December 2002 terms of capital adequacy at the end of December 2002 reveals that 39,5 percent of banking institutions (2001: reveals that 39,5 percent of banking institutions (2001: 34,6 percent) had capital adequacy ratios that 34,6 percent) had capital adequacy ratios that exceeded 20 percent.exceeded 20 percent.


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Qualifying Capital and ReservesQualifying Capital and Reserves

BSD Annual Report, 2002BSD Annual Report, 2002


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FSAP evaluation report and Basle Core PrinciplesFSAP evaluation report and Basle Core Principles

The IMF and the World Bank identified South Africa, The IMF and the World Bank identified South Africa, amongst other countries, to form part of the pilot Financial amongst other countries, to form part of the pilot Financial Sector Assessment Program (FSAP).Sector Assessment Program (FSAP).

One of the main objectives of FSAP was to evaluate One of the main objectives of FSAP was to evaluate countries’ level of compliance with international countries’ level of compliance with international standards.standards.

Basle Core Principles –set by Basel Committee on Bank Basle Core Principles –set by Basel Committee on Bank Supervision: Accord for prudential and risk-sensitive Supervision: Accord for prudential and risk-sensitive supervision supervision


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The assessment indicated South Africa is compliant with 22 of The assessment indicated South Africa is compliant with 22 of the 25 Basle Core Principles for Effective Banking Supervision. the 25 Basle Core Principles for Effective Banking Supervision. Since that assessment, further work has been done to effect full Since that assessment, further work has been done to effect full compliance.compliance.

BSD is currently undertaking a detailed study of the new Capital BSD is currently undertaking a detailed study of the new Capital Accord to determine the changes required to the current Accord to determine the changes required to the current banking-supervisory process.banking-supervisory process.

It is expected that a comprehensive project plan will be in place It is expected that a comprehensive project plan will be in place by the time the final Accord is released.by the time the final Accord is released.

On 1 October 2002 the Basle Committee on Banking Supervision On 1 October 2002 the Basle Committee on Banking Supervision launched the third Quantitative Impact Study (QIS 3). South launched the third Quantitative Impact Study (QIS 3). South Africa participated alongside a number of countries in this study.Africa participated alongside a number of countries in this study.


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QIS 3 is a comprehensive assessment of the proposed capital QIS 3 is a comprehensive assessment of the proposed capital requirements for the new approaches under the New Basle requirements for the new approaches under the New Basle Capital Accord as well as the capital charges for operational risk Capital Accord as well as the capital charges for operational risk and securitisation.and securitisation.


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NATURE OF THE REGULATORY NATURE OF THE REGULATORY INFRASTRUCTUREINFRASTRUCTURE

Background on the RegulatorBackground on the Regulator

The Registrar of Banks is responsible for the regulation and supervision of banks The Registrar of Banks is responsible for the regulation and supervision of banks in SA.in SA.

The Registrar is the Head of the Bank Supervision Department (BSD) of the The Registrar is the Head of the Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) and applies a risk-based approach to South African Reserve Bank (SARB) and applies a risk-based approach to supervision.supervision.

A combination of on- and off-site supervision characterises the supervision A combination of on- and off-site supervision characterises the supervision process.process.

The off-site component regularly analyses and revues monthly returns (from The off-site component regularly analyses and revues monthly returns (from banks), covering a comprehensive range of risk information.banks), covering a comprehensive range of risk information.

The on-site component does the actual verification of the data supplied to the The on-site component does the actual verification of the data supplied to the BSD and runs an “audit” to ensure that the banks’ policies are implemented as BSD and runs an “audit” to ensure that the banks’ policies are implemented as prescribed by their own Board of Directors and as per regulations.prescribed by their own Board of Directors and as per regulations.


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BSD implemented BSD implemented new regulationsnew regulations with regard to consolidated with regard to consolidated supervision with effect from 1 January 2001.supervision with effect from 1 January 2001.

The new regulations provide, amongst others, for a standardised The new regulations provide, amongst others, for a standardised approach to the calculation of a measure of group capital adequacy.approach to the calculation of a measure of group capital adequacy.

The new consolidated-supervision regulations incorporate the latest The new consolidated-supervision regulations incorporate the latest international developments.international developments.

These regulations are regarded as being at the forefront of worldwide These regulations are regarded as being at the forefront of worldwide banking supervision standards.banking supervision standards.

Besides having been received favourably by the industry, the Besides having been received favourably by the industry, the regulations have achieved the Bank supervision Department’s objective regulations have achieved the Bank supervision Department’s objective of complying with the Core Principles for Effective Banking Supervision.of complying with the Core Principles for Effective Banking Supervision.


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As regulator, the Bank Supervision Department is now in a As regulator, the Bank Supervision Department is now in a position to assess the financial condition of individual banking position to assess the financial condition of individual banking groups. Banking groups will also reap benefits, particularly groups. Banking groups will also reap benefits, particularly when they wish to expand their international operations.when they wish to expand their international operations.

Consolidated supervision is now applied to all South African Consolidated supervision is now applied to all South African banking groups, which have to ensure that they are banking groups, which have to ensure that they are adequately capitalised in order to sustain both their banking adequately capitalised in order to sustain both their banking and non-banking operations.and non-banking operations.

At present, the minimum capital-adequacy ratio for a banking At present, the minimum capital-adequacy ratio for a banking group is set at 10 percent of risk exposure. The entities group is set at 10 percent of risk exposure. The entities subject to consolidated supervision are the bank controlling subject to consolidated supervision are the bank controlling company, it subsidiaries, joint ventures and companies in company, it subsidiaries, joint ventures and companies in which the bank controlling company or its subsidiaries have a which the bank controlling company or its subsidiaries have a participation.participation.


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As mentioned before, these regulations assists with the As mentioned before, these regulations assists with the compliance of the Core Principles for Effective Banking compliance of the Core Principles for Effective Banking Supervision.Supervision.


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Improving access to financial Improving access to financial servicesservices

South Africa faces an enormous challenge in the provision of South Africa faces an enormous challenge in the provision of banking services to the majority of its population. banking services to the majority of its population.

Seventeen million adult South Africans are unbanked today Seventeen million adult South Africans are unbanked today (Finmark Trust, 2002). (Finmark Trust, 2002).

Currently only about 40% of the nation’s 27 million adult Currently only about 40% of the nation’s 27 million adult population, about 10 million, have access to transactions and population, about 10 million, have access to transactions and savings products.savings products.

There is a clear need in South Africa to expand simple banking There is a clear need in South Africa to expand simple banking services, as a means to improving access to financial services services, as a means to improving access to financial services to the poor. to the poor.


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Difficulties to expanding banking services to the low-Difficulties to expanding banking services to the low-income populationincome population

High costHigh cost of the products relative to their utility to the low- of the products relative to their utility to the low-income population income population

The high fee structure charged by the private banks for access The high fee structure charged by the private banks for access to their infrastructure effectively sidelines the poor, given their to their infrastructure effectively sidelines the poor, given their low incomes and minimal transaction values. low incomes and minimal transaction values.

Formal banking sector consider uneconomical to create Formal banking sector consider uneconomical to create infrastructure in rural areas because …infrastructure in rural areas because …


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Service this market in a manner that would be largely Service this market in a manner that would be largely “over-the-counter” with significant cash handling and “over-the-counter” with significant cash handling and face-to-face service from bricks and mortar outlets face-to-face service from bricks and mortar outlets ((Task Group on Standing Committee for the Revision of Task Group on Standing Committee for the Revision of the Banks Act, 2003the Banks Act, 2003). ).

Lack of convenient access pointsLack of convenient access points..

The current banking infrastructure, composed of private The current banking infrastructure, composed of private bank branches and ATMs, and traditional online retailers bank branches and ATMs, and traditional online retailers (e.g. Pick ‘n Pay) do not reach the rural and township (e.g. Pick ‘n Pay) do not reach the rural and township areas where the majority of the unbanked reside. areas where the majority of the unbanked reside.


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Postbank as an affordable, wide-reach solutionPostbank as an affordable, wide-reach solution

Postbank is the possible low-cost financial services provider Postbank is the possible low-cost financial services provider for the low-income.for the low-income.

The postbank (through post office network) has wide reach The postbank (through post office network) has wide reach and infrastructure that can guarantee it comparative cost and infrastructure that can guarantee it comparative cost advantage over the existing banking industry. advantage over the existing banking industry.

We are mindful the pWe are mindful the post office/post bank, ost office/post bank, insufficient technical insufficient technical banking systemsbanking systems capacity and has a relatively capacity and has a relatively small ATM small ATM networknetwork


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Largely structured to serve the population in an over-the-Largely structured to serve the population in an over-the-counter mode. counter mode.

Possible operational risk and systemic risk.Possible operational risk and systemic risk.

Risks minimised if Postbank undertakes limited banking Risks minimised if Postbank undertakes limited banking services, depostits (and loans on a small scale)services, depostits (and loans on a small scale)

Deposits invested in liquid assetsDeposits invested in liquid assets


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Rationale for the Rationale for the AmendmentsAmendments

During the public hearings of the Banks Amendment Act, 2000 During the public hearings of the Banks Amendment Act, 2000 in October 2000, the Finance Committee of the National in October 2000, the Finance Committee of the National Council of Provinces directed that the gender insensitive Council of Provinces directed that the gender insensitive provisions of the Banks Act, be amended in order to reflect the provisions of the Banks Act, be amended in order to reflect the constitutional imperative in this regard.constitutional imperative in this regard.

The vast majority of the amendments to the principal Act, in The vast majority of the amendments to the principal Act, in the present Bill, have, therefore, been drafted in order to the present Bill, have, therefore, been drafted in order to comply with the above-mentioned directive.comply with the above-mentioned directive.


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Rationale for the Rationale for the AmendmentsAmendments

Certain further issues have emerged as a result of recent bank Certain further issues have emerged as a result of recent bank failures and the report pertaining to the affairs of Regal failures and the report pertaining to the affairs of Regal Treasury Private Bank Limited delivered by Adv. J Myburgh SC. Treasury Private Bank Limited delivered by Adv. J Myburgh SC. These issues have also been addressed by means of the These issues have also been addressed by means of the legislative amendments proposed in the Bill.legislative amendments proposed in the Bill.

Further amendments proposed in this Bill seek to improve the Further amendments proposed in this Bill seek to improve the Principal Act to comply with the Core principles of the Basel Principal Act to comply with the Core principles of the Basel Committee.Committee.


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KEY AMENDMENTS TO THE BILLKEY AMENDMENTS TO THE BILL The majority of the amendments to the principal Act, in the The majority of the amendments to the principal Act, in the

present Bill, have been drafted to comply with the directive from present Bill, have been drafted to comply with the directive from the Portfolio Committee to the Portfolio Committee to correct gender-insensitive provision of correct gender-insensitive provision of the Banks Act.the Banks Act.

Clause 40: Appointment of directors, chief Executive Clause 40: Appointment of directors, chief Executive Officer and executive officers of a bank of controlling Officer and executive officers of a bank of controlling company.company.

Gives legal clarification for fiduciary duties and responsibilities of Gives legal clarification for fiduciary duties and responsibilities of directors; CE’s and Managers of Banks.directors; CE’s and Managers of Banks.

Enables Registrar to object to appointment of Directors.Enables Registrar to object to appointment of Directors.

Introduce an objective test for both the duty of skill and the duty Introduce an objective test for both the duty of skill and the duty of care of management.of care of management.


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KEY AMENDMENTS TO THE BILLKEY AMENDMENTS TO THE BILL Modern chief executive officers and managers Modern chief executive officers and managers command wide command wide

powers.powers.

Important to extended corporate governance measures developed Important to extended corporate governance measures developed by common law in respect of directors, to chief executive officers by common law in respect of directors, to chief executive officers and executive officers of banks (“management”).and executive officers of banks (“management”).

The proposed amendment, in contradistincion to the existing The proposed amendment, in contradistincion to the existing provisions of the Banks Act, which refer to a “fiduciary relationship” provisions of the Banks Act, which refer to a “fiduciary relationship” only, codifies the generally accepted common law principles of a only, codifies the generally accepted common law principles of a fiduciary duty and a duty of care and skill owed to the company.fiduciary duty and a duty of care and skill owed to the company.

Proposed amendment also clearly defines the parameters of such a Proposed amendment also clearly defines the parameters of such a duty.duty.


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KEY AMENDMENTS TO THE BILLKEY AMENDMENTS TO THE BILL Clause 42: Appointment of more than one auditor and the rotation Clause 42: Appointment of more than one auditor and the rotation

of audit firmsof audit firms

1.1. Enables Registrar to appoint an auditor for the bank controlling Enables Registrar to appoint an auditor for the bank controlling company as well, (currently can appoint only for the bank; consistent company as well, (currently can appoint only for the bank; consistent with principle of consolidated supervision) with principle of consolidated supervision)

2.2. Principal Act provides that the Registrar may prescribe that a bank with Principal Act provides that the Registrar may prescribe that a bank with total assets exceeding R10 000 000 appoint not less than two auditors. total assets exceeding R10 000 000 appoint not less than two auditors. This requirement has proved to be somewhat rigid and it is proposed to This requirement has proved to be somewhat rigid and it is proposed to prescribe the amount by regulation.prescribe the amount by regulation.

3.3. Aims to ensure the independence of a bank’s auditor at all times by Aims to ensure the independence of a bank’s auditor at all times by means of a system of compulsory rotation under such conditions as means of a system of compulsory rotation under such conditions as may be prescribed by regulation.may be prescribed by regulation.


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KEY AMENDMENTS TO THE BILLKEY AMENDMENTS TO THE BILL Clause 41 and clause 1(b): Corporate Governance. Clause 41 and clause 1(b): Corporate Governance.

Requires greater degree of care and skill from the directors Requires greater degree of care and skill from the directors and executive managers of a bank than is normally required in and executive managers of a bank than is normally required in respect of duties of directors of other companies. respect of duties of directors of other companies.

Enables Registrar to issue regulations in this regard from time Enables Registrar to issue regulations in this regard from time to time. to time.

Certain regulations pertaining to corporate governance have Certain regulations pertaining to corporate governance have

already been incorporated in the Regulations relating to Banks. already been incorporated in the Regulations relating to Banks.

Creates legal certainty in this regard. Creates legal certainty in this regard.


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SummarySummary

Proposed Bill largely corrects gender insensitive provisionsProposed Bill largely corrects gender insensitive provisions

Gives legal clarification for fiduciary duties and Gives legal clarification for fiduciary duties and responsibilities of directors; CE’s and Managers of Banks.responsibilities of directors; CE’s and Managers of Banks.

• Introduces a system of compulsory rotation under such Introduces a system of compulsory rotation under such conditions as may be prescribed by regulation.conditions as may be prescribed by regulation.

Requires greater degree of care and skill from the directors Requires greater degree of care and skill from the directors and executive managers of a bank than is normally required and executive managers of a bank than is normally required in respect of duties of directors of other companies.in respect of duties of directors of other companies.

Creates legal clarification in less than clear provisions.Creates legal clarification in less than clear provisions.


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QUESTIONS?QUESTIONS?


1 BANKS AMENDMENT BILL, 2003 PRESENTATION TO THE PORTFOLIO COMMITTEE ON FINANCE 31 MARCH 2003...

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