1. 1 BANKS AMENDMENT BILL, 2003 PRESENTATION TO THE PORTFOLIO COMMITTEE ON FINANCE 31 MARCH 2003 NKOSANA MASHIYA DIRECTOR OF BANKING DEVELOPMENT NATIONAL TREASURY

2. 2 BANKS AMENDMENT BILL, 2003 OVERVIEW 1.Profile of the South African Banking Industry 2.The nature of the Regulatory Framework 3.Improving access to financial services: policy intentions 4.The rationale for the current amendments to the Banks Act, i.e purpose of the Banks Amendment Bill, 2003 5.Key Amendments to the Bill 6.Summary

3. 3 PROFILE OF THE SOUTH AFRICAN BANKING INDUSTRY  Financial stability and growth  Stable banking system compared with most emerging markets.  Banks are well managed and most have sophisticated risk-management systems and corporate-governance structures in place.  As at 31 December 2002, the banking system in South Africa consisted of 31 registered banks and mutual banks, 14 local bank branches of foreign banks, and 53 representative offices of foreign banks.  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 constituted 74,2 percent (December 2001: 69,3 percent) of the total banking sector.

4. 4 PROFILE OF THE SOUTH AFRICAN BANKING INDUSTRY SOURCE: BSD:2002 Annual Report

5. 5 PROFILE OF THE SOUTH AFRICAN BANKING INDUSTRY  Consolidation in local and international banking industries  Throughout the world, the banking industry is undergoing a rapid and sometimes startling process of consolidation, spurred occasionally by hostile take-over bids, but more often by friendly mergers between institutions and this has also taken place in the South Africa’s banking sector.  One direct result flowing from consolidation is a more concentrated banking sector. The big four bank’s market share 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.  High levels of concentration in any banking system means less competition and could result in higher margins and higher prices for banking services.

6. 6 PROFILE OF THE SOUTH AFRICAN BANKING SECTOR  A before-tax return equivalent to approximately 0,8 percent of total assets (2001: 1,1 percent) were reported for 2002.  An after-tax return equivalent to approximately 0,5 percent of total assets (2001: 0,8 percent) were reported for 2002.  An after-tax return equivalent to approximately 5,6 percent were reported on net qualifying capital and reserves (2001: 9,0 percent).  The banking system in South Africa is well capitalised.  Capital provides a safety net to depositors and other providers of loan finance against losses that a bank might incur.  Important that only banks that are adequately capitalised be authorised to accept deposits from the public.

7. 7 PROFILE OF THE SOUTH AFRICAN BANKING SECTOR  As at the end of December 2002, the average capital and reserves held by the banking sector amounted to R97.8 billion (December 2001: 89.7 billion), R84.4 billion (December 2001: 77.6 billion) of which constituted qualifying capital and reserves for purposes of statutory capital adequacy.

8. 8 PROFILE OF THE SOUTH AFRICAN BANKING SECTOR PROFILE OF THE SOUTH AFRICAN BANKING SECTOR  The average adequacy ratio for the year ended December 2002 was 12,6 percent (2001: 11,4 percent).  An analysis of the percentage distribution of banks in terms of capital adequacy at the end of December 2002 reveals that 39,5 percent of banking institutions (2001: 34,6 percent) had capital adequacy ratios that exceeded 20 percent.

9. 9 PROFILE OF THE SOUTH AFRICAN BANKING SECTOR Qualifying Capital and Reserves BSD Annual Report, 2002

10. 10 PROFILE OF THE SOUTH AFRICAN BANKING SECTOR FSAP evaluation report and Basle Core Principles  The IMF and the World Bank identified South Africa, amongst other countries, to form part of the pilot Financial Sector Assessment Program (FSAP).  One of the main objectives of FSAP was to evaluate countries’ level of compliance with international standards.  Basle Core Principles –set by Basel Committee on Bank Supervision: Accord for prudential and risk-sensitive supervision

11. 11 PROFILE OF THE SOUTH AFRICAN BANKING SECTOR PROFILE OF THE SOUTH AFRICAN BANKING SECTOR  The assessment indicated South Africa is compliant with 22 of the 25 Basle Core Principles for Effective Banking Supervision. Since that assessment, further work has been done to effect full compliance.  BSD is currently undertaking a detailed study of the new Capital Accord to determine the changes required to the current banking-supervisory process.  It is expected that a comprehensive project plan will be in place by the time the final Accord is released.  On 1 October 2002 the Basle Committee on Banking Supervision launched the third Quantitative Impact Study (QIS 3). South Africa participated alongside a number of countries in this study.

12. 12 PROFILE OF THE SOUTH AFRICAN BANKING SECTOR  QIS 3 is a comprehensive assessment of the proposed capital requirements for the new approaches under the New Basle Capital Accord as well as the capital charges for operational risk and securitisation.

13. 13 NATURE OF THE REGULATORY INFRASTRUCTURE  Background on the Regulator  The Registrar of Banks is responsible for the regulation and supervision of banks in SA.  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 supervision.  A combination of on- and off-site supervision characterises the supervision process.  The off-site component regularly analyses and revues monthly returns (from banks), covering a comprehensive range of risk information.  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 prescribed by their own Board of Directors and as per regulations.

14. 14 NATURE OF THE REGULATORY INFRASTRUCTURE  BSD implemented new regulations with regard to consolidated supervision with effect from 1 January 2001.  The new regulations provide, amongst others, for a standardised approach to the calculation of a measure of group capital adequacy.  The new consolidated-supervision regulations incorporate the latest international developments.  These regulations are regarded as being at the forefront of worldwide banking supervision standards.  Besides having been received favourably by the industry, the regulations have achieved the Bank supervision Department’s objective of complying with the Core Principles for Effective Banking Supervision.

15. 15 NATURE OF THE REGULATORY INFRASTRUCTURE  As regulator, the Bank Supervision Department is now in a position to assess the financial condition of individual banking groups. Banking groups will also reap benefits, particularly when they wish to expand their international operations.  Consolidated supervision is now applied to all South African banking groups, which have to ensure that they are adequately capitalised in order to sustain both their banking and non-banking operations.  At present, the minimum capital-adequacy ratio for a banking group is set at 10 percent of risk exposure. The entities subject to consolidated supervision are the bank controlling company, it subsidiaries, joint ventures and companies in which the bank controlling company or its subsidiaries have a participation.

16. 16 NATURE OF THE REGULATORY INFRASTRUCTURE  As mentioned before, these regulations assists with the compliance of the Core Principles for Effective Banking Supervision.

17. 17 Improving access to financial services  South Africa faces an enormous challenge in the provision of banking services to the majority of its population.  Seventeen million adult South Africans are unbanked today (Finmark Trust, 2002).  Currently only about 40% of the nation’s 27 million adult population, about 10 million, have access to transactions and savings products.  There is a clear need in South Africa to expand simple banking services, as a means to improving access to financial services to the poor.

18. 18 Improving access to financial services  Difficulties to expanding banking services to the low-income population  High cost of the products relative to their utility to the low-income population  The high fee structure charged by the private banks for access to their infrastructure effectively sidelines the poor, given their low incomes and minimal transaction values.  Formal banking sector consider uneconomical to create infrastructure in rural areas because …

19. 19 Improving access to financial services  Service this market in a manner that would be largely “over-the- counter” with significant cash handling and face-to-face service from bricks and mortar outlets (Task Group on Standing Committee for the Revision of the Banks Act, 2003).  Lack of convenient access points.  The current banking infrastructure, composed of private bank branches and ATMs, and traditional online retailers (e.g. Pick ‘n Pay) do not reach the rural and township areas where the majority of the unbanked reside.

20. 20 Improving access to financial services  Postbank as an affordable, wide-reach solution  Postbank is the possible low-cost financial services provider for the low- income.  The postbank (through post office network) has wide reach and infrastructure that can guarantee it comparative cost advantage over the existing banking industry.  We are mindful the post office/post bank, insufficient technical banking systems capacity and has a relatively small ATM network

21. 21 Improving access to financial services  Largely structured to serve the population in an over-the-counter mode.  Possible operational risk and systemic risk.  Risks minimised if Postbank undertakes limited banking services, depostits (and loans on a small scale)  Deposits invested in liquid assets

22. 22 Improving access to financial services  Legal Framework  NT of opinion that such kind of “developmental” bank should not be addressed through either Banks Act or Mutual Banks Act.  High registration fees and strict prudential supervision requirements.  Requires own Act. Can incorporate existing formal/ informal financial services groupings (FSC’s, Stokvels, Credit Unions etc)  Should operate under own legislation and set of regulations rather than under exemption of Banks Act

23. 23 Improving access to financial services  Registrar (Single Regulator as case may be) to supervise and regulate under appropriate set of regulations

24. 24 Rationale for the Amendments  During the public hearings of the Banks Amendment Act, 2000 in October 2000, the Finance Committee of the National Council of Provinces directed that the gender insensitive provisions of the Banks Act, be amended in order to reflect the constitutional imperative in this regard.  The vast majority of the amendments to the principal Act, in the present Bill, have, therefore, been drafted in order to comply with the above-mentioned directive.

25. 25 Rationale for the Amendments  Certain further issues have emerged as a result of recent bank failures and the report pertaining to the affairs of Regal Treasury Private Bank Limited delivered by Adv. J Myburgh SC. These issues have also been addressed by means of the legislative amendments proposed in the Bill.  Further amendments proposed in this Bill seek to improve the Principal Act to comply with the Core principles of the Basel Committee.

26. 26 KEY AMENDMENTS TO THE BILL  The majority of the amendments to the principal Act, in the present Bill, have been drafted to comply with the directive from the Portfolio Committee to correct gender-insensitive provision of the Banks Act.  Clause 40: Appointment of directors, chief Executive Officer and executive officers of a bank of controlling company.  Gives legal clarification for fiduciary duties and responsibilities of directors; CE’s and Managers of Banks.  Enables Registrar to object to appointment of Directors.  Introduce an objective test for both the duty of skill and the duty of care of management.

27. 27 KEY AMENDMENTS TO THE BILL  Modern chief executive officers and managers command wide powers.  Important to extended corporate governance measures developed by common law in respect of directors, to chief executive officers and executive officers of banks (“management”).  The proposed amendment, in contradistincion to the existing provisions of the Banks Act, which refer to a “fiduciary relationship” only, codifies the generally accepted common law principles of a fiduciary duty and a duty of care and skill owed to the company.  Proposed amendment also clearly defines the parameters of such a duty.

28. 28 KEY AMENDMENTS TO THE BILL  Clause 42: Appointment of more than one auditor and the rotation of audit firms 1. Enables Registrar to appoint an auditor for the bank controlling company as well, (currently can appoint only for the bank; consistent with principle of consolidated supervision) 2. Principal Act provides that the Registrar may prescribe that a bank with 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 prescribe the amount by regulation. 3. 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 may be prescribed by regulation.

29. 29 KEY 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 and executive managers of a bank than is normally required in respect of duties of directors of other companies.  Enables Registrar to issue regulations in this regard from time to time.  Certain regulations pertaining to corporate governance have already been incorporated in the Regulations relating to Banks.  Creates legal certainty in this regard.

30. 30 Summary  Proposed Bill largely corrects gender insensitive provisions  Gives legal clarification for fiduciary duties and responsibilities of directors; CE’s and Managers of Banks. Introduces a system of compulsory rotation under such conditions as may be prescribed by regulation. Introduces a system of compulsory rotation under such conditions as may be prescribed by regulation.  Requires greater degree of care and skill from the directors and executive managers of a bank than is normally required in respect of duties of directors of other companies.  Creates legal clarification in less than clear provisions.

31. 31 QUESTIONS?