Prudential regulationi Relationship with the prudential regulator
The SARB, as the central bank of South Africa, is responsible for bank regulation and supervision in South Africa. It also has responsibility for promoting the soundness of the domestic banking system through the effective and efficient application of international regulatory and supervisory standards and for minimising systemic risk. The SARB issues banking licences to banking institutions, and monitors their activities in terms of either the Banks Act or the Mutual Banks Act.
On 21 August 2017, the FSRA was signed into law. The passing of the FSRA was the culmination of the collaboration on financial sector reform by the SARB, National Treasury and the FSB, and marked an important milestone in South Africa's journey towards a safer and fairer financial system that is able to serve all citizens.
The FSRA introduced three important changes to the regulation of the financial sector:
- it granted an explicit mandate to the SARB to maintain and enhance financial stability;
- it created a prudential regulator, the PA, which is responsible for regulating banks, insurers, cooperative financial institutions, financial conglomerates and certain market infrastructures; and
- it established a market conduct regulator – the FSCA – which is located outside of the SARB.
The PA is a juristic person operating within the administration of the SARB and comprises four departments:
- the Financial Conglomerate Supervision Department;
- the Banking, Insurance and FMI Supervision Department;
- the Risk Support Department; and
- the Policy, Statistics and Industry Support Department.
Banks are subject to inspection by the regulatory authorities listed in Section II. Official inspections may take various forms. Banks are requested and required by various statutes to submit, at regular intervals, specific financial and other reports, which are then analysed by the regulatory authorities with a view to identifying undesirable developments, such as potential default trends.
In addition, banks are subjected to on-site inspections, in which case the authorities undertake a type of external audit of the bank, but with specific reference to the prudential and conduct-of-business requirements. Regulatory bodies may also conduct inspections when complaints are received by the public. Informally, supervisors may also engage in presentations to and meetings with any bank's board of directors (board).ii Management of banks
The board of a bank is ultimately responsible for ensuring that an adequate and effective process of corporate governance, which is consistent with the nature, complexity and risk inherent in the bank's on-balance sheet and off-balance sheet activities, and which responds to changes in the bank's environment and conditions, is established and maintained.
The process of corporate governance includes the maintenance of effective risk and capital management by a bank. The overall effectiveness of the processes relating to, inter alia, corporate governance, internal controls, risk management, capital management and capital adequacy must be continually monitored by the bank's board. The board of a bank, or a committee appointed by the board for that purpose, must at least once a year assess and document whether the processes relating to corporate governance, internal controls, risk management, capital management and capital adequacy implemented by the bank successfully achieve the objectives specified by the board; and at the request of the Registrar, provide the Registrar with a copy of the report compiled by the board or committee in respect of the adequacy of the processes relating to corporate governance, risk management, capital management and capital adequacy.
In addition, the external auditors of a bank must annually review the process followed by the board in assessing its corporate governance arrangements, including the management of risk and capital, and the assessment of capital adequacy, and report to the Registrar whether any matters have come to their attention to suggest that they do not concur with the findings reported by the board, provided that when the auditors do not concur with the findings of the board, they provide reasons for their non-concurrence.
Every director of a bank or controlling company is required to acquire a basic knowledge and understanding of the conduct of the business of that bank, and of the laws and customs that govern the activities of such an institution. Although not every member of the board of a bank or controlling company is required to be fully conversant with all aspects of the conduct of the business of a bank, the competence of every director of a bank must be commensurate with the nature and scale of the business conducted by that bank and, in the case of a director of a controlling company, as a minimum must be commensurate with the nature and scale of the business conducted by the banks in the group.
In view of the fact that the primary source of funds administered and utilised by a bank in the conduct of its business are deposits loaned to it by the general public, it is further the duty of every director and executive officer of a bank to ensure that risks that are of necessity taken by such a bank in the conduct of its business are prudently managed.
The board must establish, inter alia, a remuneration committee consisting only of non-executive directors of the bank or controlling company. The functions of the remuneration committee include working closely with the bank or controlling company's risk and capital management committee in the evaluation of the incentives created by the compensation system, and ensuring that performance measures are based principally on the achievement of the board-approved objectives of the bank or controlling company and its relevant functions.iii Regulatory capital and liquidity
A bank must manage its affairs in such a way that the sum of its Common Equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital, and its Common Equity Tier 1 unimpaired reserve funds, additional Tier 1 unimpaired reserve funds and Tier 2 unimpaired reserve funds in South Africa does not at any time amount to less than the greater of 250 million rand, or an amount that represents a prescribed percentage of the sum of amounts relating to the different categories of assets and other risk exposures of the bank, calculated as prescribed in the regulations relating to banks, where the business of the bank includes trading in financial instruments.
A bank must furthermore hold in South Africa liquid assets amounting to not less than the sum of amounts, calculated as prescribed percentages not exceeding 20 per cent, of such different categories of its liabilities as may be prescribed in the regulations relating to banks. A bank may not pledge or encumber any portion of these liquid assets. The Registrar is empowered to exempt the bank from this prohibition on such conditions, to such an extent and for such a period as he or she may determine.
A controlling company must further manage its affairs in such a way that the total of its Common Equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital, and its Common Equity Tier 1 unimpaired reserve funds, additional Tier 1 unimpaired reserve funds and Tier 2 unimpaired reserve funds, does not at any time amount to less than an amount that represents a prescribed percentage of the sum of the amounts relating to the different categories of assets and other risk exposures, and calculated in such a manner as prescribed. In addition, the capital and reserve funds of any regulated entity included in the banking group and structured under the controlling company must not at any time amount to less than the required amount of capital and reserve funds determined in respect of the relevant regulated entity, in accordance with the relevant regulator responsible for the supervision of the relevant regulated entity.iv Recovery and resolution
The SARB has issued a directive that specifies the minimum requirements for the recovery plans of banks, controlling companies and branches of foreign institutions. The level of detail and range of recovery options must be commensurate with the risk profile of the relevant bank or institution. These requirements are in line with the international standard for resolution planning set by the Financial Stability Board in its 'Key attributes of effective resolution regimes for financial institutions' released on 4 November 2011.
The directive sets out the following governance requirements:
- the development, maintenance, approval and annual review of the recovery plan should be subject to an appropriate governance process with clearly assigned roles and responsibilities for operational staff, senior management and the board (or committee of similar standing in the case of a locally registered branch of a foreign bank);
- the board should express its view on the recoverability of the bank from severe financial stress based on the options identified in the recovery plan; and
- an overview of any material changes or updates made since the previous version of the bank's recovery plan needs to be included in the recovery plan.
If the Registrar is of the opinion that a bank will be unable to repay deposits made with it or will probably be unable to meet any other obligations, the Minister of Finance (Minister) may appoint a curator to the bank, if he or she deems it desirable in the public interest, by notifying the chief executive officer or chair of the board of that bank in writing. If such an appointment is made, the management of the bank vests in the curator, subject to supervision by the Registrar, and those who until then were vested with its management are divested of it. The curator must recover and take possession of all the assets of the bank. The appointment of a curator does not amount to the bank being wound up or liquidated.
Subject to the supervision of the Registrar, the curator must conduct the management of the bank in such a manner as the Registrar may deem to best promote the interests of the creditors of the bank concerned and of the banking sector as a whole, and the rights of employees in accordance with the relevant labour legislation. The curator may dispose of all or part of the business of a bank to enable an effective resolution of a bank under curatorship. If, at any time, the curator is of the opinion that there is no reasonable prospect that the continuation of the curatorship will enable the bank to pay its debts or meet its obligations and become a going concern, the curator must inform the Registrar in writing forthwith.
The curator is empowered to cancel any guarantee issued by a bank prior to its being placed under curatorship, excluding a guarantee that the bank is required to make good within a period of 30 days of the date of the appointment of the curator. A claim for damages in respect of any loss sustained by or damage caused to any person as a result of the cancellation of a guarantee may be instituted against the bank after the expiry of a period of one year from the date of the cancellation. A curator is further empowered to raise funding on behalf of the bank from the SARB, or any entity controlled by the SARB and, notwithstanding any contractual obligations of the bank, but without prejudice to real security rights, to provide security over the assets of the bank in respect of that funding. Any claim for damages in respect of any loss sustained by or damage caused to any person as a result of such security may be instituted against the bank after the expiry of a period of one year from the date of the provision of security. A curator may also propose and enter into an arrangement or compromise between the bank and all its creditors, or all the members of any class of creditors, in terms of Section 155 of the Companies Act 71 of 2008 (Companies Act).
Notwithstanding the foregoing, the Registrar has the right to apply to a court for the winding up of any bank under the Companies Act. The Registrar also has the right to oppose any such application made by any other party. Only a person recommended by the Registrar may be appointed as provisional liquidator or liquidator of a bank.
The introduction of the FSRA provides for the establishment of an explicit deposit insurance scheme for banks. Together, the resolution chapter of the FSRA and the Financial Sector Laws Amendment Bill of 2018 (FSLAB) provide that the resolution of designated institutions falls squarely within the ambit of the SARB as the resolution authority.