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Regulatory framework

Key policies

What are the principal governmental and regulatory policies that govern the banking sector?

In 2011, the National Treasury published a policy document titled ‘A safer financial sector to serve South Africa better’ (2011 Policy Document). The 2011 Policy document identified the following policy priorities for the financial services sector:

Stability and soundness of financial institutions

The primary objective of the central bank of South Africa, the South African Reserve Bank (SARB), is to protect the value of South Africa’s currency in the interest of balanced and sustainable economic growth in South Africa. The SARB assesses the stability and efficiency of South Africa’s financial system.

The Financial Sector Regulation Act, 2017 (FSR Act) has recently been assented to. The majority of the FSR Act has taken effect on or before 1 April 2018 and other sections will commence at the end of 2018 or during early 2019.

The FSR Act provides for coordination, cooperation, collaboration and consultation among the SARB and other organs of state in relation to financial stability and the functions of these entities and seeks to establish a regulatory and supervisory framework that, in conjunction with the specific financial sector laws, promotes:

(a) financial stability;

(b) the safety and soundness of financial institutions;

(c) the fair treatment and protection of financial customers;

(d) the efficiency and integrity of the financial system;

(e) the prevention of financial crime;

(f) financial inclusion;

(g) transformation of the financial sector; and

(h) confidence in the financial system.

Consumer protection and market conduct

The 2011 Policy Document contemplates improving market conduct regulation, including ramping up consumer education and introducing a retail banking services market conduct regulator. The FSR Act establishes the Financial Sector Conduct Authority, which is mandated to, among others, protect financial customers by promoting fair treatment of financial customers by financial institutions, including banks, and providing financial customers and potential financial customers with financial education programs and otherwise promoting financial literacy and the ability of financial customers and potential financial customers to make sound financial decisions.

Expanding access to financial services through financial inclusion

In terms of the National Treasury’s Budget Review 2018 (2018 Budget review), financial inclusion refers to the provision and use of regulated financial services by those segments of society where financial services are needed but are either unavailable or inadequate in order to enable social and economic development, particularly for low-income people, women, the youth and small, medium and micro enterprises (SMMEs). This document contemplates that financial products and services should be available to and used by most South Africans and they should be convenient, affordable, fair and trusted.

The Amended Financial Services Sector Code (Code) was published on 1 December 2017 in terms of the Broad-Based Black Economic Empowerment Act, 2003. The Code applies to any person conducting, among others, the business of banking in the South African financial sector. The Code aims to broaden and hasten the transformation process by making financial services accessible to the previously unbanked and under-served. The Code targets empowerment financing and access to financial services in sectors such as affordable housing, black SMMEs, agriculture and transformational infrastructure.

Among the initiatives planned pursuant to this policy objective is for government to provide further support to cooperative and ‘dedicated bank’, including Postbank. The 2011 Policy Document identified Postbank as among the financial institutions best suited to take the lead in satisfying the financial services needs of rural and lower income communities in South Africa and seeks to expand Postbank’s products and services to such communities and to communities that have little or no access to commercial banking services. In terms of the 2018 Budget Review, Postbank has a temporary banking licence and an application for a full banking licence has been submitted to the Reserve Bank. The 2011 Policy Document envisages the existence of ‘dedicated banks’ as narrow or core banks that specialise in certain retail activities such as deposit taking or lending or both and whose activities are limited to the funding of risk-free or lower-risk retail assets in order to reduce the bank-default risk of depositors.

Financial integrity and combatting financial crime

The 2011 Policy Documents contemplates measures being taken to promote financial integrity in order to bring transparency to the financial sector by requiring financial institutions to conduct proper due diligence on their customers and capture and maintain customer and transaction information in records that are accessible by supervisory and investigating authorities.

Primary and secondary legislation

Summarise the primary statutes and regulations that govern the banking industry.

Regulation and supervision of the South African banking sector

The legal framework for the regulation and supervision of the banking sector in South Africa consists of (i) the Banks Act, 1990 (Banks Act), (ii) the Co-operative Banks Act, 2007 (CBA) and (iii) the Mutual Banks Act, 1993 (MBA) together with the regulations, directives, circulars and guidance notes relating to each of the Banks Act, CBA and MBA:

  • The Banks Act regulates the business of public companies taking deposits from the public and related matters.
  • The CBA regulates deposit-taking financial services cooperatives that are capitalised by their members and qualify as cooperative banks.
  • The MBA regulates the operations of informal financial structures such as credit unions, building societies and stokvels (general savings, burial or investment societies) that qualify as mutual banks.
  • The National Payment Systems Act, 1998 regulates the management, administration, operation, regulation and supervision of payment, clearing and settlement systems in South Africa.
  • The Companies Act, 2008 (Companies Act) regulates the organisation and management of companies generally.
  • Legislation concerning the oversight of the banking industry includes the following:
  • The South African Reserve Bank Act, 1989 regulates the SARB and the monetary system in general.
  • The FSR Act regulates financial stability by providing for prudential standards applicable to, and the supervision of, financial institutions, including banks.
  • The Currency and Exchanges Act, 1933 regulates legal tender, currency, exchanges and banking. The Regulations made under the Currency and Exchanges Act, 1933 and published on 1 December 1961 limit the extent to which South African residents and companies may transfer funds abroad. The exchange control rules are also set out in the Currency and Exchange Manuals and related client guideline documents implemented with effect from 1 August 2016.
  • The Financial Institutions (Protection of Funds) Act, 2001 sets out and consolidates the laws relating to, the investment, safe custody and administration of funds and trust property by financial institutions.
  • The Promotion of Administrative Justice Act, 2000 gives effect to the right to administrative action that is lawful, reasonable and procedurally fair and applies to any administrative action taken by a financial sector regulator in terms of the FSR Act or any specific financial sector law.

Stability and soundness of financial institutions

  • The FSR Act has the objective of achieving a stable financial system that works in the interests of financial customers and that supports balanced and sustainable economic growth in South Africa.
  • The Financial Markets Act, 2012 regulates financial markets, prohibits insider trading and other market abuses and regulates and controls securities trading.

Consumer protection and market conduct

  • The National Credit Act, 2005 (NCA) aims to promote a fair and non-discriminatory marketplace for access to consumer credit and to prohibit certain unfair credit and credit-marketing practices as well as reckless credit granting.
  • The Consumer Protection Act, 2008 (CPA) promotes a fair, accessible and sustainable marketplace for consumer products and services (including banking services) and seeks, among others, to establish national norms and standards relating to consumer protection and to prohibit certain unfair marketing and business practices.
  • The Financial Advisory and Intermediary Services Act, 2002 (FAIS Act) regulates the rendering of certain financial advisory and intermediary services to clients.
  • The Competition Act, 1998 applies to the investigation, control and evaluation of restrictive practices, abuse of dominant position, and mergers.
  • The Promotion of Access to Information Act, 2000 gives effect to the constitutional right of access to any information held by another person and required for the exercise or protection of any rights.
  • The Protection of Personal Information Act, 2013, among others, establishes minimum requirements for the processing of personal information by public and private bodies; provides for the rights of persons regarding unsolicited electronic communications and automated decision making and regulates the flow of personal information across the borders of South Africa.

Expanding access to financial services through financial inclusion

  • The Broad-Based Black Economic Empowerment Act, 2003 establishes a legislative framework for the promotion of black economic empowerment. The Code published in terms of this legislation commits financial institutions to promoting transformation in the financial services sector.
  • The South African Postbank Limited Act, 2010 establishes the Postbank Division of the Post Office to, among others, conduct the business of a bank that will encourage and attract savings among South Africans.

Financial integrity and combatting financial crime

The Financial Intelligence Centre Act, 2001 (FICA) seeks to combat money laundering activities and the financing of terrorist and related activities by, among others, imposing certain duties on institutions to identify, and conduct due diligence in respect of, the clients with whom they have business relationships.

  • The Prevention of Organised Crime Act, 1998 criminalises money laundering.
  • The Protection of Constitutional Democracy Against Terrorism and Related Activities Act, 2004 criminalises terror financing.

Regulatory authorities

Which regulatory authorities are primarily responsible for overseeing banks?

Banks are regulated by the following entities.

  • The SARB is responsible for, among others, supervising the banking sector and ensuring the effective functioning of the national payment system. The oversight of the soundness of the domestic banking system and financial stability has been delegated to the Bank Supervision Department (BSD) within the SARB. The BSD is accountable to the Minister of Finance and is required to submit an annual report on its activities.
  • FICA establishes the Financial Intelligence Centre, which is required to supervise and enforce compliance with this legislation or any directive made in terms of this Act by accountable institutions, including banks, for purposes of its objective. The Financial Intelligence Centre is accountable to the Minister of Finance.
  • The National Credit Regulator is established in terms of the NCA to promote and support the development, where the need exists, of a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry to serve the needs of (i) historically disadvantaged persons, (ii) low income persons and communities and (iii) remote, isolated or low density populations and communities. The National Credit Regulator is responsible for regulating the consumer credit industry by, among others, registering, and suspending or cancelling the registration of, credit providers, including banks. The National Credit Regulator is accountable to the Minister of Trade and Industry as the Minister currently responsible for consumer credit matters.

The FSR Act establishes the Prudential Authority within the administration of the SARB, which is tasked with:

  • promoting and enhancing the safety and soundness of financial institutions (which includes banks) that provide financial products and securities services;
  • promoting and enhancing the safety and soundness of market infrastructures;
  • protecting financial customers against the risk of financial institutions failing to meet their obligations; and
  • assisting in maintaining financial stability.

The FSR Act also establishes the Financial Sector Conduct Authority, which is replacing the Financial Services Board (FSB). The FSB was established in terms of the Financial Services Board Act, 1990 to supervise compliance with laws regulating (without affecting the operation of a bank’s business as a bank) (i) financial institutions, including banks, that deal with trust property as a regular feature of their business and (ii) the provision of financial services. Accordingly, the FSB Act regulates South Africa’s non-banking financial services industry. The Financial Sector Conduct Authority is, subject to the concurrence of the SARB, responsible for making standards (i) that impose requirements on providers of payment services or (ii) aimed at assisting in maintaining financial stability. The FSB Act will be entirely repealed once the FSR Act is fully implemented. The Financial Sector Conduct Authority is responsible for enforcing the provisions of the FAIS Act.

Upon implementation of the FSR Act, the Prudential Authority, the Financial Sector Conduct Authority, the National Credit Regulator and the Financial Intelligence Centre will be subject to the directives of the Governor of the SARB in the event that the Governor determines that a specified event or circumstance is a systemic event that may reasonably be expected to have a substantial adverse effect on the financial system or on economic activity in South Africa.

Government deposit insurance

Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.

The CBA requires the establishment of the Cooperative Banks Deposit Insurance Fund for purposes of compensating members of cooperative banks (that paid contributions to the fund) for deposits lost as a result of a cooperative bank having been unable to repay the deposits from its members, up to a percentage or amount determined by the Minister of Finance. The Minister of Finance must also prescribe the deposit insurance contributions that are payable by cooperative banks. At the time of writing this note, the Minister of Finance has not prescribed the applicable amounts of contributions payable to, and compensation payable from, the Cooperative Banks Deposit Insurance Fund.

The SARB has published a discussion paper dated May 2017 titled ‘Designing a deposit insurance scheme for South Africa’. The paper motivates the need for an explicit, privately funded deposit insurance scheme for South Africa and presents for public discussion proposals on the key design features of such a deposit insurance scheme. There is currently no deposit insurance mechanism employed in the banking sector in South Africa.

The government of South Africa does not own any interest in the banking sector.

Transactions between affiliates

Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.

In terms of the Banks Act, a bank must manage its business in such a manner that the aggregate amount of (i) its investments in debentures or preference shares of any of its associates (other than subsidiaries of which the main object is the acquisition and holding or development of immovable property), a bank or mutual bank, which debentures or preference shares are not convertible into ordinary shares plus (ii) its advances to any such associates plus (iii) its guarantees or other instrument relating to the liabilities or contingent liabilities of such associates less (iv) the excess amount of qualifying primary and secondary capital and reserve funds, does not at any time exceed 10 per cent of the bank’s aggregate amount of deposits, current accounts and other creditors. For the purposes of this provision an ‘associate’ in relation to a bank refers to (i) any subsidiary or holding company of that bank, any other subsidiary of that holding company and any other company of which that holding company is a subsidiary, or (ii) any juristic person of which the board of directors is accustomed to act in accordance with the directions or instructions of that bank and includes any trust controlled or administered by that bank. The terms ‘holding company’, ‘subsidiary’ and ‘control’ have the meanings given to them in the Companies Act.

The Prudential Authority must approve any transaction by a bank or its associate to:

  • establish or acquire a subsidiary within or outside South Africa or enter into an agreement having the effect that any company becomes its subsidiary within or outside South Africa;
  • invest in a joint venture within or outside South Africa if the investment, or the investment together with one or more investments already made by the bank in that joint venture, results in the bank being exposed to an amount representing more than five per cent of its capital and reserves and to make any further investment for so long as the bank is exposed. A joint venture means a contractual arrangement between two or more persons, one or more of whom is a bank or a controlling company, in terms whereof the parties undertake an economic activity that is subject to their joint control;
  • open or acquire a branch office outside South Africa;
  • acquire an interest in any undertaking having its registered office or principal place of business outside South Africa
  • create or acquire a trust of which the bank is a major beneficiary outside South Africa;
  • establish or acquire any financial or other business undertaking under its direct or indirect control outside South Africa;
  • establish or acquire a representative office outside South Africa; or
  • create or acquire a division within or outside South Africa by means of an arrangement or agreement with any person having the effect that such person conducts his or her business through or by means of such a division.

A bank or its controlling company must disclose to the Prudential Authority details of:

  • any subsidiary it has established or acquired;
  • any joint venture it has invested in;
  • an undertaking it has acquired an interest in; or
  • any trust or financial or other business undertaking it has established or acquired.

The Banks Act prohibits a bank from:

  • holding shares in any company of which such bank is a subsidiary;
  • lending money to any person against security of its own shares or of shares of that bank’s controlling company;
  • before provision has been made out of profits for any amount representing the cost of organisation or extension or the purchase of a business or a loss (including a loss originating from the sale of an asset) or bad debts, (i) opening any branch or agency or any further branch or agency or (ii) paying out dividends on its shares;
  • concluding a repurchase agreement in respect of a fictitious asset or an asset created by means of a simulated transaction;
  • purporting to have concluded a repurchase agreement without (i) such agreement being substantiated by a written document signed by the other party thereto and (ii) the details of such agreement being recorded in the accounts of the bank as well as in the accounts, if any, kept by the bank in the name of such other party; or
  • without the prior written approval of the Prudential Authority and notwithstanding anything to the contrary contained in any law, paying out dividends from its share capital without the prior written approval of the Prudential Authority.

A bank must hold all its assets in its own name, excluding any asset (i) held pursuant to a bona fide hypothec to secure an actual or potential liability, (ii) that is held in the name of another person with the written approval of the Prudential Authority has, on application of the bank concerned, approved in writing that such asset may be held in the name of another person or (iii) falling within a category of assets designated by the Prudential Authority as a category of assets that may be held in the name of another person.

Regulatory challenges

What are the principal regulatory challenges facing the banking industry?

The FSR Act aims to coordinate the SARB and other organs of state to ensure financial stability. Differences in interpretation of the new regulatory requirements pursuant to the FSR Act and related legislation may cause disputes. For instance, the FSR Act grants the Prudential Authority broad powers to require a bank to take action to avoid risks arising from, among others, conducting its business in an improper or financially unsound way or the likelihood of the bank (i) contravening a financial sector law, (ii) being involved in a financial crime or (iii) causing or contributing to instability in the financial system. The implementation of such provisions of the FSR Act may require banks to implement new internal processes and procedures or otherwise restrict their powers and actions and banks may wish to challenge such restrictions.

Consumer protection

Are banks subject to consumer protection rules?

Other than the provisions of the NCA, the CPA and the FAIS Act set out in question 2, banks are subject to scrutiny by competition authorities of their compliance with the provisions of Competition Act, 1998 (Competition Act) regulating restrictive market practices. The Competition Act prohibits, among others, an agreement between, or concerted practice by, firms directly or indirectly fixing a purchase or selling price or any other trading condition. On 15 February 2017, the Competition Commission filed a complaint referral initiating proceedings against certain banks at the Competition Tribunal alleging that the banks entered into an agreement or engaged in a concerted practice to fix bids, offers and bid-offer spreads and to allocate customers and suppliers in respect of trade in United States dollars and the rand currency pair. At the time of writing this note, the matter has not been heard before the Competition Tribunal.

Future changes

In what ways do you anticipate the legal and regulatory policy changing over the next few years?

A notice recently published by the National Treasury schedules the remainder of the FSR Act to come into force by April 2019. This will include new provisions regulating, among others, ‘significant owners’ and ‘financial conglomerates’, as well as further changes to financial sector regulation. The 2018 Budget Review contemplates that a Conduct of Financial Institutions Bill will be tabled in Parliament in 2018. According to the 2018 Budget Review, in 2017 the National Treasury, in partnership with the World Bank, assessed the conduct of retail banks and how well they treat their customers. The recommendations pursuant to this review are expected to be published in 2018 and will inform the emerging regulatory requirements.

Supervision

Extent of oversight

How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?

The BSD of the SARB is responsible for the supervision of the activities of all banks. In terms of the Banks Act, the Prudential Authority is entitled to undertake the following:

  • conduct (i) an onsite examination, inspection or review of a bank or controlling company and its respective branches, subsidiaries, joint ventures or related entities, within or outside South Africa or (ii) an offsite review of a bank or controlling company and its respective branches, subsidiaries, joint ventures or related entities, within or outside South Africa;
  • hold discussions, from time to time, (i) with the chief executive officer of any bank, or with any executive officer or employee, designated by such chief executive officer or (ii) with a member of the board of directors or a member of a board-appointed committee of a bank or controlling company;
  • review (i) the work done by an external auditor of a bank or controlling company or (ii) reports submitted in terms of the Banks Act by a bank, controlling company or banking group; and
  • require a bank to furnish (i) any information at intervals specified in the notice or (ii) a report by a public accountant.

In terms of the FSR Act, the financial sector regulators (ie, the Prudential Authority or the Financial Sector Conduct Authority) may conduct information gathering, supervisory on-site inspections and investigations of financial institutions. The supervisory on-site inspections may be conducted for purposes of (i) checking compliance by the entity with an applicable financial sector law, a directive issued by the relevant financial sector regulator or an enforceable undertaking accepted by the financial sector regulator, (ii) determining the extent of the risk posed by the entity of contraventions of an applicable financial sector law and (iii) assisting the financial sector regulator to supervise the relevant financial institution. A financial sector regulator may appoint an investigator to conduct an investigation if the financial sector regulator (i) reasonably suspects that a person may have contravened, may be contravening or may be about to contravene, an applicable financial sector law or (ii) reasonably believes that an investigation is necessary to, among others, coordinate and harmonise the reporting and other obligations of financial institutions, exchange information, coordinate supervisory activities and regulate and enforce any laws with certain authorities (including authorities in whose countries a subsidiary or holding company of a financial institution is incorporated or a branch is situated) in terms of a bilateral or multilateral agreement or memorandum of understanding.

In terms of the Regulations relating to banks published pursuant to the Banks Act on 12 December 2012, as amended (Banks Act Regulations), the directors of a bank are required to report the following information annually to the Prudential Authority:

  • whether or not the bank’s internal controls provide reasonable assurance as to the integrity and reliability of the financial statements and safeguard, verify and maintain accountability of the bank’s assets;
  • whether or not the internal controls are based on established policies and procedures and are implemented by trained, skilled personnel, whose duties have been appropriately segregated;
  • whether or not adherence to the implemented internal controls is continuously monitored by the bank;
  • whether or not all bank employees are required to maintain high ethical standards, thereby ensuring that the bank’s business practices are conducted in a manner that is above reproach;
  • whether or not anything has come to the directors’ attention to indicate that any material malfunction, as defined and documented by the board of directors, which definition has to be submitted to the Prudential Authority of banks, in the functioning of the aforementioned controls, procedures and systems has occurred during the period under review;
  • that there is no reason to believe that the bank will not be a going concern in the year ahead, and should there be reason to believe so, such reason shall be disclosed and explained; and
  • reports on the internal controls and going-concerns aspect of a bank, which is required to be delivered to the Prudential Authority within 120 days after the financial year of the bank.

The external auditors of a bank shall annually report to the Prudential Authority whether or not they concur with the reports of the directors and the reasons if they do not concur with such reports.

Enforcement

How do the regulatory authorities enforce banking laws and regulations?

The Banks Act requires the Prudential Authority’s approval of an auditor’s appointment by a bank or controlling company. The Prudential Authority may refuse an application for approval of an auditor’s appointment or withdraw any approval previously granted if an auditor:

(i) has been convicted of an offence of which dishonesty is an element;

(ii) is found to be incompetent or unfit to perform the functions of an auditor;

(iii) is under investigation by the Independent Regulatory Board for Auditors; or

(iv) fails to disclose any direct or indirect interests that may constitute a conflict of interest in respect of such auditor’s duties.

Under the Banks Act, the Prudential Authority may by notice in writing to the institution concerned, cancel or suspend on such conditions as the Prudential Authority may deem fit, the registration of a bank if, among others, the institution concerned has failed to comply with a prescribed condition or a further condition for registration determined by the Prudential Authority, to which its registration is subject. The Prudential Authority may also institute court proceedings for an order cancelling or suspending the registration of a bank if there exist other grounds in the opinion of the Prudential Authority to justify such cancellation or suspension.

The FSR Act prohibits a bank from providing a financial product or financial services otherwise than in accordance with the licence issued to it in terms of the Banks Act or other applicable law. The bank, as licensee, is required to report any material contraventions of law or other applicable provisions specified in the FSR Act to the Prudential Authority. The Prudential Authority is entitled to suspend or revoke a bank’s licence in the instances specified in the FSR Act.

The FSR Act also requires the auditor of a licensed financial institution or a holding company of a financial conglomerate to submit a detailed report to, among others, the Prudential Authority about any matter that the auditor considers:

(aa) is causing or is likely to cause the financial institution to be financially unsound;

(bb) is contravening or may contravene a financial sector law; or

(cc) may result in an audit not being completed or may result in a qualified or adverse opinion on accounts.

It is an offence for a financial institution to fail to comply with a regulator’s directive issued to it, for which the financial institution would be liable on conviction to a fine not exceeding 15 million rand or imprisonment for a period not exceeding 10 years. Under the FSR Act, the Prudential Authority is also entitled to commence court proceedings against any person in order to ensure compliance with any financial sector law.

The CBA makes it an offence for a cooperative bank to contravene of to fail to comply with certain provisions of the CBA or a directive under the CBA or to make an untrue or misleading statement. Such offences are subject to a fine or to imprisonment. The MBA contains similar provisions.

In terms of FICA, administrative sanctions may be imposed on banks for, among others, failing to comply with (i) a provision of FICA or determination or directive made in terms of FICA or (ii) a condition of a licence, registration, approval or authorisation issued in terms of FICA. The following administrative sanction may be imposed by the Financial Intelligence Centre or a supervisory body, including the SARB:

(a) a caution not to repeat the conduct that led to the non-compliance;

(b) a reprimand;

(c) a directive to take remedial action or to make specific arrangements;

(d) the restriction or suspension of certain specified business activities; or

(e) a financial penalty not exceeding 10 million rand in respect of natural persons and 50 million rand in respect of any legal person.

What are the most common enforcement issues and how have they been addressed by the regulators and the banks?

Most recently, administrative sanctions were imposed by the SARB on banks in terms of the provisions of FICA, including financial penalties, a reprimand and a directive to take remedial action to address certain deficiencies such as in relation to:

  • identifying and verifying customers’ details;
  • training of employees to enable them to comply with the provisions of FICA and the bank’s internal rules; and
  • failing to implement adequate processes and working methods in relation to the sanctions screening of customers to ensure that the bank complies with its reporting duties.

Resolution

Government takeovers

In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?

There are no circumstances in which banks may be taken over by the government or regulatory authorities. However, the SARB has appointed a curator in respect of a bank in order to facilitate the orderly management of the bank in instances where such bank has not complied with its prudential requirements. As more fully set out in question 19, the Minister of Finance may appoint a curator to the bank in terms of the Banks Act if the Prudential Authority believes the bank will probably be unable to meet its obligations in general.

Bank failures

What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?

South Africa is a member of the Financial Stability Board, which has issued international standards for resolution planning titled ‘Key attributes of effective resolution regimes for financial institutions’ in 2011 and additional guidance in 2014. In terms of the 2015 SARB Directive, South Africa is required to comply with these international standards, which include recovery and resolution planning.

The prevention of bank failure is not regulated by the banking laws currently in force. However, the SARB has issued a directive on 4 February 2015 (2015 SARB Directive) setting out certain minimum requirements for the recovery plans of banks, controlling companies and branches of foreign institutions. The directive requires the recovery plan to identify interdependencies among group entities, including material intra-group exposures and funding relationships, shared services, capital mobility within the group as well as intra-group guarantees applicable ordinarily and in times of crisis. The recovery plan should also provide the details on the criteria used to identify significant legal entities within the group. The criteria should be based on an assessment of the legal entity’s possible impact on the overall banking group as measured by, among others, size, profitability, strategic importance, systems and other discrepancies. The recovery plan must also identify key executives, managers and members of the bank that would be involved in the implementation of each recovery option. Details of the governance process to be followed in the implementation of the recovery options should be included, including internal and external stakeholder communication teams and processes, the escalation process and the decision-making process.

In 2015, the National Treasury published a paper setting out the principles and policy proposals for a strengthened framework for the resolution of designated financial institutions. The paper proposes the drafting of a ‘special resolution bill’, which would designate the SARB as the resolution authority.

The FSR Act introduces requirements applicable to, among others, banks that are designated as systemically important financial institutions in order to mitigate the risk of occurrence of systemic events (ie, event or circumstances that may reasonably be expected to have a substantial adverse effect on the financial system or on economic activity in South Africa). The requirements will include prudential standards or directives to be made in terms of the FSR Act and imposed on systemically important financial institutions in relation to, among others, recovery and resolution planning.

Are managers or directors personally liable in the case of a bank failure?

The Companies Act establishes the personal liability of directors in certain circumstances, including for the following actions or omissions:

  • Representing or purporting to bind the company despite knowing that he or she lacked authority.
  • Allowing the company to carry on its business while knowing that the business is being carried on recklessly, with gross negligence or with the intent to defraud any person.
  • Being a party to an act or omission by the company despite knowing that it was calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose.
  • Having signed or consented to (i) the publication of a financial statement that was false or misleading in a material respect or (ii) the publication of a prospectus that contained an ‘untrue statement’ or with reckless disregard as to whether, the statement was false, misleading or untrue.
  • Taking part in a meeting and failing to vote against a resolution in respect of (i) the issuing of unauthorised shares or options on those shares, despite knowing that those shares had not been authorised, (ii) the issuing of any authorised securities without shareholder approval, (iii) the provision of financial assistance to any person for the acquisition of securities of the company or to a director while knowing that the financial assistance is in contravention of the Companies Act or the company’s constitutional documents, (iv) approving a distribution, despite knowing that the distribution was contrary to the Companies Act, (v) the acquisition by the company of any of its shares, or the shares of its holding company, despite knowing that the acquisition was contrary to the Companies Act and (vi) an allotment by the company despite knowing that the allotment was contrary to the Companies Act.

In terms of the FSR Act, if a financial institution commits an offence in terms of a financial sector law (including the Banks Act, MBA, CBA or the FAIS Act) and a member of the governing body of the financial institution failed to take all reasonably practicable steps to prevent the commission of the offence, the member of the governing body would be guilty of the same offence and, on conviction, liable to a penalty not exceeding the penalty that may be imposed on the financial institution for the offence.

Planning exercises

Describe any resolution planning or similar exercises that banks are required to conduct.

The 2015 SARB Directive specifies the minimum requirements to be met by a recovery plan that is adopted by a bank, which includes the following:

  • Banking groups that have been classified as systemically important within the South African banking sector are required to have group-wide recovery plans in place (including in respect of foreign branches and subsidiaries).
  • 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 of directors (or committee of similar standing of a locally registered branch of a foreign bank).
  • The recovery plan must include details the bank’s strategy, business model, core business lines (ie, the business lines that a bank would seek to protect through the implementation of its recovery options in order to ensure the sustainability of the bank after the implementation of one or more recovery options) and main activities as well as the bank’s legal and operational structures, organisational structure and business units.
  • The recovery plan should identify any interdependencies among group entities in a banking group, including material intra-group exposures and funding relationships, shared services, capital mobility within the group as well as intra-group guarantees that would apply in both business-as-usual and crisis times.
  • Banking groups should identify significant legal entities within the group and specify the criteria used to determine this based on an assessment of the legal entity’s possible impact on the overall banking group measured by, among others, size, profitability, strategic importance, systems and any other interdependencies.
  • Any branches that are considered systemically significant in the country of operation should also be included in the banking group’s recovery plan.
  • Each bank should develop triggers that would activate the recovery plan for capital, liquidity and operational purposes.
  • The recovery plan must identify and provide a quantitative and qualitative description of the point of failure (where the bank’s recovery options’ cumulative capital or liquidity benefit would not be able to meet the capital or liquidity required for the bank’s operations to remain sustainable) through the use of reverse stress testing. The stress scenarios should cover at least one systemic stress scenario and at least one idiosyncratic stress scenario resulting in a liquidity, capital and operational disruption of such a severe nature that it could lead to the bank’s failure.
  • Each recovery option should include details of (i) the expected amount of the benefit it could provide during a stressed period, (ii) the impact on capital and/or liquidity as a result of the implementation, (iii) the time frame for execution and/or implementation during stressed periods, (iv) the process to be followed, (v) the approvals required, (vi) the identification of potential buyers, (vii) valuations, (viii) costs, (ix) human resources; (x) legal and structural considerations, (xi) the key executives and/or managers and/or members of the bank that would be involved in the implementation of each recovery option and (xii) possible barriers to implementation and actions to overcome these.
  • The recovery plan should identify:
  • the bank’s critical functions, which are the functions performed by a bank for third parties where failure would lead to a disruption of the services that are vital for the sustained functioning of the real economy and for the financial stability in the country where the bank is present, including deposits and withdrawals, payments, clearing and the settlement of transactions);
  • the bank’s critical shared services, which are activities performed by a bank or outsourced to a third party where failure would lead to the inability to perform critical functions; and
  • the bank’s core shared services, which are activities performed by a bank or outsourced to a third party where failure would impair the bank’s ability to continue its core business lines.

Capital requirements

Capital adequacy

Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?

For purposes of setting capital adequacy requirements, section 70 of the Banks Act distinguishes between (i) banks of which the business does not include trading in financial instruments, (ii) banks of which the business consists solely of trading in financial instruments and (iii) banks of which the business includes trading in financial instruments. A bank is required to manage their affairs to maintain a prescribed minimum sum of share capital and unimpaired reserve funds (comprising the bank’s 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). For most banks, the prescribed amount of such funds may not fall below the greater of 250 million rand and a prescribed percentage (minimum percentage) of the sum of amounts relating to the different categories of assets and other risk exposures (namely, credit risk, counterparty credit risk, market risk, operational risk) and calculated in such a manner as may be prescribed. Regulation 38 of the Banks Act Regulations sets out directives and interpretations concerning capital adequacy and leverage for banks as contemplated in the Banks Act and presently sets the applicable Minimum Percentage of assets and other risk exposures required to be maintained by a bank at 8 per cent.

Currently, under the Banks Act Regulations, banks are also required to maintain, among others, the following current minimum capital and reserve funds:

  • the common equity tier 1 capital adequacy ratio (ie, the ratio of qualifying common equity tier 1 capital and reserve funds to risk-weighted exposure) must at all times be a minimum of 6.5 per cent;
  • the tier 1 capital adequacy ratio (ie, the ratio of qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds to risk-weighted exposure) must at all times be a minimum of 8 per cent;
  • the total capital adequacy ratio (ie, the ratio of qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds and tier 2 capital and reserve funds to risk-weighted exposure) must at all times be a minimum of 10 per cent;
  • the minimum required percentage of capital and reserve funds specified from time to time for systemic risk must be maintained;
  • the minimum required percentage of capital and reserve funds specified from time to time for idiosyncratic risk must be maintained;
  • a capital conservation buffer must be maintained, ranging between zero and 2.5 per cent of a bank’s relevant amount of risk-weighted exposure;
  • a countercyclical capital buffer must be maintained, ranging between zero and 2.5 per cent of a bank’s relevant amount of risk-weighted exposure;
  • the additional minimum required percentage specified by the Prudential Authority from time to time must be maintained by systemically important banks or controlling companies;
  • from 1 January 2016, capital constraints, including capital distribution constraints, must be imposed on a bank if its capital adequacy ratios are reduced owing to write-offs against the capital conservation buffer until the bank’s conservation buffer is restored;
  • after 1 January 2015 no amount obtained from the issue of any hybrid-debt instrument may form part of the total amount of qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds of the bank.

In terms of the Banks Act, banks are also required to hold level one high-quality liquid assets to a value not less than the sum of amounts calculated as percentages not exceeding 20 per cent of different categories of its liabilities. A bank is not entitled to pledge or encumber such liquid assets.

Banks are not required to make contingent capital arrangements.

The FSR Act allows the SARB to direct the Prudential Authority to impose (through appropriate standards or directives) requirements that would apply generally or specifically to systemically important financial institutions concerning any of the following matters:

(a) solvency measures and capital requirements, which may include requirements in relation to countercyclical capital buffers;

(b) leverage ratios;

(c) liquidity;

(d) organisational structures;

(e) risk management arrangements, including guarantee arrangements;

(f) sectoral and geographical exposures;

(g) required statistical returns;

(h) recovery and resolution planning; and

(i) any other matter in respect of which a prudential standard or regulator’s directive may be made that is prescribed by Regulations made for this section on the recommendation of the Governor.

How are the capital adequacy guidelines enforced?

Failure to comply with the prudential requirements set out in the Banks Act constitutes an offence that is punishable by a fine or imprisonment for a period not exceeding five years. Regardless of pending or contemplated criminal proceedings, the Prudential Authority is entitled to impose a fine upon the relevant bank or controlling company limited to (i) one-tenth of 1 per cent of the amount of the shortfall for each day on which the failure or inability to comply with the minimum capital and reserve funds requirements continues or (ii) 3 per cent of the amount of the shortfall arising from the failure or inability to comply with the minimum liquid assets requirements. A bank’s failure to pay such fine may be enforced by civil court proceedings.

Undercapitalisation

What happens in the event that a bank becomes undercapitalised?

If a bank, its controlling company or its branch fails or is unable to comply with the prudential requirements under the Banks Act and the Banks Act Regulations concerning the minimum capital and reserve funds and minimum liquid assets to be maintained, such institution must report its failure or inability to comply with reasons to the Prudential Authority. The Prudential Authority may choose to immediately take enforcement action against such institution or set any conditions and afford it the opportunity to comply within a specified period.

Insolvency

What are the legal and regulatory processes in the event that a bank becomes insolvent?

Under the Banks Act, the Minister of Finance may place a bank under curatorship if (i) the Prudential Authority is of the opinion that the bank will be unable to repay deposits made with it when legally obliged to do so or will probably be unable to meet any other of its obligations and (ii) the Minister of Finance deems it desirable in the public interest. The Minister of Finance must notify the chief executive officer or the chairperson of the board of directors of the bank in writing of the appointment of the curator. The Prudential Authority may appoint an assistant to the curator who, in the opinion of the Prudential Authority, has wide experience of and is knowledgeable about the specific field of activities in which the bank under curatorship is predominantly engaged.

The Minister of Finance must, in the curator’s letter of appointment, direct, among others, the curator’s management of the bank under curatorship and incidental matters, including in respect of raising money by that bank, as the Minister of Finance may deem necessary. Once appointed, the curator is responsible for managing the bank with the supervision of the Prudential Authority and in the manner that the Prudential Authority deems to best promote (i) the interests of the creditors of the bank, (ii) the interests of the banking sector as a whole and (iii) the rights of employees in accordance with relevant labour legislation. The bank’s management shall be divested of such power. The curator must recover and take possession of all the bank’s assets. The curator’s appointment and powers must be announced in the Government Gazette.

The curator is also required to, among others:

  • keep the required accounting records and prepare the required annual financial statements, interim reports and provisional annual financial statements in respect of the bank;
  • convene the meetings of the members of the bank and comply with the company laws applicable to directors; and
  • apply any money of the bank towards (i) paying the costs of the curatorship, (ii) conducting the bank’s business in accordance with the requirements of the curatorship and (iii) as far as the circumstances permit, paying the claims of creditors that arose before the date of the curatorship.

The curator is entitled to:

  • exercise the power to bring or defend legal proceedings on behalf of the bank; and
  • dispose of any of the bank’s assets or transfer any of its liabilities in the ordinary course of the bank’s business or by following the procedure for amalgamations, mergers and arrangements set out in the Banks Act.

The provisions of the Insolvency Act, 1936 concerning circumstances in which dispositions of property may be set aside are applicable to a bank under curatorship. All legal proceedings and legal process against a bank while it is under curatorship are stayed unless the court grants leave to continue with such processes.

The curator must inform the Prudential Authority if it is in the opinion that there is no reasonable probability that the continuation of the curatorship will enable the bank to pay its debts or meet its obligations and become a successful concern. The Prudential Authority may apply to a court for the winding-up of any bank in accordance with the Companies Act. Pursuant to the Companies Act, the previous Companies Act, 1973 continues to apply with respect to the winding-up of insolvent companies, which requires, among others, that:

  • In the winding-up of a company unable to pay its debts the provisions of the Insolvency Act, 1936 must, in so far as they are applicable, be applied, with the necessary changes, in respect of any matter not specially provided for by the Companies Act, 1973.
  • A company is deemed to be unable to pay its debts if (i) a creditor, by cession or otherwise, to whom the company is indebted in a sum not less than 100 rand then due has served on the company a demand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor, (ii) any process issued on a judgment of any court in favour of a creditor of the company is returned by the sheriff or the messenger with an endorsement that he has not found sufficient disposable property to satisfy the judgment or that any disposable property found did not upon sale satisfy such process or (iii) it is proved to the satisfaction of the court that the company is unable to pay its debts.
  • Every disposition of property made by a company of its property that, if made by an individual, could, for any reason, be set aside in the event of the individual’s insolvency, may, if made by a company, be set aside in the event of the company being wound up and unable to pay all its debts, and the provisions of the law relating to insolvency shall be applied to such disposition.
  • Every disposition of property (including rights of action) made after the commencement of winding-up proceedings by a company that is unable to pay its debts, shall be void unless the court otherwise orders.

In terms of the Banks Act, the following additional requirements apply to the winding up of a bank:

  • The Master of the High Court may only appoint a liquidator who is recommended by the Prudential Authority and an assistant to the liquidator who, in the opinion of the Prudential Authority, has wide experience of, and is knowledgeable about the latest developments in, the banking industry.
  • The Master and the Prudential Authority must receive (i) copy of any resolution or application for winding up, and (ii) the accompanying documentation including every affidavit confirming the facts stated in the application.
  • A copy of every special resolution for the voluntary winding-up of a bank and of every court order amending or setting aside the proceedings in relation to the winding-up must be delivered to the liquidator, Master and Prudential Authority by the bank within 14 days after registration of the resolutions with the Companies and Intellectual Property Commission or the making of an order.

The approval of the SARB is required under the FSR Act in order to take any of the following steps in relation to a systemically important financial institution or a systemically important financial institution within a financial conglomerate:

(a) suspending, varying, amending or cancelling a licence issued to that financial institution;

(b) adopting a special resolution to wind up the financial institution voluntarily;

(c) applying to a court for an order that the financial institution be wound up;

(d) appointing an administrator, trustee or curator for the financial institution;

(e) placing the financial institution under business rescue or adopting a business rescue plan for the financial institution;

(f) entering into an agreement for amalgamation or merger of the financial institution with a company; and

(g) entering into a compromise arrangement with creditors of the financial institution.

Recent and future changes

Have capital adequacy guidelines changed, or are they expected to change in the near future?

The Banks Act Regulations have been amended over recent years to include the requirements developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector, including most recently the requirements of the Basel III framework and revisions to such requirements, including in respect of:

  • capital disclosure requirements;
  • revisions to the liquidity coverage ratio;
  • requirements related to a restricted committed liquidity facility;
  • liquidity disclosure requirements;
  • requirements related to intraday liquidity management; and
  • public disclosure requirements related to the leverage ratio.

The FSR Act allows the Prudential Authority to make prudential standards for or in respect of, among others, a bank and key persons of such financial institutions, including concerning requirements relating to financial soundness such as capital adequacy, minimum liquidity and minimum asset quality.

Ownership restrictions and implications

Controlling interest

Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?

A bank may only be controlled by (i) a public company and is registered as a controlling company in respect of a bank; (ii) another bank or (iii) an institution that has been approved by the Prudential Authority and that conducts business similar to the business of a bank in a foreign country.

A person is deemed to exercise control over a bank if:

  • the bank is a subsidiary of the controlling company;
  • the controlling company alone or together with his or her associates holds shares in the bank of which the total nominal value represents more than 50 per cent of the nominal value of all the issued shares of the bank and entitles the controlling company to decisively influence the outcome of the voting at a general meeting of the bank;
  • the controlling company alone or together with his or her associates is entitled to exercise more than 50 per cent of the voting rights in respect of the issued shares of the bank; or
  • the controlling company alone or together with his or her associates is entitled or has the power to determine the appointment of the majority of the directors of the bank, including the power to appoint or remove, without the concurrence of any other person, all or the majority of the directors or to prevent the appointment of a director without his or her consent.

Foreign ownership

Are there any restrictions on foreign ownership of banks?

The acquisition of shares in a bank or its controlling company requires the written permission of the Prudential Authority if the acquisition results in the purchaser, alone or together with any associates, (i) holding shares amounting to more than 15 per cent of the total nominal value of the issued share capital of the bank or controlling company or (ii) being entitled to exercise more than 15 per cent of the total voting rights in respect of the issued shares of the bank or controlling company. The Prudential Authority’s permission must be obtained for each subsequent acquisition of the relevant bank’s shares or voting rights exceeding 15 per cent and 24 per cent of the bank’s total shares or voting rights if the acquirer has held 15 per cent or 24 per cent, as the case may be, of such shares or voting rights for a period of 12 months (or a shorter period determined by the Prudential Authority).

The permission of the Minister of Finance, through the Prudential Authority, is required to hold more than 49 per cent of the shares or voting rights in a bank or controlling company. The Prudential Authority or Minister of Finance, as the case may be, may only grant permission for the acquisition of shares in a bank if satisfied that the acquisition will not be contrary to the public interest and the interests of the relevant bank or its depositors or of the relevant controlling company. The permission of the Minister of Finance must be obtained for each acquisition of a bank’s shares or voting rights exceeding 49 per cent and 74 per cent of that bank’s total shares or voting rights if the acquirer has held 49 per cent or 74 per cent, as the case may be, of such shares or voting rights for a period of 12 months (or a shorter period determined by the Minister).

While approval from the SARB pursuant to the Exchange Control Regulations, 1961 promulgated in terms of the Currency and Exchanges Act, 1933 (Exchange Control Regulations) will not be required for the purchase of shares in a resident by a non-resident, control measures require securities held by non-residents to be endorsed by authorised dealers as ‘non-resident’. The ‘Currency and Exchanges guidelines for business entities’ issued by the SARB on 21 February 2018 provide a general understanding of the exchange control system in South Africa and explain the requirement as follows:

The principal objective in controlling non-resident owned securities is to ensure that residents requiring funds outside [South Africa] do not obtain such funds by purchasing securities in [South Africa] and selling them abroad without accounting for the proceeds in foreign currency or Rand from a [n]on-resident Rand account. In addition, since all income due to non-residents on their securities is freely transferable, the aim is to ensure that non-residents do not purchase securities from residents other than through approved channels at a fair market price. Since exchange controls on non-residents have been abolished, the onus rests on the South African buyer or seller of securities to prove that the transaction was concluded on an arm’s length basis at a fair and market related price. … The control over the acquisition or disposal of non-resident securities is exercised by an Authorised Dealer placing the endorsement ‘non-resident’ on securities owned by non-residents or in which non-residents have an interest. The effect of this endorsement is to ensure that in the event of a disposal by the non-resident of its interest, the payment may be transferred abroad or credited to a Non-resident Rand account.

Implications and responsibilities

What are the legal and regulatory implications for entities that control banks?

The Banks Act establishes, among others, the following requirements in respect of controlling companies, in addition to those listed in question 24:

  • Controlling companies must be registered in terms of the Banks Act.
  • Controlling companies are subject to the supervisory review process and inspection required to be implemented and maintained by the Prudential Authority.
  • The Prudential Authority may issue a non-financial sanction or a directive requiring, among others, a controlling company to:

 

(i) cease or refrain from engaging in any act, omission or course of conduct or to perform such acts necessary to remedy the situation;

(ii) perform such acts necessary to comply with the directive or to effect the changes required to give effect to the directive; or

(iii) provide the [Prudential Authority] with such information and documents relating to the matter specified in the directive.

  • The Prudential Authority may require controlling companies to furnish information or prepare a report at its own expense.
  • The Prudential Authority must approve a controlling company’s (i) establishment or acquisition of a subsidiary or entry into an agreement having the effect that any company becomes its subsidiary within or outside South Africa, (ii) acquisition of an interest in any undertaking having its registered office or principal place of business outside South Africa, (iii) to creation or acquisition of a trust outside South Africa of which the bank is a major beneficiary or (iv) establishment or acquisition of any financial or other business undertaking under its direct or indirect control outside South Africa.
  • The Prudential Authority must approve the acquisition of shares in a controlling company in certain instances.
  • The Prudential Authority’s approval is required for the reconstruction of companies within a group of which a controlling company is a member.
  • The Prudential Authority’s approval is required for the alteration of a controlling company’s constitutional documents.
  • The Prudential Authority’s approval is required for a controlling company to convert its shares to, or to issue, preference shares, hybrid debt instruments or debt instruments.
  • The Prudential Authority may impose a penalty on a controlling company that has contravened or failed to comply with the Banks Act.

The Banks Act also requires a bank to disclose the name of any individual shareholder who holds more than 25 per cent of that bank’s issued shares if the bank’s exposure to the shareholder (through loans or other advances) exceeds the nominal value of the shares.

In terms of the FSR Act, the Prudential Authority is entitled to regulate the conduct of holding companies of financial institutions. In particular, the Prudential Authority is entitled to make prudential standards that must be complied with by, and issue written directives requiring the holding company to take specified actions to, the holding company of a financial conglomerate.

The FSR Act allows prudential standards to regulate:

(a) financial or other exposures of companies within financial conglomerates;

(b) the governance and management arrangements for holding companies of financial conglomerates;

(c) reporting of information about companies within financial conglomerates that are not financial institutions; and

(d) reducing or managing risks to the safety and soundness of an eligible financial institution arising from the other members of the financial conglomerate.

The FSR Act prohibits a holding company from acquiring or disposing of a material asset (which is required to be identified in a prudential standard) without the approval of the Prudential Authority.

In terms of the FSR Act, a directive may be issued in circumstances where the holding company or another company in the financial conglomerate:

(a) is conducting its business in an improper or financially unsound way and, as a result, there is a risk that an eligible financial institution in the conglomerate will not be able to comply with its obligations under a financial sector law or in relation to a financial product or financial service that it provides or offers to provide;

(b) has not complied with an enforceable undertaking accepted by the Prudential Authority;

(c) has contravened or is likely to contravene a financial sector law;

(d) is involved or is likely to be involved in financial crime; or

(e) is causing or contributing to instability in the financial system, or is likely to do so.

What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?

The Banks Act imposes, among others, the following responsibilities on controlling companies.

  • A controlling company must disclose details of its interest in subsidiaries, joint ventures, certain undertakings and certain trusts.
  • The amount of investments made by a controlling company (i) in undertakings other than banks or institutions that conduct business similar to the business of a bank outside South Africa, controlling companies or companies of which the main object is the holding or development of property for the purpose of conducting the business of a bank or(ii) in fixed property that is not used or intended to be used mainly for the purpose of conducting the business of a bank, may not exceed a prescribed percentage of a prescribed amount of the share capital and reserve funds of the controlling company.
  • The amount of loans and advances provided by a controlling company (i) to undertakings other than banks or institutions that conduct business similar to the business of a bank outside South Africa, controlling companies or companies of which the main object is the holding or development of property for the purpose of conducting the business of a bank or(ii) in relation to fixed property that is not used or intended to be used mainly for the purpose of conducting the business of a bank, may not exceed a prescribed percentage of a prescribed amount of the share capital and reserve funds of the controlling company.
  • The Banks Act imposes certain duties and standards of conduct on the directors of controlling companies in addition to those required by the Companies Act.
  • Controlling companies must comply with the corporate governance requirements set out in the Banks Act.
  • Controlling companies must comply with prudential requirements to maintain certain minimum capital and reserve funds and are liable to receiving a fine for their failure or inability to comply.

In terms of the Banks Act, the chief executive officer of a bank (in the case of the appointment of the chief executive officer, a director designated by the board) must, at least 30 days prior to the proposed date of appointment, give the Prudential Authority written notice of the nomination of any person for appointment as chief executive officer, director or executive officer. The Prudential Authority may object (and must provide the grounds for the objection) to the proposed appointment within 20 working days of receipt of the notice. Each director, chief executive officer and executive officer of a bank owes towards the bank the duties set out in the Banks Act and the Companies Act. The Prudential Authority may object to the appointment or continued employment of a chief executive officer, director or executive officer of a bank if the Prudential Authority reasonably believes that such individual is not, or is no longer, a fit and proper person to hold that appointment or if it’s not in the public interest for that individual to hold or continue to hold the appointment.

The majority of directors of a bank must not be employees of that bank, its subsidiary or controlling company and the majority of the employees of a bank’s controlling company must not be employees of that company or of any bank in respect of which that company is registered as a controlling company. Those directors who are employees must not together be entitled to exercise a vote in excess of 49 per cent of the total vote on the board of the bank or controlling company, as the case may be.

What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?

In the event that a bank is placed under curatorship, the curator may be empowered by the Minister of Finance to make and carry out any decision in respect of the bank that would have required an ordinary resolution or a special resolution of shareholders of the bank or its controlling company in terms of the Banks Act, the Companies Act, the bank’s memorandum of incorporation or the rules of any securities exchange on which any securities of the bank or its controlling company are listed.

While a bank is under curatorship, the Prudential Authority is entitled under the Banks Act to appoint a commissioner and assistants to the commissioner to investigate the business, trade, dealings, affairs or assets and liabilities of that bank or of any of its associates. The commissioner would have the powers and duties corresponding to the powers and duties conferred or imposed on a financial sector regulator, and each assistant to the commissioner would have the powers and duties corresponding to those of an investigator under Part 4 of Chapter 9 of the FSR Act, including the power to question or require the production of a document by any person who the investigator reasonably believes is able to provide information relevant to the investigation.

Changes in control

Required approvals

Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?

A person is deemed to exercise control over a bank if:

  • the bank is a subsidiary of the controlling company;
  • the controlling company alone or together with his or her associates holds shares in the bank of which the total nominal value represents more than 50 per cent of the nominal value of all the issued shares of the bank and entitles the controlling company to decisively influence the outcome of the voting at a general meeting of the bank;
  • the controlling company alone or together with his or her associates is entitled to exercise more than 50 per cent of the voting rights in respect of the issued shares of the bank; or
  • the controlling company alone or together with his or her associates is entitled or has the power to determine the appointment of the majority of the directors of the bank, including the power to appoint or remove, without the concurrence of any other person, all or the majority of the directors or to prevent the appointment of a director without its consent.

A public company may apply to the Prudential Authority as a controlling company if (i) it intends to exercise control over the bank or (ii) it is a holding company in respect of the company that has applied for registration as a bank. Acquisition of control of a registered bank also requires the permission of the Minister of Finance, through the Prudential Authority. Such permission is required for a person to hold more than 49 per cent of the shares or voting rights in a bank or controlling company.

Foreign acquirers

Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?

Control of a South African bank may be acquired by an institution that has been approved by the Prudential Authority and that conducts business similar to the business of a bank in a foreign country.

Foreign acquirers of securities will require the same approval from the Prudential Authority or the Minister of Finance, as the case may be, as South African acquirers. Also see question 22 regarding the acquisition of securities by non-residents.

Factors considered by authorities

What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank?

Pursuant to the Banks Act, the Prudential Authority must be satisfied of the following requirements before it may grant the application of the bank’s controlling company:

(a) that the registration of the applicant as a controlling company will not be contrary to the public interest;

(b) that, in the case of [a public company applying for registration where it that intends to exercise control over any bank], the applicant will be able to establish control … over the bank concerned;

(c) no provision of the memorandum of incorporation of the applicant is inconsistent with a provision of [the Banks Act] or is undesirable in so far as it concerns banks;

(d) that every director or executive officer of the applicant is, as far as can reasonably be ascertained, a fit and proper person to hold the office of such director or executive officer, and that every such executive officer has sufficient knowledge and experience to manage the affairs of the applicant in its capacity of a controlling company;

(e) that the applicant is in a financially sound condition;

(f) that no interest which any person has in the applicant is inconsistent with a provision of [the Banks Act]; and

(g) that the application complies with the requirements of [the Banks Act].

The Minister of Finance may only grant permission for the acquisition of shares in a registered bank if the Minister of Finance is satisfied that the acquisition will not be contrary to the public interest and the interests of the relevant bank or its depositors or of the relevant controlling company.

Filing requirements

Describe the required filings for an acquisition of control of a bank.

In terms of the Banks Act Regulations, the application for registration as a controlling company must be accompanied by the following documents:

  • the constitutional documents of the applicant;
  • the registered office and postal address in respect of the applicant;a statement containing the name and address and the curriculum vitae of the chairperson, every director and every executive officer of the applicant;
  • full particulars of the business that the applicant conducts or proposes to conduct, of the manner in which such business is or is to be conducted and of the extent of each type of business conducted or to be conducted;
  • the applicant’s latest audited group and company financial statements or, in the case of an applicant whose first financial year has not yet expired, of an audited balance sheet or a pro forma balance sheet of the applicant, as at a date not more than 30 days prior to the date of application;a return concerning shareholders of a bank or controlling company duly completed in respect of the applicant;
  • a statement furnishing, as at a date not more than 30 days prior to the date of the application (i) the amount of the issued share capital and reserves of the applicant, (ii) the amounts of the applicant’s investments in fixed property used mainly for the purpose of conducting the business of a bank and fixed property not used mainly for the purpose of conducting the business of a bank and (iii) the name of the undertaking concerned and the amount invested or proposed to be invested, set out separately under the headings Shares and Loans, in banks, controlling companies, property companies of which the property is used mainly for the purpose of conducting the business of a bank, property companies of which the property is not used mainly
  • for the purpose of conducting the business of a bank and other undertakings (to be specified in the statement);
  • a diagrammatic representation of the structure of the group of companies consisting of associates of the applicant, showing also the percentage shareholding of members of that group in the other members; and
  • a return concerning shareholders of a bank or controlling company duly completed in respect of every bank in respect of which the applicant is, or is to be, registered as a controlling company.

A controlling company must enclose with the application, a registration fee in the amount of 6,000 rand, excluding VAT.

Timeframe for approval

What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?

The time frame for such applications is not prescribed and may vary in practice.