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The Financial Sector Laws Amendment Bill, published for comment in September, proposes amendments to various acts to strengthen the ability of the SA Reserve Bank (Sarb) to manage the orderly resolution or winding down of a failing financial institution with minimum disruption to the broader economy.
Changes would be made to the Insolvency Act, the Financial Sector Act, the South African Reserve Bank Act, the Banks Act, the Mutual Banks Act, the Competition Act, the Financial Markets Act and the Insurance Act.
This comes against the backdrop of recent distressed banks, such as VBS and African Bank.
The proposed amendments seek to ensure that depositors’ funds are protected in the event of a bank failure, with the establishment of a government-owned Corporation for Deposit Insurance.
The corporation would be mandated to establish, maintain and administer a Deposit Insurance Fund to protect bank customers’ deposits in the event of a bank failure.
The corporation would be funded partly by deposit insurance premiums payable by banks as compulsory members of the corporation.
Comments on the bill closed on November 7.
Treasury, Sarb and the Financial Sector Conduct Authority will convene meetings and workshops with interested stakeholders.
In a financial market such as South Africa it is essential that customer protections are set in place.
The bill is unique in the sense that it provides customer protection (in the form of the deposit insurance) on an individual level, as opposed to the broader protections that are intended within the financial regulatory framework – for example, the rationale that the split between conduct and prudential regulation will entrench customer protections.
Assuming that the bill is passed as it is, customers of a distressed bank can claim the monies that are due to them, subject to the specifics of the Deposit Insurance Fund.
The bill provides certainty in the sense that affected customers who are likely to achieve redress without the rigmarole of proving and submitting their claims as part of the curatorship process and then waiting for the outcome.
The changes proposed by the bill are necessary – but the broader policy consideration is whether it has taken too long to make them.
In the wake of 2014’s African Bank failure, Treasury published a paper in August 2015 titled Strengthening South Africa’s resolution framework for financial institutions, which highlighted the need for financial reforms, including a defined depositor insurance scheme.
Since the initial formal identification (2015) of this critical deficiency in the protections available to depositors, South Africa has seen yet another bank failure in the form of VBS Mutual Bank.
Three years later, as we deal with the aftermath of the VBS failure, depositors remain unprotected.
The burning question is whether adequate priority is being given to the implementation of financial services legislation.
How can we justify not having adequate depositor protection this year, while having, by way of example, finalised law on central counterparties? (A central counterparty is a type of market infrastructure relevant in the context of derivative trades. South Africa does not yet have a central counterparty.)
It is clear that we need to be more selective about financial legislative reforms, with priority given to those changes that must occur in the interests of customers.
In these uncertain financial times, we can only hope that the changes proposed by the bill come into law before there are any further bank failures.
On the assumption that this will in fact be the case, the next burning question is likely to be whether the protections are enough.
- Reddy is a director at Norton Rose Fulbright
