Banks Amendment Bill [B12-2007]: briefing; Taxation Laws Amendment Bill [B18-2007]: SARS response to Submissions & voting

FINANCE PORTFOLIO COMMITTEE
12 JUNE 2007
BANKS AMENDMENT BILL: BRIEFING; TAXATION LAWS AMENDMENT BILL: SARS RESPONSE TO SUBMISSIONS & VOTING

Chairperson: Mr N Nene (ANC)

Documents handed out:
SARS response to public comments on Taxation Laws Amendment Bill
SARS Explanatory Memorundum on Taxation Laws Amendment Bill
South African Reserve Bank presentation on Basel II
National Treasury’s Motivation for Proposed Amendments to the Banks Act
Briefing on Banks Amendment Bill by National Treasury and South African Reserve Bank
Taxation Laws Second Amendment Bill [B19-2007]
Taxation Laws Amendment Bill [B18-2007]
Banks Amendment Bill [B12-2007]

Audio Recording of the Meeting


SUMMARY
The National Treasury team briefed the Committee on the Banks Amendment Bill and Basel II. These amendments to the Banks Act were necessitated by the revised Framework on International Convergence of Capital Measurement and Capital Standards published by the International Basel Committee on 26 June 2004. Amendments had become necessary since the Banks Act was last amended in 2003 due to industry developments or to clarify certain provisions. In summary the Basel II amendments aim to create a sufficiently robust regulatory environment that will enable the Registrar to properly discharge his/her responsibilities in respect of banks, controlling companies and banking groups on a solo, cross-border or consolidated basis. Basel II was all about increasing financial stability, competitiveness and improving the efficiency of the banking sector.

SARS briefed the Portfolio Committee on proposed changes to the Taxation Laws Amendment Bill as a result of public submissions on the Bill. Both bills were approved with the changes.

MINUTES
Banks Amendment Bill
Mr Jonathan Dixon (Chief Director: Financial Sector Policy Unit) focused on the implementation of Basel II and the resulting amendments to the Banks Amendment Bill. Basel II aimed at improved risk management and supervision so as to bring the South African (SA) banking sector up to standard. Basel II also aimed to increase financial stability, competitiveness and improving the efficiency of the banking sector.

Mr Errol Kruger (Registrar of Banks) gave a presentation on Basel II and its aims within the South African banking system. He described the history of Basel 1 and changes which had happened since Basel 1. Globalisation, technological advances, and financial engineering required a more forward looking approach to deal with risks within the banking sector. Basel II aimed to strengthen the financial system, level the playing field, limit regulatory arbitrage and foster sound risk management. The objectives of Basel II focussed on three pillars which include regulatory capital, economic capital versus risks, supervisory processes and market discipline by improved disclosure. The goal was to implement Basel II by the beginning of 2008. An Accord Implementation Forum was established with various sub-committees to implement Basel II.

Mr Dixon then went through the significant proposed amendments to the Banks Act (see National Treasury motivation document).

Discussion
Mr K Moloto (ANC) asked if operational risks, to be introduced with the capital held by banks, would not lead to a credit crunch.

Mr Dixon replied that National Treasury aimed at ensuring that there would be no unintended consequences with Basel II. National Treasury had made an economic assessment of Basel II which focused on the regulatory capital that banks would be required to hold. National Treasury's impact assessment also focussed on banks' behaviour in terms of pricing of fees and interest rates and the broader macro economic impact of Basel II. Treasury did not think that Basel II would have a substantial impact on regulatory capital. Therefore Treasury thought that there would not be a risk of a credit crunch.

Mr Dixon said that although a new operational risk charge has been introduced under Pillar 2 of Basel II, it was counterbalanced by a reduction in regulatory capital under Pillar 1. He said that overall capital required will be broadly neutral and did not indicate a significant increase.

Mr Moloto asked if information disclosure would be mandatory or voluntary and also which type of information should be disclosed.

Mr Errol Kruger (Registrar of Banks) replied that all market participants needed access to information which included the risk profile and level of capitalisation that banks have. In published annual financial statements, a number of banks were already disclosing their risk profile. Disclosure in this regard seemed to be prevalent already. Disclosure would be mandatory and not voluntary.

Mr Moloto also asked if there was a memorandum of understanding with law enforcement agencies to ensure that they would hold confidential information as confidential.

Mr Michael Blackbeard (Deputy Registrar of Banks) replied that they have a memorandum of understanding with the Financial Services Board, the Competition Commission, and are finalising an agreement with the Regulatory Board for Auditors. He said that they have an ongoing exchange of information with law enforcement agencies.

Mr B Mguni (ANC) said that commercial banks only service about 4% of people who need credit. He asked if Basel II would increase or put those people at a disadvantage.

Mr Dixon replied that Treasury were concerned about whether Basel II would have any impact on access to finance and focussed on this issue in their economic impact assessment. Treasury concluded that Basel II would be positive for Small, Medium and Micro Enterprises (SMMEs) especially for retail SMMEs. In the past due to a lack of information and data, banks gave a conservative blank risk weighting to SMMEs. Increasing the importance of credible information and introducing better risk weighting requirements should favour SMMEs. Banks also made a commitment in terms of the financial section charter.

Mr Mguni also said that literature suggested that one should have a framework for regulation but one should not prescribe to banks. He asked if the formula in Basel II would prescribe to banks how much risk they should take or should not take.

Mr Dixon replied that Basel II did not introduce prescriptions or limits on the risks that banks could take on. It would only require banks to be clear on the risks they did take on. Banks would be given a higher risk weighting and would have to carry more capital against their risk.

Mr Mguni referred to the Money Wise scheme where one could buy property and get proceeds.
He said that lots of people were laid off due to a decrease in mining after which they bought property in the Money Wise scheme. The Money Wise scheme was closed down by the Governor. He asked if this example constituted a pyramid scheme.

Mr Blackbeard replied that the scheme was liquidated because there was a concern about the funding structure which did not comply with the regulations. It was only the holding company that was liquidated and not its subsidiaries. The appointed liquidators were looking at ways to resolve issues related to other companies.

Mr S Marais (DA) asked if it was clearly indicated in the bill that the penalty is "up to" R10 million and not fixed at R10 million. He also asked if there were other forms of penalising banks.

Mr Blackbeard confirmed that there were other penalties which would include withholding approvals until such time that a bank rectify something which were not in compliance with the Act.

Mr Marais referred to Slide 11 of the National Treasury presentation that stated that the registrar “may” nominate but also that the master "shall" appoint. He asked for clarification because there might be different interpretations of the words “may” and “shall”.

Mr Blackbeard replied that the word “may” related to the discretion of the Registrar. The word "shall" indicates that it would be mandatory for the Master of the High Court to appoint a liquidator nominated by the Registrar.

Mr Marais referred to the persons to be nominated by the registrar. He asked what the process was to identify and accredit persons so identified. He wanted to know if those persons were similar to registered persons in the banking industry.

Mr Marais also said that his impression was that there will be an increase of costs to banks which will eventually be passed on to the consumer. Had National Treasury looked at ways that this cost could be discounted to the extent that it would not be too inflationary?

Mr Dixon replied that in terms of economic impact, Treasury did not foresee that Basel II would have a significant impact on bank pricing. Regulatory requirements were only one of the factors that influence how much capital banks hold. Other influences included consumer demand and level of competition. Basel II should not be the lever to affect bank pricing. There was a need to push ahead with government initiatives in other areas to facilitate lower bank prices; for instance, the competition enquiry into bank charges.

In reply to Mr Marias asking if the proposed amendments implied a further relaxing of exchange control requirements and regulations in terms of the flow of funds over borders, Mr Dixon said that Basel II would not affect exchange controls.

Mr M Johnson (ANC) indicated that there might be a need for the Portfolio Committee to have a workshop on banking and Basel II.

Mr Kruger replied that the South African Reserve Bank would be prepared to have a workshop with the Portfolio Committee.

Mr Johnson referred to the 11^th amendment proposed by Treasury which focussed on the control of the activities of unregistered persons. He wanted clarification regarding registered persons.

Mr Blackbeard replied that "unregistered" referred only to not being registered as a bank.

Mr Johnson commented that unregistered businesses might not be making a profit but use their business as a way of cleaning money.

Mr Kruger replied that there was a strong drive by all banks to implement the Financial Intelligence Centre Act which aims to prevent money laundering.

Mr Johnson asked if it is not time to focus on deposit insurance schemes.

Mr Dixon confirmed that deposit insurance schemes needed to be looked at. He said that a strategy paper would be forwarded to the Minister. A submission had also been submitted by the Banking Association.

The Chairperson indicated that the concerns raised by the Banking Association were being addressed by National Treasury. National Treasury were confident that the Banking Association’s concerns would be resolved.

Mr Nene noted that Standard Bank had indicated that they would not be making an oral submission.
NEDLAC and the South African Institute of Chartered Accountants (SAICA) said that the matters that they wanted to raise had been already raised with National Treasury and had been dealt with.

Mr Nene asked National Treasury if they would be in a position to report back to the Committee on 13 June 2007 so that the Portfolio Committee could move forward with formal consideration of the Bill.

Mr Dixon indicated that he would be able to report back on 13 June 2007.

Mr Y Bhamjee (ANC) asked National Treasury how the gold deposits stored in the vault of central bank was included in their calculations of capital adequacy?

Mr Dixon said that there were no legal provisions that required banks to hold a percentage of their assets in gold.

Mr M Mbili (ANC) asked what the overall book value of liquidation in terms of percentage was and to what extent could one attribute that to reckless lending.

Mr Dixon said that Basel 11 provisions introduced through amendments to the Banks Act would not directly impact on bank lending practices.

Taxation Laws Amendment Bill - SARS response to submissions
Mr Franz Tomasek (General Manager: Legislative Policy: South African Revenue Services) assisted by Ms Meintjie Botha (Director: Legislative Policy), went over the proposed changes to the Taxation Laws Amendment Bill as a result of public submissions (see document). He said that the changes had required further interaction with the Minister. Meetings had been held with the Minister subsequent to drafting the proposed changes.

Discussion
In response to Mr Marais request for clarity, Mr Nene explained that there were two bills. The one dealt with administrative matters and the other one dealt with the actual "meat".

Mr Bhamjee said that retirement funds taxation was dealt with in Point 3.3 of the SARS response document and their response was that information on all the issues at stake was still being collected. He asked how one could say that one was still collecting information but yet come forward with recommendations.

Mr Tomasek said that the Life Officers' Association was looking for a complete cut-off with respect to audit activity and adjustments in terms of Tax on the Retirement Funds Act. One could understand that nobody wanted to still litigate five to ten years from now about a tax that did not exist any more. It was difficult to recommend a hard cut-off without having a good sense of what is being walked away from. One needed a better sense of arithmetical errors, amounts due or payable, and gaps in the system. This was distinct from issues where an assessment has already been raised and where there was a dispute. One was empowered to enter into a settlement negotiation with the tax payer concerned. This ability did not exist in the Tax on Retirement Funds Act. It was proposed that in the interim, settlement negotiations were also to be used within tax on retirement funds. They were bringing the Tax on Retirement Funds Act in line with other Acts being administered.

Voting on the Taxation Laws Amendment Bills
The Chairperson read the motions of desirability for the two Bills and the Committee agreed to approve the Bills including the proposed amendments.

The meeting was adjourned.