Chairperson, the DA is a patriotic party. We love our country and we cherish its institutions. That is why we work relentlessly to ensure that their functionality is not eroded by the selfish actions of any interest group or any political party. The SA Reserve Bank was established in 1921. It was modelled on the Bank of England and its primary objectives were to issue banknotes, act as custodian of cash reserves of other banks, lend cash to other banks in the event of shortages of liquidity, clear and settle interbank transfers and act as custodian of the country's gold and foreign-exchange reserves. From the outset shareholding in the bank was intended to be symbolic. Shareholding was limited to ensure that the broader public could participate in ownership of the bank and dividends were limited to restrain the profit motive for share acquisition.
One of the current shareholders who appeared before the committee during the public hearings presented a detailed history of the bank and confirmed that, historically, shareholders played a very limited role in the affairs of the bank and that the bank divulged little, if any, information to its shareholders. Over time, the shareholder said, the bank began to exchange more and more information with its shareholders as governance trends changed over the years and shareholders became more vocal about their demands for access to information.
The relationship between the bank and its shareholders appeared to be progressing in the right direction until a few years ago, when a noise emanating from a group of shareholders started to increase significantly. It was not immediately obvious, but this marked the beginning of a specific strategy by one shareholder in particular, who was determined to unlock the so-called value of the investment in the bank and embarked on a programme to encourage other shareholders, and new shareholders, to do the same. Part of this strategy included attempts to circumvent legislated limits on the number of shares any individual or entity could hold in a bank, with a view to mobilising a block of shareholders to appoint directors to the bank who were sympathetic to their cause.
The strategy included plans to increase the limited dividend payable to shareholders, access capital at the bank and share in their annual profits but not in any losses. An approach was also made to the ANC to nationalise the bank. Their primary motive was to liquidate the bank and receive a massive windfall.
We will never know how the relationship between the bank and its shareholders would have evolved on its current trajectory, because there is no doubt after the public hearings that a legislative intervention is required to match the expectations of the shareholders with those of the bank.
The proposed amendment limits an individual or entity to ownership of 10 000 shares, including the shares held by their associates. Limited shareholding is not new, and strengthening this position will make it more difficult for individuals and entities to yield more influence than the original legislation intended.
Some shareholders claim that the proposed amendment is unconstitutional, is an act of expropriation and contravenes bilateral international agreements on compensation for acts of nationalisation. The basis of their argument is that the bank is a company similar to any other company, is subject to the Companies Act and that they, as its shareholders, are its owners and can do whatever they want with their asset.
The fact is that the bank is a unique policy institution, established in terms of a special Act of Parliament, the Currency and Banking Act No, 31 of 1920, and its shareholders have always known the limits that are associated with ownership of its shares. The bank's view is that the actions of a group of shareholders are undermining its ability to properly perform its functions. The amendment, they argue, will improve and clarify governance of banks.
It is unfortunate that the expectation mismatch between the bank and its shareholders arose, requiring legislative intervention. We need to accept the reality that the SA Reserve Bank performs a crucial policy function and that it also has private shareholders, many without ulterior motives. Despite the noisy dispute, the actual question is how the SA Reserve Bank should be structured to best serve the interests of all South Africans.
The DA recognises the need for government to intervene when the market fails. The world financial crisis has revealed substantial gaps in classical economic theory, especially the assumption that all the information is available and that markets can always self-correct. In this instance, the failure is the misaligned objectives of the bank and some of its shareholders. This problem is not unique and arose at the Bank of England, prior to its nationalisation in 1947. Hansard records of debates in the House of Commons in 1945 and House of Lords in 1946 reflect the primary reason for the bank's nationalisation. Both sides of the Houses agreed that the bank was a unique policy institution and that shareholders should not be permitted to influence the bank for their own benefit. Although the solution, to nationalise the bank, was not unanimously supported, the British government paid 58 million, in 1947, to buy out the shareholders.
During our parliamentary hearings, some SA Reserve Bank shareholders made clear their opposition to current monetary policy and declared a need for a fundamental change in the operation of our entire banking and financial system. This is well beyond their mandate and reflects broader aspirations to influence key aspects of our economy. Board members are not intended to represent a particular interest group and must act in the best interests of the bank. The amendment sets out the corporate governance functions of the board and introduces a mechanism to consider the suitability of directors who will be nominated by a wider group of stakeholders. The number of directors is increased to 15, seven of whom are elected by shareholders. Any shareholder, current director or member of the general public can nominate a director for election.
A panel will confirm that a candidate is suitable for possible election to the board. This process should screen out unsuitable candidates and retain those who are fit and proper and possess the required skills and experience.
During my recent visit to the United Kingdom, I had an opportunity to meet with the governance department at the Bank of England and had a close look at developments in their corporate finance over their long history - since 1694. Their view is that governance is evolving and this is reflected in ongoing amendments of the Bank of England Act.
Similar to the Bank of England, the SA Reserve Bank operation in pursuit of its mandate is independent, but the inflation target is set by government. While the Crown appoints all directors to the Bank of England, the SA Reserve Bank Amendment Bill proposes the election of seven directors, a more transparent and inclusive approach than that of the Bank of England.
Having considered the deliberations before the committee and the role of the SA Reserve Bank in our economy, an amendment to clarify shareholder expectations and improve governance procedures to ensure ongoing stability at the bank is required. The proposed amendment does move in this direction. Governance evolves over time and Parliament must exercise more vigorous oversight over this institution.
It is likely that further amendments will be required over time to strengthen governance and ensure that the most optimal structure is maintained. In this regard, the Bank of England and other central banks, including those that have private shareholders, can provide useful guidelines.
At the peak of the world financial crisis in 2008, a group of 15 leading financial economists met at Squam Lake, New Hampshire, to consider the question of how we can prevent a repeat of the world financial crisis. The resulting Squam Lake report sets out several recommendations, including the need for one organisation in each country to be responsible for overseeing the health and stability of the overall financial system. They argue that the central bank should be charged with this important responsibility. The DA agrees. The role of the SA Reserve Bank is far wider than implementing monetary policy and protecting the value of our currency. It needs to drive macroprudential policy and the necessary microprudential reforms.
The role of Parliament is to hold the bank to account, to provide oversight and to ensure that the bank operates in a stable environment. Although the proposed amendment does improve this stability, it is likely that further amendments will be required in future, especially to enhance transparency and inclusivity. Given that this amendment takes a step in the appropriate direction, the DA will support this Bill. Thank you. [Applause.]
Mr N J J van R KOORNHOF: Thank you, Mr Chairman. The debate around the shareholding, the so-called nationalisation and the independence of the Reserve Bank created quite a stir. The financial columns were full of speculation - why the sudden need for these amendments? However, as far as I can remember in my political life, in the committees I have served on, the amendments published in this Bill went through the committee unchanged. There were no objections from those parties present at the meetings. Full marks go to Governor Marcus and her team, who have so eloquently argued for the adoption of these amendments.
In 1999, S K Apea wrote, "To ensure that the central bank commands the confidence of the financial system, the Governor, in particular, must possess the following qualities: strong academic and professional background, strong personality and ability to influence opinions through persuasive argument." The Governor lived up to this definition during our hearings.
Fabian Amtenbrink wrote for the International Monetary Fund, the IMF, on the three pillars of central bank governance and according to him the first one is independence. There is large consensus worldwide on the need for central bank independence. This independence concerns the relationship that exists between the bank and the government. It is therefore desirable that the bank and its board are not subjected to political orders or pressures. We, as politicians, must always remind ourselves that the very nature of our positions makes it impossible for us to be impartial to the short-term benefits of an expansive monetary policy. The focus must be long-term stability rather than short-term monetary temptations.
The second pillar of governance is accountability. To the extent that central banks are independent, mechanisms of democratic accountability are required in order to legitimise the position of the bank within a given constitutional system. The legislation is silent - quite correctly - on this, and therefore it is important that Parliament and, in particular, the Standing Committee on Finance, should become more active in this role.
The third pillar of governance, according to Amtenbrink, is that the central bank must be transparent. Transparency includes the public's understanding of decisions taken by the bank and the reasoning behind those decisions. In the words of Deane and Pringle, "an open, democratic society has the right to demand a broad degree of understanding of what central banks do and how they do it". We should design our own parliamentary process to assist in a way that does not compromise the independence of the bank nor apply undue political pressure for the wrong reasons. Cope will support these amendments. And, in closing, were it not for the various international treaties and the possibility of sending a negative signal to international investors, we would have supported an amendment that only South African citizens should be allowed to buy shares in the Reserve Bank.
We are looking forward to a stable era under the governorship of Gill Marcus. Be strong. Defend your independence and do not allow the debate and disagreement on economic policy within the alliance to undermine your independence. I thank you. [Applause.]