Co-operative Banks Bill, 2007: Overview and Key Differences

1. CO-OPERATIVE BANKS BILL,2007 Presentation to: Select Committee on Finance 19 September 2007 National Treasury

2. Outline • Background & context of the Bill • Differences between the 2004 Draft and the 2007 Draft Bill • Summary of the Bill • Outline of each chapter • Interim supervisory arrangements • Depositor Payout process • NT – visits to the FSC’s

3. Context behind the Bill • Cooperative Banks Bill constitutes part of the financial regulatory framework • Creates second and third-tier class of banks • Outcome of the financial sector summit (2002) • Other elements of the proposed reform, dedicated banks bill, deposit insurance bill

4. Context behind the Bill • Purpose of financial regulation • Establish and maintain financial stability • Promote efficiency of the financial system & soundness of financial institutions • To protect the consumers of co-operative banks & promote consumer confidence • Promote access to financial services

5. Differences between the 2004 Draft Bill and the 2007 Draft Key differences:

6. Summary of the Bill 12 Chapters of the Bill • Chap I – Definitions & purpose of the Act • Chap II – Registration, constitution, functions & management • Chap III – Prudential requirements & large exposures • Chap IV – Deposit Insurance Fund & schemes • Chap V – Amalgamation, division, transfer & winding up • Chap VI & VII – Representative Bodies & Support Organisations • Chap VIII – Administration of Act • Chap IX – Cooperative Banks Development Agency • Chapter X – Appeals & Appeal Board • Chapter XI – Offences & Penalties • Chapter XII – General Provisions

7. Chapter IDefinition, purpose & application Purpose of the Act (S2)- to: • Create an appropriate regulatory framework for deposit taking FSCs, credit unions, village banks & community banks; • Promote the development of sustainable & responsible cooperative banks; and • Promote and advance the social and economic welfare of all South Africans by enhancing access to banking services.

8. Chapter I The Purpose will be achieved through (S2): • The registration of deposit taking FSCs, Credit Unions, village banks, community banks as cooperative banks; • Establishment of cooperative banks supervisors to ensure effective regulation & supervision; • The establishment of a Development Agency for cooperative banks to develop & enhance the sustainability of cooperative banks; • Creation of a Deposit Insurance Fund.

9. Chapter I The Act Applies to (S3): • Any co-operative that takes deposits, registered with the Co-operative Act and under this Act; • That has 200 or more members; and • Holds deposits of members to the value of R1m and more.

10. Defining a “Co-operative” “Co-operative Bank” is defined as (S1)- a Co-operative registered as a co-op bank whose members: • Are of similar occupation or profession or who are employed by a common employer or who are employed within the same business district; or • Have common membership in an association or organisation, including religious, social, co-operative, labour, business or educational groups; or • Resides within the same defined community or geographical area.

11. Chapter I Types of Co-operative Banks defined in the Bill are (S5): • Primary savings banks • Primary savings and loans banks • Secondary co-operative banks • Tertiary co-operative banks

12. Chapter IIApplication, functions & registration requirements To register, a co-operative bank must submit, inter alia (S6): • Copies of the constitution, registration certificate as a co-operative; • lending policy (if applicable), savings policy & business plan; • Certified copies of the registers referred to in the Co-operative Act; • Postal and physical address; • Application fee, as prescribed by the supervisor.

13. Chapter II To qualify for Registration, a co-op bank must demonstrate that (S7): • It has sufficient human, financial & operational capacity to function competently as a co-op bank; • Director has experience & knowledge to operate a co-op bank (Fit & Proper requirements section 9); • The composition of the board of directors is appropriate.

14. Chapter II The constitution of a co-op bank must provide for (S13): • Appointment of an Audit committee; • Establishment of a Governance committee; • The supervisor may, in accordance with section 48 direct a co-op bank to amend its constitution to remove anomalies.

15. Chapter II Primary savings co-operative bank may provide the following banking services (S14): • Solicit & accept deposits from members; • Open a savings account for its members; • Open a savings/cheque account in the name of that co-op bank with any banking institution; • Provide trust or custody services; • Conduct any other banking services and invest money in investments as may be prescribed by the Minister.

16. Chapter II Primary savings & loans co-operative bank may provide the following banking services: • All of the activities by the primary savings co-operative banks, in addition: • Grant secured and unsecured loans to members; • Conduct any other banking services and invest money in investments as may be prescribed by the Minister.

17. Chapter II Secondary co-operative banks may provide the following banking services: • All of the activities by the primary savings and loans co-operative banks, plus • Trade in financial instruments; • Open an account with a bank to facilitate foreign currency transactions (through commercial bank); and • Conduct any other banking services and invest money in investments as may be prescribed by the Minister.

18. Chapter II Tertiary co-operative banks may provide the following banking services: • All of the activities by the secondary co-operative banks, plus • Conduct any other banking services and invest money in investments as may be prescribed by the Minister.

19. Chapter II General functions of Co-op banks allows for co-op banks to (S15): • Receive grants & donations; • Secondary & Tertiary co-ops may apply to be a representative body or for accreditation as Support organizations; • Together with co-op banks of the same type establish a dispute resolution scheme (Ombud); and • Subject to conditions may act as an agent or intermediary of a banking institution, pension fund, etc.

20. Chapter IIIPrudential Requirements A co-op bank must meet and maintain minimum (S20): • Capital requirements; • Asset quality; • Liquidity to be held in addition to surplus reserves; • Surplus reserves as required by section 46 of the Co-operatives Act. The inability to meet or maintain prudential requirements (S21): • Should be reported to the supervisor; and • The supervisor may de-register or suspend the registration of a co-op bank

21. Chapter IVDeposit Insurance Fund and Schemes Establishment & control (S26) • Development Agency for co-operative banks must establish Deposit Insurance Fund • The Fund will be controlled & administered by the Agency • i.e. it must account for money received & paid out • Funded by • Contributions from cooperative banks • Funds from the National Revenue fund – via the Agency • Interest from Investments • Audited by • the Auditor General

22. Chapter IV • Funds to be used for: • Compensating members for deposits lost as a result of co-op bank failure • Expenses involved in the control & management of the Fund • Also, the Fund: • Must maintain separate accounting records & prepare separate financial statements • Participation in the Deposit Insurance Fund is compulsory

23. Chapter VAmalgamation, Division, Convention, Transfer, Judicial Management and Wind-up Prohibited Transactions (S27) • A co-op bank may not convert into any other form of corporate or unincorporated body; • A co-op bank may only amalgamate with another co-op bank and transfer assets rights, liabilities and obligation to another co-op bank. Conversion of primary savings co-op bank (S28) • A primary savings co-operative bank may convert to a primary saving and loans co-operative bank.

24. Chapter VIRepresentative Bodies • Requirements for registration(S32) • Must represent two or more co-operative banks; • Has knowledge, experience & competence to represent co-operative banks; • Has sufficient human, financial & operational capacity to function. • Must submit (S31): • A list of co-operative banks it represents; • Constitutions, list of members & directors.

25. Chapter VIISupport Organisations • Must apply for accreditation with the Agency (S36) • Requirements for accreditation, must demonstrate (S37): • To have 2 or co-op banks as members • Support agreements have been entered into which provide for • Development & support for members • Education & training of members • Assistance in managing & maintaining prudential requirements • Must submit – copies of support agreements, business plan, cooperative registration certificate.

26. Chapter VIIIAdministration of the Act • Supervisor 1: South African Reserve Bank (S41) • Primary co-ops banks with deposits in excess of R20m • Secondary and Tertiary co-op banks • Supervisor 2: Agency • Primary cooperatives with deposits less than R20m • Supervisors must annually submit a report to the Minister • Agency must notify the SARB when a primary co-op bank starts holding deposits of more than R20m

27. Chapter IXCo-operatives Banks Development Agency Establishment & legal Powers (S54) • Public entity accountable to the Minister of Finance • Governed by a Board appointed by the Minister (between 6 to 10 non execs) • Managing Director and management team Funding (S68) • From the National Revenue Fund • Collection of fees • Financial management, preparation & submission of financial statements - PFMA

28. Chapter IX General Functions (S55) • Support, promote & develop co-operative banks • Facilitation and promotion of education & training • Oversee the collection of data & act as repository of data • Manage the Deposit Insurance Fund • Regulate & supervise co-op banks (deposits less that R20m) • Register representative bodies & accredit support organisations • Interact with any regulatory authority to ensure appropriate regulation of cooperative banks

29. Chapter XAppeals and Appeal Board Appeal against decision of supervisor (S75) • A co-operative bank, representative body or support organisations may appeal to the board against any decision of the supervisor or a decision of the Agency on: • Registration; Accreditation • Cancellation of registration • Accreditation of a representative body or support organisation Establishment & composition of appeal board (S76) • Appeal board consists of at least three members appointed by the Minister • Board expenses will be paid for by NT

30. Chapter XIOffences and Penalties Offences (S77 – 80) • Unlawful use of the word “co-operatives bank” or conduct of banking business of co-operative bank; • Untrue information in connection with applications; • Criminal liability of directors, managing directors executive officer and other persons; • Failing to comply with the directive under this Act. Penalties (S81) • A fine or imprisonment for a period not exceeding 10 years.

31. Chapter XIIGeneral Provisions Fair administrative actions (S82) • Any decision of an administrative nature must comply with the Promotion of Administrative Justice Act, 2000 (Act no.3 of 2000) Certification of documents (S83) • Any document that must be submitted to the supervisor by co-operative bank must be certified as correct by managing director Access to records, register and other documents (S84) • Regulatory authorities must, at the request of the supervisor or agency make information regarding a co-operative bank, representative body or support organisation available to the supervisor or Agency

32. Chapter XII Regulations (S86) Minister may by notice in the Gazette make regulation regarding • Anything which must or may be prescribed in terms of this Act • The conduct of a member of the board of directors of a co-operative bank in the performance of his or her functions • The manner in which any payment in terms of this Act must be made to the supervisor Exemptions (S89) • Co-operative bank may be exempted from the provision of this Act or any other Act administered by the Minister of finance

33. Chapter XII • Amendments of Laws (S90) • Bank Act, 1990 • National Payment System Act, 1998 • Financial Services Ombud Schemes Act, 2004 • Co-operative Act, 2005

34. Interim Supervisory Arrangements • Minister of Finance issued exemption notices in terms of the Banks Act; • 2007 - Exemption Notice appoints SAMAF as interim regulator for FSC’s pending the promulgation of the Co-operative Banks Act & Est. of the Agency; • 2006 - SACCOL is appointed through another exemption notice to regulate SACCOs, also pending the promulgation of the Co-operative Banks Act, including: • stokvels and ROSCAS.

35. Conditions of the Exemption Notice • Banking activities as defined in the Banks Act can be performed by FSCs solely in respect of its members; • An FSC shall not refer to itself by the name “bank”; • An FSC shall comply with the provisions relating to: • The management of co-operatives contained in chapter VI of the Co-operatives Act, and • Accounting records, accounting and auditing of co-operatives contained in chapter VII of the Co-operatives Act. • Any additional prescriptions imposed by the Registrar of Co-operatives.

36. Depositor Payout Process • In 2002 two self regulated bodies (Finasol & FSA) – that supervised & supported the FSC’s collapsed; • As a result FSC’s & village banks were left unregulated - faced financial difficulties – unable to sustain themeselves; • 2005 – NT appointed Deloitte to conduct the payout process to the depositors; • NT committed R5,3 million for this process; • 35 FSC’s were visited (62 FCS on the Co-operatives Register) – about 11 FSC’s that were willing to close down were paid out;

37. Depositor Payout Process • SACCOL has been appointed to complete the payout process; • SACCOL is expected to make contact with about 50 FSC’s; • They will make recommendations to NT w.r.t: • FSC’s no longer operating; • Those that opted to continue operating – and their financial status (e.g. solvency etc.); • Those that must close down; • FSC’s that require recapitalisation & support.

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