1. CO-OPERATIVE BANKS BILL, 2007 Presentation to: Portfolio Committee on Finance 22 August 2007 National Treasury

2. 2 Outline 1.Background & context of the Bill 2.Differences between the 2004 Draft and the 2007 Draft Bill 3.Summary of the Bill 4.Outline of each chapter 5.Interim supervisory arrangements 6.Depositor Payout process 7.NT – visits to the FSC’s

3. 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. 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. 5 Differences between the 2004 Draft Bill and the 2007 Draft Key differences: Initial Draft (2004)Latest Draft (2007) Provided for a single supervisor appointed by the SARB Two supervisors will be established: SARB and Development Agency No provisions for deposit insuranceStatutory and voluntary deposit insurance schemes Prudential requirements adapted from the Banks Act Simplified prudential requirements to be prescribed by the Minister of Finance Only one Support OrganisationA Development Agency for Co-operative Banks to be established. Will work with support organisations. Board of ReviewAppeals Board

6. 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. 7 Chapter I Definition, 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. 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. 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. 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 or educational groups; or Resides within the same defined community or geographical area.

11. 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. 12 Chapter II Application, 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. 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. 14 Chapter II The constitution of a co-op bank must provide for (S13): Appointment of an Audit committee; Establishment of a Supervisory committee; The supervisor may, in accordance with section 48 direct a co-op bank to amend its constitution to remove anomalies.

15. 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. 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. 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. 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. 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. 20 Chapter III Prudential 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. 21 Chapter IV Deposit 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. 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

23. 23 Chapter IV Establishment of Deposit Insurance Scheme (S25) Secondary co-op bank may establish a voluntary deposit insurance scheme; Tertiary co-op bank must establish a deposit insurance scheme; Secondary & Tertiary co-op bank must apply to the supervisor for approval of the proposed scheme; Supervisor has power to withdraw approval of such scheme Voluntary deposit insurance scheme must: Be underwritten by an insurer – Short Term Insurance Act

24. 24 Chapter IV Obligations of co-op banks (S24) Primary co-op bank must pay deposit insurance contributions to the Fund or; Must participate in a voluntary scheme of a secondary co-op bank; Secondary co-op bank must pay deposit insurance contributions to the Fund or; Must participate in a voluntary scheme of a Tertiary co- op bank; Tertiary co-op bank must establish & manage a deposit insurance scheme.

25. 25 Chapter V Amalgamation, 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.

26. 26 Chapter VI Representative 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.

27. 27 Chapter VII Support 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.

28. 28 Chapter VIII Administration 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

29. 29 Chapter IX Co-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

30. 30 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

31. 31 Chapter X Appeals 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

32. 32 Chapter XI Offences 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.

33. 33 Chapter XII General 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

34. 34 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

35. 35 Chapter XII Amendments of Laws (S90) –Bank Act, 1990 –National Payment System Act, 1998 –Financial Services Ombud Schemes Act, 2004 –Co-operative Act, 2005

36. 36 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.

37. 37 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.

38. 38 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;

39. 39 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.

40. 40 NT - visits to FSC’s Two FSCs were visited in August 2007; Holy Cross in the Eastern Cape – used to have 315 members and deposits of R260 000 –nearest town Flagstaff – 15km away; KwaMachi in KZN – has about 400 members and deposits of R300 000 – nearest town Harding - 20km The visits emphasized the need for the services of FSC’s and their developmental needs; The challenges that are currently faced will have to be addressed before the FSC’s can comply with the requirements for application.

41. 41 THANK YOU