SOUTH AFRICAN RESERVE BANK
BANK SUPERVISION DEPARTMENT
Ref: Mr C F Wiese, Registrar of Banks
Adv M S Blackbeard, Head: Legal Division
PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY
PROPOSED AMENDMENT TO THE COMPETITION ACT, 1998 (ACT NO. 89 OF 1998): REGULATORY AND LEGAL CONCERNS
1.1 The purpose of this submission is to inform the Portfolio Committee on Trade and Industry of the regulatory and legal concerns of the Office for Banks to the proposed amendments to the Competition Act, 1998 (Act No. 89 of 1998 – hereinafter referred to as the "Competition Act").
- In terms of the provisions of the Banks Act, 1990 (Act No. 94 of 1990 – hereinafter referred to as the "Banks Act") the Registrar of Banks (hereinafter referred to as the "Registrar") and the Minister of Finance have sole jurisdiction over the regulation of share acquisitions of banks and banking mergers.
- Section 37(2)(a) of the Banks Act provides that the Registrar’s permission is required for share acquisitions in banks and bank controlling companies when the shareholding exceeds the thresholds of 15 percent and 24 percent. The permission of the Minister of Finance, through the Registrar, is required when the shareholding exceeds the thresholds of 49 percent and 74 percent.
- Section 37(2)(b) of the Banks Act provides that the above-mentioned permissions shall only be granted after consultation with the Competition Commission.
- Baxter (Administrative Law,1984 on p 225) describes what is meant by the term consultation in terms of the principles of administrative law:
Consultation does not guarantee that the participants will be able to affect the final decision: a public authority which is bound to consult is not bound to follow the views of those it consults nor does consultation require eventual agreement between the consultor and the consulted. It may even misunderstand the advice it has been given, yet still have consulted. But, by consulting, the decision-maker is more likely to be informed of the various issues and views to which he ought to pay regard.
- Section 54 of the Banks Act provides that no compromise or arrangement referred to in Chapter XII of the Companies Act which involves a bank and no arrangement for the transfer of all or part of the assets and liabilities of a bank to another person, shall have legal force unless the consent of the Minister of Finance, conveyed in writing through the Registrar, has been obtained beforehand.
- Section 54, however, does not contain any provision requiring consultation with the Competition Commission in this regard.
- The Competition Act came into force on 1 September 1999 and, inter alia, creates an institutional framework for the regulation of mergers and the proscription of anti-competitive behaviour.
- Although the Competition Act applies to all economic activity within the Republic of South Africa, section 3(1)(d) provides that the act does not apply to "…. acts subject to or authorised by public regulation".
- Public regulation is defined by the Competition Act as "… any national, provincial or local government legislation or subordinate legislation, or …… directive or similar authorisation issued by a regulatory authority or pursuant to any statutory authority".
- Regulatory authority is defined by the Competition Act as "….. an entity established in terms of national, provincial or local government legislation or subordinate legislation responsible for regulating an industry, or sector of an industry".
- The recent Appeal Court judgement in the Standard Bank Investment Corporation Limited appeal, inter alia, held that the provisions of section 3(1)(d) of the Competition Act precluded the Competition Commission from having jurisdiction over share acquisitions of banks and banking mergers and that these areas were within the sole regulatory jurisdiction of the Registrar and the Minister of Finance.
- This position is, in our view, for reasons that will be discussed hereinafter, not only the more prudent position with regard to the regulation of the banking industry, but is also in accordance with international best practice in this regard.
- Although we had known about the Competition Commission’s intentions to amend the Competition Act for some time, we have, however, only recently learnt that the legislative process has progressed to Parliamentary level. We have conveyed our displeasure and concerns in this regard to the Competition Commission.
- On 18 July 2000 we were supplied with a copy of the Competition Second Amendment Bill, 2000 (hereinafter referred to as the "Bill").
- The proposed amendments to the Competition Act would, inter alia, entail the deletion of section 3(1)(d) from the Competition Act.
- It, however, appears that an attempt has been made to address our concerns with regard to the effective regulation of the banking industry, by the insertion of section 22(2) of the Bill which effectively provides that the Competition Commission shall not have jurisdiction in respect of a proposed banking merger where the Minister of Finance issues a notice that the proposed merger is in the best interests of the stability of the financial system in the Republic.
- Although we have difficulties with the wording of the proposed section 22(2) of the Bill, we have serious concerns with regard to the effect that the proposed draft amendments might have on the banking industry in general and with regard to the ability of this Office to effectively regulate banks and supervise systemic risk and financial stability issues.
- The proposed amendments to the Competition Act will result in the Competition Commission effectively having concurrent jurisdiction with the Registrar (and the Minister of Finance) in respect of the acquisition of shares in banks and banking mergers in cases where the Minister of Finance does not issue a notice in terms of section 22(2) of the Bill.
- Concurrent jurisdiction with the Competition Commission on matters effecting the banking industry is, however, unacceptable to us. Share acquisitions and banking mergers are more often than not done in order to assist an ailing bank and is, therefore, done in the interest of banking stability. It is our view, and it seems to be international best practice, that banking stability issues are regarded as being more important than competition issues.
- A further problem that could be experienced with regard to concurrent jurisdiction with the Competition Commission is the determination of what the position would be where there is disagreement on a particular application. It is clear that the proposed draft Bill does not make provision for such an eventuality nor does it contain provisions addressing a potential deadlock situation. A deadlock in this regard would cause undue uncertainty in an industry where certainty is of paramount importance.
- It is in any event not legally certain that the mere deletion of section 3(1)(d) of the Competition Act would afford the Competition Commission concurrent jurisdiction in this regard. The Competition Act is an act of general application, whereas the Banks Act is an act of specific application. Legally, it could be argued that where the provisions of the respective acts do not concur, the provisions of the specific act should be preferred and adhered to. This aspect alone could lead to unnecessary litigation.
- It also begs the question what the purpose would be of the consultation process prescribed by section 37(2)(b) of the Banks Act where the Competition Commission has concurrent jurisdiction. It is also not clear whether or not the Competition Act has jurisdiction where the acquisition of banking shares amount to less than 35 percent.
- In affording the Minister of Finance with the power to exclude the Competition Commission’s jurisdiction by issuing a notice as described above, it would appear as though the Canadian model has been adopted in this regard.
- On the one hand the Canadian model effectively disregards competition issues all together where the Minister of Finance issues a notice as described above and, on the other hand affords the Minister the sole discretion in matters relating to banks. This could be viewed as direct political interference in banking matters and could lead to litigation against the Minister. Public disclosure of such a fact in the form of the notice by the Minister will certainly be disastrous to the banks concerned and/or the merger deal itself.
- Instead, we are in favour of an exemption of bank mergers from the Competition Act, whilst retaining the consultation requirement in the Banks Act. In this way competition issues will still be considered by the Competition Commission, albeit by means of consultation only, and the merger application as a whole will be considered and facilitated by the Registrar, who will make an appropriate recommendation to the Minister of Finance.
- In this way all the relevant factors (risk to the banks concerned, public interest, systemic risk and financial stability together with competition issues in consultation with the Competition Commission) will be considered by the Registrar as the regulator of banks. This will also ensure that undue information pertaining to the financial status of the banks concerned are not made public and that the Minister of Finance is not required to make decisions that could be challenged in the courts. The difficulties pertaining to the concept of concurrent jurisdiction will also be eliminated.
- In order to ensure that the Registrar and the Minister of Finance retain sole jurisdiction over banking mergers and to provide for an effective process of consultation with the Competition Commission on competition issues, we hereby propose that the following section be inserted in the Bill:
22(2) The provisions of Chapter 3 shall not apply in respect of:
- a transaction regarding the acquisition of shares in a bank or a bank controlling company in terms of section 37 of the Banks Act, 1990;
- a compromise, amalgamation or arrangement referred to in Chapter XII of the Companies Act and which involves a bank or a bank controlling company as one of the principal parties to the relevant transaction in terms of section 54 of the Banks Act;
- an arrangement for the transfer of all or part of the assets and liabilities of a bank to another person in terms of section 54 of the Banks Act; or
- any merger between two or more banks or bank controlling companies or the take over by one or more banks or bank controlling companies of one or more banks or controlling companies,
save that the Registrar of Banks or the Minister of Finance, as the case may be, shall make a determination in terms of section 37 of the Banks Act only after consultation with the Competition Commission.
- In order to formalise the consultation process and to, inter alia, ensure the confidentiality of information and the speed of the process, especially in urgent matters, we suggest that the consultation process be provided for by means of regulations in terms of the provisions of the Banks Act.
- We have conveyed our concerns as described above to both Dr Rob Davies, Chairperson of the Parliamentary Portfolio Committee on Trade and Industry and Ms Barbara Hogan Chairperson of the Parliamentary Portfolio Committee on Finance at a meeting held in Cape Town on Friday 28 July 2000.
- Both Chairpersons took note of our concerns, but requested that we approach the Competition Commission in order to endeavour to obtain consensus on the relevant issues. The Cairpersons were also of the opinion that consensus on the issues between this Department and the Competition Commission prior to the public hearings of the Bill on 22 August 2000 would be preferred over an extended public debate thereof.
- Consequently we held a meeting with Adv Menzi Simelani, Commissioner of the Competition Commission on Monday, 7 August 2000 in order to discuss the relevant issues in order to obtain consensus in this regard. Adv Simelane undertook to arrange a joint meeting between this Office, himself and the Departments of Finance and Trade and Industry. This proposed meeting, however, never took place.
- We have also not been able to meet with the Department of Finance on the issue and are not certain what their official view is in this regard.
- We hereby request that the Portfolio Committee on Trade and Industry take cognisance of our concerns and to record our objection to the proposed amendments to the Competition Act as set out in section 22 of the Bill.