Clinton van Loggerenberg and Deborah Carmichael of ENSafrica examine the key elements of South Africa’s banking and finance legislation from an investment perspective
South Africa is often labelled the “gateway to Africa”, and for good reason. South Africa boasts a strong banking and financial services sector, which is supported by a robust and sophisticated legal system committed to keeping in step with the G20 initiatives of recent years. South Africa’s legal system accommodates post-insolvency set-off in derivative transactions and the rights of secured creditors are protected post-insolvency.
Financial services and banking sector
Currently, the South African Reserve Bank (SARB) and the Financial Services Board (FSB) exercise regulatory oversight over the banking system and non-banking financial services sector, respectively. This is set to change as the government takes steps to implement its “twin-peaks” approach, aimed at the enhancement of systemic stability, improvement of market conduct regulation, sound micro- and macro-prudential regulation, and the strengthening of the operational independence, governance and accountability of regulators. Under this system, the FSB will act as the consumer protection body and the SARB will act as the prudential regulator.
Regulations that aim to guide South African banks along the path to Basel III compliance are in effect, and South African banks are required to meet Basel III milestones in relation to capital and liquidity requirements.
In response to the curatorship of African Bank Limited, parliament promulgated the Banks Amendment Bill. This Bill was introduced to strengthen the powers of a curator appointed to rescue a troubled bank. The Bill seeks to empower the curator to take decisive action in order to restore the bank to a position of financial stability.
The Financial Markets Act 19 of 2012 (FMA), which came into operation on June 3 2013, was enacted to replace the Securities Services Act 36 of 2004. The purpose of the FMA is to ensure financial markets in South Africa operate fairly, efficiently and transparently to promote investor confidence. Draft regulations to the FMA, which were released in 2014, regulate over-the-counter (OTC) derivatives in South Africa, thereby giving effect to a key G20 commitment.
In April 2015, hedge funds were declared to be collective investment schemes and now fall to be regulated under the Collective Investment Scheme Control Act 45 of 2002, bringing hedge funds into the scope of regulatory oversight for the first time. All hedge funds are now required to have structures in place to ensure that investors cannot lose more than they invest, and an appropriate level of independent review must be undertaken for each valuation of assets, particularly those in which the valuation is influenced by the manager of the hedge fund.
Despite significant relaxations in recent years, South Africa still implements a system of exchange controls. These controls regulate the transfer of currency abroad by South African residents.
The Johannesburg Stock Exchange (JSE)
The JSE, which ranks among the top 20 exchanges in the world by market capitalisation, is South Africa's only exchange. The JSE rules and enforcement procedures are based on global best practice, while its automated trading, settlement, transfer and registration systems are on par with other leading stock exchanges. The JSE also features a futures exchange (Safex) and an interest-rate exchange on which debt instruments are listed and traded.
Investors wishing to list bonds on the bond market platform must do so in terms of the JSE's updated Debt Listing Requirements, which took effect from January 15 2014.
South African residents are taxed on worldwide income and non-residents are subject to income tax on South African sourced income, subject to domestic exemptions or treaty relief. Non-residents are subject to South African capital gains tax on the disposal by such non-resident of (1) any immovable property, (2) any interest in immovable property situated in South Africa, or (3) any asset attributable to a permanent establishment in South Africa.
Section 24JB of the Income Tax Act 58 of 1962 was introduced in 2014 and contains specific provisions dealing with the fair value taxation of financial instruments of certain “covered persons”, including South African banks and branches of certain foreign banks.
Dividends tax, at 15%, came into effect on April 1 2012. An interest withholding tax on South African sourced interest payments to non-residents is imposed at a rate of 15%, effective from March 1 2015, and applies to South African sourced interest that is paid or that becomes due and payable on or after this date. As of January 1 2015, the rate of withholding tax levied on South African sourced royalties paid to non-residents increased from 12% to 15%. A 15% withholding tax on South African sourced service fees paid to non-residents will also come into effect on January 1 2016.
The Income Tax Act contains hybrid debt and hybrid interest provisions, which came into effect on April 1 2014. These sections re-characterise certain types of interest paid as dividends in specie. Re-characterised interest payments are, inter alia, subject to the dividends tax provisions and are not deductible in the hands of the party making payment of the interest. Certain hybrid debt instruments have been listed in a recent Government Gazette as constituting “reportable arrangements” as defined in the Tax Administration Act 28 of 2011.
The Income Tax Act also contains hybrid equity provisions that have been subjected to regular amendments. These provisions operate to re-characterise dividends paid in respect of certain shares as income in the hands of the recipients thereof. A headquarter company regime offers beneficial tax treatment for qualifying headquarter companies. The regime is intended for the establishment of regional holding companies in South Africa by foreign multinationals for investment outside of South Africa.
The provisions require careful analysis and investors should engage advisors in this regard.
About the author
Clinton van Loggerenberg is a director in ENSafrica’s banking and finance department. He has more than 20 years of experience and specialises in banking, derivatives, capital markets, finance, structured finance, collective investment schemes, financial markets, exchange control and regulatory work.
Clinton has acted for a number of local and international banks in establishing operations in South Africa, as well as bank mergers and acquisitions.
Clinton regularly assists financial institutions with the raising of finance and the granting of loans. His practice experience includes advising dealers, arrangers and issuers.
He is the author of a number of published Annexures for the International Swaps and Derivatives Association (ISDA), and was the original author of the Credit Support Documentation opinion for South Africa. He has acted as local counsel to ISDA, the International Capital Markets Association and the Securities Lending and Repo Committee.
About the author
Deborah Carmichael is a director in ENSafrica’s banking and finance department. She has 12 years of experience and specialises in complex regulatory matters in the banking and financial services sector, including collective investment schemes, exchange control, derivatives, securities lending and over-the-counter trading.
Deborah’s experience also includes development finance, debt restructuring, workouts and specialist borrower advisory work in debt finance transactions, including corporate and bank debt.
Deborah has also acted for the International Swaps and Derivatives Association (ISDA), the International Capital Market Association, the Securities Lending and Repo Committee and the Capital Adequacy Working Group on issues requiring derivatives and securities lending legal counsel.