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’s diverse economy and developed regulatory environment creates an excellent African investment platform. 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 the 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.
The insurance industry awaits the passing of the Insurance Bill which will have far-reaching effects for both long-term and short-term insurers. The Insurance Bill will bring into effect the Solvency Assessment and Management Framework that seeks to ensure financial stability of insurers by aligning insurers’ regulatory capital requirements with the underlying risks of the insurer. The Insurance Bill is currently under consideration by the Parliamentary Standing Committee on Finance, as is the Financial Sector Regulation Bill. Together, the bills will form part of the “twin-peaks” model of financial regulation in South Africa.
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.
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.
South Africa implements a system of exchange controls. These controls regulate the transfer of currency abroad by South African residents. Exchange Control Ruling B.2 has recently increased the total foreign capital transfer allowance for private individuals to R10-million per calendar year and to R1-billion per South African company per calendar year.
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 August 4 2015.
The Second Draft Regulations to the FMA will regulate over-the-counter (OTC) derivatives in South Africa, thereby giving effect to a key G20 commitment. The Draft Regulations aim to reduce the systematic risk associated with derivatives.
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 situated in South Africa, (2) any interest in immovable property situated in South Africa, or (3) any asset effectively connected with 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 assets” and “financial liabilities” of certain “covered persons”, including South African banks and branches of certain foreign banks.
Dividends tax, at 15%, came into effect on 1 April 2012 and applies to any dividend paid by a South African resident company, or cash dividends paid by foreign companies which are listed on the JSE. 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 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 1 January 2017.
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.
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.
Clinton van Loggerenberg
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.
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.