Clinton van Loggerenberg and Deborah Carmichael of ENSafrica in Cape Town examine the key elements of South Africa’s banking and finance legislation from an investment perspective
South Africa has the largest and most developed economy in sub-Saharan Africa. Its banking and financial services sector, which is supported by a progressive, robust and sophisticated legal system, has ranked in the top ten in several key categories in the World Economic Forum’s Global Competitiveness Report in recent years. South Africa boasts a legal system in which insolvency set-off is available in certain derivative transactions and the rights of secured creditors are protected post-insolvency. The country recognises a range of universal security interests and recent legislative enactments have ensured that South Africa keeps on track with international expectations.
Financial services and banking sector
At present, 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, however, 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 Financial Services Board (FSB) will essentially act as the consumer protection body and the Reserve Bank will act as the prudential regulator.
Recently, amendments were made to the bulk of South Africa’s financial legislation, with the passing of the Financial Services Laws General Amendment Act, 2013. The Act was drafted to update legislation and mitigate existing systemic risks by aligning financial sector legislation with the new Companies Act, No 71 of 2008, giving the Minister of Finance emergency powers to deal with systemic risks to the financial system and strengthening the SARB's powers to intervene in the event of a banking crisis. South Africa is also amongst the first ten regulatory authorities globally to have implemented Basel III on schedule.
The Financial Markets Act, No 19 of 2012, (the ‘FMA’) which came into operation on June 3 2013, was enacted to replace the Securities Services Act 2004. The purpose of the FMA is to ensure financial markets in South Africa operate fairly, efficiently and transparently to promote investor confidence It also provides a framework for regulating over-the-counter (OTC) derivatives in South Africa, a key G20 commitment.
Exchange control in South Africa is regulated by the SARB's Financial Surveillance Department (FSD). The FSD applies a system of exchange control designed to prevent the unauthorised transfer of currency abroad and to ensure the repatriation into the South African banking system of currency acquired by South African residents. Policymakers have embarked on a process of exchange control liberalisation over the years to encourage foreign direct investment.
Residents over the age of 18 are permitted to transfer up to R5 million ($477,387) abroad per year for investment purposes, subject to certain conditions. Investments made by companies that do not exceed R500 million per applicant company per year are no longer subject to approval from the FSD.
Transactions between residents of the common monetary area (the Republic of South Africa, Namibia, and the Kingdoms of Swaziland and Lesotho) are not subject to currency controls. There are also specific incentives for African investments where controls are slightly relaxed.
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, in line with the FMA.
Corporate law reform
The new Companies Act, 2008 eradicated the outdated system of capital maintenance by introducing a solvency and liquidity standard with which companies have to comply when inter alia granting financial assistance and making distributions to holders of securities. A company is now, subject to conditions, permitted to finance the purchase of its own shares, which may prove useful in the context of Black Economic Empowerment transactions. The Companies Act has also replaced judicial management with a new business rescue regime for companies in financial distress and partially codified the common-law duties of directors, resulting in directors being exposed to broader personal liability.
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) of any asset attributable to a permanent establishment in South Africa.
Section 24JB of the Income Tax Act was introduced in 2014 and contains specific provisions dealing with the fair value taxation of financial instruments of certain “covered persons”, which includes South African banks and branches of certain foreign banks.
Dividends tax, at 15%, came into effect of April 1 2012. An interest withholding tax on South African sourced interest payments to non-residents will be imposed at a rate of 15% effective from January 1 2015 and applicable to interest that is paid or that becomes due and payable on or after this date.
There is currently a 12% withholding tax on South African sourced royalties paid to non-residents, which will increase to 15% from January 1 2015. A 15% withholding tax on South African sourced service fees paid to non-residents will also come into effect on January 1 2016.
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 at ENSafrica in the banking and finance department. He specialises in banking, derivatives, capital markets, finance, structured finance, collective investment schemes, financial markets, exchange control and regulatory work.
He has acted for a number of local and international banks in establishing operations in South Africa, as well as bank mergers and acquisitions.
Clinton assisted the Banking Association of South Africa with the drafting of the current Section 35B of the Insolvency Act, which ensured that post-insolvency netting may take place in respect of certain derivatives contracts.
Clinton regularly assists financial institutions with the raising of finance and the granting of loans. His practice experience includes advising dealers, arrangers and issuers and Securitisations, Euro Note Programmes, as well as advising various banks on capital-qualifying loans.
Clinton is recognised as a leading lawyer by numerous reputable international agencies and their publications.
About the author
Deborah Carmichael is a director at ENSafrica in the banking and finance department. She 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.
She has acted for the International Swaps and Derivatives Association, 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. In addition, Deborah has acted for pension funds, insurance companies and other regulated financial services institutions.
Deborah’s experience also includes development finance, debt restructuring, workouts and transactions refinancing involving derivative instruments.
She is the author of numerous articles on finance and South African investment related matters.
Deborah is recognised as a leading lawyer by reputable rating agencies and their publications.