Finance committee adopts crucial amendments to Insolvency Act

Last minute interventions by Reserve Bank governor Lesetja Kganyago and the Banking Association SA (Basa) succeeded in persuading parliamentary authorities to give the go-ahead for the processing of amendments to the Insolvency Act, which are regarded as vital for the stability of the financial system.

Initially the parliamentary authorities of the National Assembly and the National Council of Provinces instructed the finance committee not to proceed with the amendments because of time constraints ahead of the closing down of parliament at the end of March.

The committee itself was always keen to approve the Insolvency Act amendments, which form part of the Financial Matters Amendment Bill. However, negotiations with parliamentary authorities on Wednesday afternoon by Treasury officials and finance committee chair Yunus Carrim succeeded in getting approval for the processing of the amendments, which were formally approved by the committee on Thursday. 

Also approved were amendments to the Banks Act to allow for the establishment of a state bank by a state-owned entity;  amendments related to equality of payments of military pensions; and amendments to the Government Employees Pension Law.

Kganyago sent a letter to Carrim on Wednesday stressing the need for the amendments to the Insolvency Act if SA is to comply with international banking requirements. “If the proposed amendments to the Insolvency Act are not processed as part of the Financial Matters Amendment Bill there will be serious ramifications for local market participants and SA financial markets more broadly,” Kganyago warned in his letter.

This failure would have major implications for the ability of SA entities to transfer risk offshore instead of concentrating it in the SA financial markets. Basa also wrote to Carrim warning that the amendments “are critical to the stability of our financial market”.

Basa MD Cas Coovadia said in his letter that US banks have already indicated they would have to terminate current agreements with SA banks if the Insolvency Act remained as is.

International banks

The proposed amendments to the Insolvency Act would protect financial obligations under derivative contracts from automatic incorporation into an insolvent estate; provide the international banking partners of SA banks with certainty regarding contractual arrangements in the event of insolvency; and provide a guarantee that collateral would be paid in the event of insolvency.

From September, SA banks will be required to provide a guarantee of repayment under derivative contracts. If they are unable to provide a guarantee, international banks might decide not to transact with them on these particular contracts — or charge much more for them.

This would mean that SA banks would not be able to provide these products to their corporate clients who want to transfer their risks (related, for example, to commodity prices, exchange rates and interest rates) onto the banks that then hedge this risk with offshore banks. It is customary for the parties to provide security for their obligations under these hedge transactions.

In an interview Carrim insisted  that the finance committee “was always keen to finalise the insolvency provisions in the Financial Matters Amendment Bill and, indeed, the bill as whole”.  

“The committee agreed with the insolvency provisions but was not allowed to deal with them because the bill was only introduced in late January, and the decision-makers in the National Assembly and National Council of Provinces decided that as parliament ends in March for the May elections, there just was not enough time to finalise the bill in both Houses. Permission was initially only granted to process the provisions on the bill dealing with state-owned banks and those related to military pensions.”

Carrim urged the Treasury to submit bills on time in future. “Our committee is loath to process bills without the fullest consideration of them. However, as the insolvency issues were largely technical the committee was able to process them fairly quickly and we would not have come to any other decisions had we had more time. We are satisfied we did the right thing.”

ensorl@businesslive.co.za