Banks and other financial institutions should take note of the new resolution framework that came into effect on 1 June 2023. These legislative changes stem from the global financial crisis and the Group of Twenty’s request that the Financial Stability Board provide a list of international standards to ensure the resolution of systemically important financial institutions. These institutions are considered “too big to fail” (TBTF) as their collapse would have a detrimental impact on depositors, the financial system and/or the broader economy.
As a member of the G20 and in line with the FSB’s recommendations, the South African Government has introduced a new Chapter 12A in the Financial Sector Regulation Act, 2017 (“FSRA”), as amended by the Financial Sector Laws Amendment Act, 2021, which deals with the resolution of “designated institutions”. In terms of section 29A of the FSRA, a designated institution includes a bank, a systemically important financial institution, the payment system operator and participants of a systemically important payment system, and a company that is a holding company of a bank, a systemically important financial institution, or a payment system operator of a systemically important payment system. Furthermore, if a bank or systemically important financial institution is a member of a financial conglomerate (as designated by the Prudential Authority), each of the other members of the financial conglomerate will be classified as a designated institution.
It is important to note that these legislative amendments result in the appointment of the South African Reserve Bank (“Reserve Bank”) as the responsible authority for managing the resolution procedure for designated institutions. Accordingly, the Reserve Bank has been granted an extremely wide range of powers. Section 166D(1) of Chapter 12A, for example, lists a number of steps that a designated institution may not take, whether in resolution or not, without the concurrence of the Reserve Bank such as entering into an agreement for amalgamation or merger. Any step taken without the concurrence of the Reserve Bank will be rendered void.
The Reserve Bank has also been given the power to recommend to the Minister of Finance (“Minister”) that a designated institution be placed in resolution. After considering this recommendation, the Minister may make a written determination to the Governor of the Reserve Bank placing the designated institution in resolution if he or she considers that the designated institution is or will probably be unlikely to meet its obligations, whether or not the designated institution is insolvent, and it is necessary to ensure the orderly resolution of the designated institution to maintain financial stability, or in the case of a bank or a member of a group of companies of which a bank is a member, to protect depositors of the bank.
One of the key features of the resolution legislation is that once a designated institution has been placed in resolution, and if the Reserve Bank determines that it is necessary for the designated institution to enter into a particular transaction, the designated institution must then do so despite any law or agreement (our emphasis). This is an extremely wide-ranging power and purposefully so. In addition to the amendments to the FSRA and the powers prescribed to the Reserve Bank therein, other legislation has been specifically amended to accommodate the new resolution framework such as sections 112-114 of the Companies Act, 2008. These provisions have been amended to expressly exclude their application if the resolution procedure applies.
This new resolution framework has important consequences for designated institutions and their shareholders.
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Read the original article at ENSafrica.