Submission by the Competition Commission on the Co-operative Banks Bill

(B13-2007)

1. Introduction

Section 21(1)(k) of the Competition Act 89 of 1998 (“Competition Act”) empowers the Competition Commission to review legislation and public regulation that permits anti-competitive behavior. This function also entails pro-actively commenting on draft parliamentary Bills with the aim of preventing legislations enacted after the coming into operation of the Competition Act from facilitating or advancing anti-competitive market structures and/or behavior. It is on this basis that the Competition Commission welcomes the opportunity to comment on the Co-operatives Banks Bill, 2007 (“the Co-operatives Banks Bill”) published under the Portfolio Committee of Finance. Furthermore, the Competition Commission would like to make an oral presentation during the public hearings scheduled for the 28^th and 29^th of August 2007.

The Cooperative Banks Bill seeks to ensure the sound and safe management of depositor money and to promote the growth and development of deposit taking financial services co-operatives.

With the seemingly less accessibility of the National Payment System being said to be a barrier to entry in the banking industry, it is laudable that this Bill aims at creating a development strategy and a regulatory environment conducive for the promotion of the development and growth of co-operative banks.

It is within the spirit of the objectives of the Competition Act that competition-enhancing measures are taken to facilitate, amongst others, the promotion and advancement of small businesses. In this regard, the Competition Commission therefore welcomes the Bill as a positive step towards extending affordable banking services to all South Africans, including the unbanked, by promoting the entry and expansion of alternative providers of banking services. This in turn will contribute to increase participation in our economy and hopefully also increase competition in the banking industry to the betterment of social/consumer welfare. However, as we pointed out in our comments on the previous version of this Bill, the success of this legislation will depend on its flexibility and the extent to which it will be effective in lowering the entry and operational barriers that currently characterize the banking sector.

Our comments below mainly concern the determinations of supervisors, consequent amendments to the National Payment System Act, limitations on Primary Co-operative Banks as well as the role of the Competition Commission in respect to amalgamations and merger control.

2. Determinations of supervisors

Chapter VIII provides for the appointment of supervisors. This is a welcome step as it allows for effective administration of the Act. However, it is important that the supervisors apply clear and objective criteria in fulfilling this role. This is particularly true in areas where a supervisor is permitted to exercise some discretion. One function of the supervisor is to grant applications for the registration of co-operative banks. In terms of section 8(2) of the Bill “The supervisor may grant an application for registration subject to any condition he or she may determine”. Although Chapter X provides for appeals against decisions of the supervisors it is important that in any such determination the supervisor apply objective criteria. Opaque conditions and determinations can potentially hamper the efforts of entities to enter the sector, particularly if it introduces uncertainty and unpredictability into the process. We recommend that consideration should be given to establishing clearly stated and objective criteria to guide the supervisor in granting applications for registration of co-operative banks.

3. Consequent amendments to the National Payment System Act

In terms of the relevant amendments to that National Payment System Act (that would follow from the promulgation of the Co-operative Banks Act) we make the following comment:

The exclusion of any reference to primary cooperative banks in the amended National Payment System Act implies that primary cooperative banks would be precluded, either directly or by way of sponsorship, from participating in clearing and settlement activities. It is not clear whether this would mean that a primary cooperative bank would only be able to offer transaction services on its own infrastructure. This may limit the scope of payment services that the primary cooperative bank can offer to its members, and thus potentially its ability to compete effectively. We suggest that greater clarity be provided on primary cooperative banks’ rights and obligations in respect of payments services requiring clearing and settlement in both the Cooperative Banks Bill and in the proposed amendments to the National Payments System Act.

4. Limitations on Primary Co-operative Banks

Section 14 of the Co-operative Banks Bill distinguishes between primary, secondary and tertiary co-operative banks. As noted above, proposed amendments to the National Payment System Act are silent with regards to primary co-operative banks’ requirements in terms of clearing and settlement. However, in terms of section 14(1)(b) of the Co-operative Banks Bill a primary co-operative bank may “open savings accounts of its members in the name of each member, into which that member may deposit or withdraw money and from which that member may instruct the co-operative bank to transfer or pay money”. It is not clear how some of these payment activities (which may involve clearing and settlement) would be facilitated in the case of primary co-operative banks’. Is it intended that primary co-operative banks be specifically limited in this regard? If a primary co-operative bank wished to broaden the scope of its payment services would it be facilitated through some process or would it have to convert to a secondary or tertiary cooperative bank? We recommend that more clarity be provided in this regard.

5. Amalgamation and Merger Control

Chapter V deals with the amalgamation, division, conversion, transfer, judicial management and winding-up of co-operative banks. In terms of section 29(3) of the Co-operative Banks Bill “The supervisor may not approve an amalgamation or division of or transfer by a co-operative bank or issue a certificate of registration in respect thereof without the written consent of the Minister to that amalgamation, division or transfer”.

It is important to note that to the extent that any amalgamation, conversion or transfer may constitute a merger in terms of Chapter 3 of the Competition Act the Competition Commission will scrutinize and make recommendations on the impact that such amalgamation, division, or transfer may have on competition. However, as the decision on the amalgamations, divisions or transfers of co-operatives banks ultimately rests with the Minister of Finance, these matters may fall under the concurrent jurisdiction of the Competition Commission, supervisor and Minister of Finance. Therefore, it is recommended that the supervisor and the Minister of Finance should have a working relationship with the Competition Commission in order to liaise on such matters, as also provided for in terms of section 53(1) of the Co-operative Banks Bill.

6. Conclusion

Overall, the Competition Commission supports the objectives of the Co-operatives Banks Bill. Nonetheless, the Competition Commission recommends that consideration should be given to establishing clearly stated and objective criteria to guide the supervisor in granting applications for registration of co-operative banks; greater clarity be provided on primary cooperative banks’ rights and obligations in respect of payments services requiring clearing and settlement in both the Cooperative Banks Bill and in the proposed amendments to the National Payments System Act; and that the Competition Commission would be scrutinizing amalgamations, divisions or transfers of co-operatives banks to the extent that they fall within Chapter 3 of the Competition Act. Lastly, it should be noted that an effective working relationship between the Competition Commission, supervisor and the Minister of Finance is crucial in as far as regulating amalgamations and/or merger control of cooperative banks is concerned.