Covid-19: Impact on banks, non-insurance financial institutions & expectations on regulated entities
by Danelle Prinsloo, Lenee Green, Johann Scholtz, Dawid de Villiers, Kent Davis from Webber Wentzel
In response to the Covid-19 emergency, the South African Reserve Bank (Reserve Bank) and the South African financial sector regulators, the Prudential Authority and the Financial Sector Conduct Authority (FSCA), have implemented several mitigation measures to support the economy and companies.
On 19 March 2020, the Monetary Policy Committee of the Reserve Bank (MPC) decided to cut the repo rate by 100 basis points. In making this decision, the MPC had regard to, amongst other things, the impact of Covid-19 and the monetary policy in major advanced economies.
The Prudential Authority in support of Covid-19 relief initiatives has proposed two draft directives in respect of banks. These draft directives are aimed at:
- temporarily reducing Pillar 2A minimum capital requirements for banks to zero so that banks will be allowed to conduct business with a zero percent Pillar 2A capital requirement without any regulatory action being taken; and
- providing factors for restructuring of retail loans due to Covid-19 related factors. These restructured loans will be classified as "Covid-19 related restructures".
In addition, the Prudential Authority also published Directive D1/2020, which introduced temporary measures to aid compliance with the liquidity coverage ratio (LCR) of banks during the Covid-19 stress period. Pursuant to this directive, that Prudential Authority revised the minimum LCR of banks to 80 per cent with effect from 1 April 2020 and until such time as the Prudential Authority directs in writing that it is of the view that financial markets have normalised;
Banks must ensure that only loans classified as retail (including SME retail) that are expected to remain up to date after the relief measure period ends and economic conditions have normalised (i.e. Covid-19 related retail restructured loans) would not be regarded as distressed restructures as defined in paragraph 2.4 of D7/2015 D7/2015 provides clarity on how banks should identify restructured credit exposures and how these exposures should be treated for purposes of the definition of default.
In order for Prudential Authority to the monitor the extent and impact of Covid-19 related retail restructured loans, additional reporting requirements may be specified in writing by the Prudential Authority as part of its ongoing supervisory processes.
The FSCA has put in place several arrangements in respect of the submission of statutory returns and fit and proper related deadlines due to the Covid-19 crisis. The FSCA has advised that it will do its best to accommodate anyone that is experiencing problems in complying with specific regulatory requirements because of the impact of Covid-19.
In relation to the expectations on regulated entities, the FSCA issued a communication, 12 of 2020 which outlines the main expectations of the FSCA regarding the culture and main responsibilities of financial institutions during the Covid-19 crises. The FSCA emphasised that the uncertainty and market volatility due to Covid-19 may lead to poor decision-making by customers that leaves South Africans financially vulnerable.
Regulated entities are encouraged to assist customers with more empathy, flexibility and understanding. Regulated entities are expected to attend to (or to consider) the following during the Covid-19 crisis:
- business continuity plans to deal with Covid-19 and mitigate risks or potential risks which could impact the operational ability of the entity (including ability to deliver services);
- if any major risks have been identified, communicate the risk, impact thereof and mitigation plans to the Authorities;
- continued fair treatment of customers from advertising to sales, to claims, to renewals and complaints;
- in relation to intermediary service providers, advice to customers by advisers during this time of uncertainty is critical and advisers must stay abreast of developments and provide customers with suitable advice;
- board members of retirement funds must keep abreast of risks that Covid-19 brings to the fund and take steps to mitigate such risks;
- asset managers and CIS managers must manage liquidity risks that Covid-19 brings to portfolios;
- complaints management process and turn-around-times on resolving complaints must not be compromised;
- consideration of cyber-risk exposures and potential breaches heightened over the lock-down period.
In relation to bank operations it is important to ensure that the banking system remains secure. If branches are closed, alternative banking venues must be carefully communicated to customers. Banks must ensure ATM availability and manage queues where practical. The Banking Conduct Standard is not yet implemented but banks are encouraged to consider principles and good practices promoted through the standard.
Developments related to Covid-19 are expected to impact parliamentary process and result in the delays of the effective date of Conduct Standard for Banks. The FSCA will continue to advise industry on progress being made in this regard. The Authorities are aware of the challenges that regulated entities might face and have extended the deadlines of the following standards: (i) gap analysis on the World Bank's Retail Banking Diagnostic Review Report (2018); (ii) pre-submission of inspection documents; and (ii) proposal on the complaints management process, to 31 May 2020.
In relation to all financial institutions, entities are reminded that the necessary due diligence, monitoring and control over all third parties should remain intact and alternative measures to ensure fair outcomes to customers should be considered.
Furthermore, the Minister responsible for the administration of the Competition Act 89 of 1998 has issued an exemption for: (i) banks, (ii) the Banking Association of South Africa (BASA) and (iii) the Payments Association of South Africa (PASA) which is aimed at enabling the banking sector to:
- minimise the negative impact on the ability of customers, including both business and private individuals, to manage their finances during the national disaster, and be in a position to continue normal operations beyond the national disaster; and
- manage banking infrastructure, including the payment infrastructure, ATMs and branches.
This exemption allows the banks to have a collective discussion on how to strengthen their response to the Covid-19 pandemic.
The following categories of agreements or practices in the banking sector are exempt from the application of sections 4 and 5 of the Competition Act (which deal with the prohibition of horizontal and vertical restrictive practices) if undertaken at the request of, and in coordination with, the Minister [of Trade and Industry] or the Minister of Finance for the sole purpose of responding to the Covid-19 pandemic national disaster and which exclude communication and agreements in respect of prices unless specifically authorised by the Minister [of Trade and Industry] or the Minister of Finance:
Payments systems with the sole purpose of ensuring essential payment systems to operate during the Covid-19 national disaster, which are limited to the development of industry monitoring, operational policies and contingency plans in respect of:
- the continued availability of bank notes to ATMs, branches and businesses;
- the continued provision of essential ATM, branch and corporate banking services; and
- the continued provision of electronic payments systems;
Debtor and credit management with the sole purpose of ensuring management of debtors and extension of credit continue during the COVID-19 national disaster, which are limited to the development of industry policies and monitoring in respect of:
- payment holidays and debt relief for business and individual debtors subject to financial stress;
- limitations set on asset repossessions of business and individual debtors subject to financial stress; and
- the extension of credit lines to individuals and businesses subject to financial stress.
BASA issued a statement on 26 March 2020 saying amongst other things that "Customers in good standing – those that were up to date with commitments and have historically conducted their relationship with banks responsibly – who experience financial challenges as a result of Covid-19, should contact their banks who will, on a case-by-case basis, assist with appropriate solutions. These solutions could include suitable payment deferrals, the restructuring of debt, the provision of small and medium enterprise (SME) bridging finance and liaising with government and others who are providing additional support mechanisms. Particular attention will be given to those sectors likely to be most vulnerable in the current circumstances. Banks are investigating ways to assist customers on an industry and collaborative basis wherever possible."
All the large banks have announced their own measures to provide relief to vulnerable persons and/or institutions. However, unfortunately some measures announced so far have been criticised for being inadequate.
NADINE VAN TONDER - TS COMMUNICATIONS
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