When is a bank not a bank

Most parts of the developed and developing world felt the effects of the banking crisis of 2007/2008 to some degree or another. Numerous reasons have since been offered in explanation for what was considered the most severe financial crisis since the Great Depression of the 1930’s: reckless credit policies, massively complex financial products and plain old-fashioned greed, top the lists. The contagion effect saw governments and financial institutions around the globe hurriedly re-evaluating their credit granting, risk management, capital reserve policies and many more besides. 

It appears, however, that the resultant tax-payer funded bailouts of both banks and sovereign nations (see Abu Dhabi) seemed to serve only as a temporary patch. The inherent fallibilities of the global monetary system in its current guise remain.  As ever, the desire for perpetual revenue and profit growth continues unabated. Bankers bonuses have silently crept up to pre-crisis levels and the bail-out monies will remain owed to tax-payers for many years to come. 

The global banking system may have been temporarily saved from collapse but the fundamental issues of money supply and debt creation, as ever, remain unattended. The world still relies on the US as the main driver of economic growth (and the biggest consumer of goods), notwithstanding the fact that the US national debt is at staggeringly high levels, and the Federal Reserve continues on its inflationary path of excessive money creation. Cognisant of the need to rein in the similarly swelling debt levels, the European Union began imposing the so-called “austerity” measures. This is essentially a belt-tightening exercise which has resulted in soaring unemployment and political upheaval in certain countries most notably Spain, Portugal and Greece. Most recently the tiny island nation of Cyprus experienced the painful fall-out of the Eurozone crisis and had to request financial assistance in the form of loans from its Eurozone partners. In order to repay these loans a suggestion was mooted to levy a once-off tax on the savings accounts of ordinary Cypriots up to almost 10%. This strategy was strongly rejected by the Cypriot parliament.

Mistrust of banks

The cumulative effect of these global events is the increasing the mistrust with which banks both (central and commercial) are regarded. The increasing criticism faced by these institutions is evidenced by popularity of protests such as the Occupy Movement. Central banks were originally created in order to smooth economic growth, control inflation and money supply and prevent catastrophic financial disasters such as the Great Depression from occurring. It is clearly evident that this has not been the case. The boom and bust cycle remains a feature of economies around the world. Several commentators have remarked that the sharply increasing gold price over roughly the last ten years or so could be partially attributed to the decreasing faith in fiat currencies as a store of wealth.

Alongside the gold price, we now also witness an increase in alternative currency/credit systems. The most notable of these is Bitcoin, a digital currency of sorts, not managed by any central banking or monetary authority. Bitcoin was launched in 2009 and its initial growth was promising. Many vendors around the world began accepting the virtual currency as payment and many private individuals too. The Bitcoin share price experienced a significant spike but has since tumbled amid increasing scepticism of the efficacy of the system.  Whatever the eventual outcome of Bitcoin, alternative banking and currency systems will certainly become more common place as the existing global financial regime continues to lurch from one crisis to the next. 

Registrar of Banks

In South Africa our banking system is overseen by the Registrar of Banks who is appointed by the Reserve Bank and is an officer of the same institution. The Registrar not only supervises banking activity but is also responsible for the issuing of new banking licenses. The requirements for being permitted to operate as a bank in South Africa are that the company must be a public company and also registered as a bank (see section 11(1) of the Banks Act 94 of 1990 – the “Banks Act” regarding the “business of a bank”). Further, the Registrar is also the person responsible for determining what qualifies as the “business of a bank” by the publication of notices which define the term. Should any person be suspected of carrying on the “business of a bank” without the necessary authorisation then the Registrar may apply to the High Court for an interdict (in terms of section 81 of the Banks Act) to prevent such person from contravening these provisions.  Currently the definition of what constitutes the “business of a bank” is remarkably broad. 

Section 1 of the Banks Act states that the primary definition of the “business of a bank” is “the acceptance of deposits from the general public as a regular feature of business”, “any other activity which the Registrar has, after consultation with the Governor of the Reserve Bank, by notice in the Gazette declared to be the business of a bank”. This definition was then broadened even further  by Notice 498 published in Gazette 17895 which served to include schemes which operated under the principles of the notorious “pyramid schemes” or “multi-level marketing”.

In Corpclo 2290 CC t/a U-Care v Registrar of Banks (755/2011) [2012] ZASCA 156; [2013] 1All SA 127 (SCA) (2 November 2012) just such a scheme was examined by the SCA (Supreme Court of Appeal). Corpclo traded under the name “U-Care”, a company that claimed to incentivise one to contribute to charity. Briefly, U-Care operated as follows: members contributed a set amount each month to a fund which paid out 20% of its contributions to a charity of the contributor’s choice. Of the remaining 80% - 20% would go towards U-Care’s “administrative expenses” and the remaining 60% paid out as commissions to members who managed to bring in new contributing members. The rationale being that the more members one brought in the more your own commissions would increase and so too the contributions to your favourite charities.

The Registrar began investigating U-Care in about 2009 and launched an interdict application against U-Care in terms of section 81 of the Banks Act for contravention of section 11(1) read with Notice 498. U-Care contended that they did not operate the business of a bank but merely as a charity funding service business.  As U-Care were not a public company and neither were they registered as a bank - the only dispute left in issue was whether they were, in fact were, conducting the “business of bank”.  The court a quo found that U-Care clearly did “operate the business of a bank” in terms of the above regulations. 

On appeal, however, U-Care’s counsel alleged that the court a quo had failed to interpret the banking regulations in terms of sections 1, 8, 22, 25, 33 and 39 of the Constitution which promotes the principles enshrined in the Bill of Rights and further that Notice 498 was unconstitutional and drafted in an “unlawfully wide” fashion granting excessive powers to the Registrar in determining the “business of a bank”.  Given the current economic climate and the rise of alternative banking systems (alluded to earlier) these issues seemed particularly pertinent and in its judgment the SCA indicated that it would be willing to test the constitutionality of the Registrar’s powers.

A lost opportunity to test constitutionality of Reserve Bank powers

Unfortunately, U-Care’s counsel had not followed the well-established rules of litigation practice and failed to raise these constitutional issues in their answering affidavits. They were thus precluded from raising them on appeal as the Registrar would have not had an opportunity to consider these arguments and adequately prepare for them.  The court was scathing in its appraisal of counsel’s presentation of U-Care’s appeal labelling it “incoherent” and “unintelligible”.  No submissions were made by U-Care’s counsel regarding the constitutional issues and these arguments were subsequently abandoned. Only the meaning of section 11(1) and Notice 498 was considered and the SCA concurred with the initial decision of the court a quo that the Registrar was acting within his powers and according to the clearly worded legislation.  Further half-hearted attacks on the Registrar’s actions being procedurally unfair in terms of the Promotion of Administrative Justice Act 2000 (“PAJA”) were considered by the SCA and also dismissed.

It seems a great shame that the several issues of profound importance were not comprehensively dealt in this case. The issues relating to the powers afforded to the Registrar of Banks and the constitutionality thereof are gaining increasing traction. These matters are now of global concern and are not limited to South Africa. It would have been tremendously enlightening to hear our courts views on these matters and their reconciliation of the rights enshrined in our Constitution and the considerable powers of the banking establishment. It does appear as if a great opportunity has been lost but perhaps these issues will arise again in the near future.
 

This advertorial was written by:
By Sageer Pansari, Candidate Attorney - Schoeman Attorneys, Conveyancers and Notaries Public
 

Relevant Legislation:

Banks Act 1990
South African Reserve Bank 1989
Promotion of Administrative Justice Act 2000
Constitution of the Republic of South Africa