Banker’s Law 01 | 2021

Here follows our bi-monthly short update on banking practice and the law, providing essential knowledge to busy bankers.

One thing that litigants and conveyancers are often faced with, is the shock and horror expressed by a client when he is approached by a lender, usually a bank, for payment of a debt for which he undertook the responsibility of surety. Were one to delve into the lists of reported case law, it is apparent that there is a large number of these disputes that land in Court, the surety on many occasions denying liability because he did not know that the document he signed was a suretyship, or thought that the suretyship was limited to a certain amount or specific loan.

In most instances these defences are unsuccessful, as the signatory must explain why he would append his signature to a document without verifying what it is; or he must convince a court that it was reasonable of him to believe it was a different document at the time of signature.
However, in some instances, it goes the other way and the financial institution cannot rely on the signed document.

See the interesting judgment in this regard here >> 
(approx 4-minutes reading)

For most of us, the name “Twin Peaks” brings back memories of the crime TV drama about FBI Agent, Dale Cooper, who travels to the small logging town of Twin Peaks to solve the murder of seemingly innocent high schooler Laura Palmer.  For bankers, however, it has a very different meaning!

South Africa has recently adopted the “Twin Peak” model to regulate the banking industry. This model was established in 2017 by virtue of the Financial Sector Regulations Act (‘the Act’) and is being implemented progressively. The Act established two spheres of regulation:

1. A Prudential Authority:  This Authority will operate under the administration of the Reserve Bank and has the objective to promote and enhance the safety and soundness of market infrastructure and financial institutions.
   A practical example of its application is, for instance, where a bank seeks to appoint a new director to its board.  Because of the importance of sound corporate governance and the risks inherent to the activities and the business of a bank, which are all the responsibility of the board of directors and the executive officers of a bank, it is required that a bank, when it considers the nomination of a new director to its board, must first submit that nomination to the Authority.  The Prudential Authority may then object to the appointment or continued employment of a director on the basis that the Prudential Authority reasonably believes that the director is not, or is no longer, a fit and proper person to hold that appointment; or if it is not in the public interest.
2. A Financial Sector Conduct Authority (FSCA): This Authority must regulate the conduct of banking institutions by providing enhanced support the efficiency and integrity of financial markets, as well as to protect customers of the financial services industry and providing consumer education.
   For example, in 2019 already, the FSCA published a first-of-its-kind-in-South-African-banking-law draft Conduct Standard which endeavours to establish an enforceable market conduct regulatory framework against which banks’ conduct could be measured. The draft code paid particular attention to banks’ conduct towards customers and the customer experience (based in its “Treating Customers Fairly” regulatory Framework).

Upcoming amendments to the Act

1. During a virtual meeting held in June 2020, Cabinet approved the Financial Sector Laws Amendment Bill of 2020, for submission to Parliament. The Bill has provisions which are seen as a first step to formalising a resolution process for financially distressed banks. Public funds will no longer be the default source of funding used to bail out failing banks and other large financial institutions. In addition, the Reserve Bank will get more legal tools to ensure that critical services continue and that stability is maintained in the financial system in the event of a significant failure.  For this purpose the Bill proposes to designate the South African Reserve Bank as the Resolution Authority.
2. The Bill also introduces South Africa’s first comprehensive deposit insurance scheme to which all banks must contribute. A deposit insurance scheme will be established and managed by the South African Reserve Bank through a newly established Corporation for Deposit Insurance.  This is insurance for those who deposit their funds at the bank, in the instance of the bank failing. The legislator believes that such insurance will protect vulnerable depositors and ensure minimal disruptions to the financial system and broader economy in the instance of a bank falling into financial distress.

The franchise sector in South Africa accounts for 14% of our GDP. As you would probably guess, the fast food  and restaurant sector  represents the largest portion in this sector, at 24%.  These informative statistics aside, there is no Franchise Act or franchise-targeted legislation in South Africa. Yes, large parts of the Consumer Protection Act deal specifically with franchises, but it is in the context of consumer protection only and not industry-encompassing.

This is one of the reasons why bankers sometimes find it more challenging to assess loans for franchisees. In June 2020, the Department of Trade, Industry and Competition has published a discussion document, asking for comments on (i) a proposed code of conduct for the franchise sector that will regulate behaviour in the industry; and (ii) outline an alternative dispute resolution process.  The latter includes the establishment of an Ombud for the sector, where disputes between franchisors and franchisees can be resolved in a consistent, effective and efficient manner. The jurisdiction of the FIO includes disputes between a franchisor and franchisee in relation to franchise agreements, disclosure documents, breaches, terminations, payments of money and also the supply of any goods.

This is a positive step forward for the industry and should assist your franchisee clients to attend to disputes in an expeditious manner.

Contact martinem@stbb.co.za should you wish to see the draft Code of Conduct.

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