Compliance trumps empowerment: decision to deregister co-operative bank upheld

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Complying with regulations designed to protect the public outweighs the need to advance economic empowerment, the Financial Services Tribunal (FST) concluded when it upheld the Prudential Authority’s decision to deregister a deposit-taking institution.

The PA deregistered Women Building our Africa (WBoA), a co-operative financial institution (CFI), in August last year because of persistent non-compliance with its registration conditions and the prudential requirements.

WBoA was registered as a CFI in August 2020 with 202 members and R412 500 in share capital. Its registration came with specific conditions, including:

  • Maintaining a minimum of R100 000 in members’ share capital.
  • Having at least 200 members.
  • Maintaining a solvency status of 100% or above.
  • Submitting quarterly returns.
  • Appointing a qualified manager.
  • Commencing operations within six months.
  • Complying with the Co-operative Banks Act and related regulations.

Throughout its existence, WBoA grappled with severe compliance and governance issues. It failed to commence operations, meet the capital adequacy and membership thresholds, submit reports timeously, and maintain proper records. Simultaneously, governance was hampered by board instability, internal conflicts, and inadequate oversight.

Reasons for upholding the deregistration decision

The key issue before the Tribunal was whether the PA’s deregistration decision was justified under section 40D of the Co-operative Banks Act.

Section 40D(1) permits deregistration where a co-operative financial institution fails to commence operations within six months of registration, no longer meets the requirements for registration, does not meet its prudential requirements, fails to comply with any condition imposed under the Act, or fails to comply with any directive issued under the Act.

The Tribunal identified five primary areas of non-compliance that supported the PA’s decision.

  1. Failure to commence operations

WBoA did not commence operations within six months of registration, and it was granted condonation and an extension to start operations by 1 August 2021. Despite this leniency, as at the date of deregistration, it had not commenced taking deposits or issuing loans.

  1. Lack of a qualified manager

The Tribunal said WBoA did not comply with the condition to appoint a suitably qualified and experienced manager to manage its affairs as at the date of deregistration.

Instead, board members were managing daily operations, which the Tribunal found problematic. “The involvement of a board member to manage the affairs of the institution offends the need for the board to remain independent of the management of the institution.”

  1. Late submission of financial statements

The Tribunal also pointed to WBoA’s consistent delays in submitting audited financial statements. It noted that until 21 July 2024, WBoA failed to submit audited financial statements, and even when submitted, the late submission did not cure the serious failure to timeously submit the financial statements. Additionally, quarterly returns were submitted late.

  1. Unverifiable membership records

Poor record-keeping that prevented verification of membership numbers was another key concern. The Tribunal agreed with the PA’s assessment that “the mere recordal in the return of improved membership numbers is not evidence that the membership threshold is met”.

It elaborated that “an audit of the files availed to the PA revealed that WBoA did not have copies of identity documents and numbers and addresses of supposed members”.

  1. Lack of accounting and banking system

WBoA failed to establish an operational accounting and banking system. Despite WBoA’s assertions that it had taken steps to address this, the Tribunal found no evidence that the institution had an accounting and banking system in place at the date of deregistration.

Tribunal’s response to WBoA’s arguments

WBoA presented several arguments in its reconsideration application, but the Tribunal rejected them, finding they did not mitigate the severity of the non-compliance.

WBoA claimed the PA relied on outdated information and that the new board, elected in March 2024, should be given an opportunity to rectify the issues. It also argued the PA should have conducted site visits or offered coaching.

The Tribunal dismissed these contentions, stating that “even if it is considered in favour of the new board that it may well turn the institution around for the better, the reasons provided by the PA are serious and valid reasons to deregister the institute”.

It further rejected the idea that the PA was obliged to provide additional support.

WBoA also pointed to its submission of audited financial statements in July 2024 and efforts to procure an accounting system. However, the Tribunal found these actions inadequate, because they occurred post-deregistration and did not address prior failures.

Regarding membership, WBoA suggested the PA should have audited its records in person, but the Tribunal dismissed this.

No compromise on regulatory compliance

The Tribunal acknowledged WBoA’s societal value, describing it as “a great concept, a much-needed empowerment tool” and recognised its importance in society.

However, it emphasised that regulatory compliance is crucial for a deposit-taking institution such as WBoA to ensure stability, protect depositors (members), and maintain the integrity of the financial system.

“Regulatory compliance protects the public (members) from losses and helps the PA to maintain financial stability within this crucial sector. It is consequently our view that a deposit-taking institution must be held to the highest regulatory standard,” the FST said.

The registration conditions were not unreasonable, and the PA’s decision to deregister WBoA could not be faulted.