LML4807 Exam (06 October 2021) - BANKING LAW AND USAGES

Briefly discuss the role the South African Reserve Bank (SARB) fulfils in the South African payment system. (10 marks)

Answer: The Reserve bank is the central bank of South Africa and Central banks are generally conceived as autonomous institutions that have exclusive jurisdiction over the affairs within their competence and operate at the apex of the monetary and banking structure of a country. Under section 224 a, Its primary objective is to protect the value of the currency of the Republic in the interest of balanced and sustainable economic growth in the republic. S10 (1) contains a detailed list of the powers and functions of the bank. The role of the Reserve bank is: Note issue - To make or cause bank notes to be made and to issue them; to coin or cause coins to be coined; and to form companies for their purposes, Banker, agent and advisor of the government - To carry out such other activities as a banker and financial agent as are customarily carried out by central banks Custodian of the cash reserves of banks Central clearing - To establish a clearing system and to organise and participate in such a system, and to take up shares in a company established for the management and operation of such system. A clearance system is an organisation formed by a member bank to serve as a medium for the presenting and cashing of cheques, Keeper of the country\'s reserves of gold and foreign currency Manager of money and credit - To accept money on deposit, to pay interest on any deposit and to collect money for any other person, and to grant loans, To buy, sell, discount or rediscount bills of exchange or promissory notes issued or drawn for commercial, industrial or agricultural purposes, To buy, sell or deal in financial instruments and to issue its own interest bearing securities for purposes of monetary policy and to buy, sell, discount or rediscount such securities

The savings scheme mentioned above is a concept of South African indigenous law which resembles concepts of the “formal” banking sector. Identify this concept (1 mark)

Answer: Depositum

Some activities of the concept identified in 1.1 above, correspond with the “business of a bank” as defined in the Banks Act 94 of 1994 (Banks Act). Briefly discuss whether the provisions of the Banks Act would apply to the concept you identified in 1.1. (10 marks)

Answer: Depositum is a contract i.t.o. which a person (the depositor) delivers an object to another (the depositary) who keeps it in his custody without using it and with the obligation of returning the same object to the depositor. If the customer gave the right to the bank to use the depositary for his own purpose but still has the obligation to return the same amount or mass, the contract changes from depositum to mutuum, for instance, when the bank makes loans using the depositors monies. According to the Bank Act 90 of 1990 in South Africa only a public company that is registered as a Bank with the Registrar of Banks is permitted to conduct Banking business. The following are activities that are listed in the Banks Act 94 of 1990 as activities that form part of the business of a bank: Accepting deposits from the general public on a regular basis - The banks accept and safeguard money owned by other individuals and entities, this is a relationship based on trust that it will be given back to them as and when they demand. Soliciting of deposits - The bank here invites the general public by advertising to come and deposit funds for savings or investment purposes with the promise of earning interest on the funds deposited with the particular banking institution. They can earn some extra money when the money is kept in savings or fixed deposits. Using money from deposits to grant loans or make investments - Once funds have been deposited the banking institution then lends out this money to borrowers or invests it in order to earn a profit for the banking institution. Repurchase agreements - This occurs in the sale of securities or assets together with an agreement for the seller to buy back the securities or assets at a later date. Foreign exchange dealers - The banking institutions make foreign currency available to the general public and they make some profit on the sale of any foreign currency. Customers can also sell any legitimately acquired foreign currency to the bank. The provisions of the Banks Act would not apply to the concept because The present day deposits taken by the banks do not involve depositum as a form of contract. In essence, when a registered bank takes a deposit, they are in effect borrowing money from the depositor in which case a credit and debtor relationship ensues, where the bank is the debtor. The bank has the authority to then loan the money out through a system called Fractional reserve banking.

Briefly discuss whether the concept identified in your answer in 1.1 can serve as an informal financial institution which provides access to finance and thus promotes financial inclusion.

Answer: Depositum cannot serve as an informal institution because section 1 of the banks act prohibits unregistered people from performing the business of the bank. Section 22(5) provides that no one may use any name, description, or symbol calculated to lead people to infer that he is a registered bank unless they are so registered. Duties of the bank include, but not limited to, Accepting and safeguarding money owned by other individuals and entities, Inviting the general public by advertising to come and deposit funds for savings or investment purposes with the promise of earning interest on the funds deposited with the particular banking institution. Using money from deposits to grant loans or make investments

With reference to Nedbank Ltd v Pestana 2009 (2) SA 189 (SCA), advise whether all electronic fund transfers are made unconditionally and are therefore always irreversible. (10 Marks)

Answer: Facts of the case - The respondent, Mr Jose Manuel Pestana, conducted a current account at the Carletonville branch of the appellant, Nedbank. A different Mr J M Pestana (Pestana) conducted a similar account at the same branch. On 4 February 2004, Pestana instructed the branch to transfer R480 000 from his account to the account of the respondent. The bank duly complied with this instruction and credited the respondent’s account. Unbeknown to the bank official at the branch who effected the transfer, Nedbank had earlier that same day received an instruction from SARS, informing the bank that Pestana owed SARS some R340 million. Nedbank was accordingly appointed as agent for Pestana in terms of sec 99 of the Income Tax Act 58 of 1962 and was instructed to pay to SARS the amount standing to the credit of Pestana. The bank accordingly reversed the credit in the respondent’s account without authority from the respondent and paid the money to SARS. The respondent sued Nedbank in the Johannesburg High Court for payment of the amount of R 480 000, but the claim was dismissed by the court of first instance. On appeal to the full court in Johannesburg, the claim succeeded. On further appeal to the Supreme Court of Appeal, the court agreed with the full court that payment to the respondent had taken place. Furthermore, there was no evidence before the court to indicate that the payment was conditional or that there was anything improper about the instruction by Pestana to the bank to transfer the money to the account of the respondent. The SCA accordingly dismissed the appeal and ordered Nedbank to pay the costs of the respondent, including the costs of two counsels. Legal question - Whether all electronic fund transfers are made unconditionally and are therefore always irreversible. Reason for decision - Court held that when the bank transferred the funds it had to have the intention which affected both customers. Once it intended to make payment unconditionally on behalf of the 1st customer it had to have the intention to accept payment unconditionally on behalf of the 2nd customer. The bank wasn’t entitled to unilaterally reverse the credit because the appellant got payment in ignorance of the fact that the bank had made it by mistake. Decision of the court - The SCA held that even though it was a mistaken transfer, the bank could not unilaterally reverse the transaction. Conclusion - Schulze says that there are number of valid reasons why a bank should be entitled to reverse the credit transfer unilaterally should it become aware that the recipient of the money was not entitled to it: in cases of mistaken identity – meaning money was transferred to the wrong person in cases where the wrong amount was transferred in cases where the right amount and was transferred to the right person but on the wrong date in cases where the right amount was transferred to the right person on the right date but the Bank was not entitled to effect the transfer Schulze says that there are also other reasons why EFTs should not be regarded as unconditional. In the case where the bank-client agreement doesn’t expressly provide for the bank\'s right to reverse the transfer and therefore the transfer is conditional.

The definition of a business of a bank. Exclude a discussion of the exceptions. (5 Marks)

Answer: The accepting of deposits from the public The soliciting and advertising of deposits The utilization of money/interest/ income earned on the money for certain described purposes The getting of money as a regular feature of the business through the sale of an asset to anyone other than a bank subject to an agreement in terms of which the seller undertakes to buy from the buyer at a future date the asset sold = Repurchase agreement: A sells an asset to B but agrees that A must take the same asset back from B at a future date against payment of an amount which is the same/ higher than that at which B bought it = money lending transaction Any other activity which the registrar has declared to be the business of a bank in the gazette In government notice after consultation with the governor of the reserve bank, the registrar declared certain activities regarding the practice to be the business of a bank = acceptance of money, either directly/indirectly from the public as a regular feature of the business practice with the prospect of such members receiving payments directly of indirectly: On or after the introduction of other members of the public to the business practice On or after the promotion/ transfer of change of status of the participating members From funds accepted/obtained from participating members in terms of the business practice

The operation of a savings account (5 marks)

Answer: Although, it is now possible for all banks to create different types of savings account, practice shows that in general the savings accounts presently offered by the banks exhibit the following characteristics: Deposits and withdrawals can be made at any time. There is no notice period for withdrawals. The customer can instruct the bank to make payment to 3rd parties (by way of stop orders or debit orders). The account is conducted by means of a traditional savings passbook or an auto teller card. The card grants access to the account through an auto teller machine. Two contracts come into being between the bank and savings account holder: A contract of loan for consumption is concluded, i.t.o. The bank borrows the first deposit from the customer and undertakes to borrow all further deposits as well. A contract of mandate i.t.o. which the bank undertakes to collect deposits in the form of cheques for the customer.

Repayment of a fixed deposit before the maturity date. (5 Marks)

Answer: A fixed deposit has been described by our courts as a loan to a bank repayable on a certain date, usually bearing interest. an investment account that consists of a single deposit for a fixed term at a guaranteed fixed rate of interest. The contract between the parties is one of loan for consumption, and the fixed deposit receipt is merely evidence that the loan has been received and confirmation of some of the terms of the contract. The purpose of a fixed deposit is that can be used for both short and long term investments. Since the parties agreed expressly on the maturity date, the bank will be under an obligation to repay the fixed-deposit on or after maturity only. Prior to 1965, a bank could waive its right to retain the loan until maturity and at its discretion, could repay the whole or part of the amount before maturity. The Banks Act restricted a bank’s power to agree to earlier repayment, to a number of defined circumstances.

When does the NCA apply to a credit agreement? (4 Marks)

Answer: Common law: Credit agreement is any agreement in terms of which the parties agree that payment will take place at a future date. S8 of the NCA lists 4 types of credit agreements A credit facility (credit card) A credit transaction (mortgage) A credit guarantee (suretyship) Any combination of the above Under the National Credit Act an agreement for the purposes of the Act will be regarded as a credit agreement, provided two elements are present, namely: Deferral of repayment A fee, interest/charge with regard to the payment