Judgement opens a world of trouble for SA banks
The judgement opens up a world of trouble for the banks. Judge Baqwa ruled that the banks’ securitisation vehicles are “subsidiaries” of the banks. This doesn’t sound like a bombshell judgement, but it confirms a central pillar of NewERA’s argument: that banks’ securitisation vehicles are subject to the same laws as the banks themselves.
NewERA, a non-profit group with 135,000 members, is involved in an ongoing legal battle with the banks over what it says are shadowy and secretive practices such as "securitisation." It says the judgement effectively means the banks’ failure to disclose their securitisation activities places them in violation of the Banks Act, Consumer Protection Act and several other statutes.
This judgement appears to be an unintended outcome from a case brought by Investec and three of its securitisation vehicles against the directors of NewERA. Investec accused NewERA of “vexatious litigation” and asked the court to hold NewERA’s directors responsible for its court costs in their personal capacities. Other banks involved in litigation with NewERA did not join the action. Judge Baqwa acceded to Investec's point, ordering NewERA directors to pay the bank's legal costs. He added that this decision was not based on the substance of NewERA's case against the banks, but on procedural considerations.
This follows an application by NewERA in December last year in the South Gauteng High Court to interdict the major banks and 50 of their subsidiaries from attempting to repossess the homes, cars and assets of more than 1,000 South Africans on the grounds that the banks had no legal standing to do so.
Securitisation is a process whereby bank loans, such as mortgages, credit card and vehicle loans, are bundled together into what are known as Special Purpose Vehicles (SPVs) and then on-sold to other investors. These securitised loans are then traded on the bond and capital markets, like the JSE, for profit. NewERA argues that once a loan is securitised, it has a new owner – a fact that is not disclosed to the borrower – and the bank loses the right to bring legal action against the borrower. We previously covered the case here and here.
Investec’s action was a transparent attempt to shut down NewERA’s efforts to expose the banks’ role in foreclosing on securitised loans, when they have no legal right to do so, says NewERA founder, Scott Cundill.
Criminal charges“We are extremely heartened by Judge Baqwa’s ruling. While the judge ordered NewERA directors to pay Investec’s legal costs, his judgement is, in our counsel’s opinion, a deadly blow against the banks. It opens the way for criminal charges to be laid against the banks and its senior executives.”
Senior counsel for Investec Bank, Dianne Fisher, stated in her heads of argument that the shadow entities are “subsidiaries” of the banks. A subsidiary is a company that is more than 51% owned by a holding company, or controlled by that same company. She also stated that banks cede/cession loans to these shadow entities.
“By admitting that these shadow entities are subsidiaries of the banks, Investec has effectively proven NewERA’s case for us,” says Raymondt Dicks, legal advisor to NewERA.
Once the loans are sold and ceded to the SPVs, the bank loses legal title to foreclose on these loans, according to NewERA, adding that Investec has effectively admitted that its own subsidiaries are in violation of the laws applicable to all bank holding companies.
NewERA’s legal advisor Raymond Dicks placed on the court record that because the SPV’s are subsidiaries, this would now be a “criminal matter.”
When Judge Baqwa read his verdict, the directors of NewERA were on tender-hooks, says Cundill. The Judge mirrored Fisher SC’s heads of argument and stated in his judgment that SPV’s were “subsidiaries.”
Says Dicks: “The judge has essentially ratified NewERA’s strongest contention. If the bank actually owns these shadow companies, they must appropriately disclose this on their financial statements and to the public. This kind of casino banking (such as securitisation) is putting our entire economy at grave risk.”
Judge Selby Baqwa is no stranger to the world of banking. The Harvard-trained judge currently serves on the South African Reserve Bank’s Standing Committee for the Revision of the Banks Act; he has also been a director of the Peoples Bank, a member of the executive committee of Nedbank and group executive head for governance and compliance at Nedbank Group.
Most SA banks participate in securitisation schemes, a practice that is being shredded by courts overseas. Recently, banks in the US were ordered to pay aggrieved homeowners $8,5 billion. This was one of many other such settlements involving the securitisation process which brought the global economy to its knees in 2008.
Numerous home owners in the US have won court victories against the banks by challenging their legal standing on discovering that their home loans had been securitised. Last year five US banks were forced to pay $25 billion in settlement to customers whose homes had been fraudulently or wrongly foreclosed. Another multi-billion dollar settlement was slapped on US mortgage banks earlier this year for similar reasons. Attorneys in the US believe this may just be the start of a tsunami of legal actions against the banks from aggrieved customers forced out of their homes by foreclosure.
It will be difficult for South African courts to ignore these international developments. The verdict by Judge Baqwa now paves the way for NewERA to have the substance of its case heard by the court, something it has been unable to do so far. The banks have managed to frustrate its court actions on technical points.
Investec succeeded in one aspect of its case, namely that NewERA directors were ordered by Judge Baqwa to pay its court costs in their personal capacities. The judge stated that his verdict was not based on the merits of Investec’s case, but on procedural flaws by NewERA that did not fully comply with strict High Court rules. This is a common problem with non-governmental organisations (NGOs) with little funding and reliance on pro bono lawyers.
“NewERA, however, is overjoyed with one part of the judgment. A High Court judge has effectively proven that the banks are dealing underhandedly,” says Dicks.
Pull up a chair, folks, and grab the popcorn. This is going to get interesting.
Consumer Protection Act
National Credit Act
Banks Act 1990