The announcement that 17 banks have been referred to the Competition Tribunal for the prosecution of alleged collusive forex practices on Wednesday did not really come as a surprise, but the timing could not have been worse.
The Competition Commission announced two years ago that it had begun an investigation. This follows the pattern of similar investigations and prosecutions in Europe and the United States – some of which resulted in large international banks – several of which were implicated in the South African case – paying more than $10 billion in fines and settlements.
Despite the fact that this case is not unique to South Africa, it is a big one.
Typically, while Twitter erupted with aggressive condemnation of the alleged transgressions, the JSE’s reaction was more mooted.
The announcement was made just after three, and hardly caused a blip in the banking index. Standard Bank ended the day nearly 1% stronger, while Investec shed 2.5%, although the bank seemed to have suffered these losses prior to the announcement. (Hopefully, Mr. Market’s immediate reaction translates into a longer-term trend.)
But this case could not have come at a worse time for the local banking industry.
Local banks have recently been dragged into a political crossfire after they closed the Guptas’ bank accounts. They have also been subjected to severe criticism, from among others the president, on their perceived absolute control of the economy. It is therefore not inconceivable that criticism of the whole sector could intensify, despite the fact that only the forex divisions of two local banks – Standard Bank and Investec – are in the crosshairs (no penalties are sought against Absa, which came forward first and applied for corporate leniency).
The reason is that South African banks have always been heralded as the custodians of a very advanced and respected financial services sector – both locally and internationally. It is also regarded as South Africa’s flagship economic sector and one of the (most stable) pillars of our economy. (I can see the late Barry Sergeant turning in his grave.)
This is also why the political fallout could be so significant. The first signs emerged within minutes of the announcement when the term “currency capture” was coined. Many political commentators were highly critical and accused the sector of being hypocritical.
The ANC also issued a statement late on Wednesday night confirm this view. The statement read: “The African National Congress takes an extremely dim view of the activities of the listed banks, understanding the banking sector as being instrumental to our quest for economic growth and development. .. The profit-driven assault on the South African rand through such collusion and corruption by the banks flies in the face of efforts by the South African nation to prosperity for all. It is further an indication of how the markets are and can be manipulated by dominant oligopolies to cripple its functioning to suit their nefarious agendas. Without a doubt, further raises a question of the extent to which the currency was manipulated with politically motivated intentions… With the same vigor and zeal directed at public sector corruption, we must be unrelenting in fighting private sector corruption.”
This will be a difficult view for the banking sector to defend, even if only the forex divisions of two local banks are implicated.
Bread and construction
Unfortunately, we have seen other examples where anti-competitive behaviour have drawn the ire of South Africans. The first was the collusion of bakers to fix the price of bread and the second was construction companies who rigged their bids for tenders to build the World Cup stadiums. In one case consumers paid the price and in the other, taxpayers stumped up.
Both these cases led to a massive public outcry – and rightly so. They are held as examples that the private sector cannot claim superior moral ethics relative to the levels of corruption in government.
A critical aspect is however if the banking sector can be branded unethical (or even criminal) for transgressions in their forex divisions, which for the majority of the accused banks are really very small operations. There are most definitely arguments for both views.
What is critical is that the transgressors are held accountable and if they are found guilty, are prosecuted to the full extent of the law. There can be absolutely no leniency and the actions must set an example on how to deal with such conduct.
It is however critical that it is done in a way that is not to the detriment of the banking sector as a whole.
The biggest risk is that the case is drawn out for years. Banks are notorious for their aggressive legal defense and along with the slow pace at which competition cases are resolved in South Africa, it is not inconceivable that the case is dragged out for years. Appeals will drag it out even longer.
The best case scenario for South Africa is, therefore, a quick resolution to limit uncertainty about the integrity of a critical component to our economy.