SARB clarifies bail-in rules

The South African Reserve Bank (SARB), acting as the Resolution Authority, is empowered by the Financial Sector Regulation Act, 2017 (FSR Act) to execute statutory bail-in actions.

These include cancelling shares, issuing new shares, writing down liabilities (with specific exclusions), and converting debt instruments into equity.

This statutory power is distinct from contractual bail-in, which relies on specific clauses in financial agreements for loss absorbency.

The Guidance Notice clarifies that SARB's authority to conduct bail-in in a resolution is derived directly from the FSR Act, not from contractual terms for loss absorbency.

Critically, statutory bail-in can be applied to all liabilities, except those explicitly excluded by the FSR Act, encompassing a broader scope than just debt capital instruments subject to contractual bail-in.

Designated institutions must include contractual terms acknowledging the SARB's resolution and bail-in powers under South African law for Flac instruments.

This is vital for external Flac instruments governed by foreign law, ensuring their subjection to South African resolution frameworks.

This contractual recognition provides legal certainty, confirming investors' awareness that Flac instruments can be written off or converted by the SARB as per the FSR Act.

This differs from creating loss absorbency features.

The notice also clarifies creditor hierarchy: Flac instruments rank senior to debt capital instruments (AT1 and T2) but are subordinated to other unsecured creditors within the concurrent creditors category.