How South Africa's private banks handed wealthy clients rope to hang themselves with Steinhoff margin loans

Among the many dimensions of the Steinhoff collapse that did not receive adequate attention in the immediate aftermath of December 2017, one stands out for the specificity of the harm it caused to a particular class of South African investor: the private banking margin loan.

Margin lending against share portfolios is a standard tool of sophisticated wealth management in every major financial market in the world. A bank lends a client money, secured against shares the client holds in their portfolio, at an agreed loan-to-value ratio. The client gets liquidity without having to sell their shares. The bank gets a secured loan with transparent underlying collateral. The arrangement works well right up until the collateral collapses in value faster than anyone anticipated. Then, in a matter of hours, everything can unravel.

The specific catastrophe that South Africa's private banks and wealth managers enabled between 2015 and 2017 was the systematic extension of margin loans against Steinhoff shares to high-net-worth clients who had been advised to hold the stock as a global growth story. By late 2017, Steinhoff was South Africa's most globally diversified retail conglomerate, with a market capitalisation of over R200 billion and an investor base that spanned institutional funds, retail investors and the private banking clients of every major South African wealth manager. It was a blue chip. It was safe. And its shares were excellent collateral.

The mechanism of destruction

The problem with using any single stock as primary collateral for a margin loan is concentration risk. A diversified portfolio can absorb a significant decline in any individual position while maintaining enough overall value to service the loan. A concentrated position in a single stock, especially when that stock falls 60 percent in a single session and then continues falling, produces a margin call that the collateral cannot cover.

That is precisely what happened on December 5, 2017. Steinhoff's share price fell more than 60 percent in a single day after the accounting irregularities were announced. By the end of the first week, it had lost more than 80 percent of its value. Clients who had borrowed against Steinhoff shares at loan-to-value ratios of 50 or 60 percent suddenly found that the value of their pledged collateral had fallen below the outstanding loan balance. The banks issued margin calls. The clients had to either deposit additional cash immediately or accept the forced sale of their Steinhoff shares and, where that was insufficient to cover the loan, the liquidation of other assets pledged as secondary collateral.

The practical effect was the wholesale destruction of some clients' entire investment portfolios. Clients who had used their Steinhoff margin facility to make secondary investments found those secondary investments also liquidated when the primary collateral became insufficient. Some lost portfolios they had spent decades building. The timing, days before Christmas, meant that for many families the full extent of the damage was not clear until the new year.

The legal and regulatory aftermath

Several private banking clients pursued legal action against their wealth managers in the years following the collapse. The core argument in those cases was that the wealth managers had failed in their duty of care by recommending and facilitating concentrated exposure to a single stock through both direct shareholding and margin lending simultaneously, and that inadequate risk disclosures had left clients without a clear understanding of the catastrophic downside scenario they were exposed to.

The outcomes of those cases varied. Some clients received settlements from their financial institutions without public disclosure of the terms. Others pursued matters through the FAIS Ombud, South Africa's financial services dispute resolution body, with mixed results depending on the specific documentation around risk disclosure in their client agreements. The Financial Sector Conduct Authority noted the pattern of Steinhoff-related margin loan complaints in its subsequent guidance on concentrated position lending.

PSG Wealth, which had significant Steinhoff exposure through its PSG shareholder Michiel le Roux's long-standing commercial relationship with Steinhoff and Christo Wiese's broader investment network, faced particular client pressure during the immediate aftermath. Wiese himself, who had been Steinhoff's non-executive chairman, lost billions in the collapse, with his own pledged Steinhoff shares contributing to a margin call dynamic that reduced one of South Africa's wealthiest men to a fraction of his former net worth in a matter of weeks.

South Africa's private banking sector emerged from the Steinhoff episode with a more cautious approach to concentrated position lending. Loan-to-value ratios on single-stock margin loans were tightened. Concentration limits were introduced or tightened at several institutions. Stress testing of client portfolios against severe single-position decline scenarios became more rigorous. None of that helped the clients who had already lost everything. It was, as reforms triggered by financial disasters invariably are, wisdom acquired at someone else's expense.