Developments in regulation of non-banking financial institutions: briefing by Financial Services Board

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Finance Standing Committee

17 August 2010
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Financial Services Board briefed the Committee on developments in the regulation of non-banking financial institutions in one of a series of consultative meetings. The Financial Services Board valued the opportunity to interact with the Committee, which it valued “as a back-up” and source of advice. The Board outlined its role in the financial sector; lessons from the recent global financial crisis; the status and major initiatives in Services Board regulated sectors - insurance, retirement funds, investment institutions and capital markets, and financial advisory and intermediary services; treating customers fairly; financial inclusion, with particular reference to micro insurance; and enforcement. The Board had been established by the Financial Services Board Act 1990 (Act No. 97 of 1990), to oversee primarily the non-banking financial services industry in South Africa purely to protect the public interest and the fair treatment of consumers of financial services and products.

The Board also promoted the financial soundness of financial institutions; the systemic stability of the financial services industries; and the integrity of financial markets and institutions. The Board achieved this by regulating the sectors of insurance, collective investment schemes, capital markets, private retirement funds, and financial services providers. The Board conducted its work through developing a proper regulatory framework in consultation with National Treasury, if necessary by amendments to legislation. It also conducted off-site reporting, on-site visits, and inspections. The object of these visits was to assist institutions in correcting problems. Sometimes extensive investigation was required, and on other occasions there might be the need for recourse to enforcement actions, including curatorships. A curatorship did not always mean the end of the institution, but if the Board discovered that managers were no longer fit and proper, the Board insisted on new appointees to management.

The recent global financial crisis had highlighted the importance of proper regulation and supervision of the sector. Moreover, it was learned from the crisis that most of the problems had arisen in the banking sector.  Those countries, such as Canada, Australia, and South Africa, which had better regulation, were the countries least impacted by the crisis. Those countries, like the United States, with weak regulation, had suffered badly. There had been much talk about financial regulation over the past two years, mostly through the G20, the grouping of the 20 most important economies in the world, of which South Africa was one, and also through a new entity, the Financial Stability Board, an international body which was developing most of the policy on recommended changes to financial sector regulation.

The biggest lessons from the G20 and the Financial Stability Board were their recommendations that proper financial supervision was critical to financial and economic stability. They had further recommended system-wide supervision to include unregulated entities, for example, hedge funds. There should be supervisory co-ordination by means of supervisory colleges and peer reviews. The only case of the failure of a major insurance company was that of AIG, which had been the world's largest insurance company. It had failed because of problems in a small unregulated subsidiary dealing in financial guarantees. This was why there was now a focus on supervising all aspects of the financial sector.

The United States was an extreme example of how not to do supervision; there each of the 52 states in the United States had its own insurance supervisor. Additionally there were separate regulators for banks, for securities; there was a whole myriad of regulators. It was thus that the idea of the supervisory college had arisen. Also the concept that supervisors should be subject to periodic peer reviews had been developed. All these key lessons were now receiving attention in South Africa.

The Board reported that the pension fund sector had largely been unaffected by the financial crisis. However, job losses had led to withdrawals from pension funds. Unfortunately, those who had withdrawn funds had suffered doubly because they had been constrained to withdraw funds at a time when equity markets were on a downward trend.  The Board explained pension fund surplus apportionment as a result of legislation passed in 2001. As at 31 July 2010: 7,984 surplus apportionment schemes and nil returns in respect of standalone funds had been submitted (out of an estimated 8,000 – 8,500); 7,265 had been approved and noted; in addition, schemes in respect of a number of participating employers of umbrella funds still had to be submitted.

The total amount of surplus apportionment approved to date was R18.9 billion. The Board explained the role of the Directorate of Market Abuse, a committee of the Board responsible for combating abuse in capital markets. The Board explained its role in regard to financial advisory and intermediary services. The treating customers fairly outcomes-focused approach to ensuring that companies had an embedded culture of treating their customers fairly throughout the product life cycle was based on the United Kingdom Financial Services Authority approach but adapted to South African circumstances.  A discussion paper had been issued in April 2010.

The Board explained its approach to financial inclusion. Its view on micro insurance was a response to problems of unregistered insurance business and consumer abuse. A National Treasury/Financial Services Board Policy position paper was expected in September 2010, with a view to a dedicated legislative framework aimed at reducing regulatory barriers to broadening access to insurance by low income consumers, encouraging informal players, for example, funeral parlours, to formalise, and visible enforcement.  The Board explained the role of its Enforcement Committee which had been established in terms of the Financial Institutions (Protection of Funds) Act. The Enforcement Committee had adjudicated on cases against 63 respondents, and imposed a total of approximately R17 million in penalties since 2006.

The Board had prepared a second presentation, on consumer education. However, this was not tabled. Instead the Chairperson decided later in the meeting that copies would be given to Members for them to study in their own time and discuss subsequently.

A Democratic Alliance Member asked in detail about surplus apportionment. A great deal of negative things had happened to members of pension funds. It had been a totally unacceptable situation. He noted that there were members of pension funds who were in very serious trouble. According to his information, some of the members who had converted years previously had now completely run out of money. They had bought living annuities, and now the providers which had assisted this so called virtuous process were now offering to take these members' homes. The process, moreover, had not finished. Had the Board perhaps considered having some kind of Commission of Enquiry to examine the phenomenon of what had happened? This Member observed that one of the problems was that regulators became co-opted by the entities that they regulated, because the regulators lacked the necessary resources and expertise. Thence the public was not properly protected and the industry not properly regulated.

A Congress of the People Member asked if the Board regulated the fees of the fund managers, or if it would do so in future. The perception, unfortunately, was that the Board was too slow in their “blocks” to stop disasters. Was his perception wrong, or were there legal impediments to the Board's performing its task on time? The Board needed “more teeth”. A second Member asked for the discussion paper on the treating customers fairly, and for the extended codes. She asked if the Board considered itself to be part of the process of the creation of wealth for the poor. She asked about the funeral parlours and undertakers in which sector there was much abuse, particularly in the rural areas. She asked for an expeditious approach.

An African National Congress Member was not sure that Board's monitoring tools were sufficiently effective and showed a sufficient grasp of the problems that existed, and asked the Board to explain its backlog.  Members were confronted time after time in their various constituencies with these problems. This Member asked also about market abuse, and the extent of the Board's collaboration with other stakeholders in regulation, to ensure that this market abuse came to an end, and about the preferential Black Economic Empowerment scorecard.

The Member said, with a note of despair, that she had not heard one sentence about community involvement. 
Another African National Congress Member asked about conflicts of interest between consumers and vendors who coerced consumers buying furniture to purchase insurance at the same time. Such insurance was the choice of the shop, not the customer. Other Members asked the Board to define what should be the core business of insurance institutions, and noted that the Board was a juristic person and was therefore able to enforce some values in the insurance industry. What were the Board's minimum and maximum sanctions? Another Member asked about the Board's relationship to other role players in other parts of the world.  Secondly, he asked about the retirement funds, and if there was regulatory provision for minimum qualifications for the appointment of people as trustees. He said that it was important that the Board use parliamentary constituency offices to disseminate information. 


Meeting report

The Chairperson welcomed Members and Mr Dube Tshidi, Executive Officer, the Financial Services Board (FSB), and colleagues.

The Chairperson said that this meeting with the FSB was one of a series of consultative meetings. The Committee took the role of the FSB in the financial sector very seriously. He did not believe that the sector was over-regulated. However, he thought that there was room for improvement.

Financial Services Board Presentation
Mr Tshidi thanked the Committee for the opportunity to make a presentation. He valued the opportunity to interact with the Committee, which he valued “as a back-up” and source of advice.

Mr Tshidi said that the presentation would outline the role of the Financial Services Board (FSB) in the financial sector; lessons from the recent global financial crisis; the status and major initiatives in FSB regulated sectors -
insurance, retirement funds, investment institutions and capital markets, and financial advisory and intermediary services (FAIS); treating customers fairly (TCF); financial inclusion, with particular reference to micro insurance; and enforcement.

Mr Tshidi said that the FSB had prepared a second presentation, on consumer education. However, this was not tabled. Instead the Chairperson decided later in the meeting that copies would be given to Members for them to study in  their own time and discuss subsequently.

Mr Tshidi described the role of the FSB. The FSB was established by the Financial Services Board Act 1990 (Act No. 97 of 1990), to oversee primarily the non-banking financial services industry in South Africa purely to protect the public interest. The mission of the FSB was to promote the fair treatment of consumers of financial services and products. The FSB also promoted the financial soundness of financial institutions; the systemic stability of the financial services industries; and the integrity of financial markets and institutions.

The FSB achieved this by regulating the sectors of insurance, collective investment schemes, capital markets, private retirement funds, and financial services providers. The FSB conducted its work through developing a proper regulatory framework in consultation with National Treasury, if necessary by amendments to legislation. It also conducted off-site reporting, on-site visits, and inspections. The object of these visits was to assist institutions in correcting problems. Sometimes extensive investigation was required, and on other occasions there might be the need for recourse to enforcement actions, including curatorships. A curatorship did not always mean the end of the institution, but if the FSB discovered that managers were no longer fit and proper, FSB insisted on new appointees to management.

Mr Jonathan Dixon, Deputy Executive Officer: Insurance, FSB, commented on lessons that had been learned from the recent global financial crisis, which had highlighted the importance of proper regulation and supervision of the sector. Moreover, it was learned from the crisis that most of the problems had arisen in the banking sector. However, this did not mean that the FSB could not learn from the crisis. Those countries, such as Canada, Australia, and South Africa, which had better regulation, were the countries least impacted by the crisis. Whereas those countries, like the United States, with weak regulation, had suffered badly. There had been much talk about financial regulation over the past two years, mostly through the G20, the grouping of the 20 most important economies in the world, of which South Africa was one, and also through a new entity, the Financial Stability Board, an international body which was developing most of the policy on recommended changes to financial sector regulation. There was probably a paper every week from the Financial Stability Board. The biggest lessons from the G20 and the Financial Stability Board were their recommendations that proper financial supervision was critical to financial and economic stability. They had further recommended system-wide supervision to include unregulated entities, for example, hedge funds.

It also called for conglomerate supervision. Macro-prudential regulation should include systemically significant entities, macro-prudential surveillance and tools, and anti-cyclical capital requirements. There should be supervisory co-ordination by means of supervisory colleges and peer reviews. The only case of the failure of a major insurance company was that of AIG, which had been the world's largest insurance company. It had  failed, not because of problems in its insurance business, but because of problems in a small subsidiary based in London. This subsidiary had been in the business of financial guarantees, and had largely been unregulated. This had caused  the collapse of the whole AIG group. This was why there was now a focus on supervising all aspects of the financial sector. There was also a new focus on conglomerate supervision. It had been realised that regulation internationally had kept pace with the growth of these large groups.

There was also a focus on macro-prudential regulation. Now the focus was on the financial system as a whole.  In the South African context, the Standard Bank Liberty Life Group was systemically significant and a failure in that group would have serious implications for South Africa's whole economy. There was some focus on trying to build in automatic stabilisers with regard to regulatory capital. The other last lesson was the importance of supervisory board regulation. If the United States was taken as an extreme example of how not to do supervision, there each of the 52 states in the United States had its own insurance supervisor. Additionally there were separate regulators for banks, for securities; there was a whole myriad of regulators. It had become apparent that they had not done a good job of talking to each other. It was thus that the idea of the supervisory college had arisen. Also the concept that supervisors should be subject to periodic peer reviews had been developed. All these key lessons were now receiving attention in South Africa.

Mr Dixon described the status of the insurance sector. An industry analysis indicated that there had been limited direct fallout from financial crisis. Recent recovery in asset markets had generally improved financial positions.
Results had suffered from economic slowdown – with lower sales and increased lapse and surrender rates. There had been an increased number of smaller insurers experiencing financial strain. Underwriting results had remained relatively stable throughout the crisis. A graph showed results as a percentage of net premiums (Slide 6).

Mr Dixon described FSB initiatives in the insurance sector. In respect of solvency assessment and management (SAM), these comprised a response to International Monetary Fund (IMF)/World Financial Sector Assessment Programme (FSAP) recommendations, and a revised, risk-based solvency regime for insurers to meet international standards, but adapted for South African circumstances. SAM covered technical provisions, regulatory capital requirements, and risk management and reporting. Its targeted implementation date was January 2014. A considerable amount remained to be done to meet that target, and this was a major project for FSB involving consultations with stakeholders such as industry, the National Treasury and the South African Revenue Service (SARS), and other stakeholders. FSB initiatives in the insurance sector in respect of insurance group supervision included legislative provisions, reporting, and supervisory co-ordination. FSB had also undertaken initiatives in respect of the conduct of insurance business. In this regard binder regulations were proposed to enable oversight over outsourced functions. FSB had also undertaken initiatives in regard to micro insurance.

Mr Jurgen Boyd, Deputy Executive Officer: Retirement Funds, FSB, said that the pension fund sector had largely been unaffected by the financial crisis. However, job losses had led to withdrawals from pension funds. Unfortunately, those who had withdrawn funds had suffered doubly because they had been constrained to withdraw funds at a time when equity markets were on a downward trend, and they had not been protected to any extent by preservation. He explained pension fund surplus apportionment as a result of legislation passed in 2001. As at 31 July 2010: 7,984 surplus apportionment schemes and nil returns in respect of standalone funds had been submitted (out of an estimated 8,000 – 8,500); 7,265 had been approved and noted;
in addition, schemes in respect of a number of participating employers of umbrella funds still had to be submitted. The total amount of surplus apportionment approved to date was R18.9 billion. A table was provided of 15B surplus apportionments, and 15B “nil” returns (slide 8).

Mr Boyd explained FSB initiatives in regard to retirement funds. PF130 dealing with good trustee governance was being converted to a directive and would become mandatory. A web-based Trustee Training Toolkit was being developed and would be implemented by mid-2011. This would be a cost-effective way to reach trustees. Essentially each individual trainee would be expected to access the internet to receive training, and on successful completion would receive certification.

Mr Boyd explained FSB initiatives in regard to investment institutions and capital markets. He noted that collective investment schemes were a well-regulated sector with considerable inflows. The FSB   was examining “white label” funds, “black box” products and types of investments under Notice 1503. In respect of the regulation of hedge funds, there was a joint National Treasury (NT)/ FSB working group which was developing regulatory proposals based on international best practice according to guidance from the IOSCO and FSB/G20. A working group had been established with representation from stakeholders (NT and industry) to investigate the need for regulation of OTC products. A discussion paper and draft Bill on the regulation of credit rating agencies was submitted to the National Treasury for consideration. This had been informed by international best practice (IOSCO) and FSB/G20 guidelines. The FSB had also taken initiatives in regard to the merger of the Johannesburg Stock Exchange (JSE) and BESA, in regard to JSE trading failures, and the IOSCO Conference to be held in April 2011 at Cape Town. Members of Parliament might be interested to attend this conference. This was “the world cup of securities administrators. It was the first time this conference would be held in Africa.

Mr Gerry Anderson, Deputy Executive Officer: Market Conduct and Consumer Education, FSB, explained the role of the Directorate of Market Abuse (DMA).This was a committee of the Board of the FSB responsible for combating abuse in capital markets. It examined issues such as insider trading, market manipulation and publication of false or misleading statements related to listed companies. During the financial crisis, the number of market manipulation cases linked to single stock futures had increased. After the crisis, the number of insider trading cases had increased. The number of cases was illustrated by means of a graph (slide 11). 

Mr Anderson explained FSBs role in regard to financial advisory and intermediary services (FAIS). FSP statistics were given (slide 12). 20,252 applications had been processed since FAIS Act requirements commenced in September 2004. With regard to intermediary professionalisation, 24 regulatory examinations were to be rolled out by November 2011. Each would be piloted beforehand. Level 1 regulatory examination had been piloted in August 2010 for roll-out in October 2010; level 2 regulatory examinations were to be piloted in October 2010 – these would focus on deposits, short-term insurance, and pension fund benefits. An extended code on conflicts of interest had been issued in April 2010 and would be implemented in stages.

Mr Dixon explained FSBs treating customers fairly (TCF) outcomes-focused approach to ensuring that companies had an embedded culture of treating their customers fairly throughout the product life cycle. This was
based on the United Kingdom (UK) Financial Services Authority (FSA) approach, adapted to South African circumstances. Behavioural change would be a multi-year project and required clear regulatory guidance, self-assessment by financial institutions of their TCF culture, an effective supervisory approach, and visible enforcement. A discussion paper had been issued in April 2010.

Mr Dixon explained FSBs approach to financial inclusion. Its view on micro insurance was a response to problems of unregistered insurance business and consumer abuse. A National Treasury/FSB Policy position paper was expected in September 2010, with a view to a dedicated legislative framework aimed at reducing regulatory barriers to broadening access to insurance by low income consumers, encouraging informal players, for example, funeral parlours, to formalise, and visible enforcement. 

Mr Tshidi explained the role of the FSBs Enforcement Committee (EC). This had been established in terms of the Financial Institutions (Protection of Funds) Act. The EC used to deal solely with sanctions arising from the Directorate of Market Abuse, but its mandate had been expanded with effect from November 2008. The
Registrar might refer contraventions of any FSB law, regulations, directives and codes of conduct to the EC.
The EC might impose unlimited penalties and make compensation and cost orders. EC determinations were published. The EC was a major step forward for FSB enforcement as it allowed for speedy administrative sanction. The EC had adjudicated on cases against 63 respondents, and imposed a total of approximately R17 million in penalties since 2006.

Discussion
The Chairperson thanked Mr Tshidi. He invited Members to engage generally with the presentation, and make proposals at the same time.

Dr D George (DA) thanked the FSB for the presentation and said that the FSBs presence was highly appreciated. He believed that the Committee did not see enough of the FSB and did not have sufficient understanding of the FSBs work and the value that it added to the economy. He asked about surplus apportionment (slide 8). He found this quite fascinating, because the process was not quite finished yet. He said that Members were aware that surplus apportionment had begun in 1980 when the conversion had begun from defined benefit to defined contribution. A great deal of negative things had happened to Members of pension funds, particularly in the early years when transfers were made just on members' contributions and nothing else. It had been a totally unacceptable situation. However, pensions were “a long tale”. Dr George asked if one was beginning to see the consequences of what happened. He noted that there were members of pension funds who were in very serious trouble. According to his information, some of the members who had converted years previously had now completely run out of money. They had bought living annuities, and now the providers which had assisted this so called virtuous process were now offering to take these members' homes in exchange for annuities that were paid over time. So there were many unintended, perhaps intended, bad consequences which had occurred. The process, moreover, had not finished.

Had the FSB perhaps considered having some kind of Commission of Enquiry to examine the phenomenon of what had happened? He noted that the FSB was talking about justice and about treating consumers fairly. Certainly history showed that the members of funds were treated properly. Moreover, what had happened had not been fully understood? Who had benefited in the end? It certainly was not the members of pension funds. Following on from that was the issue of pension fund reform. Part of the solution was supposed to be in the reform of pensions which had been in progress for seven years, according to Dr George's understanding. Yet there was still nothing concrete on the table, as far as he knew. What had happened about that? Dr George also asked about macro-prudential regulation (slide 5).  His understanding was that since the global financial crisis the Reserve Bank had a central role to play. How would the FSB and the Reserve Bank interact with each other in this regard? Finally, Dr George observed that one of the problems was that regulators became co-opted by the entities that they regulated, because the regulators lacked the necessary resources and expertise. Thence the public was not properly protected and the industry not properly regulated. He asked FSBs response to his observation, with particular regard to the entities that it regulated.

Ms Z Dlamini-Dubazana (ANC) said that her questions had been covered largely by Dr George. She asked about FSBs responses to the financial crisis. Mr Dixon had spoken about financial stability. She was not sure that FSBs monitoring tools were sufficiently effective and showed a sufficient grasp of the problems that existed. She asked FSB to explain its backlog. She referred to the liquidated funds of the companies which had experienced financial crises and could not continue to operate, and the problems of the employees who had contributed to the liquidated funds. Members were confronted time after time in their various constituencies with these problems, only to be told, in the end, that FSB had a backlog. Ms Dlamini-Dubazana asked also about market abuse, and the extent of FSBs collaboration with other relevant stakeholders in regulation, to ensure that this market abuse came to an end. She asked about the preferential scorecard, in particular the Black Economic Empowerment (BEE) scorecard, to ensure that there was growth and improvement in the economy. She asked anxiously how far the FSBs enforcement went.  Ms Dlamini-Dubazana asked lastly about treating customers fairly. She said, with a note of despair, that she had not heard one sentence about community involvement. FSB should ask the communities how far they were comfortable with the way FSB was regulating. Could this please be explained?

Mr N Koornhof (COPE) asked if FSB regulated the fees of the fund managers, or if it would do so in future. The perception, unfortunately, was that the FSB was too slow in their “blocks” to stop disasters. He could give a long list, including Fidentia. Was his perception wrong, or were there legal impediments to FSBs performing its task on time. It had been mentioned that FSB had recovered R17 million, but if one looked at what had been lost, people's lives had been destroyed by these schemes. FSB needed “more teeth”. Perhaps FSB should approach Government to request them.

Ms N Sibhidla (ANC) asked if there were agreed periods for submissions to FSB. Secondly, Ms Sibhidla asked about conflicts of interest. Such conflicts of interest occurred when a person went to a shop to buy a piece of furniture and was persuaded, convinced, or coerced into purchasing insurance at the same time. Such insurance was the choice of the shop, not the customer. She asked how widespread that behaviour was. Also Ms Sibhidla asked Mr Anderson to share with Members the extended code, issued in April 2010, which he had mentioned. She had not seen it. What did the code intend to do about this issue?

Mr M Motimele (ANC) said that he wanted to ask the kind of question one would ask in a workshop. However, he felt that the answer would also help the Committee to know more about the kind of oversight it should exercise over the FSB in relation to insurance companies. He had been reminded by the example given of the AIG. His knowledge of insurance had been limited to the long-term and short-term insurance policies. When studying the recent financial crisis, he had realised that AIG was one of the biggest culprits. He had never realised that a failing insurance company could bring the whole world to its knees. Central  to the problem was that AIG had involved itself in a whole range of products and services that were unrelated to its core business. He asked FSB to define what should be the core business of insurance institutions, so that the Committee would have a clearer ideal of its oversight responsibilities for the future.

Dr Z Luyenge (ANC) asked firstly about the role of the FSB over insurers. He noted that the FSB was a juristic person and was therefore able to enforce some values in the insurance industry. What were the FSBs minimum and maximum sanctions? The other issue was the manner whereby the insurers obtained money from members of the community. It was always made incumbent on clients to ensure that their insurance premiums were paid on time. He asked about car insurers who, in the final analysis, abdicated responsibility to recover a stolen car, in spite of car tracker insurance having been taken out. Such insurers would do their best to recover the car, but in the event that it was unrecoverable, there was no comfort or restitution that they could offer to their hapless clients.

Ms B Nosimo (COPE) asked for the discussion paper on the TCF, and for the extended codes. She asked if FSB considered itself to be part of the process of the creation of wealth for the poor. She asked about the funeral parlours and undertakers. It was well-known that much that was wrong was happening there, particularly in the rural areas. She asked for an expeditious approach.

Mr D van Rooyen (ANC) asked about FSBs relationship to other role players in other parts of the world.  Secondly, he asked about the retirement funds, and if there was regulatory provision for minimum qualifications for the appointment of people as trustees. He noted that the FSB had demonstrated awareness of the problems arising when trustees were not sufficiently qualified for the responsibilities with which they were entrusted. With regard to consumer financial information, he noted that information must be disseminated appropriately. It was important that the FSB use parliamentary constituency offices to disseminate information, and to undertake training, since dissemination of information was one of the primary responsibilities of these structures, which were shared by Members of Parliament and members of the provincial legislatures. 

The Chairperson invited Mr Tshidi and colleagues to respond.

Mr Tshidi said that he would respond on the sufferings of former members of those pension funds and the possibility of  a commission of enquiry. He would also respond on the perception that the FSB was co-opted by the entities that it regulated, the backlog issue, and the perception that the FSB was too slow to act.

Mr Tshidi responded that the problems of the pension fund surpluses had, as Dr George had pointed out, begun around the 1980s. This was the period in which many members of funds had migrated from the area of pension funds to the area of provident funds. It was at that time that a great deal of money had stayed behind in the pension funds. That had created the surpluses. However, it was also necessary to understand that when members had moved from pension funds to provident funds, the understanding at the time was that if one remained in a pension fund when one left one's employment either by retiring or by resigning one would not receive everything that one had saved for one's pension. Therefore it would be better to move from pension funds to provident funds so that when one left, one would receive a lump sum. One would receive every single cent that belonged to one and one could go and invest it by oneself or do as one wanted with it. So when members of pension funds left them to migrate to the provident funds, they were paid every benefit to which they were entitled. However, the focus at the time should have been that clients were moving from pension funds, which were defined benefit funds, to provident funds, which were defined contribution funds, and that clients should have been made aware that they were moving the risk, which had lain with the employer, to themselves. Now they were moving from an area where their retirement benefits had been defined up front, where the employer was going to take responsibility to make sure that that benefit when the employee retired would be paid whether the market fluctuated and the benefit would remain intact, at the employer's responsibility.   This had not been communicated to the members. In moving to the provident funds, the clients were expected to take the responsibility upon themselves. If the market went down, the clients would have to take the risk. A surplus was, however, something extra. Employers had believed that the surpluses belonged to them. This was the reason for court action, whereas members of the funds had believed that the surpluses belonged to them.  The truth of the matter was that the surplus belonged to neither of the two.

The court said that because the surplus belonged to the fund, not to the employer, nor to the employee, when any pension or provident fund was registered, that entity became a legal entity that owned the funds to the exclusion of any other juristic person. The court said that the best way to deal with surpluses was to for the two parties to meet and negotiate and decide how to share that surplus. This was why the FSB and the National Treasury approached this Committee and told it that FSB had this problem of the surpluses and was calling for legislation. Thereafter legislation on surpluses was put in place. However, because the FSB was mindful of the problems of the 1980s it said that it was not possible to have legislation that would operate retrospectively. It could only operate from the present. However, because FSB knew when the problem had started, it would say that this law began from today, but offered the opportunity to seek redress from when the problem first started, 01 January 1980. It was therefore a fallacy to think that retired members were suffering because of the surpluses. The reason was that when they left as members of provident funds, they were given every cent that belonged to them. What they did with what they received was another issue. The rule of pension funds, on the other hand, was that when any employee retired, he or she qualified only to commute or en-cash one third of what had been accumulated for the employee; the remainder would be paid to the employee on a monthly basis thenceforth. These were the two scenarios. Nonetheless, the FSB was considering such employees in the surplus legislation.

Mr Tshidi responded that the other issue around the surpluses was that once the members migrated to the provident funds, the surpluses remained behind because employers believed that the surpluses belonged to them. Then the employers began devising ways of extracting the surpluses from the funds. This was why Members had been reading for a long time about a system or a formula that had been put in place by a certain individual who taught employers how to extract the surpluses from the pension funds. This individual had succeeded in most cases. However, where he had succeeded, and FSB was aware of what had happened, FSB had pursued those cases relentlessly. Mr Tshidi emphasised that his colleagues and he were spending sleepless nights in pursuit of this matter. He himself had travelled to Cape Town on Monday, 17 August 2010 to follow up this subject. He noted that it was with this matter of the surpluses that the most criticism was received about the curatorships. He noted the famous case of five or six funds which had lost a vast amount of money. When the FSB had investigated them, and this was even before FSB knew about the case of Mr Ginwala, it had found that these funds had absolutely no assets whatsoever. In fact, those funds were even about to be de-registered so that they would not exist any more. However, somehow, one old man had come to Mr Tshidi's office, and asked him about the surplus issue and the large amount of money that had been taken away from funds. He had given Mr Tshidi the name of the fund, and Mr Tshidi had pursued the matter. In one month the employer of that fund had sent an offer of R12 million to clear the matter. The old man was present and said that it could not be R12 million. Therefore the FSB had rejected that offer of R12 million. Two massive institutions had been pursued for R500 million. This was the kind of damage that had happened to the surpluses. It had not been easy to pursue these matters, because some of the institutions had some political friends. Every time the FSB pursued these matters, these institutions tried to portray the FSB as “the bad guys”. These were the people who would tell one that curatorships were expensive. They would tell one that FSB was co-opted. Mr Tshidi said that he had no reason to deceive Members: the issue of the surpluses was a massive one. Previously when he had visited the Committee to present the FSBs annual report, the Chairperson had said to Mr Tshidi that the FSB never asked for the Committee's help. Mr Tshidi now made it clear that FSB sought the Committee's help on the matter of the surpluses. He emphasised that he urgently needed the Committee's assistance. There were very rich people who had benefited from surpluses. Such rich people would not put the interests of stakeholders ahead of their own shareholders. In the meantime, it had to be asked whose money these rich people were sharing with their shareholders.

Mr Tshidi said that on the issue of backlogs, he emphasised that he was not being defensive, but he wished to say that FSB did not have any backlogs, but the message that was being given out was that – and most of these things emanated from the retirement industry – when members left funds, when they wanted their benefits, or when they transferred from one fund to another, when things were not done as speedily as they were supposed to be done, the administrators instead of acknowledging that they had not made their submissions as quickly as they should have done and taken the blame themselves; they blamed the FSB for having a backlog. This was why today Mr Tshidi had provided Members of the Committee with a list of FSB contact persons so that if Members received complaints from constituents that their issues were not addressed because there was an apparent backlog at the FSB, Members could advise their constituents to contact the appropriate contact person at the FSB.

Mr Tshidi responded to the question on the regulation of fees. A Member had asked a very pertinent question about the problems that the FSB was experiencing with some of the trustees of the various funds. The people who were supposed to be monitoring the fees charged to consumers were the trustees themselves of those funds. There was competition in the market and it was the responsibility of the trustees to ensure the best prices for the members of their funds. These people were not doing what they were supposed to be doing. This was why another Member had asked what FSB was doing to ensure the proper qualifications of trustees. FSB was working to ensure that trustees were of high quality. However, there was a history behind why one was faced with the kind of trustees that one found today. The issue of the involvement of members as trustees of funds arose only on 01 April 1996. Previous to that, members of funds were not involved as trustees at all. Thereafter members of funds had been involved as trustees without sufficient regard to their suitability. This was where new measures on the education of trustees would assist FSB to deal with this problem.

Mr Tshidi responded to the question on the FSBs allegedly being too slow to act. He had been so accused on a number of occasions. When he was appointed Executive Officer, he had decided that it was maybe the time for him to write a clear document to explain to the press the process that FSB followed to deal with issues. The staff of FSB were not journalists. The staff were accountable for whatever they said or did. They could be taken to court. It was not going to happen that a whistle-blower would tell the FSB a rumour, and the FSB would jump to respond and act on such rumours. It was incumbent on FSB to verify the facts for itself. FSB would continue to do so, but while doing so it was accused of being too slow. This was why sometimes institutions were suspended while being investigated. Mr Tshidi said that he most definitely could not go to court and testify on the basis of hearsay, only on the basis of what FSB had investigated and was satisfied was the truth. He assured Members that FSB dealt with cases as quickly as it could. “Fast and slow are relative words; beauty is in the eye of the beholder. We do our best.” 

Mr Anderson added to what Mr Tshidi had said on the regulation of fees. In response to Mr Koornhof, he said that there was a drive to have competition on the one hand, and on the other to protect consumers as much as possible. In different areas of the FSB there were different approaches according to what the FSB perceived to be the interests of the investors. For insurers there were maximum prescribed commissions. The problem with maximums was that the providers tended to hover on them. It was the same in the collective scheme investment industry. A few years ago FSB had told the exchanges that the brokers' commission must be taken away. Now one could do deals on the JSE more cheaply than was possible 10 years previously. What had happened was that the charges payable had increased, but now they had come down. From the market point of view, FSB believed that the disclosure principle was important. The consumer must decide, but the consumer must know. Thus FSB had introduced the disclosure principle. The consumer must know the premium, the cost and the fee. The advisory fee must be analysed. This was another way of regulating fees.  If a provider knew that his maximum on an ongoing investment was 5%, then he must inform the client fairly what he, the provider could charge the client. Treating customers fairly was actually an addition to the regulatory framework. With regard to the Fidentia case, Mr Anderson noted that every case was different. FSB could have acted faster in the Arthur Brown matter or the Fidentia matter if FSB had not had to engage continuously with the management and legal advisor  of such companies. A great many people had lost money in the King case. This was not an FSB action. This was an action brought by investors who had suddenly stopped receiving their promised returns. Master bonds was a case from the 1990s, and recently Ovation. This had nearly been in Fidentia's clutches. However, FSB had been successful in these two cases.

Mr Olano Makhubela, Chief Director: Financial Investments and Savings, National Treasury, advised Members that he had previously been responsible at National Treasury for matters related to the Financial Sector Charter and had been transferred to his present post only from the beginning of the week. There were some six task teams which were dealing with social sector insurance, such as the unemployment fund, the Road Accident Fund, the reality was that it was “a monster and a half” of a project. There were also certain issues that related to health. National Treasury had  tried to deal holistically with all the issues. Some of the task teams had struggled. This was to be held the next day, Thursday, 20 August 2010, a meeting of the various directors-general of the concerned departments to examine the whole issue of social security and pension reform. The task teams included most of the key departments – Labour, Social Development, Transport (for the Road Accident Fund), and Health. Institutionally there was thus a structure to deal with this issue. However, there had been glitches. Moreover, the issues were complex and would take time to resolve and consider the implications. National Treasury was aware of the need to prioritise this issue as soon as possible.

The second question dealt with the interaction with the FSB. Since the global financial crisis, the National Treasury had tried to come up with what it had described informally as a regulators' round table. This had endeavoured to assemble all the relevant regulators from within the economy – the FSB, the Financial Intelligence Centre (FIC), the Banking Supervision Department, and the National Trade Regulator. There had been a sense that there had been some valuable output from the regulators' round table that might be useful to formalise that process henceforth. The whole point of the regulators' round table was to coordinate on certain matters, such as insurance issues, and share information. The third question was on the BEE scorecard. This was related to the market abuse issue.

Given his previous experience with the Financial Sector Charter, this was a classic example of why there was an impasse  in the Charter. As a result it had not been possible to review the targets and gazette the codes. The problem was that the Charter was a voluntary process. It was much more an issue for the Department of Trade and Industry (the dti) rather than a responsibility of the FSB. Some of the stakeholders had argued that the BEE codes were applicable because these were the legal instrument applicable, which would mean that the dti would be responsible for ensuring that financial institutions were complying with the targets within the codes. However, that had never been formalised. Without gazetting there would remain a legal vacuum. The last question had dealt with micro insurance.   He noted the abuse in the area of funeral parlours. Mr Dixon had correctly touched upon this. The National Treasury envisaged with the micro insurance legislation the capturing of two objectives. Firstly to enable products which low income persons would be able to access and secondly to regulate most of the unregulated industry, particularly the funeral parlour industry. Part of the challenge had been very much linked to development. It was a framework with three objectives. The third objective was development. It was useless to keep pumping money into most of these institutions if structurally they were not sound. It was a very similar approach to that which had been taken towards the cooperative banks.

Members would be familiar with the Cooperative Banks Development Agency. This very much tried to supervise the cooperative banks sector. It was also to develop the existing cooperative banks, and those institutions which could be upgraded to become cooperative banks. It was aimed with regard to micro insurance to develop those institutions so that they could become financially viable, and this was why National Treasury had produced the micro finance legislative framework. National Treasury would be finalising the issues and hoped, possibly, to table the legislation to Parliament in the middle of 2011. National Treasury had consulted extensively.

The Chairperson commended the FSB and National Treasury on the quality of information which they were  providing to the Committee. However, he was mindful of the need for economy of time, while equally not wishing delegates  to be economical with information. 

Mr Anderson said that Mr Makhubela had more than adequately dealt with several of the matters to which he would have responded.  It was probably true that consumers were bullied when purchasing on credit into taking out particular forms of insurance by the vendor of the consumer goods themselves. This was a contravention of the National Credit Act. This Act stipulated that if one was providing credit, one had to give the consumer a choice. So if a customer had comprehensive household insurance, the vendor, instead of leaning on the consumer to make the sale, should be obligated to tell the purchaser what his or her rights were. Two Members had asked to be provided with the extended codes on conflict of interest. FSB would do so. These codes provided that the provider must act in the interests of the client, not in the provider's best interests. There had been a creation of wealth issue, this question would be addressed in the presentation on consumer education (which was not presented, as per the decision of the Chairperson).  

Mr Boyd replied that pension funds should have responded within three years of the promulgation of the relevant legislation in December 2001.  It had been a frustrating and slow process from the perspective of the FSB, which for the past several years had conducted road shows throughout the country and had interacted on a continuing basis with pension fund administrators, who were tasked with the submission of these schemes. The FSB found that there were funds which were refusing to cooperate; in such cases, the FSB had handed those schemes over to tribunals, which the surplus apportionment legislation allowed the FSB to do. FSB had tried various means to speed up the process. It was the perception that some trustees were persuaded to prefer the interests of the employer. Some surpluses which had been declared were deemed not appropriate and the FSB had launched an appeal process. Two years previously, legislation had been passed to include bargaining councils in the FSBs regulatory net. 

Mr Dixon said that the FSB had been working very closely with the Bank Supervision Department to ensure supervisory coordination on large groups involving banks and insurers. FSB did that through the supervisory colleges.  He acknowledged that the term supervisory colleges was misleading; it implied a training scheme,  but, in fact, it was a term to describe the coming together of different regulators to meet and discuss concerns around insurance in a particular institution.

Mr Dixon said that South Africa was fortunate that its insurers had not involved themselves in these complex financial products that AIG had involved itself in. Instead they had focussed themselves on their core business of insurance. The FSB would endeavour to ensure that it remained thus. The FSB certainly could enforce measures against insurers, who had to be licensed. FSB was making sure that even where insurers outsourced functions, the licensed insurer must remain responsible, and could indeed be sanctioned. The penalties that the Enforcement Committee could apply were unlimited. There were concerns raised about lapses on account of administrative glitches. This was an issue of fairness. One channel was the long term or short term ombudsmen. This was the reason for the TCF since the ombudsmen could deal only with claims when they became aware of them. The TCF campaign aimed to be preventive. If the lapse was on account of the insurer's error, then the insurer must not penalise the client on that basis. The FSB was introducing certain standards for micro insurance, for example, grace periods for missed premiums before the policy lapsed. He noted that insurance was a sector in which there were many complaints, since insurance products were by their nature complex. He invited Members to contact him directly with constituents' concerns. He was on the first page of the contact list. 
Unregistered insurers would be dealt with severely by the FSB.

The Chairperson decided that the second presentation was more for purposes of information. Therefore, it would not be tabled; rather it should be given to Members for them to study on their own and discuss subsequently.   He allocated the remaining ten minutes to follow-up questions and responses. 

Dr George asked what the Committee could do for the FSB to assist it to achieve its aims. 

Dr Luyenge asked if the surpluses could be considered the same as a suspense account for insurers. To his understanding, these surpluses represented unclaimed money. Perhaps some of the owners of that money were alive but were not aware that their money lay in the coffers of these companies. So it could not be regarded as a surplus alone. He understood that part of that “surplus” was unclaimed, or came from the claims that had been declined. He asked for clarity. 

Dr Van Rooyen said that the issue raised by Dr George had been going on for a long time. He called for a written report from the FSB on these surpluses. Such a report would greatly help the Committee.

Mr Tshidi asked the Committee if it would be possible, in cases where the FSB had encountered serious resistance, instead of spending large amounts of money in going to court, it could approach the Committee about entities with surplus issues and ask the Committee to subpoena these institutions, since these institutions believed that they were entitled to those assets, whereas in the FSBs view they were using assets that belonged to poor people. This was the kind of assistance that the FSB requested of the Committee.

Mr Tshidi said that Dr Luyenge had raised an important issue about surplus unclaimed benefits. These were two separate issues. Unclaimed benefits were those in regard to which it was known to whom the benefit belonged, even though he or she had not claimed it for a reason that had prevented the benefit and the beneficiary coming together. There were a number of reasons, for example, lack of contact details. There were historical reasons in many cases, for example, the need to give a false address in order to gain employment in an area from which an individual was excluded under apartheid legislation from seeking employment. There was R5.3 billion of unclaimed pensions alone. FSB acknowledged the need to create legislation, but it would have to approach the National Treasury first, and then come to the Committee.

The Chairperson thanked Mr Tshidi and his colleagues, and said that this was one of the Committee's most interesting interactions. It was especially so in the light of the previous week's interaction with the Financial Sector Charter Council on 11 August 2010, in which the Committee had agreed that it would conduct follow-ups with specific participants within the Council itself. Before the Committee could proceed to interact at another level, it was important to confer with the regulator of the non-banking sector, namely the FSB. There was one issue that he thought he should clarify. The FSB was an institution established by Act of Parliament. In terms of reporting lines, that National Treasury was the FSBs political head. So therefore there could not be any other political connection. Such issues as had been mentioned must be reported and dealt with. Otherwise there was a risk of undermining institutions of democracy, which our people had fought for, and for which some had paid the higher price.

He supported the proposal that the FSB should submit a report to the Committee on the surplus issue, and it would be out of that report that the Committee would then interact with FSB on the further steps that  the Committee should take. Obviously the Committee would have to interact with National Treasury at the same time to find out what work had been done in that particular area.

The other issue was the responsibilities of trustees. The sooner the Committee clarified that issue the better, either in the form of regulations or legislation; it was quite critical that this matter was addressed. No institution could claim to be infallible. He noted that trustees were also human beings and could be pursued by one way or the other. The round table discussions were an important forum. The Committee would also interact with National Treasury on this matter to find a way to obtain a feel of the discussions at that level. It was quite an important forum.  Regulators were always at the centre of what had happened, or what should happen in the future. In the absence of regulators, the system might collapse, but it did not collapse because regulators were always there, sluggish though some of them might appear to have become.  The reality was that they did perform that particular kind of work.

The retention of licences, on the understanding that the Charter did not have gazetted codes, he wanted to know to what extent the FSB linked the renewal of licences with transformational programmes in those institutions. It could not be that the issue was discussed in the Council, when the FSB was still issuing licences. It should be one of the measurable objectives that the FSB set for itself, and the Committee needed to measure on the basis of those issues. He appreciated the FSBs elaborate and thorough preparation for the meeting and pending the report on surpluses to which the Committee looked forward he expected another interaction very soon. He assured the FSB that the Committee was ready to help. He noted Mr Tshidi's frustration with the surpluses, but felt that the existing legislation did give enough powers to the FSB. However, it was necessary to find a way to recover that money from those institutions that were resisting for the benefit of those to whom it belonged, the poor people, The sum of R5.3 billion referred to was a huge sum, while there were many children unable to go to school and many people without housing who thereby became a social responsibility of Government. If that money could be recovered, many such people could provide for themselves.   He thanked the FSB.

The meeting was adjourned.



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