The Financial Services Board (FSB) and the Public Investment Corporation (PIC) with the Deputy Minister of Finance Mr Nhlanhla Nene, presented their annual reports for 2011 to the committee. These included an overview of their performance for the financial year ending 31st March 2011. The FSB presentation focused on amendments to legislation, the Treating Customers Fairly (TCF) framework and regulatory and supervisory activities. The FSB gave an update on its operational review and a review of financial information for the year ended 31 March 2011. The FSB had performed well overall but was plagued by difficulties surrounding the requirement of examinations to be written by brokers. Some brokers were dissatisfied with the fact that the exams were only offered in English and brokers in the rural areas who were selling funeral cover for Metropolitan refused to write the exams as they felt they were not educated enough to pass such exams. As at 31 March 2011, the FSB recorded a net surplus of R15,049 million.
Members wanted to know how the FSB identified inspection targets and what happened to money recovered from fines. They asked questions around the remuneration policy and what criterion was used to allocate salary increases. Members were satisfied with the work by FSB and found them to be effective and efficient. Members also wanted to know whether bursaries were available to the children of FSB staff members and congratulated them on their public education drives but they were concerned about whether rural people were reached. Members also asked why the 2009 financial statements were used for the pension fund portion of the annual report. They were also worried that the constant legislation changes would have a negative impact on the functioning of the FSB.
The PIC presentation focused on the background and state of the economy, an overview of PIC clients and assets under management per asset class. Some of the investment highlights was that PIC assets exceeded R1 trillion in the year celebrating its centenary. The presentation also gave the performance of key client portfolios and the developmental impact of PIC investments. Some operation highlights was that PIC had a new building at Riverwalk which was the first “green” property development of its kind. The key financial indicators showed that revenue was growing in line with the increase in assets under management and net assets continued to grow in line with business strategic activities.
Members wanted to know whether the change in investment for development from long-term to short-term was a good idea and whether the V&A purchase was a viable investment. They asked why the property was not previously purchased when it was for sale. Members were concerned about the targets not achieved and wanted to know on whether the PIC had a remuneration policy in place and if they did why this was not disclosed. They wanted to know more about the long-term incentive scheme for directors and whether subdued inflation had a negative impact on the financial performance of PIC investments.
The Deputy Minister of Finance, Mr Nhlanhla Nene, commented that the presentations were merely a summary of the annual reports and due to time constraints the presentations would not elaborate on all issues. Members were welcome to submit any questions to the two organisations afterwards if all issues could not be dealt with during the meeting.
Financial Services Board (FSB) Annual Report presentation
Mr Dube Tshidi, Executive Officer: Financial Services Board, said that one of the functions of the FSB was to identify problems in the financial sector through the Ministry of Finance. The core business of the FSB was to regulate and supervise the non-banking financial services sector in terms of the FSB Act and other relevant legislation (page 176 of the annual report). This was done to promote fair treatment of consumers of financial services and products, financial soundness of non-banking financial institutions, systemic stability of financial services sector as well as the integrity of financial markets and institutions. The FSB was funded from levies raised from regulated entities.
Ms Nonku Tshombe, Head of Legal: Financial Services Board gave an update of the legislative and regulatory framework. Amendments to legislation involved the:
Financial Services Laws Amendment Bill
Financial Markets Bill
Credit Ratings Bill
Insurance Laws Amendment Bill
Micro Insurance Bill
Ms Tshombe said that based on research conducted worldwide by different companies, the Treating Customers Fairly (TCF) framework was established as a regulator for market conduct. This had been very handy thus far.
Mr Johnathan Dixon, Insurance Deputy Executive Officer: FSB added that the TCF was an outcomes focused approach to regulation. It was designed for the customer to come first, from the stage of production to sales to after sales. This regulatory framework focused on proactive supervision. A dedicated head was appointed and the internal team strengthened. The roadmap was completed as at 31 March 2011 and the implementation plan spans over three years. Mr Dixon went on to highlight regulatory and supervisory activities. A total of 11 934 licences were issued to Financial Service Providers (FSP’s), with 2069 licences suspended and 1604 withdrawn. In the process, 523 individuals were debarred and were not allowed to operate in this sector any longer. A total of 409 on-site visits were conducted to assess compliance and the possibility of money laundering. 905 complaints were received by the FSB and of these 411 were not resolved as at 31 March 2011.
Mr Tshidi spoke around regulatory exams. All FSP’s and brokers had to write exams to ensure quality service. There were two major challenges experienced around this. The first challenge was that companies complained that the exams were only made available in English. Some companies wanted their exams in Afrikaans as well and as a result filed for litigation against the FSB. This case was now at the Equality Court and they were awaiting a trial date. The second challenge was in relation to Metropolitan. This company had brokers who were selling funeral policies in townships, and these brokers were requested to write the exams to be certified, but they had refused stating that they were not educated enough to pass these exams. The intention of the FSB was not to let people lose their jobs but rather to ensure that consumers were protected.
Mr Dixon said that insurance numbers remained stable and there was financial soundness. 17 on-site visits were conducted and those fined were as a result of weakness in governance, poor outsourcing, undue reliance and Information Technology (IT) challenges. The Solvency Assessment and Management (SAM) model was being used to counter this. The SAM roadwork document was published in 2010.
Mr Jurgen Boyd, Deputy Executive Officer: Retirement Funds, FSB, noted that on the issue of retirement funds there were no major failures and a decrease in incidences. However from a supervisory perspective there were increased incidences of administrators failing to comply with the prescribed requirements. All cases were referred to the enforcement committee and they have imposed penalties of over R300 000 to these administrators. An important support to the pensions department was the actuarial department and 4448 section 14 transfers amounting to approximately R24 billion was paid out under the year of review.
Mr Tshidi said that as a result of the financial crisis in 2008/2009, South Africa as part of the G20 arrangement had learnt how to deal with the aftermath of this crisis. South Africa had also taken note of the outcomes and recommendations by looking at its legislative framework and what could be done if a recurrence should happen. There was a need to revise the Security Services Act and the proposals would be brought to the committee. He further noted that the Johannesburg Stock Exchange (JSE) was rated the best in the world for two years running. The collective investment schemes were doing well and assets had grown from R817 billion to R962 billion in the 2010/2011 financial year. With regards to market abuse, 18 new cases were reported. Of these, 14 investigations had been completed and these cases closed. Most outcomes were that parties requested for a settlement but one case has gone to the High Court.
Ms Tshombe went on to explain developments in other business. The registrars instructed for inspections to take place and currently there was a total of 43 inspections on course (24 ongoing and 19 new). Of the 43 inspections, 27 were completed as at 31 March 2011. The enforcement committee was established on 1 November 2008. It is an administrative tribunal within the FSB and it had jurisdiction to impose penalties against people who contravene the laws of the FSB. It considered cases under the period of review and imposed penalties on those found guilty of market abuse.
Ms Olivia Davids, Head Consumer Education: FSB, highlighted the work done in the Consumer Education Department (CED). From January to March 2011 a total of 159 workshops had been held for 4895 learners in 49 out of 50 FET colleges. 98% of these learners found the workshops to be informative. The FSB was planning to hand over these workshops to the Department of Basic Education (DBE) as well as the Department of Higher Education and Training (DHET) to be implemented into their curriculums.
Mr Dawood Seedat, Head: Inspectorate, FSB, outlined the organisation’s operations with regards to staffing. The FSB had a staffing component of 449 which was up 7% from the previous years’ 418. It had a staff turnover of 10% and 78% of staff employed were from previously disadvantaged backgrounds. Three bursaries were awarded to students in actuarial science. The ICT revamp worth R40 million had begun and as at 31 March 2011 assessment and designs were completed, with testing under way. As part of this development, the position of Chief Information Officer had been added to the executive committee of the board. The FSB reported an audited net surplus of R15,049 million against a budgeted surplus of R18,666 million.
Mr D George (DA) wanted to know how the FSB identified its inspection targets and whether inspections were done by outsourced companies.
Mr Tshidi responded that inspections were based on the outcome of the submissions of annual returns. Investigations were never outsourced and remained within the FSB, but from time to time they had to call in the expertise of others to assist.
Mr D Van Rooyen (ANC) said that good work was taking place within the FSB as the South African JSE was found to be the best Stock Exchange in the world. However, the curatorship in the Road Accident Fund was not doing good as it seemed curators tended to drag the process deliberately. He wanted to know what types of checks in balances were in place to address this.
Mr Boyd replied that the process of dealing with curatorship was normally a long process and took time to be completed effectively therefore the process seemed long.
Ms Z Dlamini-Dubazana (ANC) said that the FSB was doing good work by being effective and efficient. She asked what the outcome of the R1.9 billion loss case would be.
Mr Tshidi replied that the case could not be discussed as it was still going through the court system.
Ms P Adams (ANC) congratulated the FSB on their work with the Community Education drives. She wanted to know whether bursaries were available to the children of FSB staff members.
Mr Tshidi replied that bursaries for children of staff members were not awarded, however it was being looked at.
Mr George wanted to know what was done with the money collected from fines.
Mr Seedat replied that these funds were saved in the discretionary reserves pool and could not be used for FSB operations.
Mr Van Rooyen asked whether constant legislation changes encompassed effective enforcement of these regulations.
Mr Nene replied that legislation changes were needed and they were more reactive than proactive. Some Bills were currently in the stage of public consultation and was ready to come before parliament. It was sometimes difficult to be proactive as legislation might be changed where there was no need.
Ms Sibhadla asked whether these legislation changes were urgent.
Mr Nene replied that they were indeed urgent and were coming through parliament. The committee would be contacted for a suitable date for discussion according to their parliamentary schedule.
Ms Dlamini-Dubazana asked why the pension fund financial statements of 2009 were used in the Annual Report.
Mr Boyd replied that the reason why the 2009 financial statements for the pension funds were used were because pension funds had 6 months to submit financial statements and all tended to submit right at the end therefore there was this carry over to the next financial year.
Ms Adams said that financial education was an important part of solving poverty as it taught people how to budget effectively. She wanted to know how the rural people were being reached.
Ms Davids replied that commuter education drives were held at taxi ranks right across the country. The urban centres in the cities were found to be the place where people from rural areas travelled through and the FSB was currently investigating the possibility of using electronic media through social media sites.
Mr George asked what the remuneration policy of FSB was when salaries were determined
Mr Tshidi replied that remuneration of employees was based on the FSB Act and were market-related.
Public Investment Corporation Annual Report presentation
Deputy Minister Nene highlighted that the presentation would focus on the key performance areas related to the annual report of the PIC. One major achievement was that assets had increased from R910 billion to above R1 trillion rand. Job creation was at the forefront of outputs and PIC has embarked on a comprehensive study to be able to give the figures to the committee at a future opportunity.
Mr Elias Masilela, Chief Executive Officer, Public Investment Corporation, highlighted that the annual report was presented within a broader global context. There was a close link between economic and asset performance but it was one directional as economic performance directly impacted asset performance. Following the deepest global economic downturn, many economies recorded positive growth. There were concerns regarding the sovereign debt crisis and this directly impacted South Africa. Commodity prices increased which helped South Africa but a commodity such as oil was still concerning (page 37 of the annual report). With regards to the domestic economic environment, growth in assets under management was in line with economic recovery and one reason for this was that South Africa’s regulatory structures were strict which helped a lot. The financial sector was seen as the growth engine of the economy and global integration was the threat. Since the year 2000, people employed in the sector increased by 24.5%. The Government Employees Pension Fund (GEPF) had made the developmental aspect of investment explicit and paramount, and had also allowed for investment offshore (page 13 of the annual report). The progress here was mainly due to a forced long term outlook instead of following short term returns.
Dr Daniel Matjila, Chief Investment Officer, PIC, gave an overview of the organisation’s clients. They were 23 public sector pension, provident, social security, development and guardian funds in South Africa. Collectively, the assets under PIC management as at 31 March 2011 were R1.032 trillion. GEPF remained the PIC’s largest client and as at 31 March 2011 had entrusted assets worth R923 billion to the PIC. Mr Matjila gave an overview of the top five clients which were GEPF, the Unemployment Insurance Fund (UIF), Associated Institution Pension Fund (AIPF), Compensation Commissioner (CC), Compensation Commissioner: Pension Fund (CC:PF) as well as other smaller clients. Assets under management per the top three asset classes (page 9 of the annual report) were local equity at R495.1 billion, bonds at R381 billion, cash and money market at R84 billion. Assets showed growth of 13.4% from R910 billion to R1.032 trillion.
Dr Matjila gave some of the investment highlights of PIC. Their assets exceeded R1 trillion in the year of celebrating its centenary and PIC doubled its assets under management since corporatisation in 2004 when these were R377 billion (page 8 of the annual report). The exposure of the Isibaya Fund for the year was R5.5 billion; R3.04 billion worth of deals were approved in the year under review (page 48 of the annual report). The Victoria & Alfred (V&A) Waterfront was back in South African hands. It was purchased for the GEPF at R4.85 billion and the PIC shared 50% ownership with Growthpoint. R25.8 billion had been invested in equities offshore. The GEPF revised mandate allowed for 5% Rest of the World outside Africa investments and 5% in Africa (page 7, 9, and 13 of the annual report). Performance of Key Client Portfolios (pages 40 to 46 of the annual report) gave an outline of assets classes and return versus benchmarks set.
Dr Matjila gave an overview of the developmental impact of PIC investments. Isibaya investments (pages 48 to 52 of the annual report) focused on Human Settlements and Housing projects (partnering with Old Mutual Housing Impact Fund, International Housing Solutions, and the Johannesburg Housing Company). They were also funding higher education edu-loan bursaries engaging with the Department of Higher Education and Training. There was engaged listed companies that were not compliant to the PIC corporate governance scoring matrix for the year ending 2010 (page 57 of the annual report). Isibaya and Fixed Income investment processes were subject to Environmental, Social and Governance (ESG) (page 57 of the annual report).
Ms Petro Dekker, Acting Chief Operation Officer, PIC, presented the operations highlights of PIC. PIC had a new building which was a flagship property development at Riverwalk (page 16 of the annual report). She added that this was the first green property development of its kind. The organisation’s training programme intake increased by 33% since its inception. 20 new chartered accountant graduates and interns were taken in and 14 new PICeeds were recruited. Property division consolidation was finalised (page 15 of the annual report), PIC was compliant with its own ESG matrix (page 56 of the annual report) and Employment Equity in terms of disability improved from 0% to 1% (page 34 of the annual report). A key financial indicator was that revenue was growing in line with the increase in assets under management. Group revenue increased for the current year by 11.8% and there was an increase in market value of assets under management. There was no increase in fees charged to clients for the last three years and fees remained significantly below industry levels. In terms of expenses there was active cost containment. The increase in expenditure was mainly due to the acquisition of Advent’s assets and personnel. Group expenses increased for the current year at 7.4% and the primary cost drivers were employee and IT costs. The staff compliment increased from 195 to 296 in line with strategic initiatives to grow the business. Other operating costs were actively contained by careful monthly monitoring.
Ms Dekker explained the PIC’s net profit in terms of the maximisation of income and negative growth in operating expenditure as a percentage of revenue. There was a group increase for the current year of 54.9%, maximum return on investments increase of 23.7% and an increase from associate of 225.7%. Operating expenditure as a percentage of revenue was 70.9%, 3.9% lower when compared to 2010. This was as a result of active cost containment. Net assets continued to grow in line with strategic business activities. There was a group increase of 25.6% and a cash increase due to an increase in fixed deposits. All sustainability targets were exceeded for the year under review with a return on equity of 26.8%. Earnings before interest and tax was 39.9%, personnel costs and management fees were 45.5% and IT costs and management fees were 5.3%.
Mr George wanted to know whether the investing for development change from short-term to long-term focus would affect risk especially around Afrisam as there were lots of things that could go wrong as returns had to be delivered.
Mr Masilela replied that long-term inflation looked good and the Afrisam performance indications showed that the market for cement was very strong so it was still a good investment long-term.
Mr Van Rooyen wanted more information on the long-term incentive scheme and whether this was included in the current provision.
Mr George added to this and asked whether the PIC had a remuneration policy especially for the short term incentive bonuses for directors.
Ms Dekker replied that the short-term incentive was based on the Patterson scale and both the short and long-term incentive schemes were performance based. Both were budgeted for and formed part of the sustainability of retaining the company’s skills.
Ms Dlamini-Dubazana noted a typing error in the annual report as it showed R1 billion instead of R1 trillion. She wanted more information on the purchase of the V&A Waterfront and whether this was a good investment.
Mr Masilela replied that the V&A was a very good investment as it was one of the most strategically placed shopping centre in the country. It was a huge part of cultural development especially for tourists and it had an average vacancy rate of 5% but this way mainly due to developments taking place and some shops had to close.
Ms Adams also wanted to know why the PIC did not purchase the V&A a few years ago when it was for sale as it would have been cheaper back then.
Mr Jan Strydom, Chairman: Investment Committee, PIC, explained that the V&A was offered to the PIC at a 7-8% forward yield. The Dubai Consortium bought it at 4%. It was then for sale again after that and PIC as well as Growthpoint bought it. It was a good investment as Growthpoint was listed as one of the top 40 companies on the JSE.
Ms Adams wanted clarity on the performance against pre-determined objectives as some targets were achieved and others not. She wanted to know the timeframe for those not achieved.
Deputy Minister Nene replied that the annual report was a true reflection of targets met and it was true that some were not achieved. It was not possible for all targets to be achieved as this was the nature of the industry. However, in some areas the benchmarks were outperformed. By when all targets would be achieved was not clear.
Ms Dlamini-Dubazana asked if inflation was subdued in the domestic environment what this would mean for South Africa.
Mr Masilela replied that inflation was subdued because of the 2008/2009 global slowdown. It posed no major threat for South Africa however the price of oil went up this would have an impact.
The meeting was adjourned.
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