Financial Services Board on its 2013/14 Annual Report

Meeting report

Briefing by Financial Services Board

Adv Dube Tshidi, CEO: Financial Services Board (FSB), said the vision of the Board was to promote and maintain a sound financial investment environment in SA. Its mission was to promote the fair treatment of consumers of financial services and products, the financial soundness of financial institutions, the systemic stability of financial services industries, and the integrity of financial markets and institutions.

One of the key institutional objectives was to empower customers through ensuring they were treated fairly. To implement this successfully, the FSB needed to build internal capacity to supervise an outcome-based regulatory framework as opposed to the traditional compliance-based frameworks, and to apply the regulatory and supervisory frameworks to a broader range of financial services, including banking. The key performance indicator (KPI) here was an operational and effective framework by the end of the 2017 financial year, with annual milestones.

Another objective was coordination and communication with all stakeholders through interaction, to improve customer service from regulated institutions through proactive stakeholder management. The KPI here was a fully implemented stakeholder management programme by 2017 and the implementation and maintenance of a communication, brand and reputation management strategy in 2014. For the objective of building a regulatory framework in line with international standards, enforcing compliance with legislation and effective supervision of financial service providers for sound financial intuitions, the KPI was an on-going review of the framework to identify gaps, effective enforcement of legislative compliance and implementation of risk-based supervision. A further objective was for an adequately resourced FSB to deliver on its strategic plan, a comprehensive internal policy framework, effective systems and processes and a knowledge management system for optimal performance for improved internal policies and processes. The KPI here was to align departmental requirements with available financial and human resources, with policies reviewed and updated annually for implementation by the end of 2014.

Mr Jurgen Boyd, FSB Executive Director: Collective Insurance Schemes (CIS), turned to the performance of the FSB against strategic objectives. The first goal was for informed and protected consumers, where some of the performance indicators included the submission of recommendations to amend the relevant legislation and regulations within the required timeframes, and to maintain or increase the level of financial literacy measured across the four domains in the national consumer education strategy -- financial control, financial planning, product choice and knowledge and understanding. Here the consumer education department of the FSB promoted financial education in two target areas, through institutions in the formal education system and through community education initiatives.

The second goal was in stakeholder management, with one of the performance indicators being improved brand awareness. This target was achieved with the communications, branding and marketing strategy approved by the board in October 2013, and phase one of the strategy implemented. Another performance indicator under this goal was improved communications specifically with the media. The target was for 12 meetings to be held with the media and the target was partially achieved, with 10 meetings held with media representatives, comprising four round-table and six one-on-one meetings with journalists from various media houses.

Mr Jonathan Dixon, Deputy Executive Officer: Insurance, FSB, turned to goal three which was for sound financial institutions looking at the objective of effective enforcement of compliance with legislation, which was critical in a regulatory environment. This target had been fully achieved.

Internal excellence was goal four, where the objective was an adequately resourced FSB to deliver on its strategic plan. Here, all the targets had been achieved.

The Committee was told that the core business of the FSB was to regulate the non-banking financial services industry. Its on-going operations were funded through levies and fees charged to the industry it regulated. Other income received included penalty income and interest earned on invested funds. Levies raised from the industry were driven by the zero-based budgeted operating needs of the FSB. A rigorous budgeting process that required detailed motivation for all resources and operating needs raised by its departments, took place annually.

The FSB results showed the institution’s financial position remained healthy, the liquidity position had improved and the working capital was well managed. For the 2014 financial year, revenue was at R577 million (up by almost by 11% since 2013), net assets were at R184 million (up by almost 19%), the cash balance stood at R180 million (an increase of almost 8%) and the accumulated surplus was R115 million (an improvement of almost 22%). The discretionary reserve for 2014 was R15 million (compared to R13 million in 2013) and the contingency reserve was R55 million (compared to R49 million). Penalties and income from fines went into the discretionary reserve, which was then used for financial consumer education and welfare.

Looking at the financial results against the budget, actual revenue was R585.75 million for 2014 as compared to the budgeted revenue of R547.48 million. There was a slight under-spending on staff costs. The net surplus was R29.16 million, which was up from R16 million in 2013. In terms of performance, expenses for 2014 were R557 million, up by almost 6% (R523 million). 60% of the expenses was spent on staff costs, which was to be expected, as the FSB was a service organisation. For the statement of financial position as at 31 March 2014, the current assets were R180.25 million, with post-retirement obligations of R36.63 million -- which was noted as being more than well funded -- and a contingency reserve of R54.68 million.

Discussion

Dr D George (DA) asked why Ms Rosemary Hunter, Deputy Executive Officer for Pensions, was not part of the FSB’s delegation. He asked why the guidelines on curators were necessary and if this was owing to a problem of management of curators. What was the current status of the twin peaks model of financial regulation?

Adv Tshidi replied that Ms Hunter had been committed to another appointment.

Dr M Khoza (ANC) felt the FSB delegation was capable of answering any of the Members’ questions. He congratulated the Board on its favourable audit outcome and improved liquidity position. However, she was concerned about how targets and indicators were reported on. How prepared was the FSB for the implementation of twin peaks? Had the entity thought about its name change, as it would no longer be the FSB? She knew the name change would be launched, but it would be comforting for Members to know that some thought was being given to it. She noted the FSB had issued 541 new licences, and 68 had been declined. What were some of the generic reasons for these applications being declined? Government had taken a conscious decision to develop a savings culture and perhaps there could be a problem with the reason why applications were being rejected, which could be addressed.

Adv Tshidi responded on the twin peaks issue, noting that according to the parliamentary programme, on 18 November both the FSB and Treasury would be briefing the Committee on the twin peaks. He would reserve the answers to that issue for that engagement.

Ms Caroline da Silva, Deputy Executive Officer, Financial Advisory and Intermediary Services (FAIS), responded on the declined licences, noting this was usually for financial services licences. For such a licence, a number of standards needed to be met. The first was operational competence and capability, the second, financial stability, and the third, competency and fit and properness of key individuals which spoke to experience, honesty, integrity and qualifications. Sole proprietors were exempt from this and so there were no barriers at entry-level. Most applications were declined either because the individuals involved did not have the experience to render the advice in the category applied for, or had an unclear history of honesty and integrity. 

Mr Ross (DA) questioned the role of the FSB in Sharemax, in line with its objective of strategic intent. Had the FSB taken any responsibility or intervened in the business model of African Bank?

Ms Da Silva explained that Sharemax was a difficult issue where there were questions of appropriate areas of jurisdiction over the different regulators and which regulator could most appropriately react the quickest. Sharemax was involved in matters (deposit taking and property) which extended beyond its licence of normal financial service provision. A lot of these matters would be addressed in the new market conduct legislation, where the appropriate jurisdictions would be looked at. The FSB had taken, and would still be taking, action against certain financial service providers who promoted the Sharemax product. The appeal to the ombudsman would be heard in January 2015, and would provide direction on how to move forward.

Mr Boyd said that African Bank was a bank failure, and the FSB did not have a mandate to regulate the Bank. There were entities in the African Bank Group which the FSB supervised. With collective investment schemes, the FSB impacted directly as a result of the African Bank failure, particularly the money market funds, where 12 or 13 of the money market funds had been exposed to the African Bank debt affected by the 10% cut imposed by Treasury. The new concept of side pockets was introduced to SA for the exposed money market funds to try to put a stop to any run on these funds. The idea was for these exposed funds to be placed in a separate portfolio.

Ms D Mahlangu (ANC) needed to know why the FSB did not use the Treasury guidelines in the preparation of its annual report. She felt a breakdown of female employee numbers in the FSB was important. She was concerned about the wage gap and that 60% of the FSB’s budget went to salaries for 511 employees. She wondered how much the lowest level employee at the FSB was paid. Even service delivery-intense departments did not use 60% of their budget on HR.

Mr D van Rooyen (ANC) asked about the engagement between the FSB and Treasury in relation to the change in reporting, as he was concerned about a sound working relationship, as prescribed by the FSB Act. He asked if part of the surplus was because of operational cost savings or because of vacancies not filled. How did the operational cost saving impact on the service delivery of the FSB? He also requested an update on the appointment of the CFO.  

Adv Tshidi said that the case of the former CFO, Mr Dawood Seedat, was a difficult one to handle as he had suddenly one day got an email from a journalist asking about “allegations of corruption”. The email asked if the FSB was aware Mr Seedat received R12 million from Cash and Carry and that he received the money because he promised he would do some favours for Cash and Carry in a tax-related matter. The FSB had responded that it was not aware, which indeed it was not, but Mr Seedat was confronted with the allegations. Such matters impacted on the reputation of the institution and when Mr Seedat was made aware, he immediately offered to resign. In his resignation he denied all allegations, but resigned to protect the reputation of the FSB. The resignation was discussed and accepted at Board level. The FSB then asked the Office of the AG and internal auditors to review all functions performed by Mr Seedat as CFO, to make sure nothing had been missed over the years. It was found there were no untoward functions performed. SARS also did not find anything in this regard. The FSB had been struggling to find a replacement CFO.

Mr Van Rooyen said, if he was correct, that there had also been a criminal case against Mr Seedat. Had the criminal proceedings come to a different conclusion?

Adv Tshidi responded that there had been no criminal case against Mr Seedat. There was a publication, with a wide distribution, which reported that Mr Seedat had been charged and arrested, which was totally incorrect. Mr Seedat was in the process of suing this publication, because there were never any charges or arrests at all.

The Chairperson noted this was an important matter, as reported on in the media. He did not understand the reason why the FSB did not use the Treasury-guided format for the annual report and if the entity was exempted in this regard, and if so why. He asked how the figure of someone getting paid R5.2 million was arrived at. He was interested to find out the breakdown of “black” employees into African, Indian, and Coloured. He also wanted to know to what extent the FSB was being consulted on the twin peaks legislation.

Adv Tshidi said the FSB was being fully consulted. On the issue of Treasury guidelines, one had to look at the composition of the Board of the FSB, which was not like the board of any normal company – this was an oversight board. The FSB board was made up of independent people from the private sector, including a representative from the Reserve Bank, as well as two representatives from Treasury itself. The FSB was a creature of regulations in the space of integrated reporting. The Board thought the Treasury guidelines should form part of reporting, but the format should be in line with current happenings within the industry it regulated. If itt was advised that the FSB should go back to the old way of reporting, this would be done.  

Mr Dixon added that exemption had been obtained from Treasury in the time of the former CFO, but Treasury was part of the decision of the Board with its two representatives.

Ms Da Silva also added there had been a long debate regarding the obligations to meet the format versus integrated reporting. It was also important to remember that the investigation of the FSB into the procedures of Mr Seedat was an internal process, and was not an investigation into the allegations.  

Ms T Tobias (ANC) said the guidelines did not restrict entities, but the limitations were seen in terms of accountability. Any institution established through an Act of Parliament needed to be in sync with government reporting guidelines, otherwise it would be difficult for Parliament to play an oversight role. This needed to be taken into consideration in future. The President of the country earned R2 million, but here was someone getting R5 million – it needed to be known that Members of the Committee had a problem with this. Was this salary performance-based?

The Chairperson said it was difficult to assess performance with the current reporting format, and this was the real issue.

Adv Tshidi could not respond, because the issue of the salary referred to him and he did not want to leave the meeting with the impression that he paid his own salary.

The Chairperson ensured this was not a reflection on the personal capability or value of the CEO. This was not a personal matter. It may well be explained and using the salary of the President as a comparison was not fair, even for the most established democracies. The Committee did have a right to ask, but it was not a personal matter as presumably the CEO’s predecessor was paid about the same amount.

The Chairperson had to leave to attend to another commitment, and Dr Khoza took over as Chairperson.

The Chairperson said she was in a difficult position, because she understood the specialised nature of the industry and the need to attract skills.

Ms Mahlangu felt the wage gap was just too large. It was not a personal matter, but a principled one. The Committee had always made a noise about the wage gap. There might be matters which justified the remuneration but looking at the annual report, she could not see this and it therefore needed to be questioned. She recommended the FSB be given seven working days to get information about the possible exemption granted during the tenure of the previous CFO, so that the Committee knew what to look for when dealing with reports of the FSB. The response could be in writing.

Ms Tobias suggested the Committee reserve some time at a later stage to come back to the matter on measuring targets. The Office of the Auditor General could also be present to have a thorough discussion because as a previous Member of the Standing Committee on Public Accounts (Scopa), she found the targets immeasurable.

The Chairperson agreed. She suggested a time frame of two weeks.

Adv Tshidi thanked Members for the input. The FSB had taken note and would submit the information as requested.

Mr Dixon added the discussion had been very useful, especially as feedback to the Board. He said it was not the Executive’s decision to follow this reporting format, but it had been at the request of the Board. If it was the view of the Committee that the FSB should rather stick to the reporting based on Treasury’s guidelines, this feedback would be provided to the Board.

The Chairperson hoped the Board would revisit the issue in light of the fact the current reporting of the FSB seemed to have some gaps in terms of what the Committee expected. If the Board had a compelling case, there was nothing prohibiting it from making this case and justifying the deviation.

The meeting was adjourned.