Transformation in the Financial Sector: Broad-Based Black Economic Empowerment Commission

Meeting report

The Chairperson welcomed Committee Members, the Broad-Based Black Economic Empowerment (B-BBEE) Commission, Public Benefit Organisations and the media to the meeting. He asked why the meeting had started 30 minutes late.

Ms Teboho Sepanya, Committee Secretary, explained that she had experienced connectivity challenges.

The National Economic Development and Labour Council (Nedlac) and Ms D Peters (ANC) sent apologies for their absence.

Ms Zodwa Ntuli, Commissioner, B-BBEE Commission, Ms Moipone Kgaboesele, Head: Investigation and Enforcement, Ms Nontokozo Nokhwali-Mboyi, Chief Operating Officer, Ms Thembakazi Dondashe, Senior Manager: Organisational Strategy, and Mr Mofihli Teleki, Director: Stakeholder Relations and Communications (all B-BBEE Commission), and Mr Jacob Maphutha, Chief Director: B-BBEE Policy, Department of Trade, Industry and Competition (DTIC), were present.

Briefing by the Broad-Based Black Economic Empowerment Commission on Transformation in the Financial Sector and update on the Financial Sector Summit
Ms Ntuli noted that the Commission had previously had an opportunity to engage with the Committee on transformation in the financial sector. The financial sector was the most important sector of the economy. She believed that if the financial sector led on transformation, the other sectors would follow. Transformation remained imperative in this country because racial disparities still existed. She looked at B-BBEE requirements specific to the financial sector, observing that the Financial Sector Council (FSC) had not submitted a report on transformation it was required to in terms of section 13G of the Act since 2017/18.

Ms Dondashe presented B-BBEE data submitted by financial sector entities through the Commission’s B-BBEE portal and section 13G reports. The data covered Black ownership and Black women ownership in the sector, achievements against other B-BEEE elements, achievement of priority elements, major B-BBEE transactions, and the amount and type of funding for B-BBEE transactions. This data covered the period 2017-2020.

Ms Ntuli summarised and added to Ms Dondashe’s presentation points. She emphasised that there were barriers in place that had led many Black entrepreneurs to exit the financial sector. The sector should directly empower individuals to enter the sector. She observed that the Act could not force financial institutions to meet transformation targets, but it did empower government to give compliant institutions preferential treatment.

See attached presentation for more information.

Discussion
Ms P Abraham (ANC) asked whether companies suffered any consequences for instances of wrongdoing, such as when Eskom had accepted forged B-BBEE certificates from Tegeta. She also asked what the consequences were for companies that did not submit compliance reports. She observed that there had been 909 complaints received from 2016 to 2021. What was the success rate in resolving these complaints? She asked what had caused the decrease in B-BBEE ratings, specifically on Black women ownership, and what the remedial measures should be. How was genuine Black ownership and specifically Black women ownership distinguished from fronting? Did the Commission feel that the Act limited what it could do, and did it have any suggestions on how it could be amended?

The Chairperson asked if the DTIC's Black Industrialist Programme was making progress. He was concerned that the Minister was not doing anything about the fact that the FSC had not submitted a section 13G report since 2017/18. The financial sector could not remain untransformed after 28 years while so many of its customers were Black people. This made Treasury's absence a concern. It was supposed to work with the Commission to ensure the financial sector gained traction on transformation, but reports were rarely received. He recalled that the last time Treasury had appeared before the Committee had been in 2019 when it had been agreed that a financial summit would take place. Nedlac had made excuses for why the summit had not taken place, but they were not acceptable – a virtual conference could have been held. A report was supposed to be sent in March. It was unacceptable that entities of government did not take parliamentary decisions seriously when given responsibility. Steps must be taken against such entities. There were resolutions that had been taken from previous summits, but these needed to be implemented. He said it was shameful that after 28 years, there was still not even one 100% Black-owned company on the Johannesburg Stock Exchange (JSE). In China and India, there were companies owned by Chinese and Indian people but South Africa seemed as if it was in Europe. The Committee and Commission were elected through the ballot into their positions. People who had participated in elections were not happy with the pace of transformation in the economy in general and in the financial sector in particular. He observed that the youth were the hardest hit by the state of the economy – almost 74% of youth were unemployed – and asked if the Commission had a measurement instrument on youth. The youth could not get money from the very same mainstream banks that were being discussed. Graduates could not get jobs or economic opportunities.

Mr G Skosana (ANC) was also concerned about the rate of transformation in the financial sector. Challenges that were present 28 years ago still confronted South Africa. He wondered whether the low number of complaints received was because there were fewer genuine challenges in the financial sector or because the financial sector was predominately a White sector? Was it because people in this sector were "doing things by the book", or was it because Black people had decided to "stay away" from the financial sector? What was the Commission's assessment of this situation? He observed that the Commission seemed to be unable to do things because the Act did not give it enough power, and asked the Commission to pinpoint gaps so that Parliament could assist by amending the legislation.

Ms M Mabiletsa (ANC) observed that the FSC had not submitted reports. How was the Commission going to plan without these reports? How had the Commission responded to the lack of reports? What had it done? No reports meant that no work had been done.

Responses
Mr Maphutha confirmed that the DTIC's Black Industrialist Programme was continuing. A full report on its achievements over the past five years since its establishment was available on the DTIC website. The Department and the private sector had together invested R32 billion to fund 800 Black industrialists and entrepreneurs, creating 120 000 job opportunities in the process. All government institutions needed to be galvanised to support more Black industrialists and enterprises. Sectors that had benefited included food production, clothing and textiles, mining, metals and machinery and equipment, transport and logistics, infrastructure, healthcare, and tourism. The reason given by the FSC for not submitting transformation reports was that there had been delays among companies submitting their progress to the Council. However, all stakeholders and entities had committed to the implementation of the Charter. There needed to be a sector-specific transformation guideline. He agreed that reports not being submitted should not happen again. He expected that outstanding reports would be received by the end of June. The poor quality of previous reports (not being comprehensive enough), meant that future reports needed to indicate not only transformation within the sector but also an institution's impact on the socio-economic challenges in the country.

Ms Ntuli agreed that the level of non-compliance was worrying. She recalled that in 2016, the Commission had raised awareness on compliance requirements and had written to all the relevant entities to inform them of the requirements and offer assistance helping them compile reports. The Commission continued to offer assistance free of charge and had begun work on a compliance strategy. During this process, it had engaged with the JSE to improve the compliance of JSE-listed entities. In response, the JSE had made B-BBEE compliance part of JSE-listing requirements, which was a welcome intervention. When it had been observed that there was only 50% reporting, the Commission had further engaged with the JSE to issue notices through the JSE to entities to inform them of their non-compliance and their requirement to submit their reports, failing which the Commission would invoke provisions of the Act.

Last year, entities were informed and given until December to submit their reports. This week, entities that had not submitted their reports would be issued with notices of non-compliance. The Commission hoped to refer these entities for prosecution. It was hoped that this would increase the level of reports coming through, resulting in less time spent on enforcement and more time on compliance. However, more enforcement needed to be done to deal with blatant non-compliance. The Commission had written letters to Parliament on the need for organs of state to report their compliance with the Act and had asked the Auditor-General to include B-BBEE compliance in their audits.

Ms Ntuli said that there were too few consequences for non-compliance. The Commission was processing notices of non-compliance to organs of state and private entities which had already been informed multiple times. A full report on these activities would be sent to the Committee. She said that the Commission needed all entities to submit reports to get a clear picture of the situation in the country, but even with incomplete information the trend was consistent – change was taking place at a snail's pace. She had seen pockets of change, but for an overall impact to be made there needed to be consequences for non-compliance. Contracts and licences should be cancelled if entities were not meeting transformation targets. Government should always ensure that all aspects of the Act were met and ensure that B-BBEE was embedded in the criteria to source partners for state-owned entities. There had been certain transactions involving the Covid Relief Fund that had not embedded compliance in their terms. She noted the High Court's position against the Minister of Tourism on this matter. As long as an activity was an economic incentive, it needed to take transformation into account so that Black people were given preference. She hoped that the outcome of the Tourism Minister's appeal would set the tone for future transactions between privately-owned businesses and the government.  On Eskom and Tegeta's false certificates, Ms Ntuli said that the Commission had recommended that it be terminated, which had since happened. The Commission had also requested an audit of all Eskom's contracts, and other violations had been referred to the Special Investigating Unit (SIU). Several matters had also been referred to the South African Police Service (SAPS) and the National Prosecuting Authority (NPA). She hoped prosecutions would take place soon, especially around fronting.

Of the 909 complaints the Commission had handled, there had been a 79% success rate. The Commission had issued findings to entities in 423 cases, which had included remedial recommendations, which the majority of the entities involved had complied with. Less than ten cases would take the Commission’s decision on review, and the Commission was still defending these cases.

On distinguishing genuine Black ownership from fronting, Ms Ntuli recalled that the definition of fronting was all-encompassing, as per the 2013 amendments. Fronting was defined as any transaction, initiative, or arrangement that was entered into, and was a B-BBEE initiative, that undermined the Act or any of its provisions. Fronting was mostly found in the ownership element, as Black people were 51% shareholders only on paper and had no real power to control their businesses. When ownership was tested, the exact shareholding that was being held and allocated to a Black person was tested. The Commission tested to see if the Black person actually existed and was alive. The Act also defined who a Black person was – foreign nationals or people naturalised as South African citizens after 1994 did not qualify as a Black person for the purposes of the Act. Voting rights were also tested. This ensured that if a person was a 51% shareholder, they needed to control the votes in the company. This needed to be evidenced in the shareholder's agreements and the company's dividend flows. In some instances, despite the Black shareholder being allocated the majority of the shares, it was found that they did not have voting rights and the Black shareholder was only ceremonial for the B-BBEE certification to be approved. Remedies had been supplied for some of these cases. The Commission also tested for economic interest. If the person was a shareholder, they should be entitled to economic benefits such as dividends. In some of the cases that the Commission had analysed, it had been found that some of those dividend flows were restricted in either the financer's or shareholder's agreements, where the dividends were only declared after the Black shareholder had finished paying their loan towards their shares. This meant that Black shareholders would not get any dividend flows, whether or not the company made a profit (and so would never be able to pay off their loan). This structure undermined the ownership elements of the B-BBEE Act and therefore constituted fronting.

Ms Ntuli said that most of the entities had not submitted section 13G reports because they had been unable to show evidence of Black ownership. The Commission had issued letters of non-compliance and referred a number of entities for investigation. The Commission had followed up with various entities and done site visits to check that reporting was accurate. Site visits verified reports and would increase the level of compliance.

Ms Ntuli said that Parliament should amend the provision in the B-BBEE Act that limited the Commission from publicising its findings before a case went to court because this limited the Commission's ability to act as a regulator. Success as a regulator came from awareness which deterred other entities from engaging in similar non-compliance practices, and no other regulators had such a limiting clause. The legislation was also over-criminalised and this approach was not successful on its own in a regulatory environment. There needed to be both criminal and administrative processes. The Commission had found that the legislation did not penalise entities for not transforming and did not criminalise non-compliance, only acts such as fronting and misrepresentation, and only imposed B-BBEE requirements on businesses that wanted to trade with the state. She asked the Committee to look into the possibility of establishing a tribunal to speed up the processing of fronting cases, which currently had to go through a criminal procedure with very high standards of evidence. This would be similar to the Competition Commission and Consumer Protection Act structures. The independence of the Commission needed to be strengthened so that it could run without fear, favour or prejudice. The Commission was not currently listed as a public entity, which needed to be changed to ensure that its budget was appropriated directly from Parliament. This would allow the Commission to operate independently and efficiently. Finally, there should be a definitive list of activities that would render agreements null and void, similar to provisions in the Consumer Protection Act on consumer credit without an affordability assessment.

Closing remarks
The Chairperson had lost connection and Ms Abraham closed the meeting. She said that where transformation was concerned, all members should play their role in closing gaps in legislation. There was a lot of work ahead for Parliament and the relevant departments. The Committee looked forward to seeing the report mentioned by Maphutha. Transformation was not “a walk in the park”. There were elements in society that “needed to [be] let go” and there was a lot of responsibility involved. The Chairperson appreciated that Ms Ntuli had spoken on the challenges that the Commission faced.

The meeting was adjourned.