Financial Sector Charter Council: annual report

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Finance Standing Committee

14 November 2006
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Meeting report

FINANCE PORTFOLIO COMMITTEE
15 November 2006
FINANCIAL SECTOR CHARTER COUNCIL: ANNUAL REPORT

Chairperson:
Mr N Nene (ANC)

Documents handed out:
Transformation in the Financial Sector Powerpoint presentation
Draft Committee report on Special Pensions Board report
Draft Committee programme for 2007
[available once adopted at www.welfare.gov.za]

SUMMARY
The Financial Sector Charter Council briefed the Committee on the implementation of the Financial Sector Charter from 2005 to date. The Charter envisaged a ten-year transformation process, with interim targets in 2008. It aimed to promote a transformed, vibrant and globally competitive financial sector. Its seven performance pillars were outlined. The Council would consider reports submitted by financial institutions and give ratings. There was close alignment with targets of the Black Based Black Empowerment Act Codes of Good Practice. The 2005 review figures were tabled and discussed. The institutions reviewed in 2005 represented 70% of the sector by market capitalisation and 90% by designated investment. The study results would be used as a yardstick for future transformation. All the figures for targets and achievements were tabled and explained during the presentation. The figures represented an adequate start for the ten-year transformation process. There was support from the majority of institutions, the baseline study was in place to measure future transformation progress. More intervention and re-focusing were needed in housing, skills development, procurement and enterprise development, and agriculture development. Questions by Members addressed the roles of Treasury and the Department of Trade and Industry, funding of the Council, consumer education, monitoring systems, measurement of targets, and the outcome of failure to report. The position of Retirement Fund Trustees was examined, and it was noted that they were not yet fully participating. Further questions related to whether global competitiveness was desirable or would impact on development, the exemptions from reporting, the development of the second and third economies by the Council, and the rating process. Skills development as against skills shortage was clarified, and the role of education stressed. The Preferential Procurement Framework Act requirements, and the maxim “Once empowered, always empowered” were discussed.

The Committee considered and approved its Report on the Special Pensions Act implementation, the arrangements for the forthcoming Study Tour and the draft programme for 2007.

MINUTES
Mr Jan Mahlangu, Chairperson, Financial Sector Charter Council (FSCC) indicated that the FSCC had a number of stakeholders and members of the Council, represented the financial sector, labour, government and business.

Mr Enoch Godongwana, Principal Officer, FSCC, reported that the Financial Sector Charter had been in effect since January 2004, although the review work had begun only in 2005. The Charter envisaged a ten-year transformation process, with interim targets set for 2008 and final targets for 2014. It had a dual focus, looking at the sector itself and at the sector’s contribution to broader social transformation. The primary objective was to promote a transformed, vibrant and globally competitive financial sector reflecting the demographics of South Africa, contributing to an equitable society, providing accessible finance to black people and targeting investment into certain sectors. Its seven performance pillars were human resources, ownership and control, procurement, access, origination and targeted investments, Black economic empowerment (BEE) transaction financing, and corporate social investment.

All financial institutions were asked to submit comprehensive reports based on a form prepared by the FSCC. The Executive of the Council would consider and approve the reports and prepare a rating. The ratings would provide BEE credentials for tenders and the Charter targets aligned with the Broad Based Black Empowerment Act Codes of Good Practice. The 2005 review figures were tabled. They had not resulted in a rating, although FSCC did give feedback on performance. The retirement fund industry were not yet participating in the Charter as the trustees had argued that they needed to transform that industry first before fully participating. The non-involvement had some difficult implications as this sector had been included in the targets set.

Nine trade associations were members. In 2005 372 institutions were due to report. 50 were exempted (having less than 50 employees or less than R10 million investment) and more than half did participate in the review. Those reviewed represented 70% of the sector by market capitalisation and 90% by designated investment. The FSCC was satisfied that the data represented a fair sample. Some firms reported under a group banner. The study results would be used as a yardstick for future transformation.

All the figures for targets and achievements were tabled and explained during the presentation. Employment equity and black skills development were all well on or over targets. Alignments with the other Charters in other codes sometimes presented a challenge as different targets applied to different categories. Management targets were on track, and skills development was slightly under target.

In regard to procurement, an amount of R16 billion, representing 38% of total procurement, was paid to BEE accredited suppliers. The 2008 target was 50%. The enterprise development figures for procurement from black owned suppliers were too low. However, there was some doubt whether the procurement and enterprise development figures may have been combined, with too much weighting being given to procurement and insufficient to enterprise development.

A key feature under access to banking was the Mzansi initiative, although once again the figures presented were perhaps not quite correct since some banks did not classify accounts as Mzansi accounts, although all the clients clearly belonged to this group. They also excluded the post office accounts.

Standards had been agreed by the FSCC for short and long term insurance, banks and collective investment schemes. Consumer education standards were still being negotiated, and the reports showed that 0.39% of post tax operating profit was being spent on consumer education, which was above the target of 0.2%.

With regard to origination and targeted investments, transformation was slower, with only R6.7 billion being spent as against the 2008 target of R25 billion. Low-income housing was also under performing. Although the figure given in this sector was R19 billion, many of the banking systems were not structured to produce reports on the income categories used by the FSCC, and had used house-prices as a guide. In addition, the banks tended to base their calculations on only the borrower’s income and not on household income. A further challenge lay in the fact that Government risk mitigation initiatives in respect of housing were not finalised, so the additional R10 billion expected had not been released. There was a trend showing a bias towards Gauteng, Cape Town and Durban, and not to the smaller centres. Agricultural development, targeting resource-poor farmers, showed weak performance. Black Small and Medium Enterprises (SMEs) showed 40% over target performance, but there was once again a bias to only three centres.

BEE transactions had reached the R47 billion mark, compared to the 2008 targets of R50 billion. Direct black ownership targets were 25%, but so far only 16% had been achieved. Corporate social investment was above target.

In summary, Mr Godongwana stated that the figures represented an adequate start for the ten-year transformation process. There was support from the majority of institutions, the baseline study was in place to measure future transformation progress. More intervention and re-focusing was needed in housing, skills development, procurement and enterprise development, and agriculture development, and these issues would be raised at the forthcoming Board meeting on 29 November.

Discussion
Mr M Johnson (ANC) asked for clarity on the fact that the Charter was set up by an Act that was sponsored by the Department of Trade and Industry (dti) although the oversight was seemingly done by National Treasury.

Mr Godongwana stated that each sector was linked to the line Ministry that dealt with that sector, so that the Tourism Charter was linked to the Ministry of Tourism, and many of the other Charters, unlike the FSCC, were funded from the fiscus. The Line Ministry was even to confirm the sector codes.

Mr Johnson asked whether the FSCC received any income apart from its stakeholder contributions.

Mr Mahlangu said that the trade associations did contribute and that was the sole form of income. The FSCC did not aim to make a profit but to achieve transformation. The FSCC did not play a consultancy role.

Mr Johnson asked for further information on consumer education and financial literacy. Many people were unaware of how changes in exchange and interest rates would impact directly upon them. He felt FSCC was ideally placed to undertake education and asked what was being done.

Mr Mahlangu agreed that FSCC had a significant role to play. It had drawn guidelines and agreements in regard to the distinction between marketing and consumer education, such as including financial literacy training in educational campaigns.

Mr Godongwana added that as the review process developed it should become easier to give specific examples. The short term insurance industry was quite active in this area, and had produced a number of modules directed at giving financial information to the lay public. Some standards had been drawn to measure consumer education and the FSCC was working on a clearer distinction between education and marketing. In essence, though, consumer education involved educating and assisting people to make informed decisions. He added that there had been some discussion on how best to pool resources, but no finality on how this should be done.

Mr Gerhard Joubert, Member of FSCC and Chief Executive Officer, Life Office Association, added that the Life Office Association (LOA) had an approach based on fair charges, easy access and good terms. This would include matters such as clear policies, using vernacular languages, using risk ratings and having a cap for prices. Consumer education was vital. LOA would be launching a new product in February 2007 in respect of funeral policies. It would be a different brand to Mzansi but would set similar standards. Companies would be incentivised to ensure that the business sold stayed on the books and there would be records to ensure that one person was not sold a whole range of policies.

In respect of consumer education, he commented that the Consumer Council had done quite a lot of work to draw up standards, including the aspects of financial literacy, a cap on media advertising, and measuring the spending by assessing whether the education had changed the behaviour of the consumer. It was also working with the Financial Services Board on questions of access. Around R100 million was being channelled to consumer education.


The Chairperson said that the Committee would be interested to receive a presentation on the new product and would try to arrange a briefing session.

Dr S van Dyk (DA) asked how the FSCC monitored standards, as this was not covered by the report.

Mr Godongwana stated that there were some elaborate monitoring systems. FSCC had its own report form that must be used, and it must be noted that all the biggest institutions had reported and the data had been interrogated. The industry were pioneers in allowing themselves to be subjected to independent scrutiny. Some institutions that had not submitted their reports initially, had now done so. In addition, it must be noted that some institutions – such as First Rand – covered all their various subsidiaries in one report, so that the report had covered First National Bank, Rand Merchant Bank, Outsurance and other businesses.

Mr Cas Coovadia, Member of the FSCC, representing Banking Association SA, stated that FSCC would, on the basis of the individual reports, hold one-on-one interactions with the member firms and point out their shortcomings. From 2006 all the reports would have to be accredited, verified and signed off by the Chief Executive Officers.

Dr van Dyk asked how black management targets were being measured, especially since many companies did not appear to have responded to the request for reports.

The Chairperson asked what was the outcome if institutions failed to report, and asked what was the reason why some had so far failed to report. He was concerned that only three members of the Institute of Retirement Fund Trustees had reported.

The Chairperson asked whether the retirement fund industry were signatories to the Charter, and whether they had by now undertaken full participation.

Mr K Moloto (ANC) also asked whether the retirement fund industry was working on separate targets, whether they lagged behind in achieving objectives and whether the transformation process was in line.

Mr Mahlangu stated that the retirement fund industry had signed the Charter at a late stage. The Institute of Retirement Fund Trustees had not been part of the Nedlac negotiations. They believed that they could not sign and commit their savings or those who were not already members of the Institute. They believed that it was necessary first to effect transformation within the Institute. There were furthermore problems with the enabling legal environment dealing with assets of the retirement funds, as the firms were limited in making payments out of the funds in terms of the Pension Funds Act and Regulations. This was presently under discussion by National Treasury. He furthermore pointed out that there was a general signature by the Congress of South African Trade Unions (COSATU) on behalf of labour organisations.

Mr B Mnguni (ANC) asked for a definition of what the FSCC meant when it aimed to have a “globally competitive” financial sector. He wondered if development and competitiveness could operate together.

Mr Godongwana stated that he had not been one of the drafters of the Charter, and it was his job to interpret what was meant. FSCC proceeded on the basis that the sector was interlinked with the global economy. The development mandate related to development of transformation processes so that he did not see that it was necessarily inconsistent with the global competition. Achieving transformation was a step along the search for high standards.

Mr Cas Coovadia added that the banks believed that South Africa should strive to be at the cutting edge of international practice, and must remember that banking must be relevant to the people in the country. The challenge of the banking industry and the FS Charter was to achieve relevance to all whilst being globally competitive.

Mr Mnguni was concerned that a number of firms had not reported and asked if they were in one group, or one sector, and how many of those not reporting were exempt.
Dr van Dyk wondered if the goals for 2008 could be reached in view of the fact that some of the information was outstanding, since not all firms had reported.

Mr Johnson also requested some further clarity and asked what the impact was of their failure insofar as the measurements were concerned. He felt that a failure to cooperate must surely impact negatively.

Mr Godongwana explained that the 50 companies who were exempted were originally included in the total figure of over 300 institutions. He also indicated that the total number of companies did not mean that 300 reports should be received as some institutions had reported under the “banner” of their groups. 116 reports were made. Only two of the smaller institutions in the banking sector had missed reporting, and some reports from smaller institutions were still outstanding. He stressed, however, that the data received was a representative sample.

Mr Mnguni noted with some concern the remark that much of the development was concentrated in Gauteng, Cape Town and Durban, and asked how much of the second and third economies were being addressed by the FSCC. He also raised the question of high bank charges and how this impacted on the economies.

Mr Godongwana replied that this concentration on only some areas was a weakness that was discovered during the 2005 review, and it would be interesting to see what had transpired by the time of the 2006 review. Guaranteed loans were assisting in regard to the second economy and the contribution would become clearer as matters developed.

In regard to bank charges, Mr Mahlangu noted that there was a commission dealing with submissions ongoing at present, and there would in due course be recommendations on how best to move forward.

Mr I Davidson (DA) asked how the companies were rated, and whether there were different considerations under each component. He wondered how, for instance, a company that was high on employment equity but low on procurement equity would be rated.

Mr Godongwana referred back to the seven elements mentioned earlier in the presentation and stated that each was weighted in a certain way and the score for each was then aggregated across all areas to reach the final figure. One of the challenges was that different sectors with different Charters sometimes applied different weightings. This would be something to be discussed further with dti as the Charter moved forward.

Mr Cas Coovadia added that significant weighting was attached to economic empowerment issues and to what contributed meaningfully to improvement of lives, which must mean jobs and opportunities.

Mr Davidson was also concerned about skills development. He asked how the targets matched to the huge skills shortage. He wondered if the targets were realistic, and whether in attempting to meet the targets there would be an unwitting drop in standards if the correctly skilled professionals were simply not available.

Mr Mahlangu stated that training was an integral part of meeting the targets. FSCC was aware of the skills shortages but hoped to address them through training. The figures already indicated that those firms who had achieved good transformation had spent a high figure on training, so there was a proven correlation between investment and outcomes.

Mr Godongwana added that the FSCC had noted in its original report that if more resources were not put into skills development, this would result in a situation where the same skills were merely being circulated in the marketplace without the skills base being strengthened, and that the existing skills would become too expensive. It was possible to correlate employment equity with development of skills.

Mr Y Bhamjee (ANC) noted that most of the targets were stated in terms of percentages, and he wondered if this was a true reflection of progress, as he thought it might be easier to comprehend numbers.

Mr Bhamjee asked that FSCC set out the long term and short term strategic plan so that the Committee could engage to take matters to a higher level. It was difficult to see exactly what had been achieved, and the Committee also needed more clarity on the challenges in order to address them.

Mr Godongwana added that this was the first report that FSCC had presented and so it was necessary to take an overview. More comprehensive comparative information would be included in subsequent reports and the progress path would be clearer.

Mr Bhamjee commented that some variables would be measurable and others not. He still suggested that FSCC should work out a strategic plan and set certain targets to it, to be able to see precisely what was met and what was not.

Mr Mahlangu replied that the targets set out would be reviewed in 2008 to check whether they were still relevant and at the same time there would be a projection for 2014, which would be in the form of strategy planning. In regard to the comments on the targets he said that the Charter targets had been set out, and the figures given for 2005 was in fact comparing the targets to what had been achieved. He said that perhaps it might be useful to give the figures when the FSCC began to operate as a further comparison and FSCC would see if it could provide that further information.

Mr Mnguni asked how FSCC was dealing with the problem that some institutions were experiencing with the Preferential Procurement Framework Act, saying that the requirements were actually acting to their disadvantage.

Mr Ismael Momoniat, Deputy Director General: Economic Policy, National Treasury said that there was more to be done to lower the cost of doing business for small and medium enterprises. A plethora of policies applied, and National Treasury and dti had discussions to try to find ways of making the business environment more user-friendly for small businesses. It was necessary to do an audit to try to identify all the barriers. There were already some incentives and tax relief, but other issues must also be addressed. Although he did not deal with procurement, he said that National Treasury was trying to measure the impact of the legislation in this regard. On the one hand a uniform system would assist entrepreneurs but on the other this created some attendant costs. If there were too many sector-specific issues this would complicate the business environment. National Treasury was concerned to try to reach a balance and find a monitoring system that would not undermine growth targets.

Mr Mnguni asked whether FSCC collaborated with the Black Management Forum (BMF), and whether FSCC targets were aligned to those of the BMF.

Mr Sello Moloko, Member of FSCC and President of the Association of Black Securities and Investment Professionals (ABSIP), said that FSCC was passionate about skills development and employment equity. There was a close relationship with the BMF and other aligned organisations and engaged fully on issues of transformation. FSCC did not only play an “activist” role but also tried to engage with the sector to try to find ways of helping, particularly in view of the dearth of skills in the sector. FSCC would engage with institutions and ask whether they would support certain programmes that had been devised.

Mr Johnson asked that an indication of the finances be set out in the next Annual Report. He also asked for clarification of the terms of office of the Board, and pointed out that there seemed to be a typographical error. It was confirmed to him that the Principal Officer had been appointed in October 2005.

Dr van Dyk asked whether there was any indication what type of training was accepted as “skills development”, and whether there was any evaluation of the training.

Mr Godongwana stated that FSCC had measured the skills spending and not the quality of the skilling. It was up to the specific sector and its institute to define what it would regard as suitable skills. FSCC merely asked whether the skills were core to the sector and what was spent.

Ms Rojie Kisten, Member of FSCC and Western Cape President of ABSIP, added that although the 2005 reports had measured the total skills spending, there would be merit also in looking to ensure the right interventions at the right level. Weighting was another issue to be considered, and there was a distinction between core skills, scarce skills and critical skills.

Mr Mnguni asked if FSCC had any views on how to improve direct investment in order to be more globally competitive. He noted that many BEE businesses struggled in the first few years and many closed as they were not able to make sufficient profits. He asked if FSCC had any proposals as to other models for BEE that would assist people to stay in business.

Mr Godongwana stated that FSCC was aware of some of the studies that had been conducted but FSCC had not itself interrogated the issues. Dti was certainly looking at the structure of some of the BEE deals, as this did not fall directly under FSCC mandates. FSCC merely looked to verify whether companies were being empowered, and did not necessarily look to the mechanisms. A number of different structures preceded the FSCC coming into existence.

Mr T Vezi (IFP) asked whether the maxim of “Once empowered, always empowered” was the correct way to proceed.

Mr Godongwana stated that he could not express a personal view; this maxim was in the Charter and FSCC would use this high water-mark principle. He noted that once black people’s value had been realised, they must be retained in the financial services sector, and he commented that an empowerment company would have to draw the distinction between making good profits for black shareholders and not jeopardising the Charter’s principles in the long term.

Mr Moloko stated that he held a personal view that was not necessarily aligned to the FSCC and the Chairperson asked him to share it. Mr Moloko had some difficulty with the maxim “Once empowered, always empowered”. To him, it suggested that empowerment was the ultimate personal goal, and once that was achieved there were no further challenges, and no necessity to continue to strive for empowerment for all subsequent generations. He feared that the first beneficiaries of empowerment might “cash out” and the empowerment programmes would cease. He believed that it was necessary to explore a number of different possibilities and to try to decide when –and if – empowerment initiatives should cease, what was “sufficiently empowered”, and to look at broadening the wealth base, rather than concentrating wealth in the hands of a few.

The Chairperson thanked the presenters, commenting that the debate on transformation cut across all sectors of the economy, and FSCC was ideally placed to take the debate head on.

Other Committee business
Committee members discussed the draft programme for 2007, previously circulated, and agreed that any changes could be raised during the Strategic Planning Workshops from 29 to 30 January 2007.

The Chairperson noted that the forthcoming Study Tour had been scheduled for early January. The Tour would take place in the United States as it had been logistically impossible to try to arrange for a tour in other African countries. The purpose was to garner further information in preparation for the deliberations in March 2007 on the Cooperative Banks Bill that was being prepared by National Treasury. It was agreed that the two DA Members would attend, and seven ANC Members, which should account for all active serving Members. It was agreed that there would be a briefing by National Treasury on the Bill during the morning of the outbound flight so that Members had a good background for the Tour.

The Chairperson tabled and read out the Draft Report of the Committee on the progress of the Special Pensions Act, which had been considered the previous week. There were some grammatical changes suggested. Mr Davidson and Mr Bhemjee made suggestions on changes to the wording of the Resolution, particularly as it related to the November 2005 Resolution. It was agreed that the Report would be altered by numbering the paragraphs. After some discussion whether the Committee should specifically recommend to the Leader of Government Business that the initiatives should address training and re-skilling of the under-35 age group rather than pensions, it was agreed that the wording should not be too prescriptive. It was agreed that the Leader of Government Business should be asked to provide feedback on the adoption of the November 2005 Resolution by this Committee, with particular reference to the coordination and implementation of programmes addressing certain issues. The amended wording was approved, and it was resolved that the Report would be debated that afternoon in Parliament.

The Chairperson thanked Members for their dedication to the Committee and their support to him as Chairperson. The meeting was adjourned.

 

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