Financial Services Board Annual Report 2006/07: briefing

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Finance Standing Committee

22 October 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
23 October 2007
FINANCIAL SERVICES BOARD ANNUAL REPORT 2006/07: BRIEFING

Chairperson:
Mr N Nene (ANC)

Documents handed out:
Financial Services Board Powerpoint presentation
Financial Services Board Financial Statements presentation
Financial Services Board Annual Report 2006/07

Audio recording of meeting

SUMMARY
The Financial Services Board briefed the Committee on its Annual Report 2006/07. It covered the most important issues handled during the year, including secret profits made by the Pension Funds Administrators, curatorship of Fidentia and related entities, pension funds surpluses, which had resulted in 23 prosecutions, and ongoing apportionment of pension fund surpluses. There had been implementation of the Financial Advisory and Intermediary Services Act (FAIS), pension fund adjudicator rulings, regulations on capping of commissions, a discussion paper on changes to the business model for insurance projects, and listing of the Johannesburg Stock Exchange following demutualisation. The strategic objectives were long term in nature, and were detailed in the Annual Report. Challenges include development of management and employee skills, ensuring continuing relevance of the regulatory framework, the FSB being subjected to two international reviews, benchmarked against international standards, and forthcoming proposals for an administrative sanction process. Transformation and the Financial Sector Charter issues were of particular relevance. The financial statements were tabled, showing a rise in income and a net surplus of R61 million. Post retirement medical aid liabilities were at R15.4 million. Accumulated funds would be allocated to the different industries, as shown in a separate table, The accumulated surplus would be put towards next year’s budget, funding capital expenditure, recoupment of the FAIS and FAIS Ombud accumulated deficit, and short term working capital.

Members raised questions on the models for risk-based supervision, outsourcing of inspections and safeguards imposed, the difference between on-site reviews and inspections, the insolvent situation of the Road Accident Fund, prevalent inducements and the rulings on them, and how the budget and statements were reflecting payments to the two statutory bodies. Further questions related to the levies and their basis of calcuation, the calculation of the rebate, employment equity and disability targets, the communication strategy of the Board, and the success rate of prosecutions. Members felt that the Strategic Plan was too vague and that the Committee should be placed in a position to compare the strategic plans with the achievements, and should receive quarterly results. Other queries related to consumer education, the stakeholder surveys, the structure of the balance sheet, particularly the reserves, and the limits on these reserves, the salary increases and performance bonuses, staff retention programmes, the three dismissals, and disciplinary issues against institutions.

MINUTES
Financial Services Board (FSB) Briefing

Mr Rob Barrow, Executive Officer, FSB, noted that a number of important issues had been handled by the FSB during the past year. These had included the investigation into secret profits made by the Pension Funds Administrators, and a number of matters had been concluded while one was still being dealt with. The situation had been handed over to the National Prosecuting Authority (NPA). The curatorship of Fidentia and related entities were also still under investigation. Fidentia seemed to have been fraught with a number of malpractices, and there were likely to be significant capital losses. The Ovation entity was not owned by, but managed by Fidentia, and its capital losses were not likely to be material, other than in relation to the Common Cents cash pool. A number of legal issues surrounded both the Ovation and Fidentia curatorships. The curatorships of a number of pension funds historically had schemes whereby the pension fund surpluses were effected back through the "Ghavalas" option. There were 23 prosecutions arising from this. The prosecution was driven and funded jointly by the NPA and the FSB. At the same time the Curator was seeking to recover funds from various entities that benefited from the surpluses. Apportionment of pension fund surpluses was ongoing, and involved around 6 500 apportionment schemes, of which about 600 had surpluses. Around 6 000 were still awaited. Those who had not submitted were being referred to tribunals. This also necessitated an amendment through the Pension Fund Amendment Act 2007 to close the loopholes.

Significant regulatory issues included the implementation of the Financial Advisory and Intermediary Services Act (FAIS), bringing a number of new entities into the net of management. About 15 000 applications were submitted and 14 000 licences issued. A proper supervisory framework was being put in place, based on a risk-based approach. Obtaining and training staff had been a challenge, but this had been resolved successfully. The pension fund adjudicator rulings were dealt with. The Statement of Intent had been implemented and regulations issued. These had included capping of commissions. A discussion paper would be giving rise to significant change to the business model for distribution of insurance projects. The listing of the Johannesburg stock Exchange (JSE) following on demutualisation had posed challenges, but after listing the FSB regulated the JSE, and would monitor the ongoing trading in their shares and ensure that there was no market abuse of their own shares. This was a similar model to that used elsewhere in the world.

Strategic objectives were set out in detail on pages 112 to 115 of the Annual Report. All objectives were long term in nature. The strategic plan had been revised and simplified in the current period. An independent stakeholder opinion survey had shown around 72% satisfaction with the FSB delivery and mandate.

Challenges for the future included development of management and employee skills. Currently 364 staff were employed, and this would probably rise to 420 by the end of the current year. FSB would have to ensure that the regulatory framework remained relevant. A Financial Stability Assessment Programme (FSAP) review would be conducted in the first quarter of the next financial period. FSB would also be subjected to reviews against the international money laundering and terrorism standards. Ongoing attention would need to be paid to the pension fund reform process. Standards would be benchmarked against international practice. The FSB would be continuing to enhance its supervisory enforcement structures. FSB was often not seen as effective, as most sanctions were limited to handing the matter over to the NPA for prosecution. The FSB had proposed an administrative sanction process, where non-compliance would be dealt with through a Tribunal, with membership independent of the Executives of the FSB, which should be able to impose stiff funds and name offenders. This would obviously not be appropriate for those committing fraud, and FSB would continue to assist NPA with its endeavours to prosecute white collar crime.

FSB continued to assist in the regions. It would be continuing to promote transformation, and currently the staff was over 74% black and 52% female. Broad based black economic empowerment initiatives were supported, with a strict supply policy being followed. It participated in Financial Sector Charter issues. Consumer education was also of importance, and the indications were that South Africa was ahead of other countries in this regard.

Ms Nosipho Molope, Chief Financial Officer, FSB, tabled the financial statements. The FSB was funded entirely from levies raised from regulated entities, and fees and service charges. Income had risen to R252 million, and operating expenditure was R203 million, leaving a net surplus of R61.4 million. She tabled an analysis of income and of expenditure, which included the levies. She noted that there was income of R1.9 million in fines and penalties, which were not included in the budget. The major expenditure was staff expenses, but there had been savings due to difficulties in hiring and filling posts. R14.9 million had been contributed towards the office of the Pension Funds Adjudicator (PFA), and a contribution of R10.8 million had been contributed to the expenses of the Office of the FAIS Ombud. Total assets were now at R191 million, mainly due to increases in cash and interest. Post retirement medical aid liabilities were at R15.4 million. Accumulated funds would be allocated to the different industries, as shown in a separate table. The accumulated surplus was to go to the budget for the next year, funding capital expenditure, recoupment of the FAIS and FAIS Ombud accumulated deficit, and short term working capital.

Mr Barrow indicated that despite the difficulties, FSB was in a good situation to face the challenges for the future. He commended his management team for their strong support.

Discussion
The Chairperson noted that the Annual Report on Friendly Societies had also been sent to the Committee. He noted that this was a significant part of the work of the FSB. He asked why this had been singled out.

Mr Barrow noted that the FSB in fact submitted a number of reports for other industries, and that the Friendly Societies was only one. The reports were submitted throughout the year and it was coincidental that this report had reached the Committee today.

The Chairperson mentioned this one simply because it had been sent to the Committee now. At some stage the Committee would have to find a way of dealing with these.

Mr K Moloto (ANC) noted that the core business lay in risk-based supervision, and that there were large amounts involved in long-term insurance. He referred to pages 17, 18, 23, 28, and 49 of the Annual Report. He asked what were the number of inspections, and what model was followed for risk based assessments. There seemed to be a low number of inspections in relation to the amounts involved. He asked also for the difference between on-site visits and inspections. Further, because of the workload, some of the responsibilities were outsourced. He asked how the FSB would ensure that the information was protected and all the people seeing the information were vetted properly.

Mr Jurgen Boyd, Deputy Executive Officer: Retirement Funds, FSB, noted that the FSB had introduced risk-based supervision in around 2004. Given its limited resources, and its responsibilities as regulators and supervisors of around 14 000 funds, it would have been impossible to attend to all supervisions on the historical compliance basis. The idea behind risk-based supervision was to continuously risk-weight each institution , and that would then inform the frequency of interaction between the institution and FSB. A low risk weighting would attract less attention from FSB than a higher-risk weighting. The FSB was in the process of various stages of the roll out and the idea was that once this was fully implemented, certain levels of risk would kick in.

In regard to the difference between on-site reviews and inspections, Mr Boyd said that most of the departments within FB had their own compliance and surveillance teams, responsible for conducting on-site reviews. Issues of fraud and corruption would be picked up from these reviews, and would result in more drastic inspection intervention.

There was a limited number of inspectors, and the resources at FSB had been fully utilised, with the result that some inspections were outsourced. The inspectors were appointed in terms of the Inspection Act, which had onerous secrecy requirements, and there had never been a problem around sensitivity of the information. The outsourcing was done to professionals, such as chartered accountants, who themselves were required to maintain high professional standards.

Mr Barrow added that the specific query raised related to outsourcing of computer forensics. The FSB did not have this capacity in house. When doing search and seizure, the computer experts would be required to download every piece of information, including deleted files, from the computers, using very sophisticated techniques. They had even recovered information from computers that had been dumped in a dam, and where a person had re-formatted the disk. This information was vital for forensic investigations.

Mr Moloto was interested in the underlying problems highlighted when doing the investigation into the Road Accident Fund.

Mr Barrow said that this was a difficult situation. The Road Accident Fund (RAF) was in effect insolvent. Steps had been taken to rectify the situation. The FSB could do no more than refer to the financial situation of the Fund. The question might well be asked why FSB should be required to supervise RAF, as it was not an insurance company.

Mr Moloto asked, in relation to page 43, what inducements had been picked up in the industry, and whether these were prevalent across the industry, or limited to a particular sector.

Mr Barrow said that the most common inducement in the market was the offer of a free cell phone with a signed contract. The legislation said that no inducements were allowed for insurance. A cellphone contract was a relatively short contract, whereas an insurance policy was a long term commitment that should not be swayed by inducements. The High Court had been asked to give a declaratory order on the issuing of loyalty cards as inducements. Over the years cash prizes had been found not to be acceptable.

Mr Marais understood that FAIS Ombud had not been budgeted for in the past, and asked whether this would be budgeted for in the future, or would be dealt with from the accumulated income.

Ms Molope noted that the budget did not reflect the levies, which was the reason for the disparity between budget and levies. The difference from the prior year reflected mostly the differences on the FAIS side.

Ms Molope added that the PFA and FAIS Ombud office had in fact been budgeted for. In 2006 the FSB had changed its accounting policy. Previously the payments were accounted for as loans in the Balance Sheet. Since 2006 FSB had reflected them in the financial statements, since it was required by legislation to fund these offices. At the time the financial statements were finalised, the budget had already been done. In future years the expenses would be reflected in the budget. There would be a tendency to budget higher on the FAIS Ombud.

Mr S Marais (DA) noted that the Financial Statements showed accumulated surpluses, and asked why this had occurred at this time. Not all income came from operating income, there was also a substantial increase in the levies, and he asked how this was determined, and whether members were satisfied with these levies, in light of the surplus.

Ms Molope noted that the average increase in levies was around 7%. The accumulated surplus used to include levies. The registration process used to be funded from own resources, so that there was no rebate of over recovery of levies. The over recovery arose from the fact that the FSB would base the budget on the then-current information on size of liabilities and assets, and raise invoices accordingly. However, during the year there would be adjustment of numbers of entities or size. There would inevitably be recovery over and above the budgeted figure, not because of levies being increased, but due to growth of the industry. In regard to accumulated services in the past year, there were 14 000 more entities, the cash flow had improved, and the FSB was able to rebate more than the budgeted amount back to the industries. It would rebate R23 000, and the levies budgeted for the 2007/08 year would be reduced by that figure.

The Chairperson asked how the rebate would be determined.

Ms Molope noted that the FSB would look to the different industries, and would rebate those with the larger surpluses.

The Chairperson noted that the policy did not allow for cross subsidisation.

Ms Molope said that whatever had been allocated to insurance would go back to the insurance companies, so there was no cross-subsidisation.

Mr Barrow added that the FSB had a detailed costing methodology, and could assess easily where there had been over-collection. Much of the increase and the over-recovery could be attributed to strong growth in the market. On realising that there was over-recovery, FSB would return it.

Mr Marais asked what the income from legal and other recoveries, and also sundry income, consisted of.

Ms Molope said that these were amounts recovered from the Directorate of Market Abuse. This related to insider trading cases, where FSB was permitted to recover costs of its investigation from the settlement. It was very difficult to budget for this, and the number of cases had dropped off. The balance of the money was distributed back to people who were active in the market, on the basis of a complex formula, as compensation.

Mr Marais referred to employment equity and non-discriminatory practices. He asked whether FSB was employing the 2% target of disabled, and, if so, where they were employed.

Mr Barrow noted that FSB was doing whatever it could to employ people with disabilities. Currently there was one blind actuary, who had been provided with touch computer facilities. The FSB had not achieved the 2% target. However, a number of the offices did not cater for those with physical disabilities. The new premises, which would be operative in 2009, would be disabled-friendly.

The Chairperson said that this target should in future be reflected in the strategic plan.

Mr S Asiya (ANC) noted that a number of issues were being reported to the NPA. He asked if there were successful prosecutions.

Mr Dube Tshidi, Deputy Executive Officer, FSB, noted that FSB had recently discussed whether it was doing enough to report on its successes, and concluded that it was not. It had also discussed whether to employ a public relations executive. The main focus in all cases was how to recover what the investors had lost. He took the point that this had not been reported on specifically, and in future a specific report on this would be given to the Committee. Whether or not recovery was possible, all matters were handed over to the NPA. It was unfortunate that the massive case load at the NPA resulted in delays, and this was another reason why enforcement tribunals were being mooted. The Security Services Act made provision for establishment of an enforcement tribunal, and although this was in place, it was limited to the areas covered by that Act. The FSB would be approaching this Committee, via National Treasury, to ask for an FSB-wide enforcement tribunal.

Mr Asiya noted that pages 112 to 115 of the Annual Report, whilst setting out the Strategic Plan, were rather vague. There were no specific dates. In addition the references to the Consumer Protection Department appeared to differ in the written report and the oral presentation. There were no targets set, and it was difficult to assess the measurable objectives.

The Chairperson noted that it was important that the Committee should be able to compare the strategic plans with the achievements.

Mr Barrow said that the dates and details of achievements were itemised in the strategic plans, and in future the FSB would be happy to gear future presentations around those. These issues were reported on rigidly on a quarterly basis.

Mr Asiya said that if the results could be forwarded quarterly, this would ease the work of the Committee.

Mr M Mbili (ANC) referred to page 19 of the Annual Report, noting that there had been difficulty in obtaining responses from the administrators on apportionment schemes. He asked what was being done to ensure that responses were received and the issues were addressed.

Mr Boyd noted that some of the legal matters and legal positions taken by the industry service providers, particularly in the Sanlam Pension Funds matter, led to the FSB having to approach this Committee for clarity and amendments. A number of surplus-apportionment matters had been held over, subject to the amendments going through. The FSB had gone back to the industry, and asked them to re-look at their surplus apportionments. It would hope to see an improvement in the submissions. The responsibility for submission rested with the Board of Trustees. The FSB had taken a decision to appoint specialist tribunals to attend to these matters, but the pool of members was limited, and this was quite a costly exercise. The Chief Actuary had been interacting with the industries to try to improve the submission rates. It was hoped that the additional powers given to the Registrar under the Amendment Act would assist. If the FSB were to penalise funds for non-submission, it would incur heavy costs that would be non-recoverable. Bargaining Council funds had been brought under Pension Funds, and this was also a further challenge.

Mr Barrow indicated that the ability to fine the administrator, rather than the Fund, for non-submission was only brought in this year. In terms of the previous legislation the fine was based on R30 a day. The new legislation gave powers to fine up to R5 million a day (which was set by National Treasury)

Mr Mbili asked for an update on matters reported on page 41 on Sure Curatorship.

Mr Barrow noted that the Sure Curatorship situation continued, and they had not yet met FSB requirements, therefore there was no justification for lifting of the curatorship order. This view was supported by the curator. In due course the FSB would like to see the business re-introduced into South Africa.

Mr Mbili stressed the need for time frames. This matter was supposed to be concluded in June 2007.

Mr Barrow said that management must satisfy FSB that it had competent people and the necessary capital to operate the business successfully in South Africa, failing which it would be put into final liquidation. The management of Zimri, the owners, still had to satisfy the FSB that if curatorship was lifted, the company would not then fall back into difficulties. The curatorship order was extended to October 2007 and was likely to be extended again to February 2008. The solution lay in the hands of the managers, not of the FSB.

Mr M Johnson (ANC) referred to page 29 of the Annual Report, relating to consumer education, and asked about the strategy for reaching out to the rural areas and the marginalised people without understanding of complex issues, who would be very vulnerable.

Mr Barrow said that the projects were listed in the Annual Report, under Consumer Education. The strategy was multi-faceted. It aimed to get better awareness into schools, through the Department of Education, which would assist in rural and urban areas. The Teacher Development Project sought to put limited resources into training the trainers, to get a multiplayer effect. That had been concentrated in rural areas, through teacher workshops, extensive distribution of booklets, and the like. The ComputerNet project was designed more for the urban areas, and would obtain a lot of exposure for limited cost. Rural areas were a focus of the FSB.

Ms N Mokoto (ANC) noted that she had never, in her area, seen any correspondence from the FSB, including at pension payouts. She asked how far it would spread its net, and the languages used.

Mr Barrow said that the consumer education booklets were produced in Sotho, Nguni and English. Resources were limited, but these were generally distributed with sponsorship, and African Investment Bank had been very supportive in distributing. It was hoped that wider distribution could be achieved.

Mr Asiya thought that this Committee should make a recommendation that the FSB should not be relying on sponsorships. He suggested that consumer protection and education should be specifically listed and accounted for in the budget.

The Chairperson noted that the financial service providers should have their own sections to deal with consumer education. In respect of Alexander Forbes there was an amount earmarked for consumer protection, but the impact of that earmarked funding had not as yet been assessed. This was a matter that would have to be dealt with at some point.

Dr G Woods (NADECO) noted that the first issue was that if FSB was competent and effective, it would create confidence in the industry. He asked if FSB believed it was both, despite the oft-repeated criticisms.

Mr Barrow said that FSB did believe that its markets had integrity, and it was contributing to macro-economic confidence. There had been failures, but it was impossible - as shown worldwide - to regulate to a zero failure rate. The measure was how quickly the failures could be identified. FSB would be measured against international standards next year, and he was confident that it would measure very well.

Dr Woods referred to the customer survey. He noted that 28% felt that FSB was not fulfilling its mandate. He wondered whether introspection was formalised, and what was being done about the dissatisfaction.

Mr Barrow said that it should be appreciated that FSB was not a commercial organisation and it was inevitable that those entities against whom regulatory action had been taken would give poor ratings to FSB. The 72% of people indicating satisfaction had rated their level of satisfaction at high levels. Only between 2% and 6% had reported perceptions of poor service across the various fields.

Dr Woods referred to investigations of secret profits being made by the administrators. He asked if it was possible to establish how far back this had gone, and whether amounts had been verified, to ensure that corrective action was taken.

Mr Barrow said that the practice seemed to have started in the mid-1990s, on the introduction of cash management systems within pension fund administrators. They had been traced back.

Dr Woods congratulated the FSB on achieving a clean audit. However, he wondered if the structure of the balance sheet was appropriate for the nature of the FSB. He believed it was positive to pay back the surplus, but noted that this would still leave high cash reserves, and wondered if this was appropriate for the FSB. He asked if FSB, being protected by law, was not too risk-sensitive or conservative. He noted that there was a spread of investments, and enquired what the policy was.

Mr Barrow said this was a valid question. He pointed out that although the reserves looked high, they represented six months only of operating expenditure. An entity such as FSB should be able to fund at least three to six months operating expenditure, since its income was not guaranteed. The investment portfolio contributed significantly. Some years ago, the Board had a commitment to provide post-retirement medical aid benefits, outside of the pension fund. Actuaries had calculated the liability at the time, and a portion of the reserves was earmarked for this liability. Because it was a long-term liability, the Board decided that the funds set aside were to be invested in a long-term investment portfolio. It was handled by an investment manager, who reported back on a regular basis, and had full discretion where to invest, so there was no danger of inside knowledge being used. FSB did impose some restrictions on the types of companies, and the percentages to be put into smaller companies, other restrictions on derivative instruments, and gave guidance as to how much could be invested outside South Africa. However, there was no influence by FSB as to the extent the investor could invest in bonds or equities. The policy was reviewed on at least an annual basis, to ensure it remained relevant.

Although the full amount was included in the reserves, about half was earmarked for the long term liability, and the assets were currently almost double the current value of the liability. The Committee was also asked to bear in mind the rebate of R23 million, which should rectify the next financial year, so the reserves in that year would go down if the budgeted revenue was correct.

Mr B Mnguni (ANC) queried the percentages of the accumulated reserves.

Mr Barrow noted that the accumulated reserves were 10%, by agreement with National Treasury. This was to be retained on the basis that there was not permanent capital in the Institute. This was the minimum to be retained. It would in effect serve the same purpose as share capital.

Mr Mnguni noted that the maximum of the reserve was listed in the report as 10%.

Ms Molope explained that the reference to the maximum of 10% was specifically in relation to a specified topic, and this percentage did not apply to the total reserves.

Ms J Fubbs (ANC) asked for clarity as to the reserves, and where the limits were being set.

Ms Molope noted that page 102 listed other reserves. There were contingency reserves, which was measured at a maximum of 10% of gross income (annual levy and fees). The discretionary reserve was used to fund consumer education projects. This was kept separately, as it consisted of the fines paid to the FSB. The general reserves were over and above that. There was no limit on the total.

Mr Mnguni noted that the Governor of the Reserve Bank would urge financial institutions to keep to the consumer price index in salary awards. He noted that remuneration of the top executives ranged quite widely above that of general staff. He wondered if this was in line with government policy, and asked how the remuneration committee had determined the remuneration for top executives, and how this equated to the objectives set out in the Strategic Plan. He asked how bonuses could be justified against the poor performance of the industry.

The Chairperson noted that performance bonuses were paid to the top 25% of performers. He noted that all executive committee (Exco) members were awarded bonuses. He asked how this had been determined, as this varied quite substantially as a percentage of the total remuneration.

Mr Tshidi noted that there was a remuneration policy, which dealt both with remuneration and performance bonuses. As far as remuneration was concerned, FSB, being an institution dealing with complex issues, needed specialised skills and therefore needed a basis for development and retention strategy. The remuneration policy aimed to pay market-related salaries, although it could not compete entirely with the market. Failure to pay at least at this rate would result in loss of skills to the private sector.

As far as the performance bonuses were concerned, the Board had suggested that 20% of top performers would be rewarded. Exco had negotiated successfully for bonuses for the top 25%. Because of the historical situation, the upper level of performers was mostly white, and Exco wanted, by increasing the percentage to 25%, also to catch those with upcoming skills, who would largely be black. The percentage would be reviewed as the racial levels were balanced out.

Mr Barrow said that the 25% referred to excluded executive remuneration, which was dealt with by the Remuneration Sub-Committee of the Board. Executive members were not involved in this committee.

Ms Molope added that there were annual increases, of about 6.19%, the exact amount dependent on performance. The increases were spread to achieve an average. In the 2006 year, Mr Barrow was appointed in July and the Chief Financial Officer’s post was created for the first time in August. The salaries therefore in this financial year were not for twelve months. There was also a saving in relation to the post vacated by Mr Barrow as it was filled only in May 2006. A comparison of the two years seemed to reflect a large increase, but the vacancies and part-year salaries must be taken into account. The basis of computation was the difference between the median of market surveys, and the performance at the next level. The differential between those two figures was multiplied to the extent to which the performance reflected achievement above the average. This formula was applied rigidly.

Mr Barrow said that his personal performance would be assessed by the Chairperson of the Board and Chairperson of the human resources subcommittee.

The Chairperson noted that some matters had not been mentioned during the presentation, and he asked for further comment why they were not raised. The Committee had previously engaged with the FSB in relation to a ruling by the FAIS Ombud, and he asked for an update on that.

Mr Barrow noted that page 28 of the Annual Report did contain the details. The FAIS determination had been issued in April, which was why it was not included in the Annual Report. The FSB had reported back on the situation and its position had not changed since its last report to the Committee.

Ms Mokoto noted that the Public Finance Management Act (PFMA) noted that a public entity without a Board could bring the executive authority to be the reporting authority. However, where there was a Board, the Board should be accounting to parliament. She asked whether FSB had confused this.

Ms Molope noted that FSB was a public entity with a Board. Mr Farrow was the accounting officer, although the Board was the accounting authority.

Ms Mokoto asked why FSB seemed sometimes to adopt a "hands-free" approach. She was concerned about the outsourcing, particularly of the core work. Ms Mokoto noted that at times FSB would allow for self-regulation by the industry, relying on international standards. She asked how this impacted on efficiency and on the FSB targets. She further asked what were the consequences on the industry.

Mr Barrow noted that inspections and the forensic computer investigations could be outsourced. FSB would try to retain as much as it could in house. The self-regulation by industry applied to the JSE and STRATE (Electronic Share Transaction) Central Depository, and Vehicle Standards Association (VESA). An internationally acceptable model (as used in USA) was applied. The decentralised regulatory approach was increasing in the USA, although European models were moving the other way to pure statutory regulations. Both models were accepted internationally. The key in both instances was effectiveness of oversight. The FSB oversight over VESA, Strate and JSE would exceed most regulatory authorities. He said that FSB certainly did not have a hands-free approach

Ms Mokoto heard that there was a great deal of poaching in the industry. The report had not spoken of any corrective measures, except to note that staff were being paid market-related salaries. That was not the only way to address the situation. She asked FSB to elaborate further on skills development or internships, and comment also on how this was related to those who should be entering the industry.

Mr Barrow said there were extensive staff retention programmes, including training and an externally-performed assessment of staff opinion. Similar to other professional organisations, the FSB was to a large extent a training ground. New graduates formed a large body of the staff, who would be assisted through further educational processes. It was inevitable that once they had trained, they would move out into the industry. The requirement to pay market-related salaries was a requirement of the Act, but the FSB simply could not meet the incentives that the private industry was paying.

Ms Mokoto asked about the three dismissals, and the reasons for them.

Mr Barrow noted that two of the dismissals were for fraud. The FSB had gone through the entire disciplinary process. Neither involved large sums of money. Both employees had appealed, but at the end of the day it was found that expense claims had been forged and petrol removed from internal vehicles. FSB had a zero-tolerance policy. The third dismissal related to someone who had absconded, simply failing to come to work.

Ms Mokoto asked about early warning signals and self-detection. The inspectorate division was reported as having conducted only 18 inspections. She asked what triggered the inspections; whether the FSB would initiate own inspections and how effective were the early-warning systems. She asked whether the FSB was really in charge of the industry. Furthermore, she asked if there was not some conflict because in effect the FSB was biting the hand that fed it by regulating the companies who were obliged to pay levies.

Mr Barrow said that risk-based supervision as described by Mr Boyd would often detect that some problems required deeper investigations, whereupon inspectors would be called in. The inspectors could also conduct search and seizure. Often inspections would be triggered by complaints from the public, and at the minimum an on-site visit would be conducted, to find out the background to the complaint. This would instantly raise the risk profiling. One of the reasons for the low number of inspections was the inordinate amount of time and resources directed to Fidentia, and even here there had been a need also for outsourcing.

Mr Barrow said that the FSB was not shy to bite the hand that fed it. There was no hesitation in dealing with the industry should it step out of line.

Mr M Johnson (ANC) questioned what was regarded as the norm in a stakeholder opinion survey.

Mr Barrow said that there was apparently no norm because FSB was so specific and individual in nature. Those doing the survey had commented that the results were very good.

Mr Johnson asked how to measure the success of consumer education.

Mr Barrow said that it was possible to spend a lot of money on consumer education and not know the results. FSB and national treasury were doing research how to go about effective measurement of educational issues. However, particularly if funds were being raised, it was necessary to try to get some measure points. Although he could not give an answer, consumer marketers were being asked to assist.

Mr Johnson asked whether there were plans to create offices other than in Pretoria. He felt that many complainants perhaps felt that they had nowhere to go.

Mr Barrow said that there were no plans. However, perhaps there was a need for some mechanism whereby complaints could be laid outside the commercial centre. This had been investigated by the Financial Services Ombud Schemes Council. He would feed these concerns back.

Mr Johnson asked to be enlightened on the extent of the enforcement problems and the success rate.

Mr Tshidi said that the enforcement tribunal was created under new legislation, and up to the present there had been one case successfully concluded and two were pending. These were larger cases, and would be more likely to give an indicator of success. This enforcement tribunal was not a court created by the Executive Committee of the FSB, and consisted entirely of independent people, chaired by a retired judge.

Mr Johnson asked why the FAIS Ombud office and PFA required the FSB to collect their levies and assist with expenses. He asked if there were other bodies that were independently running themselves, and, if so, how FSB would justify some being assisted and others not.

Mr Barrow said that this was really a matter of convenience, but it was prescribed also in the legislation.

Ms Molope added that the two were statutory schemes, whereas the others were voluntary schemes. The banking Ombud and long term Ombud were funded by the industry. The funding for FAIS Ombud and PFA was set out in the FSB Act.

Ms Fubbs asked about dismissals and recruitments. A table in the Annual Report indicated that junior management and professional staff had filled 42 vacancies. However, in this same band, there were 19 resignations. It was difficult to assess what the status was at the time of this report, and she asked what positive or negative impact the recruitment had had.

Mr A Singh (DA) felt that 13.9% of resignations was very high.

Mr Barrow noted that there were difficulties with recruiting the right type of people, and FSB relied heavily on own-development. The majority of new recruits were new graduates. A large number of interns were taken in. Staff turnover had been very low for the previous years, and it suddenly rose to 13.9%, but the FSB did not believe this was anything to worry about. Too low a staff turnover would create blockages, where people could not move through the ranks. Many of the people who left were not top performers, nor in the higher ranks.

Ms Fubbs said that although the Strategic Plan and Annual report had referred to skills and profiling, there was nothing in the Annual Report about the long term intentions - such as taking in a large batch of people and encouraging them to do other courses. Secondments were referred to, but she would like to see a medium to long term plan.

Ms Fubbs noted that the response to the levy question had related to the surplus, which was a result of the economic climate. However, it was not specified what FSB would do if the economic climate was not so healthy.

Mr Barrow noted that the accumulated reserves were there precisely to cater for the bad times.

Ms Fubbs asked for a more definitive response on exactly how the levies were calculated. If the climate were to fall, was FSB expecting to have a deficit.

Mr Barrow said that there was no standard model but he could provide the calculation to Ms Fubbs.

Ms Molope explained that the calculations would be based, in respect of pensions, on numbers of members; in respect of the long term market would use liabilities; in respect of short term would use premiums; in respect of capital markets would use bond exchange rates. The JSE fixed amount was based on operating requirements. The Directorate of Market Abuse would work out resources required and propose that to the industry. FAIS had several categories; with a base levy plus the number of key personnel. The bigger entities would use base levy, key personnel and also management. Each of the levies would be worked out, based on operational requirements,

Ms Fubbs noted that the large numbers being employed was intended to address the need for staff to do the complex work. She asked how long recruitment would take. She also enquired why people were not contracted in, in view of extra funds having been available. If there was insufficient space in the building, she asked why FSB was not looking at another building.

Ms Molope noted that FSB had looked for new offices where all staff could be housed together and a new building was being developed.

Mr Barrow said that the number of employees was hoped to reach 420 by the end of the current financial year, but he thought that 400 was probably more achievable. The recruitment would depend on being able to find the right people who met employment equity policies and competency requirements. Recruitment procedures and policies were very rigid, and everything possible was done to try to bring in suitable staff.

Mr N Singh (DA) said that the perceptions of members of the pension schemes around the surplus were that FSB was not looking adequately nor timeously at the surplus apportionments. He asked what assurance there was that any interest lost would be duly repaid. He thought that FSB should make public announcements on the result of the investigations, so that members and families would know what to expect.

Mr Boyd agreed that FSB had operated in a fairly conservative way. Most complaints emanated from members having been fed incorrect information. They would instantly blame FSB in situations where there was, perhaps, an ongoing query process. FSB could correct misperceptions when approached directly by members. Interest accrual was covered in the most recent Amendment. Some pension funds had taken a legal challenge, and this was being dealt with. Funds were compelled, if they had a surplus, to pay a fund return.

Mr Moloto noted that the market capitalisation was in the trillions, whereas dematerialised equities were shown as very much lower, He asked why the worldwide trend seemed to be the opposite in South Africa.

Mr Moloto had understood that it was an offence to present misleading information under the Securities Act. He asked if any such cases had been encountered under Section 73of the Security Services Act.

Mr Barrow said that the difference lay in foreign registers, and on dual listed stocks. He could not comment whether the level of dematerialisation was an international norm, but believed this was in the international ballpark. Most countries, except USA and UK, did require securities to be fully dematerialised.

Mr Barrow said that a number of investigations had been conducted on misleading information. When FSB investigated issues, it would not identify the companies as this could cause harm to share prices. There were three matters that were likely to proceed through to the enforcement committee process under the Act. It was hoped that this would be effective in curtailing misleading information. Individuals and directors could be liable either if they did know, or should have known, that there was a false report.

Mr Johnson asked where to find the mission and vision of the FSB. He was still not happy with the answer on consumer education. In relation to establishment of "branch offices", whether for lodging of complaints or other business, he said that FSB should look into regulation. More facilities must be provided. Calls through the call centres were not sufficient. He would like to get a full cost of establishment of a unit elsewhere.

Mr Tshidi noted that the vision and mission were set out on page 2 of the Annual Report.

Mr Marais asked for clarity on points mentioned under performance. He also asked for further explanation on the review of the performance strategy, following media coverage. He did not believe it was correct to say that targets had been met if insufficient numbers of disabled people were being employed.

Mr Barrow said that the corporate governance evaluation was currently being done. The communication strategy was being finalised. The media coverage link related to the issues resulting from the fall out and curatorship of Fidentia. Mr Barrow took the point in relation to the disability issues.

The meeting was adjourned.

 

 

 

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