Stock Exchanges Control Amendment Bill; Financial Services Board Annual Report: briefing

Meeting report

FINANCE PORTFOLIO COMMITTEE
26 September 2001
STOCK EXCHANGES CONTROL AMENDMENT BILL; FINANCIAL SERVICES BOARD ANNUAL REPORT: BRIEFING

Chairperson: Ms Hogan (ANC)

Relevant Documents:
Stock Exchanges Control Amendment Bill [B75 – 2001]
Powerpoint Presentation by Financial Services Board:
- Part 1
- Part 2
- Part 3
- Part 4
FSB Annual Report of the Registrar of Pension Funds: email [email protected]

Financial Services Board website: http://www.fsb.co.za/

SUMMARY
The Committee was impressed with the Financial Services Board annual report and commented that it was more informative than in the past. Issues arising out of the meeting were the position of the Pension Funds Adjudicator and the problem of the bottleneck of contravention prosecutions once sent to the Director of Public Prosecutions. The Committee is to be kept updated on the matters of unclaimed benefits and funeral operators. Treasury was asked for an update on the review of the retirement fund industry.

The FSB briefed the Committee on the Stock Exchanges Control Amendment Bill which amends Section 40 of the main Act. Telkom wants to use a price stabilization mechanism at the time of listing. Without the amendment the price-stabilising mechanism would amount price manipulation in terms of Section 40. The deadline for public comments on the Bill is 8 October 2001

MINUTES
Financial Services Board Annual report
The FSB annual report was presented by the following persons:
Jeff Van Rooyen Executive Officer
Rob Barrow Deputy Executive Officer: Financial Markets
Lourens Botha Head: Insurance
Dube Tshidi Head: Pensions
Sammy Mohlaoli Head: Consumer Education
Also present was Jeremy Andrew.

Employment Equity
Mr Van Rooyen discussed the FSB personnel composition and noted that there are 80 males and 93 females. The aim was not to bring in more people but to rather develop those who are there. The emphasis is therefore on upward mobility. There are no black people on Grade A but there is one in the pipeline. At the moment there are three black people in Grade B and not 1 as reflected in the slide. To deal with the Financial Advisors Intermediary Bill the FSB will have to employ about 15 more people. Top management has been restructured because of the significant growth in the Pension Fund and Insurance industries. Two positions of Deputy Executive Officer have been created. One more will be created for market conduct.

Reserves
The current assets of the FSB is R30 million in cash and cash equivalents. The Reserves stand at R15 million. R9,5 million being contingency reserves and R5.8 million being a discretionary reserve. The discretionary reserve arises from fines and penalties collected by the FSB. These funds are not used for operational expenses and the FSB has to apply its mind on how to us it. R450 000 has been spent on consumer education in the past year.

The FSB had R12 million in surplus in the year 2000. R7.3 million was given back to industry as a rebate. For the current year there will again be a surplus, so as a rebate, the levies due by industry will be set off against the surplus. The FSB is the only regulator to give rebates.

The FSB is the first regulatory agency to disclose the salary of the executive officer. The salary is market related. Market research is done to get to a salary range. The FSB needs to pay market related salaries to attract skilled professionals.

Mr Van Rooyen concluded by saying that the FSB is in a healthy financial position.

Discussion
Ms Joemat asked about the budgetary implications of the Financial Advisors Intermediary Bill.

Mr Van Rooyen said that it will cost about R10 million per annum to implement. The cost will be recovered from those falling under the FAIS Bill.

Mr Mofokeng says that there is a big jump in salary from one year to the next and wanted to know the justification for this.

Mr Van Rooyen said that he had replaced the former executive officer. It was negotiated that he would join the FSB at the same salary that he was earning in his previous job. Again the importance of market related salaries was emphasised. The previous year staff turnover was 80%. This year it is down to 5%. Salary was not the only factor in keeping employees happy. The FSB places a strong emphasis on development and training.

Ms Hogan asked about the effect of the Financial Intelligence Centre Bill since the FSB will play a regulatory function.

Mr Van Rooyen said that he was not aware that is would be the responsibility of the FSB.

Ms Hogan advised that initially the Financial Intelligence Centre was given the responsibility of ensuring compliance with the FIC Bill. Subsequently the responsibility was given to the FSB. The rationale behind the change in policy was that the FSB was a regulatory body and that another one was not needed.

Mr Van Rooyen replied that the FSB would work out a way to cope with this extra function and recover the cost in the same way as with the FAIS Bill.

Financial Markets, Unit Trusts and Insider Trading
Mr Rob Barrow presented this section. He pointed out that the JSE figures quoted in the document are to the end of March. At this stage there is no significant withdrawal form our markets by foreigners as a result of the attacks on the US.

There has been a change in governance structure of the JSE. An independent board of directors has been appointed. This is an encouraging development and seems to be working well. It is the last phase in the change from the past where the board only did what benefited them and nobody else.

The Stock Exchange is under threat of globalisation and therefore a joint venture with a strong exchange is welcomed. The first phase of the joint venture will involve technology sharing and the second phase will involve a joint board. The JSE board will therefore sit on the board of the London Stock exchange.

Bringing in line listing requirements with international standards is important. One area where this country lagged behind is with the clearing and settlement period. The period in SA is 6 days which is too long. At the moment the period has been decreased to date of trade plus five days. (T+5). The objective is to bring it down to T+3. New exchanges with modern technology can do this in two days.

Mr Barrow said that the Bond exchange was in a strong position and that he believed that it would merge with the JSE.

The South African Futures Exchange (SAFEX) experienced good growth in the previous financial year. This was due to the move to option rather than futures. Agricultural matters performed exceptionally well.

An additional 51 investment managers were licensed and foreign investment managers were approved to operate in SA because their own regulatory rules were sufficient.

The performance of Unit Trusts was not that great - probably because there are 358 different funds. Foreign schemes were continued to be approved and at the moment there are 286 foreign schemes marketed in SA.

There were 107 investigations into insider trading. One criminal action must be completed and is somewhere in the justice system. R2.2 million was distributed to claimants. The FSB is currently involved in big cases and in the near future, summons will be issued in relation to funds totaling R200 million.

Discussion
Prof. Turok asked if the FSB was not a bit soft on insider trading and also just generally because there is much fraud but few convictions.

Mr Van Rooyen pointed out that the FSB matters get referred to the Director of Public Prosecutions. The DPP has a problem with capacity because the matters are complex. The FSB has discussed with the DPP about how the FSB can use its own resources to bring matters to finality. Recently the FSB has employed two former state prosecutors to work closely with the DPP. Mr Van Rooyen conceded that what they had at the moment is not sufficient.

Mr Barrow added that a substantial number of cases are handed over and nothing has happened. Contraventions can either be dealt with by civil action or criminal prosecution. Civil action is working well because the burden of proof is lower. There will not be as much success in the criminal courts because of a higher burden. He believes the civil sanction is working and is a deterrent.

Insurance Industry Report
Mr Lourens Botha noted that at the end of March there were 161 Insurance Companies registered: 68 long term insurers and 93 short term insurers.

The financial strength of the long term and short term insurers is good:
- 805 of long term insurers have a CAR cover of 2 X. Only 1 X CAR cover is required.
- 76% of short term insurers have a surplus asset ratio above 50%, the minimum requirement is 15%.

New regulatory developments were outlined:
- The whole industry must now provide quarterly returns to provide the FSB with an early warning system as to what is happening with a company. Unregistered operators are being rooted out but there remains a problem with the prosecutions.
- The FSB is consulting with the Medical Schemes Registrar to get a clear demarcation of the two industries.
- The FSB is changing its focus to on site visits because it is difficult to analyze financial figures after twelve months. With on site visits up to date information can be collected.

Special projects of the FSB include solvency norms and outsourcing. The FSB is looking at other ways to calculate the solvency norm to increase protection. It is common that companies outsource so the FSB needs to know how the principal company exercises control over the conduct of the company doing its work.

Mr Botha concluded by saying that the FSB is constantly looking at ways of making supervision more cost effective.

Discussion
Ms Hogan asked for a comment on the funeral operators.

Mr Botha said that there are many unlicensed funeral operators and this needs to be rooted out.

Ms Hogan said that she had been made aware that banks are involved in deducting the premium from the amount pensioners receives as a monthly pension into their account.

Mr Barrow advised that this would now fall under the FAIS Bill because the Bank is acting as an intermediary. He pointed out that it would be incorrect to exempt banks from the ambit of the FAIS Bill especially where this kind of activity is concerned.

Consumer Education
Mr Sammy Mohaoli said that laws are not enough to protect the consumer in the Financial Service Industry. They need to adopt a partnership approach in teaching consumers as this increases the resources available to educate, The FSB has invited representatives from government, (GCIS, Trade and industry, Education), Ombuds offices and the insurance sector to develop a strategy. This large team came up with three main streams for delivery.

- There are many unscrupulous operators in the communities who prey on the vulnerable and this is one of the delivery areas.

- The second area is business because they need their help to educate the lower end of the market. Business has a duty to help because it is their products that are sold by the unscrupulous operators.

- The third area is formal education. National and provincial departments of education are involved to see how financial management can be brought into the curriculum.

The Consumer Education department is structured in a way that allows each target area to get individual attention. There are managers of community relations, formal education and business relations. Further, there are consultants that have dedicated tasks to perform in each area.

Consultants for community relations consult with provincial consumer affairs offices, regional business associations, unions, NGOs and schools.

The consultants for formal education consult with the departments of education.

The consultants for business consult with the various role players in the business sector such as industry bodies, banking etc.

Mr Sammy Mohaoli noted as an example that Old Mutual presents market theatre to communities to teach them about financial management.

Ms Hogan welcomed this initiative and said that the multi-prong approach is the correct way to go but questioned what the role of the media was.

Mr Mohlaoli replied that the SABC provides 30 minutes of air time per week on African language radio stations. Regional and community radio stations are very willing to give air time to help in consumer education.

Retirement Fund Industry
Mr Dube Tshidi stated that the total assets of the industry are approximately R644 billion. There are 16 000 retirement funds registered with the FSB. The total membership is 9.1 million, 7.8 million being active members. 1.3 million are pensioners, deferred pensioners and dependents. Total contributions are R48 billion and this figure is 11.4% less than previous years because many funds have been liquidated. The total benefits paid out are R62 billion. These figures are based on 1999 statistics.

It is the trend that funds are moving into umbrella schemes and it might be time that the FSB revisits the whole concept of such schemes.

Regarding supervision, the FSB had introduced member-elected trustees into the management of retirement funds. This was not easy because of the level of skill of the member-elected reps. It is therefore important that these representatives be trained because in the future, responsibilities of the FSB can be transferred to the trustees. To catch up with modern trends, the FSB is developing a system whereby funds submit their rules, annual financial statements and valuations electronically. This system will save time and is less work. The system is currently being tested.

The FSB wants to improve fund governance. This will require improving the skill levels of trustees and guiding them away from conflict of interest situations.

The Pension Funds Act is old. There has been many changes since 1956 but a holistic review of the Act is needed. The FSB is currently looking at the compulsory provision of pension and compelling members to preserve what they have contributed to the fund. Other technical amendments have also been made. The more substantive amendments being worked on include Surplus Assets and forcing companies to track down the rightful owners of unclaimed benefits.

To enhance the regulatory function of the FSB, there are on-site visits to fund administrators to check administrative systems and that contributions are actually paid to the administrator and contributions are properly allocated to individual members. This facilitates in identifying problems early.

Audit-exempt funds do not need to submit audits. However all funds should be audited so that the management is in full control and has knowledge of what is happening in the fund. As a result the FSB is going to withdraw this exemption. But all funds are not the same size so FSB will have to find a way to deal with smaller funds where it is not cost effective to demand an audit.

To keep up to date with international trends, the FSB is a member of the International Network of Pensions Regulators. SA and Zambia are the only African countries that are members. At the past two meetings Zambia did not attend. SA therefore has a duty to help her neighbours develop pension regulation and financial infrastructure. SA has 40 years of experience to draw from.

Discussion
Ms Joemat asked what the plan was for unclaimed benefits.

Mr Tshidi replied that the funds are not doing much to track down people. The FSB felt that intervention was necessary. It was decided that information needs to be centralised and in this regard the FSB requested the funds to supply information on how much money was unclaimed and how many people it involved. The response was poor. Regulations were drafted to speed up the process. The funds will be obliged to hand over the information. The FSB found that the unclaimed benefits were invested and the fund administrators benefited from the investment. The regulation therefore states that the interest goes to the beneficiary. It is a long term view that all the unclaimed benefits be centralised and a new management board be appointed with the sole aim of tracking down the beneficiaries.

Mr Mofokeng (ANC) wanted to know the value of the unclaimed benefits.

Mr Tshidi said that from the figures he had received, there were unclaimed benefits to the value of R540 million. This amount will obviously increase.

Mr Nene (ANC) asked what happens to unclaimed benefits if a fund is liquidated.

Mr Tshidi replied that it remains in the fund because at the end of the day the FSB is the only body that can terminate the fund.

The Chair concluded that the Committee now had a better grasp of what the FSB was doing. She asked for a report on the current situation in the Office of the Pension Fund Adjudicator. She noted that she would talk to the Justice Portfolio Committee chairperson about the problems with the prosecution of contraventions. She requested updates on the funeral operators, unclaimed benefits and the review of the retirement fund industry.

Stock Exchanges Control Amendment Bill: briefing
Mr Barrow (FSB) briefed the Committee on this Bill.

The Bill amends Section 40 of the main Act and is in response to Telkom’s pending listing. Telkom wants to use a price stabilization mechanism at the time of listing. The amendment is needed so as to avoid the mechanism amounting to a price manipulation in terms of Section 40.

A price stabilizing mechanism promotes an orderly after-market following a new issue of shares. It is done through an over-allotment of shares with a greenshoe option.

A greenshoe option is a call option to purchase up to 15% of the base offer size. Normally only for a limited period of 30 days and if price falls.

The procedure is open and there must be full disclosure.

Telkom employees will be issued shares. Normally there is a rush to sell these shares. Such a rush could cause the share price to fall. The mechanism prevents this. It is the appropriate mechanism to manage the initial period after listing. It is beneficial to the issuer and the investor and many countries do it including the US and UK. Old Mutual used it when listing in London.

Regulation does exist in that it is done in terms of the listing requirements of the JSE and the listing requirements are drafted in consultation with the Registrar.

There were no questions or comments.

Ms Hogan said that the deadline for public comments is 8 October 2001 and the Bill can only be dealt with thereafter.

The meeting was closed.