SUBMISSIONS TO THE PARLIAMENTARY PORTFOLIO COMMITTEE
RE
THE PRACTICE OF “BULKING” IN RELATION TO THE BANK
ACCOUNTS OF REGISTERED RETIREMENT FUNDS
Disclaimer and confidentiality warning:
This document is subject to copyright and may not be
reproduced in whole or in part without the written permission of NBC Holdings
(Pty) Limited (“NBC”). No warranty,
expressed or implied, as to the accuracy, timeliness, completeness or fitness
for any particular purpose of any of the information contained herein is given
or made by NBC in any form or manner whatsoever. NBC will accept no
responsibility of whatsoever nature in respect of any statement, opinion or
information contained in this document.
The sole purpose of this document is to share information with members
of the Portfolio Committee on Finance on the practice of “bulking” at their
written invitation to do so and for no other purpose. The contents hereof, in
so far as they may or may not affect NBC’s client funds, is a matter which has
and continues to be given our fullest attention and has and continues to be
taken up and discussed in detail directly with the trustees of these
funds.
Introduction
and context of submissions
1.
“Bulking” of bank
accounts refers to a practice in the retirement fund industry whereby –
2.
Without “bulking”,
individual retirement fund cheque accounts attract nil or very little interest
on their own. The higher interest rates
negotiated with the bank are intended to benefit all individual retirement
funds forming part of the larger group whose cash amounts would normally not
attract any interest at all.
4.
NBC Holdings (Pty)
Limited is a proprietary black owned and managed employee benefits business
established in April 1998 pursuant to the purchase by NBC of contracts between
Alexander Forbes and some 180 negotiated provident funds and the subsequent
cession of the same to NBC with the consent of the funds in question. These
contracts comprise some 75% of NBC’s current client base by number of funds.
6.
NBC’s core areas of
business are retirement fund administration services (including fund accounting
and treasury services), employee benefits consulting services and actuarial consulting
services.
7.
Fees for these services
are charged as either a percentage of total payroll of the combined membership
of a given fund or as a Rand rate per member per month. Our fees for these services are amongst the
lowest per member per month in the employee benefits industry given that the
members of our client funds comprise some of the lowest paid formal sector
employees.
8.
NBC
is an Authorised Financial Services Provider in terms of the
Financial Advisory and Intermediary Services Act, 2002 (License No. 991). It is also operates as an administrator in
terms of section 13B of the Pension Funds Act, 1956 through wholly owned
subsidiary NBC Fund Administration Services (Pty) Limited.
NBC’S Practice regarding
“bulking” as referred to in 1 to 3 above
9.
From the date of NBC’s
formation in April 1998 Alexander Forbes continued for a period of time to
perform certain fund accounting functions on behalf of NBC for its clients in
terms of a management agreement concluded between Alexander Forbes and
NBC. This was to enable NBC the time to
procure and develop its own internal capacity to perform these functions which
at the date of its formation it did not possess.
10.
Alexander Forbes had its
own cash management arrangement with Standard Bank which around mid-1999 paid
credit interest rates to our client funds of between Prime less 12.75% and
Prime less 10.50% depending on the size of the daily cash balance in the
current account of a given fund.
11.2 Each individual fund is then paid a credit
rate of interest (rather than zero interest) of between Prime less 8.00% and
Prime less 5.75% calculated on the daily average held in its current account
with Standard Bank at any point in time.
This is done without forfeiting any of the transactional functionality
of an individual funds’ current account.
11.3 Each individual fund receives a credit rate
of interest calculated on the actual daily average balance held in its separate
current account to avoid cross subsidisation.
15.
When NBC established its
own cash management group and moved its clients’ bank accounts from the
Alexander Forbes cash management group to the NBC cash management group we
incorrectly omitted to advise our clients that we would retain a small portion
of the improved interest as a fee. Although
the credit interest earned by our clients had been further improved
considerably (by an average of some 4.75% per interest rate tier) by the
introduction of the NBC cash management group and these rates are known to all
clients, our failure to disclose our earning of a fee -sufficient to offset the
additional expenses incurred in establishing, monitoring and administering the
cash management system - is accepted to have been an oversight.
The Legal Position
16.
We have since been
advised that the common law position has most recently been restated in the
case of Phillips v Fieldstone Africa (Pty) Ltd & Another 2004 (3) SA
465 (SCA) as follows :
‘Where one man stands to another in a
position of confidence involving duty to protect the interests of that other,
he is not allowed to make a secret profit at the other’s expense or place
himself in a position where his interests conflict with his duty. The principle underlies an extensive field
of legal relationship. A guardian to
his ward, a solicitor to his client, an agent to his principal, afford
examples of persons occupying such a position.
As was pointed out in The Railway Company v Blaikie Bros (1 Macq 461 at
474), the doctrine is to be found in the civil law (Digest 18.1.34.7), and must
of necessity form part of every civilised system of jurisprudence. It prevents an agent from properly
entering into any transaction which would cause his interests and his duty to
clash. If employed to buy, he
cannot sell his own property; if employed to sell, he cannot buy his own
property, nor can he make any profit from his agency save the agreed
remuneration; all such profit belongs not to him, but to his principal. There is only one way by which such
transactions can be validated, and that is by the free consent of the principal
following upon a full disclosure by the agent…” (our underlining)
17.
Consequently,
from a common law perspective, we understand that the practice of “bulking” of
bank accounts is not per se unlawful.
What is unlawful is the taking of a “secret profit” without disclosure
to the principal. In the case of an
administrator such as NBC the principals being retirement funds who have
appointed NBC as the administrator of their funds.
18.
In
terms of Section 15(1)(b) the a General Code of Conduct became binding on all
authorised FSPs on 8th August 2003.
19.
Paragraph 10 of Part
VIII of the General Code of Conduct provides inter alia that an FSP who
provides a financial service and who receives or holds financial products or
funds of or on behalf of the client must account for such products or funds
properly and promptly and shall :
“(a) …
(b)
…
(c)
…
(d)
open and maintain
a separate account, designated for client funds, at a bank and–
(i)
must within one
business day of receipt pay into the account all funds held on behalf of
clients;
(ii)
ensure that the
separate account only contains funds of clients and not those of the provider;
(iii)
pay all bank
charges in respect of the separate account except that bank charges
specifically relating to a deposit or withdrawal of the funds of the client are
for the client’s own account; and
(iv)
ensure that
any interest accruing to the funds in the separate account is payable to the
client or the owner of the funds.” (our underlining)
20.
If sub-paragraph
10(d)(iv) of the General Code of Conduct (quoted above) relates to interest
accruing to funds by virtue of the “bulking” of bank accounts, it is submitted
that all interest accruing to the funds in the separate accounts in accordance
with the interest rate tiers referred above (as negotiated by NBC with the
bank) have indeed been paid to the funds.
22.
It is submitted that
neither the General Code of Conduct nor the Administrative FSP code in any
event outlaw “bulking” per se.
To the contrary, the practice of bulking (albeit in the narrow sense
referred to in the Administrative FSP code) is recognised and certain
disclosure obligations pertaining to the practice are introduced.
Conclusion
23.
We accept that NBC’s
position as an administrator of retirement funds appears to fall within that of
“agent” in its broadest sense vis a vis its client funds.
24.
The “bulking” of bank
accounts to treat individual funds’ current account as part of a large group
for the purpose of obtaining a beneficial interest rate is not in itself unlawful. To the contrary, it appears to us that it is
a desirable practice which is beneficial to all funds forming part of the large
group. The aspect of “bulking” of bank
accounts which is unlawful is the taking of a “secret profit” without
disclosure to the principal.
25.
This can be remedied by
the consent of the principal which would then make NBC’s participation in the
profits generated from the credit interest on the aggregate value of the NBC
cash management group lawful.
26.
We are advised that
should the trustees of a fund, having regard to their fiduciary duties, decide
to consent to NBC’s historical and future participation in the profit generated
by virtue of the cash management arrangement with Standard Bank, such a decision
would be competent.
27.
We have issued a general
disclosure to the trustees of all of our client funds and have commenced a
process of formally dealing with the issue directly with the trustees of our
client funds at properly constituted trustee board meetings.
28.
NBC and its directors
regret the alarm and concern that the issue of “bulking” has occasioned in the
minds of trustees and members of its client funds alike as well as the omission
to disclose to them that we have earned a fee in the process, albeit that the
practice has objectively advantaged our client funds and their members
considerably.
NBC HOLDINGS (PROPRIETARY) LIMITED
21 JUNE 2006