Ownership Targets: Financial services need radical transformation
JOHANNESBURG – The allocation of capital greatly influences patterns of ownership and production in the economy. So why has greater transformation and economic inclusion in the financial services sector been so sluggish, seriously lacking and at best regressing?
Why is that after more than 25 years of a democratic dispensation our country has yet to create the economic ecosystem necessary for the transformation of the financial services sector to thrive through an integrated policy environment that encourages transformative ventures to take hold and succeed?
Institutions across the board – notably asset managers, which is among the least transformed sub-sectors – have had ample time to effect transformation but have chosen not to. They simply pay lip service to Broad-Based Black Economic Empowerment (B-BBEE) codes and deliverables.
In my numerous engagements with the private sector, there is an unfair and frankly ridiculous expectation from the industry and their apologists that the people of South Africa need to be patient and understanding that transformation will only be precipitated if and when the economy picks up. This has been a recurring theme and excuse for many years. This attitude is disingenuous and unjust.
An in-depth analysis by the Financial Sector Transformation Council (FSTC), a non-profit company constituted in terms of B-BBEE based on the recalculation of data from the comprehensive scorecards to determine numeric, rand value and percentage performance concluded that there was lack of commitment by industry players.
For example, of the 167 entities who submitted scorecards and spreadsheets with underlying data which informed their final B-BBEE report and certificates, only 55 percent submitted detailed information that allowed for in-depth analysis.
The financial services sector has not met ownership targets across the indicators in the scorecard. Entities in the five sub-sectors, namely banking, long-term insurance, short-term insurance, asset managers and other institutions, did not meet targets for ownership across almost all indicators.
Under management control, overall sector performance was below target. Based on the submitted scorecards, performance on the appointment of African managers and black female employees in senior positions, as a percentage of all senior managers, was low with long-term insurers and asset managers performing best against targets on the two indicators, respectively.
Also, a recent report published by 27four Investment Managers on transformation in the asset management industry showed that of the R8.7 trillion assets under management in South Africa, about R5trln is available for management by the private sector, but only R490 million is managed by black firms.
So the FSTC report, titled Moving beyond the Scorecard, confirms that while there are pockets of good performance, the sector is still underperforming on transformation.
Outside the FSTC report, the culling of standalone retirement funds, for example, has been breathtaking. In 2012, South Africa had a total of 2 761 retirement funds. Umbrella funds made up only 13 percent of these funds.
By 2016 the number of retirement funds had dwindled to 1 572, with the market share of umbrella funds more than doubling – comprising 28 percent of all funds.
While 28 percent of funds may seem like a small number, umbrella funds make up a significant portion of all retirement funds in South Africa.
The umbrella fund industry is dominated by the largest players in the industry: Old Mutual, Alexander Forbes, MMI, Sanlam, Sygnia and Liberty, which wield unbelievable management and investment control through multi-managers.
Multi-Managers, Discretionary Fund Managers and LISPS, such as Analytics, Fundhouse, Sanlam Multi-Managers, Old Mutual, Momentum, Investec and PPS are the most reluctant to consider emerging black asset managers.
It is estimated that less than 10 percent of assets on their combined platforms are managed by black asset managers, let alone black asset managers who have consistently delivered exceptional long-term investment performance.
Workers have very little say. If an employer decides to move from a standalone fund, where employees will legally have 50 percent representation in the board of trustees, to an umbrella fund where employees can participate in the management of the fund, but have no legal status or say. The sponsor and employer wield disproportionate influence in the running and management of the fund.
This trend is at odds with the government's priority of broadening access to financial services for all South Africans, and begs the question, how transformed are umbrella funds and multi managers that typically manage the allocation of those funds, given the significant size of the market that they control on behalf of members who are largely workers?
With every standalone fund that joins an umbrella fund in South Africa, workers’ rights and participation in the management of their retirement is immediately eroded, with no legal say or any other recourse.
Transformation is more than just an economic term. It is creating jobs, empowering people, and giving individuals access to better lives for themselves and their children, and is certainly a development goal which we all aspire to.
The Association of Black Securities and Investment Professionals, a lead activist for black professionals and black businesses in the financial services sector, supports the following FSTC proposals:
- That the industry be compelled, including through licensing conditions, to provide the necessary information to the B-BBEE Commission.
- Achieving targets to be a condition for licensing of financial institutions as provided for in Section 10 (1) of the B-BBEE Act.
- Consideration be given to amending the B-BBEE Act to provide for a system of fines for failure to meet targets.
- The government and other relevant institutions should consider legislative changes allowing for proportional entry requirements for new entrants. This will support progressive growth of informal entities, such as stokvels, into larger players within the sector.
- Engage with the various stakeholders for the development of legislation that will lead to ownership of banks by mainly blacks, particularly Africans, with adequate inclusion of women. Such legislation should also lead to black people and women, particularly Africans, being the majority at all levels of management.
- Strong action against bank collusion on the manipulation of currency trading.
- Consider tightening legislation to reduce prospects of collusion among banks.
- Banks and law enforcement agencies must do more to combat Illicit financial flows.
- Encouraging foreign investors to invest in initiatives that will promote the entrance of new players.
The financial services sector should be radically transformed to become a vibrant, and globally competitive industry that reflects the demographics of South Africa and contributes to the establishment of an equitable society by providing accessible services to black people and directing investment into targeted economic sectors.
Sibongiseni Mbatha is president of the Association of Black Securities and Investment Professionals and chairperson of the Financial Sector Transformation Council.