South Africa’s financial institutions rank well globally, specifically our JSE, banking sector and governance in general ranks very well when compared to the rest of the world (including developed countries).
In addition, our King Code of Corporate Governance and regulatory framework that guides our financial institutions has been highly acclaimed worldwide for many years. Institutions that have stood out include:
- The Financial Services Board (‘FSB’)
- National Treasury (‘NT’)
- Ministry of Finance ('MOF') and,
- South African Revenue Service ('SARS')
What has transpired over the past year at these institutions is somewhat laughable. However, we cannot ignore these problems that point to deeper underlying issues.
Let’s start with the Financial Services Board. The below is directly from an FSB brochure:
“The FSB is the statutory regulator of the following financial industries in South Africa and carries out its functions in terms of the Financial Services Board Act No.97 of 1990, in the public interest:
- retirement funds;
- financial markets;
- collective investments; and
- financial advisory and intermediary services.
The FSB also has some jurisdiction in the banking sector with respect to market conduct issues. The mandate of the FSB is to:
- supervise and enforce compliance with laws regulating financial institutions and the provision of financial services;
- advise the Minister on matters concerning financial institutions and financial services; either of its own accord or at the request of the Minister; and
- promote programmes and initiatives by financial institutions and bodies representing the financial services industry to inform and educate users and potential users of financial products and services.”
The FSB should essentially ensure that the public is not prejudiced in any manner by any of the above institutions. Unfortunately over the past week information has come to light that all is not well WITHIN the FSB. In fact the Deputy Registrar of Pension Funds herself has ‘filed a notice with the North Gauteng High Court to force her employer to make public two potentially damning reports on the way in which it relied on major pension fund administrators to expedite the closure of so-called orphaned funds – one by former Constitutional Court Justice Kate O’Regan, and a forensic investigation by auditors KPMG.’
These reports are allegedly supposed to demonstrate that when closing down pension funds, the FSB cut corners by handing control to major pension administrators.
“I fear that it is probable that the members and beneficiaries of a significant number of funds ... may have been unlawfully deprived of retirement fund benefits,” she states in her affidavit.
She goes on further to state that: “This has resulted in considerable benefit to the fund administrators and related service providers of financial products and services.”
If you have followed any news in SA, it is clear that savings is a huge problem and with the majority of the retired population dependant on the State Old Age pension of R1 420 per month and R1440 per month for persons over the age of 75, the accusations mentioned above will anger many, especially as this is an institution that should protect retirement fund members from exploitation from service providers, not facilitate this exploitation as appears to be the case above.
National Treasury or National Embarrassment?
NT are the policy makers of the country that together with the MOF should guide the country to economic success. The Tax Law Amendment Act which has been signed in by the Presidency to take effect 1 March 2016 is under massive criticism by what seems like all unions in the country.
Let’s talk about the implementation of the legislation. Communication is absolutely essential to avoid misunderstandings, unfortunately the manner in which NT communicated the changes in tax laws with stakeholders has left a lot to be desired. This has resulted in union members believing that government is going to access their hard earned retirement savings, and many of these members have resigned simply to get access to these funds. Definitely not the desired outcome in a country with an extremely poor savings record.
In addition, while NT may have had the retirement outcomes of members in mind when the legislation was drafted (refer 27.5% tax deductibility of contributions to retirement savings vehicles), to me there seems to be a few other motives behind the change that Unions have caught on to. The most glaring of these is forced annuitisation at retirement for contributions to retirement funds post 1 March 2016. At first glance this seems great as many members squander their lump sum at retirement and this new legislation forces them to secure some kind of income in retirement. However, members would still like access to a state old age pension. What NT has failed to communicate is that members will still have access to a government pension subject to a ‘means test’ as has been the case in the past. The actual criteria for the means test has actually been extended and will be more inclusive going forward.
What is clear of late is that NT has used fantastic case studies conducted world-wide in first world countries such as the UK, Canada and Australia in the drafting of new legislation especially when it comes to retirement savings. What NT have failed to take into account is that South Africa is not a first world country especially when you look at the distribution of income which is at the heart of the union discontent in this matter. The populations of UK, Canada, and Australia etc. have a large proportion of middle class, South Africa does not. So why would we even consider implementing a first world solution in a country that does not share the same characteristics of those first world countries? I’m still looking for an answer to that one.
The realities of our country cannot be forgotten when implementing legislation that has worked elsewhere.
Ministry of Finance or Ministry of musical chairs?
Let’s look at MOF next. The fracas that ensued over December 2015 will not be forgotten for a very long time. Three Finance Ministers in four days defies belief. With Pravin Gordhan replacing David van Rooyen a semblance of sense seems to have returned.
However our extremely important off shore investors are not yet convinced. Remember the graph of the Rand depreciation from our last article?
There is further talk of a downgrading of South Africa to ‘junk status’ which would most probably see the Rand decrease to around R20 to the US Dollar. This would be catastrophic for a country that was seen as the gateway to Africa and the African country with the best regulated financial services industry.
Mr Gordhan has a lot of work on his hands if he is to restore investor confidence. Unfortunately he now seems to have a bit more on his plate, particularly disagreements with the SARS Commissioner.
South African Revenue Service or MI6?
Speaking of the SARS Commissioner, recent information in the form of a top secret report by KPMG regarding an even more top secret spy team within SARS has been met with disbelief by many. SARS has stood as one of the most efficient divisions within the government and has been the epitome of integrity and sound governance. It is very interesting to note the number of confidential reports being leaked of late and even more interesting to note is the butting of heads between our current Minister of Finance and the SARS Commissioner.
Where this one ends up could determine the future of one of these heads (hopefully not yet another Minister of Finance!).
What does the future hold?
Well, if you had to look at the past as a reasonable indicator of what could happen in the future, we can believe that various commissions will be set up to investigate all of the above. There will be discrepancies in the findings of these commissions and this will result in more commissions being set up to investigate the commissions themselves. Ultimately we will lose interest in the abysmal waste of the tax payer’s money and nothing will come of any of it.
That’s the pessimists view anyway. An optimist would say that the above will lead to a shake-up of these institutions that will result in improved operations going forward.
Tough to be an optimist of late when the very institutions set up to look after the nation are seen to be the biggest threats to the nation, isn’t it?
On a positive note, the Proteas seem to be on the right track finally.