The buck might soon stop with CEOs of financial services firms for the fast-tracking of transformation and black-economic empowerment (BEE), which has been widely considered to be slow and resulting in skewed ownership patterns of the economy.
This is a major recommendation by Parliament’s Standing Committee on Finance and the Portfolio on Trade and Industry contained in the first report of the financial sector transformation, which is the antithesis of the current status quo and a sign that Parliament is upping the ante on BEE compliance.
The committees have supported National Treasury’s proposal that CEOs should be active in the decision-making processes of the Financial Sector Charter (FSC) Council, which oversees transformation and BEE in the financial services sector, to “ensure sector buy-in”.
CEOs are part of company boards but a dedicated team of directors is part of the Social, Ethics and Transformation Committee, which is a sub-committee of the board that drives transformation.
The recommendations of the committees place transformation and BEE objectives on CEOs. This is a positive move, said Cas Coovadia, MD of the Banking Association SA (Basa).
“We don’t have a problem with this recommendation as we believe that transformation needs to be about the way we do our business to ensure that we are actually doing our business with cognisance of the environment in which we work,” Coovadia told Moneyweb.
Basa, along with commercial banks, made submissions to parliament in March during public hearings to assess the progress of transformation in the financial services sector.
The committees recommend that the industry be compelled to provide the necessary information about their transformation and BEE compliance to the FSC Council, the newly-established BEE Commission and any other relevant state structure.
In cracking the whip, the committee has also recommended sanctions be imposed for non-compliance to BEE under the Financial Sector Charter and the BEE Generic Codes. Transformation and BEE compliance is a choice for companies and widely viewed as the right thing to do and there are no punitive measures for non-compliance.
The BEE Commission is expected to develop a system of fines for non-compliance and present a policy on this by June 2018.
Coovadia said the implementation of BEE by companies since the early 2000s has not had a broad-based focus, with many companies focusing largely on the ownership element while ignoring other seven BEE elements. These include management control, procurement, skills development, enterprise and supplier development, socioeconomic development, access to financial services, and empowerment financing.
“The concentration of the ownership element is too narrow. BEE is about looking at the demographics of your staff, particularly at management level. And BEE is about ensuring that we finance homes for the majority of the black population, development of small and medium enterprises and skills. These are central to the businesses of banks,” said Coovadia.
In March, the FSC Council signed off on the final amended 2013 BEE code for the financial services sector. The big change was that the ownership requirement for previously disadvantaged individuals in the amended BEE codes is 20% compared with 25% for the generic codes.
Asset management industry
Another significant recommendation is for state assets to be managed by asset management entities that are at least 51% black-owned. This is intended to nurture black-owned asset management firms by giving them funds to manage over many years and help them to build critical mass.
Sibongiseni Mbatha, the president of the Association of Black Securities and Investment Professionals, said black managers could increase their market share in SA’s investing and savings industry “three-fold in the next 18 to 24 months” if state-owned enterprises like Eskom and Transnet included black firms in the management of their pension and provident funds.
“The private sector has to follow on this recommendation for black asset managers to manage private assets,” said Mbatha.
The asset management industry has a checkered transformation record with a recent survey by 27four Investment Managers showing that black firms control R416 billion of the R4.6 trillion savings and investments industry.
Several of the committees’ recommendations will be reviewed before the Financial Sector Summit is held in the first quarter of next year, where the committees will engage with the Department of Trade and Industry and Treasury to finalise a second report on the financial sector transformation.