Deputy finance minister says the Cofi Bill seeks to make explicit the constitutional imperative for transformation

By Garth Theunissen

 

Transformation of the financial sector, and the asset manager segment in particular, is a “constitutional imperative” and the government will bolster BEE legislation to achieve a more equitable demographic balance, says deputy finance minister David Masondo.

He said on Tuesday three proposals in the draft Conduct of Financial Institutions Bill, which is expected to be tabled in parliament later in 2021, will deal with the slow pace of transformation in the sector.

The legislation will make transformation an explicit function of the Financial Sector Conduct Authority (FSCA); require financial institutions to have transformation plans that demonstrate their compliance with broad-based BEE legislation; and enable the FSCA to issue directives forcing compliance, Masondo said.

Almost three decades after the end of apartheid and 17 years since the adoption of a voluntary transformation charter, the industry is under pressure to boost the participation of black-owned companies. Such companies managed R668bn, or just 9% of SA’s total savings pool of R7.63-trillion, in June 2020, according to 27four Investment Managers. The amount managed by black asset managers in 2020 was 15% higher than a year before.

“From the side of the state, what motivates us, what informs what we’re doing, is a constitutional imperative for transformation,” Masondo said at a webinar hosted by Business Day. “The equality clause in the constitution requires the state to undertake measures to transform SA in all facets of our society. We are also motivated by inclusive growth.”

The pending bill will empower the FSCA to set conduct standards and regulate the operations, culture, product design, selling, marketing, advertising and internal procedures of financial institutions including banks, insurers, retirement funds and collective investment schemes.

Photo Credit: Pexels/Jopwell

Transformation is included in the obligations set to be imposed on financial institutions. While critics have argued the 9% figure for black participation used by 27four is misleading because it excludes the Public Investment Corporation (PIC), Masondo said the R1.9-trillion asset manager belongs to all SA citizens, not just black people.

“To present the PIC as a black-owned asset manager because it is owned by the state gives an impression that this government is a black government only,” he said.

Even so, Fatima Vawda, MD of 27four and author of the BEE.conomics report, queried whether the government had lost its focus on transformation amid SA’s other economic challenges.

Migration of standalone retirement funds to umbrella funds meant to create economies of scale and reduce fees had merely resulted in these funds being concentrated “in the hands of a few large companies”, she said.

“Outside of the PIC and some of the state-owned entity retirement funds, at least half of active member assets are now sitting in the hands of three or four very large umbrella fund arrangements,” Vawda said.

Umbrella funds allow unrelated employers to join, the idea being that greater numbers will allow for cost savings and better value for individual numbers.

Robert Roux, CEO of Sanlam Investments, which was subject to one of the biggest empowerment deals in the industry when Patrice Motsepe’s African Rainbow Capital acquired a 25% stake in 2020, said the need for scale in the context of falling margins made it difficult for new entrants in what was an expensive business to run.

“Even though we’ve seen black-owned managers rising, it has been tough for them because the market has really not helped.”

The debate on transformation comes at a time when passive investment strategies, which use index-tracking products, are challenging active asset managers by providing competitive market returns at lower costs.

Companies with a relatively small pool of funds struggle to make profits after covering their costs, raising questions whether creating more black-owned players will merely set them up for failure.

Asset managers receive income by charging management and performance fees as a percentage of the money they manage on behalf of clients.

Masondo said the government was not opposed to large fund managers as the country needed “big SA champions” that could compete globally.

“We all agree we need consolidation as it provides economies of scale and should drive costs down,” he said.

“Either consolidate into umbrella funds or establish the national social security fund, which we have been working on for more than a decade.

“Alternatively, we might have to think about sector funds. But it is a difficult question and issue — we have 1,500 active funds, which is too much,” the deputy minister said.

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