The financial sector is of critical importance to the South African economy and is regarded globally as well-developed and sophisticated. During the 2008 financial crisis, South Africa was significantly less affected by the “credit crunch” than other developing and even developed economies, which can largely be attributed to the highly regulated and controlled sector.

The numbers behind the financial sector in South Africa are simply staggering:

• Controls about R12 trillion worth of assets, which is four times the country’s GDP;
• Contributes about 21,6% of the country’s GDP, which exceeds the contribution made by the government;
• Contributes over 30% of corporate income tax per annum;
• Employs more than 250 000 people.

Slow transformation?

The South African government is intent in ensuring that this important sector in the economy is adequately transformed. The 2018 Budget Review states: “The introduction of the Financial Sector Code in 2004 increased the sector’s focus on deepening financial inclusion and sustainable transformation. But progress has been slow. More work is needed to ensure that a transformed financial sector contributes to inclusive economic growth. Government’s holistic transformation agenda includes increasing competition, broadening ownership and directing lending to high-growth, labor-intensive firms.”

The Association of Black Securities and Investment Professionals (Absip) also criticised the financial sector earlier this year for its slow pace of transformation.

Amended Financial Sector Code (FSC)

The Amended Financial Sector Code has been gazetted on 1 December 2017. At the time, Minister Rob Davies said that: “Transformation of this sector is key because it is the life blood for all other sectors of the economy. The process to develop a Code emanated from the 2002 NEDLAC Summit where stakeholders committed to a sector Code. The Amended FSC has unique features and deviations that intend to address transformation peculiarities that exist in the sector.”

Stuart Edmond, a Corporate Finance Analyst at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions with specialist expertise in B-BBEE ownership transactions, unpacks key aspects of the Amended Financial Sector Code.

Entities required to comply with the Financial Sector Code

Broad-based black economic empowerment regulations (B-BBEE) are inherently voluntary, as there are no fines imposed or other regularity consequences for non-compliance with B-BBEE. However, non-compliance may have a significant impact on an entity’s ability to win business and may have a negative impact on the reputation of an entity.

The Financial Services Code is applicable to natural or juristic persons involved with a business, trade or profession operating in the financial sector of South Africa. This includes, but is not limited to banks, long-term insurers, short-term insurers, re-insurers, underwriting management agents, financial intermediaries and brokers, managers of formal collective investment schemes in securities, investment managers and other entities that manage funds on behalf of the public, including retirement funds and members of any exchange licensed to trade equities or financial instruments in South Africa and entities listed as part of the financial index of a licensed exchange.

The Financial Sector Code specifically provides that all entities within its scope must comply with the FSC and shall not be entitled to rather measure their compliance against the generic B-BBEE codes.

Ownership

Parliament’s finance and trade and industry committees held joint public hearings on transformation of the financial sector in 2017. The March 2017 Presentation to Parliament’s Standing Committee on Finance showed that Black ownership in the financial sector has deteriorated in recent years. This deterioration has been a concern for transformation in the sector and thus the number of points allocated to ownership in the FSC has been significantly increased from 14 to 23.

Management Control and Skills Development

The level of black managerial control within the financial sector has also deteriorated according to the March 2017 Presentation to Parliament’s Standing Committee on Finance. According to the latest BEE.conomics survey, less than 10% of total assets under management are managed by majority black-owned fund managers. Further, as at 31 December 2016, the total size of the Collective Investment Schemes (unit trusts) industry was R2 trillion, but the value managed by 51% black-owned asset management firms was a mere R87.3-billion or 4.35% of the total.

Investment in skills development leads to improved management control performance. As time and money are invested into the skills of the previously disadvantaged people, the more equipped they will be to fulfill senior, middle and junior managerial positions within the financial sector.

As a result, the FSC has responded by increasing the points allocated to management control from 8 to 20, and further by increasing the points allocated to skills development from 10 to 20.

Procurement, Enterprise & Supplier Development (ESD) and Empowerment Financing

One of the key functions of the financial sector is to provide funding, which can be used to capitalise business ideas and opportunities, stimulate growth and create wealth. As a result, the progression of the South African economy and improvement of the inequality, is heavily dependent on the access to capital and financing that is provided to Black individuals and Black owned companies.

The 2018 Budget Review states: “The expansion of small, medium and micro enterprises (SMMEs) can help transform the economy. SMMEs employ 47 per cent of the workforce, contribute more than 20 per cent of GDP and pay about 6 per cent of corporate taxes. The 2015 SMME Survey shows that the majority of small businesses do not borrow from financial institutions, with only 2 per cent indicating that they rely on banks for funding.”

Low cost housing, transformational infrastructure projects, Black agricultural projects, Black business growth including SMEs and BEE transactions (Targeted Investments) are all capital intensive in nature. Through effective funding the financial services sector will contribute significantly to the development of the South African economy and the opportunity for Black individuals to develop their own businesses and wealth.

The FSC states that a bank should provide R48 billion of financing to “Targeted Investments” within a specific year to obtain the maximum of 12 points within this subcategory. The “big banks” with significant lending books will be able to achieve these targets with relative ease, while “smaller banks” with limited resources may find it almost impossible to reach these pre-determined targets. The FSC increased the points allocated to Empowerment Financing and ESD from 15 to 25 points.

Procurement and Enterprise & Supplier Development ensures that other enterprises use the services and purchase products from the entities that are Black owned and meet B-BBEE requirements.

The FSC increased the points allocated to procurement and enterprise & supplier development from 21 to 35 for short-term insurers, stock exchanges and members, and other institutions, which are the primary procuring entities within the financial services sector.

Socio-economic Development and Consumer Education

A fundamental pillar for the development of the economy and to improve poverty within the South African economy is to provide resources to individuals on the lower end of the inequality spectrum. Helping to develop the individuals within society that are within the lowest economic segment of our economy, will help uplift these individuals and ensure that everybody within the economy benefits from fiscal expansion.

The FSC increased the points for socio-economic development and consumer education from 3 to 5 points.

Access to Financial Services

The financial services sector has expanded significantly within South Africa and as a result the vast majority of South Africans, from all walks of life, have access to financial services. The FSC reduced the points available from access to financial services from 14 to 12.

Compliance and way forward

All entities within the financial sector must report on their compliance with the Financial Sector Code annually to the Financial Sector Code Council. The council may “name and shame” companies that are not reporting in the required manner and in addition, if an entity does not report to the council, it will be automatically discounted a level immediately following verification.

Richard Ryding of Global Business Solutions states that there is currently ongoing talk of a requirement that state assets must be managed by entities which are at least 51% black owned. Although not yet effective, this will have significant implications on the financial services sector and will require financial institutions to go above and beyond the Financial Sector Code ownership requirement of 25% + 1. It appears that the “big banks” have already commenced with this process, as evidenced by the Black ownership of First Rand Limited of 37.09%, ABSA Bank Limited of 14.96%, Standard Bank Group Limited of 22.14% and Nedbank Limited of 28.16%.

Click here: To access the Financial Services Charter gazetted in December 2017
Categories:  B-BBEE, News
Published:  Business Brief