Transformation of the Financial Sector: public hearings

Meeting report

National Credit Regulator submission
Ms Nomsa Motshegare, NCR CEO, discussed statistical trends. NCR has more than 7 500 registrants that collectively have 42 000 branches. These entities are credit providers, credit bureaus, debt councillors, and so on. At 31 December 2016, the gross debtors book was R1.6 trillion in consumer credit. 89% of mortgages are granted to individuals with income greater than R15 000 while 11% are granted to individuals with income less R15 000. 57% of unsecured credit is granted to individuals with income greater than R15 000 while 43% is for individuals with income less R15 000.

Ms Motshegare listed the number of mortgage and vehicle finance accounts opened over a 12-month period by gender. In total about three million accounts were opened. On average, 55% of the accounts for both mortgages and vehicle finance were for men. Broken down, mortgage loans were split half-half between men and women, while 55% of vehicle loans were in favour of men.

Ms Motshegare discussed the debt of South African consumers. Total debt was R1.6 trillion at 31 December 2016. Breaking this down, mortgages account for 51%, secured credit 23% and credit facilities 13%. The remainder was made up of unsecured credit (also called personal loans), short-term credit (which is credit up to R8000 payable up to six months), and developmental credit (education loans). A breakdown by credit provider is also available, which reveals that 82% of credit is provided by banks.

Ms Motshegare went on to discuss the geographic patterns of indebtedness. Less than 30% of credit goes to rural areas. By September 2016, unsecured credit took the lead as the dominant form of credit provided to rural areas, followed by home loans. Short-term loans decreased in prominence over the last ten years from 25% of total rural credit in 2008 to just 5% by 2016.

Ms Motshegare discussed the distribution of credit amongst population groups. Out of total credit, 50% currently goes to Historically Disadvantaged Persons (HDPs). This includes women and disabled persons. Roughly 30% of total credit has gone to women over the past 10 years. The types of credit granted to women are split quite evenly between secured credit, unsecured credit, short-term credit, credit facilities (credit cards), secured credit (driven by vehicle finance) and mortgages. Women and men both hold close to 100 000 mortgage accounts. However, men hold as many as 340 000 vehicle finance accounts (64%) compared to 190 000 for women (36%).

Ms Motshegare listed NCR’s proposed interventions. Credit providers need to create a new range of products for asset building targeting new customer segments previously excluded, such as low-income families and micro-businesses operating in villages. Initiatives promoting corporate social responsibility (CSR) taken by banks in other countries should be considered. For example, the Indian programme promoting women-owned businesses. Home loan products should be specifically designed for rural areas. Credit providers, especially banks and retailers, should strive to improve the livelihoods of the communities they operate in as corporate social responsibility, such as providing funding to schools and clinics in villages. Credit providers should provide more funding towards consumer education. Support should be provided for both the establishment of cooperative banks and Parliament's work in investigating measures to address over-indebtedness.

Cooperative Banks Development Agency submission
Mr Desmond Golding, CBDA chairperson, outlined the legal framework of the CDBA, its mandate and the three organizational units which pursue this mandate.

Mr Golding summarized the context of the CBDA and the role of cooperatives in South Africa. He commented that the banking sector is monopolistic and a threat to our democracy. The banks, insurance and asset management companies are concentrated and oligarchic; the four largest banks control 90% of the market. If an economy is to grow, it needs new entrants in its sectors. In this sense, the banking sector has been disappointing.

Price Waterhouse Coopers (PWC) recently ran a study on the emerging powerful economies in the world and South Africa ranked only 30th behind both Egypt and Nigeria. Similarly, the IMF World Growth Report 2017/18 predicted that the world will grow at 3.6%, with Africa closer to 5%. Unless there is a systematic and systemic intervention, which is disruptive in nature, SA’s economy will not grow at these rates. Small businesses and CFIs play a critical role in a radical growth plan.

Mr Golding explained the meaning of the term “Cooperative Financial Institution (CFI)”. It is an umbrella term used to refer to member based deposit-taking financial co-operatives owned and controlled by their members who have a common bond. Members may choose to call them any of the following names: a credit union, a savings and credit cooperate (SACCO), a financial services cooperative (FSC), a financial cooperative or a cooperative bank.

Mr Golding stated that members of a CFI must have a common bond, a feature which distinguishes CFIs from commercial banks. Cooperative banks have their own specific regulation under SARS. The common bond between members can be classified into three types. A work based bond means that members work for the same employer or are employed in the same business district. Under an associational bond members are common to an association or organization including religious, social, cooperative labour or educational groups. Under a geographic bond members reside within the same defined community in a rural or urban district.

Mr Golding explained that there are three tiers of CFIs. Primary CFIs have at least 200 individual members, provide services to members and promote community development. Secondary CFIs comprise at least two primary CFIs and provide services to members that relate to the financial sector. Tertiary CFIs consist of two secondary CFIs and also provide finance related services to members.

Mr Golding discussed the difference between CFIs and commercial banks. CFIs have a different motive to banks. CFI serves to provide services to their members, whereas commercial banks function to generate profit. CFIs are owned by members whereas commercial banks are owned shareholders. In a CFI each person has one vote regardless of the number of shares they hold, unlike commercial banks. In a CFI the board of directors is unpaid and is elected directly from members, whereas in a commercial bank the board paid and elected by shareholders. Fees are typically lower in CFIs as they are determined by members. If a CFI makes surplus it goes back to members. Interactions are cooperative and not competitive as in commercial banks. CFIs reinvest in their members – the money does not leave the community that mobilises the deposits. Ideally, 80% of money mobilized is re-circulated into the community.

Mr Golding stated that CFIs are governed by the same cooperative principles as set out by the International Cooperative Alliance (ICA). These principles are: voluntary and open membership, democratic member control, members’ economic participation, autonomy and independence, education training and information, cooperation amongst cooperatives, and concern for community.

Mr Golding explained the role of the supervisory unit at the CBDA. He noted that registration requirements are slightly different for CFIs as opposed to Cooperative Banks (CBs). Both CFIs and (CBs) need at minimum 200 members. CFIs need R100 000 in member share capital, whereas CBs need R100 000 as well as R1 million in member deposits. Both must define a common bond and meet the requirements of the cooperatives Act. CFIs must also meet the requirements of the Bank Exemption Notice whereas CBs meet the requirements of the Cooperative Banks Act. CFIs follow CBDA rules, prudential standards and operating standards, whereas CBs follow South Africa Reserve Bank (SARB) rules, prudential standards and operating standards.

CBDA manages the registration and deregistration of CFIs if they become insolvent or too small. CBDA is responsible for the renewal of their annual licenses. It also issues infringement notices. In terms of supervision, the CBDA performs onsite risk-based and compliance examinations. It also performs offside report analysis and tries to resolve problematic CFIs.

Ms Nomadelo Sauli, CBDA Head: Capacity Building, discussed the role of the capacity building unit. The CBDA wants to automate and grow CFIs. It did research in 2010 to understand the environment and ensure that services to be rendered were appropriate. Since, the CDBA has provided holistic support to CFIs. Business process and systems engineering is used to improve operational efficiency. Informal training, formal training, mentorship and other interventions are used to strengthen institutions. Branding and marketing are used to develop strong CFI brands marketing. The services are customised and ICT enabled. They aim to strengthen stakeholder relations and create a provincial footprint.

Mr Kobus van Niekerk, CBDA Head: Central Support Services (CSS), said the strategic objective of CSS is to enhance the operational capability of the participating CFIs and to integrate the organisations into the National Payment System. The CSS have created an enabling environment where the sector can compete on an equal footing with commercial banks. The banking platform project has been developed to meet the need for a common system for CFIs and CBs that enables them to improve services to their communities, join the National Payment System and achieve economies of scale.

Mr Golding took over to conclude with the CBDAs recommendations for the sector. The Sector needs a deliberate policy position on cooperatives by government. National Treasury, SARB and the CBDA is responsible to take a firm stand and to undergo a change of mindset towards cooperatives. CFIs should not be viewed as small grassroot operations – elsewhere in the world they operate as large scale insurance companies. The government needs to ensure that there is a national cooperative banking strategy. Academics and stakeholders need to conduct research, publish papers and debate on the issue of financial sector transformation. CFIs must be viewed as an imperative tool and an anchor for the sector. Government, Treasury, SARB, and the sector itself must review the regulatory and legislative framework. Elements of the current regime, such as the R30 million deposit limit and the 15% external credit rule.

Ms Fubbs reminded the CBDA that their time was nearly up.

Ms T Tobias (ANC) offered that the five minutes she would have for questions be given to the CBDA as she was enjoying their submission.

At this point co-chairperson Yunus Carrim (ANC) arrived and stated that he was impressed [by the CBDA]. He reminded delegates that their recommendations, input and comments would be read and considered by a team of researchers. Debates over these matters will happen at a later date when the Standing Committee on Finance (SCOF) considers the final report including the researchers’ submissions.

Mr Golding continued the submission. A deposit insurance fund should be implemented. Currently, members are 100% exposed if the institution loses funds for some reason or another, which is not appropriate as members are often the more vulnerable members of society. A review of the cooperative banking model should be undertaken by all organizations in the sector. Dependence on member contributions for capitalization delays economic growth. Emphasis should be on enterprise lending to support other SMMEs and promote CFIs as financial intermediaries at the local level. There should be skills requirements and competency checks of the board of directors, managers and personnel.

Mr Golding recommended that there be review and close monitoring of the financial sector. Just as in the case of collusion in the construction industry, there is similar behaviour in the financial sector. The CBDA proposed that 10% of total fines collected from banks for the price fixings scandal go towards a co-operative banking support fund. Additionally, 1% of commercial banks’ annual turnover should go toward the support of new entrants in cooperative banking. This money exists in the financial sector; the four big banks have made R50 billion purely by charging fees. The CBDA believes that the recommendations mentioned in the submission will lead towards grassroots ownership of the economy and therefore to transformation.

Members of the ANC applauded the submission.

Chairperson Carrim enjoyed the submission but noted that there had been public criticism of the CBDA.

Johannesburg Stock Exchange (JSE) submission
Ms Nicola Newton-King, JSE CEO, stated that the JSE is not just a company but also a platform for the country. The JSE is the frontline regulator of companies that want to list on the stock exchange. It sets the rules by which companies can list. Together with the Financial Services Board (FSB) and SCOF, the JSE monitors market conduct. The JSE is a home to SA companies and a place for diversity. The JSE (Ltd) is itself listed on JSE as a company and this is regulated by FSB. This is a norm around the world.

Ms Newton-King stated that the JSE is a world class exchange. There were 18 new listings in 2016, three of which were black-owned firms. The JSE has been among the top three exchanges in the world for eight years in terms of regulation. It is one of the largest exchanges globally and the largest continentally. The JSE as an organization spends a lot of time building capacity in the African continent.

Ms Newton-King mentioned social development. She commented that it is up to markets to respond constructively to socio-economic issues. The JSE believes that it can best improve social outcomes by using its core strengths to contribute to the growth of economy. On that note, she discussed who actually benefits from a well-functioning stock exchange. A stock exchange does three things. Firstly, it raises finance for entrepreneurial companies. This creates employment. The JSE further helps people to manage risk and build sustainable wealth.

Ms Newton-King discussed how the JSE is working to transform ownership of capital. The JSE does this by creating platforms. The first is main board. On the main board there are 325 listed companies of which only 11 are black-owned. The alternative exchange (AltX) is designed to accommodate high growth small to medium enterprises (SMMEs) and currently has 56 listed companies. The JSE is also building a township exchange which will be a market for very small businesses. Entrepreneurs will be supported through mentors and training.

Ms Newton-King went through transformation of ownership statistics on the exchange. According to 2013 information, of the top 100 firms, ownership was 39% foreign, 23% black and 22% “non-black”, with an additional 16% having gone unanalysed. She commented that the JSE’s role is simply in publish these numbers. It is up to market to create a change in ownership. She added however that a Black-Economic Empowerment (BEE) policy will be required starting next year. Transformation control will be done at the time of listing.

Ms Newton-King skipped ahead slightly due to time. She discussed transformation within the JSE (ltd) as a company. There are 11 board members, of which 6 (55%) are black and 5 are female (45%). There are 11 members on the executive committee, of which 4 are black (37%) and 6 are female (55%). In terms a total staff of 498, 50% are female and 66% are black at all levels. As such, black empowerment is strong at all levels except at the executive level. She added that the JSE is very advanced in terms of gender-equality at all levels. In terms of ownership of the JSE itself, only 18% is black. The company has a level 2 BBBEE rating.

Ms Newton-King concluded that the JSE is committed to the development of the country. The company uses the things it is good at to drive the transformation of the sector.

Black First Land First (BLF) submission
Mr Andile Mngxitama, BLF president, noted a “whiff of sulphur” following the submission by the JSE. The JSE is a problem for BLF. He explained that BLF is a black consciousness organization and movement that is registered with the Independent Electoral Commission (IEC). He noted an amendment to the submission due to the removal of [previous] Minister of Finance Pravin Gordhan. BLF believes that Minister Gordhan was blocking the transformation of the economy. Pravin Gordhan had a conflict of interest due to his shares in “white monopoly capital”.

Ms Tobias felt that this comment about Mr Gordhan was unfair as it construes an attack on someone who was not present at the meeting to defend themselves. It was nonsense to attack him in this way.

Chairperson Fubbs agreed somewhat with Ms Tobias and asked BLF to tighten their focus to the subject of the meeting.

Mr D Maynier (DA) stated that the speaker should have freedom of speech.

Mr Mngxitama quipped that it was pleasing to hear a member of the DA “sometimes say the correct things”. He continued that the block to the transformation of the economy is White Monopoly Capital (WMC), which holds control over capital and the state itself. He stated that WMC is not a “creation of spin-doctors” but a real phenomenon: SA is controlled by a handful of white families. White supremacy as a phenomenon in the country is manifested in WMC. There is no way to deal with it without changing the economy. WMC is corrupt and undermines development. WMC owns the state and the media. The Competition Commission has already shown that the banks are corrupt. The Public Protector’s report shows that ABSA owes the country, and that about R26 billion was stolen from the South African Reserve Bank (SARB) by the big banks. The family of Johann Rupert is directly implicated in these crimes. He added that certain majority-party members were “in the pockets” of WMC, which was evidenced by the fact that they were willing to vote “against their own President".

Ms T Tobias asked Mr Mngxitama to stay on point.

Chairperson Carrim stated that Mr Mngxitama had a right to say what he feels, but noted that he found the tone of the submission crass. It is irrelevant and is not addressing the issue. He added that it was in the public domain that Mr Mngxitama and/or his associates had been described as corrupt “Gupta-ites”. He added that while Mr Ngxitama could speak his mind, he would likewise have to answer to the responses and questions of the Committee.

Mr G Hill-Lewis (DA) felt that Ms Tobias should withdraw her comment that Mr Mngxitama was speaking nonsense.

Chairperson Fubbs disagreed with this request, explaining that Chairperson Carrim had already made a ruling that free speech was allowed at the caution of whomever was speaking. She added that BLF had less time due to the interruptions, with only ten minutes left for their submission.

Mr Mngxitama described this development as fascist. It was the chairpersons who were taking time and interrupting him. To take up time like themselves and state that it was he who had used the time was nonsense.

Ms Tobias objected to the Committee being described as fascist.

Mr Mngxitama stated that he refused to let Ms Tobias take more of his time.

Chairperson Fubbs clarified that it was her that he described as fascist and not Ms Tobias. She explained how time was being allocated, and asked Mr Mngxitama to continue.

Mr Mngxitama continued. WMC controls the banks. An example is the unprecedented closure of Oakbay’s bank accounts by the four large banks with no justification. Justine Lewis has made a submission on the capture of the judiciary by WMC. The President in the State of the Nation Address indicated that the biggest beneficiary of tender corruption is WMC. South African Airways (SAA) is an instructive example. Mr Mngxitama stated that of the R24 billion spend on procurement by SAA each year, 98% of this money goes to white people. When Chairperson Dudu Myeni raised the issue she was vilified by white media. The same goes for Brian Molefe and many others.

Mr Mngxitama stated that BLF wants to undermine the structure of WMC in the following ways. Firstly, banks are criminal agents and should subjected to a judicial commission of enquiry. The Competition Act should be amended to take 100% of the turnover for each year that a bank was found to be dealing in corrupt practises. There must also be a judicial commission on apartheid corruption as per the CIEX report. A further judicial commission must investigate SAA, with specific regard to the role played by Coleman Andrews.

Mr Mngxitama listed their proposals for the transformation of the financial sector. These were influenced by proposals from Prof Malikane, economic advisor to the Minister of Finance. Firstly, SA must throw away the National Development Plan as it does not work. The new plan must involve the following principles. Firstly, WMC establishments (including banks, insurance companies, mines and other monopolies) must be expropriated to help industrialize the country. A state bank must be established, which will consolidate all the state-owned financial institutions to facilitate affordable credit to the progressive class forces. SARB must be nationalized. Lastly, the new economic plan must include the expropriation of all land without compensation.

Mr Mngxitama stated that BLF had a message for the new Minister of Finance, Mr Gigaba. Mr Gigaba must fully license black banks such as Ithala, VBS and PostBank within a year, and ten within the next five years. Government must immediately terminate all accounts with ABSA. It must facilitate the nationalization of the Reserve Bank. Minister Gigaba must stop talking to the criminal ratings agencies who undermine our sovereignty. He must raise the percentage for black-owned business for procurement spend from government to 80% (R500 billion plus the R900 billion infrastructure expenditure). He must also ensure that PIC mandates that asset management procurement goes to 80% black asset managers (R1.8 trillion). He closed by inviting all members of the Committee to a national land Imbizo in Soweto on 27 May 2017.

Chairperson Fubbs stated that Mr Mngxitama had two minutes left if he wanted them.

Mr Mngxitama continued. He mentioned the integration of the SA economy into the Southern African Development Community (SADC) region. He added that Zimbabwe needs sufficient intervention from SA. He repeated that the Reserve Bank must be nationalized within a year.

Wealth Creation Global Cooperative was scheduled to present but was absent and the Committee moved on to discuss the first round of submissions.

Discussion
Mr Maynier asked the NCR if they had any cost proposals for the recommendation to create a new range of products for asset building by credit providers. He had the same question for the recommendation to provide funding for consumer education. Mr Maynier wanted clarity regarding a proposal by the CBDA. Is their proposal that 1% of commercial banks turnover should go to new banks and 10% from found price-fixing incidents should go towards a cooperative bank support fund? Please provide more detail on this.

Mr Maynier noted BLF alleges that SA is controlled and owned by white monopoly capital. If this is so, how is it that on slide 11 of the JSE submission, it appears that of the top 100 companies, black ownership exceeds white ownership? If we are controlled by WMC how is it that black ownership exceeds white ownership in the top 100 companies?

Mr D MacPherson (DA) suggested that the NCR on their slides should have given the percentage of total credit granted to women and HDIs rather than only show total credit granted. Not necessarily accurate or informative if one only looks at the total of number of applications of total credit given; this can distort the view. Regarding home-loan products for rural areas - there are very large areas of communal land. How do home-loans work in areas where the land is not owned by individuals but by a large trust?

Mr MacPherson wanted to know which bank Mr Mngxitama banked with.

Ms Tobias stated that she found it interesting that when members speak to the percentage terms of black ownership listed on the JSE they do not look at “margin”. It can be 23% black ownership, but those people are on a lower margin. One does not need to be a rocket scientist to know that there is no black ownership in SA. There no debate here.

Ms Tobias felt that the minimum number of members of CFIs at 200 members was too small and limited the role that CFIs could have. Some villages are smaller than 200 in population but could still benefit from joining a CFI. Secondly, CDBA should include recommendations on operational efficiency to ensure the sustainability of CFIs in the long. Thirdly, discussions should be made in terms of targets. The CDBA and government should have a targeted approach to establishing CFIs that encourage growth. Ms Tobias asked the CDBA if there had been any engagement with commercial banks to try and establish a healthy relationship. Ms Tobias stated that there are fundamental issues of ownership and licencing with the JSE need to be looked at. She asked the JSE what their strategy was to assist in creating inclusive growth in SA?

Ms P Mantashe stated that she was excited to hear the view that credit should be extended to rural communities. She added that credit must not just be extended however: there is a need to ensure that the existing properties they have can be evaluated properly and that transactions can operate in a similar fashion as in the urban areas. She felt that cooperative banks could help to emancipate the people.

Mr B Topham (DA) asked the CBDA how many CFIs were registered in SA. How exactly is income distributed between members? He asked if the R30 million and R1 million deposit limits were hard limits, meaning that the CB or CFI would have to stop taking deposits if the amount was reached. He commented that the common bond was a limiting factor for the development of CFIs in SA. He asked for the CBDAs opinion on this comment. He asked how they felt government could loosen the restrictiveness of the common bond without undermining the distinction between commercial and cooperative financial institutions. He added that he felt the CDBA had made a good submission. He stated that information systems served as an important barrier to entry for potential new CFIs. A share info system that CFI members can access is critical. Have you considered this?

Mr Topham noted the banks have stated that they are willing to help. What portion of costs of entering the national payment system do commercial banks have control over that could be used to assist in alleviating the costs of cooperative banking? He said to the JSE, companies have complained about the strict control of permissions to audit. What is the JSE doing to make it easier for competing Auditors and black auditors to enter the market? Lastly, the identification of shareholders is naturally complicated. Foreign citizens are particularly difficult to categorize. It is difficult to discuss transformation of ownership when it cannot be easily measured. This by nature makes it easy for political parties and movements to try and misrepresent the truth.

Ms P Kekane (ANC) wanted more detail regarding the indebtedness of people living in townships and villages. The situation for pensioners is particularly important: how indebted are they? Are operators in these areas performing legally? She echoed Ms Tobias’ comment regarding increased and transformed economic growth. What is the JSE’s contribution to the transformation of the financial sector? Will there be enforcement of new measures for transformation or is this just “encouragement”?

Ms Kekane was excited by the work of the CBDA. She found financial literacy training important and was glad it had been linked to the National Qualifications Framework (NQF). Given financial constraints, she added that training should be done with assistance from the NCR. You need such a programme to assist people – the programmes of the CBDA and NCR could overlap.

Mr Maynier asked BLF whether, given the Malikane proposal, BLF shares his view that one option would be to take up arms in order to achieve radical economic transformation.

Chairperson Carrim (ANC) stated that he liked what had been said, especially about cooperative banks. At the same time, he was wary and would like to see the results. He questioned why the CBDA had been criticized by the public if it was doing such good work [as claimed in the submission]. He commented that he was not compelled by the JSE’s submission. SA is in a delicate situation globally and domestically. If the country does not address its transformation issues, we will all “go down”. He was not convinced that enough was being done to transform the JSE. He stated that he wanted to call the JSE back for another meeting.

Chairperson Carrim asked BLF if they agree that it is not just a question of de-racializing the monopoly but also one of reducing it. What is the good of a black monopoly? Black or white, monopoly capitalists treat the poor badly. Therefore, is not the challenge not just the racial character of monopoly but the nature of monopoly itself? When it comes to radical transformation, yes, we need it - but what exactly does this mean? We need to define this term.

Chairperson Carrim continued that it is not only what one says but what one does that matters in the public domain. What is it about the BLF submission and their actions that will make the public believe that BLF is going to act in the interests of all people? This should be particularly true of the poor, both the African poor and indeed poor whites as well. What is it that should make us trust BLF specifically to help these people? Can you explain what it is you have said that will convince us of this. He added that Mr Mngxitama had been present before the Committee under a vastly “different ideological camp” [as EFF member]. He added that BLF should avoid “sloganizing” and rather provide some more concrete suggestions.

Chairperson Carrim said on illicit financial flows, BLF presumably says WMC is responsible for these flows. Is it any less a crime if it is black person who is doing this?

Chairperson Fubbs stated that she had a comment for CFIs. The SCOF went to Kenya and was impressed by the size of the cooperative system. This had been achieved without monetary contributions from government. The sector was run by lay people; government merely provided the legal framework. South Africans need to understand cooperative banks and organizations better in order to unlock them. She echoed Mr Carrim’s comment that it would be good to see results from the CBDA and not just hear talk.

Response
Ms Newton-King responded to Chairperson Carrim and others. The JSE submission did not mean to suggest that enough had been done or that the transformation of the JSE was complete. Indeed, she looked forward to further work and engagement with the SCOF. She added that the township exchange being set up was a primary channel through which the JSE aimed to promote transformation.

Ms Tobias felt that it was important to be clear on what was meant by inclusive growth as opposed to simply growth. The JSE believes it must do what is core to the JSE to help the country grow. She felt that more should be done and that the JSE listing requirements could be used to encourage broader economic growth. Growth in and of itself is important but it is not good enough if it is not transformative and inclusive. The ability of South Africa to create growth very much depends on the investment environment. An investment environment that is useful to long-run capital that will enable entrepreneurs will improve the growth prospects for the economy. The Financial Intelligence Centre Amendment (FICA) Bill took four years and is a strong signal to investors. Fiscal discipline and the independence of state-owned entities is also critical and this is in government hands.

Mr Topham stated that the Committee was aware of the concerns of small black accounting firms. Attaining approval from their regulators was part of the problem. In terms of the transformation of the JSE, in 1994 government took away the requirement to register a company in terms of its race. This is a function of the Companies Act. He echoed his previous comment that ownership statistics must be collected per individual which was time consuming and made these figures difficult to come by.

Ms Newton-King stated that quotas are not set by the JSE because national legislation does not require so. The JSE requires disclosure so that stakeholders can engage on the issue of transformation. The JSE will take this further however if national legislators decide to set quotas. If a company fails to provide full disclosure, ultimately the JSE can delist them. The JSE is reluctant to do this, but companies normally disclose to avoid such consequences.

Ms Tobias was pleased that Mr Topham raised barriers to entry. She asked whether audit rotation or accreditation that was the challenge to entrants.

Ms Newton-King clarified that the accreditation of auditors to audit firms on the JSE is a different matter to mandatory audit firm rotation. This point would be clarified in writing.

Mr Golding responded from the CBDA. He commented that the bulk of the engagement had been regarding their recommendations. The structure of the economy is a part of the problem for SMMEs and CFIs are a key way to improve their chances. The CBDA has a self-sustainable model to assist SMMEs that has been given to National Treasury. The model proposes to assist CFIs as well as assisting the CBDA in terms of its sustainability (as opposed to dipping into the fiscus).

On that note, Mr Golding responded to Mr Maynier regarding what will be done with the 10% windfall the CBDA suggested receiving from funds confiscated from collusion cases. The CBDA will use this money to ensure that there is sufficient and robust infrastructure for the cooperatives sector. For example, the money will be used to fund the banking platform. The platform will assist CFIs to operate efficiency, increase their product offering and access the National Payment System (NPS). Currently, CFIs operate like “glorified Stokvel”. The reason is that they do not have access to the NPS. Instead, they need a sponsor bank to be able to participate in a potential settlement. Without a sponsor, you can never compete with a commercial bank. He replied to Ms Tobias stating that the CBDA already has a Memorandum of Understanding (MOU) with NCR in this regard. In terms of its footprint, there are currently 28 CFIs and 2 cooperative banks registered. He clarified that in the case of Kenya the government issued a directive stating that CFIs must be registered.

Ms Motshegare on behalf of the NCR replied that the new range of products for asset-building has not been costed. The idea was to provide credit for low-cost housing. The initiative will need proximity to funding projects such as a from hardware stores. The NCR does not have full information of total credit to woman or HDPs but this is information that it hopes to begin collecting.

Ms Tobias wanted to know how the NCR plans to unlock the potential for funding on tribal land that does not have individual property. There needs to be a set of regulations in place for this.

Ms Motshegare stated that the CBDA would have to revisit the issue with the Committee.

Mr Mngxitama responded that BLF demands radical economic transformation. The manipulation of numbers to convince listeners that the JSE is transformed is misleading. Mr Mngxitama claimed that top companies on the JSE are 97% white-owned. He stated that Public Investment Corporation (PIC) money and pension money does not count as capital. If the JSE was 90% black-owned this would be representative of the national demographic. The difference should be of critical concern. He stated that Chairperson Carrim alluded that he had undergone “an ideological shift” but that he should be specific in what he means by this.

Mr Mngxitama said demanding land without compensation is indeed a massive shift. By Marxist logic, the ruling class is defined as those who own the means of production. This class also controls the ideas that permeate society. The link between the Gupta Family and President Zuma is one of these ideas. The ruling class goes further to say that WMC is a fiction. This is because they control the production and dissipation of knowledge. WMC is the problem. BLF is not trying to replace WMC with Black monopoly capital. Suggesting this is its objective is just an attempt to delegitimize the legitimate struggle against WMC. Even the DA should be against WMC if it truly believes in the free market.

Mr Mngxitama stated that the BLF proposals were absolutely clear. BLF is calling for a proper treatment of WMC. BLF is requesting a judicial commission inquiry the findings of the CIEX report. He argued that ultimately land determines citizenship. At present black people are just tenants in our own country. BLF supports President Zuma in his call for land without compensation. It is not sloganization.

Another unidentified speaker from BLF responded to Mr Maynier’s question about taking up arms. He found this question annoying. Mr Mngxitama did not say this specifically. The construction of the arguments of Mr Malikane in this way follows a racist motive. He stated that BLF will have no problem taking up arms if it will create true citizenship for the people of the country.

Chairperson Carrim stated that his question was not answered. There has been R600 billion in illicit flows. Is it less of a crime if these people are black?

Mr Mngxitama felt that the question was disingenuous. Why even ask this question? Sure, of course it is also wrong if it done by blacks. But speculating in this way about possible black corruption is just a diversion. In a highly-aggravated tone of voice, he repeated that the actions of the chairpersons were fascist.

Chairperson Carrim, also raising his voice, repeated that he does not have a problem with the concrete suggestions, such as an inquiry into the banks. On the other hand, he does not want to discuss wide sweeping statements that cannot be tested. Furthermore, to refer to Chairperson Joan Fubbs as a fascist was completely unfair and should be withdrawn. Chairperson Fubbs is a veteran with deep roots.

Mr Mngxitama shouted that Chairperson Carrim was out of order. He was being a fascist.

At this point a shouting match ensued. Both Chairperson Carrim and Mr Mngxitama were on their feet and shouting into their microphones, which created significant noise. Some members of the Committee as well as BLF members were interjecting with shouted remarks and order was entirely lost in the meeting. The words spoken over the microphones were a heated exchange between Chairperson Carrim and Mr Mngxitama which appeared to be centred around whether or not the behaviour of Chairperson Fubbs had been fascist.

Chairperson Carrim left his desk and crossed the floor to engage Mr Mngxitama face to face. Aggressive shouting and gesticulating between the two continued and the mood became very tense with several BLF members standing up and crowding around Chairperson Carrim who was on the other side of the table to Mr Mngxitama. Some committee members and delegates left the meeting while most remained seated. Ms Tobias made her way between Chairperson Carrim and Mr Mngxitama, apparently to calm the situation.

In the midst of this confrontation a security officer in blue uniform arrived and made his way through the group to the centre of the confrontation. The shouting continued, but Ms Tobias and Chairperson Carrim separated from the BLF group and no one attempted to heighten the situation. Chairperson Carrim was shouting at BLF to leave and it appeared that they would do so, while repeatedly shouting their dissatisfactions. Mr Mngxitama stated that Chairperson Carrim had an “Indian superiority complex”.

As BLF was leaving Chairperson Carrim stated that he did not take Mr Mngxitama’s comments seriously.

The Committee decided not to take a break to “cool down” after the verbal confrontation but rather continue with the meeting.

Mr Topham was still interested to know which bank Mr Mngxitama banked with and whether the question could be answered in writing. He also wanted to know why BLF and ANN7 News had left the meeting at the same time.

Regiments Capital submission
Mr Niven Pillay, Executive Director: Regiments Capital, stated that the Bill of Rights was violated by a lack of access to financial services. The financial sector is not structured optimally to service basic human rights.

Mr Pillay noted four structural problems within the financial sector. Firstly, focus is skewed towards the wealthy and high-earners, while there is limited innovation and competition compared to other vibrant emerging markets. Secondly, credit allocation, interest and service charges are individual-customer focused with no evident risk-pooling or cross-subsidization. The poor borrow less and pay more. Thirdly, capital allocation is economically inefficient due to legislation, tax policy, gatekeeping and vertical integration. Finally, the provider-customer power dynamic empowers customer with limited recourse in the face of procedural and substantive unfairness.

Mr Pillay elaborated on each of these four problems. Regarding innovation and competition, India has made advances which has benefited the poor: 200 million individuals were banked in two years. The programme was initiated by the government. Tax rebates were granted for merchants that digitized their transactions. 80 percent rebates were granted on the patent costs for start-ups. Income tax exemption was granted to start-ups for their first three years.

Mr Pillay quoted extracts from the Competition Commission Banking Enquiry. The enquiry stated that government should pass legislation for second and third-tier banks. It recommended that certain rules restricting the participation of duly qualified institutions as acquirers in the payment card schemes be abolished. The membership and governance of the Payments Association of South Africa (PASA) should be revised so as to include qualified non-bank participants. It also recommended an approach that requires an explicit access policy for banks and nonbanks alike. Mr Pillay added that at present, credit denial can be done for several reasons: there is no transparent system by which the customer can assess whether or not the decision was fair.

Mr Pillay discussed the second structural problem: credit allocation, interest and service charges. Risk pooling is important; the United States of America has Fannie Mae [formally the Federal National Mortgage Association] and Freddie Mac [formally the Federal Home Loan Mortgage Corporation]. South Africa has the upcoming National Health Insurance for example. Credit allocation to the poor can be enhanced by risk pooling in the same manner as health and retirement insurance to eliminate the current cherry picking. The availability of affordable credit can be backed by a government guaranteed structure. Services charges to the poor can be reduced by cross subsidisation.

Mr Pillay discussed the third structural problem: capital allocation. Capital Allocation is currently economically inefficient due to legislation, tax policy, gatekeeping and vertical integration. There is massive potential to more efficiently allocate capital to stimulate the economy, create employment and direct capital to national economic imperatives. Regulation 28 in the Pension Funds Act is an example of an inefficiency. It limits asset allocation to alternative asset classes under the guise of prudence, ignoring economic imperatives as expressed in the National Development Plan (NDP). Tax policy is not used at all to support the housing space. The Real Estate Investment Trust (REIT) Sector pays zero tax if the investment is into a pension fund. This is the only asset class that enjoys such a benefit. Government needs to offer a tax advantage to the housing sector, comparable to the benefits given to the REIT sector. Instead we see the proliferation of shopping malls and office blocks. If we want the proliferation of affordable houses, we need to offer a tax advantage to the sector.

Mr Pillay said there are a few gate-keepers that control too much of the investment allocation in the economy. Consultants to trustees allocate Funds Under Management (FUM) of pension funds to managers they are comfortable with as opposed to objective merit. The critical evaluation of fund allocations is vital to continuously provide visibility of equitable fund allocations. The vertical integration seen in the sector is anti-competitive. For example, Life companies allocate funds to in-house fund managers regardless of performance. This also provides an uncompetitive pricing advantage over independent fund managers.

Mr Pillay discussed the fourth structural problem, the Provider-Customer power dynamic. Currently, the Provider-Customer power dynamic empowers customer with limited recourse in the face of procedural and substantive unfairness. Large corporations have the financial means to deal with consumer grievances. Customers may be protected by various acts, however, given the cost of litigation and the knowledge deficit of the poor, they are not equipped or empowered to take effective action in the face of procedural and substantive unfairness.

Mr Pillay summarized Regiments recommendations given these four structural problems. Regarding problem one (innovation and competition), sectoral arrangements with respect to transactional banking, insurance and the payments system (including the relevant legislation) must be reviewed and reformed in line with the recommendations of the Competition Commission Banking Enquiry of 2008. Regarding problem two, a solution must be designed and implemented that embodies the principles of risk pooling, cross-subsidization and government guarantees to enable the poor to access credit at comparable rates to the wealthy or high earners. To address the third structural problem, The National Treasury, the DTI and the Competition Commission need to evaluate the regulatory regime, the tax regime, concentration risk and vertical integration in the investment industry in order to more rationally align these with national imperatives as per the NDP. Finally, to address problem four, SA must establish a Financial Services Commission for Conciliation, Mediation and Arbitration (FSCCMA) to mirror the arrangements for the Employer-Employee relationship.

Black Insurance Advisors Council submission
Mr Madiele Samuel Mpuru, BIAC president, gave a brief introduction to the background and composition of the BIAC. The BIAC exists with several functions. It aims to assist in developing regulation. It wants to deal with the problem of profiling in the insurance sector and the challenges facing the Insurance Sector Education and Training Authority (INSETA). Similarly, there is the problem of broker contracts without consent or agreement. There is a high turnover rate of representatives in the insurance industry. Commissions are often changed without consultation. There is a high exodus of previously disadvantaged people (PDIs) from the insurance industry. There is a loss of income when leaving the insurance industry as one does not leave with one’s income. Another challenged faced is that the average age in the sector is 57 years old, which is very old. There is a lot of pressure from broker consultants. These are the problems the BAIC aims to address.

Mr Mpuru discussed current practise in the insurance industry. The current practise one of a conflict of interest. As independent advisors, we are told that insurance companies cannot spend more than R1000 per annum on the development of a PDI financial advisor. The Binder Agreement is not available to a lot of PDI financial advisors. Premium collection is given to other financial advisors but is often not available to PDI financial advisors. Support for BIAC has been difficult to get from insurance companies even though is it is an NGO. The BIAC does not have its own products but aims to support insurance companies. Part of the problem is that the big companies are franchises. There are serious challenges with empowerment in the insurance industry.

Mr Mpuru discussed the need for intervention. The Association for Savings and Investment South Africa (ASISA) lobbies the government. BIAC is often told that BIAC cannot be paid to sit on the committees of these organizations. We cannot be involved in consumer education and as advisors [if we are unpaid]. South African Insurance Association (SAIA) has stated that the biggest challenge is that that 35% of the cars on the road are insured while 65% are not insured. This also reflects the need for consumer education. INSETA receives revenues as 1% of the payrolls of all insurance companies. This money is supposed to help grow small PDI financial advisors. But this has not been happening. This is why unemployment is so high in SA. Young people should be being employed by insurance companies.

Mr Mpuru continued with the need for intervention. The level of entrance examinations has decreased from NQF six to NQF four. People still struggle to pass these expensive exams, which are only available at two institutions. The Financial Services Board (FSB) should address this.

Chairperon Fubbs reminded Mr Mpuru that he had three minutes left.

Mr Mpuru skipped to the concluding slide, which like other slides contained a picture of a man begging for help. The figure asking for help represents the fact that the poor want to be transformed. They do not want to be peddlers working in the informal economy. They want access to factors of production, being money, materials, machines, manpower, and land. If they are granted these, they will be transformed.

27four Investment Managers submission
Ms Fatima Vawda, Managing Director, 27four Investment Managers, noted that their submission included both a written paper and a submission. The submission focused entirely on the retirement funds, savings and investments industry, and does not speak to other parts of the financial services sector. The submission consisted of four key components. It represents a departure from the norm [in the meeting] by suggesting real ways that SA can address the anti-competitive nature of the industry. It is hoped that these strategies will align with the government's broader strategy to achieve economic equality.

Ms Vawda stated that 27four Investment Managers chose to make the submission for several reasons. Firstly, it is a black post-apartheid financial services and asset management company. Secondly, there is the perceived threat any substantial change could result in the collapse of a stable financial system. The result of this sentiment is that we have only see incremental change in the sector. We would like to demonstrate in the submission today that transformation and the deracialization of the sector will lead to job creation, innovation and a competitive environment. 25 black asset managers have been trained and employment at 27four Investment Managers. 466 jobs have been created in the sector by 27four. 27four has personal experience of what is holding back the competitive nature of the sector.

Ms Vawda continued. Until 10 years ago, less than a 1% of assets under management in the sector were managed by black asset management firms. Today around 5% of overall assets are under management by black owned firms. There are a number of areas where we still find that we do not have sufficient diversification and skills in black asset management firms, such as in alternative asset management including hedge-fund management.

Ms Vawda discussed the status quo in the savings and investments industry. The top 20 asset management firms are largely white-owned, managed and controlled businesses that were established in the apartheid-era. These businesses had a head start a built a large base of capital and resources. This creates a barrier to entry for new businesses. Of the R8.9 trillion rand managed in the industry, black asset management firms control only 4.6%. There are 41 black asset managers of which the top 10 control 88% of the assets [amongst black managers]. There is a long stream of asset managers that therefore manage very little assets in the industry. We also find that black asset managers that are older than 10 years have not managed to enter a “second-level of extension”, meaning that they are going to compete with the largest [white] managers.

Ms Vawda stated that there were significant data that illustrated the shortcomings within the sector in terms of sustainability, due to client concentration risk as well as lack of profitability. There are only a few independent black firms. There is significant client concentration risk. There are limited or no skills outside of domestic equity and fixed income management. Most concerning is that the R2trillion that sit within collective investment schemes unit-trust industry – very little of this wealth is managed by black asset management firms. The problem with this is the lack of distribution of this work afforded to black firms under current structures.

Ms Vawda summarized her points so far. Black firms in the industry are continually playing catch-up to large white business established pre-1994. We play by the same rules although they were allowed a large head-start. The value-chain is owned and controlled by four or five large players. There is vertical integration, significant conflict of interest and transfer pricing in the value chain. There are efforts to leave out black participants from becoming part of the value chain. For example, the large retail platforms that allow distribution in the retail sector; artificial barriers to entry have been created to stop black business from getting onto these retail platforms. 27four has experienced this first hand and it is time that SA transformed the value change. Particularly, it has been found that suppliers to large retirement funds have been manipulating BEE ratings. There are efforts to restrict the participation of black enterprises.

Ms Vawda went on to summarize the key stumbling blocks identified that block black business. The first is access to capital. The regulators play a role here in mobilizing black businesses. The channels that have historically been used in the country have not changed very significantly in post-apartheid South Africa. For a black business to gain access to capital is extremely difficult. At present the regulator is not playing a key role in enabling black business to play catch up with white business. A clear example is the requirement to apply for a hedge-fund license in the new dispensation which is the movement of hedge-funds to the regulatory space of the Collective Investment Schemes Act. Several applications were made by black businesses to the regulator and an excess of R2million was spent on the applications. Each time the regulator refused to grant the license with no explanation or reason for the refusal is given. This is pure disablement. How can black business advance? These clients ended up with white business.

Ms Vawda discussed solutions. Regulatory compliance should be matched with support for new entrants. Regulatory compliance can inadvertently serve to entrench existing market behaviour; the Financial Services Charter Council must do a lot more in terms of affording more indicators and an outcomes-based methodology. Non-compliance with the BEE scorecard, now that the retirement fund scorecard has been entered into the revised financial sector code is still voluntary – 27four wants prescription for compliance with the scorecard. The black industrialists fund that was created does not include the financial services sector. Furthermore, why was the Black Industrialists Fund given to Brian Joffe and a group of white people to manage? Why were not black people with the same level of skills given the opportunity to manage the Black Industrialists Fund? Where is government on this issue?

Ms Vawda said government needs to ensure efficient monitoring of the sector. If we look at the retirement fund scorecard that has been added to the revised financial sector codes, it is again voluntary and not prescriptive. Asset owners need to be made aware of the allocation to capital in order to balance their fiduciary responsibilities with the deracialization of the sector. One way to achieve that is through using a preferential procurement policy which speaks directly to the financial services sector scorecard.

Ms Vawda concluded that ultimately what we see in the entire savings and investments industry is that the retail sector has not transformed. The distribution channels that distribute savings and investment products to the masses of our people are very expensive and driven by high commission structures and by large enterprises that control the sector. The retail distribution review will hopefully balance this out. We still find a limited number of black financial advisors and black financial products and services being distributed because of the ownership of distribution channels by four or five large players. Black business needs greater enablement.

National Black Business Caucus submission
Mr Volchere Kgekwane, CEO: NBBC, stated that the submission was a response to complaints from financial sector, especially regarding banks. The contract between the bank and consumer is not even but biased in favour of the bank. Typically, the consumer must either agree with the terms of the bank or they will get no finance. The bank always has the upper hand in case of a conflict. When there is a conflict where the consumer has not made a payment that is owed, the bank threatens your assets by sending “goons” who try claim it back, for example a car. Intimidation should not be a part of the relationship. This can also be problematic as it later looks like the individual volunteered the asset when it was really taken under duress.

Banks also repossess property when somebody is incapacitated. For example, after a car accident. This is wholly unfair. The loan should be paused – the bank should not be allowed to cancel the contract and claim the asset. Banks should be a part of society and not preying on it. Often banks offer an unfairly low resale price. If something is repossessed and its fair price x, the consumer should at least get x and nothing less. Again, it is a case of a bank being an enemy of their customer.

Mr Kgewane felt that the issue above was symptomatic of an overly capitalist society. Another example is the ownership of an asset that is being paid off. A debtor should become the owner of the product if they own the majority of the asset, in other words if they have paid off at least half of the debt. It is unfair that the bank always keep full control of the good even if they have become a minor shareholder. Again, the problem is due to the asymmetric relationship between the consumer and the bank.

Mr Kgewane explained that these problems reflect in the courts. According to constitution we are all equal before the law. Therefore, if a Financial Services Provider (FSP) takes a certain point a view, a judge should hear seek both sides to the story. In reality, the bank can get a judgement against a consumer without even going to court. There is no recourse when the bank gets a judgement. This is problematic. Courts should behave constitutionally. A typical example of similar exploitation is from the cellphone industry. When a consumer runs out of data from a bundle, far higher fees often apply without sufficient warning. There has been no recourse when consumers as individuals have tried to resolve the matter.

Mr Kgewane stated that another problem is that many banks get people to sign contracts when the consumer does not actually understand the agreement in full. The banks should be forced to make sure the other party understands the agreement. A further problem with contracts is that the bank is allowed to distribute information to third party agencies. This should be disallowed. This is how the “goons” that confiscate property get involved in the contract when you never invited them as the consumer.

Maxima Advisors was not present in the meeting as scheduled.  

Discussion
Ms Tobias addresses the NBBC. She wanted to check if judgements could be made against individuals that had defaulted. This included the problem of the small print in the contract. Could someone clarify this? There were further issues to be discussed with the NBBC that should be held until a later meeting. She asked 27four Investment managers to clarify if they meant that the Black Industrialist Fund was not supporting the hedge-fund asset management programme. What are your specific recommendations with respect to this? Secondly, in terms of the provision of licences – is there a specific clause that inhibits the granting on licences that we can engage on? They could also be a further meeting to discuss this.

Chairperson Fubbs echoed the NBBC’s point regarding the repossession of incapacitated client’s property. It is shockingly unfair that they could take a property from someone who has no capacity to agree to it, and further charge them a storage bill. The claim that the Black Industrialists programme is handled by a white group should be examined more closely. Finally, NCR spelt out clearly that the current practices of financial agencies on regaining property not completely paid for, often neglects the fair market price.

Joint submission by South African Towing Board, South African Auto Repairer & Salvage Association (SAASA), Western Cape Towing Association, South African Builders Contractors Civils Association and the Retail Automotive Aftermarket Federation
Mr Wesley Douglas, representative from South African Builders Contractors Civils Association highlighted:
- A memorandum of agreement was signed on the 6 December 2014 between insurance companies and stakeholders to facilitate immediate transformation and procurement targets in the towing, panel beaters, contractors and builders industry.
- White monopoly capital still own entire value chains.
- Expanding market access to black service providers and suppliers.
- Evidence of collusion exists between panel shops, underwriters and insurers.
- The flagrant disregard of government legislation and BBEEE transformation targets by insurance companies.
- Black service providers who were party to signing the memorandum are victimised.
- The industry has seen a reversal of gains made before the signing of the agreement in spite of platforms such as a cooperative model and upgrades to shops that have taken place at the request of the insurance companies at great expense to black service providers.
- There were significant barriers that discouraged black service providers from actively participating in the industry.
- The establishment of a National Towing Board to regulate the industry.
- De-monopolisation of the insurance industry players.

Discussion
Ms Fubbs (ANC) commended the industry role players on their submission but implored them to provide the Committee with more evidence to support their allegations. The Chairpersons were of the view that if true, the allegations would constitute anti-competitive behaviour and collusion and should therefore be reported to the Competition Commission.

The Chairpersons concluded the meeting by affirming the resolution to draft a statement to clarify Parliament's position on the scuffle between Yunus Carrim and Andile Mngxitama. They also proposed a national forum between key role players to address challenges in the industry.

The meeting was adjourned.