Financial sector feels the heat

Finance Minister Nhlanhla Nene took aim at the financial services sector earlier this year and said it needed to transform itself and the way in which it conducts business. And just two weeks ago, thousands of Economic Freedom Fighters supporters echoed these sentiments in a march in the name of transformation in the sector.

The pace of change in the financial services sector has come into sharper focus this year as it continues to contribute significantly to economic growth as the fortunes of South Africa’s mining sector are reversed.

On paper, the sector appears to be transforming suitably, but on the ground it is lamented as being far too slow.

Several surveys have sought to measure the transformation of the sector, and the 2013 review of the Financial Sector Charter Council found it achieved an overall broad-based black economic empowerment (B-BBEE) level of four, as measured under the sector charter.

Level four is considered good on the compliance rating scale, which ranges from a high score of one down to eight. Level four means that between 65 and 74.99 scorecard points were achieved out of a total 100 points.

Following the signing of the Financial Sector Charter in 2003, the council was formed and represents the primary governance mechanism for empowerment in the sector.

But the genuine level of transformation remains difficult to assess.

“While scorecards list scores per se, they don’t truly reveal the percentage and number of black individuals that are in influential decision-making positions in firms,” said Delphine Govender, the deputy president of the Association of Black Securities and Investment Professionals (Absip), which is represented on the council.

“At Absip our members are all active participants in the sector and we understand the difference between scores and titles and individuals who are given real positions of influence … A simple look around the industry and an objective assessment of who the key individuals are in various firms are reveals that blacks are significantly underrepresented in positions of influence in the financial sector. This is what is of grave concern for us – that the pace of true transformation across the financial services sectors is happening too slowly.”

Earlier this year, Nene said transformation was, in effect, about reducing inequality. The Gini coefficient shows South Africa has regressed in reducing inequality and, with a score of 0.63, is one of the worst countries in the world regarding income differences.

The Black Management Forum’s Transformation Barometer reports that, although the Gini coefficient for white people and Indians in South Africa has moved in the right direction, inequality increased for black and coloured people between 1996 to 2012.

The council’s report found the financial sector’s average ownership score of 25.30% exceeded the empowerment target.

Asief Mohamed, the chief investment officer of Aeon Investment Management and a member of the council representing Absip, said the financial sector had lower targets on ownership than other sectors.

“What should be considered is that black people should own, in a normalised society, 91% of the wealth of this country. This 25% target is a significant compromise by black people.”

Govender said, if the substance and intended essence of the charter had been implemented by all firms, Absip could not think of any other intervention that could have helped to a greater extent.

“However, at Absip, we sometimes observe that to some extent it could be observed that the industry may have been stalling or delaying efforts to try and progress transformation. For example, discussions and attempts with regard to the inclusion of investment and retirement funds as voluntary signatories have been delayed for nearly three years.”

It was one of the biggest obstacles to further transformation in the financial sector, Mohamed said. “The retirement fund industry is substantial and yet there is no formal mechanism to include retirement and similar funds to be accountable for the pace of transformation of their entities.”

Absip sees one of the greatest hurdles as the lack of will.

“If businesses and leaders can’t see that transformation is not simply a tick-box requirement but a business imperative for the future sustainability of the industry at large, then we face a serious mind-set issue problem,” said Govender. “We remain unconvinced at times given the evidence and actions that the broader participants in the South African financial industry truly do view transformation and an inclusive sector as a business imperative.”

Keith Levenstein of EconoBEE said he saw the financial sector as being no different, in terms of transformation, to any other sector. He said those who say that BEE is ineffective are probably not looking at what BEE was saying in the first place. “BEE is not going to solve every single problem,” Levenstein said. “It won’t get fees to fall, but it does ask banks to pay bursaries and pay a little to skills development.”

The council’s review found that average spending across the sector on developing the skills of black people increased by 0.54% from 2008 to 2.25% in 2013.

“This falls short of the 3% target and has not yet returned to the reported spend of 2.9% in 2005. The 2005 figures may be an anomaly, and the increased skills development spend in 2013 compared to 2008 under the more stringent requirements of the Financial Sector Charter is a very positive trend,” it reported.

In 2013, there was also a significant improvement in performance in the percentage of black learnerships, with the average being 6.28% and exceeding the 5% target.

The Black Management Forum’s Transformation Barometer found the long-term solutions to improve transformation include “improving the education system radically so as to provide a steady stream of work-ready young people that are able to compete on the rapidly advancing technology front worldwide”.

According to the council’s review, the average percentage of black senior managers in 2013 was just under 2% greater than it was in 2008, and middle management was similar.

But black participation in junior management across the sector showed a steady increase from 39.71% in 2005 to 67.96% in 2013. Furthermore, average black female representation in junior management reached 41.77%, exceeding the target of 40%.

Ownership issues present deadline challenge

The Financial Services Sector Charter Council is racing against time to submit its realigned codes as the deadline of the department of trade and industry rapidly approaches.

Ownership, despite meeting the targets of the sector code in 2013, has proved to be a hurdle in realigning the charter with the department of trade and industry’s new generic codes, whose deadline was recently extended to November??15. Failure to do so will result in sector charters being repealed and instead generic codes will be mandatory.

Sibongiseni Mbatha, the secretary general of the Association of Black Securities and Investment Professionals and a member of the council, said the council had held meetings with the department and treasury this week to “iron out some of the issues that have been holding us back”.

The council has requested a further extension to submit by December 15.

Generally, the sticking point had been to clarify the issue of ownership, Mbatha said. “The problem is there had been no ownership audits conducted so we are discussing numbers based on hearsay.”

The Financial Services Board has since conducted an ownership audit, which the council is reviewing.

Ajay Lalu, the managing director of Black Lite Consulting, said the risk of the financial services sector code being repealed was not necessarily a negative development.

“The financial services sector has always measured itself in terms of the charter, but many analysts would argue the charter has significantly lower targets than the revised generic codes.”

But it didn’t mean the sector hadn’t made strides in transformation, Lalu said, “especially if you look at problems black business was facing and the challenges in terms of access to finance, the banks performed very well. The issues that existed when the charter was first conceived, don’t exist anymore.” – Lisa Steyn

graphic: Financial transformation

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