/ 3 April 2017

How Net 1 flouts the financial rules

We take a look into what to expect in this week's edition of the Mail & Guardian.
We take a look into what to expect in this week's edition of the Mail & Guardian.

South Africa’s social grants distributor Cash Paymaster Services has embarked on a charm offensive, emphasising its commitment to “uninterrupted service delivery” and to new restrictions imposed by the Constitutional Court. Those terms limit the ability of CPS parent Net 1 to continue leveraging the welfare system to build a financial services monopoly.
But, as Craig McKune demonstrates below, Net 1 has previously shown little regard for laws designed to protect customers from abuse.

The Financial Services Board (FSB) is probing Net 1 over allegations that it abuses its clients – mostly social grant beneficiaries – and breaks financial laws.

Net 1 is the US-listed parent company of Cash Paymaster Services (CPS), which pays social grants for the South African Social Security Agency (Sassa). Net 1 has controversially used this access to sell loans, insurance, airtime and electricity to grant beneficiaries.

The probe comes after a whistleblower and I separately presented evidence and questions to the FSB, a financial services regulator, suggesting Net 1’s sales staff might not be properly accredited to sell some of its financial products.

Net 1 does not have its own financial services provider (FSP) license and outsources the role to a third party. The evidence presented suggests this third party might not have the capacity to make sure Net 1 sticks to the rules.

Critics have accused Net 1 of abusing grant beneficiaries through its business of debiting money from social grants to pay for financial products. Many beneficiaries say money is taken without their authorisation and that they have no clear recourse to stop this.

Net 1 vigorously disputes this, but my investigations show the company has a long history of flouting financial regulations designed to protect clients from abuse.

Net 1 executive chair Serge Belamant did not answer detailed questions, but said: “We follow all of the rules and regulations by all authorities.”

The regulator

My attention was first drawn to Net 1’s financial regulatory problems in January. I was investigating the complaints of the company’s alleged abuse of grant beneficiaries.

Wanting to know what steps an aggrieved beneficiary should take, I looked up the terms and conditions for the Sassa grant bank cards on Net 1’s website. They say that complaints can be directed to Net 1’s outsourced FSP, a company called Eledon Project Management.

Eledon accounts to the FSB, a statutory body established to regulate people who sell insurance, financial advice and related services. Such FSPs fall under laws like the Financial Advisory and Intermediary Services (FAIS) Act and the insurance acts. The FSB’s overall job is to make sure FSPs treat their customers fairly.

It is common for companies like Net 1, who don’t have their own FSP license, to outsource the role to a licensed FSP like Eledon.

This works well when the licensed FSP has enough staff and experience to keep its operating partner in check – and when the operating partner works in good faith with the FSP. Otherwise, it’s a sham.

Meet the D’Onofrios

I called Eledon’s phone number and reached one Lenny D’Onofrio.

I lied to D’Onofrio, telling him I was calling on behalf of my domestic worker who was having troubles with her Net 1 bank account – Net 1 was debiting money for a loan she had repaid a long time ago. What’s more, she had lost her bank card and could not get her Sassa grant anymore. These are stories I have heard from a few beneficiaries.

D’Onofrio told me I had reached the wrong office. He said he was the “compliance officer” for Eledon but that I should call the company on a different number.

A man named Carl answered. “Hi. I’m looking for Eledon,” I said.

“What is the company he works with?” Carl said, clearly confused.

“No, it is a company,” I explained. “It has an FSP license for Moneyline.” Moneyline is Net 1’s lending subsidiary.

Carl put me on hold for a minute to consult with his colleagues. When he returned, he said: “I think you have an incorrect number,” and ended the call.

I tried a second number for Eledon’s Daniela Anderson. On social media, she uses the surname D’Onofrio. I was later told she is D’Onofrio’s sister, although Eledon did not confirm this.

Anderson dutifully listened to my story. She said I should speak to Lenny D’Onofrio.

Completing the circle, I called D’Onofrio again, revealed that I was a journalist and recounted my experience trying to lay a complaint with Eledon.

It appeared likely that grant beneficiaries with real problems would be given the run-around when they tried to sort out financial problems through Eledon, I said.

I told him that Net 1 was distributing terms and conditions for one of its bank cards that erroneously listed someone else, not Eledon, as the FSP. It was Eledon’s job to fix this – so beneficiaries knew who to contact with problems – and it had clearly failed.

I said that Net 1 had hundreds of salespeople through the country. They are convincing grant beneficiaries to open new bank accounts, where their social grants are automatically transferred every month. To protect consumers, the FSB requires anyone dispensing financial advice to obtain certain qualifications. Yet Net 1’s salespeople are not accredited with the FSB, Eledon’s profile on the FSB website suggests.

The bottom line, I said, was that Eledon appeared to be ill-equipped to make sure Net 1 treated grant beneficiaries fairly when it sold them financial products.

I also suggested to Lenny D’Onofrio that the family relationship between Eledon’s compliance officer (him) and a “key individual” (Daniella Anderson aka D’Onofrio) might be a conflict of interest – these are statutory positions.

FSPs are supposed to have their own checks and balances to further protect consumers, including a compliance officer that oversees the FSP’s operations.

And I pointed out that a third D’Onofrio – said to be Lenny’s wife – was a senior manager within Net 1 and, according to a press release, “has worked with Net1 for the majority of her tenure in banking, which has allowed her to establish working relationships with executive and management teams across most business units”.

How, I wondered, did all the D’Onofrios and Eledon act impartially when dealing with each other and Net 1?

Report to the headmistress

Lenny was outraged.

He emailed me: “Your line of questioning and reading of the facts and the law regarding amongst others, a perceived conflict of interest and any wrongdoing on behalf of any of the parties mentioned in your questions are at best misstated, speculative and at worst baseless. To my knowledge, no client has been prejudiced or ‘given the run around”’.

He concluded: “Your self-confessed conduct in pretending to be the employer of a client with a legitimate complaint to elicit information is both unethical and a potential breach to the [press code]. In light of your actions to date, I have no confidence that you will report on the matter in a fair and unbiased manner, and accordingly do not intend making any further comments.”

The press code permits misrepresentation if in the public interest.

I sent similar questions to the FSB and within days Net 1 and Eledon were in trouble.

The FSB demanded documents and contracts from them and, in short order, Net 1’s top managers and Lenny D’Onofrio were on a plane from Johannesburg to Cape Town, where they endured two days of tense interviews with regulators.

FSB spokeswoman Tembisa Marele told me: “The FSB has already begun its engagement with Eledon regarding the allegations. A regulatory onsite visit has been scheduled to determine, among others, Eledon’s operational ability to oversee the financial services activities rendered by [Net 1].”

But the D’Onofrios are by no means the beginning of Net 1’s dubious relationship with South Africa’s financial laws.

License fail #1

Net 1 launched its plan to leverage South Africa’s welfare system by founding The Smart Life Insurance Company in 2011. At the time, Net 1 was hoping that its subsidiary CPS would win the Sassa contract to distribute social grants nationally.

Belamant cut in financial services consultant Chris van der Walt to Smart Life in 2011 as Van der Walt held an FSP license.

Van der Walt, who later became embroiled in litigation with Belamant, explained in a sworn affidavit how it was Smart Life’s initial business plan to leverage CPS’s expected Sassa contract to sell funeral insurance policies to grant beneficiaries.

He said: “It was envisaged that CPS’s infrastructure, such as its staff members who effect the payment of government benefits at payment sites across the country, could simultaneously market and sell long-term insurance products, notably funeral policies.”

Van der Walt’s job was to make sure Smart Life obeyed the financial regulations. His FSP license meant that he had to account personally to the FSB if anything went wrong.

He said: “CPS confidently expected that it would be awarded the tender,” and in February 2012, it was – although the constitutional court later ruled that the contract was invalid because Sassa badly botched the tender in favour of CPS.

Report to the headmistress too

Things quickly went wrong for Smart Life.

By early 2012 Van der Walt had received legal advice that Smart Life’s strategy might be anti-competitive. CPS also did not have an FSP license.

So, Van der Walt and the Smart Life board changed tack and started to roll out a Smart Life branch network completely independently of CPS and the Sassa contract.

But Belamant stopped this, Van der Walt said, and a power struggle ensued with Net 1 as the controlling shareholder versus Van der Walt, the FSP.

In a letter to his regulator, the FSB, Van der Walt complained that Net 1 would “steamroller” decisions “through the board at threat of dismissal of the directors”.

Van der Walt recounted one board meeting: “Belamant expressly told the independent directors that if they can’t keep him out of regulatory trouble, they serve no purpose on the board and they can F*&^ off.”

Van der Walt claimed that Belamant and Net 1’s chief financial officer, Herman Kotze, “hold the FSB in low esteem and have been very vocal about what they believe to be undue interference in Net 1’s right to conduct business”. He said Belamant routinely referred to a certain financial regulatory framework as “that b##^sh*t”.

One of Van der Walt’s Smart Life co-directors resigned in protest over similar complaints, while CPS continued to sell Smart Life policies without a license.

Then the FSB intervened. In February 2013, its long-term insurance registrar, Jonathan Dixon, ordered Smart Life to stop selling insurance policies immediately.

Dixon pointed at Belamant, who he said “does not function within the confines and parameters of the [Smart Life] board as a collective and unilaterally approves or rejects key decisions”.

Dixon said Belamant was conflicted as both Smart Life chair and Net 1 executive chair, and this endangered Smart Life’s clients’ policies, which had to be sustained for the rest of their lives.

“Lawfare”

Not long after, Belamant fired Van der Walt.

“During a board meeting, Belamant admitted that he simply wanted me ‘out’,” Van der Walt said in a letter to the FSB. “[Belamant said] he had instructed attorneys to find contractual reasons for it regardless of merit, and if the independent directors did not support his resolution, he would convene a shareholder meeting and dismiss them all.”

Van der Walt sued Belamant, who countersued. Net 1 also laid criminal charges over documents Van der Walt removed from Smart Life. Ultimately, they settled out of court and the charges went nowhere, Van der Walt said.

Meanwhile, the FSB continued its own probe, finding that both Smart Life and CPS contravened financial regulations.

Van der Walt was in trouble because Net 1’s breaches happened on his watch as the FSP license holder. The FSB also found that Van der Walt provided contradictory versions on other matters. It decided that he “does not comply with personal character qualities of honesty and integrity” and debarred him.

Van der Walt appealed to an FSB panel, but Judge Yvonne Mokgoro upheld the decision. She ruled that Van der Walt’s duty was to make sure Net 1 obeyed the law. He knew “that none of the people employed by CPS who sold the Smart Life policies had been duly qualified and authorised by Smart Life or any FSP for that matter, to serve as representatives. Besides, CPS was not an authorised FSP.”

Van der Walt has applied to have Mokgoro’s decision reviewed in a high court.

License fail #2

Then Net 1 signed on with a new FSP, Libra Financial Services.

Libra’s people refused to speak to me, but I was otherwise able to collect enough information to piece together some of their story. It is no less worrying than Van der Walt’s.

Starting late in 2013, Libra put together an emergency rescue plan for Net 1. It assessed Net 1’s compliance with the FAIS Act and other laws and took steps to fix problems.

Under Libra’s watch, Net 1 was able to resurrect Smart Life and get the insurer its own FSP license.

Libra used its own FSP license to cover for CPS, Net 1’s loan company, Moneyline, and Net 1 Mobile Solutions, which sells electricity and airtime. The latter is responsible for many grant beneficiary complaints about unauthorised deductions.

But by late 2015, Libra – like Van der Walt before them – was battling to keep Belamant and Net 1 on the straight and narrow.

In one email, a Libra staffer notified Net 1’s executives that Net 1 found itself in a “high risk position” because it was “non-compliant” with financial laws.

According the email, Net 1’s managers improperly bypassed Libra to instruct financial staff “in direct and flagrant disregard of the FAIS Act”.

The Libra staffer also wrote that when grant beneficiaries complained about Net 1’s debits from their accounts, they were “not being responded to within mandated timelines”, and Net 1 had been “extremely reticent” to provide information about the complaints to Libra.

Libra also complained that Net 1’s hundreds of sales employees were giving financial advice – as defined by the FAIS Act – when they convinced beneficiaries to open new accounts so that they could take loans.

To give such financial advice, the salespeople must be properly FAIS accredited, a cumbersome and expensive process involving exams, training and monitoring. According to Libra, Net 1 didn’t want to get them accredited.

When I asked one Net 1 salesman if he and his colleagues had been accredited to give financial advice, he said: “No, we don’t have that… None of us has ever been trained with FAIS. We were not even given some sales training, including the one which is FAIS. None of us ever attended or have got any certificates of FAIS compliance.”

I asked if his Net 1 branch manager was trained in financial services. He said: “Nothing, nothing.”

However, FSB spokeswoman Marele said: “The question whether or not financial services are being rendered is both a factual and legal question which should be answered on a case-by-case basis. This will also be looked at during the regulatory onsite visit [of Eledon].”

I received separate correspondence from a senior FSB manager who explained that in her opinion Net 1’s staff were indeed dispensing financial advice, so they should be properly accredited.

In the Libra staffer’s email to Net 1, he said: “This has unfortunately become an untenable situation, as no remedial action, nor response to our communications, has been forthcoming.”

Not long after, Libra fired Net 1 – and the D’Onofrios stepped in.

If at first you don’t succeed

Two years ago, Net 1 applied to the FSB for CPS, Moneyline and Net 1 Mobile Solutions’ own FSP licenses. If successful, Net 1 would no longer need to use outsiders like Van der Walt, Libra and Eledon.

To get its licenses, Net 1 needs to demonstrate to the FSB that its managers and staff are fit and proper for the job, that it can stick to the rules and that it will treat its clients fairly.

The FSB was expected to decide on these licenses in February, but this appears to have been delayed by the probe. FSB deputy executive officer Caroline Da Silva told me that Net 1’s applications were taken to a license committee in March “and are still under consideration”.

In a separate reply, FSB spokeswomen Marele said: “It would be inappropriate to make any comments in a public forum in respect of the applicants’ appropriateness to hold FSP licenses.”

In response to detailed questions for this article, sent in February, Net 1’s Belamant said: “This week is not good for me to respond as it is the week of our board meetings and investors update. I can assure you however that all is good on our front and that we follow all of the rules and regulations by all authorities.”

Through a new PR advisor, Bridget von Holdt, Net 1 responded to follow up questions last week. She said: “The comments made by the individuals concerned are false, misrepresented or inaccurate. Net 1 has referred to the relevant reports, judgments and affidavits regarding the disciplinary action taken by the FSB and criminal charges brought against these individuals and FSP for dishonesty, fraud, etc. Based on this, it is not recommended that you rely on their interpretation of events (sic).”

She would not give details of the criminal charges.


Get more on this topic
  • Read our #Sassa archive The R10bn social grants tender that kept on giving
    It includes analysis, explainers and investigative news exclusives that go deep into who stood to benefit, who the players are and what the roles of Serge Belamant and Minister Bathabile Dlamini, among others, has been in the controversial Sassa grants tender awarded in 2012.


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