Issue: June 2005
Edutorials
Future Growth

The Financial Sector Charter - What trustees should know

WHAT IS THE FINANCIAL SECTOR CHARTER (FSC)?

It is a voluntary document committing the financial sector to transformation in terms of Government's broad-based BEE legislation. It has been signed by representatives from government, labour, community groups, the banking sector and the Institute of Retirement Funds.

WHAT IS THE AIM OF THE FSC?

The charter has set targets for the various deliverables defined in it, eg human resource development, procurement policies, enterprise development, etc. In addition to this "operational empowerment", the FSC has targets to channel money into transformational investments in six key areas:

  • Transformational infrastructure,
  • Black economic empowerment,
  • Access to financial services,
  • Low-income and affordable housing,
  • Black-owned SMEs, and
  • Agriculture.

In aggregate, the financial sector is committed to investing R125 billion in such initiatives.

WHAT IS THE TRUSTEE'S ROLE IN TERMS OF THE FSC?

A trustee's primary role is to seek investments that will meet the retirement fund's obligations to its beneficiaries. In terms of the FSC, therefore, trustees are likely to be encouraged to proactively seek development opportunities that will meet these obligations. Further, retirement funds will likely want to measure the operational empowerment of their service providers.

HOW DOES THE FSC WORK?

Each year the signatories to the FSC will be rated according to how they measure against the targets set. While there has been forward movement in defining scorecards for operational empowerment (employment equity, ownership by previously-disadvantaged individuals, etc) the scorecards for investments are only in the early draft stages.

ARE RETIREMENT FUNDS REGULATED BY THE FSC

Retirement funds are foremostly regulated by Regulation 28 and the Financial Services Board. However, the Charter Council (formed last year) has set up a sub-committee to engage with the retirement funds industry. The aim is to set guidelines for the industry to engage in appropriately targeted development investments. Concurrently, the Investment Managers Association of South Africa (IMASA) is in the process of assisting in the definition of targeted investments or socially responsible investments (SRIs) and appropriate investment channels.

SHOULD RETIREMENT FUNDS INVEST IN THE AREAS DEFINED BY THE FSC?

With an industry that controls over R1 trillion of assets, there is potential for retirement funds to play a meaningful role in transformation. Provided that socially responsible investments should earn returns equal to or better than traditional investments, they will have the advantage of delivering positive social and economic impact.

SHOULD SRIs BE PRESCRIBED?

Not necessarily. Prescription distorts capital markets and investment decisions. It is also likely to create an imbalance between available funds and suitable investments. Further, given that there is a willingness on the part of trustees to consider developmental investments, prescription should not be seriously considered.

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