Issue: March/May 2008
Editorials

COVER STORY 2

Donation at Ovation

A judgment of the Cape High Court is being taken on appeal. There’s a lot to appeal about, considering the complexities and costs that impact directly on fund members.

In contrast with contingency fees, curators of the Ovation companies (part of the Fidentia fall-out) are paid as agreed with the Registrar “in accordance with the norms of the attorneys and auditors professions respectively”. Put simply, attorney John Levin and accountant Barend Petersen are being paid at hourly professional rates.

The curators’ second report to court on Ovation, for the six months to end-August 2007, showed their fees for the period at R3,45 million. This equates to R575 000 per month, or R287 000 monthly for each of them. Assuming 22 working days in a month, each receives R13 045 a day. And assuming an eight-hour working day, it comes to R1 631 per hour each.

This doesn’t seem excessive by the standard of rates prevailing in their professions, where over R2 200 an hour for top lawyers and accountants is pretty much the norm. But few would be able to perform at this billable rate for eight hours a day, 22 days a month, month in and month out.

Even these curators, with the best will in the world, might find it difficult to devote all their attention throughout every working day to Ovation and nothing else. Levin is a consultant in a large law practice and Petersen is a director of several companies, including De Beers, where he owns a slice of its empowerment entity.

These aren’t the only fees, for the curators are allowed to outsource services. During the six months, they paid out R1,2 million for forensic investigations and R1,5 million for legal fees.

Who pays for all this? The 17 000 investors whose savings the curators have come to rescue. To such an extent have Ovation expenses increased over income that a “curators’ cost levy” was introduced. It was adjusted in January for scaled deductions from investors’ accounts. The levy of R100 monthly per investor per product on holdings over R5 000, and R50 monthly for holdings under R5 000, plus a variable fee of 0,3 percent a year on all assets under administration, was scrapped. But the variable fee has been increased from 0,3 percent to 0,6 percent (plus vat), deducted monthly, on the assets.

A year ago, when Ovation was placed under curatorship, the assets it administered were worth R4,5 billion. Allowing for subsequent appreciation in share prices and interest earned on cash, they’d probably now be worth, say, R5 billion. So the levy will pull in something like R30 million a year, or R2,5 million a month, for the costs of curatorship. This is atop the regular administration fees that investors must still pay. In a report to the Cape High Court, the curators stated that these fees had averaged 0,65 percent of assets and were averaging R2,5 million monthly during the first six months of the curatorship. It would therefore seem that, for the investors, curatorship has a dubious benefit of doubling their costs.

By court order, the assets have been frozen pending their reconciliation. Of the R5 billion, however, only a fairly small proportion remains to be reconciled. Yet, on assets they cannot access, the investors must continue to pay administration fees on the full R5 billion.

In the Cape High Court, Justice Dlodlo had held that the costs of Ovation’s curatorship must be borne by the investors: “It is only common sense that they are called upon to contribute, if necessary, should the funds of the financial institution prove to be insufficient for the purpose. Having regard to the total sum under administration . . . the individual contributions likely to be required from investors should, on a pro rated basis, not be large”.

The judgment is on appeal. As it stands, it inhibits normal operations of the Ovation retirement fund. In the FSB’s opinion, the trustees, faced with the assets moratorium, must nevertheless comply with fund rules and the Income Tax Act on payouts to members. This is exceptionally difficult as the assets cannot be moved off the Ovation platform. And members who want to withdraw from the Ovation funds are unable to get their benefit paid to them.

The curators have a discretion that they exercise with the FSB’s consent. They have agreed that members, obliged by the rules and the Income Tax Act to retire from the Ovation funds at age 70, can purchase a post-retirement annuity from the Ovation suite. This will enable retired members to be paid monthly pensions. But because there is now a dispute between the curators and Metropolitan Life, which underwrites the annuities, the impact on retiring members is unclear.

However, it is clear that the cash portion the retired member would have been permitted to access on retirement must be moved into another Ovation product from which the retired member cannot withdraw. In essence, the curators have not allowed monies to move off the Ovation platform. Another issue faced by the trustees relates to the curators’ cost levy. Because it is not an administration fee in the hands of the Ovation retirement fund, it can conflict with the statutorily prescribed minimum benefits that the trustees are obliged to pay the fund members. In other words, it can diminish the minimum benefits.

Also, argues trustee Hunter Thyne, had Ovation been put into liquidation rather than curatorship, the investors’ money would have been untouchable by the Ovation liquidator. Placed in nominee accounts, this money is recognised by the Financial Institutions (Protection of Funds) Act as “trust property” specifically for protection of investors from the misfortune of institutions. The Dlodlo judgment has overridden the protection: “The court may grant whatever order it deems necessary to assist in the achievement of the objects of the curatorship (and) the current Act leaves the court’s discretion entirely open with regard to the remuneration of the curator.

”Counsel for Metropolitan Life, which has some R1,4 billion of “trust property” administered by the Ovation companies, argued that shortfalls in curatorship costs should not be borne by investors whose monies were in a particular institution under curatorship. Rather, the shortfall should be borne by the FSB (sitting on cash and cash equivalents of R122,3 million, according to its 2007 financials) as it is funded by levies imposed on financial institutions.

The judge dismissed this submission: “The Financial Services Board Act closely defines the use to which funds of the FSB may be put. There is no reason that the expense of a curatorship . . . should be borne by the general public as opposed to those investors whose interests are most directly affected by it.

”Footnote: The FSB Act provides that the FSB “shall utilise its funds for the defrayal of expenses incurred by the board in performance of its functions under this Act”. One function is “to supervise the compliance with laws regulating financial institutions and the provision of financial services”.

FIDENTIA’S PROFESSIONALS

The curators of Fidentia, attorney Dines Gihwala and accountant George Papadakis, are also remunerated on the basis of professional tariffs. Asked why curators of the Datakor/Cortech funds are being paid on contingency while curators of Fidentia and Ovation are being paid professional fees, FSB deputy chief executive Dube Tshidi explains: “The difference is that the Datakor/Cortech funds have no assets from which curators can be paid.

”Gerry Anderson, deputy executive for market conduct at the FSB, notes that the Financial Institutions Act provides for the court to appoint curators and determine their remuneration. In the case of Fidentia (and others), the court ordered that their remuneration shall be in accordance with the norms of the attorneys’ and auditors’ professions respectively as agreed with the Registrar.

Having considered the seniority and expertise of the two curators, and the complexity of the issues involved, the Registrar agreed to a fixed monthly rate. He was satisfied that this rate amounted to a discount on what they would have been able to charge at hourly rates applicable to their professions.

The court order also provided, as is normally the case, that the curators’ remuneration is to be paid from the assets of, held by or under the control of the companies under curatorship on a preferential basis. All curatorship applications launched by the FSB since 1991 have had similar provisions. These fees are paid firstly from the available assets in the business and secondly, if necessary, as a contribution from investors’ funds in the business.

There is no other way of funding a curatorship, he adds: “The primary objective of a curatorship is the preservation of investors’ funds in their interest. The FSB is primarily funded by levies that it imposes on regulated institutions and it is not in a position to fund curatorships. It would not be fair to impose levies on the industry to pay for the curatorship costs occasioned by a single institution. Unfortunately, investors in that institution have to contribute to the extent necessary towards the costs of the curatorship which is aimed at preserving the value of their investments.

”The FSB, he points out, is a non-profit organisation: “Any reserves are aimed at maintaining a provision for working capital to fund ongoing operational costs.”