Issue: September/November 2008
The radical conservative
New man in the FSB hot seat is “fit and proper” for the role. He has strong ideas on how those under his supervision should be too, like it or not. Biblical inspiration is intended to find form in regulatory practice for investor protection.
The soft tone and gentle manner of Dube Tshidi, newly appointed executive officer of the Financial Services Board (FSB), disguise a tough determination not to suffer regulation defaulters gladly. To the world, he’d come across as conservative. In a sense he is; he lives by old-style values that his training for the Catholic priesthood helped shape.
At the same time he brings to them a modern-day practical relevance, where the guiding principle for his job he summarises in Psalm 24. It’s about “clean hands and a pure heart”, which he sees as the foundation for the “fit and proper” requirements of the Financial Intermediaries & Advisers Act (FAIS). Let opportunists take their chances on whether Tshidi mentions religious belief as flowery stuff, or as deeply held conviction that he’ll bring to bear.
“My training has taught me to deal impartially with difficult issues,” says Tshidi. “Hard as the issues might be, my beliefs system allows me untroubled sleep.”
Question: Having previously been in charge of retirement funds at the FSB, for the past few years you’ve officially been outside this industry. From your most recent FSB vantage point, overseeing investment institutions and market abuse, what do you think were your most valuable insights for retirement funds?
Tshidi: I’d want a situation where independent professionals can assist trustees draw up the investment mandates for their funds. These professionals must be totally separate from investment managers and have nothing to do with them. Once the mandate is produced, it should be given to trustees, who then can shop around for the most appropriate investment manager. They do this shopping with the mandate already in their hands. You can’t have the managers help trustees draw up the mandates. The professionals should also see to it that the mandate, as they’ve drawn it, is executed.
Q: What are the major changes over the short and longer terms that you’d like to effect? In other words, how would you identify your main challenges and vision for the FSB?
Tshidi: It’s to focus mainly on three issues. First is the concept of treating clients fairly, the concept of TCF as it’s known and already operational in the United Kingdom. It will only work if it becomes part of your nature, ingrained in those who provide financial services to clients. One can write and talk endlessly about TCF, which involves transparency and accountability, which are relatively new to our culture, but if it’s not part of your make-up it’s not going to work.
Second is FAIS-related. There are too many people in the industry who simply don’t comply with its “fit and proper” requirement. The sort of people we want are those who will treat clients, make profits and earn returns in ways that are clean and fair.
Third is in setting up the FSB enforcement committee. It will address criticism that we don’t have sufficient teeth and don’t do enough to protect investors.
Q: Does this criticism not have substance? Setting up the enforcement committee implies that it does. What will change?
Tshidi: In the past, where we found that investors had been robbed and suffered damage, we’d have limited options. We could apply for curatorship and we could refer the matter for prosecution.
But we know that the high levels of crime have caused the prosecution authorities to become overloaded. Also, they often lack the expertise to prosecute in so specialised an area as financial regulation. So it can take years for them to attend to these matters, if they eventually attend to them at all.
The enforcement committee will now deal with all infringements of legislation under the FSB’s control. The committee will comprise independent legal, accounting and actuarial professionals, and will often be chaired by a retired High Court judge. We’ll make out the case against a particular party, who in turn will make out the defence case, and then the committee will make a determination.
Q: With what consequences? Will the committee’s determination be the last word, or will there be rights of appeal?
Tshidi: Determinations will address compensation for damages at their present value, not their value when the damages were incurred. The committee will also be able to sanction an administrative penalty up to three times the compensation amount. Should a recalcitrant institution or individual decide not to pay, we’d approach the High Court to make the committee’s determination a court order and so obtain a writ of execution.
After a determination, we’d be able to decide whether the matter should be referred for prosecution. If it is, and a conviction results, a court might sentence the guilty party not only to a fine but to imprisonment too. What is revealed in determinations should be of great assistance to prosecutors.
The FSB will fund these processes, but ultimately we’d insist that guilty parties pay the costs. We’d look only to recoup our expenses. Monies paid in administrative penalties will be used for the public benefit, such as FSB funding of consumer education.
Q: Would you say that the FSB resources are adequate for the functions it must perform? If not, from where will the additional resources come?
Tshidi: One can never say that resources are adequate. It depends on the mandate. The enforcement committee will come with its own demands, such as the use of experts for the preparation of cases. They’ll be funded from our pool of levies and recouped as payments of penalties are received.
Q: From your experience inside and outside the retirement fund industry, in which areas do you believe we can do with greater or lesser regulation? Let’s take hedge funds as an example, because the area is contentious.
Tshidi: Nowhere in the world is there a regulator of hedge funds. We’re trying to regulate the managers of hedge funds as fit and proper. But obviously, this will not remove the very high risk of investment in hedge funds.
To decide on the hedge funds in which retirement funds might invest, if they want to invest in them at all, trustees should rely on that pool of mandate crafters I mentioned earlier. It’s presumed that trustees won’t take any Tom, Dick or Harry as an independent adviser. They should only take those who’ve been voices of investors over long periods, who have track records in fighting for the rights of investors.
Q: As a lawyer, are you comfortable with the principle of retrospective legislation? Or, to be more specific, with retrospective application of the surplus-apportionment legislation?
Tshidi: There is no retrospective legislation. The law on surplus apportionment became effective in December 2001 to recognise problems that had occurred previously. This law provides the tool to deal with these past problems.
Q: Can’t it be argued that, prior to December 2001, the stripping of surpluses from pension funds was actually legal? In other words, that it only became illegal from the date that the surplus-apportionment legislation became effective?
Tshidi: No. The Pension Funds Act is explicit at s5 that the money in a fund is owned by the fund to the exclusion of anybody else. It does not belong to the employer or the fund’s members. All the member has is a promise from the fund that it will pay him or her a certain amount on a certain eventuality, retirement being one. The section applies irrespective of whether the fund is defined benefit or defined contribution. This provision has been in the Act since its introduction in 1956, and I believe it should remain in any future Act.
Q: But what about the spate of recent withdrawals from pension funds, ostensibly through fears of nationalisation?
Tshidi: If trustees allow withdrawals that are in breach of the Act and in breach of the fund’s rules, which are registered under the Act, they can be held personally liable for the fund’s money that they let out.
Q: On the subject of a future Act, to what extent is the FSB consulted by National Treasury and the Department of Social Development on fund reform and introduction of the proposed National Savings & Social Security Fund?
Tshidi: The consultations are between government departments. We feed into National Treasury, which consults with Social Development.
Tshidi... strong hand
He reads the Bible in Latin. He believes in leadership, which he defines in terms of serving people and not the other way around. He’s come a long way from the Attridgeville township outside Pretoria where he was born.
Having studied for three years at the Vatican to become a priest, Tshidi took his B Proc and LL B degrees at Vista University. It was followed by an LL M at Frankfurt, Germany. He also holds a higher diploma in labour law.
Having joined the FSB in 1994 as a junior analyst in the pensions department, he was later appointed to the FSB’s exco and in January 2002 he became the deputy executive officer responsible for retirement funds. From May 2006, he was the deputy executive officer responsible for investment institutions. In July this year, his experience now rounded, he succeeded Rob Barrow as the FSB executive officer.
Rick Cottrell, FSB executive officer from 1996 to 2000, comments: “Early during my period we spotted in Dube Tshidi a very rare talent. We did our best to encourage him, and he’s certainly justified it.”