Issue: Sep - Nov 2013
Editorials

COVER STORY

FSB in the box

From the Fidentia debacle to the sentencing of J Arthur Brown, from the appointment and remuneration of curators to protection of investors, from handling of the Ghavalas affair to efficacy of its operations, and right down to proposed policy changes, the Financial Services Board has been in the forefront of controversy. In this question-and-answer interview, FSB executive officer Dube Tshidi puts the regulator’s side of the story.

Today’s Trustee: Would you consider that the FSB, as it’s presently structured and staffed, is ready for its role as the market-conduct regulator under National Treasury’s proposed “twin peaks” regulatory system? If not, what changes would you like to see?

Tshidi: The statutory framework for the “twin peaks” regulation model has not yet been put in place. National Treasury sets the policy. It issued a discussion paper in February and the discussion process is ongoing, so the FSB would be unable to comment at this stage. But I have no reason to doubt the ability of the FSB to fulfil its mandate, particularly as government did not hesitate to give the market-conduct regulatory role to the FSB.

Since the Reserve Bank will be tasked with prudential regulation and the FSB with market conduct, under which regulator will pension funds fall? And will the Registrar of Pension Funds still be within the FSB? What’s the reasoning?

Here too, because of the ongoing discussions, I’m afraid that it would be premature for me to comment.

The FSB is funded by levies on financial institutions, whereas the Reserve Bank isn’t. Under the new dispensation, shouldn’t both be funded in the same way? Put differently, is it desirable that the FSB continues to be funded by levies and not by the fiscus?

This will also have to await the outcome of discussions with Treasury.

The FSB appears alone amongst state agencies to enjoy legal protection from being sued for negligence. What is the justification for this provision under the Financial Services Laws General Amendment Bill?



Tshidi . . . considered replies

Your opening statement is incorrect. The Bill
did not introduce the concept of limited liability for the FSB. The limitation clause (s23) has
existed since promulgation of the FSB Act in 1990. The proposed amendment – i.e.
removal of the words “not grossly negligent”
from s23 – aligns the FSB Act with other statutes dealing with the liability of organs of state under similar circumstances. A few examples are in the Banks Act, the Labour Relations Act, the Social Services Professions Act, the Prevention of Public Violence & Intimidation Act, the Sea Birds & Seals Protection Act and the Public Audit Act.

In addition to the alignment with national legislation, the proposed amendment will also bring the liability provision in line with international provisions and requirements. The International Organisation of Securities Commissions (IOSCO), of which SA is a member, similarly prescribes one of the core principles as adequate legal protection for regulators acting in the bona fide exercise of their functions.

The main difficulty with the current wording of s23 is that is may mean that, if a plaintiff can establish gross negligence (the fault element), then the FSB (or relevant officer or appointee) may be liable for any ensuing economic loss even if the imposition of liability would not accord with the legal convictions of the community and the Constitution (the wrongfulness element).

Some of the FSB’s decision-making powers concern contested matters e.g. approval of pension-fund amalgamations that some members might oppose. But the Constitutional Court has held that compelling public considerations require that adjudicators of disputes are immune from damages claims if they act honestly. This is a constitutional requirement for all valid exercises of public authority.

Far from the amended provision prejudicing potential litigants against the FSB, it will assist them. It will allow the court to enquire, without any possible distortions caused by the current wording of s23, whether the power was exercised honestly and with due care to avoid and minimise damage to others i.e. the bona fide exercise of power.

The R150 000 fine imposed on J Arthur Brown, convicted for fraud in the Fidentia debacle, has been criticised by the FSB for its excessive lenience. At the same time, the FSB has been exposed to criticism for not having adequately performed its statutory duty “to supervise and enforce compliance with laws regulating financial institutions and the provision of financial services”. If the FSB had properly performed its duty, how was Fidentia able to evade the supervision that allowed the debacle? Further, can you explain this ostensible dichotomy between the lenience of sentencing by the courts against enforcement of compliance by the FSB?

There is no factual foundation for the suggestion that the FSB did not properly perform its duties. The FSB’s actions concerning the Fidentia matter have not been criticised by any authoritative body.

Should any person actually go through the trouble of studying the FSB inspection report and the papers filed in the curatorship application, it will become apparent that Fidentia operated for the most part outside the regulatory laws in a manner apparently designed to circumvent FSB supervision. When the problems did come to the FSB’s attention, action was taken. The nature and extent of it appear from the court papers filed.

I fail to appreciate the “ostensible dichotomy” to which you refer. The courts are independent and perform their duties with reference to what is placed before each court. The FSB performs its duties independently and in terms of its enabling legislation.

This brings us to controversies in the conduct of curatorships, several aired from time to time in TT.

Firstly, the state, in the form of the National Prosecuting Authority, tries white-collar criminal cases. When the NPA enters plea bargains with accused persons, on matters where prosecutions are derived from FSB inspections and curatorship reports, can it or does it do so without consulting the FSB and the curators? If it does, then surely the FSB (as an enforcement arm of the state) should be given powers to intervene?

Prosecutions and plea settlements are in the hands of the National Prosecuting Authority (the state). The legal position with regard to the “rights” and “interests” of the FSB as a complainant in respect of plea and sentence agreements, concluded between the state and accused persons, is covered by s105A of the Criminal Procedure Act. It’s the prerogative of the prosecutor (or generically the NPA) to enter into plea and settlement agreements.

In terms of legislation, before such an agreement may be concluded the prosecutor must afford a complainant a reasonable opportunity to make representations on the contents of the agreement and the inclusion in the agreement of a condition relating to compensation.

The FSB is an organ of state. In that sense, it is a creature of statute. It can only perform the duties and functions afforded to it in legislation. It cannot “intervene” in prosecutorial matters. The NPA exercises its mandate independently. To the extent that the FSB is endowed with enforcement powers, such powers are spelt out in statute. They do not include criminal enforcement of matters dealt with by the NPA.

Secondly, the NPA has entered plea bargains with a number of people who had been accused of stripping the surpluses of pension funds. Amongst them is Peter Ghavalas, said to be the “mastermind” of these schemes, who was allowed to return to Australia with which SA has no extradition agreement. Did the FSB consent to the NPA allowing the plea bargain on these terms? In the event that Ghavalas does not return from Australia, to give evidence against those facing trial, is there a risk of the FSB being more embarrassed than with J Arthur Brown i.e. not merely of lenient sentences but of the trials being abandoned and securing no convictions at all?

In the case of Ghavalas, the FSB (as a complainant) was consulted and provided with an opportunity to make representations. The Criminal Procedure Act does not require a complainant to consent to a plea agreement.

The NPA initially consulted the FSB in March 2008 on the Ghavalas plea agreement. At the time the FSB was opposed to the agreement on the specific terms offered (non-custodial sentence and only R10m compensation to the funds in question). These sentiments were expressed to the NPA.

The plea and sentence agreement of Ghavalas only eventuated on 16 February 2009. Reluctantly, the FSB indicated that – given the need of the pensioners and the need to progress the other prosecution matters still pending at that time – a non-custodial sentence may be appropriate on the understanding that Ghavalas would pay compensation of all the assets he had at that time i.e. R18,5m.

The FSB has no reason to suspect that Ghavalas will not return to SA. Subsequent to his conviction, he did (in compliance with the plea agreement) assist both the FSB and the curator of the ‘Ghavalas funds’ on numerous occasions. However, the plea agreement provides that the condition imposed on him to assist and testify will endure for five years. Ghavalas was convicted on 16 February 2009, and the five-year period will therefore expire during February 2014.

The delays in finalising the criminal trials are well documented. Should the five-year period expire, the FSB can hardly be blamed for it. The FSB will never be embarrassed by events over which it exercised no control.

Thirdly, there was recently a High Court judgment which reflected poorly on a company director, Dines Gihwala, who happens also to be a Fidentia curator. Doesn’t it also reflect poorly on the FSB’s nomination of him as a Fidentia curator in the first place? Would the FSB now look to displace him as a curator, and can it do so?

The nomination of Gihwala as a Fidentia curator during 2007 was overseen by my predecessor, Rob Barrow. Gihwala’s appointment by the Western Cape High Court has been criticised by J Arthur Brown, and others aligned to him, in court proceedings. During 2010, Barrow deposed to an affidavit setting out the basis on which Gihwala was nominated.

The FSB is aware of the Supreme Court of Appeal judgment, in the Grancy Property Ltd matter, delivered on 10 May. On receiving a copy during June, the FSB immediately communicated with Gihwala and sought advice from its lawyers.

The judgment did not deal with the merits of the allegations against Gihwala. The SCA made no finding of wrongdoing on his part, or that he has in fact been guilty of any lack of honesty and integrity. The allegations of wrongdoing against him are due to be tested in a trial that seems to be imminent. The matter is in hand and it would not be appropriate to speculate on further developments.

As for the “displacement” question and whether the FSB can remove a curator, s5(9) of the Financial Institutions (Protection of Funds) Act applies. The appointment of a curator, being a court-appointed official, may be cancelled by the court on application by any party at any time and upon good cause shown.

Fourthly, please explain the role of the FSB in monitoring the fairness and effectiveness of curatorships. For example, how can it contain the costs of a curatorship so that they don’t get out of hand relative to the ultimate payouts for intended beneficiaries?

Those responsible for pre-curatorship losses invariably resist every attempt made by curators to recover those losses. The FSB is extremely conscious of the costs of a curatorship, yet these costs may be high because of the resistance encountered from those who previously controlled the affairs of the institution under curatorship.

Court-appointed curators perform their functions independently of the Registrar. In all instances the court orders stipulate what powers curators have and what their duties are.

In overseeing the curators, the various FSB registrars act in terms of s5(6)&(7) of the FI Act: “The curator acts under the control of the registrar who made the application . . . (and) may apply to the registrar for instructions . . . The curator must furnish the registrar of the institutions concerned with such information concerning that affairs of that institution as the registrar may require.”

Management of costs in curatorships is an issue of which the FSB is very conscious. A few principles have been formulated:

  • It is expected of curators to disclose in their regular reports to court the costs of the curatorship. In some instances it is required of curators to provide detailed breakdowns of specific aspects of the costs incurred e.g. of all litigation undertaken;
  • The costs of a curatorship may at a particular stage of the curatorship appear to be excessive. However, it may very well have been necessary to incur such costs to protect the interests of investors. Whether or not the costs may therefore be considered to have gotten “out of hand” relative to the intended payouts to beneficiaries, is an issue which can only be determined once all the work has been done and payouts (i.e. recoveries) made. The comparison of costs to payouts is too simplistic and will often be misleading as costs may have been incurred in order to stop/prevent abuses by those previously in control of an institution or to arrest a deteriorating situation;
  • The registrars require curators to submit details of their fees and expenses at frequent intervals for consideration and scrutiny. In assessing the costs incurred, the registrars are assisted by legal and accounting personnel employed by the FSB;
  • Alternatives to a curatorship are considered. One possibility is the liquidation of an entity. In recent years the FSB has encountered two instances where it had obtained provisional curatorship orders. Having thereafter received a report from the provisional curator, the FSB did not apply for a final curatorship but instead motivated and applied for the winding up of the entity.

Fifthly, given the high costs of curatorships, whether on a contingency or hourly-fee basis, are there alternatives for FSB consideration? For instance, at a fraction of the costs incurred on the surplus-stripping and Fidentia curatorships, why doesn’t the FSB rather employ its own in-house professionals? Wouldn’t they then also be directly subject to FSB management and able additionally to lead evidence before the FSB enforcement committee?

FSB personnel cannot conduct “curatorships” as it is not the function of the FSB. Management of a curatorship is a specialist field where commercial litigation, insolvency enquiries and the like are the order of the day.

Although the FSB is of the view that the majority of conventional curatorships have been successful, experience has taught that there may very well be need for a regulatory measure which may be somewhat less intrusive than a curatorship, yet more than the exercise of the FSB’s supervisory function. As such, National Treasury has proposed in the pending amendment Bill the concept of a statutory manager who may be appointed by consent with the institution under investigation and who will not divest the management of the institution of control.

To the extent that your question expresses concern regarding the remuneration of curators, I point out that the basis of a curator’s remuneration is determined by the court. Refer to s5(5)(c) of the FI Act.

Such remuneration would normally be determined with reference to the norms of the particular profession of a curator. In respect of lawyers (attorneys or advocates), an hourly rate based on the seniority of the curator will normally be applicable. In respect of auditors the hourly charge-out rate of the auditor-general is normally applied. The contingency-based remuneration was based on certain special circumstances. They’ve previously been disclosed and court orders were made.

Sixthly, what controls does the FSB exercise over the use by curators of their own professional firms for litigation? Is it content with situations where this happens, or is it concerned that it can be an incentive to litigate where the professional firm picks up the fees and the fund under curatorship pays the costs?

The FSB has taken note of allegations that curators “traffic in litigation” and criticism that they conduct investigations through instructions to professional firms with which they are associated.

The first point to consider is that it is open to those expressing such criticism or making the allegations to exercise their entitlement under s5(8) of the FI Act: “Any person, on good cause shown, may make application of the court to set aside or alter any decision made, or any action taken, by the curator or the registrar with regard to any matter arising out of, or in connection with, the control and management of the business of an institution which has been placed under curatorship.”

The second point is that some curatorship orders have forbidden curators to use their own firms. Other orders have allowed this, particularly where it may be practical and cost-saving for a curator to use his own professional firm, rather than spend time briefing an external firm.

The third point is that the FSB requires of curators to disclose to the Registrar the use of service providers and monitors the costs and fees paid to those providers. Accounts by the curator and service providers are monitored inter alia to ensure that there is no “doubling up”, i.e. that a curator is remunerated qua curator and as well as for work done in another capacity such as performing an audit.

There’s an ongoing dispute over curatorship of the Cadac pension fund. It’s argued that curator Tony Mostert is conflicted because he’s also curator of the Sable pension fund which has a claim against the Cadac fund. Since the same person is the curator of both, how can he simultaneously be plaintiff and defendant? Why resist the appointment of an independent curator to the Cadac fund? Alternatively, why not allow at least a joint curatorship or perhaps even a committee of fund investors to sit alongside the curator (which appears to be working well in the Rocklands curatorship)?

The curatorship application relating to the Cadac fund is sub judice. But I’m constrained to correct your suggestion that the FSB is resisting the appointment of an “independent” curator and that it is not, at the least, supporting a joint curatorship. The appointment of a curator is the prerogative of the court.

As far back as May 2011 the FSB did, in fact, nominate a second candidate. He was an eminent attorney, experienced in pension-fund law, for consideration by the court for appointment as a
co-curator.

When you were cross-examined on this Cadac/Sable conflict, during the criminal trial of Simon Nash, you responded that you preferred not to answer on the FSB’s nomination of Mostert as the Cadac fund’s provisional curator because you might incriminate yourself as the Registrar. You said that you’d answer during the court application for the fund’s final curatorship. That was over two years ago, but still the question remains unanswered. Would you like to answer it now?

Similarly, the issues raised in your question are sub judice so it would be inappropriate for me to comment. However, the question as to the alleged conflicted position of Mostert has been answered and addressed in full in the Cadac curatorship application. There is no conflict.

At present there’s a possibility of further interests conflict in that Mostert is also curator of the seven surplus-stripped pension funds in the “Ghavalas schemes”. Following a judgment in the Supreme Court of Appeal, and the subsequent decision of the Constitutional Court to dismiss (with costs) Mostert’s application for leave to appeal against the SCA judgment, these funds are now exposed to non-recovery of about R600m. Who is to decide whether any recourse might attach to the curator?

The judgment in question was an exception. Mostert is still at large to pursue any outstanding claims against those who perpetrated the losses to the funds. He is in no interests conflict and no recourse attaches to him from this judgment.

The FSB recently withdrew the licence of Kopano ke Matla Employee Benefits, owned by the Cosatu investment company, to manage pension funds. But there’s been no FSB media release on this; no reference to it on the FSB website, and no publication by the FSB of its inspection report. Why not?

The approval of KEB to act as a benefit administrator, in terms of the Pension Funds Act, was withdrawn in June 2012. The Registrar instructed KEB to inform all pension funds under its administration of the Registrar’s decision to withdraw the approval, to allow the pension funds concerned to find alternative administrators.

S13(B) of the Act allows the Registrar to make known the withdrawal of an approval through appropriate media. Media releases of the FSB, however, generally have to do with warning the public against doing business with a suspect entity. This was not the scenario with regard to KEB.

Reports prepared by inspectors are not public documents and are not “published” as such. In fact, the making known of information gathered during an inspection is governed by s9 and s10 of the Inspection of Financial Institutions Act, inter alia determining the categories of affected parties to whom the Registrar may provide information gathered during an inspection.

Provisions of s22 of the FSB Act also find application in some instances. It is possible that the Registrar may exercise discretion and make known information gathered if such disclosure is in the public interest.

For that matter, it’s noted that publication on the FSB website of inspection and curatorship reports is inconsistent and erratic. Sometimes you see them; suddenly you don’t any longer. Sometimes, as with Kopano, you never see them at all. Given the numbers of people affected, wouldn’t transparency and accountability be served by these reports being regularly published and archived as a matter of course for public scrutiny on the FSB website?

Publication of inspection and curators’ reports may seem erratic to someone if the basis on which reports are published is not understood. The starting point is that inspection reports, i.e. information gathered during an inspection, are subject to the general secrecy provision in s22 of the FSB Act read with s9 of the Inspection Act. As such, as a general rule, inspection reports are NOT published on the FSB’s website.

Reports by curators to court are published on the FSB’s website where it is required by the court order to publish such reports. Not all reports by curators are so published when the court orders note that the reports may not require publication.

Reports by curators to the court become public documents once they have been considered and noted by the court. As such they are available in the court files and accessible by the public.

The newly-gazetted Financial Sector Charter statutorily obliges financial institutions (including those which pay FSB levies) annually to invest 0,4% of taxed profit from their respective SA operations in consumer financial education. For its part, the FSB has a statutory obligation “to promote programmes and initiatives by financial institutions and bodies representing the financial services industry to inform and educate users and potential users of financial products and services”. How does the FSC obligation reconcile with the FSB obligation? Will the institutions be able to conduct education initiatives of their own, under the Charter guidelines, or do you envisage that the FSB takes control of the 0,4% to fulfil its mandate? In other words, where will the responsibility for consumer financial education actually reside?

The FSB Act neither enables nor obliges the FSB to “control” money which institutions are required by law to set aside for consumer-education purposes. The FSB’s role is one of promoting industry programmes and initiatives towards such education. For this purpose the FSB has established a successful consumer-education department and money which may be entrusted to the FSB is controlled by a trust under the control of independent trustees.

The new Charter may bring changes to this system, but I see no uncertainty as to what’s expected of the FSB and of the institutions respectively.

Similarly, with “fit and proper” qualifications for trustees about to be introduced, who will be responsible for training of trustees and for ensuring compliance with the qualifications? Who will bear the costs, and what will be the role of the private sector?

With the law as it is at present, no responsibility rests on the FSB as far as the training of trustees is concerned. That responsibility resides with the industry.

However, the FSB firmly supports the concept of “fit and proper” trustees. To this end, in an effort to enhance the professional development of retirement-fund trustees and thus enable proper governance of the retirement-fund industry, the FSB funded development of an internet-based toolkit for training of trustees. The toolkit is available on the FSB website.