Edition: April / June 2016
Editorials

FINANCIAL SERVICES BOARD 1

Hunter and hunted

Massive litigation getting set to commence.
Allegations fly, and counter-allegations sure to fly,
about the regulator of retirement funds.

It’s taken a while for the project of the Financial Services Board, to cancel the registrations of “dormant” retirement funds, to blow up (TT Sept- Nov ’15). It’s since exploded into something much bigger.

Rosemary Hunter, deputy executive officer of the FSB and head of its Retirement Funds Division (RFD), recently launched a mandamus application in the North Gauteng High Court. Basically, a mandamus application is one where a court order is sought for a public authority to perform a specific act that it is required by law to perform.

Hunter wants the FSB to make available to her the reports of retired Concourt judge Kate O’Regan and of accountancy firm KPMG into the cancellations project. Respondents are the FSB itself, FSB chairman Abel Sithole, FSB executive officer Dube Tshidi, former RFD head Jurgen Boyd and Finance Minister Pravin Gordhan (as the minister to whom the FSB reports).

They’ve indicated that they intend to defend the action. It will doubtless take them time to prepare responses to the screeds of legal arguments and documents, with all their revelations about internal workings of the FSB, that Hunter has filed in support of her application.

Litigation of this magnitude is unlikely to be heard, let alone be decided, before Hunter’s employment contract expires at end-July. Moot is whether the finance minister will then renew it, either for the FSB or the market-conduct authority to take its place.

The more that litigation proceeds from the North Gauteng court to higher courts, the more exorbitant the expense. Hunter might be comforted by a 2009 Concourt decision that, in testing a constitutional principle, an unsuccessful litigant in proceedings against state officials should not be ordered to pay costs.

Thus, even if the respondents succeed, it’s possible that the FSB (substantially funded by levies on retirement funds) could be liable for the costs of all parties. If so, wait to see what provision will be made in the next (and probably last) set of FSB accounts.

Hunter’s papers are replete with allegations that the FSB had incurred irregular expenditure and had contravened the Public Finance Management Act as well as the FSB Act. There’s much more hard-hitting stuff: about the seizing of her computer and subjecting her to a forensic investigation; instituting a disciplinary inquiry where the charges were quickly dropped during cross-examination by her counsel; the offer of a golden handshake, and a failure by the FSB board to respond to her non-compliance notices (NCNs).

The first NCN was submitted to the FSB board in July 2014 and the second in June 2015. Detailed allegations include how:

  • Tshidi had engaged in a “concerted campaign” to have her dismissed from the FSB “possibly in order” to prevent her from investigating the manner in which RFD staff had dealt prior to her arrival with the governance, disposal of assets and liabilities, and cancellation of registrations of thousands of dormant funds. He’d also sought to protect certain underperforming staff in the RFD;

  • To achieve this objective, Tshidi had “sabotaged” her ability to ensure that the RFD properly performed its mandate by, amongst other things, seeking to frustrate investigation of the cancellations project and preventing approval of the necessary budget to upskill the RFD;

  • He’d also sought to persuade her to resign by making “numerous false and defamatory allegations” against her; publicly undermining her reputation, and encouraging members of the FSB executive committee “to view me with suspicion” and to address her in a “hostile manner probably with a view to finding support for an allegation” that her relationship with colleagues was irretrievably broken.

The big questions are whether, and if so how, the FSB board responded to Hunter’s grievances. It goes to the heart of FSB governance. Yet little is revealed in the 2015 integrated annual report.

The annual report was unavailable until an enterprising journalist, Carol Paton of Business Day, tracked down a copy in a storeroom at parliament. This was in February, prior to presentation of the report to parliament’s Standing Committee on Finance (SCoF). The FSB then published the report on its website and simultaneously put out a press release which itself is instructive for the FSB’s approach.

Paragraph by paragraph, with TT comments inserted at each, it said:

FSB:The Public Finance Management Act (PFMA) requires all public entities to submit their annual reports to parliament through the Finance Minister at the end of August every year. The FSB has been complying with this requirement since it published its first report in 1991. The practice since then has always been for FSB executives to present the Annual Report (AR) to parliament’s SCoF before the report is published on the FSB website. This is a common practice for many public entities. The FSB had no reason to deviate from this 24-year old practice when preparing the 2014-15 AR.

TT comment:There was reason to deviate, and no obligation not to deviate. The report was for the year to end-March 2015. We were now into February 2016, almost a year later when the FSB was already approaching the end of its next financial year.
Public officials are required to act in a manner that is effective, transparent and accountable. For the AR to have been withheld from the public domain for so long hardly promotes these standards. According to parliament’ own rules, documents that have been tabled and referred to the relevant committee (as the 2015 AR had been) are public documents. There was therefore nothing to have prevented the FSB from making it public at a much earlier stage.

The report was tabled in parliament on 28 August 2015, in accordance with statutory requirements and within the specified timeframe. The FSB was scheduled to give its presentation to the SCoF on 22 September 2015, but this was rescheduled for 14 October 2015. This date was also cancelled. Public entities can only present reports to the SCoF on invitation. This is how the committee works. Our executives have since been waiting for an invitation to present the report, in line with the committee’s practice.

The FSB’s long-standing practice undermines the ability of parliament to hold it accountable. Had the AR been published on the FSB website at the same time or shortly after it had been tabled in parliament, any person (including the media) concerned about what was or wasn’t in it could have brought it to the attention of a SCoF member who could then ask FSB representatives about it when they appeared before the committee. And it would have helped to guide SCoF on which FSB representatives to invite. The FSB approach is disempowering of SCoF.
In the particular Hunter instance, prompt publication on the FSB website may well have caused questions to be asked by the public and media about cryptic references in the AR to the cancellations project. Quite possibly, SCoF would have attached such importance to these questions as to have moved the FSB presentation up its agenda. Maybe, were Hunter invited to appear before SCoF, it would have averted the litigation now being pursued.
On the other hand, maybe it suited the FSB for SCoF’s attention to be delayed until the matter was overtaken by other events. The expiry of Hunter’s FSB contract and the dissolution of the FSB board on the establishment of the Financial Sector Conduct Authority come to mind.

On page 71 of the 2014-15 AR, the Chairman of the FSB Board has made full disclosures of investigations into the cancellation of dormant pension funds between 2007 and 2013. The disclosures indicate that the outcomes of these investigations are expected in the 2015-2016 report. Furthermore, on page 30 of the AR an update is given on the status of the cancellations.

Not so. First, the disclosure on page 71 was not made by the FSB chairman. It was made by the Auditor General and contained in his report on the FSB audit. Also in this report the Auditor General stated at page 70 of the FSB annual report:
“The FSB has commissioned an investigation to establish whether any pension fund or its members had suffered financial prejudice as a result of the action by the registrar to cancel the registration of dormant or other inactive pension funds during the period between 1 January 2007 and 31 December 2013....The outcome of this investigation is expected in the 2015-16 financial year.”
Second, even if this statement had been made by the FSB chairman, is cannot be said to resemble “full disclosure”. For example, it does not disclose that the FSB had been advised by Andrew Breitenbach SC that key elements of the Registrar’s conduct, in relation to the cancellations project, were ultra vires his powers. In these circumstances, according to Breitenbach, the FSB was obliged by law to investigate whether any of these funds and/or their members had been prejudiced.
What followed were a report by Justice O’Regan and, on her recommendation, an investigation by KPMG on a sample of funds. The contents of neither the O’Regan report nor of the KPMG investigation have been disclosed. It delays the triggering of processes for redress of prejudice that affected funds and members might have suffered.
Third, all that’s said at page 30 of the AR – under the heading “significant (retirement-fund) industry-related issues – is a bland statement about the FSB having obtained legal advice and consulted with the retirementfunds industry on measures to improve the governance, disposal of assets and liabilities, and cancellations of the registration of orphan funds etc. There is no update on the status of the cancellations project.
The report of the Auditor General was signed on July 31 2015. By then, according to Hunter, the FSB board had copies of both the O’Regan and KPMG reports.

The FSB adheres to the highest standards of corporate governance, with no tolerance for corruption or any wrongdoings. Allegations of any breach of the PFMA are therefore without foundation and are strongly rejected. As a public entity, the FSB is stringently monitored. Every year the Auditor General conducts a comprehensive audit of our financial and non-financial performance and the FSB has received unqualified audits for the past 24 years.

Ok then, but it leaves a chasm between what the FSB says about itself and what Hunter says in her founding affidavit about matters in her noncompliance notices not being investigated by the board. She also suspects that misinformation to the Auditor General had caused him not to investigate her allegations of irregular expenditure during the 2014-15 financial year.

The battle is joined for the courts, eventually, to have the last word. Then, and only then, can it be assessed whether Hunter is a public-interest heroine or a mischief-making villain.