Edition: February/April 2018
Code of clarity
Financial education of consumers and trustees is writ large. There’s to be big money from institutions and big motivation for them to think big in their advancement of it.
It goes without saying that the broad mass of South Africans should be supported to understand the benefits to them of saving for the long term. But there’s another dimension to it, more subliminal yet no less significant.
One of the last things a Zuma-infused government could seriously welcome is consumers of financial products who’re alert, aware and active in the control of these savings. This in itself is a strong reason vigorously to encourage the financial education of consumers generally, retirement-fund members and trustees particularly.
Imagine a situation where the eight million or so members of SA retirement funds, swelled by these members’ dependents, are alive to the linkage between their benefits and the behaviour of their government; where they take a stand (through their representatives) against the waste and worse that impact directly on their funds’ investments (cumulatively worth over R5 trillion); where there’s widespread exercise of their rights (often neglected) to vote in elections for trustees committed to advance their interests on the national stage.
It goes beyond clean and efficient fund administration. These are routine matters that should be taken for granted, but nonetheless in need of constant monitoring by competent trustees not always evident. It extends, in the composition and capacity of retirement funds, to the nuts and bolts for the practice of stakeholder democracy at whose core is a robust and participative market economy.
Retirement funds are crucial because their broad demographic representation -- across the lines of income, race and political groupings -- joins them in the shared objective to optimise the sustainability of long-term investment returns. As such, they’re the cement for a social compact on which SA’s stability and welfare rely.
They’re the largest shareholders in SA’s biggest corporates and major funders of debt instruments issued by government. The funds are well capable of influencing both, were they of a mind to do so. The fortunes of funds and country are inextricable.
Imagine no longer. Stimulation is at hand.
It takes the form of the amended Financial Sector Code. Gazetted in November under the Broad-Based Black Economic Empowerment Act, a highlight is the emphasis on trustee and consumer financial education. This is the bedrock for improved savings as crucial to individual households as it is to domestic capital formation. The adjunct is for bottom-up pressure by the mass of savers to assert their authority over fund trustees, ensuring their voice in effecting investment mandates.
Relative to need, inadequate attention has been paid to the implementation of programmes for the better education of consumers. After many years since the first itineration of the voluntary Financial Sector Charter in 2004, efforts have been less than successful.
Financial education has tended to be confused with brand and product marketing. To show for the efforts is rather attempts to grow market share than improvements in the nation’s dismal savings pool and individuals’ vulnerability on retirement, let alone a citizenry exhibiting activism as stakeholders in the equity and bond markets.
Under the 2004 Charter, effective from 2008, each financial institution committed itself annually to invest a minimum of 0,2% of post-tax operating profits in consumer education poorly defined: “Consumer education will include programmes that are aimed at empowering consumers with knowledge to enable them to make more informed decisions about their finances and lifestyles.” It further recognised shareholder activism as “a critical component of continued confidence and long-term growth of the sector”.
Back then, when the entitlement of members to elect half of the trustees to boards of their funds was beginning to show traction, there were some 14 000 standalone funds registered with the Financial Services Board. (This number excluded such giants as the Government Employees Pension Fund and others in the public sector that don’t operate under FSB supervision.)
There were no umbrella funds. There was no Regulation 28 or other FSB requirement providing guidance for funds to compile investment policy statements that would commit asset managers. Or to comply with standards for environmental, social and governance (ESG) that would shape their approach to investee companies. Neither was there a UN Principles for Responsible Investment nor a Code for Responsible Investing in SA seeking retirement funds’ and asset managers’ adherence.
As at end-March 2017, according to the latest FSB annual report, the number of registered retirement funds was down to 5 119 of which only 1 758 were active (having members for whom a fund receives contributions and/or pays benefits). They are overwhelmingly defined-contribution funds (where the investment risk is carried by members, represented by trustees, underlining the imperative for their relevant education).
Clearly, there’s been a massive shift of standalones into umbrella arrangements sponsored predominantly by life offices. Also in progress are substantial moves by such industry bodies as Batseta and Asisa to promote the professionalism of principal officers and to provide for the training of trustees.
Then too, atop the initiatives of individual institutions, there’s the continued statutory function of the FSB “to provide, promote or otherwise support financial education, awareness and confidence regarding financial products, institutions and services”.
Taken together, with umbrellas consolidating the number of trustees and assets they control, they represent a strengthened platform for concentrated focus. But none is stronger than the amended Financial Sector Code, backed by law, to enliven the thrust with potentially huge money and incentive in qualifying for BBBEE scorecard points.
Notably, for instance, the annual value of qualifying consumer-education contributions by the “measured entity” (e.g. life offices and the retail operations of local banks) is 0,4% of its net after-tax profit with bonus points for an additional 0,1%. The agglomerated rand amount might be difficult to estimate but could run annually into the tens of millions, entailing a reprioritisation of budgets and a congruity of skills sets.
A guidance note under the Code defines how consumer education, inclusive of trustee education, will qualify for scorecard points. There are set terms for physical access, appropriateness and use of internal resources. Programmes can include interactive projects by classroom, workshops and media. These days the latter would seemingly embrace social media, abetted by the proliferation of smartphones as communication tools.
There’s a kicker. “All initiatives should be measurable to demonstrate impact. Monitoring and evaluation should therefore form part of every project to ensure both quality service providers and good use of money,” it says.
All external and internal projects, it adds, should be measured by independent service providers: “This means that a separation of powers between the person and/or entity that implements the project and the person and/or entity that measures the impact should exist at all times.”
There are strict limits on the use of branding for consumer education not to cross the thin line into marketing. Branding will be allowed because it can assist companies to develop a trusted brand in the education market. It may also ensure the use of quality service providers as the companies’ brands will be at stake.
Overall the quality of the branding should generally be consistent with the education content e.g. all full-colour or all black-and-white. In short, the tricks have already been foreseen and the formula for them to be averted is stipulated.
It’s not been by thumbsuck or magic that this Code has emerged. It’s the product of exhaustive thought and negotiation through representatives of government, the financial institutions and numerous industry associations. Such has been the range of disparate interests and inputs that the practical consensus is itself a remarkable achievement.
The next achievement will be for it to work. If it doesn’t, nothing will. Institutions need to apply their minds and resources as never previously. They’ll be challenged not only in offering water to target markets, throughout the income groups, but also in getting them to drink it.