Edition: February/April 2018
Giving it stick
There’s no pussyfooting on non-compliance with deadlines. The FSB will be getting tougher.
Not without good cause, the Financial Services Board is coming down hard on retirement funds guilty of late or non-submission of annual financial statements. Its latest annual report, for the year to end-March 2017, the FSB refers to circulars of 2016 and 2017 in which the boards of funds were informed of the Registrar’s intention to impose a penalty of R60 per day for the defaulting funds’ 2014 and 2015 fiscal years.
Too hard, perhaps? Or not sufficiently hard? Ultimately, when a fund is penalised, it’s the wholly-innocent members who pay. Also, the R60 per day can mount up disproportionately for the smaller funds. Moreover, the R60 is likely to increase significantly.
As a general comment, FSB acting deputy executive officer for retirement funds Olano Makhubela notes the regulator’s view that administrative penalties help to improve compliance: “Accurately prepared and properly audited financial returns, for example, provide us with useful information about how the fund or administrator is managed. Information received timeously enables faster and proactive supervision.”
In October the FSB issued for comment a draft notice proposing an increase in the maximum administrative penalty for the failure to submit various reports, returns and information within prescribed periods. The current maximum penalty, set in 2008, is R1 000 for every day during which the failure continues. Proposed is an increase to a maximum of R4 000.
There is of course an argument that such high penalties in the case of retirement funds mean that it is the funds and therefore the members who will be financially or negatively impacted by higher penalties. Although this is a fair argument, Makhubela concedes, it does not detract from the fact that funds -- of whatever size and also as applicable to any regulated financial entity -- are required to comply with laws. There should be consequences for non-compliance.
Secondly, many funds use external administrators to assist with various functions and services including compliance. In several instances, it is these administrators who fail to assist the fund with compliance. Where there are such clear cases, he insists, it should and will be the service provider paying the penalty. The fund must also request the service provider to provide it with a breakdown of charges so that the service provider does not pass these costs onto the fund.
What will certainly assist in this process, says Makhubela, is also publicly to name service providers and funds which are non-compliant. Public naming will force the trustees, members of funds and employers to hold each other accountable for such non-compliance.
Overall, the FSB wants to encourage a stronger culture of compliance.
TT: How prevalent is the problem? Could you offer some quantification and a rough profile of defaulters e.g. bigger or smaller funds?
Makhubela: Some 95% to 100% of the top 100 largest funds, in terms of asset size, are generally included in the annual reports of the Registrar for the past five years. These top 100 funds comprise about 75% of the assets in FSB-registered funds. On average, over the past five years 98% of them have submitted their annual financial statements on time. In particular years it’s been 100%.
Makhubela . . . comply or else
Larger funds tend to be better run because their boards meet regularly. Audit and risk subcommittees are in place for proper governance. Where there are few exceptions in terms of non-compliance, they’re usually due to litigation or other reasons beyond control of the board or administrator.
Smaller funds have various challenges. These include boards not meeting frequently or not being properly constituted. Fund governance and planning are hampered.
When one analyses the small defaulting funds, the majority are underwritten. They generally lag privately-administered funds on timely submission of returns. But the large underwritten funds, including the large retirement-annuity funds, do submit on time.
Many smaller funds are defaulters. Their assets comprise less than 5% of the assets in FSB-registered funds.
Could you indicate the number of funds fined over the past few years, the range from biggest to smallest fines, and the total paid in penalties?
Each year, on average, around 200 funds are fined. Funds with average assets below approximately R75m tend to be late with their submissions. These funds fall within the “small to medium” category below the top 600 largest funds. For the 2016 reporting period, this amounts to assets of R14bn in respect of about 180 small to medium-sized funds. Some of these funds are in the process of transfer and/or given notice of termination.
Who takes responsibility for late submissions? What sorts of explanations are given?
In most instances the fund pays the penalty while in others the administrator agrees to pay.
Various reasons are advanced for the late submission of returns. The most common entail board unavailability; lack of advanced planning for audits and audit preparation by boards, and poor quality of audit evidence provided by some administrators; not having properly constituted boards; delays and failures in the migration of administration systems; returns which only get validated and/or signed after the due date, and litigation.
In recent years, how many funds have been fined for late submission of annual financial statements? What amounts are involved?
For the 2012-15 calendar years, the amount of penalties invoiced is approx R3,9m and the amount paid is approx R3,8m. For 2016 we invoice only in January 2018.
However, penalty notification letters were recently issued to approximately 180 funds for the 2016 calendar year. Their responses are awaited.
Why not disclose the names of defaulting funds for “name and shame” purposes?
In early annual reports published by the Registrar since 1994, defaulting funds were listed in a table. The list then proved too long to publish due to the withdrawal of the audit exemption for underwritten funds in 2006.
However, the Registrar intends in the near future to publish the names of these funds on the FSB website and on various other platforms where members will be made aware of these non-compliant funds. Members could then become more active in how their funds are governed.