2007 FSB Bulletin First Quarter.pdf

BB U L L E T I NFS

F I R S T Q U A RT E R 2 0 0 7

Prohibition on inducements regarding long-term policies

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Good regulation does not guarantee investor security

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Amendment Bill aims to protect pension interest of consumers

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Fidentia curatorship:

p 3What are the odds?

BC O N T E N T SFSTHE FSB BULLETIN IS PUBLISHEDquarterly free of charge. Views expressed by contributors are not necessarily those of the FSB. Reproduction, copying or extracting by any means of the whole or part of this publication may not be undertaken without the prior permission of the editor.

EDITORDr Franso van Zyl

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F I R S T Q U A RT E R 2 0 0 7

3 Fidentia curatorship: What are the odds?

By Louis Wessels, Legal Department, FSB

5 MOU with United Arab Emirates

5 New Deputy Ombud hopes to attract more women

6 Prohibition on inducements regarding long-term policies

By Dr Franso van Zyl, Chief Counsel Legislation, FSB

8 Mzansi provides affordable access to financial services

By Leila Moonda, Transformation Manager, SAIA

10 Good regulation does not guarantee investor security

11 Easy share call number for consumers

12 Risk profile questionnaires: Inappropriate questions lead to inappropriate advice

By Anton Swanepoel, Crux Consulting

16 IOSCO seeks global dialogue with industry

By Peter Elstob, Complinet

18 Amendment Bill aims to protect pension interest of consumers

19 State grants extension to comments on draft Companies Bill

By Michael Hamlyn, Business Day

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From what has been uncovered by the inspectors and the curators thus far, one thing is certain: it will take time to unravel the intricate affairs of Fidentia, establish and reconciliate investor and other creditor claims and finally dispose of assets and businesses into which Fidentia had, against all rules, invested client moneys through a proliferation of private entities. Woes begets woe, goes the expression, and in this case the concurrent curatorships of two other

Fidentia curatorship:

What are the odds?By Louis Wessels, Legal Department, FSB

With all eyes focused on the Fidentia curatorship, anxious investors whose money is trapped in the Group may well ask whether anything will be saved at all. Only time will tell.

institutions closely associated with Fidentia’s business are causing further complications. How exactly the business and shareholding of Fidentia, Ovation and Common Cents intertwine, have yet to be established. Ovation and Common Cents each have their own curators, who may be asserting claims against the other institutions under curatorship. And then the executors of the estate of the late Angus Cruickshank who, prior to his suicidal death, was the ultimate majority shareholder of both Ovation and

Common Cents, are also likely to join in the legal fracas of determining who owes whom. Amidst these peripheral issues the three panels of curators will give effect to their overarching mission, that is, to act in the best interest of the respective investors. This is done under the control of the Financial Services Board and under the broad auspices of the High Court. At least this is consoling for

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investors, who repose their confidence in these regulated entities and strengthen their belief that everything possible will be done to minimise their losses. Curatorships are subsequent steps in the process, but invariably their ultimate object is investor protection. Each curatorship has its peculiar complications. In the case of Fidentia the success or otherwise of the curatorship will largely depend on the value achieved by the disposal of the underlying assets into which the investor funds went. Some of the businesses are operating profitably, have been ring-fenced and are likely to be sought after by buyers. By contrast, there are also indications that the amounts paid for certain assets acquired with investor money were excessive. The curators have already found it necessary to shut down loss-making businesses such as Santé Winelands Hotel and to retrench staff. A positive aspect is that a number of properties were acquired a while ago. As a result of improvements effected by Fidentia and the general buoyant property market and vibrating business climate, its value may well have been enhanced. The challenge for the curators will be to retrieve all liquid assets, including those that left our borders. Investors must simply exercise patience, watch developments through reports to the court and in the media, and leave it to the expertise and business acumen of the curators to recover or to salvage investments at best. This process will not happen overnight! Common Cents has its own problems, as intensive but not as extensive as those of Fidentia. The Ovation platform of investment products included Common Cents as an investment option. In particular, cash investments belonging to Ovation clients were invested in the Common Cents cash portfolio. Through what can only be described as a fraudulent strategy, investor money

Fidentia ... from p 3

intended for this cash portfolio was deviated and eventually landed up in the private estate of Mr Cruickshank or entities controlled by him. All these misappropriated assets are subject to a restraining directive issued by the FSB, which determines that they may not be dealt with. Whether more than a fraction of what has been lost will be restored to the investors, however remains to be seen. Fortunately only the cash portfolio of Common Cents is affected, and not any other assets under its administration. The Ovation picture is significantly better, assuming that the assurances given to the FSB turn out to be correct. Ovation’s problems were precipitated when it redeemed to clients out of own funds almost R16 million more than it had received from Common Cents. Ovation is a Linked Investment Services Provider (LISP). A LISP is a non-discretionary administrator who is required to have the ability to reconcile at any time client investments with the underlying funds into which investments have been placed, and to reconcile these records with its bank balances. All this lagged behind when, in June 2006 Fidentia, in anticipation of buying Ovation, took over the administration of the company. The fatal blow came for Ovation when its regular operational funding by Fidentia came to a halt with Fidentia’s curatorship. Unless a proper reconciliation will reveal the misappropriation of client assets while Ovation’s administration was in the hands of Fidentia, the shortfall in Ovation’s investment administration will be limited to what was lost through the Common Cents cash portfolios. The Ovation curators may even decline to accept responsibility for the misdeeds perpetrated by the late Mr Cruickshank, who was neither a director nor a key individual of Common Cents. The prospects of Ovation investors being

repaid most of what they had entrusted to Ovation, appear to be favourable. Let me end on a positive note: the remedy of curatorship has often been described by the FSB in court papers as one of the most useful and effective regulatory tools in the hands of the regulator. Worldwide the experience has been that no oversight or regulation can prevent financial disasters — especially if management acted recklessly or fraudulently. However, the proven success of curatorships to clear up the mess and curtail investor losses in what initially appeared to be a hopeless case, is irrefutable.

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The FSB and the Emirate Securities and Commodities Authority (SCA) of the United Arab Emirates signed a Memorandum of Understanding during the 32nd annual conference of the International Organisation of Securities Commissions (IOSCO) in April this year. The conference took place in Mumbai, India. According to Norman Müller, Head of the Capital Markets Department of the FSB, the MOU originated as a result of the recognition by the FSB and the SCA of the increasing international activities in securities, futures and other related investment product markets and the need for mutual cooperation between the authorities. “The purpose of the MOU is to promote investor protection and integrity in these markets by providing a framework for cooperation. This includes channels

of communication to increase mutual understanding and the exchange of regulatory and technical information,” Müller says.

MOU with United Arab Emirates

Rob Barrow, Executive Officer of the FSB (left), and H E Abdulla S. Al Turifi, Chief Executive Officer of the SCA, shaking hands on conclusion of the agreement.

New Deputy Ombud hopes to attract more black womenSince women are credited with the larger share of decision-making on household spending, FAIS Deputy Ombud Noluntu Bam believes her recent appointment will get more female consumers to recognise the important function of the Ombud for Financial Services Providers. Bam sees her second-in-command role to Charles Pillai, the Ombud for Financial Services Providers, as a strong indication of a realisation that transformation - both in terms of race and gender - has been long overdue in the financial services industry. “A paramount challenge facing the financial services sector is the need for it to quickly change from being racially-exclusive and male-dominated.” “There is a need for more women - especially black women - to be given significant roles within this industry. I

see my appointment as some evidence that the Government is serious about transformation in the financial services industry.“ Bam obtained a BProc degree, passing with distinction in Accounting for Attorneys and Special Latin. In 1997 she was awarded the LLB degree from the University of Natal and was admitted as an attorney in 1998. By studying part-time, she attained the LLM degree through Unisa, specialising in Income Tax Law, and also obtained a Diploma in Financial Planning (CFP) through the University of Free State. After working as an attorney for three years with Charles Pillai in a law practice in Durban, she worked as a legal advisor at two financial services institutions, a stint that later proved to have been most useful.

As Assistant Ombud, Bam handled complaints from the stage of assessment to mediation through to resolution and drafting of determinations for final approval by the FAIS Ombud. Source: Media Release, Office of the FAIS Ombud, 20 April 2007

Noluntu Bam


Section 45 of the Long-term Insurance Act, 1998, under the heading: “Prohibition on inducements”, determines: “No person shall provide, or offer to provide, directly or indirectly, any valuable consideration as an inducement to a person to enter into, continue, vary or cancel a long-term policy, other than a reinsurance policy.”. The Act contains no definition of “person”, “directly or indirectly”, “valuable consideration” or “inducement”, and an interpretation of the section must consequently start by determining the “ordinary” meaning of the words used. A contravention of the section (where “person” would obviously include a long-term insurer in terms of the supplementary definition of the word “person” in the Interpretation Act, 1957) carries a criminal penalty (section 67(1)(b) of the Act). In the interpretation of the section, one must then also act in accordance with the interpretation rule. It is necessary to take into consideration the fact that a statutory provision which amounts to a criminal prohibition, must be “strictly” interpreted, and not by extending the clear wording to cases not clearly covered thereby, unless clear grounds can be found for a more “wider” interpretation. In my view the clear ordinary meaning

Prohibition on inducements regarding long-term policiesBy Dr Franso van Zyl, Chief Counsel Legislation, FSB*

The Legislature’s policy underlying section 45 of the Long-term Insurance Act, 1998, is basically aimed at preventing customers to conclude insurance contracts which they cannot afford or do not need, but merely conclude to enjoy the “valuable consideration” provided to them.

of the section is that the word “person” only refers to the person who “enters into, continues, varies or cancels” a long-term policy, and cannot be taken to refer to other persons initiating or facilitating such a person so to act, for instance by a referral to the insurer. If the legislature’s intention was that such other “outsiders” should also be included, one would have expected it to have contained different wording, such as “an inducement to a person to enter into, continue, vary or cancel” (a long-term policy) or to any other person to facilitate or initiate such firstmentioned person so to act …“. Another question is how an “indirect” provision of, or offer to provide,“valuable consideration as an inducement” can in practice take place? This question is considered with reference to cases where the insurer provides or offers to provide a valuable consideration, as an inducement, to prospective new policyholders. I have not been able to find direct legal authority on the interpretation of “indirect” in this case. In the absence of court decisions, interpreting the word “indirect” is very difficult. To be helpful, the following guidelines are offered:(a) The meaning of the expression “valuable consideration” is well-known. In the legal sense it refers to

something of value (usually capable of being stated in monetary terms) that passes from one person to another as an equivalent, or price, or recompense for a service rendered to or in respect of the firstmentioned person (in the presently relevant cases, concluding a policy contract with an insurer): see New Webster’s Dictionary (College Edition) s.v. “consideration” and “valuable”, and Hiemstra and Gonin Engels-Afrikaanse Regswoordeboek s.v. “consideration”.(b) In our law relating to a completely different matter, namely unjustified enrichment, some criteria are offered as to what “enrichment” in the legal sense means, essentially then denoting an act which has as a consequence that a person’s assets or estate is increased in value by something passing to the person from another, which increase would not have taken place in the absence of such act. It is here also regarded as an enrichment if something happens which has the effect of not decreasing a person’s assets which otherwise would have occurred had the said occurrence not taken place, or a decrease in liabilities which otherwise would not have occurred, or the non-increase of liabilities which otherwise would have occurred (see Wouter de Vos Verrykingsaanspreeklikheid in die Suid-Afrikaanse Reg, p. 180). It seems that although the legal question whether an “enrichment” has occurred, is not dealt with one can safely adopt the above criteria with legally justifiable results to determine cases where it can be said that a valuable consideration has passed “directly or indirectly” to another person, within the meaning of section 45 of the Long-

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term Insurance Act. It must however be remembered that this section also requires that such passing must in every case mentioned below constitute an “inducement”, a requirement the existence of which will in every case have to be proved separately. Obviously the intention of the provider will then be relevant. A “direct” provision of the consideration would then occur when something is physically delivered or paid to, or otherwise put at the complete disposal and control by the insurer of, the prospective policyholder as an inducement. In my view a “direct” provision will also occur in cases where not the insurer itself, but another entity standing in a legal relationship to the insurer acts as “provider” (a subsidiary company or another mandated agent or intermediary acting on behalf of the insurer). An “indirect” provision thereof would in my opinion occur -(i) where the provision has the effect of not decreasing the assets of the policyholder, which decrease would have occurred had the provision not taken place as an inducement (an insurer undertaking to pay any tax liabilities which the policyholder has to comply with in the case of a particular policy);(ii) where the provision has the effect of decreasing liabilities ordinarily vesting

in a policyholder under a relevant policy which decrease would not have occurred had the provision not taken place as an inducement, e.g. where an insurer offers a premium-free policy, or premium discounts, or a premium credit facility, or a loan of money to be used as payment of premiums, as an inducement; or a provision which entitles the prospective policyholder to use premium payment methods which in essence constitute cases of “free cover”; or(iii) where there is a case of a non-increase of liabilities which otherwise would have occurred had the provision not been effected (the insurer waiving rights to increased premiums, as an inducement). There will undoubtedly remain cases where the guidelines above will hardly be of help, e.g. where an insurer provides, or offers to provide, an overseas trip to the prospective policyholder, as an inducement. In such cases an increase in assets of the latter can hardly be proved, but the provision constitutes a mere “onsigbare” (invisible) or “ontasbare” (intangible) benefit (De Vos, p. 180). I am of the view that such mere “moral” enrichment should, in cases where cost savings cannot be proved (subparagraph (i) above), also constitute an “enrichment” as regards the law relating to unjustified enrichment (with reference to certain other authors and

court decisions). In my view, in the present context, the provision of any such benefit to a prospective policyholder, which will certainly have monetary value, should also be viewed as a case prohibited by section 45, if the additional requirement of being an “inducement” can also be proved. The underlying rationale of such a view would be that a section such as section 45, as regards the Legislature’s policy underlying the section, is basically aimed at preventing customers to conclude insurance contracts which they cannot afford or do not need, but merely conclude to enjoy the “valuable consideration” provided to them. In my view the same conclusion applies to cases where the insurer offers a prospective policyholder a chance of participating in a “draw” where, if lucky, the prospective policyholder may win a prize. In such cases the section would also be contravened on the basis of the reasoning above. The position may be different where a prospective policyholder is offered a right to participate in a competition where it is not compulsory to actually take out a new policy. But in such cases the question arises whether such practices are not in any case undesirable and whether they should not be prohibited under section 50 of the Long-term Insurance Act, 1998.*The views expressed are those of the author and not the views of the FSB.

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This is because they may not be able to afford the products or services, or the products and services may not be suitable to their needs or they may have no excess money to save. For the majority, there is no branch of a financial institution close by, they have no access to a phone or internet banking, or perhaps they simply don’t understand the options available to them. Financial exclusion is defined as a “lack of access to financial services by individuals or communities due to their geographic location, economic situation or any other ‘anomalous’ social condition which prevents people from fully participating in the economic and social structures of mainstream communities”.1 The financial sector has taken specific

Mzansi provides affordable access to financial services

Historically the majority of South Africans have been excluded from our country’s sophisticated financial services industry. Financial products and services play a huge role in most people’s lives, but for most South Africans conventional services simply don’t meet their needs.

steps to address this issue in terms of the Financial Sector Charter.

The history

In terms of the Declaration of the Financial Sector Summit, of 20 August 2002, it was agreed that strategies would be put in place to ensure that the financial sector became more efficient in the delivery of financial services, which would enhance the accumulation of savings and direct those towards development initiatives. The Financial Sector Black Economic Empowerment Charter (the Charter) establishes a framework for the promotion, within the financial sector, of black economic empowerment, in order

to achieve the objectives of the Broad-Based Black Economic Empowerment Act, 2003 (BB-BEE Act). This includes the promotion of effective participation by Black people in the economy. Signatories to the Charter commit themselves to promoting a globally competitive financial sector, which reflects the demographics of South Africa and contributes to the establishment of an equitable society, by effectively providing accessible financial services to Black people. The Charter (paragraph 8, in particular) commits signatories to “substantially increase effective access to first-order retail financial services to a greater segment of the population, within LSM 1-5”. The Charter establishes five key principles in terms of access to financial services, namely physical accessibility, appropriateness, affordability, simplicity and non-discrimination. It is against these criteria which the Council proposes that products and services be measured for purposes of scoring BEE points in


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By Leila Moonda, Transformation Manager, SAIA

section 3 of the Financial Sector Charter Scorecard. The Financial Sector Charter Council, in its first annual report on transformation in the financial sector, states:The Charter Council emphasises ... that South Africa is in the opening stages of an ambitious national project of transformation, and that the initiative to give all South Africans access to first-order financial products represents a significant departure from past practices by the financial sector … Refinement – in some aspects substantial refinement – of the oversight and implementation of the initiative may be necessary, but the initiative itself has demonstrable value and is likely to make major and quantifiable contributions in the future to access to first-order financial products by historically unbanked strata of South African society. 2

Initiatives by the short-term insurance industry

In 2004, the short-term insurance industry, in response to the Charter requirements, started with the development of a product which would be “accessible and affordable” to low-income groups. To date, one product had become available, with more being expected during the first quarter of 2007. This initiative faced obstacles in its implementation. The most significant delay arose from the regulatory aspect. Standard product wording was initially developed as the most effective means of reaching this target market. Following advice from the Competition Commission, this route had to be reconsidered. A set of minimum standards was then developed in line with the Charter’s Generic Access Standards, in order to ensure that appropriate products would be available. This would enable companies to develop their own products in line with these standards. Other challenges include:

• Legislation covering intermediaries that sell insurance products (Financial Advisory and Intermediary Services Act, 2002 (FAIS Act)). • Poverty.• A lack of education in, and understanding of, short-term insurance products.• The commission made by intermediaries would be very low.• A lack of distribution channels into this target market.• The methods used in premium collection from people who have no bank account. Solutions to address these challenges include:• Changing legislation to allow lower level intermediaries to sell these access products.• Providing consumer education to address financial literacy and facilitate an understanding of short-term insurance products.• Investigating the use of alternative distribution channels.• Investigating alternative premium collection methods.

Mzansi standards

A set of minimum standards was developed by the Financial Sector Charter Access Committee (Access Committee) and approved by the Charter Council in December 2005. Mzansi short-term Insurance policies will be no frills policies, aimed at providing cover for the household structure, household goods and personal effects against specified risks, such as fire, lightning, explosions, storms, floods, impact and theft (i.e. sudden and unexpected events). Standards for these policies were designed as a first-loss policy to reduce administration costs and provide fair value to the client. The salient features of these standards are:• The documentation must be simple and easy to understand and must be available in all the official languages.• The policy must cater for irregular

payment of premiums.• The policy must offer cover at pre-determined levels. Therefore, the cover that the insured selects is the cover that is paid. This means that averaging will not apply to these policies.• The policy cannot be cancelled after the first non-payment. The policy-holder must be given an opportunity to get up to date with his/her premiums. However, the principle of “no premium no cover” will still apply.• Due to the nature of the target market, alternatives to application in writing and changes in writing must be sought.• Cognisance must be taken of the fact that most people in this target market will be unbanked and therefore alternative premium collection facilities should be sought.• Alternative distribution channels to the conventional method of using brokers should be sought.• The product should cover the household and the household contents. As a minimum, the policy must provide disaster cover.• Repair or replacement must always be the first option when settling a claim.• Proof of ownership is not always possible in this target market and should therefore not be a non-negotiable criterion. Where proof of ownership is not possible, an affidavit should suffice.• In order to reduce the incidence of fraud, an excess must be built into the policy.• Theft cover must be built into the policy at a limited percentage of the total cover. SAIA is confident that these standards and the products that comply with them will go a long way in addressing the problem of financial exclusion and increasing access to the short-term insurance industry.

1Financial services and Social Exclusion, Connoly C and Hajaj, K, 20012Financial Sector Charter Council, 2005 Annual review of transformation in the financial sector, p. 25

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through the net, through deliberate omission of information, deception or otherwise. I’m proud to say that on the FAIS side that while we’ve issued licences to 15 500 intermediaries, we have declined over 1 000 applications.

So what interventions are available to you?

Two really. One is to do the sifting process properly and be unrelenting in doing that. The other is to ensure ongoing monitoring and supervision. A four-eyes approach is necessary where there’s always someone to look over the shoulders of another. We rely heavily on compliance officers, auditors and getting annual reports.

How would you rate compliance in SA?

Generally good, as far as the asset management business is concerned. Helpful has been the institution of the “compliance officer”, a practice initiated in the UK in the early Nineties and has been copied here. The bigger institutions voluntarily set up compliance divisions, now asset managers are required to do it by law.

Are you satisfied that compliance officers in these institutions are sufficiently independent?

Yes, but I accept that at times they could

In fact, the former Syfrets and Board of Executors constituted the establishment of the first trust companies in the world. More recently, this reputation has been tarnished by the likes of Masterbond, Jack Milne’s PSC Guaranteed Growth Fund (PSCGG) and Regal Bank. Latest shocks have been the Fidentia issue and allegations that 26 prominent businessmen have siphoned between R200m and R800m from various large pension funds. Leon Kok spoke to Gerry Anderson, Deputy Executive Officer at the FSB, responsible for market conduct and consumer education. Anderson declined to comment specifically on Fidentia because of his handling of it, but agreed to talk about broader issues.

Are you satisfied that the regulatory framework is adequate enough to deal with these kinds of issues?

Yes, to a great extent but it’s a dynamic issue and can never be totally watertight. You can never be sure of what’ll happen in future. History has shown that the regulatory framework is developed

Good regulation does not guarantee investor security

South Africa has long prided itself on two centuries and more of having been one of the world’s leading financial services countries, going back to the Weeshere or Orphan Masters at the Cape who administered to the physical welfare and education of their wards.

after practices that have originated in the market. For example, the first stock exchange laws emanated out of the 1929 New York Stock Exchange collapse, and the rest of the world followed. Much the same in SA, Masterbond for example, led to the Nel Commission of Inquiry, the Commission made certain recommendations and these contributed significantly to the drafting of the Financial Advisory and Intermediary Services Act, 2002, commonly referred to as the FAIS Act. Of course, there have been other contributing factors as well, such as the relaxation of exchange controls eight years ago that triggered some very questionable schemes. In fact, a whole lot of entities mushroomed, attracting investors to engage in foreign currency speculation.

Elucidate on the vulnerabilities.

The regulatory process needs to be seen as a sifting process, aimed at protecting the interests of investors. The chief objective of the FSB, is to do precisely that. However, there will always be occasions where the bad guys may fall

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come under considerable pressure internally. In small firms, particularly, it can be difficult for them to be as independent as would be ideal.

What about auditors — especially in Enron-type cases where they claimed to be squeaky clean?

Binding on them is that they must provide a section 19(3) FAIS audit report that’s far more than a mere financial report, and they’re under an obligation to report any real or suspected irregularities to the Registrar of Financial Services Providers.

What warning lights do you resort to in identifying troublesome financial services players?

Several. First, the non-provision of financial statements. This happens regularly, though in some cases there’s a good reason such as a change of year-end or the auditor being unavailable. Secondly, reports from the various ombudsmen. Thirdly, client and/or staff complaints. Fourthly, indirect channels such as readers’ letters to newspapers. Lastly, consumer and other public bodies contacting us.

Given the recent scandals, what’s your advice to the investing community?

Be alert, and ensure that your financial adviser is on top of things as well. If something looks too good to be true, it is. If you’re uncomfortable about an investment, move your money elsewhere. If it generates a return far removed from the norm, consider that it probably cannot be sustained in the long term. There are exceptions to the rule, but very few. For example, no one can guarantee that you can permanently grow your JSE assets at 2% a month or 25% a year.

Three Ombuds offices in the financial industry have come together andestablished an easy to remember share call number for consumers. This centralised one-number is the result of the teaming up between theoffices of the Ombudsman for Banking Services, the Ombudsman for Long-term Insurance and the Ombudsman for Credit Information to bring their services closer to the consumers they serve. 0860 OMBUDS (0860 662837) is a single number for consumers to call. They will be connected directly to any of the three offices or get guidelines on whom to contact if in doubt of which Ombuds office to usefor lodging a complaint. “More consumers are becoming aware of the role of Ombudsmen and thatthey can lodge complaints free of charge if they need disputes to be resolved. It

is therefore important for the Ombud offices to focus on accessibility to such bodies. It was precisely with this in mind that the idea of the one telephone number for all financial Ombuds offices was borne,” says the Ombudsman for Credit Information, Manie van Schalkwyk. Neville Melville, (the former) Ombudsman for Banking Services adds: “The one telephone number for all financial Ombuds offices has been successfully implemented in Australia and this made it easier for the consumer to lodge a dispute with any of the offices.” Consumers have come to associate the term “Ombud” with someone who couldhelp resolve disputes, especially in the financial industry. However, frustrations arise when they are told that they called the wrong Ombud and that

the entire process of lodging a complaint with the correct office must start again. Justice Peet Nienaber, the Ombudsman for Long-term Insurance states: “This isanother big win for consumers. We forget that consumers don’t alwayshave the correct knowledge to know which office to contact when theywant to lodge a complaint, thus making this one telephone number initiative a win-win situation for consumers and Ombud offices.” The Ombud schemes involved in this initiative see this as a huge benefit in terms of consumers’ convenience and hope that the other Ombuds offices in the industry will soon follow suit.

SOURCE: Media release, Ombudsman for Banking Services,March 2007

First published in FINFUND, 8 March 2007 (FINWEEK, Autumn Edition).

Easy share call number for consumers


The questions in these risk profiling questionnaires should be sound and the application of the outcome from the questionnaires instrumental to appropriate advice.1 If a client’s risk profile determines the suitability of the product, it means that if the risk profile questionnaire is sound, it will lead to sound advice. However, if the risk profile questionnaire is fundamentally flawed, it will lead to fundamentally flawed and inappropriate advice. But, there is much more to this subject than it may appear.

The meaning of risk profile

The term risk profile has not been defined in the Act and therefore the normal meaning of the words must be used in its application under the FAIS Act. Risk means the possibility of something bad happening or a situation that could be dangerous. To risk something is to do something even though the result could be unpleasant.2 Profile is a description of something that gives useful or important information.3 A person’s profile may also be defined as a character sketch.

The application of risk profile

Although a client’s risk profile is particularly relevant to investments, a client’s risk profile must be determined, irrespective of the financial product concerned.4 There are two primary

Risk profile questionnaires:

By Anton Swanepoel, Crux ConsultingA client’s risk profile may determine the appropriateness or suitability of the recommended product and for that reason it is important to understand the meaning of risk profile in the context of the Financial Advisory and Intermediary Services Act, 2002 (FAIS Act) and its subordinate measures.

reasons for this requirement. Firstly, it is a specific requirement in terms of the General Code of Conduct with none of the products specifically excluded. Secondly, the normal meaning of risk profile can apply to all the financial products. Although there is a specific reference to risk profile in the General Code of Conduct, the obligation of providers to establish a client’s risk profile has also been noted by the FAIS Ombud, in an article for FA News:5 “When considering a complaint, the Ombud has to conduct an investigation. He will look at all avenues of non-compliance or wilful negligent conduct on the part of the FSP or representative.” Pillai, the FAIS Ombud, specifically stated that “this may include failure to give appropriate advice which may be manifested by the failure to do a risk profile. Historic risk profiling questionnaires have been fundamentally flawed

This article challenges one of the most widely used instruments in the financial planning industry, namely risk profile questionnaires. It aims to demonstrate why the application of historical questionnaires is fundamentally flawed and therefore inappropriate under FAIS.

Markowitz’s Modern portfolio theory (MPT)

The essence of this theory is summarised by Dr. Jan Hofmeyr, founder of The Customer Equity Company and consultant to 70 countries worldwide. He wrote that Markowitz’s Ph.D thesis (1952) laid the foundation for the definition of risk, widely used in the investment industry: “Risk is the extent to which the price of an asset varies more than the average price of a class of assets. In ordinary language, using shares as an example: the more volatile the price of a share, (relative to any group of shares), the more risky it is (again relative to that group).” The Markowitz thesis illustrated

how to maximise return for a given level of risk. In other words, if an investor can tell the adviser how much risk he/she is willing to accept, the adviser will be able to find a number of shares whose expected return is as big as possible for that amount of risk.6

Practical flaws in Markowitz’s views on risk from a FAIS perspective

The majority of South African risk profile questionnaires are designed around Markowitz’s theory, suggesting that the investor should first decide on the amount of risk7 that the investor can tolerate. It is this point that is fundamentally flawed in practice for a number of reasons. The first is that, according to its normal meaning, the definition of risk is a situation that could have a bad result.8 For the majority of clients this would simply be the risk of losing money. “Risk” is defined as “chance of bad consequences or bearing any contingent loss” or “expose to chance of injury or loss”.9 It also means “hazard” or “with him to bear any loss”.10 It is clear that the definition of risk according to Markowitz, is quite different when compared to the ordinary meaning of the word. It is an accepted legal principle that when dealing with the interpretation of words in terms of statutory law, the normal meaning of the word should be used. Such legal principles aside, the likelihood of misunderstanding between an adviser using Markowitz’s definition of risk and a client using the normal meaning of the word increases the chances of an adviser being accused of malpractice by a client. The principle for most investors is not about how much risk or volatility they are willing to take on, it is how much money they can afford to lose. Unfortunately, very few investors are confronted with this real question. Without an understanding of the principle of what risk is, there is a strong argument that no client can make an informed investment decision.11

Inappropriate questions lead to inappropriate advice


Problematic applications of MPT for risk profiling under FAIS

Historically, financial advisers have been encouraged to use client risk profile questionnaires to categorise clients into different risk profile categories. After investigating a number of investment companies they identified at least eight different investor risk profiles, namely: Risk averseRisk averse means “expose to chance of loss opposed/disinclined”12 or simply opposed to loss. ConservativeConservative means “tending to conserve/averse to rapid changes/seeking to preserve parts as far as possible/moderate/cautious/avoiding extremes”13 or simply cautious and seeking to preserve.CarefulCareful means “concerned for/taking care of/watchful/cautious”14 or simply cautious and seeking to preserve.Moderately conservative Moderately means “avoiding extremes/low/temperate in conduct or expression15 moderate/ cautious/avoiding extremes”16 or simply cautious and seeking to preserve.ModerateModerate means “avoiding extremes low temperate in conduct or expression”17 or simply cautious and seeking to preserve.Moderately aggressiveModerately aggressive means avoiding extremes/low “offensive/disposed

to attack/forceful/self-assertive”18 or simply cautious and seeking to preserve.19 AssertiveAssertive means “tending to give effect to oneself/insist on one’s rights or opinion/declare”20 or simply having one’s own way.AggressiveAggressive means “offensive/disposed to attack/forceful/self-assertive”21 Contrary to the definition of the word, providers seem to agree that there is only one kind of aggressive investor and that is one that has just lost money. Unfortunately the aggression is then aimed at the adviser. The current risk profiling practice encourages providers to give clients a risk profile questionnaire to complete. Based on the profile that emerges, without explaining the meaning of the profile to the client, the adviser proposes investment portfolios that match the above subjective profiles. The portfolios so selected normally consist of specific fixed asset allocation frameworks, ranging from 0% to 100% of investment capital invested in equities, depending on where the investor is “risk averse” or “aggressive”. However, at no point is any reference made to the investment objective or pricing of any of the asset classes. This tool effectively makes financial planners responsible for initial asset allocation22 without considering the appropriate investment objective. From a FAIS point of view, this is where the biggest conflict occurs as the point

of departure should be the client’s investment objective 23 and not the risk profile. The investment objective is the primary goal, whereas the risk profile is subject to the investment objective selected. To add injury to insult, providers who use traditional risk profiling questionnaires also become responsible for tactical asset allocation24 and/or ongoing market timing. During discussions with astute investment providers25 and debates with asset managers26 since 2003, it became clear that the reference to a “client’s risk profile” as referred to by the General Code of Conduct27 is misinterpreted by most financial services providers. As a result, the use of most current industry-designed risk profile questionnaires will continue to be instrumental to inappropriate advice, which by definition is non-compliant under FAIS.28 Research and motivation in this article should show that most risk profile questionnaires are instrumental to herd-behaviour and promote asset allocation by financial advisers who are in most cases not qualified to do so in terms of the Act’s fit and proper requirements.29 Arguably, very few providers are actually capable of doing asset allocation as an investment manager.

Survey on the success/failure of risk profile questionnaires

In most cases investors do not understand the impact of their answers because when equity markets do well, they generally feel more “aggressive” and when markets do badly, they feel more “conservative”. These perceptions are conveyed in the traditional risk profile questionnaires. A simple questionnaire was designed in this regard and 74 financial planners were selected to complete these questionnaires during a number of presentations in April and May 2004. The advisors were of different

continued on p 14


equities are over-priced (expensive) and ready for a correction (prices should come down), or the other way around. An “aggressive” investor would end up with most of the assets in his/her portfolio in equities, whereas a “conservative” investor with very little or no equities. In practice, this asset allocation, based on the risk questionnaire is normally implemented, regardless of the price of equities. Therefore the ‘aggressive’ investor could face a significant loss and as most “aggressive” investors cannot afford to lose money, they will become “conservative” investors. As confirmed through the survey, the majority of investors are likely to be influenced by recent market conditions when answering the questionnaire. This in itself poses a risk. The current practice regarding risk questionnaires does not include testing whether the client’s answers are objective or purely based on current market conditions or recent emotional experience. As an

backgrounds and various years of experience in the industry.30 They were merely asked to answer questions based on the behaviour of their clients over the years. The questions in the survey are exactly the same as the questions in the table (right). The outcome of the survey is illustrated in the table. Problems with current risk profiling questionnaires

1. Risk profiling questionnaires primarily show how investors feel at a specific timeThe questionnaires do not help to determine investment objectives, but merely indicate how the investor feels about his/her money and risk at a specific time. They do not determine what investors are trying to achieve with their money. From a FAIS perspective the client’s objective must be determined by the advisor and appropriate products must be recommended to suitably satisfy the clients needs, objectives and risk profile.31 To understand this obligation in terms of the Act, it is again necessary to refer to the normal meaning of the word objective, as it is not defined in the Act. The normal meaning of objective is “something sought or aimed at”.32 All the references in the Act pertaining to the advisor’s obligation to determine the client’s objective(s) indicate that the meaning of objective in terms of FAIS is that advisors must determine what is sought by the client financially or what he/she is aiming at. In practice, after completion of the risk profile questionnaire, results are captured in a software computer programme that uses that information to suggest to the provider to which category the investor belongs and how much of the investor’s money should be invested in equities and other asset classes. The problem is that this procedure may ignore the most basic principle of investing, which is buying the relevant assets at a good price. This procedure of asset allocation disregards whether

Risk profile ... from p 13

Risk profiling survey

QUESTIONS TRUE FALSE Spoilt Total % True

• Investors answer “aggressively” 73 1 74 98.6in strong equity markets • Investors answer “conservatively” 70 4 74 94.6in “bad” equity markets • These answers are based on 73 1 74 98.6investor perception/sentiment • Perception/sentiment is 74 0 74 100Instrumental to emotional behaviour• Risk profiling questionnaires 66 7 1 74 89.2measure people’s emotional perceptions• Risk profiling is currently the 63 10 1 74 85.1foundation of asset allocation • Successful investing depends on 71 3 74 95.9objective facts, like value of assets not investor perceptions

adjective, objective (versus subjective) also means “exhibiting actual facts uncoloured by exhibitor’s feelings or opinions”33 and “belonging not to the consciousness or the perceiving or thinking subject but to what is presented to this external to the mind”.34 These definitions make it clear that objectives as referred to by the Act should not be confused with how investors feel about asset classes and the current market conditions. Studies of behavioural finance teach us that most investors are hugely influenced by emotional elements like fear,35 greed and even events like family quarrels. In most cases investors are inclined to answer the questionnaire based on how they feel about their money at that time, instead of focusing on fundamental, objective truths about their money, like attainable, realistic investment returns or how much money they can really afford to lose. These questions are based on asking investors what they want, which immediately triggers


References

1See section 8(1)(c) of the General Code of Conduct2See Oxford Advanced Learner’s Dictionary: p.12643See Oxford Advanced Learner’s Dictionary: p. 11604See section 8(1)(c) of the General Code of Conduct5Pillai 2004: 436Hofmeyr 2002: 747Suggesting volatility in terms of Markowitz’s theory8Oxford University Press 2005: 12649McIntosh 1977: 71610Sykes 1983: 90011Swanepoel 2003: 23, 54 and 61 12Sykes 1983:60 13Sykes 1983: 20014Sykes 1983: 139; My emphasis15Sykes 1983: 65016Refer to conservative above17Sykes 1983: 65018Sykes 1983:1819My wording20Sykes 1983: 5121Sykes 1983: 1822Deciding on the mix between equities, bonds, cash and property in the portfolio23See section 8(1)(a) of the General Code of Conduct24Switching of assets (equities, bonds, cash and property) from

one asset class to the other25Gerrit Viljoen of Ultima Financial Advisors and FPI Financial Planner of the year 2003; PSG Konsult representatives 2003; FPI presentations (2004-2006); FNB Advisory Services (2006); Jan Richter, Johann Seyffert (FNB) Willem Theron, PW Moolman, Marius Kruger (PSG Konsult)26Johan de Lange, Kevin Feather of Allan Gray; Ben Frazer and Ettienne Gouws of Momentum27Section 8(1)(c)28Swanepoel 2004: Cover 3829Sections 8(1)(b) and 13(2)(a)30Almost 50% of the questionnaires were completed by delegates of a Financial Planning Institute Business presentation held for the Institute’s Pretoria Chapter on 13 May 2004. The balance of the questionnaires was completed during separate group presentations to advisers in Gauteng31See section 8(1)(a) and (c) of the General Code of Conduct32See Oxford University Press: 57833Sykes 1983: 69934Oxford University Press 2005: 57835See Botha, Geach, Goodall Rossini 2004: 24 and 2536See Botha, Geach, Goodall Rossini 2004: 2537Graham 2003: 8338See the FAIS Ombud determination in the Dr. Birken and Fidentia Financial Advisors CC case dated 8 December 2006 (Case number: FOC 2629/05 GP (1)

emotional responses. Personal finance experts all agree that when building a sound financial plan, emotion is the one element that should never be the foundation of such a plan. As financial planners, it is necessary to ascertain what clients can afford to lose. 36

2. Herd-behaviourIn most cases equities play the leading role in the asset allocation process as a result of historic returns. As investors tend to be bullish (they like equities) in a bull-market (a market where equity prices are increasing), they tend to answer the questions in a bullish fashion and end up with most of their money in equities when equities have already had their run. This leads to investors investing more money in equities at a point when equities are becoming over-priced. As the prices of equities are pushed up by these so-called aggressive investors, even more investors become excited by the spectacular returns and they also add their names to the list of

aggressive investors, leading to another round of investors buying expensive shares. This process is referred to as herd-behaviour. The result is that some investors are over-exposed to an asset class that is over-valued/expensive and more likely to decrease in value. Investment specialists agree that one should invest when the price offers good value for money. Buying an asset that is over-valued and expensive should not be recommended for investors who do not want to lose their money. “The value of any investment is, and always will be, a function of the price you pay for it.”37 To advise a client to buy an asset that is too expensive is inappropriate, which by definition makes it non-compliant under FAIS. It is important to remember that this inappropriate result started with the traditional risk profile questionnaire. To add insult to injury, the results of the risk profile questionnaire are often used to indicate to the client how much of his/her portfolio should be allocated

to equities and as a result what return he or she could expect. This means that if the client is an aggressive investor, it implies that he or she should have more money invested in equities and therefore could expect a higher return than a conservative investor, who has less equities in his or her portfolio. If this so-called aggressive investor invests in equities at the top, the opposite will happen and chances are excellent that a client may complain over the short term.38

Prediction

In view of the subjective nature of most current risk profile questionnaires, there will come a time where the FAIS Ombud’s office is going to look beyond risk profile questionnaires to actual content to see if the questions and answers are instrumental to fundamentally flawed advice or not. It is long overdue for historic risk profiling questionnaires to be challenged.


The meeting’s final discussion panel, moderated by Hector Sants, Managing Director of wholesale and institutional markets at the host regulator, the UK’s Financial Services Authority, discussed this question in detail. The London meeting was one of a series intended to foster dialogue with the industry, and comments, as well as questions from the floor, were encouraged. Sants said the primary question was whether IOSCO had the capabilities, or even the will, to move in a more operational direction. Jane Diplock, Chair of the New Zealand Securities Commission, who chairs IOSCO’s Executive Committee, said the process had already begun. One example of such “operationality” was the adoption of a multilateral Memorandum of Understanding (MMoU) in 2002, aimed at increasing the level of co-operation and consultation among securities regulators, she said. The multilateral MoU, which IOSCO hopes most of its members would have signed by 2010, is also designed so as to ensure that national regulators’ laws and regulations are complied with and suitably enforced. Diplock said that no further progress towards an operational role for IOSCO was possible without it deepening communication with the industry, and without a willingness of practitioners to co-operate. Arthur Docters van Leeuwen, head

IOSCO seeks global dialogue with industry

By Peter Elstob, Complinet

of the Dutch regulator, who chairs the Committee of European Securities Regulators, agreed with an earlier speaker that IOSCO needed to catch up with the multilateral networking of criminals, terrorists, fraudsters and others who were inflicting harm on an increasingly borderless global financial system. Van Leeuwen noted that large-scale market abuse, such as insider trading, was increasingly being perpetrated across jurisdictional borders. He recognised how hard it was for regulators to co-operate most efficiently

and, in time, to respond effectively. He said that over the next five years or so, financial regulators would need to develop in the same cross-jurisdictional way as the industry and financial criminals. Regional groupings, such as CESR in Europe, were a first step which he felt other regions might follow. Michel Prada, head of the French regulator, the Autorité des Marchés Financiers, who chairs IOSCO’s Technical Committee, noted that one of the difficulties was the difference between IOSCO, a non-intergovernmental organisation of regulators, willing to

Does IOSCO have the will to “operationalise”? A question on many minds, as the technical committee of the International Organisation of Securities Commissions met, was the extent to which IOSCO needed to “operationalise” its activities. This buzzword refers to the organisation moving beyond the issuing of high-level guidelines, so as to engage with national and regional legislators, as well as with the industry world-wide, in an effort to drive global regulatory harmonisation.


work together in confidence and working on a consensus-seeking basis, and legal and constitutional structures at national, and sometimes regional level. However, the industry could assist IOSCO in bridging this gap. Via their trade associations and via other means, the industry could influence parliaments and governments to facilitate the implementation of IOSCO principles.

The way forward

A promising way forward, Prada added, was the development of the Financial Stability Forum (FSF). At the FSF, regulators from IOSCO meet with national finance ministries and central banks, as well as with international financial institutions, such as the IMF, the World Bank and regional development banks. National regulators sometimes fear that their independence could be compromised by such a forum and, more specifically, by the interference of governmental authorities, but this was not Prada’s view. Independence was an attitude that regulators needed to foster jealously, he said, but they also needed the governments and parliaments, because only these bodies could establish statutory rules. An investment banker among the delegates pointed out that barriers still remained when it came to doing business in all markets – developed as well as emerging markets. IOSCO should therefore not shrink from playing a central role in fostering the development of capital markets and, in so doing, working towards reducing the cost of capital world-wide. The securities regulators carried more influence with finance and trade ministries than they imagined and, in this way, they could play a part in breaking down those barriers, the banker said. “The broad principles and standards that we, at IOSCO develop, are

sufficiently general not to be seen as over-prescriptive or too detailed.” Michel Prada, AFM Diplock responded that IOSCO was already reaching beyond its own members. For instance, in relation to the multilateral MoU, members of the technical panel had not confined themselves to speaking to other regulators. They had also held talks, in a number of jurisdictions, with relevant authorities about the legal changes needed before countries could sign the multilateral MoU.

Developing markets

Meleveetil Damodaran, Chairman of the Securities and Exchange Board of India, who chairs IOSCO’s Emerging Markets Committee, remarked that securities regulators in these economies should not allow themselves to be deflected from the important task of fostering the growth and development of their capital markets. In the case of markets at a lower stage of development, he felt that growth itself formed a very important part of investor protection. Regulators in emerging markets had the advantage of being able to learn from the extensive experience of those in developed markets. “Better regulation is really something that takes place at the operational level,” said Michel Prada, while another member of the panel, Manuel Conthe, Chairman of the Spanish regulator, the Comisión Nacional del Mercado de Valores, made the point that, in the case of emerging markets, regulation always preceded real market development. In small economies, this could sometimes even mean that a market regulator existed, while markets themselves actually did not exist. Therefore, there was a danger of applying the IOSCO principles too dogmatically in some jurisdictions, where the important issue was to allow a market to develop, while a regulatory framework was merely a

secondary consideration, Conthe said. An analyst from a trade association asked for the panel’s thoughts on the proposition that too much regulation had already been imposed without any evidence of market failure, and in the absence of a proper cost-benefit analysis. She thought that the improved regulation practices, adopted by the FSA and some other regulators, with the emphasis on establishing a real need for new rules, represented the sort of principle-based approach that was finding favour with the industry. The International Council of Securities Associations (ICSA), for example, had summarised the best of such principles and was urging their adoption by all regulators, and not just a few. She therefore wanted to know if IOSCO would be adopting these principles in its work plan. Also, as part of the more structured dialogue with the industry that IOSCO was proposing, would it engage with ICSA and other organisations to discuss the implementation of these principles at a global level? Prada said that efforts were underway in a number of jurisdictions, including France, to develop improved regulation along these lines. He believed this was an issue that was more important at national level than it was at global level. “The broad principles and standards, which we at IOSCO develop, are sufficiently general not to be seen as over-prescriptive or too detailed. Better regulation is really something that takes place at the operational level,” Prada said. As for regulator industry dialogue, the technical committee was in the process of establishing a small group to consider ways of organising the structure, which would not be overly formal and would emphasise effective industry input. Clearly, one of the issues was to identify which trade bodies were the relevant ones to speak to in this context – and ICSA would probably be one of these.


The primary objective of the Amendment Bill is to further protect the pension interest of members that often extends across their lifetimes following dedicated contribution by members, or employers on behalf of members. A number of amendments over time have had this objective at their nexus, for example, the establishment of the Pension Funds Adjudicator, the amendments passed by Parliament in 2001 regarding pension

Amendment Bill aims to protect pension interest of consumersThe Minister of Finance, Trevor Manuel, intends tabling the Pension Funds Amendment Bill, 2007, in Parliament during the current Parliamentary term. A summary of the Bill appears below.

fund surpluses and the determination of minimum benefits. Over time however, not only have certain references in the Pension Funds Act, 1956 (the Act), gradually become misaligned with provisions in other legislation, but more seriously, certain provisions of the Act have been challenged by those seeking in many instances to circumvent the spirit of the original legislation passed by Parliament through creative legal interpretations. The proposed amendments to the Act are largely urgent technical amendments, which need to be made in order to clarify existing provisions in the Act, to bring it in line with other legislation and to clarify the applications of surplus provisions contained in the Pension Funds Second Amendment Act, 2001. The amendments proposed should be seen as distinct from the process of retirement fund reform, which is a

longer-term process that will result in an entirely new Pension Funds Act. The amendments proposed here deal with urgent issues, which, in the interest of protecting members and former members of retirement funds, cannot wait for the broader retirement fund review. The Amendment Bill broadly addresses the following areas:• clarifying the surplus utilised improperly in terms of section 15B of the Act and other provisions regarding the surplus apportionment process. These amendments are necessary to provide clarity to boards of trustees when apportioning surplus, and to close loopholes that allow for creative interpretations not aligned with the intention of the legislature in the promulgation of the Pension Funds Second Amendment Act, 2001;• bringing the regulation of bargaining council retirement funds under the


regulatory auspices of the Registrar of Pension Funds. It is further proposed that bargaining council funds not yet registered under the Act must register on or before 1 January 2008. The amendment is necessary to ensure consistency in fund governance and dispute resolution across bargaining council funds and other occupational funds;• increase the powers of the Registrar of Pension Funds so as to increase regulatory effectiveness;• providing for specific duties of pension fund administrators;• clarifying the jurisdiction of the Pension Funds Adjudicator. Provision is also made for the appointment of a deputy and acting adjudicator, when necessary, and the alignment of the Act with the Prescription Act;• providing clarity on the treatment of divorce orders and maintenance claims in respect of pension benefits; and• updating provisions in the Act, which are no longer aligned to recently promulgated legislation.

Government Gazette, 16 February 2007

By Michael Hamlyn, Business Day

Although the initial period for commenting on the draft Companies Bill ended on 19 March 2007, extensions would be granted to people who made arrangements with the Department of Trade and Industry, deputy director-general Astrid Ludin has told legislators. The new companies legislation - the first substantial review in 34 years - aims to reduce the regulatory burden on small and medium-sized firms, enhance protection of investors and create a more flexible investment environment without compromising regulatory standards. A revised bill will be taken to cabinet in late June. Ludin told the trade and industry portfolio committee that she expected the bill to be presented in parliament in October or November. MPs were told that the bill would speed up and simplify formation and registration of companies. “Registration will be a right, not a privilege,” said Ludin. There will be a minimal requirement to lodge a notice of incorporation, which need only be one page. A standard form will be attached as a schedule to the bill.Name registration will no longer be compulsory and will be restricted only to protect the public from misleading or hateful names, and to protect other owners of registered names. The registration number may be used as a name, and once issued, the company can start trading. “We want to create incentives for companies to operate in the formal domain,” said Ludin. She said that a thread running through the changes

being made was the requirement for solvency and liquidity, which would replace the need for companies to hold cash reserves. At the time of any distribution - for example, share buy- backs, dividends and redemptions, all of which will be treated the same way - the company must be left solvent and liquid for 12 months. The corporate governance provisions are mostly retained from the previous law, but there are some changes. The quorum for passing an ordinary resolution has been hiked to a quarter of all shares entitled to vote. Shareholders may take part in meetings by electronic means, and binding decisions can be taken other than at a meeting, that is by a round robin or a conference call. But another major change will be creation of a business rescue mechanism.“This replaces the current judicial management with a modern regime, largely self-administered by the company under independent supervision.”Ludin told Pierre Rabie of the Democratic Alliance that the bill drew on international practice in the US and Australia, and from UN guidelines. “It is very much designed for South Africa. It gives rights to employees that are not found elsewhere,” she said. Other new clauses include the decriminalising of the enforcement of the law, and the setting up of a companies’ ombudsman to resolve shareholder disputes and to hear appeals against decisions.

SOURCE: Business Day19 March 2007

State grants extensions to comments on draft Companies Bill

F S B B u l l e t i n f i r s t q u a r t e r 2 0 0 7

Documents

2007 FSB Bulletin First Quarter.pdf