Advisers, advice practices could trip up over COFI licensing rules

Post-Apartheid South Africa is awash with new, race-based legislation that is introducing all manner of compliance challenges for the country’s small, medium and emerging enterprises (SMMEs). In extreme cases, as illustrated by the following account of alleged regulatory overreach, the entities responsible for implementing regulatory change risk causing serious harm to the economy and individual business owners.

The third wave of BEE

This writer attended a recent Sakeliga panel discussion that was tasked with addressing ‘what wealth managers need to know about the third wave of potential Black Economic Empowerment (BEE) requirements’. PS, the debate was held in the context of the 28 June deadline for local financial institutions to comply with the Financial Sector Transformation Council (FSTC) Reporting Notice 1 of 2024. FAnews has not visited this topic recently, but our 2023 newsletter ‘FSCA ups the transformation and inclusivity stakes’ is worth a read for some context. 

Sakeliga, which bills itself as a public interest organisation advocating for economic freedom and business rights domestically, promised an in-depth examination of significant developments in South African law, specifically focusing on the country’s Broad-based Black Economic Empowerment (B-BBEE) legislation. Sakeliga's CEO, Piet le Roux, Russell Lamberti, Executive Director as well as Pèter Wassenaar, Attorney: Kriek Wassenaar & Venter Inc offered their perspectives on the evolution of BEE policies, the enforcement of these policies, and the broader implications of these policies for businesses and the economy. 

Le Roux opened the discussion by providing historical context to the BEE policies in force in South Africa presently. He contrasted the ‘boom times’ of the early 1990s, when businesses had an unprecedented opportunity to engage in transactions without racial restrictions with the subsequent political shift towards BEE as a means of exerting soft pressure on businesses. The latter took hold in heavily regulated sectors of the economy such as petroleum and mining. The initial phase, christened by Sakeliga as ‘the first wave of BEE’ was characterised by informal political requirements rather than statutory mandates; but the landscape changed in the late 1990s. 

South Africa’s new racialisation

“The first wave of BEE is quite a complicated period,” said Lamberti. “There was an opening up, a de-racialisation in many aspects of the economy, post the apartheid era; but from day one, the African National Congress (ANC) starts setting in place its plans for a new racialisation of the economy”. In 1998, the Black Economic Empowerment Commission, chaired by Cyril Ramaphosa, was established to develop proposals for a statutory BEE framework. And by 2003, BEE had become a statutory requirement for businesses engaging with the state, as announced by then President Thabo Mbeki. 

This marked the beginning of the second wave of BEE, where compliance became necessary for state-related transactions. According to Le Roux, BEE got its statutory character during the second wave, with the legislation setting minimum black ownership requirements for companies doing business with the state. “At this time, it was only a requirement when you did business with the state; but when you do business with the state there is a spill-over effect or chain reaction through the economy,” he said. Companies that wanted to conduct business with government had to consider what their supply chain and procurement footprints looked like, for example. 

The law did not prevent companies from transacting with non-state entities. And a decision not to transform had financial consequences, but these were not business-ending. This scenario persisted for about 15-years, until 2018, when Ramaphosa replaced then-President Jacob Zuma. According to Sakeliga, a ‘shift’ started with the insertion of a public interest clause allowing the Commissioner of the Competition Commission to “deny or approve transactions and set conditions upon mergers, acquisitions, debt financing and so on for all reportable deals”. The result was that the Commissioner could withhold approval for a transaction based on transformation scorecards. 

A premium for every transaction in the economy

The Competition Commission scenario has now moved into other areas, as illustrated by recent developments in the legal and property sectors, where fidelity fund certificates are being withheld if you do not meet BEE requirements whether or not you conduct business with the state. “BEE wave three is a complete, dirigiste attack on our ability to serve our fellow human beings and our ability to earn a living; wave three will be 10 times more harmful than wave two, because it extends BEE … making it a premium for every transaction in the economy,” Le Roux said. He was backed by Lamberti who opined that wave three involved leveraging licencing mechanisms to achieve a social outcome. 

“Once you broaden licencing way beyond the rational scope of licencing, you can start to attach all sorts of red tape and / or socialist requirements onto a licence,” Lamberti said. Areas of the economy that have already been impacted include aviation and real estate, with the spotlight now fixed on financial services. Wave three of BEE will hit local financial services businesses through the pending Conduct of Financial Institutions (COFI) Bill and the Financial Sector Codes issued under the Financial Sector Transformation Council (FSTC). Le Roux noted that BEE was being inserted into COFI. “If the COFI Bill is accepted tomorrow, we face a serious problem,” he said. 

Why? This writer has paraphrased Sakeliga’s explainer as follows. Because the financial sector legislation will empower the Financial Sector Conduct Authority (FSCA) to set minimum BEE compliance requirements for licensing; enable them to sanction firms for not meeting those targets, on an individual or company basis; and make participation in and loyalty to the political objective of BEE a professional requirement. And now, finally, we get to the regulatory overreach part mentioned in the opening paragraph. 

Is the FSTC Reaching beyond its authority?

It turns out that even though the COFI Bill has not yet been enacted, the FSTC has already issued a strongly-worded deadline for financial services firms to meet a 28 June ‘reporting’ deadline. “We think that this FSTC requirement is them reaching beyond their authority,” said Lamberti, before inviting Wassenaar to comment on the development. The legal expert noted that the FSTC had asked firms to submit affidavits and reports regarding their compliance with the Financial Sector Code to the B-BBEE Commission. 

“On reviewing the legislation, the BEE Act, the current financial sector regulations and legislation, we could find no single piece of legislation which authorises the FSTC to make a threat [of sanction for failing to comply with their 28 June request],” Wassenaar said. PS, he even offered a screenshot of an FSCA strategy document that reads, in part, that the FSTC is not able to sanction institutions, and that the B-BBEE Commission can only take administrative action in the event they uncover fraud or misrepresentation. 

Sakeliga conceded that COFI, once enacted, has strong BEE ambitions. “Section 17 of the draft bill says that all licenced financial institutions must promote transformation within their organisation … [and] the bill goes as far as to say each of these financial institutions must submit a transformation plan,” Wassenaar said. He warned that as currently proposed, the key person within a financial institution could be removed if the business failed in its reporting and / or transformation journey. These requirements will become a continuing duty under the COFI Bill, but only once it is enacted. 

This is not financial, legal advice … but

The central issue from the debate is that the FSTC, in issuing its recent reporting notice, is pre-empting the implementation of the COFI Bill. Sakeliga has been embroiled in a two- or three-month long letter writing session with the FSTC, without much joy. “We have sent formal legal correspondence to the FSTC asking them where they believe they derive their authority from to require racial reporting on businesses … they have failed to provide us with a straightforward answer,” Wassenaar said. What followed has to come with a massive disclaimer, as it is a Sakeliga (not FAnews) view. 

“Our reasonable conclusion in law is that the FSTC have the right to ask the public to assist in this information gathering exercise; but they have no right to demand it or to penalise anyone for non-compliance,” the legal expert said. And Lamberti was even more forthright, saying: “We do not think you have a duty to submit a report by 28 June 2024”. He concluded that South Africa could not afford a highly-racialised policy environment, and that businesses should not be subjected to unacceptable constraints that stifle business formation, job creation and growth in ways that affect millions of South Africans from all communities and walks of life. 

Writer’s thoughts:

The abrasive catchphrase offered up by Sakeliga to guide financial institutions submitting B-BBEE Reports to the FSTC by 28 June 2024 was to exercise ‘maximum achievable non-compliance’. Seems risky; what approach have you taken? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.