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FSB 2008 Annual Report

03 October 2008 Financial Services Board

FSB says beefing up prudential regulation stands SA in good stead

The chairperson of the Financial Services Board (FSB) board, Dr Cyrus Rustomjee, says the efforts made in recent years to strengthen both prudential and conduct of business regulation in South Africa has served the country well with domestic markets proving resilient to the global financial crisis.

In his review of the latest FSB Annual Report which was tabled in Parliament recently, Rustomjee says the FSB will continue to watch the regulatory and supervisory trends. “We will also monitor several recent international proposals for regulatory reform which are emerging from this global episode of financial turmoil.

“South Africa’s financial regulatory landscape continues to evolve robustly, with extensive and far-reaching proposals for retirement fund reform, an emerging regulatory framework for micro-insurance business, and the review of a number of aspects of the regulatory framework for insurance.”

In his review, former FSB executive officer Rob Barrow says in 2008 and beyond, the environment can be expected to be even more challenging as growth in the economy slows and as inflationary pressures intensify.

“Increased volatility in the markets will continue to be a feature and the challenge for macroeconomic policy will be to sustain steady growth while reigning in inflation.

“In this challenging environment, the financial sector has demonstrated its resilience and a high level of performance. The Collective Investment Industry, for instance, once again attracted record inflows in spite of volatile markets. This is commendable as there had been outflows in other global industries.

“The strengthening of the equity market has led to a notable move from equity investments to money market funds. More importantly, the financial sector has been able to perform its intermediation function and thus support the growth and development process.

“Regarding the Fidentia curatorship, it is pleasing to note that the National Prosecuting Authority became involved early in the process and through their timeous intervention, action has already been taken against certain people involved. The curators of the Fidentia and Ovation groups have continued to secure the recovery of investors’ funds and have made good progress in winding up the affairs of these businesses.

“It is anticipated that the majority of issues will be dealt with by the end of this year. Unfortunately investors in these entities will suffer significant losses. The lessons learnt from these events have been thoroughly assessed and steps have been taken to intensify regulatory and supervisory processes in order to avoid failures of this nature in the future.

“Likewise the pension funds secret profit (bulking) issue has been referred to the South African Police Services for the prosecution of criminal actions committed. In the Lifecare Pension Fund (P Ghavalas) case significant effort has gone into the investigation, which has led to a number of arrests. The matter is ongoing.”

An overview of the various industries which the FSB regulates and supervises shows that the sector is strong and robust, albeit with some challenges.

INDUSTRY

FINANCIAL

CHALLENGES

Long-term Insurance

Net premium income totaled R226,1bn (2006:R220,3bn).

LT insurers paid R233,9bn in benefits (2006:R214,3bn)

Total assets increase by 9,1% to R1 420,3bn (from R1 302,1bn in 2006)

Increased lapses and surrenders owing to economic conditions

Increased competition from savings products in other sectors

Short-term Insurance

Net premium increased by 15% (2006: 12%) to R58,4 bn

The total value of investments increased by 17,5% to R65 967m

Increased competition from new entrants

Premium pressures due to economic conditions

Limited reinsurance capability available in the local market

Retirement Funds

2006: Benefits paid = R84 024m

2006: Assets = 1 454 827m

Contributions received decreased by 4,2% from R75 131m in 2005 to R72 009m in 2006

Failure by funds to submit financial statements due mainly around the auditing profession’s inability to meet the increased demand for their services following the FSB’s lifting of audit exemptions granted previously to certain categories of funds.

Capital Markets

JSE: Turnover of shares amounted to R3 174 bn

CIS:Net inflows = R63bn

Total assets under management = R659bn

Road Accident Fund:

The FSB is empowered to supervise the RAF in terms of the Financial Supervision of the Road Accident Fund Act 1993. The intention of the Act is to subject the RAF, as far as possible, to supervision appropriate to its insurance function. The total liabilities of the fund at 31 March 2007 exceeded its assets by R20,2 bn, which placed the fund in a technically insolvent position. The challenge for the FSB relates to the fact that the RAF, as a public entity with public funding, cannot be supervised on the same basis as a private sector commercial insurer.

An electronic version of the 2008 FSB Annual Report (covering the period 1 April 2007 until 31 March 2008) may be viewed (and downloaded) at the FSB’s website: www.fsb.co.za Go to publications, followed by reports. Click on 2008.

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