And the next compliance report is due…

The compliance officers and key individuals at South Africa’s financial services providers (FSPs) must have their wits about them to meet the submission deadlines for countless statutory reports.

They must also scrutinise multiple streams of legislation to ensure that internal plans are drawn up and individuals appointed to critical roles in accordance with the law. Financial advisers and insurance brokers who thought they were 100% compliant midway through 2021 should think again … because there is another important compliance report due by 7 June. 

All FSPs are required to submit a transformation report to the Financial Sector Transformation Council (FSTC) by 7 June 2021 or risk being flagged as non-compliant and, potentially, having their BEE status level discounted in the following year’s Broad-based Black Economic Empowerment (B-BBEE) Scorecard. Anton de Wet, a Registered Auditor and B-BBEE Ownership Specialist at Net Value Equity Partners, said that FSPs should view the requirement to report on their BEE statuses in light of the transformation objectives of recent legislation, most notably the Financial Sector Regulation (FSR) Act and soon-to-be implemented Conduct of Financial Institutions (COFI) Bill. 

He was presenting to an audience of independent financial advisers (IFAs) at a South African Independent Financial Advisors Association (SAIFAA) event, held virtually on 20 May 2021. SAIFAA is of the view that IFAs must be educated on the current BEE requirements and the various options available to them to ensure the future sustainability of their practices. 

The legal background

The FSR Act, which was gazetted on 22 August 2017, describes various rules and regulations to facilitate the transformation of the financial services sector. It states that transformation must be ‘interpreted’ in line with the Financial Sector Code (FSC), the establishment of which was set out in section 9(1) of the B-BBEE Act. The FSC was eventually gazetted on 1 December 2017 following extensive discussions between organisations in the financial services sector, over many months. 

De Wet pointed out that the pending COFI Bill was a game-changing piece of legislation that would take financial sector transformation to the next level once enacted, probably in the first half of 2022. Per clause 23: “If a licensed financial institution is subject to or has undertaken to comply with the requirements of the B-BBEE Act and the FSC issued in terms of section 9(1) of that Act, it must have a plan in place to meet its commitments in terms of promoting transformation of the financial sector in line with those requirements”. 

FSPs should, by now, be familiar with concepts such as ‘BEE Level’ and ‘BEE Scorecard’, which are stipulated in the FSC; but it is worth revisiting some of the key concepts. An entity’s BEE Level, and whether or not it requires a SANAS-accredited verification certificate, depends on its size and the percentage of black ownership. FSPs with less than R10 million annual turnover are described as exempt micro enterprises (EMEs); those with turnover between R10 and R50 million per annum as qualifying small financial institutions (QSFIs); and those with turnovers exceeding R50 million as large enterprises. The following table illustrates how the combination of turnover and black ownership translate to a BEE Level.

Entities that are not subject to the scorecard requirement, need only issue a sworn affidavit on a standard BEE template. Those that require a scorecard must annually obtain a SANAS-accredited verification certificate. “An EME is considered to be fully BEE compliant and is exempt from the scorecard requirement regardless of its ownership profile,” said De Wet. “A QSFI that opts for the scorecard route will find the accreditation process to be time consuming and expensive, with the administrative effort / cost involved in reaching a Level 2 status often considered inhibitive”. 

Many QSFIs have therefore opted for finding a suitable empowerment partner to take them to 51% black ownership and an automatic Level 2 status. An entity that is subject to the scorecard will have to implement some black ownership if it is to achieve any of the eight BEE status levels as the Ownership element constitutes around 25% of the entire scorecard and is defined in the FSC as a ‘priority element’. 

Getting back to the annual FSTC report

Armed with this background information we can refocus on the requirement to submit an annual transformation report to the FSTC. The requirement is set out in statement 000, paragraph 8.5 of the FSC. Companies that fail to submit this report will be considered non-compliant with the FSC and may face punitive action by the FSTC, including being ‘named-and-shamed’ in the FSTC’s Annual Report and having their BEE Level discounted by one level on their following year’s BEE certificate. “Although this discounting will only affect large enterprises and QSFIs that opt for the scorecard route, it makes sense for all FSPs to comply,” said De Wet, who offered two points in motivation of this view. 

First, FSPs should consider the reputational damage of ending up on a list of BEE non-reporting entities. “You should think about how the Financial Sector Conduct Authority (FSCA), potential clients or employees would respond to seeing your company name on this list,” said De Wet. Second, you must also consider the potential consequences or impact on the issue or reissue of your FSCA license. The B-BBEE Act requires “every organ of state and public entity” to consider “codes of good practice issued in terms of this Act in determining qualification criteria for the issuing of licenses, concessions or other authorisation in terms of any law”. This explains why the FSR Act and COFI Bill speak to transformation so strongly and supports the consensus view that the FSCA will eventually make compliance with the FSC part of its future licensing process. 

Procurement is being closely monitored

Those who are overly casual about their BEE Level should think again. Clause 6.10 of the Amended FSC will be in-force from the current financial year. “This clause considers the BEE compliance of an insurers’ suppliers. From a BEE perspective a broker or IFA is a service provider to the insurer … you distribute their product and get paid a commission or fee, including binder and outsource fees, for doing so,” said De Wet. “The Preferential Procurement element on your insurer’s BEE Scorecard is therefore influenced by your BEE Level”. 

De Wet encouraged all IFAs to submit their transformation reports to the FSTC by 7 June 2021. “When submitting your report make sure that the measurement year is the same as the financial year indicated on your BEE certificate or affidavit,” he said. “You must attach the certificate or affidavit to your transformation report. More importantly, make sure to attach the certificate or affidavit that was issued prior to 30 November 2020, if you had one, as this will fall within the FSTC’s current reporting period. If you did not have one, then attach your current one”. 

He also reminded FSPs to renew their annual BEE affidavits and urged companies in the R10-R50 million annual turnover band to complete a thorough cost / benefit analysis before making BEE decisions. Finally, he encouraged all FAnews readers to stay abreast of the latest legislation on broad-based black ownership, including a gazetted Practice Note by minister Ebrahim Patel, 18 May 2021. 

Writer’s thoughts:
The rate at which new regulation is enacted makes it difficult for small firms to stay ahead of the compliance curve… Many choose to outsource their compliance function; but there are a few mid- to large-size practices that retain the function in-house. Are you clear on what is required from your FSP insofar submitting your annual transformation report to the FSTC? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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