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A major step forward in a key legal battle

08 November 2016 Jonathan Faurie

In January this year, the financial services industry was rocked by reports that Rosemary Hunter, the Deputy Executive Officer of Retirement Funds at the Financial Services Board (FSB), took the regulator to court following what she deemed as irregularities when it came to the closing of pension funds by the FSB.

Because the issue is being fought through the courts, precious little information has been released because the matter is sub judice. However, Abel Sithole, Chairman of the FSB, addressed the issue in part in the regulators 2015/16 Annual report.

Legal progress made

The High Court application brought by Hunter, against the FSB Board (Sithole, FSB CEO Advocate Dube Tshidi, Jurgen Boyd the Deputy Executive Officer of Collective Investment Schemes at the FSB), and the Minister of Finance Pravin Gordhan, has been opposed by all parties and has been set down for hearing from 29 November to 2 December 2016.

“The application relates to a project undertaken by the FSB to cancel dormant funds between 2007 and 2013. Among other things, Hunter alleges that the cancellation process was unlawful,” says Sithole.

In-house investigation

Following the application made by Hunter, the FSB board appointed Judge Kate O’Regan to look into the matter and on her recommendation appointed auditing firm KPMG to investigate the circumstances in which the cancellations occurred.

KPMG submitted a draft report to the board on the results of its investigation in July 2015 and its final report on the matter in October 2015. KPMG questioned the basis of the processes which it found led to the possibility of the likelihood of prejudice.

“The board had reservations over the approach used by KPMG and believed the conclusions reached by KPMG failed to squarely address Judge O’Regan’s recommendations about investigating whether there had been a likelihood of material prejudice to anyone with an interest in the cancelled dormant funds,” says Sithole.

Further due diligence

On Judge O’Regan’s recommendation, independent specialist pensions lawyer Jonathan Mort, of Jonathan Mort Attorneys, was engaged to conduct a detailed investigation into the cancellation of dormant funds from a sample of cancelled funds which formed the subject matter of KPMG’s preceding investigations, in order to determine whether there was a likelihood of material financial prejudice emanating from the cancellation of the funds.

Mort appointed Jeremy Andrew, a specialist consulting actuary familiar with pension fund regulation, to assist him. Mort issued two reports – one assessing KPMG’s findings (assessment report) and one based on his own inspection of the funds concerned (inspection report).

Mort, with Andrew, did not agree with KPMG’s conclusion about the likelihood of material financial prejudice, both for the detailed reasons set out in the report and because the test applied by KPMG was wrong (not the one formulated by Judge O’Regan).

“In all these investigations, no action with the intent to deceive, material prejudice or improper conduct – be it fraud, corruption, conspiracy or collusion – by any official of the FSB have been found,” says Sithole.

He concluded by saying that as a public entity, the FSB is stringently monitored. That the auditor-general conducts a comprehensive annual audit of the FSB’s financial and non-financial performance against targets and benchmarks, with the FSB receiving a clean audit report for the current financial year and unqualified audit opinion for the past 24 years.

Final words

All of this may be true and the FSB may well be innocent of all charges brought against it by Hunter. No decisive call regarding guilt or innocence can be made until the case runs its course through the courts.

However, it is worthwhile to take into account what is at stake.

Hunter is and has always been a respected legal voice when it comes to issues relating to pension funds. This is why the FSB appointed her into such a high position. Lawyers operate largely on reputation and her very name is on the line when it comes to this case. Future clients need to trust her advice. Would she make such allegations falsely knowing what is at stake?

On the other side of the coin, it is also important to bear in mind what the FSB hopes to achieve in the future. The regulator is preparing to become the Financial Sector Conduct Authority (FSCA) once the Twin Peaks legislation is passed. This entity also operates largely on the basis of trust. Can the FSCA afford to leave a door open for any company to question the ethics of the FSCA when they oversee conduct?

Editor’s Thoughts:
There is a lot at stake for both parties. They both stand to not only lose face, but the very element which makes doing their job necessary…trust. It will be interesting to see how this case progresses through the courts over the coming year or years. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by cynical simon, 09 Nov 2016
The names cited in the law suit sounds formidable enough but then just read reports on what happened to Bosele Provident Fund and ask yourself; How could this have happened. There were also some very prominent names ,inter alia, from the financial services community., bantered about.
My money is on Rosemary.
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Added by Paul Reed, 09 Nov 2016
Where there is smoke ,there is fire?
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