Shak­ing trust…

In an in­dus­try based on trust

Finweek English Edition - - Creating wealth - BY SHAUN HAR­RIS shaunh@fin­week.co.za SHAUN HAR­RIS

A LOT MORE DIRT will be shaken out of the Fi­den­tia scan­dal as sor­did de­tails emerge over com­ing weeks and months. There are a few clear-cut bad guys here – so bad they look like a stereo­type in a novel – but there are also the un­wit­ting “in­no­cents” whose big­gest crime is ig­no­rance and not en­sur­ing they car­ried out their du­ties prop­erly – the trustees.

Just as you can be sure a lot of the “miss­ing” money won’t be re­cov­ered, so you can be sure that trustees of funds who com­mit­ted mem­bers’ money to Fi­den­tia will be im­pli­cated.

And not just the ex­treme ex­am­ples like busi­ness­woman Danisa Baloyi. I was amazed to read, af­ter it emerged she’s a share­holder in Fi­den­tia, a trustee on the board of its largest client and has an R8m loan from them, her re­ported quote that she did not see a con­flict of in­ter­est of any sort. Please. I look for­ward to de­ci­pher­ing her re­sponse to the cu­ra­tors’ re­port to­wards the end of next month.

How­ever, many trustees of funds linked to Fi­den­tia are prob­a­bly shak­ing their heads, won­der­ing how this all hap­pened and not quite re­al­is­ing they could be in a lot of dwang. If any­thing good can come out of this mess – and I know it seems un­likely at this stage – it’s that the broader trustee group in the coun­try learns some­thing.

Kenny Meir­ing, mar­ket­ing strate­gist at Metropoli­tan Em­ployee Ben­e­fits, be­lieves the Fi­den­tia de­ba­cle will have a pro­found ef­fect on the pen­sion fund in­dus­try. “The scan­dal broke at an in­ter­est­ing time when the draft amend­ment bill to the Pen­sion Funds Act – though not im­plic­itly stated – puts greater obli­ga­tions on trustees in gen­eral.”

Not­ing th­ese is­sues are fleshed out in greater de­tail in Na­tional Trea­sury’s dis­cus­sion pa­per on trustees, Meir­ing says there’s a push to­wards mak­ing the av­er­age trustee per­son­ally li­able for the per­for­mance of a fund, “but the Fi­den­tia is­sue could lead to more oner­ous obli­ga­tions on trustees”.

It will also cast more sus­pi­cion on what Magda Wierzy­cka, CE of Syg­nia As­set Man­age­ment, calls “an al­ready bat­tered fi­nan­cial ser­vices in­dus­try”.

“In re­al­ity, the whole in­dus­try ex­ists on the ba­sis of trust. If there’s a breach of that trust, the whole sec­tor suf­fers.” Wierzy­cka says few boards of trustees have, to date, con-

They had no idea where the “miss­ing mil­lions” they were en­trusted to pro­tect had been in­vested.

cerned them­selves about the se­cu­rity of their as­sets once passed on to as­set man­agers. “Few ques­tion how their as­sets are pro­tected from fraud, or mis­ap­pro­pri­a­tion. Most would be un­able to demon­strate that they have asked even the most rudi­men­tary of ques­tions. And yet, they are per­son­ally li­able should any­thing go wrong.”

This is where many Fi­den­tia-re­lated trustees could be fac­ing se­ri­ous ques­tions, and pos­si­ble ac­tion. It seems they had no idea where the “miss­ing mil­lions” they were en­trusted to pro­tect had been in­vested. Wierzy­cka of­fers some ba­sic ques­tions trustees should be ask­ing their as­set man­agers (see sep­a­rate box).

She also lists the many ways fund as­sets can be re­moved, not­ing there’s lit­tle that can be done if there’s col­lu­sion be­tween two or more par­ties. “Sit­u­a­tions such as Fi­den­tia scare a lot of trustees, as they should. The con­cept of gov­er­nance within re­tire­ment funds needs to take a stronger hold in South Africa. How­ever, the truth is that as­set man­age­ment is a trust in­dus­try. If that trust is ex­ploited noth­ing can to­tally pro­tect the trustees against crim­i­nal in­tent.”

There are also more prac­ti­cal is­sues to look at, and one – clearly a con­cern to Na­tional Trea­sury based on its pa­per – is the com­po­si­tion of a board of trustees. Meir­ing sums it up by say­ing “beware” of em­ployer-ap­pointed, ser­vice-provider-ap­pointed or union-ap­pointed trustees. “The im­por­tant con­sid­er­a­tion is – are they act­ing in the in­ter­ests of the fund, or in the in­ter­ests of their con­stituency?”

One pos­si­ble so­lu­tion, he notes, is the ap­point­ment of a strong in­de­pen­dent trustee to the board. Ideally, that should be the way trustee­ship is mov­ing, but there are prob­lems – some unions ob­ject, feel­ing their in­flu­ence is be­ing com­pro­mised, and some em­ploy­ers don’t like out­siders on the board.

There’s also the ad­di­tional costs as­so­ci­ated with in­de­pen­dent trustees, a very real con­cern of smaller funds. But in the end it comes down to money well spent. Bet­ter to spend more than in­crease the risk of los­ing ev­ery­thing.

Beware who’s ap­point­ing the trustee. Kenny Meir­ing

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