Transform, racially and morally
Financial sector is unsustainable
THE exploitation of unsophisticated, low-income consumers by African Bank, unsecured lenders and other financial services companies is a clear indication why transformation in the financial services sector will face an uphill battle.
The focus of transformation, or normalisation, as I prefer to call it, should not only be about obtaining favourable broad-based black economic empowerment (B-BBEE) scores in terms of the relevant scorecard (whether it be the current codes or proposed revised codes), but also about conducting business in a responsible and sustainable manner that benefits consumers (by providing customers with value-for-money products and services) and the broader economy. Transformation is about good active citizenship by the business sector and individuals in those businesses.
Apart from the banking sector, the short-term insurance industry has also not been able to provide effective value-added products to the low-income mass market, even though technology has made this possible. Have you not heard the saying “An actuary who designed a product will not buy the product for himself”?
The insurance industry has not come out strongly against the minority of unscrupulous attorneys who have exploited accident victims and the Road Accident Fund by charging excessive fees (which have amounted to as much as 50% of the proceeds intended for the victim).
The exorbitant premiums charged for credit life insurance are another example of where clear action needs to be taken.
The South African financial services industry has clearly not learnt the lessons of the 2008 housing bubble in the US and elsewhere. Several people warned about the unsecured lending bubble bursting, more than a year ago.
Money market funds, managed by investment management firms and banks chasing higher yields and failing to account for the risk of default, have again put the banking system at risk in South Africa.
This has forced the Reserve Bank to provide a lifeline to the banks and money market funds to prevent a run on these entities and protect them from large write-offs. The taxpayer will effectively fund any potential losses because the Reserve Bank has “guaranteed” 90% of the face value of African Bank debt securities by taking on its “bad” book. Once again the top 1% in South Africa, as in the US in 2008, will be bailed out by the Reserve Bank, the taxpayer effectively picking up the tab, with the result that less money is available for service delivery.
Furniture manufacturers, which have created much-needed jobs, are bearing the brunt of the fallout given the failure of Ellerines, a subsidiary of African Bank. Workers are losing their jobs while the top 1% of South Africa’s wealthiest are being saved by the taxpayer.
African Bank and unsecured lenders have morphed into a sophisticated pyramid or Ponzi scheme.
By its nature, a Ponzi scheme cannot last forever, as was the case with African Bank.
The early investors make the big money, such as the founder of African Bank, who has made more than R400-million by selling his shares after he resigned as a director more than a year ago.
In another case, it has been alleged that low-income and unsophisticated consumers have been without money at month-end when collecting their pensions or grants because a bank had allowed “unauthorised” debit order deductions from their South African Social Security Agency cards. The hardship grant beneficiaries experience because of this abuse is unacceptable.
The banks and the banking association have not come out strongly enough to condemn the practice and provide strong input to bring their banking members in line with ethical business practices.
The top 1% of SA’s wealthiest are being saved by the taxpayer
After a long delay, the Financial Sector Codes were gazetted last year. However, these codes must now be aligned with the Department of Trade and Industry’s revised generic codes of good practice, introduced in October last year.
We have to ask what the industry has achieved. Where is it headed and what should its focus be?
Studies evaluating the progress of the industry have been conducted, with limited success.
The investment management summit of the Association of Black Securities and Investment Professionals (Absip) held in April showed:
According to the 27four BEE.conomics annual survey, less than 5% of the R6-trillion assets of the investment management industry are managed by majority black-owned firms or firms more representative of the demographics of the country;
According to the Alexander Forbes Annual Retirement Fund Survey 2013, black investment professionals make up only 15% of key investment professionals across the top 10 South African retirement fund managers, who collectively represent R3.2-trillion in assets under management; and
According to the same survey, only nine of the 73 key investment professionals at the top six investment management firms were black.
No amount of legislation can bring about meaningful transformation if the individuals in the industry are focused on greed and self-interest rather than conducting business in a responsible and sustainable way.
Citizenship, honesty and integrity should be the values of company directors and management, not the pursuit of excessive, unsustainable profits at the expense of the consumer and taxpayer.
Transformation should be viewed by the industry as the right thing to do for the socioeconomic stability of our country and the long-term success and sustainability of our economy, as opposed to “ticking the boxes” in terms of obtaining favourable B-BBEE scorecard outcomes.
Mohamed is a member of the Financial Services Council, representing Absip, and the chief investment officer of Aeon Investment Management. He writes in his personal capacity and as a member of Absip.