Since the post democratic introduction of the first laws governing affirmative race-based empowerment, the regime has become increasingly complex, beset with detailed codes of good practice, governed by the sector codes, and, some would argue, bogged down by a plethora of ever-changing statutes.
The black economic empowerment (BEE) environment is likely to become even more complex as the Conduct of Financial Institutions (Cofi) bill makes its way through parliament, as is expected towards the end of the year.
As SA battles with an insurrection that has unleashed violent protests in KwaZulu-Natal and Gauteng following the jailing of former president Jacob Zuma, the focus of attention on the 20-year-old BEE regime has slipped largely from the public radar.
Much has been happening on the policy front in the past six months that has an impact, in particular on key areas of the financial services sector of the economy — a preserve that continues to employ significant numbers of white people, and still in far greater numbers than their demographic footprint in the country.
Ronald King, director and chair of the regulatory committee at the Financial Intermediaries Association of SA (FIA) believes up to 90% of brokers are white.
In particular, a clause in the Amended Financial Services Sector Code — clause 5.14, that came into effect in December 2020 — alters the requirements for the banking sector and the insurance industry.
The commission procurement rule has been dubbed by the industry newsletter FANews the Rip van Winkle clause, probably because, like the Washington Irving story about Rip sleeping for 20 years and waking to a changed world, the insurance industry appears to have been caught napping as the empowerment regime ramped up. The rule will have a big impact on broker commissions as well as on panel beating expenses (yes, panel beating of vehicles after accidents) because these make up a significant percentage of a nonlife insurer’s total procurement expenditure.
This could have a negative impact on broad-based BEE (BBBEE) scorecards, points out King. Insurers such as large short-term houses using noncompliant brokers, will have to urge these brokers to improve their scorecards, or they will need to shift their businesses to compliant brokers. "You are noncompliant if you do not have at least a level eight scorecard," says King.
There are different sections under the Financial Sector Code (FSC) on which an entity is scored for BEE.
They include ownership, management and control, skills development and procurement. All the elements are added together to get a score. The change in the clause makes procurement spend more pivotal in the calculation.
A scorecard is important for any business operating in SA, particularly if it does any business with the state.
In addition, if you are providing services to another measured entity — say a broker who works for a private financial services company, in turn providing services to Santam or Old Mutual, for example — you should be appropriately BEE compliant.
In other words, if your scorecard is noncompliant and all procurement by you as a broker is from white people, there will be a negative ripple effect. The private (intermediary) company will not provide the recipient company with a "required" procurement score. On the other hand, "the higher [or better] your scorecard, the more … the measured entity spends on you, [the more it] can take into consideration for their [its own scorecard", says King.
It is not all bad news for the industry.
"A company spending R100 on a level 1 BEE company [which includes most banks in SA] can calculate R150 BEE spend when calculating their BEE score," King points out.
Thus, if Old Mutual, for example, gets business from an intermediate company — let’s call it OnlyBlack — which is fully BEE compliant, it would be good for Old Mutual, especially when it does business with a state entity. If the measured company deals with a noncompliant company — let’s dub it OnlyWhiteBrokers — the amount it can claim on procurement spend is zero, which obviously has a negative impact on its overall BEE score.
For nonlife insurers, repairs to vehicles at panel beaters make up about three-quarters of all short-term insurance claims. That is why many short-term insurers are already telling their clients to which panel beater workshop they should take their cars. Simply put: "If they spend on a white panel beater, it hurts their scorecard," says King.
He says it is important to point out that the FIA believes the creation of black intermediaries is going to be very slow, difficult process.
But it’s also important to resolve the empowerment problem by expanding the cake and getting new black professionals involved.
Other than for entry-level products in the insurance sector, a high level of qualification and experience is required.
African, Coloured and Indian (ACI, as it is known in FIA parlance) candidates have to choose between getting a good fixed income somewhere or building a purely variable income from scratch with no guarantees.
"Given that few ACI candidates have financial reserves to fall back on, this will not happen quickly," King says.
The banking industry is gearing up for changes in the Cofi bill — expected to be an embracing bill of existing BEE legislation; an omnibus bill.
Deputy finance minister David Masondo, writing in the recent Intellidex report for the Banking Association of SA, says corruption in SA "has been used by some to discredit or discourage the need for transforming our economy and society".
But he adds that the transformation achieved so far "should give us all hope and courage that genuine transformation is still achievable".
Part of the beefing up of the empowerment regime here is to encourage low-income consumers to be part of "transactional banking". Masondo says the revised draft of the Cofi bill published in September 2020 makes promoting transformation of the financial sector "an explicit mandate" of the Financial Sector Conduct Authority (FSCA). Financial institutions will be required to submit a transformation plan "that is closely aligned to the achievement of tangible targets informed by the targets in the FSC," he says.
He has praised the transformation that has already taken place in banking.
The Banking Association’s "Transformation Report 2020" says banks’ balance sheet exposure to BEE deals stood at R164bn in 2019, 34% higher than in 2018. It is reported that the financial services sector (with nearly R35bn in 2019) is the largest recipient of BEE transactions, followed by mining and resources (nearly R26bn in 2019) and retail (just over R32bn in 2019).
The study of 18 SA banks says there has been a steady and substantial rise in banks’ expenditure on African skills development since 2016. Spend was just over R500m in 2016 and rose to R2.6bn in 2019.
According to the transformation document, most of SA’s top banks have achieved level 1 BEE status.
They include Nedbank, Investec, Standard Bank and First Rand, In addition, HSBC also has this status. Absa is at level 2 and Capitec is at level 4.
The report notes that the banks’ exposure to black small and medium enterprises decreased sharply in 2019, "which could be due to the dire economic conditions". However, in 2018 the banks achieved a record R29bn in black SME financing, though this dropped to R21bn in 2019.
Geordin Hill-Lewis, DA shadow finance minister, says the Cofi bill requires that for financial institutions to get a licence, they need a transformation business plan. The FSCA will provide the operating licence.
It appears that the current licensing conditions don’t require the inclusion of a BEE (transformation) plan.
"For many years now I have spoken out against the government using licensing powers to force companies to ever tighter and tighter BEE corners," Hill-Lewis says.
He says the BEE regime is fast becoming a block to doing business in SA. "It is just more and more compliance costs for business."
Every single company in the financial services licensing sector will need to comply with the licensing procedures. The banks already have transformation plans, though it is now a licensing condition.
The inclusion of commissions paid to insurance brokers as part of total procurement spend is a concern.
"In the ordinary course of business … to get your BEE points, you have to spend a proportion of everything you spend in a business with BEE compliant firms."
For insurance companies their biggest cost is what they pay to ordinary people when they claim as well as the commissions they pay to their brokers for new policies and products. The procurement spend will be calculated at a "much greater amount", points out Hill-Lewis. Therefore BEE targets for procurement spend will be much harder to meet.
The aim is to force companies to pay commission to more black brokers.
The only way to resolve this challenge is to have more black brokers on board, and more broker companies that are BEE empowered.
Meanwhile, the Institute of Race Relations has argued that changes to the Promotion of Equality & Prevention of Unfair Discrimination Act (Pepuda) could precipitate a banking crisis and push many companies into retrenchments or even bankruptcy, says policy research head Anthea Jeffery.
She says the existing act — of June 2003 — was introduced to give effect to the constitution’s prohibition of unfair discrimination on race, gender and other listed grounds, but it has not been fully applied. Now expanded equality provisions include that poverty would be "an additional prohibited ground". Banks making home loans will have to achieve equality in terms of impact and outcomes between the poor and better off.
A consequence of this could be "mortgages being extended to people unable to afford them — as happened in the global financial crisis of 2007/2008".
A danger is that if this bill is implemented, it could precipitate a banking crisis "in which millions could lose their homes and savings".
It is argued that the Pepuda amendment bill could open up a legal fight over whether other BEE legislation that is already on the statutes, including the Broad Based Black Economic Empowerment Act and the Preferential Procurement Act and regulations that are based on race are contradictory.
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