Small print is a big deal in banking charter

SACP, Cosatu calls for higher percentage of BEE ownership bedevils talks, writes Tim Cohen

Published: 2010/07/23 07:18:07 AM

 

NEGOTIATIONS around the financial sector charter (FSC) have dragged on now for almost three years from the time the charter was first agreed on.

 

But despite press reports suggesting progress, in fact it seems the sides are actually now further apart than they ever were.

 

The banking charter was the subject of early black economic empowerment (BEE) negotiations and following much-heralded agreements was signed in August 2002. However, the codes of good practice that came into operation a few years later require the registration of sector charters, without which the general rules for broad-based black economic empowerment apply.

 

 

 

The Department of Trade and Industry has, however, decided to hold off the implementation of the FSC following objections from the South African Communist Party (SACP) and the Congress of South African Trade Unions (Cosatu), which were angry that equity ownership requirements will be lower for financial sector institutions than for other sectors.

 

 

 

The general rule is that for the highest level of BEE recognition, 25% equity ownership should be facilitated, but the FSC agreement specifies only 10%. As a compromise , the SACP and Cosatu have proposed 15%, but the Banking Council, with some tacit government support, has refused.

 

 

 

Press reports suggest the banks have now conceded this point. However, Cas Coovadia, MD of the Banking Council, is adamant this is not the case.

 

 

 

The banks have always argued that the smaller figure for banks — which they describe as “direct ownership” as opposed to “indirect ownership”, which consists of existing black shareholders in mainly pension and investment funds — is not and has never been an issue of resistance to transformation.

 

 

 

 

 

 

 

Mr Coovadia said he could not discuss the state of the negotiations, but he stressed that far from the point being conceded, the financial crisis of the past few years had only served to convince the council it should not deviate from the stipulations of the codes, which were agreed upon at Nedlac.

 

 

 

The argument around this issue must be one of the most perverse in the already chequered history of BEE in SA. First, Cosatu and the SACP have been in the forefront of demanding less focus on equity ownership and transformation.

 

 

 

But in this case, the organisations are positively retarding transformation through their insistence of greater equity ownership, since the banks conceded higher levels of transformation to counterbalance the lower levels of equity ownership. Although the banks have been adamant that they should not be required to have a higher level of BEE equity ownership than 10% in the negotiations, most banks have long ago surpassed this level.

 

 

 

Keith Levenstein, CEO of BEE ratings company Econoserv SA, says three of the big four banks have well over 10%, with Absa the laggard at 10% and Nedbank the leader at 21%. Standard has 18% and FirstRand 18%.

 

 

 

It now appears, however, there is an additional problem. A new demand has been placed before the discussions concerning the notion of a “high-water mark”, which is similar to the notion of “once empowered, always empowered”, which the unions now reject.

 

 

 

In the discussions, the banks are adamantly opposed to this notion too. Because it never arose at the time the banks did their BEE deals, most BEE partners are not “locked in”. Banks, however, are under some pressure, since if the FSC is not passed, they will be forced to fall back on the department’s “codes of good practice”, which require higher levels of equity ownership for high BEE scores.

 

 

 

“Until the FSC is gazetted as a sector code in terms of section 9 of the act, by the minister of trade and industry, the banks and the financial sector must follow the codes of good practice. Amongst others, the target for ownership is 25% plus one vote, way ahead of the 10%-15% that the FSC is discussing,” says Mr Levenstein.

 

 

 

 

 

 

 

The codes of good practice, however, are really simply guidelines. If all the banks do not satisfy the equity pillar of the codes, which count only 20% to the total score, there is no legal requirement forcing them to comply. Neither would it be a particular impediment since interaction with banks is not particularly a matter of choice for government or parastatals.

 

 

 

Yet, the length of time involved in these negotiations is now twice as long as it took to negotiate SA’s constitution. The transformation and access issues promised in the charter are in limbo.

 

The FSC has a clause for a “mid- term review”, which has passed even though the charter is not being put into effect. So, one question now is whether the FSC shouldn’t just be scrapped.

 

Mr Levenstein thinks so. “Most sector codes have caused more problems than they are worth.”

 

Almost all the issues raised are taken into account in the codes of good practice in some way or another. An alternative would be for the department to apply the charter and put the negotiations under real pressure. If they come up with something, great; if not, then the codes of good practice will apply.

 

 

 

Something is certainly needed to break this deadlock which has been dragging on for too long.

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