Rosemary Hunter. Picture: RUSSELL ROBERTS
Rosemary Hunter. Picture: RUSSELL ROBERTS

South Africans spent most of last week debating the Constitutional Court’s decision to legalise the private use of marijuana. However, within days of this judgment, and with little attention, the court delivered another crucial decision that will have far-reaching consequences and potentially prejudice thousands of vulnerable older people and their families. In a disappointing decision a majority of seven justices rejected the appeal of whistle-blower Rosemary Hunter and found that the Financial Services Conduct Authority (FSCA) did not need to undertake further investigation into the unlawful cancellation of thousands of pension funds.

The undisputed facts of this case should be of grave concern to all South Africans. Between 2007 and 2013, the Financial Services Board (since replaced by the FSCA), the regulator of the financial services sector, cancelled the registrations of approximately 4,600 “orphan” pension funds that had ceased to have functioning boards of trustees. This was done in the course of what was called the FSB’s “cancellations project”. The FSCA has admitted that there were unlawful elements to the manner in which the project was conducted. The majority judgment does not dispute this, and the minority judgment of three justices says that “[i]t is common ground that the cancellations project was infected by some unlawfulness”.

The findings of the majority of the court are disappointing and inconsistent with a vigorous defence of the most vulnerable in society from the unlawful conduct of financial institutions and their regulator

First, the FSCA admits that its appointment of “authorised representatives” to act in place of the boards of the funds was unlawful. Secondly, many of the cancelled funds still had assets and liabilities at the time of their deregistration — which meant that beneficiaries and their dependents were unable to claim the money they were owed. Finally, Liberty (the company that had the vast majority of these “orphan funds” on their books) has approached the High Court to reinstate some of the cancelled funds. In their application they admit to misleading the FSB, indicating that the funds had no assets and liabilities when, in fact, the funds held assets of about R100m owed to more than 3,000 pensioners and their families. The registrar and FSCA accepted these inaccurate representations without requiring documentary proof.

This is what makes the majority decision so troubling. It acknowledges that the FSCA had the constitutional duty to undertake investigations into the unlawful cancellations and to assess the possible harm they caused. The FSCA accepts this duty as well. Yet it finds that the three investigations commissioned by the FSB, undertaken by justice Kate O’Regan, KPMG and attorney Jonathan Mort, into less than 25% of the affected funds, are sufficient. This finding is inexplicable given that many funds in the sample have been found to have had their registrations “mistakenly” cancelled when they still had assets. Furthermore, thousands of other cancellations remain unexamined.

4,000 funds not investigated

Considering FSB records regarding a sample of about 500 of the cancelled funds, KPMG estimated that the cancelled funds may have held assets amounting to R2.5bn at the time of their deregistrations. It added that the FSB had not had adequate information to order the cancellations. Jonathan Mort’s investigation considered the same sample and found that numerous errors had been made, adding that both the FSCA and Liberty were pursuing the reinstatement of numerous funds that had been erroneously and unlawfully deregistered.

By extrapolating from the findings of this sample, it appears obvious that of the remaining 4,000 funds that have not been investigated, at least some will have been cancelled while still having assets and owing money to beneficiaries. As the minority judgment held, even a conservative estimate would suggest that more than 100 funds may have suffered this fate, potentially prejudicing thousands more vulnerable pensioners and their dependents. As the minority urged: “That many potential irregularities cannot simply be ignored. The number is not trivial and the effect of the mistakes is not inconsequential … Moreover, the prejudiced members are likely to be pensioners – some of the most vulnerable people in our society.”

In this context, the findings of the majority of the court are disappointing and inconsistent with a vigorous defence of the most vulnerable in society from the unlawful conduct of financial institutions and their regulator. It also appears callous that the Treasury’s recent statement on the outcome called on regulators not to engage in “fruitless investigations”.

Because it wasn’t a direct issue for the court, the judgment does not probe the conduct of administrators, such as Liberty, nor their relationships with the regulator. While the FSCA took the action of deregistering the funds, it did so relying on the information provided by administrators, such as Liberty, who have statutory duties to act in the best interests of funds they administer. Liberty misled the regulator on the status of the funds, and whether they still had assets. In one of Mort’s investigative reports, he reveals that Liberty secured the deregistration of the Bivec pension fund when it still held R26,5 million in assets, and that Liberty had held onto the money despite protest by Bidvest. Mort pointed out that this problem may never have been addressed but for his investigation.

Regardless of Liberty’s motives (and it maintains that its errors are largely administrative in nature), the FSCA as regulator could have been expected to take a hard line on how it was misled by a powerful financial institution with regards to more than 100 funds over a six-year period. This has not happened. It has also seemingly failed to demand investigation and reform from a corporation that, as some have suggested, has consistently failed to meet its lawful obligations to exercise proper care and diligence over the money it manages.

Liberty is but one of the large fund administrators that were involved in the cancellations project. Tough questions must be asked of other industry giants, including Alexander Forbes, Old Mutual and Sanlam.

‘Twin Peaks’ legislation

In their statement praising the judgment, the Treasury highlights the commitment of SA to regulating and supervising the conduct of financial institutions. It trumpets the new “Twin Peaks” legislation which sees the FSCA becoming a dedicated “market conduct” regulator with the aim of protecting every day people from unscrupulous and unlawful conduct by financial institutions.

To do so successfully, the FSCA has been granted significant powers and both the cabinet and the Treasury have charged it with undertaking intrusive and proactive regulation that goes beyond generic customer-protection laws. The FSCA has shown no willingness to do this here. In fact, it has fought Rosemary Hunter to the highest court just to ensure it does not have to engage in any further thorough investigation into six years of systemic failure within the pensions industry to comply with the law. As a result, thousands have been prejudiced.

The FSCA and fund administrators are laudably engaged in a number of processes to track down beneficiaries of unpaid benefits. This should continue. But if the FSCA is unable or unwilling to engage in investigations to answer the difficult questions, it is difficult to see how it will be fit for purpose in the Twin Peaks system. We rely on it to keep profit-seeking financial institutions transparent, accountable and in line with the law.

We also expect the FSCA itself to act in a manner that is accountable and transparent — as the constitution enjoins it to do. Failure to do so enables predatory corporate practices at the expense of indigent pensioners and their dependents. In this context, it is clear that we will continue to rely on courageous whistle-blowers from corporations and regulators to come forward with crucial information, and demand accountability where regulators have failed us.

• Marchant is a researcher at Open Secrets.