Transforming SA’s financial services can catalyse economic growth
If SA is to achieve true transformation and growth in the financial services sector, the president needs a vision of what the financial sector should look like in the future
Which sector could be the catalyst to unlock the confined potential for economic growth, as well as economic and social development? A transformed, fully inclusive, ethically run financial services sector that equitably represents black professionals and black business, to enhance sustainable growth and sustainably reduce poverty.
SA has yet to create the economic ecosystem necessary for the transformation of the financial services sector to thrive — that is, an integrated policy environment that encourages transformative ventures to take hold and succeed.
Instead, many challenges continue to impede the transformation of this sector from reaching its full potential.
The challenges that hinder transformation — such as competition from larger firms, regulatory and sociocultural constraints, and limited access to capital — have to be addressed expeditiously. High market concentration of the larger firms inhibit new entrants from competing.
After all, the allocation of capital greatly influences patterns of ownership and production in the economy.
In our submission to the standing committee on finance, the portfolio committee on trade and industry and the select committee on finance in 2017, we highlighted the following statistical observations:
- The predominantly white-owned institutional sector which accounts for approximately R5-trillion and the top 10 asset managers hold approximately 70% of the assets under management, with the top five asset managers: Old Mutual, Coronation Fund Managers, Investec, Allan Gray and Sanlam Investment Management - holding 50% of the assets under management. Therefore, while it would initially appear to be a sub-sector characterised by a degree of robust competition given the presence of more than 120 fund managers, this belies the true levels of competition and market concentration, which indicate a market which continues to be very tightly held by the top 10 asset managers.
- The top 10 asset managers control about 70% of the market. This mirrors the high levels of concentration that characterises the institutional funds sector. The top five asset managers in retail funds manage approximately 51% (more than R1-trillion) of the retail/unit trust assets in total.
- There are 42 black investment management firms in the sector. However, while majority black-owned investment management firms account for 35% of the players by number, the assets they manage account for less than 5% of the total assets under management in the industry, an indication of the lack of transformation. Black firms also derive most of their assets from institutional funds, the PIC being the most notable supporter, with their share of retail assets being under 2% of total retail assets.
- In Stockbroking, the levels of concentration are high with 10 firms (UBS, Deutsche, Citigroup, RMB Morgan Stanley, Bank of America Merrill Lynch, JPMorgan, ABSA Capital, Credit Suisse, Investec Securities, SBG Securities) commanding a combined market share of approximately 80%.
- The number of black-owned stock brokerages remains disproportionately low and the number of practising majority black owned and majority black managed stockbroking firm’s remains very limited and is confined to a few firms.
- In asset consulting, the levels of concentration are high with four players (Alexander Forbes, Willis Towers Watson, RisCura, Novare) accounting for an estimated 90% of the assets under advice.
- The banking sector, valued at more than R4-trillion, has for years been characterised by an enduring oligopoly market structure comprising Standard Bank, Nedbank, First Rand, Absa and Investec Bank. These five banks collectively hold a market share of approximately 91% based on total assets and approximately 92% based on total deposits, indicating the highest levels of market concentration of all the financial services sub-sectors.
- The insurance sector, long-term and short term, also do not escape lack of transformation. The market is highly concentrated. The top four players — Old Mutual, Sanlam, MMI Group and Liberty — account for 67% of the total assets of the industry.
Given the poor record of transformation in our sector it behooves all sectors to help the 6th administration led by President Cyril Ramaphosa to promote an ecosystem that nurtures transformation.
Even though progress has been made over the past few years, greater transformation in the financial services sector must still be meaningfully achieved. Local procurement and local job creation must be more highly weighted in the broad-based BEE codes.
The transformation of this sector is an imperative, but it cannot be reduced to tokenism, where a person's unique background and experiences are reduced to a number to meet some arbitrary diversity requirement. That superficial way of thinking is just as dangerous and divisive as homogeneity.
We recommend, among others, that there must be compulsory disclosure by all participants in financial sub-sectors, to determine the state of the market structure and whether meaningful transformation is occurring.
Given the monopolistic nature of the SA economy and the racialised patterns of economic and other disparities in the country, there needs to be a review of the nature of ownership in the financial services sector.
If SA is to achieve true transformation and growth in the financial services sector, President Ramaphosa, his cabinet and the new parliament need a vision of what the financial sector should look like in the future and by when to create much needed jobs and ensure stronger, sustainable and more inclusive growth for all.
• Mbatha is president of the Association of Black Securities and Investment Professionals and chair of the Financial Sector Transformation Council.