SOUTH AFRICAN INSURANCE ASSOCIATION . SOUTH AFRICAN INSURANCE ASSOCIATION

FINANCIAL SECTOR CHARTER presented by Leila Moonda

Introducing the Financial Sector Charter

Key Outcomes Sectoral Transformation strategy Interventions on targeted areas of the economy BEE financing strategy A basis for engagement with stakeholders

Principles A commitment that is voluntarily developed by the Sector A transformation framework that establishes mechanisms for BBBEE A balanced scorecard approach to measure achievements in broad transformation and BEE objectives Growth & development of the sector integral to BEE Provisions subject to sound business principles

Context Very low levels of black participation Black senior management accounts for less than 10% Diminished black ownership in the Sector Low levels of investments in areas of national priority Infrastructure, Low income Housing, Black SMEs, BEE Transactions High number of un-banked / uninsured persons Dismal provisions of effective access to financial services and products (LSM 1-5)

Vision “…promoting a transformed, vibrant and globally competitive sector that reflects the demographics of SA, and contributes to the establishment of an equitable society by effectively providing accessible financial services to black people and by directing investment into targeted areas in the economy”

Signatories Association of Collective Investments (ACI) Banking Association of South Africa Bond Exchange of South Africa Foreign Bankers Association Institute of Retirement Funds (IRF) Investment Managers Association of South Africa (IMASA) JSE Securities Exchange Life Offices Association (LOA) South African Insurance Association (SAIA) South African Reinsurance Offices Association (SAROA) Association of Black Securities and Investment Professionals (mandated by the Black Business Council) (ABSIP) Government NB – no labour / community involvement

Who is Subject to the Charter Applies to all institutions active in the financial services sector: Banks Long-term insurers Short-term insurers Re-insurers Managers of collective investments Listed entities … Any other institution may opt-in

Exemptions Less than 50 employees – human resource development provisions Less than R10m designated investments – empowerment financing Both of the above – totally exempt, but may opt-in Companies subject to global policy – certain Board member provisions Companies subject to global policy – ownership provisions Wholesaler – access provisions

The pillars Human Resources Development Access to Financial Services Empowerment Financing Procurement & Enterprise Development Ownership & Control Corporate Social Investment

HR Development Building a diverse, non-racial, non-sexist and sustainable intellectual pool Un-quantified commitments to: Mentorship, Career Path programs Cultural Diversity and Gender sensitivity programs Where possible, support Educational Institutions Skills Audit to be undertaken to identify black skills shortage

Skills Development (5 points) Para. 5.2 Skills spend Additional skills spend to address black skills 1.5% of the financial institution’s payroll (5.5) Learnership programs (5.7) Black matriculants up to an equivalent of 4.5% of staff to be enrolled in the 1st learnership cycle (3 years – which ended on the 31st December 2006) Charter Council to investigate the feasibility of a 2nd learnership cycle

Employment Equity (15 points) Para. 5.3 2008 Employment Equity targets Black Senior Management from 2002 estimate of 9.9% to a minimum target range of 20% to 25% Black Middle Management from 2002 estimate of 17% to a minimum of 30% Black Junior Management from 2002 estimate of 28% to a minimum target range of 40% to 50%

Targets for women Para. 5.4 Black women targets (including exec level) to be reviewed in 2007 but aim for 33% of black targets in all categories Black Women Senior Management from 2002 estimate of 1.6% to a minimum target of 4% Black Women Middle Management from 2002 estimate of 5% to a minimum target of 12% Black Women Junior Management from 2002 estimate of 12% to a minimum target of 15%

Procurement & Enterprise Development Para.’s 6 & 7 To support the development of sustainable black enterprises, 3rd tier financial institutions & black SMEs BEE Accreditation to reflect the Sector’s transformation strategy and its approach to empowerment

Procurement Para. 6 Procurement from BEE accredited companies: 50% by 2008 70% by 2014 Suppliers currently have to be rated on a broad – based methodology. Though this continues to be a problem as there are no accredited verification agencies as yet.

Enterprise Development Para. 7 Objectives Foster new BEE companies Develop existing BEE companies Mechanisms Skills transfer Secondment of Staff Infrastructure Support Technical and Administrative support and assistance

Procurement & Enterprise development Premium scoring to be awarded to Black Owned, Black Women-owned, Black SMEs or excellent performers in Sectoral Charters Un-quantified Commitments Promote early payment to Black SMEs Encourage existing suppliers to become BEE accredited

Access (6 points for short –term insurers) Para. 8 Broadening the effective provision of financial services to LSM 1-5 To ensure that majority have access to basic affordable financial services Defining Effective Access: Affordability – cost effective services to LSM 1-5 Innovative, user friendly products/services; and Non-discriminatory practices. Mzansi insurance standards finalised Challenges regarding Access: Do we as an industry have a generic product such as the banks have done with Mzansi or do we produce guidelines for each organisation to produce its own product? It is a sector initiative, how do individual companies get scored? Para. 2.22.5 “ appropriate & affordably priced products and services for effective take-up by LSM 1-5” Access committee drafting a position paper regarding access

Defining LSM 1- 5 LSM =Living Standards Measure LSM is a unique means of segmenting the South African market. It cuts across race and other outmoded techniques of categorising people, and instead groups people according to their living standards using criteria such as degree of urbanisation and ownership of cars and major appliances. This category of people are generally recognised as: Living mostly in rural areas Earning less than R3000.00 per month Having limited formal education Having a low levels of financial literacy Having limited access to services Mostly the unbanked and uninsured

Access targets Para. 8.3.1 Transactional Banking products & services 80% (LSM 1-5) Bank Savings products & services Collective Investments products & services 1% (LSM 1-5) Life Assurance products & services 23% (LSM 1-5) Short term Risk Insurance products & service 6% (LSM 1-5) Consumer and financial education 0.2% of each institution’s post tax profits p.a. SAIA programme to assist insurers / others

Empowerment Financing Para. 9 Mobilising resources for investment in socio-economic transformation “Affected Institutions” – those taking “designated investments” “Designated investments” – deposits, savings, investments, risk insurance premiums “At least” R75bn originally targeted R123.5bn currently targeted BEE transaction financing (5 points) Targeted investments (low-income housing, transformational infrastructure, agriculture, black SMEs) (17 points)

Designated Investments 2.18 … means any form of statutory or voluntary deposit, saving, investment or risk insurance placed or made by the South African public (whether of a wholesale or retail nature, but not by one financial institution in another) Short term sector is basing it designated investments on net assets and that brings the brokers into the equation.

Designated Investments Designated Investments are defined to include all assets on the balance sheets of institutions included under the Financial Sector Charter. This means that the capital of financial institutions (equity or otherwise) is also regarded as part of Designated Investments. Assets not on an institution’s balance sheet (e.g. assets under administration) also qualify as Designated Investments for that institution.

Designated Investments Sector Estimate of DI at 31/12/2003 (Rbn) Retirements funds 720 Banks 774 Life Offices 456 Collective Investments 136 Short-term insurers 34 Gross DI 2 120

Empowerment Financing 2.21 … means the provision of finance for or investment in: Targeted investment; and BEE transactions

Empowerment Financing 9.1.5 The total amounts to be invested in BEE transaction financing and targeted investments in terms of 9.1.3.2 will be calculated as percentages of the total designated investments in the financial sector as at 31 December 2003, and currently estimated to be in the order of R2,000bn. Those percentages of designated investments in each financial institution will constitute the targets for BEE transaction financing and targeted investments respectively Total points will be based on funding provided 2 types Transfer of equity ownership Provision of finance Joint Ventures Debt financing Equity investments To qualify for points ownership must include control Total points cannot exceed total financing provided No points will be allocated for rolled up financing costs or marked to market value of an investment

Implications Target for short-term insurers: R34bn / R2,120bn of R122.5bn 1.6% of R122.5bn R1.96bn (over 5 years) R1.96 bn / R34 bn = 5.6% of designated investments

Targeted investment / BEE Transaction Financing targets R50bn Low-income housing R42bn / R32bn Black SME finance R5bn Agriculture R1.5bn Transformational infrastructure R25bn Total Target R123.5bn

Ownership & control Para.’s 10 & 11 Enable genuine participation in the holding and strategic direction of the Sector Black ownership to be aimed at: Promoting productive and sustainable participation by black people Encourage involvement of broad based constituencies in BEE transactions Encourage ownership that is likely to add value to the financial institution Encourage funding structures that facilitate transfer of economic interest

Ownership targets Para. 10 25% total black ownership in 2010 (14 + 4 points) A minimum of 10% must be Direct ownership A maximum of 15% may be Indirect ownership – subject to the institution first achieving its Direct ownership target and promoting shareholder activism Direct ownership above the minimum 10% can earn a maximum addition of 4 points Foreign banks may achieve an equivalent score through An additional BEE Transactions target equivalent to 25% of the local institution’s value; & JVs and partnership with Black companies in terms of paragraph 10.3

Control targets (8 points) Para. 11 Black people in Boards of Directors to be a minimum target of 33% by 2008 Black Women in Boards of Directors to be a minimum target of 11% by 2008 Black people in Executive Management from the current % to a minimum target 25% by 2008 Black Women in Executive Management from the current 2% to a minimum target of 4% by 2008

Shareholder activism Para. 12 Shareholder activism is a critical component to the continued confidence and long term growth of the sector Financial Institutions (including Pension Funds and Fund Managers) commit to undertaking various programs to promote shareholder awareness and encourage activism Indirect ownership points in the scorecard are subject to financial institutions reporting on their support for shareholder activism

Corporate social investment (3 points) Para. 13 Projects aimed at black people, have a strong developmental approach & contribute toward transformation Promote investment by the sector in areas specific to the needs of the majority Target - 0.5% p.a. of post tax operating profits

Application Targets apply from 1st January 2004 until 31st December 2014 Principles embodied in the Charter are perpetual Comprehensive review of Charter achievements in 2009 and 2015

Ensuring a result-orientated and effective implementation Monitoring Ensuring a result-orientated and effective implementation Establishment of the Charter Council representative of the Sector and Stakeholders to oversee implementation

Charter Council Para. 15.1 The Charter Council will establish an Executive with the delegated mandate to: Receive, consider and approve Annual Audits from Financial Institutions Issue guidance notes on the interpretation and application of Charter Conduct reviews identified in the FSC Engage Govt., DFI’s, Regulatory Agencies & BEE Advisory Council to promote implementation of the FSC Independent Body

Charter Council Industry Associations 6 ABSIP 3 Labour 4 Community Government

Charter Council Executive Principal Officer appointed 01st October 2005 – Enoch Godongwana Chairman rotates every year amongst the constituencies, currently Kennedy Bungane from ABSIP Council offices established at 66 Marshall street, Jhb CBD

Reporting and Review Para. 15.2 Annual Report Reporting period is January to December Reports to be submitted by 31st March each year Members of a group should report as part of the group, unless they are listed or opt to report separately Each institution annual BEE report: Audited scorecard and supporting documentation

Scorecard A basic and objective framework against which Transformation and Empowerment can be measured Provides a balance between imperatives for sector transformation and black economic empowerment Points scoring in the various areas only starts from specific thresholds of performance

Scorecard Component Points Human Resource Development 20 Procurement and Enterprise Development 15 Access to Financial Services 18 * Empowerment Financing 22 Ownership and Control Corporate Social Investment 3 * Short term industry = 6 ( 4 Products + 2 consumer education)

The Scorecard & Rating Year 2004 2005 2006 2007 2008 Interim rating 40% 55% 70% 85% 100% Rating < 16% < 22% < 28% < 34% < 40% E 16 – 22% 22 – 30.3% 30 – 38.5% 34 – 46.8% 40 – 55% D 22 – 28% 30.3 – 38.5% 38.5 – 49% 46.8 – 59.5% 55 – 70% C 28 – 32% 38.5 – 44% 49 – 56% 59.5 – 68% 70 – 80% B > 32% > 44% > 56% > 68% > 80% A

Status Charter was gazetted as a Transformation Charter by the DTI on the 09th February 2007. As the Charter has not yet been gazetted as a Sector Code, government may still choose have its financial sector suppliers rated against the DTI Codes

Outstanding matters Regulations Review with Government Gazette FSC as a sectoral code of practice for public sector procurement Review of certain targets ?

SOUTH AFRICAN INSURANCE ASSOCIATION Thank you! www.saia.co.za www.saia.co.za www.saia.co.za