1. BEE and the Financial Sector Charter

2. Introduction  In August 2002, at the NEDLAC Financial Sector Summit, the financial sector committed itself to the development of a Black Economic Empowerment (BEE) Charter.

3. S 1. Charter Preamble: Commitment made noting…  that South African society remains characterised by racially based income and social services inequalities - which is not only unjust, but inhibits the country’s ability to achieve its fully economic potential;  BEE is aimed at addressing inequalities;  It will unlock the sector’s potential, and promote its global competitiveness

4. Parties to this charter are….  Committed to promoting a globally competitive financial sector  that reflects the demographics of South Africa, and  contributes to the establishment of an equitable society by providing accessible financial services to black people and directing investment into targeted sectors of the economy.

5. This financial sector charter…  Was voluntarily developed by the sector;  Is a ‘Transformation Charter’ ito BEE;  Constitutes a framework and establishes the principles upon which BEE will be implemented;  Represents a partnership programme;  Establishes targets;  Outlines processes for implementing the charter and mechanisms to monitor and report on progress.

6. Interpretation  BEE accredited - being validated in terms of this charter as a BEE company, or having achieved a certain standard of BEE contribution in terms of a charter scorecard.  BEE transactions – acquisition by blacks of direct ownership in financial sector entity, and JV’s in BEE companies  Black companies - companies that are more than 50% owned and are controlled by black people.

7. Interpretation cont…  Black empowered companies – more than 25% owned by black people and where substantial participation in control is vested in black people.  Black influenced companies – companies that are between 5% and 25% owned by black people and with participation in control by black people.  Black people – All Africans, Coloured and Indians who are South African citizens and includes black companies – also in certain circumstances, includes permanent residents of the Republic of South Africa.

8. Interpretation cont…  Black women-empowered enterprise – companies that are more than 30% owned by black women, and where substantial participation in control is vested in black women.  Broad-based ownership – where an empowerment shareholder represents a broad base of members such as employees or where the benefits support a target group, for example black women, people living with disabilities and the youth.  Control – authority to manage assets, the determination of policies and direction of business oparations. [ indicators listed in def’n – e.g. voting rights and general participation in control structures and in executive management]

9.  Direct ownership – ownership of an equity interest together with control over all of the voting rights attaching to that equity interest.  Empowerment financing – provision of finance for or investment in:  Targeted investment; and  BEE transactions Interpretation cont…

10.  Financial sector – all the classes of financial institution defined below.  Banks  Long-term insurers  Short-term insurers  Re-insurers  Managers of formal collective investment schemes in securities  Investment managers and other entities that manage funds on behalf of the public  Any other institution in the financial sector may opt in Interpretation cont…

11.  Indirect ownership – investor owns equity in a company on behalf of beneficiaries and there may not be direct participation by the beneficiaries in the voting rights.  Management  Senior management – cost to the employer is R450 000 pa or more [excludes executive management]  Middle management – between R250 000 and R450 000 pa  Junior management – R150 000 and R250 000 pa  Salary bands will be increased in line with the consumer price index (“CPIX”) Interpretation cont…

12.  Procurement – all expenditure to acquire goods and or services including capital expenditure, but excluding:  Broker commissions;  Commissions paid to insurance intermediaries;  Property and rental purchases  Salaries and wages  Procurement spending where there is a monopoly  Procurement where supplier imposed by global policy for technical reasons  Social investment spending Interpretation cont…

13. Interpretation cont  Sound business practice – business practice conducive to maintaining and promoting, Confidence in the sector etc [see definition]  Targeted investment – financing of or equity investment in SA projects where gaps /backlogs in economic development and job creation have not been adequately addressed by financial institutions [such as in low income housing etc]

14. Challenges

15. Section 3: Challenges facing the Financial Sector  Financial sectors plays a central role in enhancing growth and development. South African financial sector is world class, but is confronted with a number of challenges:  The sector is dominated by a few very large institutions  Low levels of black participation, especially of black women  Access to financial services difficult for blacks  No effective provision of credit to black entrepreneurs  National level of savings and investment is inadequate  Insufficient investment into targeted investments of national priority  Funds circulates outside the formal financial system, stokvels,  Limited support for new black firms  Need to find meaningful ways to support the Prouldy South African Campaign

16. Challenges cont…  By addressing the challenges, the financial sector will make a significant contribution towards economic growth and also promote growth in the financial sector.

17.  To address BEE, the following imperatives must be satisfied:  Long term financial stability and sectors capacity to finance economic growth to be maintained  Enhance access to financial services for blacks  A savings culture to be developed  Investing in the skills development and training of existing and new black professionals and managers  Black leadership must be fostered  Promote triple bottom line (economic, environmental, social) accountability, including good corporate governance Challenges cont…

18. Challenges cont  Representation of black women and black people living with disabilities must be increased  Black firms providing services and products to the financial services industry must be increased  Business to support black entrepreneurs  Direct savings towards targeted investment of national priority  The sector must lower the barriers to entry and must promote the empowerment objectives of this charter

19. SECTION 4.Application of the Financial Sector Charter  Targets applied from 1 January 2004 until 31 December 2014.  the Charter Council will review and make decisions regarding the implementation of the charter on an ongoing basis, and  Principles contained in the charter will be relevant beyond 2015.  In 2009 the Council will have a mid-term review  Ownership provisions will be reviewed in 2011 to establish shortcomings  In 2015 the Council will undertake a second comprehensive review to decide further steps.

20.  The provisions of the charter are to be achieved in a manner consistent with sound business practice

21.  Provisions of the charter will not apply in the same manner to all financial institutions. The following examples of qualifications are provided for:  Human Resource Development – less than 50 staff members [but still bound by other BEE legislation]  Empowerment Financing – less than R10m  If a global policy applies – ratio’s change  Retirement funds –less than 50 members=certain exclusions – if more than 50, different exclusions  All Provisions – less than 50 staff members & less than R10m designated investment  Anyone can opt in!  Any exclusions = need to apply to Council and motivate exclusion Application of the Financial Sector Charter cont…

22.  Parties to the Charter agree that  when sourcing products and services from the financial sector, competing for business, they will use the charter rating to explain their BEE contribution  Specifically agreed, when competing for business, the charter rating to explain their BEE contribution  Tenders - Government will base their adjudication of BEE contribution on the charter rating  Private sector should base its evaluation of the BEE in terms of this charter Application of the Financial Sector Charter cont…

23. Human Resource Development  Each financial institution undertakes to:  Promote a non-racial, non-sexist environment;  Increase the participation of black people in skilled, strategic and operational leadership;  Invest in leadership to enable them to play a central role in driving the transformation programme

24.  In addition to the obligations of Employment Equity and Skills Development legislation –  Each financial institution will have a minimum target of 20% to 25% black people at senior management (> R450 000pa) level by 2008;  4% black women at senior management level (> R450 000pa) by 2008;  30% black people at middle management level (> R250 000pa) by 2008; Human Resource Development cont…

25.  10% black women at middle management level (> R250 000pa) by 2008;  40% to 50% black people at junior management level (> R150 000pa) by 2008;  15% black women at junior management level (> R150 000pa) by 2008;  A 2014 target of 33% of the relevant total back representation target has been set for black women representation at all four levels.  The Council will establish other 2014 targets for management and executive level – before 2008

26.  Over and above any skills levies, from the effective date of the charter to 2008, spend 1,5% of total basic payroll per annum on training of black employees.  Skills development initiative shall be directed at skills programmes that promote black skills.  Financial sector undertakes to implement a Learnership Programme which will employ up to 4,5% of its total staff in the form of black matriculants in registered learnerships. Human Resource Development cont…

27.  Each financial institution undertakes to develop and report on:  Career pathing to facilitate progress in their black employees careers;  Implementation of mentorship programmes;  Targeted recruitment  Cultural diversity and gender sensitivity programmes;  Introduce training programmes in line with the NQF requirements. Human Resource Development cont…

28. Chapter 6.Procurement Policies  Financial institutions will implement a targeted procurement strategy. The target will be 50% of the value of all procurement from BEE accredited companies by 2008 and 70% by 2014.  A minimum of two thirds of that expenditure must be spent with BEE accredited companies as the primary vendor. The residual one third may be channeled via a primary vendor.

29.  Financial institutions will:  Provide support to black SMEs, setting aside areas of procurement reserved or preferred for black SME’s only;  Promote early payment;  Encourage existing suppliers to address BEE;  Explore ways of supporting the Proudly South African Campaign;  The Charter Council will review the 2008 and 2014 targets in 2005. Procurement Policies cont…

30. Enterprise Development  The sector will:  Improve levels of assistance to BEE accredited companies – such as infrastructure support, secondment of staff etc. Measurable financial support will be scored under procurement  Support establishment of BEE accredited companies through which the sector sells its products and services – this will be scored under procurement  Support j.v’s debt financing of and equity investment in BEE companies – this will be scored under Targeted investments  the sector undertakes to, where appropriate, refer business opportunities to and procure financial services from, black owned financial institutions

31. Access to Financial Services  the Sector recognises that access to retail financial services is fundamental to BEE  specific actions were agreed in relation to:  Ensuring the provision of financial services including:  Affordable banking services;  savings schemes;  Credit for small and micro enterprise and poor households.  Aim is  to enhance accumulation of savings and direct them to development initiatives  Increase access to financial services to a greater segment of the population, such as access to savings products, life assurance products etc

32. Access to Financial Services cont  Sector agrees:  to annually invest a minimum of 0.2% of post tax operating profits in consumer education – empowering consumers to make informed decisions about their finances.[ from charter effective date to 2008]  Focus of education to empower consumers to make informed decisions about their finances and lifestyles  To eliminate discrimination in the provision of financial services  By 2005 there will be standards to monitor and evaluate the above initiatives on access.

33. Section 9.Empowerment Financing  All the parties commit themselves to working in partnership with Government and to mobilise resources for empowerment financing.  Preliminary calculations estimate new empowerment financing from the sector could exceed R75bn  Investment in transformational infrastructure will depend on mechanisms to identify and analyze potential projects

34. Principles of BEE transactions  BEE ownership initiatives should be aimed at promoting the sustainable participation of black people in the sector  Ownership to be encouraged where it adds value to the co and includes management and control  Funding structures to facilitate the transfer of full economic interest to the BEE partner, aimed at long term shareholder- type relationships.  Retention of shareholding to be promoted  Broad based empowerment to be promoted -Employee ownership to be promoted

35. Ownership in the financial sector  Each financial institution will have a target of a minimum of 25% black ownership at holding company level by 2010;  10% by way of direct ownership by black people;  Bonus points to be warded if more than 10% is directly owned

36. Ownership in the financial sector cont…  Direct ownership should include:  Direct ownership as a result of BEE transaction financing  Broad-based ownership;  Disposal of any assets or businesses by the financial institution to black people as a going concern;  Direct shareholding, at subsidiary level ;  Joint venture or partnership arrangements

37. Ownership in the financial sector cont…  Any transaction which involves BEE parties acquiring equity on a conditional, deferred basis, with no issue of equity carrying upfront economic interest for the avoidance of doubt, will not fall to be counted as direct ownership;  If direct ownership transaction unwinds, it must be referred to the Charter Council – who will analyse the original transaction –was it a genuine transaction?  if owned more than 25 % by empowered co, the institution can take into account the direct black ownership in that other company

38. Control in the financial sector  A target of 33% black people on the board of directors by 2008;  A minimum of 11% black women on the board by 2008;  A target of a minimum of 25% black people at executive level by 2008;  A minimum of 4% black women at executive level by 2008.

39. Shareholder activism  Sector recognises shareholder activism critical for growth in the sector  Institutions undertake, within parameters of good corporate governance, to:  Promote influence of black owners at board level  Encourage training and awareness of shareholders  Fund managers and asset consultants commit to improve their knowledge and that of union trustees regarding BEE transactions and targeted investments  Pension Fund trustees encouraged to promote the objectives of the charter in the entities in which they have taken significant investments

40. Corporate Social Investment  A target of 0,5% per annum of post tax operating profits to corporate social investment (CSI).  CSI means projects aimed primarily at black groups that will contribute to transformation.  Projects may include, but will not be limited to:  Education  Training  Development Programmes  Environment  Job Creation  Arts & Culture  Health  Sport

41. Regulatory issues  Regulatory environment must promote the Charter’s empowerment objectives  If regulatory environment inhibits compliance it is to be changed to allow for compliance  This is published as a Transformation Charter in terms of BEE legislation  Minister requested to publish a Code of Good Practice to give effect to the adjudication of tenders

42.  Charter Council – an independent body to oversee the implementation of the Charter  Council will :  Conduct reviews  Evaluate and review targets and strategies in a changing environment  Confirm ratings of financial institutions  Issue guidance notes on interpretation of the Charter  Evaluate new areas of intervention  Accredit agencies to perform audits  Promote, along with government, institutions and BEE advisory Council, the implementation of the Charter Implementation

43. Implementation cont  Reporting and Review  Each financial institution will report annually to the Charter Council. If a financial institution is a member of a group, it should report as part of the group in the South African holding company.  The first annual report will be for the year ending 31 December 2004.  All financial institutions will publish, for general information, an annual BEE report which will include the audited scorecard.

44. The Scorecard  The scorecard forms an integral part of the financial sector charter  The scorecard  provides measurement indicators for purposes of measuring BEE progress.  Will be used by:  Financial institutions for self assessment  Charter Council to measure BEE progress  Government in adjudicating contracts awarded to financial institutions  The private sector in awarding contract to financial institutions  Financial institutions which are exempted from any paragraph in the charter will not be required to complete the specific section in the scorecard.

45. Scorecard continued  measures three core elements of BEE -Ownership and control of enterprises and assets, -HR development and EE, - Indirect empowerment through preferential procurement  BEE Ratings:  0 to 40 = limited contributer  40 to 65 – satisfactory contributer  More than 65 = good contributer  Financial Charter uses more complex overall weighted average mechanism – from an ‘A’ for more than 80 points to an ‘E’ for less than 40points

46. Charter signed by  Association of Black Securities and Investment Professionals  Banking Council of South Africa  Foreign Bankers Association of SA  Institute of Retirement Funds  Life Offices’ Association of SA  South African Insurers Association  Association of Collective Investments  Bond Exchange of SA  Investment Managers Association of SA  JSE Securities Exchange SA  South African Reinsurance Offices’ Association

47. 