Financial Sector Transformation Council has been bluffing on BEE

PAIA records obtained by Sakeliga show that yet another regulator has been bluffing about BEE.

In March, the Financial Services Transformation Council (FSTC) issued demands to all financial institutions – from individual brokers to large corporates – that they should report on and provide evidence of their Broad-Based Black Economic Empowerment (B-BBEE) status.

Following a review of the FSTC’s replies and records provided to Sakeliga, we can confirm that the FSTC has no such legal, statutory, or public powers. It is not entitled to demand compliance with its annual reporting notices or to issue any sanctions, including blacklisting and naming and shaming of financial institutions who would not under other circumstances seek BEE accreditation .

The implied threat of being classified a ‘non-compliant’ financial institution, the innuendo that non-participation in BEE may lead to sanctions, and a clear escalation on the side of the FSTC to expand government’s policy of BEE into the financial sector, is part of a ploy by the FSTC. It seeks to intimidate businesses into adopting unnecessary, harmful, and costly BEE structures.

Particularly small and medium financial institutions were led by the FSTC and uncritical compliance advisors to believe that non-compliance with the FSTC’s annual reporting notices and a failure to meet procurement targets outlined by the 2017 Financial Sector Code would make them non-compliant with their professional and legal duties. In addition, these businesses were brought under the impression that they could face potential financial or professional sanctions. One of the threats mentioned by the FSTC was even the potential for blacklisting or naming and shaming financial institutions that do not submit annual BEE reports to the FSTC.

However, PAIA records (link below), legal advice, and multiple reports from industry players now conclusively demonstrate that the FSTC was bluffing, leading to a false impression by businesses of their obligations.

There is currently no legal or statutory obligation for financial institutions to comply with any of the annual reporting notices issued by the FSTC.

Indeed, multiple businesses not participating in BEE have now reported to us that the FSTC has not acted against them even though they ignored or expressly declined to comply with the FSTC’s demands.

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The FSTC backtracks

In April 2024, we requested the FSTC provide us with its internal rules and policies and the source of its ostensible authority to make demands of financial businesses. Initially, it undertook to provide all necessary records. However, by June it changed its tune, accused Sakeliga of a ‘fishing expedition’, and refused to cooperate. Last week, after a complaint against it at the Information Regulator of South Africa, the FSTC finally relented and complied with our request for access to information.

According to the FSTC’s reply, its only basis for a claim to authority and ability to sanction lies with the Financial Sector Code. The FSTC even expressly admits that it has ‘no other sanctions’, neither ‘financial penalties’ nor ‘professional sanctions’.

The Sector Code was published on 1 December 2017 by then Minister of Trade and Industry, Rob Davies. However, the code imposes no positive legal duty upon financial institutions to undergo or maintain annual reporting and accreditation under the Broad-Based Black Economic Empowerment (B-BBEE) Act. This optionality is unsurprising, since the B-BBEE rating system was designed with a view towards state procurement transactions – not private business.

The framework of the B-BBEE Act and the Sector Code does not make it obligatory for financial institutions – or any other business for that matter – to participate in annual BEE reporting. Non-compliance with reporting notices by the FSTC does not result in any direct sanction or penalty for non-participating businesses.

The sanction that is available to the FSTC under the Sector Code is to penalise an already participating financial institution one BEE level downgrade for failing to submit their report in time or failing to meet what the Sector Code deems priority elements. For non-participating financial institutions, this is of no consequence.

Financial institutions are not obligated to comply with the FSTC’s reporting notices, nor are they required to adhere to any sectoral targets or BEE levels set by the FSTC or the Financial Sector Code. Importantly, it is evident that the FSTC lacks the legal authority to name and shame or blacklist financial institutions that fail to comply.

Downstream compliance demands by large financial institutions

Following the FSTC’s reporting demands, unfortunate examples emerged of larger financial institutions who extended at their own initiative these demands to smaller financial institutions, such as brokerages and financial planners, with whom they were contractually related. This is unsound and puts the larger financial institution at ethical and legal risk, and imposes harmfully on the smaller financial institution and its clients.

Sakeliga suggests that large financial institutions should reconsider their approach to FSTC notices and refrain from imposing BEE requirements on smaller financial institutions. The preferred approach should be to focus on proven business principles instead of automatically adhering to the politically motivated agenda of the FSTC.

Third-wave BEE

Sakeliga remains committed to monitoring the implementation of third-wave BEE within the financial sector and will take action against regulatory institutions that unlawfully and unconstitutionally seek to extend the reach of BEE and try to prohibit businesses from operating based on their BEE status.

Instead of encouraging value-adding economic cooperation across communities, BEE adds layer upon layer of structural cost to doing business in South Africa, raising the cost of goods and services, and thereby making virtually everyone poorer.

We hold that the common good is best served when businesses employ a strategy of maximum appropriate non-compliance with harmful BEE policies.

For the PAIA records as obtained, click here.