Secret Profits and Bulking: Glenrand M.I.B Presentation
to Parliamentary Committee on Finance
21 June 2006
FSB General Circular - 24 March 2006
Internal Investigation launched
Methodology of Internal Investigation
Identify potential areas of secret profit practices;
Establish whether profits were indeed generated;
Establish whether profits were secret;
Obtain senior counsel opinion on lawfulness of profits;
Establish number of funds affected, total revenue and
quantum per fund;
Recommendation to Exco and Board of Director on steps
to redress situation
Present preliminary report to FSB
Discuss report with FSB
Methodology and Findings to PwC for independent audit
Present PwC report to FSB and discuss methodology
Senior Counsel Opinion on Bulking Practices
Adv. Malcom Wallis, S.C:
Retirement fund administrators exempt from the provisions
of
FAIS, to the extent that the provision of their services are
regulated by the Pension Funds Act;
Provisions of the Financial Institutions (Protection of Funds) Act
apply to individuals employed by financial institutions, in order to
extend the common law fiduciary duties imposed on financial
institutions, to individuals employed by such institutions. The Act
therefore does not apply to such institutions when acting as
service providers of other financial institutions;
Fiduciary duties of a retirement funds administrator towards its
retirement fund clients arise from the common law relating to
agency agreements;
Adv. Malcolm Wallis, S.C. (continued)
An agent may not derive any profit from managing the assets of
its principal, except where such profits had been disclosed to and
agreed with the principal;
Robinson v Randfontein Estates Gold Mining Company Limited:
“Where one man stands to another in a position of confidence involving
a duty to protect the interests of that other, he is not allowed to make a
secret profit at the other’s expense of place himself in a position where
his interests conflict with his duty…It prevents an agent from properly
entering into any transaction which would cause his interests and his
duties to clash…There is only one way by which such transactions can
be validated, and that is by the free consent of the principal following
upon a full disclosure by the agent…”
Conclusion: It is incorrect to state that profits agreed with retirement fund
boards are unlawful, i.e. only “secret profits” should fall within the ambit of
the FSB circular.
Bank bulking - Background
Implemented to ensure enhanced efficiencies and to
secure greater revenue for clients, as well as to increase
revenue to Glenrand MIB;
Process commenced 2004 in terms of SLA adjustments
and discussions with banks;
Bulking agreements were implemented with effect from
3 May 2005 (Standard Bank accounts) and 14 December
2005 (Nedbank accounts) respectively;
Glenrand share:
Standard Bank: 50% of enhanced interest;
Nedbank: 33% of enhanced interest;
Bank bulking – Example (Std Bank)
Amount
(R’s)
Client Enhance
rate
ment to
client
New
Client
Rate
Gross
Pooled
Rate
Interest Glenrand
to
fee as %
Glenrand of Gross
Pooled
Rate
%
%
%
%
%
%
0 – 499 999
1.500
2.250
3.750
6.000
2.250
37.510
500 000 –
999 999
4.500
0.750
5.250
6.000
0.750
12.500
1 000 000 –
9 999 999
5.000
0.500
5.500
6.000
0.200
8.310
Greater
than
10 000 000
5.500
0.250
5750
6.000
0.250
4.200
Bank bulking -Disclosure
Genrand MIB policy since 2004:
Any splitting of interest must be disclosed to and agreed
with clients.
Service Level Agreements amended in 2004, renegotiated
with clients;
Clause 3 (Glenrand MIB administrative duties):
“opening and operating a bank account with a major South African
bank in the name of the Fund, the parties acknowledging that such
account and the monies deposited therein, will be included in the
Glenrand MIB cash management system where Glenrand MIB groups
client accounts for efficiency and preferential interest rates, for the
benefit of both the Fund and Glenrand MIB in terms of clause 4.2(e)”
Bank bulking -Disclosure
Clause 4.2 (Additional Fees):
(e) The treasury cost to secure group preferential rates detailed in
3.1(e) equal [to] 50% of all interest earned on amounts deposited
in the account referred to in clause 3.1(e) at rates which exceed
the selected Bank’s standard rates from time to time
(“enhancement”). The quantum of the enhancement will be made
freely available and disclosed to the Fund on request by the
Trustees.”
Rand Amount of interest earned by fund and Glenrand MIB
respectively declared annually in arrears;
Quarterly cash flow statements provided to trustees at
trustee meetings (do not show GMIB share of bulking
revenue).
Bank bulking -Findings
Processes and best practices in operation, failure in
isolated instances due to human error;
Out of 250 funds administered by Glenrand MIB, 28 funds
have not yet signed Service Level Agreements;
Out of 28 funds, non-disclosure to four funds;
Total Revenue to Glenrand MIB since inception:
3 million;
R2,
Average revenue to Glenrand MIB per fund: R1, 041 p.m.
Historical Practices
Request to former executives revealed one bulking/imprest
account, the CBC account, acquired through process of
acquisition;
Used for deposit by funds of monthly amounts, from which
benefit payments were made to beneficiaries;
Unclaimed benefits refunded to relevant funds;
Interest earned annually apportioned and repaid to funds
on pro rata basis. Glenrand MIB did not take interest to
profit or loss of the company;
Preliminary view: No secret profits (To be confirmed by
PwC, specifically tasked to investigate this account).
Proposals regarding Redress
Glenrand MIB to discuss and agree with
appropriateness of sharing interest on bulking.
FSB
Provision of R2,3 million plus interest set aside to redress
improper/unlawful bulking practices;
Where SLA’s not signed: process of negotiation;
Where SLA’s agreed to and signed, no secret profits, i.e.
no redress.
Risk Umbrella
Allows clients (retirement funds and employers) to obtain group risk
rates for life and disability income replacement insurance on pooled
basis;
Rate generally cheaper than direct insurance. Competitive quotes
obtained from market. Trustee decision to utilize risk umbrella a result
of cheaper rates;
Glenrand MIB attended to administration and levied administration fee
for such services. Rate all-inclusive, incorporating both commission
and administration fee;
Findings of investigation are that clients were not in every instance
aware of split between insurance premium and administration charge.
Glenrand MIB intends to negotiate with client fee that is relative to the
service offered;
FSB provided with full details. Findings subject to PwC audit/FSB
discussion.
Other Potential Areas of Secret Profits
Imprest Accounts: None (except for CBC Account);
Commission on Outsourcing Annuities: None for several years.
Securities Lending: None;
Ten50Six Life:
Wholly owned subsidiary of Glenrand MIB, acquired during 2004;
Registered long-term insurer with limited license to issue linked
fund policies, i.e. policies only issued to institutional clients; policy
benefits not guaranteed but linked to investment market;
According to normal insurance law principles, assets of an insurer
belongs to the insurer, i.e. premiums (contributions) are paid in the
bank account of the insurer;
Other Potential Areas of Secret Profits
In terms of Ten50Six Life insurance policies, monies must be
invested within 6 business days, but practice is to invest within 24
to 48 hours.
Ten50Six Life earns the interest earned over that period;
Rebates earned in respect of two umbrella funds, administered by
Ten50Six Funds Administrators;
Rebates earned intended as refund for fund expenses paid by
sponsoring administrator. Any discrepancies found to be refunded
•
Commission on Other Service Divisions (Trusts/ Housing Loan
Administration): None. (Also no additional fee where business is
placed with other service providers)
Other Potential Areas of Secret Profits
Asset Consulting:
All asset consulting fees explicitly disclosed to clients in
application form prior to investment;
Exact cost from underlying asset manager passed on to retirement
fund client and confirmed in application form;
Glenrand MIB earns no additional revenue from asset consulting,
nor any additional fees from asset managers, nor does it pay any
fees to asset managers;
No commission paid to consultants for business placed with asset
consulting division. Practice terminated in 2005. Prior to that,
consultants earned 6% of fee paid by client for asset consulting.
Future Practices
Glenrand MIB initiated revision of client servicing and costing method
prior to FSB investigation.
Intention is to move towards fees explicitly agreed with clients, away
from other forms of remuneration, such as commission;
Intention to continue with bulking practice, but Glenrand MIB will with
effect from new financial year, 1 July 2006, cease to share in additional
interest earned by way of bulking;
All fees to be charged in terms of SLA and to be fully inclusive of
standard services to clients.
Conclusion
•
For final report to be submitted to FSB, next steps will be :• Final verification of calculation provided by banks in respect of
bulking of fund bank accounts;
• Independent review of findings by PwC;
• Discussion of PwC report with FSB;
• Agreement with FSB on process of redress believed necessary;
• Discussions with relevant fund management bords regarding
measures to provide redress.