Armed with a new mandate to be more "proactive, pre-emptive and intrusive", the Financial Sector Conduct Authority (FSCA) is going to clamp down on corruption in the pension fund industry that is denying employees a dignified retirement, says Naheem Essop, a specialist analyst in the regulator's retirement funds supervision division.
Most service providers, including legal advisers, administrators and investment advisers, are overcharging retirement funds and bribing trustees, he told the annual conference of the Pension Lawyers Association of SA this week.
The practice is "prevalent", he says. He cites the example of an attorney who charged R72,000 to prepare a "perfectly standard" two-page document. "If you took off the attorney's letterhead it would be a one-page document."
The Financial Services Board was criticised for regulatory failures but the FSCA, which replaced it as part of the new "twin peaks" model of financial regulation, is "something very different", Essop says.
"Our guiding principles are to be intrusive and outcomes-based. There's a new mandate and new ways we're going to be doing our business."
He says the authority will be pre-emptive and proactive in identifying risks, "not waiting until something happens and then identifying what led up to it".
Last year, it issued a directive that stops service providers from bribing retirement fund trustees.
"It interrupted service providers entertaining trustees at the Cape Town Jazz Festival. Some of them were quite upset about that because they had spent in excess of R500,000 to entertain these trustees."
It's not just jazz festivals, he says. "Sometimes it's taking trustees on overseas trips to sporting events, all sorts of lavish entertainment."
He has no doubt that the money for this is factored into the "excessive" fees that service providers are charging pension funds.
They're aided and abetted by trustees who are ignorant or corrupt, or both.
By law, at least half the board must be elected by pension fund members. "As a consequence, you sometimes get trustees who are underskilled."
They're required to make increasingly complex decisions affecting retirees, and make excessive use of external experts who not infrequently rip the fund off.
The question to be asked, says Essop, is: "Why do you always have to outsource a function? Wouldn't it be cheaper for a pension fund to hire an internal legal adviser?"
It's the kind of question the FSCA is going to be asking more often.
"As part of our more intensive and intrusive approach we will be looking at decisions and business strategies of retirement funds.
"We'll be interrogating funds and we'll be getting to the bottom of why they are spending more in costs than other funds."
He says trustees should be forcing service providers to be more competitive in what they offer.
"Most retirement funds are multimillion-rand entities with thousands of members, and that should create competition for service providers to get their business."
It should put trustees in a better position to negotiate lower fees.
"But we're not seeing this. They need to be alive to the fact that they do have this bargaining power, they have economies of scale and must use this to the ultimate benefit of members."
Instead of questioning the fees that service providers are charging, many trustees "are not even aware of the fees the fund is being charged", he says.
This is a "total dereliction" of their fiduciary duty and also "very scary" when the impact it has on the quality of life of retired members is considered, he says.
"They depend on trustees being aware of these things, asking the right questions and making the right choices."
He says that corruption is "probably a driver" of much so-called "negligence".
"Why else would a trustee agree to pay higher-than-market-related costs?"
Changing this behaviour won't be easy, he says.
The FSCA is going to "target" the education of trustees and principal officers but there is only so much this will achieve.
"You can't teach integrity."
They'll be relying on deterrence, he says.
"Where we pick up those instances we will take strong action. One of our strategic priorities is to be a credible deterrent to bad behaviour."
Most service providers, such as administrators, are licensed by the FSCA, "so we can take much stronger action against them, we can take away their licence and stop them from doing business".
It also has the power to act against those who are not licensed.
"We can issue a directive to a fund to stop doing business with that service provider."
A lot more of this kind of thing will be happening, and the FSCA will be reporting more attorneys to the law society, says Essop, who himself was an attorney before joining the regulator in 2015.
Half the trustees of a fund are appointed by the employer. They should be independent but too often are not.
"We need to see more independent trustees in the sense of them being truly independent. Sometimes you will find a so-called independent trustee who is 'loyal' to a certain service provider.
"You'll find a fund that is administered by a certain service provider will have the same 'independent' trustee on the boards of all the funds they administer."
Unions appoint trustees to their pension funds who are then expected to act in the interests of those who appointed them, he says.
In a recent court case involving a union fund, the union said that when it appoints trustees to the board, those trustees are obliged to carry out the mandate given to them by the union, meaning the union bosses.
He says trustee manipulation is not confined to union funds.
"You get sponsor-appointed trustees who are pressurised to give business to the sponsor. The law doesn't allow it but the reality is that it does happen."
If trustee manipulation results in a fund paying even 1% more in fees, "it has an impact on the right of members to retire with dignity", he says...