By Anne McAllister Thursday, August 13, 2009

Since January 2004, the Financial Sector Charter has guided the transformation efforts of financial services enterprises. The Charter has been gazetted as a transformation charter in terms of section 12 of the Broad-Based Black Economic Empowerment Act, 2003.

Transformation charters, as opposed to ‘codes of good practice’, carry no legal status. Publication in the Government Gazette is for ‘information purposes’ and confirms that the Minister is satisfied that the particular charter has been developed by the major stakeholders of a sector and generally advances the objectives of the Act. The Codes of Good Practice on Black Economic Empowerment, issued by the Minister on 9 February 2007 in terms of section 9 of the Act, apply across the board to all sectors and provide a ‘generic scorecard’ against which enterprises can assess their quantitative degree of compliance with the objectives of the Act.

The Minister may, in terms of the same section, issue sector-specific codes of good practice which apply only to enterprises that participate in a particular sector. Such codes are arguably better able to cater to the peculiarities of particular sectors than the one-size-fits-all Codes can.

The Financial Sector Charter Council (FSCC) has for some time now been engaged in efforts to convert the existing Charter from a non-binding transformation charter to a sector-specific code of good practice, binding on all organs of state and public entities in their interactions with financial services enterprises. For one year following the issuance of the Codes (referred to in the Codes as the ‘transitional period’), all enterprises could elect to use either the generic scorecard contained in the Codes or to make use of an alternative transitional arrangement. The Minister extended the transitional period, by notice in the Government Gazette, to 31 August 2008. All sectors wishing to submit proposed sector-specific codes in terms of section 9 of the Act were thus obliged to adhere to this deadline to avoid the generic scorecard.

The Department of Trade and Industry had indicated that the process of vetting proposed sector-specific codes for compliance with the Act and publication in the Government Gazette for public comment would be finalised by 31 March 2009. Yet to date the various constituencies comprising the FSCC have failed to agree on a final draft form of the Charter for submission to the Minister.

This has sparked widespread media reports that the Charter has collapsed and that financial services enterprises will have no choice but to adopt the generic scorecard. The generic scorecard comprises various components, one of which is ownership, a component calculated by assessing the percentage of voting rights and economic interest that black people hold in a particular enterprise. A fully compliant enterprise must have a minimum voting rights percentage of 25% (plus one vote) and a minimum economic interest percentage of 25%.

Although much of the Charter is aligned with the Codes, the sticking point in reaching agreement on the form of the final draft document seems to be the level of ‘direct’ black ownership that a financial services enterprise will be required to target.

Note that the Charter does in fact target a minimum of 25% black ownership (as essentially advocated by the Codes), measured at holding company level, by 2010. However, the Charter provides that a minimum of 10% of this target must be satisfied by way of ‘direct’ ownership by black people. The FSCC’s labour and community constituencies have refused to accept this minimum level of direct ownership for the purposes of the official sector code of good practice. In supporting their stance, banks have argued that they are in a far more precarious position than other sectors with regards the structuring and implementation of empowerment transactions, particularly now given the fragile state of the global economy.

The Charter currently provides for additional broad-based measures (for example, broader access to financial services) that are not contained in the Codes and may partly compensate for a reduced direct ownership component.

Black people may hold their rights of ownership in an enterprise as direct participants in a particular enterprise or as participants through some form of business, including a Broad-Based Ownership Scheme or an Employee Ownership Scheme that complies with certain minimum qualification criteria set out in the Codes.
The Codes provide that, unless such schemes comply with certain ‘additional qualification criteria’, the extent to which they will be allowed to contribute towards the total ownership component of the generic scorecard will be limited to a maximum of 40% (ie 40% of 25%).

It is perhaps for this reason that recent media reports indicate that the generic scorecard advocates a minimum level of 15 % direct ownership in an entity, this being the remaining 60% ‘non-scheme component’ of the 25% thresholds. However, where the additional qualification criteria are met, a scheme may in fact contribute towards the entire ownership component.

Given that the additional qualification criteria are not onerous, this suggested direct/indirect ownership distinction is misleading, if not inaccurate. The flow-through principles contained in the Codes remain of primary value in determining whether effective ownership of at least 25% of any particular enterprise is held by black people. There can be no misapprehension that the Charter carries little weight for the purposes of the Act and that financial services enterprises are now bound ‘by default’ to adhere to the Codes.

Assuming that the Minister will entertain submissions after the expiry of the transitional period, it is still likely that the FSCC will in time reach some consensus and submit a draft sector code to the Minister. Given that the Codes’ compliance targets are forward-looking, it is uncertain how financial services enterprises will interact with organs of state and public entities during this state of limbo.