Following in-depth discussions with 25 of South Africa’s top financial firms, and the Royal Commission of Inquiry’s report on misconduct in the financial industry, it is encouraging to see that initial findings point to a financial services industry that comports well with standards of good conduct. However, gaps remain that need to be overcome.
As part of an assessment of the commitment to conduct standards in the sector, DB & Associates has had over 100 meetings with the executive leadership of the top 25 firms in South Africa’s financial sector over the past 18 months. This culminated in a Royal Commission of Inquiry into misconduct in the financial industry, which delivered its final report earlier this year.
The Commission’s findings were, to say the least, sobering. Initially, the assumption was made that, because South Africa is a developing country with high levels of corruption in government, as bad as things were in Australia, they would be worse in South Africa. This prediction could not have been more wrong.
Learnings from Australia’s mistakes
Forming part of the discussions with leading financial institutions were Dr Andy Schmulow, Senior Advisor at DB & Associates, who has in-depth experience in Australia’s financial industry. His extensive knowledge about the Australian landscape is relevant for two reasons: the financial system regulatory reforms currently underway in South Africa are modelled on Australia’s Twin Peaks regime; and secondly, because Australia’s financial regulation is in crisis – the product of system-wide failure to enforce anything approaching good conduct, pervasively evident for over a decade, with misconduct, and at times serious criminality, perpetrated on an industrial scale.
What was encountered is a financial services industry which, while not perfect by any means, nonetheless comports well with standards of good conduct. The reasons are many and varied. They include a far deeper awareness that the financial industry must serve the community in which it operates, not the other way around. An understanding of the need to contribute to redressing economic inequality embedded by decades of discrimination, for both social justice reasons, and to create the kind of economic prosperity that firms themselves need, in order to grow. But doubtless also the treating customers fairly (TCF) regime has played an important role in readying financial firms for the forthcoming introduction of new conduct legislation: the Conduct of Financial Institutions Act (CoFI).
From process-driven to values-driven
However, gaps remain. These relate chiefly to requirements to transform culture and governance, and the disjuncture between TCF and CoFI. With regards to the former, CoFI will require a shift in corporate governance from what, to how and why. This shifts culture ad governance from being process-driven to becoming values-driven. TCF compliance similarly requires shifts to plug gaps. For example: the six TCF pillars do not map exactly to the nine pillars of CoFI.
The three pillars that will be new under CoFI present significant challenges. In the case of product or service distribution, a regulated entity will be responsible for misconduct committed by brokers, including brokers wholly independent. This will be tricky. How should a firm enforce its obligations on an independent broker – especially a highly successful one – without the risk of that broker ending its relationship with the firm, and henceforth, selling only its competitor’s products? How will a firm impose, if need be, close scrutiny of a broker’s activities, especially one located remotely? There are answers to these questions, but they are imperfect.
Three pillars, three challenges
1. These differences relate primarily to CoFI requirements for distribution, culture and governance, and licensing.
In respect of culture and governance, CoFI will require a whole of entity regeneration of culture; an exercise that will go far deeper than anything encouraged by TCF. The consequences of failure are real: Momentum has recently been slapped with a R100 million fine by the FSCA for governance failures in one of their unit trusts. So, whereas in the past governance issues, like conflicts of interest, could be ticked off on the basis that the firm ‘has a policy’ addressing the issue, this will no longer suffice. Now the enquiry will relate to both the efficacy of the policy itself, and the strength of its implementation.
2. TCF compliance is ascertained by the firm itself. CoFI compliance will be independently judged by the newly established Financial Sector Conduct Authority (FSCA).
To date, TCF compliance has been a matter for the firm to judge, but self-assessment is a complacency trap writ large. For one thing, self-assessment will never be as searching or as critical as an independent review. Unavoidable cognitive biases, with which we are all afflicted, guarantee that. The only credible form of assessment is arms-length (which must preclude, for example, being undertaken by a firm’s auditors; such assessments merely embed leveraged conflicts of interest). Reviews must be grounded in methodologically rigorous, credible, and critical recursive reviews, conducted independently. As such, current TCF assessments present the risk of being a complacency and self-affirming trap.
3. TCF compliance is more superficial in nature and is often addressed as an afterthought, whereas CoFI requires a deeper and more profound treatment, addressed as a forethought.
TCF’s pillars lack the cascading sets of sub-principles included in CoFI’s pillars. As such, TCF is by nature more superficial, more malleable, and easier to demonstrate. As a result, it tends to default to a tick-box approach, in which TCF adherence is demonstrated through the use of leading questions, posed by the firm, to deliver the affirmations the firm seeks. As a result, even under a TCF framework, several firms have acknowledged that they are still product-focused, not client-focused.
A failure to reform such a product-flogging emphasis will serve them poorly under the new regime. CoFI, by contrast, will require compliance as a forethought to product and service design and construction, whereas under TCF, a number of firms continue to check compliance as the product rolls off the production line. Put differently; compliance must be an active participant from conception, not a theatre assistant at birth. Therefore, CoFI requires demonstrable success in promoting financial literacy and financial inclusion and affords protection to sophisticated as well as retail customers.
A journey of change towards compliance
Set against all of this is a conduct authority – the FSCA – whose remit and powers – especially as compared to its progenitor, the Australian Securities and Investments Commission – make it fully weaponised. It can punish, and can do so severely (and has already), whereas the recipients of FSCA sanctions are severely limited in their avenues for appeal. This enables the FSCA to move swiftly, and come down hard. In the process, firms that incur its wrath, even if they mount successful appeals, will be tarnished, and their reputations damaged.
A better and more prudent approach would be to leverage existing TCF adherence, not in a vein of complacency, but rather as a good start to a real and much deeper change journey. A journey in which compliance is reconceptualised, firm values are implemented (not simply articulated), and corporate culture is strengthened and enhanced towards customer centricity, at every level of the organisation.
Since Zimbabwe’s land reform of 2000 – when around 8 million hectares of formerly large-scale commercial farmland was distributed to about 175,000 households – debates about the consequences for food security have raged.
A standard narrative has been that Zimbabwe has turned from “food basket” to “basket case”. This year, following the devastating El Niño drought combined with Cyclone Idai, some 5.5 million people are estimated to be at risk of hunger, with international agencies issuing crisis and emergency alerts.
It is unquestionable that this season was disastrous – only 776,635 tonnes of maize was produced, more than a third below the five-year average. Nevertheless, the story of food insecurity is more complex than the headline figures suggest.
But Zimbabwe suffered food shortages, often precipiated by El Niño events, before land reform. These too led to the need for more imports. And surpluses have also been produced since land reform. For example, in 2017, there was a bumper crop. Some of it was stored and has been used to keep people going.
Getting behind the headline figures and understanding an increasingly complex food economy is essential. Our on-going research shows just how complicated the picture is.
Farming and food
Since land reform, we have been tracking livelihood change in resettlement areas in a number of sites across the country. Our research is exploring how people have fared since getting land, asking who is doing well and not so well, and why. Some of our key findings include:
Crop production is higher in the land reform areas compared to the communal lands. Larger land areas allows new settlers to produce, invest and accumulate.
There are substantial hidden flows of food between land reform areas and poor rural and urban areas, as successful resettlement farmers provide food for relatives, or sell food informally.
There is a significant growth of small-scale, farmer-led irrigation in resettlement areas. This is often not recognised, as production occurs on disparate small plots, frequently farmed by younger people without independent homes.
Trade in food across regions and borders, facilitated by networks of traders, often women, is significant, but unrecorded.
Market networks following land reform are complex and informal, linking producers to traders and small urban centres in new ways. Outside formal channels, the volume and flows of food through the system is difficult to trace.
Simple aggregate analyses of food deficits, estimating the numbers of people at risk of food insecurity, do not capture these new dynamics. National surveys are important, but may be misleading, and local studies, such as ours, often do not match the national, aggregate picture.
So, what is going on?
Access to food: complex relationships
Food insecurity is not just about production, it is also about access. This is affected by the value of assets when sold, the ease with which things can be bought and sold in markets, the value of cash as influenced by currency fluctuations and inflation, local and cross-border trade opportunities, and all the social, institutional and cultural dimensions that go into exchange.
When these dimensions change, so does food security. And this is particularly true for certain groups.
Take the case of Zvishavane district, in Midlands province of Zimbabwe. In the communal area of Mazvihwa, there was effectively no production this season. Some got a little if they had access to wetlands, and a few had stores. But compared to 30 years ago, production is focused on maize, which stores poorly, rather than small grains that can be kept for years.
How are people surviving? Some seek piecework in the nearby resettlement areas; others have taken up seasonal gold panning; others migrate to town, or further afield; others get help from relatives through remittances; while others are in receipt of cash transfers or food hand-outs from NGOs.
With small amounts of cash, people must buy food. It’s available in shops, but expensive. So a vibrant trade has emerged, with exchanges of maize grain for sugar or other products. And it’s especially people from the land reform areas who are selling their surpluses. Many have relatives who got land, and some travel there to get food, but there is also a network of women traders who come and sell in the communal areas.
Aggregate surveys almost always miss this complexity. There are sampling biases, as the importance of the resettlements as sites of production and exchange are missed.
There are data problems too, as it is difficult to pick up informal exchanges, and income-earning activities on the margins. The result is that each year there are big food insecurity figures proclaimed, fund-raising campaigns launched, but meanwhile people get on with surviving.
This is not to say that there is not a problem this year. Far from it. But it may be a different one to that diagnosed.
Economic collapse is causing a humanitarian crisis
As the Zimbabwean economy continues to deteriorate, with rapidly-rising inflation, parallel currency rates, and declining service provision, whether electricity, fuel or water, the challenges of market exchange and trade become more acute. Barter trade is more common, as prices fluctuate wildly and the value of physical and electronic money diverge. With poor mobile phone networks due to electricity outages, electronic exchange becomes more difficult too.
Collapsing infrastructure has an effect on production also. Fuel price hikes make transport prohibitive and irrigation pumps expensive to run. Desperate measures by government often make matters worse. The now-rescinded edict that all grain must be supplied to the state grain marketing board undermined vital informal trade. Meanwhile, the notoriously corrupt “command agriculture” subsidy scheme directs support to some, while excluding others from the provision of favourable loans for government-supplied seed, fertiliser, fuel or equipment.
Economic and infrastructural collapse is threatening food security in Zimbabwe. Even if there is good rainfall this season, the crisis will persist. Farmers will plant, produce and market less this year. While food imports are needed for targeted areas and population groups for sure, this may not be the biggest challenge.
Stabilising Zimbabwe’s economy is the top priority, as economic chaos is causing a humanitarian crisis.