Moonstone recently reported on the regulatory action the FSCA has taken against past and present trustees of the Private Security Sector Provident Fund (PSSPF) after concluding its three-year investigation into the board.
For the first time, in my recollection, the FSCA has provided detailed background information about how it approaches matters like these, including the reasons for the investigation, its findings, the regulatory action taken, how the penalties are calculated, and further regulatory action flowing from such investigations.
Why did it take three years?
The FSCA investigation report was concluded three years after the initial instruction for an investigation to be conducted.
All the implicated parties (former trustees, current trustees and the administrator of the PSSPF, Salt Employee Benefits) were represented by attorneys, who requested extensions to provide their responses, which were granted.
Further lines of enquiry were pursued with the principal officer, before proceeding against the board members and former board members.
All the implicated parties were afforded the opportunity to respond to the allegations contained in the forensic report in 2020 and the Authority’s investigation report (2021), in accordance with the audi alteram partem principle.
Why the investigation?
The provident fund had been under scrutiny by the Authority for several years following continuous issues with its management and administration.
Following an on-site inspection of the PSSPF in 2017, various issues of concern were identified, which prompted an application for the PSSPF to be put in curatorship in 2018. These concerns included, inter alia, excessive and unjustified board expenses and the improper appointment of service providers.
A settlement, which was made a court order, was reached between the PSSPF and the Authority for certain board members to resign and the appointment of two statutory managers in terms of the Financial Institutions (Protection of Funds) Act.
The statutory managers commissioned an independent forensic investigation into the affairs of the PSSPF and the appointment of certain service providers. The statutory managers appointed Ngidi Business Advisory to conduct this investigation.
The Authority, in addition to conducting an on-site inspection, instructed its Enforcement Division to investigate the affairs of the PSSPF – that is, its board of management and whether conflicts of interest existed in the appointment of Salt.
The findings of the respective investigations
The findings by Ngidi corroborated the findings by the Authority following its on-site inspection on the PSSPF and the inspection by the Authority’s Enforcement Division. Some of the more serious findings included:
- During 2011, 2013, 2016 and 2017, the board of the PSSPF consistently deviated from the PSSPF’s procurement policy in respect of the appointment of service providers. These deviations were not included or recorded in the minutes of board meeting.
- The service level agreement between the PSSPF and Salt did not comply with Salt’s tender proposal.
- Agreements in respect of the appointment of service providers were inconsistent with service providers’ tender proposals.
- The service level agreement concluded with Salt in respect of the backlog project was signed after the effective date, which was contrary to condition 3.1 of Board Notice 24 of 2002.
- The service level agreement entered into between the PSSPF and Bophelo Life Limited differed from Bophelo Life’s tender proposal.
- Board expenses for all board members increased exponentially from 2010 without justification, following the appointment of apparently highly experienced independent and professional trustees.
- The rates paid to board members during the 2017 financial period were inconsistent with the PSSPF’s trustee remuneration policy. The remuneration paid to board members for the period August 2016 to September 2017 was beyond the remuneration policy and without justification.
- Board members of the PSSPF attended a Golf Day on 26 May 2017 and were remunerated for attending this event. The Authority regarded this as an abuse and breach of board members’ fiduciary duties.
- The establishment of a task team to monitor Salt was an unnecessary expense to the PSSPF and operated contrary to the policies of the PSSPF.
- The chairpersons of each sub-committee received a fixed monthly fee of R7 460 in addition to their fee for attendance of meetings. This is not standard practice in the retirement fund industry and appeared to be solely for the personal enrichment of the board members.
Regulatory action taken
Board members who continued to serve on the PSSPF (or other funds) were asked to vacate their positions within 10 days of receiving their sanctioning letters from the Authority.
Members who had already left the board were served with penalty fines ranging from R10 000 to R230 000. The Authority also objected to the appointment of the principal officer.
How were the penalties calculated?
This is a question I have been grappling with for many years and to which I could never get a clear answer. The following response, contained in a document titled “Q & A – Private Security Sector Provident Fund 2022”, confirms what my opinion had been all along.
“There is not (always) a scientific way of calculating penalties or administrative fines. However, we applied the principles of proportionality, deterrence and consequence management, and decided that 10% of the remuneration earned by the relevant board members would be appropriate. The fine seeks to send the right message that improper conduct will have consequences, irrespective of whether a member has left the board. Removing those members who are still on the PSSPF board (or other fund boards) serves as a good substitute for a penalty fine, and because all penalties have to be published.”
Further regulatory action
After the investigation(s), regulatory action was and is being taken against the PSSPF and implicated parties (board members and the principal officer) as indicated above.
The Authority points out that none of the implicated individuals can be debarred in terms of the Financial Sector Regulation Act, because the transgressions occurred prior to the Act being in place, and the Pension Funds Act does not have a debarring provision.
The Q & A document does not indicate whether the findings of the various investigations were submitted to the prosecuting authorities for further investigation into probable transgressions of other laws which do not fall under the auspices of the FSCA.
