Boards of trustees and management committees (MANCOs) should establish ethical standards in a code of conduct that should guide them in their duties of governing and managing the affairs of the retirement fund. This is a vital aspect of building and maintaining trust with the fund’s members, beneficiaries and broader stakeholders. Ethical standards should at all times include how conflicts of inflict are managed by the retirement fund at both board and executive levels.
Conflicts of interest
In the context of a retirement fund, a conflict of interest takes place when a person has competing interests or loyalties that are, or could be, at odds with one other. A conflict of interest causes a trustee to experience a struggle between two different interests, points of view, or allegiances (being loyal to someone or something) – when they should at all times act in the interest of the fund, its members and beneficiaries.
Conflicts of interest should be covered in the fund’s code of conduct, and trustees should be regularly made aware of this code. Trustees should be sensitised to the exact types of issues that may present as a conflict of interest.
The board of trustees and MANCO should regularly discuss possible conflicts of interest and decide on appropriate ways to manage such conflicts, when such conflicts are unavoidable. This requires boards and MANCOs to determine and differentiate between conflicts of interest that may be structural in nature, and are thus unavoidable, and those which can be avoided. At all times, boards and MANCOs should be mindful that unmanaged conflicts of interest will undermine the credibility of the fund’s governance and jeopardise the benefit promise and obligations to the fund’s members.
Serious consequences will arise when conflicts of interest are not appropriately managed and disclosed. As such, in each instance where a conflict of interest is recognised, the conflict must be disclosed. Conflicts – real or perceived – should be declared in writing to the board on an annual basis. Board trustees are obligated to disclose any interest that they might have in relation to any agenda point at every meeting. Any potential or perceived conflict of interest should be treated with the same gravity as an actual conflict of interest, which is often best assisted by a discussion by the board or MANCO with respect to the conflict or potential issue that has been identified.
Trustees or MANCO members should recuse themselves from taking part in any part of a board or MANCO meeting when a meeting agenda item presents the trustee or member with a potential conflict of interest. Such conflicts of interest, once declared, should be clearly recorded in the board or MANCO meeting minutes, with full details of the manner in which the board has decided to resolve the matter.
FSCA Directive 8 of 2018
The Financial Sector Conduct Authority (FSCA) issued Directive 8 on 8 March 2018, which aims to “assist in combatting corruption and corrupt activities in the retirement fund industry”. Directive 8 prescribes the prohibition of the acceptance of gratification.
Directive 8 is based on the general principle that a board member; principal officer; employee of a retirement fund; auditor; valuator; administrator; employee of an administrator; or service provider to a retirement fund should not be involved in any conduct constituting corruption or corrupt activities.
The involvement in conduct that constitutes corruption will have a bearing on the person’s fitness to hold office and/or provide a service.
Directive 8 specifies the types of gratification that are forbidden, and these include:
- Any gratification, which, objectively viewed, creates a conflict of interest with their fiduciary duty towards the fund.
- Token gift/s that exceed/s the annual limit set by the board in terms of the fund’s gift policy. This annual limit shall not be more than R500 per annum in aggregate from any one service provider.
- All gifts received within the R500 per annum in aggregate limit from any one service provider should be recorded in the fund’s gift registry.
- Any gratification relating to local or international due diligence including, but not limited to, subsistence, travel or accommodation.
- Any gratification relating to local or international entertainment or sporting events including, but not limited to, subsistence, travel or accommodation.
- Conferencing costs or board of fund expenses.
FSCA Guidance Note 2 of 2018
The FSCA has released Guidance Note 2 of 2018 to clarify the practical application of Directive 8 to further assist funds with the implementation of Directive 8. The new guidance notice does not replace Directive 8 and where there is any practical inconsistency between the guidance notice and Directive 8, preference must be given to the provisions of Directive 8.
Reporting
It is important to note that Directive 8 places a reporting obligation on all persons affected by the directive. Any person who fails to report a matter will be in breach of Directive 8. In this regard, even a potential breach of Directive 8 must be reported to the FSCA.
Directive 8 requires the reporting of non-compliances immediately upon becoming aware of a breach or potential breach. Such reports should preferably be made in writing. The FSCA’s Information Circular 1 of 2018 provides guidance on the manner in which a person may make a report or protected disclosure to the FSCA.
Training
The FSCA has clarified that Directive 8 was not intended to stop training being provided by service providers – or attendance at training sponsored by service providers. However, it is intended to prevent corruption and corrupt activities being perpetrated under the guise of training. In order to strike a balance by still supporting genuine training of board members while prohibiting corruption and corrupt activities, the FSCA prefers that all costs for the training, travel and accommodation be paid for by the retirement fund. In instances where training is offered for free by a service provider to a retirement fund, the fund should at least bear the costs relating to the training (e.g. travelling and accommodation costs) but not the costs of the actual training.
Where a service provider intends to provide training or to present topics relevant to the retirement fund industry at no cost, which may also include refreshments and beverages, such an event must be open for registration to the general public or to a general category of persons. The actual costs of such training, whether paid by the fund or offered for free by the service provider, must still be reasonably justifiable.
Business-related meals and similar considerations
The guidance note states that it is not impermissible under Directive 8 for a service provider to pay for business related meals, provided that such meals are legitimately for the purpose of conducting the business of the fund. Such activities should, however, be kept to the minimum level necessary to maintain effective business relationships and should not be exorbitant.
Retirement fund officers are required to declare any business meals paid for by a service provider in the fund’s gift register, which must include the value of such meals.
Entertainment
Retirement fund officers may not accept invitations to entertainment events paid for by service providers. This includes, but is not limited to, breakfasts, lunches, dinners, coffee, drinks, sporting events, hunting, jazz festivals and concerts. Service providers must act responsibly and not attempt to justify an entertainment event as a legitimate event in order to circumvent the provisions of Directive 8. Concomitantly, the FSCA expects of retirement fund officers to apply their minds as to whether an invitation to an event is for a legitimate purpose or actually for the purposes of providing entertainment.
Token gifts
Token gifts serve as a token of goodwill and are usually given at year-end. Such gifts may include pens, diaries, desk calendars, calendars, mugs and other indulgences, such as chocolates, biscuits or beverages. The annual limit from any one service provider is R500.00 (five hundred rand). The FSCA’s purpose of limiting this amount is to prohibit a concession for goodwill to be converted into corruption and corrupt activities.
Due diligences and other retirement-fund-related activities
If it is necessary for a retirement fund officer to conduct a due diligence or other fund-related-activity, the FSCA requires that all costs related to such due diligence or activity – including travel and accommodation – must be carried by the retirement fund. A service provider is not permitted to pay for such costs.
A due diligence or any fund-related-activity should not be an excuse for a retirement fund officer to go on a holiday at the expense of the retirement fund, and boards of retirement funds must exercise their discretion sparingly after proper motivation has been given for the due diligence or activity. This should include due consideration of the number of officer(s) required to attend to the due diligence or activity and whether the relevant officer(s) concerned possess the necessary skill and experience to conduct the due diligence or fund-related activity. After a due diligence or activity has been conducted, the retirement fund officer(s) concerned should produce a written report to the board.
Sponsored Funds
Directive 8 permits sponsor-appointed trustees to be remunerated by the sponsor of a retirement fund – this includes trustees appointed in terms of section 26(2) of the Pension Funds Act. Such remuneration will be interpreted to include the expenses of the fund’s board of trustees.
Gratification that objectively viewed creates a conflict of interest
As far as is reasonably possible, a retirement fund should bear its own expenses – unless circumstances dictate otherwise – and when objectively viewed, there should be no conflict of interest. The FSCA advises that substance will take precedence over form in all such instances.
Where a section 26(2) trustee is appointed to a dormant fund or a shell fund and the section 13B administrator pays the expenses for the cancellation or liquidation of the retirement fund because the fund has either little or no assets of its own, this will not constitute a breach of Directive 8.
In an underwritten fund, payment of the expenses of the fund’s board of trustees by the administrator does not objectively create a conflict of interest and would not be a breach of Directive 8. This does not mean that the board of such funds will not be expected to exercise their minds independently and fulfil their objectives and duties as required in applicable legislation.
Where a retirement fund officer has an interest in a service provider to the retirement fund concerned, and there are no circumstances that dictate that the retirement fund cannot reasonably appoint another service provider, this will constitute a breach of Directive 8.
As an example, the principal officer or trustee of a retirement fund may not also be a director or employee of the law firm appointed by the retirement fund for legal services. Objectively viewed this would create an avoidable conflict of interest.
REFERENCES
FSCA Directive 8 of 2018, www.fsca.co.za
FSCA Guidance Note 2 of 2018, www.fsca.co.za
FSCA PF 130, www.fsca.co.za
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