Tighter legislation likely as Fidentia boss goes to jail

But the scandal has also raised the possibility of more legislation being proposed in a bid to give the Financial Services Board tighter control over pension fund administrators. The Scorpions will fight efforts by Fidentia mastermind J Arthur Brown and accountant Graham Maddock to be released on bail ahead of their trial, following their arrest this week on allegations of fraud, theft and various other breaches involving R2.1bn. Business Day says Brown and Maddock, central figures in what is shaping up as one of the biggest investment scandals in SA corporate history, will remain behind bars at the Goodwood police station until Thursday next week when their bail application will be heard in the Cape Town Magistrates’ Court. Their arrests follow what must rate as one of the Scorpions quickest investigations yet into a financial scandal. The Scorpions began investigating on February 20, following a complaint from the Financial Services Board (FSB). The Cape High Court placed Fidentia under curatorship on February 1 after a damning FSB report found millions in client funds had been ‘misappropriated’ and R689m of client funds were ‘unaccounted for’. The men face charges of fraud, theft and contraventions of the Companies Act, the Financial Advisory and Intermediary Services Act, the Reserve Bank Act and exchange-control regulations, as well as of income tax laws. Advocate Bruce Morrison, who represented the Scorpions, said prosecutors were also looking to see whether they could seize Brown’s and Maddock’s assets. Full Business Day report

The charges relate to only one aspect of the investigation, Morrison emphasised in court. He said that the charges faced by the pair related to the Transport, Education and Training Authority (Teta), which was only one leg of the Scorpions\' probe, according to a report on the Mail & Guardian Online site. The other legs related to the Living Hands Trust and to allegations of corruption arising from the first two probes. About 351 bank accounts would have to be examined in the process, he said. Full report on the Mail & Guardian Online site

The arrests were possible because the curators were able to follow a more detailed paper trail in the case of Ovation. A Sake24 report says the Fidentia curators, Dines Gihwala and George Papadakis, have so far made little progress tracing bank accounts to which Brown allegedly channelled investors\' funds to the value of about R689m. The court documents submitted supporting the curatorship of Ovation, a company associated with Fidentia, by the FSB show that Fidentia withdrew investment funds directly from Ovation accounts. Ovation was earmarked for a takeover by Fidentia. Over a period, Fidentia had transferred significant sums of money to Ovation, money that presumably derived from the other assets of about R1.6bn from the Living Hands and Transport Seta umbrella funds. Full Sake24 report

The FSB is to ask Parliament to give it more clout to deal with pension fund administrators. It wants Parliament to consider new legislation to counter bulking and other secret profit scandals. This is because it believes the current regulatory measures that deal with such schemes are inadequate. The new legislation is expected to provide for the creation of an enforcement committee that will be empowered to impose penalties on all financial institutions, including pension fund administrators, according to Moneyweb. The FSB’s recommendation comes on the back of a circular issued by the Registrar of Pension funds on March 24 last year. The circular called on all pension fund administrators to disclose voluntarily all bulking and other practices whereby secret profits were made at the expense of their clients. Bulking is the process used by administrators to enhance returns by pooling different clients’ funds. It is perfectly legal and ethical, provided the extra returns are disclosed to clients. One of the biggest generators of secret profits through bulking was Alexander Forbes. The financial services group has returned an amount of R368m it gleaned from clients over 10 years. Full Moneyweb report

But PSG Konsult CE Willem Theron says more regulation is something the financial services sector does not need. What it does need, is to act faster when problems arise. Speaking at the company\'s annual conference at Sun City, North West, last week. Theron said more regulations would not as such have prevented problems at Fidentia, but a more finely tuned and speedier reaction would almost certainly have, notes I-Net Bridge. To prevent such a situation in future, a more in-depth look at management and a company\'s financial statements are needed. He said that compliance with FAIS legislation is generally on track, especially with regard to companies that have been regulating themselves for some time. But there are still some people in the industry that do not act according to the spirit of the legislation. Full I-Net Bridge report

However, the FSB says it has run into problems dealing with Fidentia because current laws do not give it power over trusts. According to Business Report, the FSB\'s deputy executive officer, Dube Tshidi, said the regulator\'s problem with the Fidentia case was that one of the beneficiaries was a trust. It was only by placing troubled institutions under curatorship that the problem could be circumvented, said Tshidi. The Living Hands Trust (LHT) is a vehicle through which the Mineworkers Provident Fund invested R1.47bn on behalf of widows and orphans of those killed in mining accidents. According to Allan McCulloch, a director at the Financial Planning Institute, the use of trusts in managing pension funds was ‘highly prevalent’. McCulloch, however, said the regulation of trusts was ‘not up to scratch’. Once the courts registered a trust, ‘it all ends there’. There was need for regulation. The extent to which the FSB would be involved would have to be worked out. Full report in Business Report