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Financial Services Sector – Ownership Element

1. Introduction and Applicability

  • 1.1 Sector Code Overview: The Amended Financial Sector Code (FSC) provides a framework for measuring B-BBEE compliance specifically within the financial services sector in South Africa. It aims to address the unique characteristics of this sector, including its systemic importance to the economy and its historical lack of transformation.
  • 1.2 Scope of Application: The FSC applies to a wide range of financial institutions, including:
    • Banks
    • Long-term insurers
    • Short-term insurers
    • Reinsurers
    • Asset managers
    • Private equity funds
    • Collective investment schemes
    • Retirement funds
    • Financial intermediaries and brokers
    • Other entities providing financial services (as defined in the Code)
  • 1.3 Legal Basis: Section 9(1) of the Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended) and the Amended Financial Sector Code (Government Gazette No. 41287, 01 December 2017).
  • 1.4 Effective Date: 01 December 2017.
  • 1.5 Precedence: This Sector Code supersedes the Generic Codes for entities within its scope.

2. Ownership Scorecard and Thresholds

IndicatorWeightingTarget
Exercisable Voting Rights (Black People) 5 points 25% + 1 vote
Exercisable Voting Rights (Black Women) 2.5 points (+0.5) 10% + (15% of 25%)
Economic Interest (Black People) 5 points 25%
Economic Interest (Black Women) 2.5 points (+0.5) 10% + (15% of 25%)
Economic Interest (Black Designated Groups, Broad-based schemes, ESOPs) 4 points 10%
Net Value 8 points
Sub-Total 27 points
Bonus points
Exercisable Voting Rights (Black New Entrants) 2 At least 10% of the Voting Rights in the Measured Entity
Economic Interest (Black New Entrants in the Enterprise) 2 points 10%
Total 31 points Net Value Target: Based on a phased-in approach, linked to “years of recognition.” The target is expressed as a percentage of 25%.
  • 2.1 Ownership Scorecard: see above
  • 2.2 Priority Element Status: Ownership is a priority element.
  • 2.3 Subminimum Requirements: 40% of the Net Value points (i.e., 40% of 8 points = 3.2 points).
  • 2.4 Entity Size Thresholds:
    • EME Threshold: Annual Total Revenue of R10 million or less. (Same as the Generic Codes).
    • QSE Threshold: Annual Total Revenue between R10 million and R50 million. (Same as the Generic Codes).
    • Generic Threshold: Annual Total Revenue above R50 million. (Same as the Generic Codes).
  • 2.5 Automatic Recognition for EMEs/QSEs:
    • The usual automatic levels apply (Level Four for EMEs, Level One/Two for 100%/51%+ Black-owned EMEs and QSEs).
    • Crucially: Are there any conditions or restrictions on this automatic recognition? No. The Financial Services Sector Code does not have a similar provision to the Construction Sector Code’s Clause 3.1.3 (restricting automatic recognition for BEPs).

3. Specific Ownership Requirements and Interpretations

  • 3.1 Unique Ownership Targets: The FSC has a slightly higher overall points allocation for ownership (27 points + 4 bonus) compared to the Generic Codes (25 points). The targets for voting rights and economic interest are generally aligned with the Generic Codes (25% + 1 vote and 25%), but there are specific targets for Black women and Black Designated Groups/Broad-based schemes/ESOPs, and bonus points for Black New Entrants.
  • 3.2 Flow-Through and Modified Flow-Through: Standard Flow-Through and Modified Flow-Through Principles apply.
  • 3.3 Exclusion Principle: Standard Exclusion Principle applies.
  • 3.4 Treatment of Specific Entities: The FSC provides specific guidance on:
    • Broad-Based Ownership Schemes (BBOS): Must meet specific criteria outlined in the Code.
    • Trusts: Must meet specific criteria outlined in the Code.
    • ESOPs: Must meet specific criteria.
    • Retirement Funds: Specific rules apply for recognizing Black participation in retirement funds.
    • Collective Investment Schemes: Specific rules apply.
    • Private Equity Funds: The FSC actively encourages investment by B-BBEE compliant Private Equity Funds. It provides a dedicated scorecard for measuring the B-BBEE compliance of the fund itself, including its ownership, management control, skills development, and crucially, the percentage of its investments in companies with at least 25% direct Black ownership (using the Flow-Through Principle). The FSC also provides detailed rules for measuring “mandated investments” and includes a phased-in target for these investments, as well as measuring realised investments. Once a PE fund is deemed B-BBEE compliant, a company receiving investment from that fund can recognize the Black ownership attributed to the fund.
  • 3.5 Multinationals: The FSC allows for both Equity Equivalents and an alternative: the sale of shares in a local subsidiary to a Black-owned “Strategic Partner.”
  • 3.6 Ownership by Qualified Professionals/Specific Roles:
    • Not a specific requirement.
    • Crucially: Are there any requirements for ownership to be held by individuals in specific roles (e.g., executive management, as in the Construction Sector Code for BEPs)? Are there penalties for not meeting these requirements? No.
  • 3.7 Sale of Assets: No specific deviations from the Generic Codes.
  • 3.8 Private Equity Funds: Ownership by B-BBEE compliant Private Equity Funds is possible and encouraged under the FSC. The Code provides specific mechanisms for measuring their compliance, as detailed in 3.4 above.
  • 3.9 Other Unique Provisions:
    • Empowerment Financing: The FSC places significant emphasis on “Empowerment Financing,” which includes investments in Black-owned businesses and transformational infrastructure. This is not part of the Ownership element, but it’s a major feature of the FSC.
    • Strategic Partners (for Multinationals): As mentioned above, multinationals have an alternative to Equity Equivalents.

4. Areas of Uncertainty and Interpretation

  • 4.1 Ambiguities: As with the Generic Codes, valuation methodologies and the application of the Flow-Through Principle can be areas of interpretation. The specific rules for BBOS, Trusts, ESOPs, retirement funds, and collective investment schemes may also require careful interpretation. The interpretation of the “mandated investment” rules and the calculation of Black economic interest from realised investments within PE funds can be complex.
  • 4.2 Industry Practice: There is a relatively well-established industry practice, but ongoing engagement with the Financial Sector Transformation Council (FSTC) is important.
  • 4.3 Potential Disputes: Valuation disputes, challenges to the legitimacy of ownership structures, and interpretation of the specific rules for various entities, including PE funds and their mandated investments.

5. Deal Process, Parties, and Costs

  • 5.1 Typical Deal Structures: Direct ownership, trusts, BBOS, ESOPs, private equity investments.
  • 5.2 Key Parties Involved: Financial institutions, Black investors, private equity funds, retirement funds, legal advisors, financial advisors, B-BBEE verification agencies.
  • 5.3 Deal Process Overview: Similar to the Generic Codes: due diligence, valuation, negotiation, legal documentation, and implementation.
  • 5.4 Cost Considerations: Similar to the Generic Codes: legal fees, valuation fees, advisory fees, B-BBEE verification fees, and the cost of the ownership transaction itself.

6. Gotchas and Best Practices

  • 6.1 Common Mistakes: Failing to meet the Net Value subminimum, inadequate documentation, fronting, not understanding the specific rules for various entities (BBOS, Trusts, etc.). For PE funds, failing to meet the “mandated investment” targets is a common mistake. For companies, it’s failing to verify the B-BBEE compliance of the PE fund itself.
  • 6.2 Fronting Risks: High risk, given the systemic importance of the financial sector.
  • 6.3 Best Practices: Thorough planning, expert advice, genuine commitment to transformation, careful structuring of ownership deals, ongoing monitoring of compliance.

7. Alternatives to Ownership

The FSC has unique elements, and others that differ from the Generic Codes:

  • Ownership: 27 points (+4 bonus)
  • Management Control:
  • Skills Development:
  • Enterprise and Supplier Development:
  • Socio-Economic Development:
  • Empowerment Financing: (Unique to the FSC) – Investments in Black-owned businesses, transformational infrastructure, affordable housing, etc.
  • Access to Financial Services: (Unique to the FSC) – Providing access to financial products and services for low-income individuals and communities.

8. Conclusion

The Financial Services Sector Code builds upon the Generic Codes but introduces several important distinctions, including specific rules for various types of financial entities, an alternative to Equity Equivalents for multinationals, and a strong emphasis on Empowerment Financing (which is not part of the Ownership element). The overall points allocation for ownership is slightly higher than in the Generic Codes. The FSC creates a specific detailed framework to facilitate and encourage the participation of PE funds in BEE ownership. Crucially, it does not impose restrictive ownership requirements based on professional registration and executive management roles, unlike the Construction Sector Code for BEPs.

Please contact us for a confidential discussion around your unique BEE ownership needs.

Chapter: Sector codes:
Chapter: Sector codes:
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