Secret Profits and Bulking: Glenrand M.I.B Presentation to Parliamentary Committee on Finance

21 June 2006

FSB General Circular - 24 March 2006

Internal Investigation launched

Methodology of Internal InvestigationIdentify potential areas of secret profit practices;Establish whether profits were indeed generated;Establish whether profits were secret;Obtain senior counsel opinion on lawfulness of

profits;Establish number of funds affected, total revenue

and quantum per fund;Recommendation to Exco and Board of Director

on steps to redress situationPresent preliminary report to FSBDiscuss report with FSB

Methodology and Findings to PwC for independent auditPresent PwC report to FSB and discuss methodology

Senior Counsel Opinion on Bulking Practices

Adv. Malcom Wallis, S.C:

Retirement fund administrators exempt from the provisions of FAIS, to the extent that the provision of their services are regulated by the Pension Funds Act;

Provisions of the Financial Institutions (Protection of Funds) Act apply to individuals employed by financial institutions, in order to extend the common law fiduciary duties imposed on financial

institutions, to individuals employed by such institutions. The Act therefore does not apply to such institutions when acting as

service providers of other financial institutions;

Fiduciary duties of a retirement funds administrator towards its retirement fund clients arise from the common law relating to

agency agreements;

Adv. Malcolm Wallis, S.C. (continued)

An agent may not derive any profit from managing the assets of its principal, except where such profits had been disclosed to and agreed with the principal;

Robinson v Randfontein Estates Gold Mining Company Limited:

“Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other’s expense of place himself in a position where his interests conflict with his duty…It prevents an agent from properly entering into any transaction which would cause his interests and his duties to clash…There is only one way by which such transactions can be validated, and that is by the free consent of the principal following upon a full disclosure by the agent…”

Conclusion: It is incorrect to state that profits agreed with retirement fund boards are unlawful, i.e. only “secret profits” should fall within the ambit of the FSB circular.

Bank bulking - Background

Implemented to ensure enhanced efficiencies and to secure greater revenue for clients, as well as to increase revenue to Glenrand MIB;

Process commenced 2004 in terms of SLA adjustments and discussions with banks;

Bulking agreements were implemented with effect from 3 May 2005 (Standard Bank accounts) and 14 December 2005 (Nedbank accounts) respectively;

Glenrand share:Standard Bank: 50% of enhanced interest;Nedbank: 33% of enhanced interest;

Bank bulking – Example (Std Bank)

Amount Client rate

Enhancement to client

New Client Rate

Gross Pooled

Rate

Interest to

Glenrand

Glenrand fee as % of Gross Pooled

Rate

(R’s) % % % % % %

0 – 499 999 1.500 2.250 3.750 6.000 2.250 37.510

500 000 – 999 999

4.500 0.750 5.250 6.000 0.750 12.500

1 000 000 – 9 999 999

5.000 0.500 5.500 6.000 0.200 8.310

Greater than

10 000 000

5.500 0.250 5750 6.000 0.250 4.200

Bank bulking -Disclosure

Genrand MIB policy since 2004: Any splitting of interest must be disclosed to and agreed with clients.

Service Level Agreements amended in 2004, renegotiated with clients;

Clause 3 (Glenrand MIB administrative duties):

“opening and operating a bank account with a major South African bank in the name of the Fund, the parties acknowledging that such account and the monies deposited therein, will be included in the Glenrand MIB cash management system where Glenrand MIB groups client accounts for efficiency and preferential interest rates, for the benefit of both the Fund and Glenrand MIB in terms of clause 4.2(e)”

Bank bulking -Disclosure

Clause 4.2 (Additional Fees):

(e) The treasury cost to secure group preferential rates detailed in 3.1(e) equal [to] 50% of all interest earned on amounts

deposited in the account referred to in clause 3.1(e) at rates which exceed the selected Bank’s standard rates from time to time

(“enhancement”). The quantum of the enhancement will be made freely available and disclosed to the Fund on request by the

Trustees.”

Rand Amount of interest earned by fund and Glenrand MIB respectively declared annually in arrears;

Quarterly cash flow statements provided to trustees at trustee meetings (do not show GMIB share of bulking revenue).

Bank bulking -Findings

Processes and best practices in operation, failure in isolated instances due to human error;

Out of 250 funds administered by Glenrand MIB, 28 funds have not yet signed Service Level Agreements;

Out of 28 funds, non-disclosure to four funds;

Total Revenue to Glenrand MIB since inception: R2, 3 million;

Average revenue to Glenrand MIB per fund: R1, 041 p.m.

Historical Practices

Request to former executives revealed one bulking/imprest account, the CBC account, acquired through process of acquisition;

Used for deposit by funds of monthly amounts, from which benefit payments were made to beneficiaries;

Unclaimed benefits refunded to relevant funds;

Interest earned annually apportioned and repaid to funds on pro rata basis. Glenrand MIB did not take interest to profit or loss of the company;

Preliminary view: No secret profits (To be confirmed by PwC, specifically tasked to investigate this account).

Proposals regarding Redress

Glenrand MIB to discuss and agree with FSB appropriateness of sharing interest on bulking.

Provision of R2,3 million plus interest set aside to redress improper/unlawful bulking practices;

Where SLA’s not signed: process of negotiation;

Where SLA’s agreed to and signed, no secret profits, i.e. no redress.

Risk Umbrella

Allows clients (retirement funds and employers) to obtain group risk rates for life and disability income replacement insurance on pooled basis;

Rate generally cheaper than direct insurance. Competitive quotes obtained from market. Trustee decision to utilize risk umbrella a result of cheaper rates;

Glenrand MIB attended to administration and levied administration fee for such services. Rate all-inclusive, incorporating both commission and administration fee;

Findings of investigation are that clients were not in every instance aware of split between insurance premium and administration charge. Glenrand MIB intends to negotiate with client fee that is relative to the service offered;

FSB provided with full details. Findings subject to PwC audit/FSB discussion.

Other Potential Areas of Secret Profits

Imprest Accounts: None (except for CBC Account);

Commission on Outsourcing Annuities: None for several years.

Securities Lending: None;

Ten50Six Life:Wholly owned subsidiary of Glenrand MIB, acquired during

2004;

Registered long-term insurer with limited license to issue linked fund policies, i.e. policies only issued to institutional clients; policy benefits not guaranteed but linked to investment market;

According to normal insurance law principles, assets of an insurer belongs to the insurer, i.e. premiums (contributions) are paid in the bank account of the insurer;

Other Potential Areas of Secret Profits

In terms of Ten50Six Life insurance policies, monies must be invested within 6 business days, but practice is to invest

within 24 to 48 hours.

Ten50Six Life earns the interest earned over that period;

Rebates earned in respect of two umbrella funds, administered by Ten50Six Funds Administrators;

Rebates earned intended as refund for fund expenses paid by sponsoring administrator. Any discrepancies found to be refunded

• Commission on Other Service Divisions (Trusts/ Housing Loan Administration): None. (Also no additional fee where business is placed with other service providers)

Other Potential Areas of Secret Profits

Asset Consulting:

All asset consulting fees explicitly disclosed to clients in application form prior to investment;

Exact cost from underlying asset manager passed on to retirement fund client and confirmed in application form;

Glenrand MIB earns no additional revenue from asset consulting, nor any additional fees from asset managers, nor does it pay any fees to asset managers;

No commission paid to consultants for business placed with asset consulting division. Practice terminated in 2005. Prior to that,

consultants earned 6% of fee paid by client for asset consulting.

Future Practices

Glenrand MIB initiated revision of client servicing and costing method prior to FSB investigation.

Intention is to move towards fees explicitly agreed with clients, away from other forms of remuneration, such as commission;

Intention to continue with bulking practice, but Glenrand MIB will with effect from new financial year, 1 July 2006, cease to share in additional interest earned by way of bulking;

All fees to be charged in terms of SLA and to be fully inclusive of standard services to clients.

Conclusion

• For final report to be submitted to FSB, next steps will be :-

• Final verification of calculation provided by banks in respect of bulking of fund bank accounts;

• Independent review of findings by PwC;

• Discussion of PwC report with FSB;

• Agreement with FSB on process of redress believed necessary;

• Discussions with relevant fund management bords regarding measures to provide redress.