Curatorships: A system in need of review
Enormous fees are being accumulated. Their defensibility must be questioned. When too few are being paid too much, too many are getting too little. And the ultimate objective is too often lost.
“It is my view that we need further to review the system of compensation for curators, to bring it in line with more acceptable standards, and to reduce the incentive for stretching out the period of curatorship as they are paid an hourly rate,” Finance Minister Pravin Gordhan told Parliament in September 2009. Since then, nothing’s happened.
This is a plea for Gorhan to request a review by the Law Commission; not only of curators’ compensation but also the manner of their appointments, the way in which they conduct their business, and the transparency of their reporting.
It’s not to suggest that there are sinister goings-on, despite the remorseless punches being thrown in the never-ending criminal trial of Simon Nash on charges of fraud relating to the stripping of pension-fund surpluses. Next step in this saga will be for the defence to call curator Tony Mostert and Financial Services Board executive officer Dube Tshidi into the witness box (see Currents).
Presuming their cross-examination will generate more light than heat, it could offer a rare occasion to illuminate some of the deeper crevices in a public understanding of curatorship practicalities. Because of the sheer sums and prominent identities of parties involved in the so-called ‘Ghavalas option’, a range of controversies has been highlighted (TT Sept-Nov ’11).
The broader policy issue is a worldwide affliction in the financial-services sector on the equitable sharing of spoils between those who manage money and those whom it’s due. The narrower issue, in the particular instance of curatorships, is in how principles of fairness are applied.
They’re piquant for two reasons: first, because of the huge fees accumulated (some would say earned) by curators; second, because one individual has pocketed multiples of millions from his share of curatorship appointments. Some issues for consideration:
How are curators appointed?
The 2001 Financial Institutions (Protection of Funds) Act effectively gives the Registrar sole power provided the appointment is ratified by the High Court. In practice, ratification is rarely contested.
Normally following the Registrar’s recommendations, the court may make an order defining the duties of the curator and the basis of his remuneration. The curator acts under the control of the Registrar. On good cause shown, any person may challenge decisions or actions by the curator or Registrar.
Is there a better way?
An analogy may be drawn with the appointment of liquidators. Of seminal interest is the 2006 ‘whistleblower’ judgment, Tshishonga v Minister of Justice & Another, by Justice Pillay in the Labour Court.
Ruling against then-minister Penuell Maduna, who wanted business pushed the way of Enver Motala, the court lauded the practice that had been introduced in the Office of the Master of the High Court for appointments of liquidators to be made by a 15-person panel rather than left to the discretion of a single official.
Senior staff in the Master’s office had attempted to promote transformation and fairness in appointments. Further, the judgment noted: “The rationale was that it was easier to bribe or corrupt an individual but not 15 members of a panel.”
In the result, as it happens, the panel was disbanded under protest. Motala was heavily favoured for liquidation appointments, earning many millions of rand in the process, only to be later removed from the Master’s list of approved liquidators and trustees when his questionable credentials and practices were revealed.
To avoid it getting to anything like this with the appointment of pension-fund curators, systemic risks might be identified: whether appointments should not similarly be made by a panel, and whether there should not similarly be an approved list of potential curators from which the panel can select. And the more that competent practitioners make themselves available for approval, the greater the competitiveness not least on remuneration.
How is remuneration calculated?
Either on the basis of professional hours worked, or on a contingency basis where the curator receives an agreed proportion of assets recovered.
The former basis carries the difficulty, mentioned by Gordhan, of curatorship durations being stretched to result in excessive fees. They might stretch in all innocence; for instance, because of the time it can take for an appointee to brush up on specialist knowledge. Take the intricacies of financial instruments or operations of administrative systems.
In addition, although discounts on top professionals’ hourly rates might be negotiated, there is a distortion when chunks of their work are delegated to juniors earning lower hourly rates.
The latter remuneration basis is justified on the principle that the curator is at risk: the higher the recoveries, the greater the fees accumulated; conversely, no recoveries mean no fees. There are occasions where pension funds have no assets and recoveries relate to surpluses wrongfully stripped.
Controversy arises from the extent of the curator’s risk: for example, when the FSB advances a fee to be recouped from recoveries; or when the curator is assisted in recoveries by FSB interventions such as threats to withdraw the licences of financial institutions who act as pension-fund administrators.
What could help is an upfront cap on fees. This would be consistent with the spirit of FSB’s own ‘Treating Customers Fairly’ initiative. The more that is earned by the service provider (curator), the less there is for distribution to end-beneficiaries (customers).
Can there be interest conflicts?
Yes, possibly when the curator uses his own professional associates that charge separately for legal and other advice. It could allow inflation of curatorship costs and might even be said to incentivise litigation.
What are the criteria for appointment?
None are defined. In practice it’s for the Registrar to decide, under any given circumstance, whom he thinks best in terms of availability and ability. For instance, with ‘surplus-stripping’ exercises, he’d favour a particular attorney who’d gained considerable experience and proven track record in this area.
More often than not, appointments go to lawyers and accountants. But whether they’re necessarily most suitable is moot. Failures of pension funds commonly result from failures of administrative systems. It begs the question of whether, when this happens, a systems expert shouldn’t at least be included.
What’s the purpose of curatorship?
Lawyers and accounts are good at recovering assets. Fair enough. But if this were the only purpose of curatorships, that would be the long and the short of it. However, curatorship isn’t supposed to be a synonym for liquidation.
First, curatorship applies not only to pension funds but to any financial institution. Count on the fingers of one hand those that have emerged intact from curatorship. Fedbond stands out, and then only because it had successfully fought for a compromise to have a “monitor” appointed instead of a curator. It got back onto its feet, to grow and flourish.
By contrast, take Masterbond. Its directors went to prison. Its assets were sold at knockdown prices relative to the subsequently-soaring values of its Fancourt and Mykonos resort developments. Time will tell whether the same might hold for assets of the maligned Fidentia, as time and not fire sales are of the essence.
Which again reverts to what curators are ordered, paid and incentivised to do. Where pension funds are invested in institutions placed under curatorship, there’s a contradiction in that these long-term holders are dispossessed of assets whose gains later eventuate.
For institutions other than pension funds, perhaps it’s preferable to align their curatorships with the ‘business rescue’ innovation of the new Companies Act. First intent should be their restoration to stability, not a rush into liquidation. Experienced business people, paid a monthly salary and a bonus for fixing the business, might be better skilled for this than lawyers and accountants. There’s potentially a huge pool of executive retirees from which to draw.
For pension funds, the objective must obviously be that distributions to end-beneficiaries are maximised. Unfortunately, it isn’t so obvious when curators have an eye and a means to maximise their own remuneration above regard for maximisation of asset realisations.
Another imbalance is when curators pick up full fees for recoveries on the one hand while, on the other, the proceeds don’t have a hope of reaching swaths of end-beneficiaries. This happens when they become lost in the sea of unclaimed benefits (TT Dec ’11-Feb ’12).
Can’t controls be improved?
The overburdened FSB, regulator of thousands of pension funds, has a devil of a job. Clearly, it must rely on the trust of those it appoints to curatorships. It must also ensure that their reporting is up to scratch for ease of monitoring and for court approvals.
Here, there’s a way to go. The Financial Institutions Act merely provides that the curator “furnish the registrar of the institution concerned with such information concerning the affairs of that institution as the registrar may require”.
Better to set out what the curator must report, and the frequency with which he must report it, then to make the reports immediately available on the FSB website. That way, such interested parties as beneficiaries can be kept abreast of a curatorship’s costs and progress. It will enable them to query what they don’t understand or challenge what they don’t like, even to make their voices heard when curators’ reports are filed in court.
It’s called transparency, the best control mechanism of all.
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