Disclaimer and confidentiality warning:

This document is subject to copyright and may not be reproduced in whole or in part without the written permission of NBC Holdings (Pty) Limited (“NBC”).  No warranty, expressed or implied, as to the accuracy, timeliness, completeness or fitness for any particular purpose of any of the information contained herein is given or made by NBC in any form or manner whatsoever. NBC will accept no responsibility of whatsoever nature in respect of any statement, opinion or information contained in this document.  The sole purpose of this document is to share information with members of the Portfolio Committee on Finance on the practice of “bulking” at their written invitation to do so and for no other purpose. The contents hereof, in so far as they may or may not affect NBC’s client funds, is a matter which has and continues to be given our fullest attention and has and continues to be taken up and discussed in detail directly with the trustees of these funds.     


     Introduction and context of submissions

1.                  “Bulking” of bank accounts refers to a practice in the retirement fund industry whereby –

1.1           Administrators of retirement funds (such as NBC) negotiate with banks to treat each individual retirement fund current account as part of a large group solely for the purpose of setting the interest rate that the bank will pay. 

1.2           The bank pays a higher interest rate based on the “bulk” of all the accounts in the group than they would do on the individual accounts, thus securing a better interest rate for each of the administrator’s clients. 

1.3        There is no change to the individual nature and flexibility of these current accounts which are used to facilitate the transactional (as opposed to investment) needs of the fund.

2.                  Without “bulking”, individual retirement fund cheque accounts attract nil or very little interest on their own.  The higher interest rates negotiated with the bank are intended to benefit all individual retirement funds forming part of the larger group whose cash amounts would normally not attract any interest at all.

3.                  The submissions by NBC as contained herein are limited to the above context and definition of “bulking”.

Brief background to NBC Holdings (Pty) Limited (“NBC”)

4.                  NBC Holdings (Pty) Limited is a proprietary black owned and managed employee benefits business established in April 1998 pursuant to the purchase by NBC of contracts between Alexander Forbes and some 180 negotiated provident funds and the subsequent cession of the same to NBC with the consent of the funds in question. These contracts comprise some 75% of NBC’s current client base by number of funds.

5.                  For NBC’s first two years of operation Alexander Forbes held a minority stake in NBC until this was sold in April 2001.

6.                  NBC’s core areas of business are retirement fund administration services (including fund accounting and treasury services), employee benefits consulting services and actuarial consulting services. 

7.                  Fees for these services are charged as either a percentage of total payroll of the combined membership of a given fund or as a Rand rate per member per month.  Our fees for these services are amongst the lowest per member per month in the employee benefits industry given that the members of our client funds comprise some of the lowest paid formal sector employees.

8.                  NBC is an Authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act, 2002 (License No. 991).   It is also operates as an administrator in terms of section 13B of the Pension Funds Act, 1956 through wholly owned subsidiary NBC Fund Administration Services (Pty) Limited. 

NBC’S Practice regarding “bulking” as referred to in 1 to 3 above

9.                  From the date of NBC’s formation in April 1998 Alexander Forbes continued for a period of time to perform certain fund accounting functions on behalf of NBC for its clients in terms of a management agreement concluded between Alexander Forbes and NBC.  This was to enable NBC the time to procure and develop its own internal capacity to perform these functions which at the date of its formation it did not possess.

10.              Alexander Forbes had its own cash management arrangement with Standard Bank which around mid-1999 paid credit interest rates to our client funds of between Prime less 12.75% and Prime less 10.50% depending on the size of the daily cash balance in the current account of a given fund.

11.                    By September 1999 NBC had established its own internal fund accounting capacity and negotiated and entered into a cash management agreement with the Standard Bank of South Africa (“Standard Bank”).  The effect of the NBC cash management group is that:

11.1        Cash balances held in an individual funds’ bank account are recognised by Standard Bank as one amount together with the current account cash balances of funds administered by NBC who also operate current accounts with Standard Bank;

11.2            Each individual fund is then paid a credit rate of interest (rather than zero interest) of between Prime less 8.00% and Prime less 5.75% calculated on the daily average held in its current account with Standard Bank at any point in time.  This is done without forfeiting any of the transactional functionality of an individual funds’ current account.

11.3        Each individual fund receives a credit rate of interest calculated on the actual daily average balance held in its separate current account to avoid cross subsidisation.

12.              Standard Bank initially offered NBC Prime less 6%.  This was subsequently settled at prime less 5.00% after negotiations.

13.              The difference between the credit interest paid on the aggregate value of the “bulked” bank accounts and the interest paid to individual funds according to the set interest rate tiers described above is retained by NBC as compensation for negotiating and administering the cash management group and for ongoing management of individual funds’ bank accounts. 

14.              No income was received by NBC during the time its client funds participated in the Alexander Forbes cash management group. 

15.              When NBC established its own cash management group and moved its clients’ bank accounts from the Alexander Forbes cash management group to the NBC cash management group we incorrectly omitted to advise our clients that we would retain a small portion of the improved interest as a fee.  Although the credit interest earned by our clients had been further improved considerably (by an average of some 4.75% per interest rate tier) by the introduction of the NBC cash management group and these rates are known to all clients, our failure to disclose our earning of a fee -sufficient to offset the additional expenses incurred in establishing, monitoring and administering the cash management system - is accepted to have been an oversight.

The Legal Position

16.              We have since been advised that the common law position has most recently been restated in the case of Phillips v Fieldstone Africa (Pty) Ltd & Another 2004 (3) SA 465 (SCA)  as follows :

 Where one man stands to another in a position of confidence involving duty to protect the interests of that other, he is not allowed to make a secret profit at the other’s expense or place himself in a position where his interests conflict with his duty.  The principle underlies an extensive field of legal relationship.  A guardian to his ward, a solicitor to his client, an agent to his principal, afford examples of persons occupying such a position.  As was pointed out in The Railway Company v Blaikie Bros (1 Macq 461 at 474), the doctrine is to be found in the civil law (Digest, and must of necessity form part of every civilised system of jurisprudence.  It prevents an agent from properly entering into any transaction which would cause his interests and his duty to clash.  If employed to buy, he cannot sell his own property; if employed to sell, he cannot buy his own property, nor can he make any profit from his agency save the agreed remuneration; all such profit belongs not to him, but to his principal.  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” (our underlining)

17.                           Consequently, from a common law perspective, we understand that the practice of “bulking” of bank accounts is not per se unlawful.  What is unlawful is the taking of a “secret profit” without disclosure to the principal.  In the case of an administrator such as NBC the principals being retirement funds who have appointed NBC as the administrator of their funds.

18.                           In terms of Section 15(1)(b) the a General Code of Conduct became binding on all authorised FSPs on 8th August 2003.

19.              Paragraph 10 of Part VIII of the General Code of Conduct provides inter alia that an FSP who provides a financial service and who receives or holds financial products or funds of or on behalf of the client must account for such products or funds properly and promptly and shall :




(d)              open and maintain a separate account, designated for client funds, at a bank and–

(i)      must within one business day of receipt pay into the account all funds held on behalf of clients;

(ii)     ensure that the separate account only contains funds of clients and not those of the provider;

(iii)   pay all bank charges in respect of the separate account except that bank charges specifically relating to a deposit or withdrawal of the funds of the client are for the client’s own account; and

(iv)   ensure that any interest accruing to the funds in the separate account is payable to the client or the owner of the funds.” (our underlining)

20.              If sub-paragraph 10(d)(iv) of the General Code of Conduct (quoted above) relates to interest accruing to funds by virtue of the “bulking” of bank accounts, it is submitted that all interest accruing to the funds in the separate accounts in accordance with the interest rate tiers referred above (as negotiated by NBC with the bank) have indeed been paid to the funds.

21.              We understand that the codes of conduct for administrative and discretionary FSPs published on 8 August 2003 (“Administrative FSP Code”) also deal with the concept of “bulking”.  The “bulking” of bank accounts however does not appear to us to fall within the definition of “bulking” set out in the Administrative FSP code.  We are advised that this definition relates to the business of asset managers, multi-managers, life insurers and the like.

22.              It is submitted that neither the General Code of Conduct nor the Administrative FSP code in any event outlaw “bulking” per se.  To the contrary, the practice of bulking (albeit in the narrow sense referred to in the Administrative FSP code) is recognised and certain disclosure obligations pertaining to the practice are introduced.


23.              We accept that NBC’s position as an administrator of retirement funds appears to fall within that of “agent” in its broadest sense vis a vis its client funds.

24.              The “bulking” of bank accounts to treat individual funds’ current account as part of a large group for the purpose of obtaining a beneficial interest rate is not in itself unlawful.  To the contrary, it appears to us that it is a desirable practice which is beneficial to all funds forming part of the large group.  The aspect of “bulking” of bank accounts which is unlawful is the taking of a “secret profit” without disclosure to the principal. 

25.              This can be remedied by the consent of the principal which would then make NBC’s participation in the profits generated from the credit interest on the aggregate value of the NBC cash management group lawful.

26.              We are advised that should the trustees of a fund, having regard to their fiduciary duties, decide to consent to NBC’s historical and future participation in the profit generated by virtue of the cash management arrangement with Standard Bank, such a decision would be competent.

27.              We have issued a general disclosure to the trustees of all of our client funds and have commenced a process of formally dealing with the issue directly with the trustees of our client funds at properly constituted trustee board meetings.

28.              NBC and its directors regret the alarm and concern that the issue of “bulking” has occasioned in the minds of trustees and members of its client funds alike as well as the omission to disclose to them that we have earned a fee in the process, albeit that the practice has objectively advantaged our client funds and their members considerably.


21 JUNE 2006