A Practice Note recently published by the Competition Commission should see more small and black-owned businesses admitted to the supplier panels of banks and insurers.
Most banks and insurers operate supplier panels for specific services such as litigation, conveyancing, product supplies and automotive repairs.
Among the reforms recommended by the CompCom are improved transparency in the selection process to be admitted to a supplier panel, reducing the term of supplier contracts to no more than five years, and lowered barriers to entry.
Each bank has different standards and criteria for admission to supplier panels, with suppliers being required to stump up capital ranging from R5 million to R100 million as part of their scorecard system for panel appointments and contract awards.
”Investment requirements of this nature raise barriers to entry for small suppliers. Banks and Insurers should not engage in conduct that leads to the exclusion of SMEs [small and medium-sized enterprises] and historically disadvantaged individuals (HDIs),” says the note.
The commission says it regularly receives complaints alleging unfair competition practices in supplier panels, which could have the effect of reducing competition.
The practice of outsourcing the management of supplier panels to third parties, who in turn allocate work to suppliers, could facilitate market cartels, it says.
Some banks and insurers have long-term supplier agreements extending for 10 years, with agreements that allow for continuous renewal and no end date. This makes the service perpetual and prevents suppliers offering services to competing banks or insurers due to exclusionary clauses that are part of these agreements.
‘Embedded’ inefficiencies and new tools
The CompCom notes some of the inefficiencies embedded in this system: banks and insurers will use the same supplier on its panel even when customers are unhappy with the service, or when they would prefer a supplier in their geographical area. In other cases, long-term agreements with suppliers can stifle innovation and competition.
The commission said it considered comments from stakeholders on panel practices, including the Banking Association of South Africa and the South African Insurance Association (Saia).
“This Practice Note is part of the tools that the Commission will use to address market conduct issues of barriers to entry, transformation, and lack of inclusivity in the broader financial sector,” says CompCom Commissioner Tembinkosi Bonakele.
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“Banks and insurers are encouraged to apply the competition principles contained in the Practice Note to conduct a self-review and reform their practices in supplier panels, particularly in relation to fair appointments and allocation of work to suppliers.”
Saia says the practice note comports with its Treating Suppliers Fairly (TSF) framework which will be incorporated into the Saia Code of Conduct.
Saia CEO Viviene Pearson says most of the organisation’s 58 member companies publish supplier policies or criteria on their websites as part of the drive to maintain transparency on matters that have been controversial in the past.
“The codifying of criteria for Treating Suppliers Fairly is critical for the non-life sector as a significant contributor to the economy through procurement of services with motor body repairers, plumbers, electricians, and other trades, in order to effectively deliver to the industry consumer value proposition.”
“These sectors include many SMEs who are already benefiting from the non-life insurers’ existing transformation policies,” says Pearson.