Regulatory changes and economic conditions pose challenges for South Africa’s asset management industry

South Africa’s asset management industry is facing a raft of regulatory changes largely associated with local pension fund reforms and enhanced investor protection as driven by global developments, according to a report issued by professional services fir

In addition to the revisions to Regulation 28 of the Pensions Fund Act and the Solvency and Assessment Management data requirements, South African asset managers also have to prepare for Treating Customers Fairly (TCF) reforms among other regulatory changes. These all require significant resources and are seen by some as stifling growth.

Tom Winterboer, Financial Services Leader for PwC Southern Africa and Africa, says: “The industry continues to face market challenges arising from the unresolved Eurozone sovereign debt crisis, competition for clients and talent together with new expectations from investors and regulators.”

PwC’s inaugural edition ofStrategic and Emerging Issues in South African Asset Managementprovides a broad-based perspective of the industry. The survey is based on personal interviews with managing directors and senior executives of 14 asset management companies.

Regulation and governance

Ilse French, PwC Asset Management Leader for Southern Africa, says: “In common with other parts of the financial services sector, asset managers are being subjected to the challenges of getting to grips with new regulations; including reforms of the distribution system and qualification of investment advisors. At the same time, the low savings culture and the proposed introduction of the National Social Security Fund make the future role of the industry more uncertain.”

Most participants predict a further substantial increase in regulation over the next three years. Participants believe that the Twin Peaks approach to financial regulation will provide better consumer protection; improve market conduct and financial integrity; and promote better internal governance. However they did not agree that it will increase access to asset management services; reduce the cost and complexity of compliance; or reduce systemic risk.

The majority of executives agree that regulation stifles growth (62%) and slows the pace of international expansion (69%). They also contend that new legislation on hedge funds will enhance investor protection (62%). However, they disagreed that regulation levelled the playing field and helped institutions achieve growth targets.

French says that the Government plans to introduce a National Social Security Fund, which is intended to encourage more people to save for retirement at an earlier age. National Treasury has stated that only 10% of South Africans are able to maintain their pre-retirement level of consumption after retirement. One of the factors contributing to this low percentage is a lack of preservation of retirement fund assets when members leave their jobs.

Several participants believe that the introduction of the NSSF could cause the demise of a number of smaller asset managers. They believe that consolidation will lead to lowering of costs for retirement fund managers.

Most executives viewed the TCF proposals in a positive light. However, there were some concerns about the future costs of applying TCF. Participants believe that their larger counterparts are in a better position to handle the proposed regulation more cost effectively.

Asset management companies predict major changes in the nature and delivery of financial advice in the industry over the next five years. They recognise that concerns such as retirement planning and events such as the global financial crisis underscore the need for quality advice.

Asset management market environment

Executives identified the following strengths in the asset management industry: A high level of skilled professionals; an industry where the top 10 to 12 players are sound; a sound regulatory environment with good governance; and a steady supply of small, innovative entrants.

However, the following areas were identified as weaknesses within the sector: The threat of excessive government intervention; South Africa lacks a savings and investment culture; the over supply of asset managers, due to low barriers of entry, has led to fragmentation in the industry; although there is an adequate supply of talented portfolio managers currently, the future pipeline is insufficient; and there is an inadequate level of investment in brand development by the larger players.

Performance

The overall expected average growth in fee revenue for the asset management industry was 10.6%, increasing to an average growth of 12.4% in 2015.

The top three challenges in key growth markets over the next three years were identified as compliance and regulatory issues, the lack of skilled resources, and the competitiveness of existing products. These three challenges were closely followed by the recent uncertain economy, penetration rates and customer attitudes towards asset management.

Risk management

The greatest risk identified by asset managers is a decline in investment performance. Unsatisfactory investment performance is closely linked to the second most important risk, which is being able to manage client expectations. Skills shortages and the regulatory environment were also seen as important risks.

Staffing issues

French says it is interesting to note than none of the participants have made changes to remuneration packages as a result of the European Union (EU) Capital Requirements Directive or other recent developments. However, several have amended remuneration structures by adding a deferred component.

Participants identified portfolio management, executive directors and non-executive directors as the three most difficult areas for sourcing talent. These were followed by compliance, risk management and IT.

Emerging issues

Three common strategic objectives were identified by asset managers: superior investment performance; building strong distribution relationships and geographic expansion. Technological improvements over the next three years are expected to reflect the increased use of smart phones and tablets. However, managers expressed concern about the availability of 4G and data security. Mobile technology was also cited as an important part of client service in the future.

Strategies

More than half of asset managers agreed that in the future the asset management industry will be influenced by political moves and that joint ventures will play a part in future expansion. Most managers do not expect to make business disposals or engage in mergers and acquisitions.

Furthermore, most participants believe that South African asset managers should expand into the rest of Africa. India and South America were ranked ahead of China, while the developed markets of Europe and the US were at the bottom of the list. Asset managers cited a number of challenges to investing in the rest of Africa. These include local regulatory restrictions, political interference, and a lack of local management skills. Another cited challenge is the appearance of previously unexpected costs.

More than half of asset managers said they were not interested in greater investment into funds or products backed by investment in infrastructure development. Only two participants said they had not given full consideration to the Code for Responsible Investment in South Africa (CRISA).

French says: “The asset management industry landscape is continuing to evolve and increase in complexity, causing organisations to face a number of challenges and concerns. Legislation, risk management and regulatory issues continue to have an effect on the industry. New customers’ expectations for speed and simplicity in an increasingly mobile internet environment and an increasing awareness of risk management are also shaping the future of the asset management industry.”