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Pension Fund Investments: a changing landscape

28 February 2014 Arabella Bennett, ENSafrica

The South African legal and regulatory environment for pension funds is perceptibly active and is becoming increasingly complex for trustees and investment professionals to navigate. The need for specialist legal advice is no longer optional as the regulator places more stringent compliance requirements on the financial services industry.

In the investment space, the South African regulator has been concerned predominantly with (1) ensuring that there is direct regulation of everyone involved in the financial sector; (2) adopting reforms to ensure that clients are treated fairly; and (3) following international proposals in the wake of the global financial crisis.
 
Significant steps have been taken in this regard, especially in the field of asset management. The Credit Ratings Services Act now provides for the regulation of credit rating agencies, whereas the new Financial Markets Act provides a regulatory framework for over-the-counter derivatives. In 2012 we saw the release of the final conditions for investment by pension funds in private equity funds, and for the conclusion of securities lending by pension funds. In October 2013 the Financial Services Board (FSB) published draft conditions for investments by pension funds in derivative instruments, and draft conditions for investments in hedge funds.
 
In the consumer protection space, the FSB is developing a programme for regulating the market conduct of financial services firms. Entitled ‘Treating Customers Fairly’ (TCF), the programme seeks to ensure that fair treatment of customers is embedded in the culture of financial firms. The programme is only likely to come into effect during the course of 2014 (or possibly even 2015), but many firms are already evaluating their practices.
 
In March 2011 the FSB published the TCF principles. Also known as ‘The Roadmap’, the thinking is that this will become law, with the TCF principles either being built into the licensing conditions for pension funds, or alternatively into the sample precedent agreements that the Registrar’s office is working on. There is expressed concern regarding the potential exploitation of this in light of the legal "ultra vires” doctrine.
 
The fees related to financial services products is a long standing debate with significant pressure being placed on the industry to address fee structures across asset classes. In July 2013, National Treasury published for comment a technical discussion paper specific to charges in the retirement industry. Part of an ongoing investigation into measures that will promote household savings and reform the retirement industry, this document is likely to form part of the wider debate on the possible regulation of the charges financial sector firms apply to client investments.
 
One such reform that is already in effect relates to the more detailed regulation of conflicts of interest of financial intermediaries and advisers licensed under the Financial Advisory and Intermediary Services Act (FAIS).
 
There was some ongoing uncertainty on the issue of whether asset managers need to register under the Pension Funds Act as well as FAIS - this uncertainty arose because of an exemption granted in terms of section 13B. The issue has now been resolved - when checking the licensing of a Financial Services Provider in the context of the ability to act, it’s only necessary to check the relevant FAIS licence.

The FSB will create a new category of license for Financial Services Providers who act for sophisticated clients (such as banks and high net-worth individuals), who previously benefited from the merchant banking license - this is the so-called ‘Category V license’, and we expect it to involve a lighter form of regulation. The Financial Services Laws General Amendment Act, which will abolish section 13B for investment administrators, is expected to become law soon.
 
In terms of the extra-territorial application of the FAIS license, there is now an exemption for foreign financial services providers who seek to render purely intermediary services. This has been of particular interest to foreign suppliers.
 
Finally, the context within which financial services operate post the financial crisis is characterised by the need to manage risk and ensure appropriate governance processes. A key aspect of this is the need to ensure that the industry is sufficiently capitalised with sound governance processes through the implementation the requisite checks and balances. The Solvency Assessment and Management (SAM) framework is intended to align the South African insurance industry with international standards, specifically the Solvency II regime implemented for European insurers and reinsurers. This framework has been particularly relevant to pension funds in the context of doing wholesale outsourcings to insurers. It is being developed by the FSB to establish a risk-based supervisory regime for the prudential regulation of both long-term and short-term insurers in South Africa, including reinsurers. Final implementation is expected on 1 January 2016, but insurers will be expected to calculate and report on the regulatory requirements under the SAM framework from the beginning of 2015. Certain interim measures relating to the governance, risk management and internal controls of insurers will be put in place by means of a legislative amendment, with effect from this year.

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