Shaun Harris
The great regulation debate over unit trusts and similar investment products has been raised to a new level with the publication of the Collective Investment Schemes Bill, jointly drawn up by the Association of Unit Trusts (AUT) and the Financial Services Board (FSB).
Like all proposed changes aimed at an established industry – and South Africa’s unit trust industry, though relatively young, has become very comfortably successful – the Bill has its supporters and detractors, motivated chiefly by vested interests.
For years the life insurance and unit trust industries, and more recently linked-product companies, have been sniping at each other, mainly over disclosure and costs. The Bill may go some way towards settling this argument, but the main aim is to bring the local unit trust industry up to speed with international trends.
AUT chair Anton Kok says this should level the playing fields between local and foreign investment management companies and products.
“Today’s structure, which limits South African unit trusts to trust-based vehicles, is severely hindering the local financial services institutions from competing with increasingly active international concerns as exchange controls are relaxed. It is internationally accepted that innovation is not possible within purely trust-based parameters,” he says.
Since the relaxation of foreign control regulations on individuals, offshore companies have found a ready market in South Africa. The problem was that local investors would not receive protection if contributing money to a foreign fund. The response from the FSB was for offshore investment companies to register under the Unit Trust Control Act, a requirement that caused considerable controversy earlier this year when a number of foreign funds were still waiting for their applications to be passed.
Part of the problem was the limitation posed on funds by the Act, which, for example, precludes hedge funds or other forms of geared investment trusts. Currently a foreign fund cannot solicit money from South African investors or market its products unless registered. It’s a grey area, because an individual can approach the representative of an unregistered foreign fund and invest.
A secondary reason, however, for the registration requirement was basically to protect the local unit trust industry. With the far greater variety of offshore products available, South African unit trust management companies were forced to compete with one hand tied behind their backs.
Registration of foreign funds meant these products could only be marketed locally if they fell within the Act. The FSB argued this levelled the playing fields between South African and foreign companies – some foreign companies countered that it merely protected the local industry.
The Bill aims to shift the parameters, opening up local companies to develop and market products in line with foreign competitors rather than limit foreigners to the restrictions of local regulations.
The key element to introduce more flexible products locally is to allow collective investment schemes. In the Bill these are defined as including feeder funds, funds of funds, hedge funds, an open-ended investment company, umbrella funds or other variations the minister of finance may declare.
Some of these funds are available locally but others, notably hedge funds, are not. “The draft legislation proposes the introduction of open-ended investment company structures allowing for far greater diversification,” Kok says. “It would benefit the South African economy if these products could be designed locally and sold in the domestic and foreign markets.”
Investor protection remains an important consideration, so the Bill also makes provision for increased financial disclosure.
The long-term aim is for self-regulation of the unit trust industry, the route favoured by Kok but one he says will only be permitted once the FSB is satisfied that the industry has mechanisms in place to competently regulate itself on an ongoing basis.
If accepted, the proposals should also allow unit trusts to compete more equally with insurance-based investment products, which, because they fall under the Insurance Act rather than the Unit Trust Control Act, have certain advantages. Chief among these is the ability to offer a purer investment portfolio in a chosen field, not limited, like unit trusts, to a minimum 5% cash holding or a limit of no more than 5% of the assets of a single company’s share.
The Bill is open to public comment. No one is sure what form the final draft will take, but it’s unlikely to become legislation until early next year.
For individuals the proposals offer more choice of investment products. The danger is not getting proper advice or sufficient information on the new products from investment advisers. The best thing an investor can do is to check out the credentials of their adviser, and gather as much independent information as possible.