FSB re­fines rules for for­eign CIS

Could re­cent leg­isla­tive changes mean that we will see more for­eign col­lec­tive in­vest­ment schemes hit our shores? RISKSA takes a closer look.

RISKSA Magazine - - CONTENTS - Neesa Mood­ley- Isaacs

The num­ber of for­eign in­vest­ment schemes di­rectly avail­able to South African in­vestors has de­creased dra­mat­i­cally over the last eight years, fall­ing from 366 in 2006 to 308 at the end of March this year. How­ever, changes ush­ered in by the Fi­nan­cial Ser­vices Board ( FSB) in Jan­uary this year have made South Africa more ac­ces­si­ble for for­eign col­lec­tive in­vest­ment schemes, which in­clude for­eign ex­change traded funds ( ETFs) and mu­tual funds. Good re­turns from off­shore mar­kets, as well as the de­pre­ci­a­tion of the Rand against ma­jor cur­ren­cies, has boosted the value of for­eign as­sets in Rand- de­nom­i­nated funds. These two fac­tors have driven de­mand for Rand­de­nom­i­nated for­eign funds. For­eign ex­change con­trols re­strict as­set man­agers to in­vest­ing a max­i­mum of 35 per­cent of their re­tail as­sets un­der man­age­ment in off­shore mar­kets. Wehmeyer Fer­reira, head of Deutsche Bank X- track­ers, which pro­vides ex­change traded funds that track ma­jor for­eign in­dices, says de­mand for for­eign in­vest­ments is likely to re­main strong, on the back of im­proved eco­nomic growth in the US last year, a re­duc­tion in fears that the Eu­ro­zone will break up, the un­der- per­for­mance of emerg­ing eq­uity mar­kets in terms of US dol­lars and un­cer­tainty about the Rand. Ac­cord­ing to the 2013 an­nual re­port of the As­so­ci­a­tion for Sav­ings and In­vest­ment South Africa ( ASISA), the as­sets un­der man­age­ment for for­eign col­lec­tive in­vest­ment schemes ( CIS) last year was R217 bil­lion.

What are the changes?

Peter Blohm, se­nior pol­icy ad­viser at the ASISA says the big­gest change was prob­a­bly the ad­di­tion of a clause that states that for­eign col­lec­tive in­vest­ment schemes mar­keted in South Africa must also be avail­able to sim­i­lar in­vestors un­der the same or sub­stan­tially sim­i­lar re­quire­ments in its own domi­cile. The con­di­tions re­quired by the FSB be­fore for­eign CIS will be al­lowed to solicit in­vest­ment in South Africa in­clude: • The reg­u­la­tory en­vi­ron­ment un­der which the scheme op­er­ates in its domi­cile must of­fer in­vestors the same or a sim­i­lar level of pro­tec­tion to the pro­tec­tion in South Africa. • For­eign schemes have to en­ter into an as­so­ci­a­tion with a lo­cal com­pany or open a lo­cal of­fice. This will make it eas­ier for in­vestors to in­ter­act with the scheme and ob­tain re­quired doc­u­men­ta­tion such as tax cer­tifi­cates. • The FSB does not di­rectly reg­u­late for­eign CIS schemes but is likely to only ap­prove In­ter­na­tional Or­gan­i­sa­tion of Se­cu­ri­ties Com­mis­sions ( IOSCO) schemes, or schemes based in coun­tries where there is a mul­ti­lat­eral un­der­stand­ing be­tween our reg­u­la­tor ( the FSB) and theirs. • Pre­vi­ously, in­vest­ment lim­its were pre­scribed for for­eign funds – to be sim­i­lar to lo­cal funds – in terms of what the port­fo­lio can in­vest in, for ex­am­ple, eq­ui­ties were capped. • Un­der the old pro­vi­sions, for­eign Fund of funds was re­quired to in­vest in five un­der­ly­ing funds. But now the fo­cus has shifted from forc­ing for­eign schemes to look like lo­cal schemes. The fo­cus is now on ju­ris­dic­tion.

• Pre­vi­ous con­di­tions were very strict. Blohm says hav­ing an in­de­pen­dent cus­to­dian is an ar­range­ment that works well in South Africa in a unit trust struc­ture. “The new con­di­tions do re­quire proper in­de­pen­dent over­sight but the need for an in­de­pen­dent cus­to­dian has now fallen away,” he says. • The scheme must have suf­fi­cient liq­uid­ity to be able to pay in­vestors out if they wish to with­draw from the in­vest­ment. To this end, the lo­cal part­ner or rep­re­sen­ta­tive of­fice must have paid- up share cap­i­tal and re­serves of at least R2- mil­lion. This money must be in­vested in as­sets that can be liq­ui­dated within seven days. • For­eign CIS are not al­lowed to in­vest in fi­nan­cial in­stru­ments that will re­sult in the scheme own­ing phys­i­cal com­modi­ties. • For­eign funds will have to pro­vide the FSB with a doc­u­ment list­ing the dif­fer­ences and sim­i­lar­i­ties be­tween the scheme and a lo­cal col­lec­tive in­vest­ment scheme.

Tax treat­ment of for­eign funds a prob­lem

Although the re­lax­ation of rules from the FSB may at­tract more for­eign CIS to our shores, ex­perts say South Africa’s tax treat­ment of these funds re­mains a prob­lem.

Shayne Krige, a direc­tor at Werks­mans At­tor­neys and head of in­vest­ment funds prac­tice, says in­ter­na­tional in­vestors tend to set up their hold­ing com­pa­nies and fund en­ti­ties in coun­tries that have the low­est tax rates. “South African tax con­sid­er­a­tions make it dif­fi­cult for South Africa to com­pete as a Pan- African in­vest­ment fund lo­ca­tion,” he says. Hir­ing a South African in­vest­ment man­ager has another ma­jor tax con­se­quence for for­eign funds un­der the cur­rent sys­tem: any prof­its that are deemed to have a South African source are tax­able in South Africa. This may be the case if the lo­cal man­ager has dis­cre­tion to con­tract on be­half of the for­eign fund. “The ‘ source risk’ is one that is eas­ier to man­age in other ju­ris­dic­tions, and it is dif­fi­cult for a South African man­ager to com­pete for a dis­cre­tionary man­date against a man­ager lo­cated in a coun­try that has the ex­emp­tion,” says Krige. He points to the UK as an ex­am­ple of a coun­try that has cre­ated an in­vest­ment man­age­ment ex­emp­tion in terms of which, only the in­vest­ment man­age­ment fees paid by a for­eign fund to a man­ager based in the UK are tax­able. “What South Africa needs is a regime that al­lows in­vest­ment man­agers to con­duct dis­cre­tionary ac­tiv­i­ties, whether un­der a con­trac­tual man­date or through a par­tic­u­lar struc­tured par­tic­i­pa­tion, with­out cre­at­ing any tax risk for a for­eign fund,” he says. How in­vestors can ac­cess for­eign in­vest­ments If an in­vestor chooses to in­vest in a for­eign CIS, then he or she needs to ob­tain ap­proval from the South African Re­serve Bank ( SARB) to con­vert their sin­gle dis­cre­tionary al­lowance or R1 mil­lion an­nual off­shore al­lowance into a for­eign cur­rency. The other op­tion in­vestors have, is to use their an­nual R4 mil­lion in­vest­ment al­lowance. If they choose the sec­ond op­tion, they will re­quire a tax clear­ance cer­tifi­cate from SARS as well as ap­proval from the SARB.

“What South Africa needs is a regime that al­lows in­vest­ment man­agers to con­duct dis­cre­tionary ac­tiv­i­ties.”

The dif­fer­ent types of for­eign col­lec­tive in­vest­ment schemes

There are sev­eral dif­fer­ent types of for­eign CIS: 1. Unit trust funds or col­lec­tive in­vest­ment scheme funds – are very sim­i­lar to lo­cal unit trust funds with re­gards to struc­ture. In­vestors pool their money and fund man­agers then in­vest the money in a range of shares, bonds and other fi­nan­cial in­stru­ments. 2. Open Ended In­vest­ment Com­pa­nies ( OEICs) – were in­tro­duced in May 1997. They are reg­is­tered mainly in ju­ris­dic­tions in­clud­ing the Chan­nel Is­lands, Isle of Man and Ire­land, and are reg­u­lated by the UK Fi­nan­cial Ser­vices Au­thor­ity. In­vestors ob­tain par­tic­i­pa­tion rights by buy­ing shares in the com­pany. As new in­vestors buy in, new shares are is­sued. The com­pany has no pre­de­ter­mined ter­mi­na­tion or end date, which is why it is an ‘ open- ended’ com­pany. 3. SICAVs – these are the same as OEICs but they are typ­i­cally reg­is­tered in French speak­ing coun­tries such as Lux­em­bourg and France. They fall un­der the Euro­pean Di­rec­tive on UC­ITS ( Un­der­tak­ing for a Col­lec­tive In­vest­ment in Trans­fer­able Se­cu­ri­ties). 4. Mu­tual funds – are of­fered in the United States and have the same struc­ture as an OEIC. 5. Feeder funds – al­low in­vestors to in­vest into an un­der­ly­ing fund through another fund. For ex­am­ple, the Al­lan Gray- Or­bis Global Eq­uity Feeder Fund in­vests only in the Or­bis Global Eq­uity Fund. 6. Fund of funds – this is sim­i­lar to a feeder fund but in­vests in a num­ber of un­der­ly­ing funds rather than just one un­der­ly­ing fund.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.