Illustration: Colin Daniel

The Association for Savings & Investment SA (Asisa) wants all investment products sold in South Africa to be brought under either an expanded Collective Investment Schemes Control Act (Cisca) or the Long Term Insurance Act.

Adopting either approach is the only way that individuals and companies that have malevolent intentions can be forced out of the shadows, Asisa chief executive Leon Campher says.

Asisa’s recommendation follows the property syndication schemes debacle, in which thousands of South Africans – who were told they were putting their money into low-risk investments – stand to lose billions of rands, as well as a plethora of Ponzi schemes, which masquerade as anything from hedge funds to money market funds.

Investors are now more at risk because of the uncertainty over which regulator is responsible for stamping out scams or even controlling legal, but extremely high-risk, investment schemes.

Last year, the Financial Services Board (FSB) told Parliament’s finance portfolio committee that it is not responsible for regulating:

* Property syndication schemes. The FSB said the South African Reserve Bank and the Department of Trade and Industry should have taken action to prevent the property syndication debacle.

The FSB made this claim even though it issued most of the property syndication companies with licences to operate as providers of financial services. The syndication companies often used these licences to dupe investors (see “Relook at licensing of service providers”).

* Ponzi schemes, such as the R3-billion Abante Relative Value Arbitrage Fund, a pseudo-hedge fund controlled by Herman Pretorius, who fatally shot a former business partner and then himself when the FSB belatedly started to investigate the fund in July last year, when the scheme was collapsing.

Campher says any money you invest should be subject to regulation, preferably by a single regulator, to prevent dodgy institutions and individuals from taking advantage of the different regulatory regimes to evade scrutiny.

The financial services industry is keenly awaiting the release of the road map for the implementation of the new “twin peaks” regulatory regime, Campher says. The road map is expected to be released for public comment this year.

The “twin peaks” structure will bring the market conduct of all financial services under the FSB, while the prudential regulation of banks, life assurance companies and possibly other institutions will fall under the Reserve Bank.

Market conduct deals with ensuring you are sold appropriate products that are in your interest.

Prudential regulation aims to ensure that banks and insurance companies have enough money to repay you or pay out the promised benefits when they fall due.

Currently, South African life assurance companies are very well capitalised, holding three times (about R90 billion) their required capital adequacy amounts, which are set and monitored by the FSB.

Campher says that Cisca should be the umbrella legislation for all pooled investment products, with separate sets of rules for different types of products (see “How life assurance and collective investments differ”).

A key feature of the product rules should be the segregation of duties when it comes to the valuation of an investment, particularly instruments such as unlisted equities, he says.

The collective investment schemes legislation was initially aimed at regulating unit trust funds only, but it has been expanded to include mortgage participation bond (part bond) schemes, where investors’ money is pooled to finance large property developments, Campher says.

Cisca is being reviewed by the FSB and National Treasury.

“There is no reason why Cisca cannot be expanded to cover all investment vehicles. There is already pending product regulation for hedge funds, which will see these products included under Cisca,” Campher says. An expanded Cisca should include property syndications and private equity, which invests in a range of opportunities, from unlisted companies to infrastructure projects, he says.

Campher says that although there can be significant differences between different types of investments, what they all have in common is that your money is pooled.

Cisca could be structured so that, under the broad regulatory principles that apply to all investments, there are specific rules for different product categories, Campher says. The potential for this approach to work has been proved by the inclusion of part bonds and property unit trusts in Cisca.

Campher says the advantages of using Cisca as the over-arching legislation include:

* Cisca requires the proper disclosure of information to investors. “No longer will anyone simply be able to claim that you will get a 30-percent return without any proper evidence to back up the claim.”

* Cisca requires that investments are properly valued. One of the problems with many investments that are not firmly within the regulatory net is that it is not obligatory for them to be properly valued, Campher says.

It is often not easy to provide ongoing daily valuations for alternative investments, such as hedge funds and private equity funds, as can be done with unit trust funds. But the expanded legislation could provide for ongoing indicative valuations and proper valuations once a quarter. The valuations would be public and comparable.

The reason that valuations can be difficult to assess is that the underlying investments are often not subject to the open market forces of buyers and sellers trading securities on an exchange such as the JSE.

* Cisca provides protection for investors’ money. Your money is held by an independent custodian (normally a bank), which acts on the instructions of an asset manager. This means an asset manager cannot merely pocket your money as happened with the Abante Relative Value Arbitrage Fund.

Campher says placing all investments under Cisca will not guarantee that every crooked operation will be stamped out.

“It is impossible to protect everyone against their own stupidity and greed. But crooks will be exposed far quicker, and there will be far greater confidence in the financial services industry,” he says.



The Financial Services Board (FSB) is reviewing how financial services providers (FSPs) and their representatives are licensed in terms of the Financial Advisory and Intermediary Services (FAIS) Act.

The current licensing system often enables product and service providers to misuse licences in two ways to mislead investors:

* To give themselves an air of respectability – for example, to imply that a property syndication scheme has been given the FSB’s stamp of approval. This tactic is not limited to property syndication schemes; it is a widespread practice for FSP licence numbers to be included on product information to imply FSB approval of the product.

But an FSP licence is not an indication of the merits of the product being sold. An FSP licence entitles an FSP and its representatives to provide advice on and sell particular products.

In the case of property syndications, FSPs and representatives were licensed to provide advice on and sell the debentures and shares that are the underlying investments of a property syndication scheme.

* To provide licences to FSPs that, in terms of their own licences and those of their representatives, are not licensed to sell property syndication shares and debentures.

In her determinations on property syndications, financial advice ombud Noluntu Bam has found that property syndication companies rented out their licences, either directly, or indirectly through associated companies.

The country’s biggest property syndication scheme, the now imploding Sharemax, set up a company dedicated to licensing financial advisers mainly so that the advisers could sell Sharemax products.

Personal Finance reported late last year that the company, Unlisted Securities of South Africa (USSA), was established by Sharemax’s compliance officer, Gert Goosen.

His wife, Renate, who now manages the FSB’s financial advisory and intermediary services enforcement division, was the compliance officer for USSA, which, in the wake of the implosion of Sharemax, has also closed down.



The Long Term Insurance Act and the Collective Investment Schemes Control Act (Cisca) are aimed at protecting your investments against abuse and theft.

Both Acts govern mainly pooled investments: thousands of investors contribute different amounts of money that are pooled and invested in a broad spectrum of top-class securities (mainly shares listed on an exchange, industrial and commercial property, and interest-earning investments).

The differences between life assurance investments and collective investments are:

* Life assurance products. You give your money to a life assurance company, which in return promises to pay you a benefit after a pre-defined period, which could be for a certain number of years or when you die, whichever occurs earlier.

The promised benefit could be an amount linked to the performance of a basket of securities (a market-linked investment), or a cash lump sum paid out on an event such as your death or disability.

You may also be promised a minimum payout, no matter how investment markets perform.

The premium you pay to receive the benefit goes onto the balance sheet of the life assurance company. In other words, the money becomes that of the life assurance company, to invest as it wishes.

To ensure that life companies can meet their promises to you, they are required to hold a certain amount of capital as a reserve.

* Collective investments. Unlike a life assurance product, with a collective investment whatever money you invest remains yours. Your money is held on your behalf by an independent custodian that takes instructions from an asset manager (collective investment scheme management company). As a result, the collective investment scheme is not required to hold a certain amount of capital as a reserve.

Collective investments tend to be a lot more versatile than life assurance products, because, in most cases, there is no contractual period for your investment. You can normally access your money in 48 hours.



A single point of entry for all financial products was created in Australia in 2002 to stop the unscrupulous from ducking between regulatory regimes or ignoring them altogether, says Peter Dempsey, deputy chief executive of the Association for Savings & Investment SA.

If South Africa adopts a regulatory regime similar to that in Australia, it will significantly reduce the number of problem operators here, he says.

Dempsey says the Australian Financial Services Reform Act of 2002 had two main objectives:

* The creation of a single regime for financial product sales and advice, and dealings in relation to financial products; and

* Consistent and comparable financial product disclosure.