Words on Wealth: Why ETF providers were wrong about exchange-control circular
Last week, the financial media were abuzz about an exchange-control circular issued by the South African Reserve Bank (SARB) at the end of October that, among other things, apparently changed the status of locally listed exchange traded funds (ETFs) tracking global indices from foreign, or offshore, investments to local ones.
This had massive implications for retirement funds, which collectively manage assets of almost R3 trillion, South Africa’s largest pot of savings. Regulation 28 under the Pension Funds Act prevents retirement funds from investing more than 40% of their assets outside South Africa (including 10% in Africa). Now, theoretically, retirement funds could effectively move the bulk of their assets offshore, via these ETFs.
The providers of ETFs, including Sygnia and Satrix, were understandably excited about this interpretation of the circular. Even though ETFs generally have low fees compared with actively managed unit trust funds, they would profit handsomely – half a percent of a trillion rands can buy you an awful lot of Land Rovers.
But the interpretation favoured by the ETF providers sounded flawed. It flew in the face of the prescribed assets debate: these are the very assets that the government wants retirement funds to invest in infrastructure projects and, dare I say it, prop up state-owned enterprises. A large portion of this savings pot is already invested in government bonds.
Crucially, the interpretation also flew in the face of the prudential protections for retirement savings embodied in the Pension Funds Act.
It appears that the SARB hadn’t fully thought things through when they issued the circular, which was to give effect to announcements by the Minister of Finance in his recent Medium Term Budget Policy Statement (MTBPS) speech about relaxing certain foreign exchange restrictions to make it easier for foreign investors to invest in South Africa. This week, National Treasury, the SARB and the Financial Sector Conduct Authority issued a statement saying they intend to review the circular. It also says: “The National Treasury would like to emphasise that the announced reforms to the capital flow management framework do not alter the prudential framework currently applicable to all regulated funds, including retirement funds, collective investment schemes (which include ETFs) and insurance.
“The circular issued on October 29 dealing with the reclassification of inward listed instruments is therefore suspended with immediate effect ... An amended circular will be issued following a period of public consultations.”
The decision by the regulators to suspend the reclassification and review the circular was almost certainly prompted by input from the asset management industry body, the Association for Savings and Investment South Africa (Asisa). On behalf of its members, Asisa had written to Olano Makhubela, commissioner of the Financial Sector Conduct Authority, requesting clarity on the position of retirement funds and their obligations under Regulation 28.
Sygnia sensed a conspiracy by active managers against ETF providers. In a press release, the company said: “Large asset managers, acting in an anti-competitive manner, have just stopped every investor in the country from accessing additional offshore investments. Not in the interest of South Africans or clients who trust them, not in line with Treating Customers Fairly, but motivated by self-interest and greed. One can but hope that the highest
regulatory bodies in the country see how they have been manipulated into giving in to Asisa’s demands and take a firm stance against Asisa. One way would be to allow the circular to stand as is and invite comments to amend or expand it – to suspend it is not in South Africa’s best interests.”
Sygnia’s chief executive, Magda Wierzycka, said: “I have no doubt that the large active managers are currently congratulating each other on successfully protecting their turf, with no concern that their self-interested actions have prejudiced the rights and investment growth of ordinary savers and breached the trust placed in them to act in the best interests of their clients”.
Asisa subsequently issued the following press release, which is published here in full:
Asisa welcomes the public consultation process on the classification of inward listed instruments
Following the MTBPS Speech on October 28 by Minister Tito Mboweni, the South African Reserve Bank issued Exchange Control Circular 15/2020. The SARB circular announced that “all the remaining foreign classified debt and derivative instruments as well as exchange traded funds referencing foreign assets, that are inward listed on a South African exchange, traded and settled in Rand, will be reclassified as domestic.”
On Friday, November 13, the FSCA issued a statement informing stakeholders that “the inward listing of all instruments on a South African exchange remains extant”, that “no presumptions pertaining to Financial Sector Conduct laws should be formed on the reclassification” and that further guidance would be provided.
According to Leon Campher, the chief executive of Asisa, these developments meant that portfolio managers were unsure of how the changes should be applied. A number of Asisa members therefore requested Asisa to urgently seek clarity.
Campher points out that Asisa and its members have always been in support of exchange control relaxation. “The SARB circular was positive in that it removed the inconsistent treatment of inward listed instruments depending on whether they were equity, debt, ETFs or derivatives. However, pension funds are still required to comply with prudential requirements applicable to their investments, namely Regulation 28.”
Campher says Asisa therefore engaged with the FSCA on behalf of member companies to ask for clarity. “At no point did Asisa demand suspension of the above mentioned circular. Our letter to the FSCA, which has now been shared widely, clearly states that Asisa was requesting urgent guidance. Our request was made a week after the FSCA had already made it clear that the inward listing classification of instruments listed on a South African exchange and the application in financial sector laws would remain until further notice.”
On Tuesday this week a statement was issued by National Treasury, the SARB and the FSCA announcing the suspension of the circular to “reduce the scope for ambiguity related to compliance with the prudential framework for regulated funds” and to allow for public consultation.
“We believe that this is the correct approach as it will allow all stakeholders to make representations. Asisa is in the process of constituting a working group, which will consist of representatives from all interested member companies, and we will submit their majority and minority views.”
Campher says: “We are aware that one of our member companies feels aggrieved by our request for guidance, but we believe that this was the responsible approach and in the best interest of investors. The reality is that there is more at stake than just the views of asset managers. Prudential regulations affect a wide ecosystem that includes the trustees of retirement funds who have a responsibility towards members of retirement funds to ensure that their investment portfolios comply with the prudential regulations. Ultimately, clear regulation protects the ultimate investors whose interests should be paramount.”