Note on Information Circular PF No. 4. of 2009 - Clarification in respect of the approval of foreign-based entities providing investment administration services or giving advice to South African Pension Funds
By Fransico Khoza

Introduction

The financial services board has in the past expressed concern about foreign-based investment administrators who conduct cross-border business in South Africa without authorization. It is therefore hardly surprising that, on 15 December 2009 the registrars of pension funds and financial services providers issued Information Circular PF No.4 of 2009 (the “Circular”). The Circular clarifies the requirement for foreign-based investment managers to be authorized in order to do business in South Africa. The Circular is particularly important for those foreign based investment managers who have South African pension funds as clients.

Why the focus on foreign-based financial services providers?

The special focus on foreign-based financial services providers who provide investment administration services or give advice to South African pension funds is informed by recognition that those administrators are mostly interested in the business of South African institutional investors, including pension funds. South African pension funds are the main savings vehicle for a majority of South African citizens. The Financial Services Board (“FSB”) recognizes that a loss of pension fund assets as a result of advice or investment administration provided by unapproved foreign-based financial services providers would have serious consequences. Hence the reason to require the registration of these foreign-based investment administrators so that they can be subject to FSB supervision.

The approach of foreign-based financial services providers to the South African market

Perhaps as a sign of the increasing recognition of South Africa as a stable and growing economy and as a gateway to African financial markets, more and more foreign-based financial services providers are considering whether to market some of their financial products to South African investors. Also the increased regulation of financial services providers in Europe and in the United States has given rise to increased interest in the financial markets of developing countries like South Africa. It is for these reasons that some foreign-based financial services providers consider whether to establish subsidiaries or branches in South Africa or to continue operating from outside South Africa on an unapproved basis.

Those foreign-based financial services providers who do not want to establish a subsidiary or branch in South Africa usually enquire about the extent to which they can conduct business without obtaining the required authorization from the registrar of financial services providers (“FAIS Registrar”) or the registrar of pension funds (“PFA Registrar”). Typical questions asked by foreign-based financial services providers include, among others, whether they can advise South African investors from their countries of domicile. Can they send travelling representatives to ‘interact’ with South African investors from time to time? Can they conduct conference calls with South African investors? Can they send marketing or research materials to South African clients?

It is worth noting that in most instances these foreign-based financial services providers are not doing anything “illegal” but are taking advantage of some “gaps” in the regulatory framework. The gaps relate to those activities which do not fall within the definitions of “advice” and “intermediary services” as defined under the Financial Advisory and Intermediary Services Act No. 37 of 2002 (“FAIS Act”). However, the universe of cross-border activities that foreign-based financial services providers can conduct in South Africa, without authorization, is very small. As such, in conducting cross-border activities without authorization the managers are always at risk of breaking the law.

The FAIS Act

The FAIS Act states that, a person may not act or offer to act as a financial services provider unless such a person has been issued with a licence. More specifically, an application for authorization by an applicant not domiciled in South Africa, must be submitted to the FAIS Registrar. Regulations issued under the FAIS Act state, among others, that no person may in any manner or by any means, whether within or outside South Africa canvass for market or advertise any business related to the rendering of financial services by any person who is not an authorized financial services provider or a representative of such a provider. The regulations issued under the FAIS Act also state that a person who is not authorized may not in any manner or by any means: (i) publish any advertisement, communication or announcement directed to clients; or (ii) use any name, title or designation, which implies that such a person is an authorized financial services provider or a representative of such provider.

The PFA

On the other hand the Pension Funds Act No. 24 of 1956 (“PFA”) states that, no person shall administer on behalf of a pension fund, the investments of such a pension fund unless the PFA Registrar has in a particular case or general granted approval. In clarifying the position the Circular states that, where foreign investments are made by a foreign investment manager in terms of an investment mandate from a pension fund, the investment manager must obtain approval in terms of the PFA prior to accepting any pension fund investments. Where foreign investments are held through an investment product managed by a locally approved investment manager, long-term insurer or collective investment scheme, no prior approval is required in respect of the foreign investment manager.

The requirement that foreign-based financial services providers who administer investments of pension funds must be registered will obviously be of great concern for boards of trustees.  In this regard section 7D (f) of the PFA states that one of the duties of a board of trustees shall be to ensure that the rules and the operation and administration (including investment administration) of the fund comply with the PFA, the Financial Institutions (Protection of Fund) Act, 2001 and all other applicable laws. It is also worth noting that PF Circular No. 130 on Good Governance of Retirement Funds states, among others, that the board of trustees of a pension funds should “only make use of licensed/accredited/approved entities or professional advisors where regulators and or independent standard setting bodies can attest to their fitness and propriety”.

The Circular

The Circular does not amend the FAIS Act, what it does is convey the seriousness with which the FAIS Registrar and the PFA Registrar regard conduct of business without authorization. The Circular clarifies that foreign-based financial services providers, who are currently doing business in South Africa without authorization, must submit applications for authorization on or before 31 March 2010. Such authorization has to be sought under the FAIS Act and the PFA.

In addition, the Circular states that a foreign-based financial services provider who renders or intends to render financial or investment services or in anyway canvass for such business directly or through the services of a consultant or advisor, must be authorised as a financial service provider or a representative of a provider in terms of FAIS. A foreign-based financial services provider who obtains authorization under the FAIS Act will be automatically granted authorization in terms of the PFA.

Conclusion

For those foreign-based financial services providers who are conducting business from outside South Africa without authorization, the message is that the FAIS Registrar and the PFA Registrar are increasing their focus on their cross border business operations. In fact South African pension funds who have as investment administrators foreign-based financial services providers are putting pressure on administators to register with the FSB and the PFA registrar. Failure to register may result in the South African pension fund terminating its mandate with the investment administrator.

For trustees of pension funds the message is that they have to ensure that the foreign –based financial services providers who are advising them or providing investment administration services are authorised to do so by the FAIS Registrar and the Pensions Funds Registrar.  That those financial services are being provided outside South Africa makes no difference.

Francisco Jabulani Khoza

Partner (Investment Management Practice)

 Bowman Gilfillan Inc.

11 May 2010