hot topics | october 2017 keeping up with legislation€¦ · 10/25/2017 · 2017/10/25 7...
TRANSCRIPT
2017/10/25
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Keeping up with legislation
Hot Topics | October 2017
Michael Prinsloo
Executive Head:
Institutional Research
& Product
Development
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Fiona Rollason
Head: Regulatory
Change, Group Legal
Vickie Lange
Head: Institutional
Best Practice
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Topics
Twin peaks
King IV
Hedge funds
POPI
Break at 10:30
PFA cases
Default regulations
Tax
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Twin peaks
Twin peaks arrives
President signed Financial
Sector Regulation Act into law
Introduces twin peaks
regulatory framework to SA
The effective date(s) of Act
still be decided by Minister of
Finance
Different effective dates will
apply to different sections
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Purpose of the Act
The Act establishes a regulatory & supervisory framework that
promotes:
Financial stability, safety & soundness
Fair treatment & protection of customers
Efficiency & integrity of the financial system
Prevention of financial crime
Financial inclusion
Transformation of the financial sector
This Act applies over other financial sector laws
Who & what is covered by the Act?
Financial institutions Product & service providers & persons licensed under
financial sector law
Financial products Long-term insurance policy & benefits provided by
funds
Financial services Advice & administration services
Financial sector law Pension Funds Act & Long-term Insurance Act
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New authorities created under the Act?
Financial System Council
of Regulators
Ensure co-operation between Government & regulators
Financial Sector Conduct
Authority
Market conduct regulator. Promotes fair treatment of
customers & provides financial education
Prudential Authority Juristic entity in SARB. Promotes safety & soundness of
institutions
Financial Sector Conduct Authority
Regulate funds &
administrators in line with the
Act & Pension Funds Act
Outcomes focused & risk
based approach
Commissioner & 2 to 4
deputy Commissioners
Three year strategy
published to explain the
regulatory & supervisory
priorities
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Regulatory instruments
Instruments may deal with:
fit and proper requirements
governance and duties of key
persons (such as trustees)
record- keeping, data
management & safekeeping of
assets
financial management
operational requirements
outsourcing &, business
continuity
conflicts of interest
Prudential standards Issued by PA
Conduct standards
Issued by FSCA
Fair treatment of customers
Joint standards
Licensing
Must be licensed to provide financial products & services
Licences granted in terms of financial sector laws, including the
Pension Funds Act.
No licence may be issued, varied, suspended or revoked by one
regulator without the agreement of the other regulator (the PA and
FSCA going forward
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Information gathering, supervisory on-site inspections and investigations
The FSCA can request information or documents from funds &
administrators
On-site inspections may take place, with prior notification to the entity
The FSCA may appoint an investigator to carry
out an investigation
An investigator can enter premises with or
without prior consent
Enforcement
Guidance notices
Interpretation rulings
Directives
Enforceable undertakings
Court proceedings
Debarment orders
Leniency agreements
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Administrative penalties
Ombud Council
Customers have access to affordable, effective, independent & fair dispute
resolution processes
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Financial Services Tribunal
Reconsider decisions made by a regulator, the Ombud Council, a statutory
Ombud or a licensed financial services provider
Fees & levies
A regulator can charge fees & levies under this Act & financial sector laws, to
fund its activities
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Information sharing & reporting
Regulators, ombuds & state bodies may collect, use, share & disclose
information, including personal information
Regulators must liaise & enter into agreements to co-ordinate reporting
& sharing of information
An institution’s auditor must report any matter to the PA which may
cause the institution to be financially unsound or any contravention of
financial sector law
If someone reports a contravention, they cannot be held criminally
liable, pay compensation or be victimised
Financial Sector Information Register
National Treasury will establish a Register to provide reliable
electronic access to accurate, authoritative and up to date
information on financial sector laws
The public will be able to access this Register
The Act lists all the documents to be published on the Register
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Offences & penalties
Examples of penalties:
institution acting without a licence or
non compliance with an enforcement
order - R15 million or 10 years in prison
or both
failing to report as required under the
Act – R5000 every day the offence
continues
failing to publish or disclose a licence –
penalty of R50 000
not meeting the requirements of an
inspection or investigation – fines of R1
to R5 million
Transitional arrangements
PA power to ensure financial soundness of funds will be delegated to FSCA for
3 years
Transfer of activities from the FSB to the FSCA
FSB Appeal Board & Enforcement Committee will cease to exist
Licences in force before the Act will remain in force
Regulations may clarify how transitional arrangements will take place
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Changes to the Pension Funds Act
New definitions – Authority, Act,
Standards, Register, Tribunal
Delete definitions - FSB,
Registrar
A new section deals with the
relationship between the PFA
and the Act
The Adjudicator must take into
account: equity, contractual
relationships & the Act
Question
Do you think the regulator considers the cost to members
of new regulation?
Yes
No
Maybe
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Question
Do you think SA needs a twin peaks model of regulation?
Yes
No
Don’t know
Question
Do you think it will be good for funds if the Adjudicator
consider equity in her decisions?
Yes
No
Don’t know
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Question
Do you think it will be good for members if the Adjudicator
consider equity in her decisions?
Yes
No
Don’t know
King IV
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King IV
Source: King IV Report on Corporate Governance for South Africa
Voluntary principles
& standards of best
practice for good
governance
Effective for financial
years on or after 1
April 2017
Applies to
organisations,
including retirement
funds
Structure & fundamental concepts of King IV
Source: King IV Report on Corporate Governance for South Africa
King IV Report
Governance outcomes (benefits)
Ethical culture
Good performance
Effective control
Legitimacy
Sustainable development
17 King IV principles (what)
Leadership, ethics & corporate citizenship (1 – 3)
Strategy, performance & reporting (4 – 5)
Governance structures & delegation (6 – 10)
Governance & functional areas (11 – 15)
Stakeholder relationships (16 – 17)
Recommended practices (how)
Retirement funds sector
supplement
TCF
Regulation 28 - ESG
CRISA
PF Circular 130
Pension Funds Act
Integrated thinking
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Sustainable development
“sustainable development
can be understood as
development that meets the
needs of the present without
compromising the ability of
future generations to meet
their needs” and is a primary
ethical and economic
imperative.
Source: King IV Report on Corporate Governance for South Africa
Integrated thinking
Integrated thinking takes
account of the connectivity
& interdependencies
between the factors that
affect an organization’s
ability to create value over
time
Integrated reporting is an
outcome
Source: King IV Report on Corporate Governance for South Africa
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Apply-and-explain basis
Disclose how principles have been applied
Apply principles on a proportional basis
Review of PF Circular 130, incorporating King IV
principles
Source: King IV Report on Corporate Governance for South Africa
King IV roadmap to disclosure
Source: King IV Report on Corporate Governance for South Africa
1 Reference all 17 principles
2 Consider recommended disclosures & explain in narrative form
3 Expand explanation to other practices to further demonstrate how these support the achievement of the principle.
Refer to specific guidance in retirement fund sector supplement
4 Review & make enhancements to ensure users of King IV can make an informed assessment of the quality of the fund’s governance in relation to 17 principles
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template
Source:
template
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Question
Do you think that the King IV Report actually helps improve
corporate governance of funds in SA?
Yes
No
Question
Do you think there is enough effective legislation &
regulation in SA to facilitate the achievement of good
corporate governance?
Yes
No
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Hedge funds
What is a hedge fund
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Why hedge funds are typically used
Diversification of benefits – low correlation with traditional investments
Potential for larger returns than traditional investments – focus on
‘absolute return’, but fees are normally higher than traditional
investments
Regulation of hedge funds
Hedge fund were unregulated
1 April 2015 – NT declared the business of a hedge fund to be a
collective investment scheme
Now regulated by Collective Investment Schemes Control Act
Conditions of investment now regulated:
Repurchase obligations
Valuation & pricing requirements
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Hedge fund requirements
Board Notice 52 of 2015
Qualified investor (QI) hedge
funds
Retail hedge funds
Retirement funds would be
using QI hedge funds
Disclosure requirements
Hedge fund service providers are required to disclose risks & other
characteristics of hedge funds to clients
Managers must disclose and report certain information to investors
before they commit their money to an investment. Examples :
Draft notice issued in 2017 will repeal Board Notice 92 of 2014 –
advertising, marketing & information disclosure requirements for
collective investment schemes
Investment strategy Portfolio composition
Investment restrictions Fund performance
Fees, TER’s Level of counterparty exposure
Liquidity risk management Leverage levels
Repurchase rights
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POPI
POPI moves closer to implementation
POPI is law but only parts of
it are effective
Information regulator
appointed
Draft regulations issued on
8 September 2017
Source: bdlive, picture: Puxley Makgatho
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Standard forms included in the draft regulations
Objection to PI being processed
Request for the correction,
deletion and destruction of PI
Code of conduct
Consent to direct marketing
Submission of a complaint or
grievance
Notice of an investigation
Investigation enforcement notice
or appeal
Duties of information officers
Compliance framework is in place
Measures exist to ensure compliance with lawful
processing
Manual to cover processing & suitability of information
security measures
Awareness sessions
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Conciliation
Regulator can conciliate between
a data subject & responsible
person, where there is an
allegation that personal
information has been interfered
with
Conciliation seeks to reach a
settlement between the parties
Regulations set out the
conciliation process
Time for a break
See you after the
break
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PFA cases
Can the Adjudicator consider TCF?
Du Toit (complainant) versus Central Retirement Annuity Fund (fund)
and Sanlam Life Insurance Limited (administrator)
Complainant was unhappy about the termination fees
Causal event charges: lawful & could be charged by the administrator
But Adjudicator made comments in respect of TCF: Actions of the fund & administrator did not embrace the spirit of the TCF
principles
TCF outcomes that were applicable: clear information, no unreasonable
post-sale barriers
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When can a fund withhold payment of a benefit on the basis of a member’s fraud, theft, dishonesty or misconduct?
Pension benefits cannot be reduced except for certain permitted
deductions:
Divorces orders
Maintenance orders
Tax
Any amount due by a member to their employer as compensation for
any damage caused to the employer by reason of any theft, dishonesty,
fraud, misconduct, by the member and in respect of which the member
has, in writing, admitted liability to the employer or judgement has been
obtained against the member in court.
When can a fund withhold payment of a benefit on the basis of a member’s fraud, theft, dishonesty or misconduct?
Following are examples of deductions not being permissible:
Study loan
Breach of employment contract
Absent without leave / not serving out a notice period
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Default regulations
Default regulations
Gazetted on 25 August 2017,
effective date 1 September
2017
Notice no. 3 of 2017: exempts
funds from regulations until 1
March 2019
Similar to the second draft
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Default regulations
Understand the context in
which the regulations exist:
NT’s broader reform
objectives: lower charges &
improve market conduct
Improve outcomes for
members
Default regulations
Regulations require retirement funds to implement:
Default investment strategy – Regulation 37
Default preservation and portability strategy – Regulation 38
Annuity strategy – Regulation 39
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Key points
Annuity strategy is not a default
Retirement benefits counselling is the provision of factual information
in writing or verbally
‘…may be prescribed’ occurs more than 10 times in the regulations.
Why? Primarily principle based regulations
But some rules apply
Regulators will monitor industry & funds
Could be more stringent rules about how to comply with the regulations
Important to embrace the spirit of the regulations and the principles
Also important to understand the wider ambit – i.e. reform
Applicability to types of funds
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Exemption clause
Been added for all 3 of the regulations
Allows funds to apply for exemption from all or certain provisions of the
regulations, subject to conditions imposed by the Registrar
Not clear on what basis funds’ can apply for exemption
It will be necessary for all closing down funds to make use of this
exemption application before the effective date of 1 March 2019. Only
fund’s in liquidation are automatically exempt from the provisions
Getting practical
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First practical steps
Trustee training
Develop a project plan Action items
Establish target dates
Consider costs
Ensure efficiencies in
implementation
Track implementation of
solutions & progress towards
compliance
Regulation 37: Default investment strategy
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Practical steps
Default portfolios must be included in the fund’s IPS:
Reg 28 – review IPS annually
Reg 37 - review default investment portfolios on a regular basis
Rule amendments
Fund’s don’t have to offer MIC, but where MIC is allowed, switching
must be allowed (at least once every 12 months)
Practical steps
Review design:
Appropriate
Take reasonable criteria into account, e.g. objectives, asset
allocations, fees & charges, expected risks & returns
Consider passive & active strategies
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Practical steps
All fees & charges must be disclosed to boards regularly
Performance fees allowed, subject to standard issued by FSB & a
regulatory review
Practical steps
Review communication strategy:
Assets & performance must
be adequately communicated
to members
Relevant information about
fees & charges to be
appropriately disclosed to
members (clear &
understandable)
Retirement benefits
counselling (Reg 37. 38 & 39)
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Practical steps
Ensure that the fees & charges of the default portfolios are reasonably
priced & competitive:
Size of fund & asset allocations
Understand all fees & charging structures
Understand the impact on members’ retirement outcomes
Compare investment fees & charges: Compare Total Investment Charges (TIC)
Review benefits relative to charges (returns net of fees)
Regulation 38: Default preservation & portability
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Practical steps
Members leaving an employer will
automatically be made paid-up
Amend fund rules to allow for paid-up
members:
No new contributions
No deductions for risk benefits
Eligibility for retirement & death benefits
Access to retirement benefits counselling
Convert DB amount to a DC component
Accept amounts transferred in from other
funds
Consider investment strategy
Practical steps
Engage with administrators & consultants:
Process of providing paid-up membership certificates
Information needed from employers (e.g. ID & tax numbers, contact
details) – might form part of monthly contribution schedules
Fee for paid-up members – must be fair, reasonable & commensurate
with service
Process & responsibilities i.r.o transfers of retirement savings: Employer’s onboarding process
Ask member for paid-up certificates & if they want to transfer savings
into their new fund
Notify administrator to arrange for transfer of savings
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Regulation 39: Annuity strategy
Key points
All types of annuities are allowed
Anticipated that most funds will use out-of-fund annuities
Fund rules must be amended if an in-fund annuity is implemented
Ensure annuity strategy is appropriate & suitable: income levels,
investment, inflation & other risks
Members must be given access to retirement benefits counselling (not
less than 3 months before NRA)
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Practical steps
Trustees to review communication strategies & ensure relevant
communication & disclosure requirements are met. On a regular basis,
in a clear & understandable language communicate to members:
LA - asset class composition of investment portfolios, performance
& changes to incomes in respect of living annuities
Relevant information to members about all fees & charges
Retirement benefits counselling (Reg 37. 38 & 39)
Practical steps
Trustees must ensure
that fees & charges are
reasonable & competitive
Review annuity strategy
at least annually
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Practical steps – living annuity
If living annuities form part of the fund’s annuity strategy, then:
Investment choice must be limited to 4 (four) investment portfolios
These portfolios must comply with Regulation 28 & 37
Drawdown rates must comply with a prescribed standard**cannot comply until the standard is prescribed
If an in-fund living annuity is utilised then the fund must monitor the
sustainability of income and inform members if their drawdown rate is
unsustainable
Question
Do you think the default regulations will help improve
outcomes for members?
Yes
No
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Question
Do you think that the preservation rules (i.e. allowing paid-
up members) will improve preservation rates on funds?
Yes
No
Question
Do you think that Regulation 39 dealing with an annuity
strategy goes far enough to assist retiring members?
Yes
No
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Alexander Forbes Retirement Income Solution
Tax
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Draft Taxation Laws Amendment Bill 2017 (TLAB)
It aims to give effect to
the tax changes
announced in the 2017
National Budget
Source: picture - SABC, Radio 2000
Draft TLAB 2017 has been released for public comment
AF has submitted comments on the Bill
Annuitisation for Provident Funds postponed
From the implementation date, retiring provident fund members will
be allowed to take one third of the benefit as a lump sum and
annuitise two thirds
This only applies to contributions made after the implementation date
The discussions on social security are still underway in NEDLAC &
are far from finalised
Annuitisation requirements for provident funds postponed to 1 March
2019
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Deferred retiring members
Since March 2015 deferred retirement allows members to choose
when to retire from the fund
From 1 March 2018 retiring members will be allowed to transfer their
benefits to a retirement annuity fund, after retiring from employment
National Treasury have agreed to extend this to preservation funds,
but no cash withdrawal allowed
Public sector fund benefits
The ITA allows for the tax-free
withdrawal of pre-March 1998
benefits when they are
withdrawn from a public sector
fund or the fund to which they
were transferred
From 1 March 2018, pre-March
1998 benefits can transfer with
the tax exemption for one
additional transfer
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Removing 12 month limit on joining new fund
The ITA limits employees to a
12-month period to join a
newly established pension or
provident fund
From 1 March 2018, the 12-
month period limit will be
removed so that employees
are allowed to join a newly-
established pension or
provident fund at any time,
subject to the rules of the
fund.
Deduction on contributions
Tax deductibility of contributions to retirement funds was harmonised
across all retirement funds from 1 March 2016
The inclusion of the deduction in section 11(k) of the ITA has created
technical complications
To remove the inconsistencies and anomalies created by the new
section 11(k), it is proposed that a new section 11F is inserted to
effect this harmonised deduction from 1 March 2016
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Repeal of the foreign income employment exemption
Residents who are working outside SA for more than 183 days a year
and for a continuous period of 60 days, are exempt from paying tax
in South Africa on their remuneration
But some employees are not taxed in the country of source nor in SA
National Treasury has realised that this exemption creates
opportunities for double non-taxation
The removal of the exemption will be postponed to 1 March 2020 and
only apply above R1 million
Pension payments relating to foreign services are exempt from PAYE
Section 10 (1)(Gc) effective 1 March 2017
Started deducting PAYE from all types of pensions since 1 March
2017
Slight wording change in TLAB 2017 has unintended consequences
Only in fund pensions have to deduct PAYE from 1 March 2017
Out of fund pensions still exempt until 1 March 2018
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Closing comments
THANK
YOU