Issue: March 2012 / May 2012
Editorials

FINANCIAL REGULATION

When fines aren’t fine

Legal opinion challenges punitive actions of the FSB enforcement committee. Regulator’s interpretation of a Pension Fund Act provision is disputed.

It might be less painful to pay fines imposed by Financial Services Board than to contest them, for there’s unknown risk in antagonising the regulator. But what if, in law, the regulator is plain wrong?

This isn’t then a matter only of the amounts paid in fines. There’s also the matter of reputation because the FSB publishes the identities of the offending parties and the penalties imposed, implying guilt admitted or proven. Add to these the chances of succeeding in claims for recompense, of reverting to business as previously (relating to the minimum amount of working capital that must be held) and to deterring the FSB from proceeding against others.

Admissions of guilt don’t necessarily confirm that the FSB is correct in its interpretation of the Pension Fund Act’s s13B, by which the fines were levied on a host of asset managers (see box). The payment of fines, without objection, merely indicates that the asset managers have been poorly advised or taken the course of least resistance.

However, If asset managers have been wrongly penalised and are having to adapt their pension-fund administration businesses in terms of a law being wrongly applied, they shouldn’t be taking it lying down. At the least they should try to sort it out over a quiet coffee at the FSB rather than an imbroglio though the courts.

Francisco Khoza, a partner at law firm Bowman Gilfillan, insists that the FSB is wrong. He argues:

In recent months a number of asset managers, which manage the assets of pension funds subject to regulation in terms of the Pension Funds Act (PFA’), have been fined by the FSB enforcement committee for their alleged non-compliance with s13B of the PFA.

Many are ‘discretionary asset managers’ in that they manage pension fund assets in terms of mandates which confer on them the discretion to decide which assets to buy or sell on behalf of a fund and when to buy or sell them.

Section 13B(1) says: ‘No person shall administer on behalf of a pension fund the investments of such a pension fund, or the disposition of benefits provided for in the rules of the fund, unless the registrar has in a particular case or in general granted approval thereto and the person complies with such conditions as the registrar may from time to time determine in the particular case or in general.’ [Emphasis added]

The allegations against the unfortunate asset managers were either that they had rendered asset-management services without first being ‘approved’ by the registrar of pension funds or that they had not complied with the capital adequacy conditions for such approval.

It seems that, none of them resisted the enforcement committee proceedings. This may have been because they believed that s13B of the PFA was applicable to them or because the FSB had threatened to ‘name and shame’ them, with a loss of client confidence the result.

Unfortunately, even those who have not resisted the enforcement committee proceedings have been ‘named and shamed’ in the media. This is unjust, particularly as in our view s13B is not applicable to them.

Discretionary asset managers are ‘financial services providers’ as contemplated in the Financial Advisory & Intermediary Services Act (FAIS). They are subject to regulation in terms of it.

The PFA does not define what is meant by the word ‘administer’ when used in the context of s13B’s reference to the investments of a retirement fund. To establish its meaning in this context, it is necessary to consider the circumstances under which it was inserted into the PFA.

Khoza . . . legal challenge

Khoza . . . legal challenge

Before either s13B was inserted into the PFA in 1996 or FAIS was enacted in 2002, discretionary asset managers were subject to regulation in terms of the 1989 Financial Markets Control Act (‘FMCA’). This Act gave the registrar of financial markets (who was simultaneously the registrar of pension funds) the power to determine conditions with which asset managers had to comply before they could provide asset management services to investors - including pension funds.

So it was not necessary to give him the power in different legislation to do the same thing. It is a principle of statutory interpretation that legislation must be assumed to have a purpose.

In this case, the purpose for which Parliament inserted s13B into the PFA must have been to regulate the conduct of pension fund administrators and those providing non-discretionary investment administration services, not discretionary asset managers. After all, in the Explanatory Memorandum that accompanied the relevant bill to Parliament, the Minister of Finance said only: “Clause 20 [of the bill] makes provision for the registration of persons who administer pension funds.”.

Asset managers themselves do not regard themselves as ‘investment administrators’. That term, some suggest, refers to providers of non-discretionary investment administration services such as the operation of investment administration systems, investment accounting, reporting and payment functions, compliance monitoring, ‘unitisation’ and ‘re-balancing’ services.

Unfortunately, the registrar of pension funds in his Information Circular PF 3 of 2010 expressed the view that s13B governed providers of both discretionary and non-discretionary investmentrelated services. The registrar’s interpretation of s13B is incorrect. That so many asset managers have accepted it without careful consideration has cost them dearly.

It has also exposed some of them to additional legal risk because their lawyers advised that, if they complied with s13B of the PFA, they did not have to comply with FAIS. Such advice, too, is incorrect.

Section 45(1) of FAIS makes it clear that the legislature did not intend that there be regulation of the same financial service in terms of two statutes. It provides that FAIS does not apply to:

  • Any ‘authorised user’, ‘clearing house’, ‘central securities depository’ or ‘participant’ as defined in s1 of the 2002 Securities Services Act;
  • A ‘manager’ of a collective investment scheme as contemplated in s1 of the 2002 Collective Investment Schemes Control Act (i.e. a person authorised in terms of this Act ‘to administer a collective investment scheme’);
  • A person who has been accredited by the registrar of medical schemes in terms of 58 of the 1998 Medical Schemes Act to ‘administer’ a medical scheme, if it complies with the requirements contemplated in this Act, or
  • a ‘person performing the functions referred to in s13B (of the PFA) if such person complies with the requirements and conditions contemplated in that section’.

WHO’S BEEN HIT

According to the FSB’s website, administrative penalties have been paid for contraventions of s13B by

  • Old Mutual Trust: R27 500
  • Mlanzo Asset Management: R10 350
  • Grant Thornton Capital: R23 756
  • Prescient Investment Management: R19 300
  • ABSA Investment Management: R170 720
  • Blue Ink Institutional Investments: R42 166
  • Leroko Metier Capital Growth: R70 000
  • Sanlam Trust: R36 585
  • Hermes Asset Management: R10 000
  • Foord Asset Management: R10 000
  • Colourfield Liability Solutions: R158 455
  • Pan African Asset Management: R30 888

This list is in descending order from the most recent in December to the earliest in March last year.

Its application is also excluded from others, to the extent that the rendering of financial services is regulated by or under those Acts.

According to the Explanatory Memorandum that accompanied the FAIS bill to Parliament, the purpose of these exemptions was “to prevent unnecessary overlapping and duplication in regulation”. It’s inconceivable for Parliament to have intended that s13B regulate discretionary asset management services provided to pension funds, and that FAIS regulate the same services insofar as they are provided to other investors such as medical schemes, insurers and collective investment schemes.

According to the Explanatory Memorandum that accompanied the FAIS bill to Parliament, the purpose of these exemptions was “to prevent unnecessary overlapping and duplication in regulation”. It’s inconceivable for Parliament to have intended that s13B regulate discretionary asset management services provided to pension funds, and that FAIS regulate the same services insofar as they are provided to other investors such as medical schemes, insurers and collective investment schemes.

REGULATOR COMMENTS

Jurgen Boyd, deputy executive officer of the FSB, says:

The debate revolves around a difference between the Registrar’s Office and Mr Khoza (and other employment-benefit practitioners) in the interpretation of “administration”.

Notwithstanding this legal stand-off, the Registrar of Pension Funds concedes that dual regulation and supervision is not ideal. As a consequence, a decision has been taken by the Registrar to delegate to the FAIS Registrar the regulation and supervision of investment managers who manage pension-fund assets.

It is anticipated that this will come into effect when the revised condition in respect of s13B administrations are gazetted towards end-February 2012.