Regulation on foreign investments flouts the rule of law
Finance minister exceeded his powers with subregulation in Pension Funds Act
The finance minister, relying on powers provided in the Pension Funds Act, made a regulation in 2011 containing a subregulation that flagrantly violates the rule of law.
The 2011 regulation limits the extent to which pension funds may invest in specified categories of assets, whether domestic or foreign. However, this regulation included a subregulation that states that pension funds’ exposure to assets that are “deemed foreign” by the Reserve Bank must not exceed a maximum “determined” by the Bank — or other amount “prescribed” by the registrar of pension funds (then executive officer of what was the Financial Services Board).
In purporting to delegate to the Bank the power to limit the foreign asset investments of pension funds, the subregulation exceeds the minister’s powers and thus violates the rule of law. (The act empowers the minister to set limits in his regulations; it does not empower him to make a subregulation delegating his power to someone else.)
The subregulation moreover gives the Bank unfettered discretion to determine which assets are “deemed foreign”. This too violates the rule of law. Legal rules should not be determined by official discretion.
The minister’s subregulation is confusing and vague. It is confusing in that it gives two entities (the Bank and registrar) the power to limit pension funds’ foreign exposure, and vague in that it stipulates that foreign exposure must not exceed a maximum “determined” by the Bank, but without specifying how the Bank should arrive at that maximum. This is another violation of the rule of law, in that laws should be neither confusing nor vague.
Increased foreign portfolio limits
The confusion and vagueness are further illustrated by how pension funds’ maximum foreign exposure was later set in 2018. In his parliamentary budget speech, the minister announced a 5% increase in offshore allocation limits, not just for pension funds but for long-term insurers, collective investment scheme management companies and other institutional investors.
On the same day, the Bank’s financial surveillance department issued a circular notice of amendments to the Bank’s exchange control manual of conditions on which authorised dealers (banks) are permitted to acquire foreign currency for their clients. The amendments increased institutional investors’ permissible foreign investments (to 30% of retail assets under management in the case of pension funds).
From this it can be deduced that the Bank’s financial surveillance department did not determine an amount in terms of either the Pension Funds Act or its subregulation. It in fact increased foreign portfolio limits for pension funds in terms of exchange control regulations made under the Currency and Exchanges Act. The pension funds subregulation states that pension funds’ foreign exposure must not exceed a maximum determined by the Bank — or such “other amount” prescribed by the registrar. But the registrar did not prescribe such “other amount”. After the Bank’s exchange control circular, the Financial Services Board issued an “information circular” by the registrar stating that “based on” the Bank’s circular, retirement funds may “therefore now” acquire foreign investments up to 30%.
Misleading and incorrect
This violates the rule of law yet again. The registrar should not have presumed to determine a prudential pension fund foreign investment limit “based on” exchange control limits. The objectives of exchange controls and of prudential pension fund foreign investment rules differ fundamentally. A public authority must exercise his or her powers only for the purpose for which they were conferred. In the case of pension funds’ foreign investments, the registrar’s powers do not envisage merely mimicking the Bank’s exchange control limits.
In stating that pension funds’ foreign exposure must not exceed an amount determined by the Bank or such “other amount” as may be prescribed by the registrar, the subregulation also implies that the registrar may determine an amount that is more lenient than exchange controls would allow. This is misleading and incorrect, and another violation of the rule of law. If something is restricted under two statutes, the stricter statute will apply.
The 2017 Financial Sector Regulation Act (the “twin peaks” statute) enables the Financial Sector Conduct Authority — and, after three years, the Prudential Authority — to amend the 2011 pension funds regulations through further regulatory instruments now called “standards”. Such a standard may authorise the Bank or the authority to make “determinations” for the purposes of the “standard”.
This new statutory power of the Financial Sector Conduct Authority and Prudential Authority to make “standards” that amend the 2011 pension funds regulations and may authorise the authority to make “determinations”, did not retrospectively validate the defective 2011 subregulation, which without any statutory authority delegated to the Bank or registrar the power to determine or prescribe a limit to pension funds’ foreign exposure. (References to the registrar must now be taken as referring to the conduct authority.)
This defective subregulation is still on the books. If the conduct authority (or, in due course, the Prudential Authority) now considers that exchange controls are the only foreign asset exposure limits that should apply to pension funds and that a prudential limit is no longer required, the authority must issue a standard that revokes the subregulation and that thereby returns the pension funds regulations to the rule of law and to constitutionality.
• Moore is a lawyer and senior Free Market Foundation researcher. He writes in his personal capacity.