Finance minister Tito Mboweni. Picture:SUNDAY TIMES/ESA ALEXANDER
Finance minister Tito Mboweni. Picture:SUNDAY TIMES/ESA ALEXANDER

An embarrassing lack of co-ordination between the Treasury, the Reserve Bank and the financial services industry watchdog, the Financial Sector Conduct Authority (FSCA), was on display this week.

The Treasury issued a statement on Tuesday saying it had suspended a circular over proposed changes in capital markets that were interpreted as an effective removal of exchange controls on investment products.  

The purpose of the changes was to allow the bourse operator, the JSE Ltd, to classify foreign instruments such as debt, derivatives and exchange traded funds as domestic provided they are traded in rand as it already does with equities.

The intention of the changes is rightly rooted in SA’s concerted efforts to attract foreign investments and turn the JSE, already one of the world’s deepest capital markets, into Africa’s financial hub. 

But within weeks of the circular being issued to the market it became clear the Treasury did not thoroughly consider the unintended consequences of the legislation or that it was open to misinterpretation.  

The legislation gave the impression that funds could now sidestep the rules limiting allocations of retirement savings to certain asset classes and the extent to which they can invest offshore.   

Under those rules, also called the Regulation 28 of the Pension Fund Act, the Treasury wants to ensure that workers’ hard-earned savings are invested in a sensible way and protected from poorly diversified portfolios. 

Broadly, a compliant fund can invest as much as 75% of an investor’s retirement savings in shares, a maximum of 30% in foreign assets, a cap of 10% exposure on the rest of Africa instruments, and up to 25% in real estate.   

Rather than effectively removing exchange controls on foreign assets, credited by many as among the main factors that helped SA banks and insurers escape the 2008 financial crisis unscathed, the Treasury was ambiguously trying to blur the lines between inwardly listed foreign equities and other instruments such as debt and exchange traded funds. 

But it failed to make it clear that pension funds will still be required to comply with prudential requirements applicable to their investments, sowing confusion on whether an investor could now invest their money in all inwardly listed foreign instruments such as debt and exchange traded funds. Some have already marketed their funds as such.  

The JSE already treats equities as domestic assets under the so-called inward listing, which allows investors to gain exposure to foreign companies without hitting their exchange control limits.  

Essentially, South Africans can freely hold inwardly listed foreign shares without restrictions. By the same logic, funds that have long been complaining that the restrictions on other foreign assets stifled their ability to maximise client returns figured they could track locally listed international indices such as the S&P 500 without breaching the 30% limit. 

It is easy to see why investors thought Christmas had come early. Over the last few years the JSE has underperformed global markets as companies at home grapple with an economy wallowing in recession. 

A looser exchange controls policy could have possibly allowed investors at home to fully take part in supersonic rallies by technology companies such as Amazon, Facebook, Google and Tesla.  

Aside the ambiguity in the capital markets reform circular in October, it is still nonetheless a welcome step increasing market capitalisation and liquidity in SA’s capital market, and crucially, in attracting foreign investments — which is at the heart of President Cyril Ramaphosa’s stalling plan to enlist the private sector in the infrastructure investment-led economic recovery.

However, it is disappointing for pension fund investors that the second iteration of the legislation is likely to explicitly state that their choices about how much gets invested at home or globally and where pension funds are invested have not changed much. 

The lessons here are for the FSCA, the Reserve Bank and the Treasury to talk to one another and think things through when one of them is crafting overlapping regulations.   


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