Following the global financial crisis South Africa has seen numerous financial sector regulatory reforms. The regulatory reforms with an impact on investment funds, and more specifically collective investment schemes and hedge funds, are:

This article provides an overview of each of the reform initiatives.

On 23 February 2011 the South African government, through the National Treasury, released a policy document (A safe financial sector to serve South Africa (policy document)) outlining reform initiatives for the financial sector.

In the policy document the National Treasury recognises that South Africa needs a stable financial services sector that is accessible to all to promote sustainable economic growth and development. The financial services sector includes collective investment schemes and hedge funds that are supervised by the Financial Services Board (FSB). The policy document outlines the reform proposals emphasising:

A major policy shift is a move towards different agencies being given lead responsibility for key policy objectives. The main proposal is to separate prudential and market conduct regulation. To achieve this, the South African Reserve Bank (SARB) will be given lead responsibility for prudential regulation. The FSB will be given lead responsibility for consumer protection. As part of this reform, the mandate of the FSB will be expanded to include the market conduct of retail banking services.

The market conduct of collective investment schemes (CIS) will be supervised by the FSB and their prudential limits by the SARB.

The National Treasury will also encourage greater access to financial services through a number of initiatives. One of those initiatives, which has a direct impact on CIS relates to increasing competition in the provision of retirement benefits after retirement. Currently, there are two main types of retirement benefits available after retirement:

CIS companies can only offer living annuity products if they obtain a long-term insurance licence. According to the National Treasury, the licence requirement is burdensome as CIS companies only offer living annuities, which by definition do not offer any guarantee. The proposal is to enable CIS companies to offer living annuities without the need for a long-term insurance licence, which could open the market and foster competition.

Before the Collective Investment Schemes Act 2002 (CISCA) was enacted, a practice described as white labelling emerged with the CIS industry in South Africa. White labelling is the practice where a third party, who does not have the capacity or the intention to establish a CIS, requests a CIS manager to establish a portfolio in the name of the third party under the CIS manager's registered CIS.

On 4 November 2011 the FSB published Notice 778 of 2011 (Notice 778). Through Notice 778 the FSB wishes to closely regulate white labelling to protect investors' interests. The notice regulates third-party named portfolios by allowing two categories of arrangements:

The differentiation aims to allow financial services providers to attain the required level of skills and experience to be authorised as CIS managers. However, if the intention of the financial services provider is not to register as a CIS Manager, the CIS Manager, who remains ultimately responsible for the portfolio, must connect its name to the portfolio. Portfolio sizes will be regulated to ensure viable sizes.

The prudential limits for pension fund investment in South Africa are issued under the Pension Funds Act 1958 (under Regulation 28). Pension fund investments in hedge funds were not previously specifically provided for in Regulation 28. Hedge fund investments were accommodated in a narrow 2.5% slice reserved for other assets (such as private equity funds).

On 4 March 2011 the FSB published an amended Regulation 28 which came into effect on 1 July 2011. Under the revised Regulation 28, pension funds can invest a portion of their assets in a hedge fund. Pension funds can invest up to 10% of assets in hedge funds both in and outside South Africa. However, further limits apply to the 10%, as follows:

The change will result in hedge funds becoming an attractive investment alternative for pension funds. It is also anticipated that the change will result in an increase in the number of assets managed by hedge funds.

The regulatory changes to date provide evidence of progressive reform that will result in the growth of the South African investment funds industry. The changes are in addition to the exchange control relaxation announced by the National Treasury in December 2010, where the National Treasury announced a 5% point increase in the limit to the percentage amount that institutional investors can invest offshore. Consequently, a CIS can invest up to 35% of its assets offshore (previously the limit was 30%). It is anticipated that further regulatory reforms, which may affect investment funds, will be initiated flowing from the policy document.