Selling Offshore Funds into South Africa
In this, the latest in our occasional series on global fund distribution, we will look at a few of the ways offshore funds can be sold into South Africa.
Registration for Retail Sale
One of the more widely used methods for distributing offshore funds to retail clients is registration with the Financial Services Board (FSB) for retail sale into South Africa. This is achieved under section 65 of the Collective Investment Schemes Control Act 45 of 2002 (CISCA) and in accordance with the Terms set out in Board Notice 257 of 2013. The latest couple of Guernsey funds to register did so in December 2017, and further funds are in the pipeline.
In order to qualify for South African registration, a foreign fund must have an investment policy which is consistent with the requirements set out under CISCA. CISCA has significantly more restrictive prudential requirements than many foreign regimes, for example under CISCA a fund may only use derivatives for limited hedging purposes. Funds may be required to incorporate specific restrictive wording into their offering documents before being able to register in South Africa.
Foreign funds registered for sale into South Africa must comply with the requirements of Board Notice 92 of 2014 (BN92). This covers advertising, marketing and information disclosure. Particularly there is the requirement for a Minimum Disclosure Document (MDD), similar to a Key Information Document (KID) as well as regular statements containing mandatory information. For foreign funds there are a couple of specific changes to BN92 under Board Notice 74 of 2015 – foreign funds do not need to publish daily prices in a South African newspaper; and the requirement for regular statements reduces from quarterly to semi-annual.
South African residents investing abroad in non-ZAR denominated funds will have to do so utilising funds they already hold outside South Africa or utilising their exchange control allowances.
South Africa operates exchange control regulations, which dictate how much and under what circumstances an individual can transfer money outside of South Africa. This applies to everyone who is considered South African tax resident.
The most commonly used allowance for investment is the ZAR 1 million foreign capital allowance. This is an annual allowance, and therefore investment can be made on a regular basis. This is an allowance due to all adults in South Africa and does not require a Tax Clearance Certificate for the individual transferring the money.
The other commonly used allowance is the ZAR 10 million investment allowance, which is another annual allowance available to individuals. In this case a tax clearance certificate can be obtained from the South African Revenue Service (SARS).
A married couple utilising both allowances could therefore transfer and invest up to ZAR 22 million annually. It is possible to exceed this amount, although specialist advice and assistance will be required to achieve this.
At the end of February 2018, the FSB and the South African Reserve Bank (SARB) announced that the offshore investment allowance for institutional investors increased from 25% to 30%, whilst this may not sound like a lot it represents many billions of Rand that may now be invested offshore rather than domestically.
The change has already been incorporated into Regulation 28 of the Pension Fund Act, meaning that South Africa pension schemes (the largest category of South African institutional investors) may already make use of the revised limit.
South African unit trusts, however, may not currently use the increased limits as the asset allocation limits for collective investment schemes are set via the Association for Savings & Investment SA (ASISA) fund classification standard. This is expected to change to the new standard as many South African retirement products utilise domestic unit trusts that comply with Regulation 28.
Offshore Life Products
Many countries allow life products to be used for investment purposes, and South Africa is no exception. Under the Long Term Insurance Act 52 of 1998 (LTIA) the only long-term insurance products that may be sold into South Africa must be those of a domestic South African life company. Therefore, any foreign life product must be offered by a foreign branch of a South African life company.
There are such branches established in offshore jurisdictions, such as Guernsey, and therefore this model is well known. Foreign funds are typically offered by the Offshore Life Branch, and such funds do not need to be registered under s65 of CISCA.
Rand-based Offshore Investing
There are many ways of investing offshore without going through exchange control, these include:
- Investing in a Rand-based unit trust whose mandate is to invest 100% into a foreign fund; the feeder fund ignores the typical limits on foreign investment
- Investing via an onshore life platform that lists Rand-based life “funds” that themselves invest fully into an offshore underlying fund
Global Fund Distribution into South Africa
Midshore Consulting can assist with the distribution of funds into many jurisdictions, including South Africa. For further information please contact us on firstname.lastname@example.org or see our dedicated Compass:Funds webpage.