Through recent weeks of policy uncertainty we at 10X have been engaging with the various authorities behind the scenes to understand what is intended and how it will affect our clients. In a parallel process, we have been laying the groundwork so that alternative choices can be offered to our clients quickly should the legislative environment change.
There has been speculation about the lifting of limits on offshore holdings in retirement funds since Finance Minister Tito Mboweni announced changes to exchange control in October’s Medium Term Budget Policy Statement. These changes were given effect in the subsequent Exchange Control Circular 15/2020, issued by the South African Reserve Bank.
In effect, foreign referenced, locally listed ETFs (essentially ETFs on the JSE that track offshore indices) would now be deemed domestic for exchange control purposes.
This has significant implications for Regulation 28 asset class limits because Regulation 28 defers to the exchange control definition of foreign and domestic. Given the new definition, Regulation 28-compliant funds could effectively hold 100% of their funds offshore if the amount over and above the 30% limit was held via ETFs listed on the JSE.
The JSE presented the initial proposal to National Treasury and the Reserve Bank, and it was accepted. It appears that the Financial Sector Conduct Authority (FSCA), which regulates pension funds, was not consulted in the process.
So, while it was clear that one could now legally hold up to 100% “offshore” in pension funds, it wasn’t clear where the FSCA stood on this. A response to our early requests for comment was not immediately forthcoming, but it soon became clear that it was not the FSCA’s intention that the asset class limits in place should be impacted by the change in exchange control.
Following the announcement from the Reserve Bank, we at 10X had started working on solutions to ensure that we could provide our clients with the most appropriate solution in the case of relaxed offshore limits. However, based on feedback from the FSCA on what their intention was, it was deemed premature to start providing this type of product given that there was a high likelihood of regulatory changes and the closing of this “loophole”.
Today, National Treasury, the Reserve Bank and the FSCA released a joint statement suspending Exchange Control Circular 15/2020, given the unintended consequence for the prudential framework for regulated funds like pension funds. An updated circular will be published following a public consultation process. 10X will actively engage in the consultation process to ensure the best possible outcome for our clients.
