The Financial Services Board (FSB) expects soon to adopt a new policy on the registration of white-label unit trust funds.
A committee that advises Dube Tshidi, the registrar of collective investment schemes and the chief executive of the FSB, is meeting to discuss recommendations on the registration of white-label funds at the end of this month.
Bert Chanetsa, the deputy executive officer of the FSB in charge of investment institutions, says once the committee finalises the recommendations, the FSB will make its policy public.
The FSB recently attempted unsuccessfully to stop Metropolitan Collective Investments from registering more white-label portfolios on behalf of smaller unregistered managers of collective investment schemes and large independent financial advisers.
Among local unit trust companies, Metropolitan has the largest number of white-label portfolios on its licence.
The FSB’s attempt to block Metropolitan from registering more white-label funds was stopped by the FSB’s Appeal Board, which found that the FSB’s concerns about Metropolitan’s actions were “without substance”.
The anticipated recommendations are likely, however, to tackle areas of concern.
The FSB is not opposed to white-label funds per se, Chanetsa says.
The FSB regards the practice of white-labelling unit trust portfolios as beneficial to smaller investment managers that one day will graduate to become fully fledged collective investment scheme managers in their own right, he says.
What concerns the FSB, Chanetsa says, is the ability of a collective investment scheme manager to properly ensure that the funds registered on its licence comply with collective investment scheme legislation.
The FSB, he says, is also concerned about investors becoming confused when parties that are not registered as collective investment scheme managers are seen and branded as collective investment scheme managers. The risk attached to this practice is, in the FSB’s view, untenable, he says.
An example is financial advisers who run broker funds. They are not registered collective investment scheme managers, although they must obtain a licence in terms of the Financial Advisory and Intermediary Services Act to manage investors’ money. Some of these broker funds have attracted criticism for poor performance and high fees (see “Some black marks against white-label funds”, below).
In 1999, the FSB’s unit trust advisory committee recommended that the registrar of collective investment schemes ensure that unit trust companies that register white-label portfolios do not allow the sale of their licences to become more important than the management of their own collective investment schemes.
In 2009, when Metropolitan applied for the registration of 16 more white-label portfolios, the registrar refused to grant its permission, in line with the advisory committee recommendation, on the grounds that Metropolitan was effectively renting out its licence.
The registrar said that Metropolitan had more white-label portfolios than funds of its own, and Metropolitan was “disabled” by the number of white-label portfolios it ran from carrying out its duties in relation to its own portfolios.
The FSB Appeal Board’s ruling sheds light on the registrar’s concerns, which were that:
* The number of Metropolitan’s white-label portfolios compromised its ability to perform its duties;
* Metropolitan had “denuded the obligations imposed on it by its licence”; and
* Metropolitan had outsourced the management of the white-label portfolios to JP Morgan Administration without making investors aware of this. There was an “unacceptable concentration of risk” and a risk of JP Morgan having conflicts of interests in managing competing portfolios.
Ultimately, the registrar’s decision was overturned by the FSB’s Appeal Board late last year. According to the ruling, the Appeal Board found that when Metropolitan applied for the registration of the 16 portfolios, its white-label portfolios already substantially outnumbered its own portfolios.
The Appeal Board said that when the FSB had initially registered Metropolitan’s white-label portfolios, the registrar had not had an adverse view of Metropolitan.
Furthermore, the ruling says, the registrar had not alleged that there had been any adverse change in Metropolitan’s business structure, methods, financial capacity or capacity to manage third-party funds from the time that its first white-label portfolio had been registered to its 2009 application.
Metropolitan, the ruling says, presented evidence that it has the capacity and the ability to fulfil its managerial obligations.
The Appeal Board also says that the registrar’s concerns about JP Morgan appear to be misplaced. It found that JP Morgan performs an asset administration function only: it implements the decisions made by the managers of the funds to buy and sell various assets (shares, bonds or other securities).
The Appeal Board found that the fact sheets of Metropolitan’s white-label portfolios did in fact contain all the relevant information.
According to the Appeal Board ruling therefore, there was “no substance” to the accusation that Metropolitan Collective Investments had “effectively shed its obligations and sold its licence”.
The registrar was ordered to consider the merits of each of Metropolitan’s 16 applications to register white-label portfolios and to register without delay the portfolios that had been approved.
According to Chanetsa, only one additional white-label portfolio has been approved since the ruling. Two existing white-label portfolios changed their names and were branded to new white-label managers, he says, while the rest of the applications were withdrawn by Metropolitan.
Robert Walton, the managing director of Metropolitan Collective Investments, says the portfolios that Metropolitan wanted were approved by the FSB, and some were withdrawn as a result of the time that had lapsed.
Investors are not affected by the number of portfolios that Metropolitan runs on its licence, because the company has more than adequate resources and skills, and achieves economies of scale, Walton says.
However, he agrees with the registrar that white-label portfolios should be monitored and well managed, but he believes that Metropolitan has such processes in place.
The Appeal Board ruling points out that Metropolitan is responsible for the investor administration, portfolio administration and portfolio compliance of its white-label funds. Should a white-label portfolio make any wrong investment decisions for which it can be held culpable, Metropolitan can be held liable.
Although Metropolitan has not been held liable for the actions of any white-label portfolios, Metropolitan Life has been held liable for losses at linked-investment services provider Ovation, which was using Metropolitan’s life licence.
Pensioners with annuities administered by Ovation suffered losses after money was stolen from a fund on the Ovation platform.
Metropolitan Life initially resisted paying close to R70 million to the pensioners, but it was forced to do so by court action taken by the curators of Ovation.
SOME BLACK MARKS AGAINST WHITE-LABEL FUNDS
Metropolitan hosts the largest number of white-label funds in South Africa – 145 of the 165 funds on Metropolitan’s collective investment scheme are white-label funds, Robert Walton, the managing director of Metropolitan Collective Investments, says. Some of these portfolios are managed by small, successful managers, such as Cannon and 36One.
The others are financial adviser, or broker, white-label portfolios. This year, one of them, the Dotport Stable Fund, won a Raging Bull Award for the top-performing domestic asset allocation prudential fund on a risk-adjusted basis over five years to the end of December last year.
However, a number of white-label portfolios can be found at the bottom of the unit trust performance tables and some have very high fees.
Financial advisers usually manage broker white-label portfolios to suit a particular risk profile. Advisers typically invest in other unit trust funds (that is, they manage a fund of funds).
Walton argues that Metropolitan has some good performers on its scheme and says their fees are in line with those charged by other companies’ funds of funds.
Broker funds have attracted criticism, because the advisers who run them earn a fee for the advice they provide to their clients and another fee as the manager of the portfolios in which clients are advised to invest.
Metropolitan also hosts portfolios managed by Dynamic Wealth and Avocado – financial services providers (FSPs) with which the Financial Services Board (FSB) has had issues.
The FSB is appealing against a court decision last year that denied its application to place Dynamic Wealth under curatorship for running investor clubs that the FSB alleged were in contravention of the Collective Investment Schemes Control Act.
Dynamic Wealth in turn is appealing against the FSB’s decision to withdraw its licence to operate as a FSP under the Financial Advisory and Intermediary Services Act, as well as the FSB’s decision to require Metropolitan to take over Dynamic Wealth’s white-label portfolios.
Avocado attracted the FSB’s attention after it was fined by the Association for Savings & Investments SA for encouraging intermediaries to churn retirement products.