OF COLLECTIVE INVESTMENTS
Response to submissions around the Draft Taxation Laws Amendment Bill, 2008
The Association of Collective Investments welcomes the intentions set out in the Draft Taxation Laws Amendment Bill, 2008 and chose not to comment at the time. as it believed that the draft fairly set out the proposed changes which in many instances were designed to level playing fields.
In particular we welcome the proposed clarity around the definition and status of living annuities, and the resultant effect of levelling the playing fields for providers of living annuities.
It was thus with concern that we noticed some of the submissions comments on the parliamentary site after the initial hearings on 5 March 2008, which indicated that despite the initial support for a level playing field, the industries concerned were still of the view that a long term insurance licence would need to be required as well.
The benefits highlighted by these organizations of the long term licence was that it offers compulsory portability, tax free status and capital adequacy. One submission goes further to say -Although banks and collective investment scheme management companies are well regulated, their regulation is not focussed on the provision of living annuities". However, the Collective Investment Schemes regulation is focussed on the provision of unitised investments - of which the living annuity is merely an extension.
A further submission indicates that similarly that they believe that a life licence should also be required in order to bring the providers under the current practice notes and long term insurance Registrar's directives.
Both these submissions seem to assume that National Treasury do not wish to level the playing field and that in fact the Long Term Insurance Act has additional benefits that other sets of legislation may not provide.
The purpose of levelling playing fields is to ensure that the same rules apply to all participating. There is no evidence to the contrary to indicate that this is not the intention of this draft amendment.
Compulsory portability already occurs between life annuities and living annuities. There is nothing to suggest that providers such as managers of collective investment schemes are not able to meet the requirements. The tax free portability is conferred through the Income Tax Act. And banks and collective investment schemes have requirements for capital adequacy set in their respective sets of legislation.
In addition the collective investment schemes environment, by way of example, offers additional investor safeguards which have served South African investors well recently. Products run under this licence are not held by the provider themselves but by an independent trustee, offering additional protection to clients. This was evident in the last two years if we consider the Ovation case, when assets held in other structures were accessed by individuals purporting to act in the name of the company concerned. The collective investment assets were not able to be accessed thanks to the independent trustee principle.
Collective investment schemes also offer daily pricing and reconciliation of all assets - again a safeguard for clients that their money is where it should be. The independent trustees are all from the larger banking community, again adding additional safety measures.
It is unclear why these submissions see the need for the additional life licence to be added to product structures that already offer similar and in many cases better protection. All that can arise from this is additional cost to the client, in terms of requiring two structures on the living annuity. One of the submissions indicates that there is no need for this levelling of the playing fields, as many companies have applied for long term insurance licences already. Certainly some of the bigger collective investment scheme managers have done this, as they have been prepared to carry the additional costs of the life licence, but it has been a barrier to entry .
There is no doubt that there may be a few additional practical requirements that will need to be put in place to effect some of the living annuity rules within the other legal environments. We would support a centralised regulatory regime, perhaps within the Pension Funds Act. We agree that the right place for this is not necessarily within directives issued by the Registrar of Long Term insurers or regulations issued by the Registrar of Collective Investment Schemes, although this is a viable option if a centralised solution to living annuity specific rules cannot be established. Ultimately the living annuity is a unitised product - it therefore seems incongruous to have the rules pertaining to them exclusively in the Long term insurance environment.
In the final synopsis the question has to be asked whether the client has been considered. In our view, the draft amendment has done this, by simplifying legislation, creating a level playing field and a more cost effective solution.