‘The financial sector needs to do more to support the real economy. The sector has a vital role to play in the ongoing transformation of our society, and our desire to bring a better life to all of our people,’ wrote former Minister of Finance, Pravin Gordhan, in a February 2011 paper titled A Safer Financial Sector to Serve South Africa Better.

This was the first in a series of papers that Treasury has released, outlining proposed reforms to the financial services sector to make it more sound, stable and user-friendly. Notably, the proposed move to a ‘Twin Peaks’ model of financial regulation – where the prudential regulation of financial institutions is separated from the market conduct regulation of those same institutions – was summarised in this document.

Regulators are increasingly scrutinising the way financial institutions interact with consumers as well as their market conduct. These regulators follow the principles-based treating customers fairly (TCF) rules to evaluate various outcomes for clients. TCF is rooted in six outcomes, which firms need to show that they are meeting. These include ensuring that products perform as companies have led their customers to expect; that they are designed to meet the needs of identified client groups and are targeted accordingly; and that advice is suitable and takes the consumer’s circumstances into account.

TCF and all the pieces of regulation that work in conjunction with it are ultimately geared at creating a more vibrant and inclusive financial sector.

Fast-forward nearly four years since the release of Treasury’s first paper and a number of reforms are already taking shape in the savings and investments space. Among the most topical are retirement reforms, the retail distribution review (RDR) and tax-free savings accounts (TFSAs).

The retirement reform is, according to Treasury, aimed at encouraging employees to adequately prepare for retirement while ensuring that they receive value for money. Proper governance of the people and structures managing that money also needs to occur.

Proposals under retirement reform include reducing costs, making retirement savings compulsory for all formally employed South Africans, improving fund disclosure, removing advisor conflicts of interest created by remuneration structures, and making products portable between providers. Regrettably, the first phase of reforms, due to be implemented on 1 March 2015, has been postponed to 2017. These changes would have, among others, increased the tax deductions for contributions to retirement funds.

Beatrie Gouws, associate director at KPMG, says it is encouraging that although many proposed retirement reforms have not yet been detailed or implemented, costs are already being reduced in the industry, and disclosure and transparency are improving as these funds implement best practice.

Reforming the way that financial advice is delivered to Joe Public to stop the unfair treatment of unsuspecting consumers was explained in the November 2014 draft of the RDR. It proposes far-reaching changes to the way that retail financial products are distributed in SA.

‘When someone has a rainy day they can access these savings instead of dipping into their retirement pot’

BEATRIE GOUWS, ASSOCIATE DIRECTOR, KPMG

Among the changes is scrapping high upfront commissions, hidden fees and punitive penalty charges built into investment products, particularly in the retirement space.

The RDR proposes a raft of changes to financial advice models, including banning commission on investment products. Clients should be charged an advice fee instead, which must be explicitly disclosed to them.

By doing so, the Financial Services Board (FSB) hopes to prevent conflicts of interest where advisors become product pushers who chase commissions. Charging for advice on an as-and-when basis will also make it unjustifiable for product providers to penalise consumers – so that they can claw back earlier commissions paid to advisors – when they cancel a product or reduce a monthly contribution.

The industry has until 2 March 2015 to submit comments to the FSB, and implementation is expected in mid 2016. To sweeten the benefits of saving, tax-free savings accounts (TFSAs) will be introduced on 1 March 2015. These must be ‘simple to understand, transparent in their disclosure and suitable for the majority of individuals making use of such savings and investment products’, said Treasury in draft regulations for TFSAs.

All returns on the money an individual invests in TFSAs will be tax-free including interest, capital gains and dividends. Contributions to TFSAs will be limited to R30 000 a year and R500 000 over a lifetime. Any amount contributed in excess of R30 000 in a year will be taxed at 40% in that tax year.

Individuals can invest in more than one TFSA, but the same limit will apply. These accounts will include different underlying investments, from unit trusts and exchange traded funds (ETFs) to fixed deposits, bank savings accounts and retail savings bonds.

Banks, long-term insurance companies and unit-trust managers are all designing TFSAs within their existing product ecosystem. ‘The unit trust industry is excited about the opportunities TFSAs will offer investors,’ says senior legal advisor at Nedgroup Investments Denver Keswell.

‘Nedgroup Investments is exploring ways to accommodate existing unit-trust holders who want to benefit from a TFSA, as well as ensuring that our product structure for TFSAs will be in line with regulations imposed by the National Treasury.’

Restrictions imposed on TFSAs will make them more accessible to retail investors who are taking their first tentative step into the world of investing

Some restrictions imposed on TFSAs, including forbidding performance fees and excessive levels of market risk, will make them more accessible to retail investors who are taking their first tentative step into the world of investing.

Gouws suggests that TFSAs may encourage people to save more, knowing their money is accessible whenever they might need it.

‘TFSAs are complementary to retirement savings, because when someone has a rainy day they can access these savings instead of resigning and dipping into their retirement pot,’ she says.

No longer the preserve of the sophisticated and wealthy, investing has over the years become far more accessible so that reforms proposed by Treasury are already taking shape in the retail investing market. For instance, first-timers can start by investing just R300 monthly into a range of ETFs comprising a basket of securities that track different indices.

Satrix, for instance, offers a range of ETFs and unit trusts to cater to different investor needs. The first ETF to list in SA was the Satrix 40 in 2000, which tracks as closely as possible the performance of the 40 biggest companies by market capitalisation on the JSE’s All Share Index.

There are a host of other ETFs offered by a number of different fund managers. These can generally be accessed directly or via a linked investment service provider (LISP), which is an independent investment administration company that offers investors access to collective schemes across a number of different management firms.

‘There are risks to investing in the stock market but these can be reduced by investing in a portfolio of shares, which is what ETFs offer,’ says etfSA MD Mike Brown. He says that for stockbrokers to offer TFSAs, they will likely use ETFs to give investors access to listed securities. Investment platforms such as etfSA Investor Plan and LISPs will also offer ETF-based TFSAs.

When choosing which ETFs to invest in, Brown suggests comparing their performance over three, five and 10 years (where possible). ‘Don’t look at the last few months and pick what’s fashionable,’ he says. The lower cost of investing in ETFs makes a significant difference to long-term performance, so that these funds often outperform those that are actively managed, says Brown.

‘ETFs are easily accessible to anyone who is prepared to do a bit of homework.

‘We find first-time investors tend to pick one ETF, building their portfolio as their level of sophistication grows,’ he says.

Since each investor’s circumstances, savings goals, risk appetite and investment horizon are different, it’s worthwhile consulting an independent financial advisor who will be able to guide your investment strategy and process.

By Hanna Barry
Image: Andreas Eiselen/HSMimages