ASSOCIATION
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.