The Financial Sector Conduct Authority (“the Authority”) issued FSCA Communication 7 of 2019 (PFA) (“the Communication”) on 12 December 2019 with the intention of addressing the existing conflict of interest relating to principal officers appointed on boards of funds, whilst also being employed by service providers.
The Communication has far-reaching impacts on various funds, specifically the Retail Umbrella Funds environment, as it is common practise that some Retail Umbrella Funds has a principal officer, which is simultaneously employed by the sponsor. These sponsors are traditionally within a group of companies that is related to the benefit administrator, which is deemed to be a service provider to a fund.
The Communication highlighted the following concern: “Directive PF No. 8 provides that principal officers are not permitted to accept any gratification which objectively viewed creates a conflict of interest with their fiduciary duty towards the fund in which they serve. Gratification is defined in Directive PF No. 8 as including “any office, status, honour, employment, contract of employment or services, any agreement to give employment or render services in any capacity…” This issue was set out in paragraph 3.8.4. of Guidance Notice 2 of 2018 published on 27 June 2018.
As such, the simultaneous employment of the principal officer by a service provider is impermissible and is also undesirable. The principal officer’s ability to comply with his/her duty to report on the activities of such service provider is likely to be impaired by virtue of their employment relationship with the service provider.”
Whilst this Communication was in all likelihood aimed at Retail Umbrella Funds, other funds are also impacted, such as sponsors and benefit administrators’ own personal pension or provident funds, as well as terminating funds.
Practical impacts of the Communication on funds
Directive PF No.8 was issued on 8 March 2018, and as such various funds are deemed to currently be non-compliant, however the Communication has afforded affected funds six months to regularise the appointment of the new principal officer. The communication is silent on the role of a deputy principal officer, however Directive PF No.8 does specifically mention a deputy principal officer as a key person, thus it would be expected that the Communication would extend to the role too.
The practical implications are however not as straight-forward, as for many of these principal officers, this is their primary role and in order to continue to serve as the principal officer on these funds, it would mean being employed directly by the fund.
If a principal officer is required to resign from a sponsor related entity (being a service provider to the fund), the repercussions for the individual would be the loss of company benefits, such as retirement and medical benefits.
The tax implications would also need to be considered, due to the fact that the fund would be required to pay the principal officer a monthly salary, it will result in further monthly taxation obligations (PAYE, SDL and UIF) for the fund.
The way forward
The Communication stated: “The Authority is aware that there are several funds that remain in contravention of section 7C(2)(c) of the Pension Funds Act and Directive PF No. 8 because their principal officers are in simultaneous employment with a service provider to the fund, which is usually the administrator or consultant firm. To ensure a principal officer’s independence, it is desirable that the principal officer is employed directly by the fund and is not in receipt of any type of prohibited gratification.
The Authority will be writing to those funds that have been identified to obtain an Enforceable Undertaking, in terms of section 151 of the Financial Sector Regulation Act, 2017 (“the FSR Act”), from the fund concerned and all relevant parties including the principal officer, to take remedial actions within a specified period of time in order to bring the fund into compliance.”
It is further advised that Funds and principal officers that are aware that they are or might be in breach of Directive PF No. 8 must approach the Authority as soon as possible if they have not yet been approached.
We anticipate that there will be resistance from affected funds, but further interactions with the Authority will be required to find a way forward, as funds do not want to risk losing experienced and qualified principal officers. However, in the interim where funds are signing off on their Annual Financial Statements, it would be a conservative approach to disclose this as non-compliance in the funds’ Schedules B and C (Statements of Responsibilities by the Board of Fund and Principal Officer), concluding that the corrective action is that the fund is engaging with the Authority and has six months from the Communication’s effective date, to rectify the non-compliance.