The Supreme Court of Appeal this week turned down an appeal by the trustees of the Ovation retirement funds aimed at preventing the curators of the beleaguered Ovation linked-investment services provider (Lisp) company from directly or indirectly using fund members' savings to pay the curators' costs.
The court determination has raised questions about the security of investors' money held by the Lisp and unit trust industries.
But Riaan van Dyk, the chairman of the Linked Investment Service Providers' Association (Lispa), says your money is not under threat.
However, Van Dyk concedes that the Ovation debacle has exposed weaknesses in the Lisp industry that need to be addressed.
Ovation was placed under curatorship by the High Court in 2006 after the Financial Services Board (FSB) discovered that Angus Cruikshank, Ovation's owner who later committed suicide, had stolen about R200 million of investors' money through an unlicensed money market fund, Common Cents. At the time, Ovation was in the process of being sold to Fidentia.
Security for investors
In their application to the Supreme Court, the trustees argued that unit trust, Lisp and retirement fund assets are held in trust under the control of trustees or custodians. This, the trustees said, is the security that investors are supposed to have against rogue companies.
If this security could be violated by anyone, including a court-appointed curator, the security provided by the independent custodian would be called into question.
Both the High Court and the Supreme Court of Appeal rejected the trustees' arguments.
"Although the Ovation situation is regrettable, the events of the past year do not imply that the Lisp business model is flawed," Van Dyk says.
"Lispa, together with the FSB and the curators, is nonetheless investigating ways in which we can further strengthen the regulatory framework and structures of Lisps."
Van Dyk says any Lisp that wishes to become an administrator of pension funds needs to be granted permission to do so by the Registrar of Pension Funds in terms of the Pension Funds Act. Lisps do not hold the assets of investors in their own names.
"In the case of pension funds, some Lisps hold the pension fund assets in the name of a nominee, and others hold pension fund assets in the name of the fund itself. The assets are not held by the Lisp.
"Where the assets are held in the name of a nominee, these nominees are regulated by the FSB.
"Nominee arrangements extend across the ambit of the financial services industry. Collective investment scheme assets are held by nominees. The very concept of a collective investment scheme requires that the assets be held collectively, and to suggest that because there is a risk that such a nominee may go into curatorship the entire structure is not appropriate, is not reasonable," Van Dyk says.
Retirement funds whose assets are held by a nominee company have two sets of watchdogs over those assets: the trustees of the fund and the directors of the nominee company. Both watchdogs have specific legal obligations, he says.
In the case of Ovation, it is not publicly known what enabled the investors' money to be stolen, particularly from the pension funds.
"The nominee company would have needed to enter into an agreement with the fund in terms of which the nominee held the fund's assets," Van Dyk says.
Unanswered questions
The questions that need to be answered about the Ovation debacle include whether:
- The nominee company complied with the legislation and the terms of the agreement that pertained to it;
- The fund's trustees monitored such compliance and what steps they took if non-compliance came to their attention;
- The directors of the nominee company carried out their statutory duties, which are aimed at ensuring that investors' interests are protected;
- The Lisp's compliance officer performed his or her duties adequately; and/or
- The FSB followed up adequately on any adverse statutory reports about Ovation.
Van Dyk says it can be assumed that the curators are aware of the core issues and failures that contributed to the breakdown in governance at Ovation, and that they will make recommendations to the FSB in due course.
"What needs to be looked at is whether the regulation around the nominee structures is adequate or if it can be improved.
"Lispa's initial view is that the legislation, which requires the nominee to be wholly owned by the Lisp, should be reviewed. Although the majority of directors must be independent of the Lisp, there could well be room for improvement.
"The nominee could be obliged to appoint 100 percent of its directors from persons who are independent of the Lisp; and possibly the requirement of ownership being by the Lisp is flawed."
Van Dyk says Lispa has formed a task team, which, with the assistance of an independent advocate, is researching the structures around the nominee arrangements pertaining to Lisps to assess where there is room for improvement.