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Regulatory paternalism farts in the face of the Constitution

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3 Aug 2011. We don't allow Government to dictate to us the finer details of how we should bring up our children, what our religious beliefs should be or how we should spend our money. So why should we be allowing the Minister of Finance to treat us like children and tell us how we should invest our money? Regulatory paternalism farts in the face of the South African Constitution, which encourages "the advancement of human rights and freedoms".

South Africans are less free

Since 1 April South Africans are less (economically) free. Take me for example. You see, my view is that the downside risk to South African equities seems greater then the risks associated with some overseas equities, and so I wanted to reduce risk by shifting money overseas. When I tried to do this to my retirement savings on the Allan Gray platform I got the following messages: "Your lump sum unit trust selection is not Regulation 28 compliant...The Minister of Finance recently introduced new investment regulations for retirement funds. These are guidelines that set, amongst other things, the maximum exposures that retirement fund savings may have to various asset classes, for example, 75% in equities, 25% in property and 25% foreign assets."

With all due respect, what right has the Minister of Finance to decide what I do with my money? And to add insult to injury, it's misguided paternalism - the guy's forcing me to make dumb investment decisions!

Regulation 28 achieves what it was trying to avoid

A founding provision of the South African Constitution is "the advancement of human rights and freedoms", so thinking that the Minister must have a good reason for legislating in the opposite direction, I read up the reasons for the Regulation 28 changes:

Absurdly, the new regulation has achieved precisely what it was trying to avoid!

No allowance for a sensible rebalancing

The even worse news is that according to Allan Gray, "If your investment account does not comply, and you have transacted on your account since 1 April 2011, you will need to rebalance your account before 31 December 2011". This means some investors are going to be forced to sell offshore assets before the end of the year (in one go), with a good chance that this occurs before they've appreciated to levels which justify this. This may cost them a lot of money! There's little allowance to wait till your investment matures, no allowance to shift slowly down to 25% in an orderly manner and take advantage of rand cost averaging - it's all or nothing, when you transact you've got to immediately shift all the way down to 25%.

A general principle of law-making is that it shouldn't punish actions made before the law came into effect. Yet, by forcing one to rebalance on transacting (all or nothing) and to rebalance by year-end (investment views typically might take 5 years to mature), people are not being allowed enough time and trading flexibility to manage themselves back into a compliant position in a sensible manner.

Regulators' actions speak louder than their words

The explanatory memorandum of the legislation makes this eminently sensible comment: "In making investment decisions, a retirement fund should be guided first and foremost by what is best for the fund and its members, and should invest accordingly; indeed what is enabled through the Regulation limits may not be in the best interests of each and every fund or member." Yet, my trustee tells me that when they applied for extensions they received no reply, and when they sounded out the roleplayers it was made clear that they wont budge on the 25% offshore limit. The regulators like to talk about allowing Funds to do what's best for members, but their actions demonstrate their disdain for those impacted by the legislation.

Regulators couldn't care less

I emailed Allan Gray and the Financial Services Board on the morning of the 31st July 2011, asking for their commentary, and got some feedback from Allan Gray on how they've tried to fight for members' interests. There was no response from the FSB.

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