Regulation in South Africa may slow asset manager growth

In South Africa’s developing asset management industry, new regulations threaten to put a brake on revenue growth, according to local asset managers. While the country’s managers are growing far faster than those in developed markets, a raft of regulatory changes associated largely with local pension fund reforms and enhanced investor protection threaten to stifle the pace of expansion.

In the PwC Strategic and Emerging Issues in South Africa Asset Management Survey 2012, asset managers forecast annual fee revenue growth of 10.6% in 2012, increasing to 12.4% in 2015. Yet respondents identified compliance and regulatory issues, as well as lack of skilled resources and competitiveness of existing products as the main challenges to this expansion.

As in other parts of the world, the country’s asset managers have to contend with increasingly tight regulation following the financial crisis. Among other regulatory changes, the government has revised Regulation 28 of the Pensions Fund Act, and is introducing Solvency and Assessment Management data requirements, and Treating Customers Fairly (TCF) reforms. Compliance will require significant resources and our respondents view this as a threat to growth.

Our inaugural state-of-the-industry survey, the first of its kind in South Africa, shows an industry growing against a background of uncertainty. In addition to the challenges already mentioned, the managing directors and senior executives we interviewed at 13 asset management firms and the Public Investment Corporation viewed the fragile global economy, low savings culture and customers’ negative attitudes to asset management as significant challenges.

Regulation stifles

Asset managers are not alone in facing challenges from new regulation. Survey participants believe that the incoming ‘twin peaks’ approach to regulating financial services– split into prudential matters and conduct of business matters – will have the desired effect of strengthening consumer protection, improving market conduct and financial integrity, and promoting better internal governance. But, turning to their own interests, they didn’t think it would enhance access to asset management services, cut the cost and complexity of compliance, or reduce systemic risk.

Most participants predicted a further substantial increase in regulation over the next three years. On top of the range of reforms already mentioned, asset managers are getting to grips with reforms of the distribution system and qualification of investment advisors. Taken together with the low savings culture and the proposed introduction of the National Social Security Fund (NSSF), new regulations are making future growth less certain.

We found that most of the executives we spoke with agreed that regulation stifles growth (62%) and slows the pace of international expansion (69%). More positively, they took the view that new hedge fund legislation would enhance investor protection (62%). But they disagreed that regulation levelled the playing field and would help institutions to achieve growth targets.

Turning to the introduction of the NSSF, which is intended to encourage more people to save for retirement at an earlier age, several of our participants believed that its introduction could cause the demise of a number of smaller asset managers. They also anticipated that the NSSF may lead to consolidation among asset managers.

By contrast, most executives viewed the TCF proposals more positively. But some were anxious about the associated costs. Generally speaking, they believed that the largest asset managers would be best placed to absorb the costs of regulation.

When it comes to distribution, asset management companies predicted major changes in the nature and delivery of financial advice over the next five years. They recognised that imperatives such as retirement planning, along with the volatility of the global financial crisis, underscored the need for quality advice.

Healthy market environment

Looking to the state of South Africa’s asset management industry, our respondents generally concluded that it was in good health. They identified the following strengths: A high level of skilled professionals; a group of 10 to 12 strong leading firms; a sound regulatory environment with good governance; a steady supply of small, innovative entrants.

But several factors – including excessive government intervention and the lack of a savings culture – clouded the picture somewhat. Other issues included an oversupply of asset managers, due to low barriers to entry, causing industry fragmentation; a thin future pipeline of talented portfolio managers; inadequate investment in brand development by the larger players.

Main risks

Unsurprisingly, asset managers thought a decline in investment performance posed the greatest risk to profitability. They linked unsatisfactory investment performance to the second most important risk, which was not being able to manage client expectations. Skills shortages and the regulatory environment were also seen as important risks.

Staffing trends

Following the international trend towards using remuneration to encourage long-term investment decisions, several respondents had amended their remuneration structures by adding deferred components. But none of the participants had changed remuneration packages following the European Union Capital Requirements Directive or other recent developments.

Participants identified portfolio management, executive directors and non-executive directors as the three most difficult areas for sourcing talent. These were followed by compliance, risk management and IT.

Rising strategic issues

The asset managers we spoke to identified three common strategic objectives: superior investment performance; building strong distribution relationships and geographic expansion.

More than half of them agreed that political issues would influence South Africa’s asset management industry. They thought that joint ventures would play a part in future expansion. But most didn’t expect to dispose of businesses or to engage in mergers and acquisitions.

What’s more, most believed that South African asset managers should take advantage of opportunities to expand into the rest of Africa. India and South America were ranked ahead of China as attractive destinations for expansion, while they regarded the European and US developed markets as least attractive. But asset managers named a number of obstacles to investing in the rest of Africa, including regulatory restrictions, political interference and a lack of local portfolio management skills. Another difficulty was thought to be the appearance of previously unexpected costs.

More than half of asset managers said they were not interested in greater investment into funds or products backed by infrastructure development. Only two participants said they had not given full consideration to the Code for Responsible Investment in South Africa.

Our respondents expected technological improvements over the next three years to reflect the increased use of smart phones and tablets. They cited mobile technology as playing an important part in client service in the future. But they also expressed worries about the availability of 4G and data security.


In conclusion, South Africa’s asset management industry still has growth prospects that exceed those in developed markets and even appear set to improve. Yet firms must overcome emerging difficulties in order to fulfil their growth potential. New regulations are increasing complexity, while customers have mounting expectations for speed and simplicity in an increasingly mobile internet environment, and risk awareness is becoming more important.

Overall, our survey carries a clear message that asset managers need to have strategies not only for growth, but also for coping with these challenges, if they’re to make the most of their opportunities in South Africa and other African markets.