The retail distribution review (RDR) has been undertaken against the background of an approach to regulating market conduct in the financial sector. The RDR is linked to the Financial Sector Regulation Bill (or otherwise known as the Twin Peaks Model to Financial Regulation) tabled before parliament on 27 October 2015.

Despite the FSB specifically stating that the RDR is retail investor focused and it does not intend affecting investment managers, it has proposed far reaching changes to the current legislative landscape for investment managers (financial service advisers) platforming off registered collective investment scheme managers (CIS Mancos).

Proposal Z of the RDR states that as a general standard the outsourcing of product supplier functions or investment management functions or activities to financial advisers will be prohibited. The RDR specifically states that this proposal will prohibit CIS Mancos from outsourcing investment management to an “authorised agent” as defined in the Collective Investment Scheme Control Act 2002.

Currently board notice 778 of 2011 regulates co-named portfolios and states that a co-named portfolio must bear the name of both the investment manager and the CIS Manco. If proposal Z is implemented in its present form all co-named portfolios in South Africa will be prohibited. There are currently 1388 collective investment schemes in securities in South Africa. 542 are co-named portfolios according to the list of approved collective investment schemes in securities published on 31 October 2015.

The FSB has stated that it has refined its views.

Last week the FSB released a status update on the RDR (Phase 1). This document provides an update on the FSB’s current thinking in relation to various proposals made, including proposal Z.

The FSB remains of the view that allowing product suppliers to outsource aspects of their business to financial service advisers, and remunerating them for such outsourced activities, creates an inherent conflict between the duties the adviser owes to the product supplier as agent under the outsourcing arrangement and the duties it owes to customers when advising them on the supplier’s financial products.

Nevertheless the FSB has stated that it has refined its views on the types of activities that may be outsourced and instead of introducing an outright prohibition of co-named portfolios, standards to address conflicts in relation to the outsourcing of the investment management function will be introduced in subsequent updates of the RDR.

Co-named portfolios therefore appear to be safe for the time being, albeit we may have a more regulated environment in the future. The standards applicable to co-named portfolios are expected to be introduced by July 2016.