SEC Reforms for the Fund Management Industry

Click to edit Master title style Emerging Issues & Key Reforms in the Fund Management Industry 5th June, 2018 La Palm Royal Beach Hotel Time: 9am 1

Table of Contents 2  Executive summary  Overview of the Fund Management sector  Funds Under Management  Seven-year market growth data  Nature of Emerging Risks  Proposed Reforms  Limitations on Investments of client funds  Approval Requirements for related party transactions (Proposed)  Cessations of Fixed Term Investments  Market Innovations  Conclusions

Executive Summary 3  AUM has grown significantly over the past 7 years from GHS 981m in 2010 to GHS 34bn at March 2018  Similarly, the number of Fund Managers (FMs) have increased from 51 to 148 within the same period Significant growth over the years  FMs have gone outside their mandate by promising fixed interest rates*  FMs have also undertaken large exposures in related parties  This has led to numerous complaints from investors due to inability of FMs to redeem investments upon maturity Business Models  A new Act, the Securities Industry Act, 2016 (Act 929) has been passed to strengthen the regulatory environment  As a result, new guidelines are being implemented to protect investors and raise the integrity bar Stronger oversight, monitoring, development and supervision Among other restrictions, there is now a cap on investments with  a single bank, & a single specialized deposit taking institution  a single unlisted issuer, unlisted equities and unlisted bonds  related parties (RPs) and a detailed definition on RPs Permissible Activities *Not a permissible activity

Click to edit Master title style Overview of the Fund Management sector 4

Funds Under Management 5 FUM End December, 2017 GHS Billion End March, 2018 GHS Billion % Change % Pension 7.21 8.12 12.66% CIS 2.17 2.61 20.64% Others 21.69 23.68 9.19% Total 31.06 34.42 10.80%

Trend of Selected Market Operators for 7–year period 6 2010 2011 2012 2013 2014 2015 2016 2017 Q1 2018 % Growth between 2010 & 2017 Fund Managers 51 58 68 87 103 129 147 157 148 208 CIS (Mutual Funds & Unit Trusts) 24 26 32 35 42 46 53 121 Listed Equities 35 34 35 35 36 3 Broker -Dealers 22 23 22 23 5 Custodians 9 12 17 18 17 17 18 89 Primary Dealers 0 0 14 15 15 16 12 17 17 21 Trustees 3 4 5 6 100 Registrars 4 3 4 0 Issuing House 0 0 1 2 2 100

Nature of Emerging Risks in the Fund Management sector Inability of certain Fund Managers to honor redemption requests on Fixed Deposits issued 7 Increasing incidence of Related Party Investments with limited accountability and performance issues

Complaints Received (Cumulative) Complaints Resolved (Cumulative) Outstanding (Cumulative) End Sept 2017 105 23 82 End Dec 2017 121 26 95 End Mar 2018 255 41 214 8 Increasing Complaints Non payment of redempti on request 97% ISSUES REPORTED IN COMPLAINTS (April 2018) 97% of complaints related to non￾payment of fixed-rate & term contracts. Value of complaints was GHS 243m as at April 2018 These complaints represent 3.7% of affected firms’ AUM (16% when two outliers are removed from data set). These managers are likely to face difficulties honoring upcoming maturities.

Related Party & Concentrated Investments Category of Related Party & Concentrated Investments No of Firms Involved Placement Related party investments 7 >65% of their FUM Single Sector Exposure 5 >66% of their FUM Funds placed with Fund Managers 9 >14% of total FUM Individuals 9 >0.07 of total FUM Microfinance, Savings and loans 11 >50% of their FUM SMEs and others 4 >38% of their FUM 9

Click to edit Master title style Proposed Reforms and Draft Guidelines for Fund Managers 10

Asset classes for investment of client funds  Proprietary funds  Discretionary and  Non-discretionary  Collective investment schemes Mandate of Fund Managers  Capital market instruments  Money market instruments  Alternative investments Assets Classes for investments  Banks and Specialised Deposit Taking Institutions Act, 2016 (Act 930)  Securities Industry Act, 2016 (Act 929)  Insurance Act, 2016 (Act 724)  Non-Bank Financial Institutions Act, 2008 (Act 774) Funds can only be placed with Institutions licensed under… A Fund Manager, prior to investing in a Commercial Paper (CP) shall refer to Guidelines on CP issued by the Commission to ensure compliance

Limitations on Investment of Client Funds  ≤ 15% of AUM with related parties as follows: o ≤ 10% of AUM where related party is a bank o ≤ 5% of AUM in all other related parties Investment with Related Parties  ≤ 10% of AUM in a single bank as fixed deposit  ≤ 5% of AUM in a single SDTI as fixed deposit  ≤ 20% of AUM in unlisted equities and bonds  ≤ 5% of AUM in a single unlisted issuer Banks, Specialised Deposit-Taking Institutions (SDTIs), Non-Bank Financial Institutions Act(NBFI’s) & Others  No Investment is allowed in Microfinance Institution & Rural and Community Banks unless… … its fully secured by Gov’t T’bills or FD with a Bank or insurance cover by licensed insurer Additional Restrictions An FM shall not invest any of its AUM with another FM except where the investment is in a CIS or listed securities of the FM

Approval of related party transactions  Related party investments (RPI) shall be reviewed by a board committee (BC) and recommended to the board of the fund manager for approval prior to the investment being made. Board Subcommittee to review for board approval  combination of independent non-executive directors and executive directors.  One independent non-executive director shall be appointed as Chairman of the committee Composition of Board Subcommittee  The BC shall ensure that they have access to, enough knowledge or expertise to assess the proposed RPI  The BC shall obtain appropriate professional and expert advice where necessary from a qualified person. Adequate information, resources and expertise A director of an FM who has an interest in a related party investment being considered for approval shall not: (a) be present while the matter is being considered at the meeting and (b) vote on the matter

No more Fixed Deposit issuance by FMs 14  Section 6(1) of The Banks and specialized Deposit-Taking Institutions Act, 2016 states that … …A person shall not accept a deposit from the general public or carry deposit-taking business in or from within the country without a license issued in accordance with the Act.  Thus, FMs are not allowed to do fixed deposit as indicated.  FDs founds are to be refunded on maturity or migrated. Fund Managers Should Not Issue Fixed Deposits Baseline Data due by June 30 Firms with FDs have up to December 31st to unwind SEC conducts inspections and undertakes enforcement in event of breaches

Mandatory & Reported Client Segmentation Fund Manager Retail Clients Regular Retail (< GHS 100K) CIS only High Net Worth Retail (> GHS 100k) CIS and Separate Accounts Clear investment mandate Institutional Clients Corporates, Pension Trustees, Endowments, Investment clubs that have clear investment mandates/membership rules 15

Increased Focus on Governance of Collective Investment Schemes 16 Staff Quality (CPDs) Liquidity management Risk management Disclosure of information (investment universe, investment strategy) Communication with clients (prospecting and maintaining) Asset allocation Investment Committee meetings Expense ratio management Related party investments Complaints resolution Shareholder/Unitholder Meetings Accounts (Audited)

Innovations in Collective Investment Schemes 17 Umbrella Funds Fund of Funds Feeder Funds Fintech & Payment solutions

Next Steps Provide Baseline Data as at 31/05/18 to SEC Migrate Funds Restructure with investment destination/banks Rollover into CIS/Separately Managed Accounts Return Client Funds at maturity 18 • Six-month window for compliance

1. Client List
2. Type of Client (Retail Regular, Retail HNW, Institutional)
3. Maturity date of fixed term investment
4. Value of fixed term investment
5. Proportion of AUM
6. Third party institutions funds invested with 30th June 2018 31st December 2018

Conclusions • We expect strong cooperation from you as we implement these reforms • We are creating investor education materials that inform that of what a fund manager is allowed to do and what they are not allowed to do. • Our education drive will be nationwide, and we expect industry players to also support and carry our educational message in order to strengthen industry standards. • We will also be enforcing the requirements of our governing law, our guidelines and best practices as prescribed by industry standards and operating manuals. 19