February 28, 2024
Marketing Director
Unregulated private funds in South Africa are subject to significant change when the COFI law is passed, with fund managers encouraged to adopt digitalization across their reporting processes.
The private equity market in South Africa has seen some optimistic growth in recent years, despite the global pandemic and other factors such as the Ukraine-Russia conflict. New funding raised R19.6bn in 2022, (USD $1.01bn) a 21% increase on 2021, when fundraising globally was down 13% for the same period. The alternative investment scene is seen as a key part of South Africa’s growth across a range of industries, especially in energy, real estate and infrastructure. Also, Cape Town has become a popular destination for tech startups with many firms housing their headquarters in what has become dubbed the ‘Silicon valley of South Africa’.
It’s not been all good news however, as South Africa was greylisted by the Financial Action Task Force (FATF) in 2023 for money laundering and terrorist financing failings. This has an indirect consequence across financial dealings since it means more due diligence and financial scrutiny will be applied by investors, and, it means the country was added to the EU high-risk third countries list by the European Union.
Currently, private funds in South Africa (structured as limited liability partnerships) are typically not regulated. However, PE fund managers are subject to both the Financial Advisory and Intermediary Services Act and to the Financial Sector Conduct Authority (FSCA) (the Financial Sector Regulation Act). This arrangement is subject to considerable change with the advent of the COFI bill.
Drafted in 2018, the much anticipated COFI bill, in conjunction with the Financial Sector Regulators Act of 2017 (FSR Act), is designed to cover the entire financial services sector including administrators, pension funds and private equity funds. In a move that signals the FSCA’s goal to bring uniformed regulation across all financial institutions, private equity funds will require licensing – and, while specific details on this still are yet to be defined, the licensing obligation will be placed on the managers.
South Africa has the opportunity to join five other African nations who have previously been greylisted by FATF and then removed (such as Mauritius, Zimbabwe and Morocco). Although the COFI bill is not going to specifically alleviate the country’s money laundering or terrorist financing deficiencies, it will help repair the country’s reputation by consolidating and strengthening market conduct laws in the financial services industry. As part of package of reforms, the COFI bill aims to enhance disclosure requirements and provide greater visibility into business practices across all financial services – but if it’s to succeed then fund managers will need to adopt digitalization across their reporting processes to both clients and regulators.
When COFI is adopted into law (likely late 2024, also a general election year), all financial institutions will also be subject to reporting, record-keeping and audit obligations, underlying the need for a robust reporting solution that makes life easier when reporting deadlines loom.
With the SEC Private Fund Advisor ruling bringing stricter requirements in the US, could this regulation in South Africa be part of a global trend in improving investor transparency?
