Exchanging control for freedom

Relaxation of strict exchange controls means greater financial freedom for the republic's investors, says David Lancaster. David Lancaster is a partner at Webber Wentzel Bowens.

Since 1961, South Africa has been subject to stringent exchange controls under the Exchange Control Regulations 1961. But on 1 July 1997 the republic introduced important relaxations to these restrictions.

Prior to this date, individuals resident in South Africa were prohibited from investing outside of the country. But from the beginning of July, South African residents were, for the first time since 1961, permitted to invest up to R200,000 outside of the republic.

Individuals who want to invest money outside South Africa must be over 18 and registered South African taxpayers of good standing. However, they still have to get exchange control approval to transfer their money before they can invest abroad.

In addition, South African companies can now, inter alia, transfer up to a maximum of R30m from South Africa to approved investments abroad.

It was initially anticipated that the relaxation of South Africa's exchange controls would have a significant effect on the outflow of capital from the country with an associated negative effect on the rand.

But contrary to expectations the rand declined only marginally after the relaxation of the exchange control regulations in July and there has recently been a slight increase in the inflow of capital into South Africa.

As a result of the relaxation of the exchange controls, a number of foreign investment and banking institutions have begun to market their services to South Africans.

The services on offer range from banking services to portfolio management services in foreign securities and financial instruments.

An increasing number of global investment funds, or unit trusts, established and managed in many disparate jurisdictions, have also begun marketing their funds to residents of South Africa.

Foreign competition in the financial arena has served as a wake-up call for the country's banks, unit trusts and portfolio managers.

As a result of the recent increase in foreign competition the regulators of South African financial institutions have been prompted to produce draft legislation which aims to control investment institutions that market their products to the South African public.

In addition the legislation proposes to subject foreign investment institutions to the same legislation that local investment institutions currently operate under, in an attempt to level the playing field.

A further aim of the proposed amendments is to protect the South African investing public from unauthorised investments institutions and to ensure that all investment institutions are subject to uniform restrictions.

The problem that has faced many legal advisers when advising on investments is the difficulty of interpreting South Africa's financial legislation, which was drafted in an era of economic isolation.

Much of the republic's financial legislation was drafted when its economy was isolated from international contact and competition and when the country's stringent exchange controls were an effective bar to foreign competition.

With the re-emergence of South Africa into the international arena and the relaxation of the country's exchange controls, it has become apparent that the remedial legislation which has been proposed is urgently needed to address the issue of foreign competition and the protection of the republic's investing public.

In particular, amendments to the Stock Exchanges Control Act 1985, the Financial Markets Control Act 1989 and the Unit Trusts Control Act 1981 have been suggested. It is expected, however, that the remedial legislation will be put into effect only in 1998.

There has been an increasing amount of work in the financial services area from overseas companies and investment institutions which are now marketing their products here and which are also setting up offices in South Africa.

Partly in response to this inflow of work Webber Wentzel Bowens has decided to open an office in Cape Town early in 1998 because the firm anticipates a growing niche market in financial services work in the region, where some of South Africa's largest life insurance and investment companies are located.