Issue: September/November 2008


Unlucky lisps

The FSB has notched a notable victory in the Supreme Court of Appeal. Trustees of pension funds should carefully examine the judgment, particularly if they deal with linked-investment service providers.

Try to find practical answers for these apparent paradoxes:

  • Where an asset manager or fund administrator is placed under curatorship, to protect the property of fund members, the property of these members is depleted by the very action that seeks to protect it. This arises from members effectively having to pay the costs of curatorship;
  • Investors’ money in nominee accounts is protected as “trust property”. In a liquidation, protection of the trust property is sacrosanct. Under a curatorship, the protection can be compromised;
  • Should curators apply a moratorium on the assets of a pension fund, whose manager is under curatorship, trustees of the pension fund cannot then comply with the Income Tax Act and the fund’s rules on the payout to members of minimum benefits.

In dismissing the appeal by three pension funds against certain terms of an order that placed Ovation Global Investment Services (Ovation Services) under curatorship, the Supreme Court of Appeal has provided the answers but sharpened the paradoxes. Previously, the Financial Services Board had successfully applied for the curatorship order to the Cape High Court. The pension funds went on appeal, contending that the lower court had restricted their rights in ways that the Financial Institutions Act did not authorise (TT March-May ’08).

Ovation Services is a linked-investment service provider, known as a lisp. Typically with a lisp, investments are channelled through nominee companies so that the lisp can function. The lisp invests moneys on behalf of clients in various investment schemes and financial products, with a variety of financial institutions, achieving for clients the benefits of aggregation and providing them with records of their respective investments.

The curatorship of Ovation Services followed, and was caused by, the irregularities at the Common Cents and Fidentia asset managers, which had already been placed under curatorship. Some time ago, the three pension funds had contracted with Ovation Services to administer the pension funds’ assets. These assets were held through Ovation Nominees, owned by Ovation Services.

The pension funds viewed the terms of the Ovation Services curatorship order to be an unjustified interference with the funds’ ownership rights over their assets. They opposed the curators’ entitlement to restrict their rights both to disinvest and to pay members’ pension benefits, as well as the curators’ entitlement to defray curatorship costs from these assets.

It was undisputed that the pension funds’ assets were not assets of the Ovation companies. They were recognised as “trust property” by the Financial Institutions (Protection of Funds) Act, which says that “under no circumstances” does trust property form part of the property of a financial institution or a nominee company. Accordingly, argued the pension funds, their agreements with the Ovation companies remained in force. The curators could only manage the business of the Ovation companies, not touch the pension funds’ property or interfere with their operations.

But the SCA held that the Act was open-ended, extending a wide discretion to the court for crafting an appropriate curatorship order that met each individual case: “The order neither changes the nature of the trust assets held by the institution nor extinguishes the institution’s contractual rights and obligations, and certainly does not vest ownership of the trust assets in the institution.”

However, it noted, this did not mean that enjoyment of full ownership rights in the trust property would not be affected: “By its very nature, the order impacts upon the institution and, for the institution to be steered through a crisis, drastic steps might have to be taken even if they impinge on the rights of third parties.”

The SCA then turned to whether the curators could look to the pension funds’ trust property for defraying the curatorship costs. It had been argued by the pension funds that the FSB was responsible for whatever expenditure the institution under curatorship could not meet, particularly as the curator acts under FSB control. Also, only the FSB could put an institution under curatorship and the cost of curatorship was incidental to the FSB function of supervising compliance with laws that regulate financial institutions.

This argument was rejected. The FSB’s functions did not include the running of an institution under curatorship, said the court. Once the `FSB had appointed the curator, the curator administered the institution. The costs incurred in running it were a product of the curatorship and could not be construed as expenses incurred by the FSB in performance of its functions. A court could not order the FSB to bear these costs.

The curatorship was there to protect the property of investors, and the SCA could “see no reason why any person other than the persons in whose favour the curatorship was granted should bear any costs related thereto in the event of the institution’s funds being insufficient”.

When it came to the moratorium on payouts from the pension funds, the SCA noted that “drastic times require drastic measures”. It could “see no reason why an order authorising a restriction on disinvestment could not have been countenanced” or a flood of investors seeking to withdraw would threaten the very existence of the institution.

By similar reasoning, a court is entitled to place restrictions on the payment of benefits to members of the pension funds. “Even if the members are paid less than what they are entitled to receive, their contractual rights remain extant and are not extinguished by the order of curatorship, which will allow them to pay any unpaid balance after it has been lifted,” held the SCA. “In preserving the trust assets of an institution in financial distress, it might at times be necessary to place restrictions on an outflow of funds to avoid the institution’s demise.”

So wide-ranging are the implications of this judgment that the pension funds are considering an application for the Constitutional Court to overturn it.


The SCA judgment offers a feast for discussion among pension lawyers and fund trustees.
For instance:

  • It seeks to preserve the trust property of a financial institution in distress. Here, the institution in distress is the lisp under curatorship. It is not one of the three pension funds owning the trust property;
  • In so far as the judgment is based on equity, it has not looked at whether the fees being charged by the curators are reasonable. These fees, calculated on professional hourly rates, have averaged R575 000 a month for two curators (TT March-May ’08);
  • How trust property might be better protected: by making the Act less “open-ended” (to use a word in the judgment) to limit a court’s discretion, by no longer pooling investors’ property in nominee companies and instead holding pension funds’ property in pension funds’ own names, or perhaps by no longer using lisps as fund administrators;
  • Whether the judgment is open to constitutional challenge on grounds that “no law may permit arbitrary deprivation of property”;
  • How curatorships will be funded if not from trust property or from FSB levies.