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Three New Decisions by EFSA Regulat

Three New Decisions by EFSA Regulating Investments by Private Insurance Funds
The Board of Directors of the Egyptian Financial Supervision Authority ("EFSA") recently issued three new and quite significant decisions concerning the supervision over the investment of savings held by private insurance funds (Decisions 99[1], 101[2], and 102[3] of 2015, published on EFSA Website, 6 September 2015) (the "Decisions "). The importance of these Decisions stems from the fact they they impact a considerable amount of money, as well as provide an opportunity for asset management companies. It is worth noting that - according to information published on the EFSA Website - private insurance funds in Egypt numbered 610 at the end of June 2014, with 4.5 million contributors, assets above 43 billion Egyptian Pounds, and investments close to 40 billion Egyptian Pounds.
The Legal Framework for Private Insurance Funds ("PIFs")
PIFs are saving pools which have independent legal personalities, boards of directors, and from which employees or members of a company, syndicate, association, or public authority derive insurance and pension benefits. They are regulated by an archaic legal framework, Law No. 54 of 1975 and its executive regulations, which are unsuitable for such an important component of the financial system, in view of its potential for raising savings and directing investments into the capital market. And in terms of supervision, PIFs are regulated and supervised by EFSA, in accordance with its own Law No. 10 of 2009, being the exclusive non-bank financial supervisor.
The New Decisions
The new Decisions did not alter neither the rules governing PIFs' establishment and licensing nor those pertaining to supervision thereon, all of which are stated in Law 54 of 1975 and its executive regulations. They provide, however, new guidelines in the following three subjects:
  • Managing investments by PIFs,
  • Governance over their boards of directors, and
  • Engagement with investment services companies.
Investment Management 
Decision No. 99 of 2015 considers PIFs with invested assets above LE one million subject to a higher standard of professional behavior and supervision. Accordingly it now requires them to either (1) hire a full time investment officer supported by suitable staff inside the PIF, or (2) engage a portfolio management company, licensed by EFSA in accordance with the provisions of the Capital Market Law No. 95 of 1995, to manage such investments. In addition the new Decree allowed PIFs with invested assets below that threshold to engage an investment officer or a portfolio management company if they so choose.
  1. Guidelines for Employing an Investment Officer
  • he / she must have a prior work experience of no less than ten years;
  • not be engaged with any other executive job, except if within the entity that established the PIF, and provided it is a bank or a financial institution;
  • have a clean criminal record.

The investment officer is then responsible for managing assets in accordance with the authorities accorded to him/ her by the PIF's board of directors, and within the limits imposed by the 1975 Law and its executive regulations, in addition to being bound by the guidelines stated in the new Decision.

  1. Conditions and Terms for Investment Management Companies 
  • the company must be licensed by EFSA to undertake portfolio management activities and not suspended from the same during the previous year;
  • it must have actually managed portfolios averaging no less that LE 200 million during the previous three years;
  • its management agreement must specify the director in charge of the portfolio, fees, term of the agreement, events of termination, investment guidelines, conflict of interest rules, and reporting requirements.

The Decision also determined the professional requirements by the company and required the PIF (board of directors) to deposit all securities owned by the PIF with a licensed custodian, and open a dedicated bank account, as well as follow up on the performance of the management company.

  1. Other Guidelines 

In addition to the above, the Decision banned the PIF from purchasing securities of companies in bankruptcy or under liquidation or those of companies established outside of Egypt except if listed with the Egyptian Exchange. In addition, it allowed investment in unlisted Egyptian securities only after undertaking research by an independent financial adviser. As to investment in bonds, this is only permitted for no less that (BBB -) rated papers.

Appointment of Investment Service Companies 
Decision No. 102 of 2015 states the terms upon which PIFs can choose - but are not obliged to - hire the services of investment services companies licensed by EFSA. These could then manage members' records, contributions, information dissemination, general assembly invitations, and other such tasks. The service company must, however, have been undertaking this activity for a year at least to qualify to engage with PIFs.
PIFs Governance Rules 
Finally, Decision No. 101 of 2015 obliged PIFs to apply a new set of governance rules prior to 31 December 2015. The new rules set out the details of undertaking internal audit functions, forming the Fund's board of directors, determining the frequency of its meetings, recording its minutes, form committees including audit and investment, preparing reports, holding general assembly meetings, appointing an independent auditor, and setting out rules for conflicts of interests.
Conclusion
Undoubtedly, the three Decisions provide an important addition in the supervisory framework applied by EFSA and set new defenses for protecting small savers' interests in one of the most important - but insufficiently recognized - investment vehicles. Moreover, requiring the hiring of professional investment managers represents a step forward in promoting professional standards in the capital markets, and an opportunity to improve the returns on long term savings. However, the Decisions should have been published in the Egyptian Gazette - as opposed to EFSA's website - in order to ensure that they're enforceable. In addition, they should have covered more details in the areas of conflict of interest and disclosure requirements.   [1] EFSA Board of Directors' Decision No.99/2015, Egyptian Gazette, Issue No. 233, 17 October 2015. [2] EFSA Board of Directors' Decision No.101/2015, Egyptian Gazette, Issue No. 233, 17 October 2015. [3] EFSA Board of Directors' Decision No.102/2015, Egyptian Gazette, Issue No. 235, 19 October 2015.
The Board of Directors of the Egyptian Financial Supervision Authority ("EFSA") recently issued three new and quite significant decisions concerning the supervision over the investment of savings held by private insurance funds (Decisions 99[1], 101[2], and 102[3] of 2015, published on EFSA Website, 6 September 2015) (the "Decisions "). The importance of these Decisions stems from the fact they they impact a considerable amount of money, as well as provide an opportunity for asset management companies. It is worth noting that - according to information published on the EFSA Website - private insurance funds in Egypt numbered 610 at the end of June 2014, with 4.5 million contributors, assets above 43 billion Egyptian Pounds, and investments close to 40 billion Egyptian Pounds.
The Legal Framework for Private Insurance Funds ("PIFs")
PIFs are saving pools which have independent legal personalities, boards of directors, and from which employees or members of a company, syndicate, association, or public authority derive insurance and pension benefits. They are regulated by an archaic legal framework, Law No. 54 of 1975 and its executive regulations, which are unsuitable for such an important component of the financial system, in view of its potential for raising savings and directing investments into the capital market. And in terms of supervision, PIFs are regulated and supervised by EFSA, in accordance with its own Law No. 10 of 2009, being the exclusive non-bank financial supervisor.
The New Decisions
The new Decisions did not alter neither the rules governing PIFs' establishment and licensing nor those pertaining to supervision thereon, all of which are stated in Law 54 of 1975 and its executive regulations. They provide, however, new guidelines in the following three subjects:
  • Managing investments by PIFs,
  • Governance over their boards of directors, and
  • Engagement with investment services companies.
Investment Management 
Decision No. 99 of 2015 considers PIFs with invested assets above LE one million subject to a higher standard of professional behavior and supervision. Accordingly it now requires them to either (1) hire a full time investment officer supported by suitable staff inside the PIF, or (2) engage a portfolio management company, licensed by EFSA in accordance with the provisions of the Capital Market Law No. 95 of 1995, to manage such investments. In addition the new Decree allowed PIFs with invested assets below that threshold to engage an investment officer or a portfolio management company if they so choose.
  1. Guidelines for Employing an Investment Officer
  • he / she must have a prior work experience of no less than ten years;
  • not be engaged with any other executive job, except if within the entity that established the PIF, and provided it is a bank or a financial institution;
  • have a clean criminal record.

The investment officer is then responsible for managing assets in accordance with the authorities accorded to him/ her by the PIF's board of directors, and within the limits imposed by the 1975 Law and its executive regulations, in addition to being bound by the guidelines stated in the new Decision.

  1. Conditions and Terms for Investment Management Companies 
  • the company must be licensed by EFSA to undertake portfolio management activities and not suspended from the same during the previous year;
  • it must have actually managed portfolios averaging no less that LE 200 million during the previous three years;
  • its management agreement must specify the director in charge of the portfolio, fees, term of the agreement, events of termination, investment guidelines, conflict of interest rules, and reporting requirements.

The Decision also determined the professional requirements by the company and required the PIF (board of directors) to deposit all securities owned by the PIF with a licensed custodian, and open a dedicated bank account, as well as follow up on the performance of the management company.

  1. Other Guidelines 

In addition to the above, the Decision banned the PIF from purchasing securities of companies in bankruptcy or under liquidation or those of companies established outside of Egypt except if listed with the Egyptian Exchange. In addition, it allowed investment in unlisted Egyptian securities only after undertaking research by an independent financial adviser. As to investment in bonds, this is only permitted for no less that (BBB -) rated papers.

Appointment of Investment Service Companies 
Decision No. 102 of 2015 states the terms upon which PIFs can choose - but are not obliged to - hire the services of investment services companies licensed by EFSA. These could then manage members' records, contributions, information dissemination, general assembly invitations, and other such tasks. The service company must, however, have been undertaking this activity for a year at least to qualify to engage with PIFs.
PIFs Governance Rules 
Finally, Decision No. 101 of 2015 obliged PIFs to apply a new set of governance rules prior to 31 December 2015. The new rules set out the details of undertaking internal audit functions, forming the Fund's board of directors, determining the frequency of its meetings, recording its minutes, form committees including audit and investment, preparing reports, holding general assembly meetings, appointing an independent auditor, and setting out rules for conflicts of interests.
Conclusion
Undoubtedly, the three Decisions provide an important addition in the supervisory framework applied by EFSA and set new defenses for protecting small savers' interests in one of the most important - but insufficiently recognized - investment vehicles. Moreover, requiring the hiring of professional investment managers represents a step forward in promoting professional standards in the capital markets, and an opportunity to improve the returns on long term savings. However, the Decisions should have been published in the Egyptian Gazette - as opposed to EFSA's website - in order to ensure that they're enforceable. In addition, they should have covered more details in the areas of conflict of interest and disclosure requirements.   [1] EFSA Board of Directors' Decision No.99/2015, Egyptian Gazette, Issue No. 233, 17 October 2015. [2] EFSA Board of Directors' Decision No.101/2015, Egyptian Gazette, Issue No. 233, 17 October 2015. [3] EFSA Board of Directors' Decision No.102/2015, Egyptian Gazette, Issue No. 235, 19 October 2015.