This article goes into detail about how the Citadel Group (the Group) keeps your wealth safe, using the regulatory and other protections that apply to investments placed with Citadel Investment Services (Pty) Ltd (Citadel), its associated companies and its related entities. As a Group, Citadel operates in a highly regulated environment across all its licenced jurisdictions.
A. What procedures and controls are in place to ensure safe custody and protection of investments?
The article deals separately with the companies within the Citadel Group, namely Citadel Investment Services (Pty) Ltd, Peregrine Administration Services (Pty) Ltd, Peregrine Life Limited and Citadel Global (Pty) Ltd, and covers various financial products, such as collective investment scheme portfolios, listed securities and investment policies.
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Citadel
Citadel is an authorised financial services provider (FSP) and is licensed and regulated in terms of the Financial Advisory and Intermediary Services Act (FAIS Act). All money and assets managed by Citadel, for and on behalf of clients, are held separately from the assets of Citadel and do not form part of the Citadel balance sheet. The FAIS Act’s General Code of Conduct for Authorised Financial Services Providers (the General Code) specifically regulates the custody of funds and provides that:
- When Citadel receives funds into safe custody without the mediation of a bank, Citadel must, on receipt of the money, issue a written confirmation of receipt of these funds (note, however, that Citadel does not allow for the receipt of funds in this way, in terms of its business rules).
- Citadel is obliged to take reasonable steps to ensure that client funds are adequately safeguarded.
- Citadel is obliged to open and maintain a separate bank account, designated for client funds and must, amongst other things, ensure that the separate account only contains funds of clients and not those of Citadel.
- Citadel must take reasonable steps to ensure that client funds are readily discernible from Citadel’s private assets or funds.
1.1 What insurance cover is in place?
The General Code further obliges Citadel to implement an appropriate risk management strategy to eliminate, as far as reasonably possible, financial loss through, amongst others, theft, fraud and poor administration. To provide comfort to clients, Citadel must, to the extent required by the Financial Sector Conduct Authority (FSCA), maintain suitable guarantees or professional indemnity cover or fidelity insurance cover. The Group has adequate insurance cover for civil liability and crime, well in excess of the prescribed minimum.
1.2 Does Citadel keep separate accounts where Citadel holds funds on behalf of clients?
In terms of section 19(3) of the FAIS Act, Citadel is obliged to maintain records of money and assets held on behalf of clients. Citadel must submit a report by its external auditors to the FSCA, confirming the amount of money and assets held by Citadel at year-end on behalf of clients and that such money and assets were throughout the financial year kept separate from those of the business of Citadel. As Citadel is obliged in terms of the General Code to maintain a separate account containing only client funds, Citadel holds such funds in trust on behalf of clients and such funds constitute “trust property” as contemplated in the Financial Institutions (Protection of Funds) Act No. 28 of 2001.
1.3 What does the Financial Institutions (Protection of Funds) Act require?
This Act clearly states that notwithstanding anything to the contrary in any law or common law, trust property that is invested, held, kept in safe custody, controlled or administered by a financial institution may under no circumstances form part of the financial institution’s assets or funds. This would apply (amongst others) to South African FSPs, collective investment scheme managers, insurers, banks, custodians and nominee companies.
1.4 Protection of clients’ investments when invested in a collective investment scheme
Clients’ investments are not held on Citadel’s balance sheet and are held in the client’s name or in the name of a regulated custodian or nominee company. Should a client make an investment in a collective investment scheme portfolio through an administrative financial services provider, also known as a linked investment services provider or LISP, a nominee company will hold the investment on behalf of and for the benefit of the client so as to separate a client’s assets from those of the LISP. The collective investment scheme portfolio itself will have a trustee/custodian (usually a financial institution such as a bank) and the trustee/custodian will hold the assets of the portfolio in trust for the portfolio.
1.5 Insolvency
If either the collective investment scheme management company or the financial institution/custodian/nominee were to be declared insolvent, then client funds would not form part of the assets of the insolvent entity. The court will appoint a curator/liquidator to manage the insolvent entity and deal with its assets. The curator/liquidator will also ensure that clients’ funds do not form part of the insolvent entity and that the interests of our clients are safeguarded.
1.6 Private Client share portfolios
Citadel’s Private Client share portfolios include local and global portfolios of listed securities. In all cases highly regulated entities will be used by Citadel, such as authorised users of the relevant stock exchange and regulated custodians.
- Peregrine Administration Services (PTY) LTD
The administrative financial services provider that we generally use is Peregrine Administration Services (Pty) Ltd (PAS).
2.1 What is PAS?
PAS has been licensed in terms of the FAIS Act and has been authorised by the FSCA to conduct the business of an administrative FSP.
As an administrative FSP, PAS is required to comply with the provisions of the FAIS Act and with certain codes of conduct made under that Act.
2.2 What controls are in place to protect money paid to PAS for investment?
All monies paid to PAS in respect of discretionary investments are paid into a trust bank account opened by PAS which can be in South Africa or offshore. The operation of this trust bank account is in terms of and subject to the General Code.
2.3 In whose name will my investments be held?
All discretionary investments made by clients are held in the name of a nominee company called Peregrine Solutions Nominees (Pty) Ltd (PSN). This ensures that clients’ investments (local and offshore) are kept separate from the assets of PAS.
2.4 What is the role of Peregrine Solutions Nominees?
Peregrine Solutions Nominees acts as an independent custodian and has been approved by the FSCA for this purpose. The role of Peregrine Solutions Nominees is to hold investments in trust on behalf of clients and to ensure that PAS has appropriate controls in place and is keeping proper records of clients’ investments. Peregrine Solutions Nominees is required to report to the FSCA on an annual basis regarding PAS’ record keeping.
The directors of Peregrine Solutions Nominees meet regularly with PAS’s management staff and are entitled to ask PAS for any information that they may require to carry out their duties.
2.5 How can I be sure that Peregrine Solutions Nominees will carry out its role objectively?
More than 50% of the directors of Peregrine Solutions Nominees are required to be completely independent of PAS and of the Group of companies. Peregrine Solutions Nominees has the necessary independent directors. Annually, the nominee company is required to submit a report in terms of the FAIS regulations, attesting that PAS has procedures in place to ensure proper reconciliation of the number of investments held in its name and reflected in PAS’ records and that this takes place on an ongoing basis.
2.6 What controls are in place to ensure that my investments will be safe with Peregrine Solutions Nominees?
Clients’ investments are held in trust by Peregrine Solutions Nominees and do not belong to PAS. These investments are beneficially owned by clients and are therefore protected from creditors of Peregrine Solutions Nominees, should there be any. In addition, Peregrine Solutions Nominees is prevented by its memorandum of incorporation from incurring any debts. PAS has undertaken to pay all the expenses of Peregrine Solutions Nominees and to be liable for any debts, should debts be incurred.
2.7 Is there any other independent check to ensure that PAS conducts its business in accordance with the law?
PAS and Peregrine Solutions Nominees are both subject to an annual external audit in terms of the provisions of the Companies Act of 2008.
2.8 How are investments protected against losses due to fraud and negligence?
The FAIS Act requires PAS to maintain fidelity and professional indemnity insurance. The adequacy of this insurance cover is reviewed on a regular basis in conjunction with the auditors.
2.9 What is PAS’ role in my retirement fund investments?
PAS is approved by the FSCA as an administrator of retirement funds. PAS has been appointed as fund administrator by The Preferred Pension Preservation Fund, The Preferred Provident Preservation Fund and The Preferred Retirement Annuity Fund.
2.10 What is the legal status of these retirement funds and how are these funds regulated?
These funds are separate legal entities registered under the Pension Funds Act of 1956 and tax approved under the Income Tax Act of 1962. The FSCA is responsible for regulating these funds.
2.11 What controls are in place to ensure that the retirement funds are managed in the interest of members?
The funds are managed and controlled by a fund board (often referred to as a board of trustees) which must have at least four board members. Each fund has two board members who are completely independent from PAS and the Group. Each board member has a legal duty to ensure that the fund is properly managed and that he/she acts with good faith, care and diligence in his/her role. The fund board meets regularly with PAS’ management staff and is entitled to ask PAS for any information that it may require to carry out its duties.
The retirement funds also have an independent Principal Officer who is responsible for ensuring that the funds operate within the legislative framework and that the governance of the funds is compliant with regulatory requirements.
2.12 Are retirement fund monies and investments kept separate from PAS assets?
Any money paid to these funds must be paid into a bank account in the fund’s name, and all investments are held in the fund’s name. Therefore, there is a clear separation of fund money and investments from PAS’ assets.
2.13 Is there any other independent check to ensure that the retirement fund business is conducted in accordance with the law?
The retirement funds are required to submit detailed audited annual financial statements to the FSCA.
PAS, in its capacity as an administrator of retirement funds is required to annually submit an external auditor’s report. The auditor is required, inter alia, to report on compliance with the provisions of the Pension Funds Act and the regulations and conditions made under that Act as well as on the financial condition of the administrator.
In addition, PAS, as an administrator of retirement funds, must submit an annual report to the FSCA on various prescribed aspects of its administration of retirement funds.
2.14 How are retirement fund members protected against losses due to fraud and negligence?
In addition to the other measures described above, the funds maintain insurance cover against civil liability and crime. PAS, as administrator, also maintains such insurance cover. The amount of this cover is determined in consultation with PAS’ auditors.
2.15 How are my insurance products administered by PAS protected?
This includes living annuity, endowment and sinking fund policies. Please refer to the section on Peregrine Life Limited (Peregrine Life) below. While policies issued by both Peregrine Life and Momentum Metropolitan Limited (MML) may be used, the principles pertaining to the risks at Peregrine Life and MML in relation to these policies are similar, so much of what is said about Peregrine Life below is also relevant to MML policies.
2.16 What is PAS’ role in my investments in the Offshore Plan?
PAS administers the Offshore Plan on behalf of SBG Securities (Pty) Ltd (SBGS). SBGS is a financial services provider, licensed with the FSCA in terms of the FAIS Act to provide advice and render both discretionary and non-discretionary intermediary services. SBGS is also an authorised user in terms of the Financial Markets Act of 2012 and, in terms of the JSE Equities Rules made under that Act, and is authorised to perform trading services, investment services and custody services.
2.17 What controls are in place to protect money paid for investment into the Offshore Plan?
All monies paid to Citadel in respect of investments are paid into a trust bank account. The operation of this trust bank account is in terms of and subject to the General Code. In terms of the General Code these monies must be held separately from the assets of Citadel and PAS. These monies are, therefore, protected from Citadel’s and PAS’ creditors.
2.18 In whose name will my investments be held in the Offshore Plan?
All investments made by clients in the Citadel Offshore Plan will be held in the name of SBGS or SBGS’s nominee. This ensures that clients’ investments are kept separate from PAS’ assets.
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Peregrine Lifez
Peregrine Life commenced operating in 2000 and was established to offer investment products to clients of the Group. It provides pure investment, rather than risk-related, products. It also offers an effective means for investors to obtain offshore exposure through its offshore investment capacity as an institutional investor. In 2021, Peregrine Life established a branch in Guernsey.
3.1 Licensing of Peregrine Life
Peregrine Life is licensed by the Prudential Authority (PA) under the Insurance Act, No.18 of 2017, to underwrite linked insurance obligations under insurance policies which offer no guarantees. Peregrine Life is licensed to offer the following types of policies:
- Individual investment – Linked (endowment and sinking fund policies)
- Income drawdown linked (living annuities) which are compulsory annuities, where the value of the policy is linked to the underlying investments
- Fund Investment – linked policies issued to retirement funds (fund policies).
The value of a linked policy is always equal to the value of its particular underlying investments. Peregrine Life does not guarantee the returns on linked policies and is not allowed to conduct any risk insurance business. Therefore, it is not exposed to the risks inherent in products that require underwriting, such as life assurance and disability policies.
3.2 Licensing of Peregrine Life’s Guernsey branch
Peregrine Life’s Guernsey branch is licensed by the Guernsey Financial Services Commission under the Insurance Business (Bailiwick of Guernsey) Law 2002 to carry on long-term insurance business. The branch also only issues linked investment policies, which offer no guarantees.
3.3 How are policyholder investments protected?
Policyholder investments form part of the Peregrine Life balance sheet, and the Company is highly regulated to provide extensive investor protection. Peregrine Life is required to keep its business in a financially sound position and submit detailed statutory returns to the PA. The Company maintains civil liability and crime insurance cover and is subject to an annual audit in terms of the provisions of the Companies Act of 2008.
All policyholder investments form part of the Peregrine Life balance sheet. However, a second layer of protection is offered to holders of Peregrine Life Guernsey Branch policies. Peregrine Life is required to appoint a Guernsey based independent trustee to hold and safeguard assets representing at least 90% of its Guernsey Branch policyholder liabilities. Peregrine Life’s Guernsey Branch has appointed Zedra Trust Company (Guernsey) Limited (Zedra Trust) to hold 100% of such assets in trust. Zedra Trust is licensed by the Guernsey Financial Services Commission. The reason for the independent trustee requirement is to ensure that policyholder assets are not placed at risk in the unlikely event of an insurer in Guernsey not being able to meet its policyholder liabilities. Further nominees and custodians are appointed by Zedra Trust.
3.4 Capital and solvency requirements in South Africa and Guernsey
Peregrine Life and its Guernsey branch comply with all statutory capital requirements both in South Africa and Guernsey, to ensure operational viability with regards to policyholder funds.
3.5 How are my South African Peregrine Life policies, administered by PAS, protected?
PAS acts as binder holder and administrator for Peregrine Life. These activities are regulated by the PA and the FSCA. All monies paid for the purchase of the policies (premiums) are paid into a trust bank account and all investments underlying them are held in the name of Peregrine Life or a nominee or custodian appointed by Peregrine Life. Such monies and investments are, therefore, separated from those of PAS.
Peregrine Life (and PAS on its behalf) must also comply with the Policyholder Protection Rules and Regulations, which apply under the Long-term Insurance Act and are supervised by FSCA. The Policyholder Protection Rules and regulations include information that must be provided to policyholders to ensure full disclosure and fair treatment of policyholders. PAS makes these disclosures on behalf of Peregrine Life.
3.6 How are the Guernsey branch policies administered by PAS protected?
Both PAS and Peregrine Guernsey Limited are appointed as binder holders for Peregrine Life Guernsey branch business to perform functions on behalf of Peregrine Life Limited. PAS acts as administrator for the policies. Premiums will be paid to the Guernsey Branch, and the account will be held in the name of Zedra Trust for the benefit of Peregrine Life. As explained above, policyholder assets are also held by Zedra Trust.
3.7 Scrutiny of Peregrine Life
In addition to scrutiny by Peregrine Life’s audit committee and its external auditors, Peregrine Life also has an independent actuary, appointed as the head of the actuarial function. The head of the actuarial function is responsible for expressing an opinion to the board of directors on the reliability and adequacy of the calculations of Peregrine Life’s capital requirements, as well as on the appropriateness of various policies adopted by the board. The valuation of Peregrine Life’s financial soundness is completed quarterly and certifies that the shareholders’ funds exceed the capital adequacy requirements (which are calculated according to the requirements set out in Prudential Standards issued under the Insurance Act). Peregrine Life is required to submit quarterly statements to the PA, which include asset details relating to policyholders’ investments. Peregrine Life annually provides the PA with an audited regulatory return, which contains a detailed analysis of the assets, liability and financial soundness of the Company. Monthly reports, including a liquidity and cash flow forecast, are also submitted. The PA performs on-site visits from time to time to ensure that Peregrine Life’s practices, procedures, documentation and record-keeping are satisfactory.
3.8 Just Lifetime Income Portfolio
Peregrine Life has entered into an arrangement with Just Retirement Life (South Africa) Limited (Just), a licensed insurer and authorised FSP and the provider of Just Lifetime Income. Just is regulated by the Prudential Authority for solvency purposes. In terms of this arrangement, an annuitant who has purchased a living annuity policy from Peregrine Life may instruct Peregrine Life to invest a portion of their living annuity into a reference portfolio in respect of Just Lifetime Income. Just Lifetime Income is a guaranteed annuity within the policy that pays a monthly income into the policy issued to the annuitant and underwritten by Peregrine Life.
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How do the OPES and elements investments work?
4.1 OPES
Overseas Trust and Pension OPES International Retirement & Savings Plan – South Africa (OPES) is a trust registered in Guernsey as an approved Pension, with Overseas Trust and Pension Limited (OTAP) as the appointed trustee. On receipt of contributions from clients, the funds become the property of OTAP, in their capacity as trustees of OPES, and OTAP, in turn, establishes a segregated sub-fund, under the trust and within its systems linked to each client. OTAP has appointed Citadel to manage the investments in each sub-fund, linked to the Citadel clients. The client’s claim to the assets from OTAP is via the application form (agreement) entered into between the client and OTAP directly but subject to the Rules of the Pension Plan.
4.2 Elements
- The Elements Corporate Pension Plan Defined Contribution Pension Scheme (Elements) is a pension plan available to companies and their employees and residents in various jurisdictions, including South Africa. OTAP is the appointed trustee of Elements. Within its systems and under the trust, OTAP creates a sub-fund for each employer and a member’s account for each participating employee of such employer. The members’ account reflects the contributions made on behalf of that employee, the investment return applicable to the contributions paid, less any expenses deducted by the OTAP.
4.3 How are assets in OPES and Elements protected?
Within both OPES and Elements, client assets belong to OTAP in its capacity as trustee once a contribution is made by such client. The client will have a claim against OTAP to the value of its contributions, adjusted by the investment return and applicable expenses, but subject to the rules of the Plan. OTAP segregates all client/employee assets from its own assets as well as from the assets of other clients/employees. With regard to Elements, assets in any employer sub-section fund are not capable of use for the benefit of any other employer sub-section. All the assets are registered in the name of a custodian and are, therefore, separate from the assets of Citadel or OTAP.
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Citadel Global
5.1 Role and licensing
Citadel Global (Pty) Ltd is a company in the Citadel group that offers foreign exchange and treasury solution services. Citadel Global is an authorised FSP and is regulated in terms of the FAIS Act. It is also approved by the South African Reserve Bank as a treasury outsourcing company. Citadel Global acts as an intermediary between clients and authorised dealers (banks) in transferring clients’ funds offshore.
5.2 In whose name are client funds held?
A client’s funds are held in a bank account in the client’s name. Client funds are therefore separate from those of Citadel Global and are protected from Citadel Global’s creditors.
5.3 What insurance cover is in place?
Citadel Global is covered under the Citadel group civil liability and crime insurance.
B. Other protections and controls, including further regulatory requirements, that apply to the Group entities
1. External auditors
All operational entities in the Group undergo an external audit. As indicated above, regulated entities are required to submit audited annual financial statements to the FSCA or the PA in the case of Peregrine Life. Deloitte has acted as auditor for the Group since 1 October 2016.
2. Independent audit of procedures around control and secure custody of investments
The procedures around control and secure custody of investments, as explained above, are subject to an external independent audit. Citadel also has an internal audit function which is independent from its operational functions.
3. Financial soundness requirements
Financial soundness requirements apply to FSPs, in terms of the FAIS Act. Both Citadel and PAS must comply with solvency, working capital, liquid assets and additional asset requirements. Early warning FSCA notification requirements also apply.
4. Cyber insurance
In addition to insurance against civil liability and crime, the Group has cyber insurance cover in place.
5. Does Citadel have off-balance sheet items?
Citadel currently has no off-balance sheet items. If you require any further information, you are welcome to phone Piet Swart, Citadel Financial Director, on 012 470 2544.
C. Scope of operations
- Are you satisfied that the investor base is sufficiently broad so as to ensure that Citadel is not vulnerable to the sudden withdrawal of a small number of large investors?
We are satisfied that the client base is sufficiently diversified not to be detrimentally affected should a group of large investors cancel their mandates. Citadel primarily deals with private clients, which makes us significantly less vulnerable to such a risk, than if we had large corporate clients.
- What would the effect on Citadel be if a large number of clients elected to disinvest, and consequently, what would the effect be on the remaining clients?z
Citadel derives income from the assets it manages on behalf of clients. A “run” would impact this income stream and, if sustained, could result in the business downsizing its staff complement. Citadel is, however, a well-capitalised business, and a run would have to be significant to have any effect. Our client retention rate is monitored and discussed on an ongoing basis.
Due to the fact that clients’ ultimate underlying investments are mostly listed securities and held for the benefit of the investor it would have little impact other than possibly affecting the market price of those securities.
