Colombia: Developing Regulatory and Supervisory Framework for Collective Investment Schemes

Colombia: Developing Regulatory and Supervisory Framework for Collective Investment Schemes

 The project, which was initiated in August 2003, aimed to analyse the regulatory and supervisory framework for collective investment schemes (CIS) in Colombia and to make recommendations for reform or improvement.

Collective investment schemes are essentially methods for aggregating the savings of retail investors (i.e. those with relatively small amounts to save) in to larger funds. Large funds can make a spread of investments in many areas (could be in shares of quoted companies, bonds and other fixed income securities issued by companies, fixed interest securities issued by central government and so on). Such funds may be specialized in certain types of securities or they may be broadly based. The retail investor gains the potential advantages of accessing investment in securities which were non-accessible to them directly, participates in a diverse range of investments and thereby spreads risk, and gains the benefit of professional and experienced fund management.  The economy may benefit from the development of a CIS sector because the funds will stimulate growth in the capital markets. CIS may exist in the form of funds that any retail investor can invest in; these are analogous to mutual funds in the USA or unit trusts in the UK. There are other similar forms available in various jurisdictions.

Pension funds are very similar to mutual funds but are a type of CIS which is open only to members of a particular pension scheme; in other respects they are similar, in that typical pension scheme members are individually small savers and the pension funds are managed by professional fund managers. Pension funds need to take account of additional factors in determining the profile of their fund’s investments: the funds are to meet contractual obligations to pay retirement benefits to the scheme’s members, and therefore the pension fund has an ongoing liability to its members that falls due at indeterminate future dates. Pension funds need to periodically assess the future liability to pay retirement benefits against the value of the assets in the fund: such assessments need to take account of mortality trends and future performance requirements for the assets in the fund; such assessments are usually carried out by actuaries. Often this means that pension fund CIS tend to adopt a longer term investment profile and a more conservative risk profile.

Lessons Learned:

Regulators need to ensure that CIS schemes are managed by persons who are appropriate to the task; pursue prudent investment management policies; disclose their investment portfolio; in the case of pension funds assess the sufficiency of assets under management to meet future pension payments to retiring members; operate safe custody procedures for assets under management; maintain adequate controls against reckless management or fraud; report regularly to investors or pension scheme members; account and properly value assets under management; be appropriately audited (internally and externally).

The regulation and supervision of CIS can be complicated by the structure of the sector. CIS in the form of mutual funds may be quoted on the stock exchange; they may be independently managed by a stand-alone asset management company or they may be part of a financial group that includes banking or insurance; the CIS may be sold and distributed through brokers. Pension funds may be managed by stand-alone asset management that may or may not be on a company specific basis; they may be managed by insurance companies; they may have separate trustees that protect the interests of pension scheme members and deal with and hold to account the fund managers. As a consequence, CIS as a whole may not be regulated or supervised by one single regulator: for example, the mutual funds quoted on the stock exchange may be regulated by a capital markets regulator (Superintendencia de Valores in Colombia) and the pension funds may be regulated by the insurance regulator or, as in the case of Colombia, by the banking regulator. Where banking groups are actively involved in the CIS business, for example, through their subsidiaries (asset management companies as well as brokers), the banking regulator might be involved.

In the case of Colombia there were two regulators involved in the CIS sector: the Superintendencia de Valores and the banking regulator, Superintendencia Bancaria. The size of the CIS sector was about $11 billion by the end of 2002, of which about 95% was in the form of pension funds. The sector had grown five-fold during the decade. The pension funds were regulated and supervised by the banking regulator.

The consultants’ main recommendations were:

  • Regulation and supervision needs to be harmonised and placed firmly under a single regulator. This reform would provide a consistent regulatory approach to the sector and prevent regulatory arbitrage.
  • Risk management processes in the sector need improvement both by strengthened procedures and subsequent training.
  • Custodian procedures needed to be strengthened and custodians to be independent

In addition, the consultants made recommendations with regard to:

  • On-site inspections
  • Off-site analysis
  • Role of compliance officers
  • Internal controls
  • Rating agencies
  • Insurance of investment management companies
  • External auditors


There are several documents that are worth sharing and which may serve to inform other countries considering a reform of their CIS sector (which includes pension funds that are “funded” and therefore capable of discrete asset management by an asset manager):