A regulatory update: Preparing for the next wave of market conduct legislation

By Anton Swanepoel

South Africa’s advisers and intermediaries have certainly had more than their fair share of challenges and obstacles over the last few years, and COVID-19 obviously took it to another level. As if COVID, our political landscape, economic outlook, loadshedding, crime and corruption, fierce competition, consumer expectations, failed property syndications, pressure on fees, the need to keep up with technology, cybercrime, and the onerous regulatory environment (FAIS, FICA and POPIA) are not already enough to deal with, financial services providers will have to prepare themselves for the next wave of regulatory reform. In the midst of a myriad of challenges the ‘Mother’ of market conduct legislation is on its way!

Although earlier this year it was expected that COFI would be submitted to Parliament for promulgation before year-end, it is my understanding that National Treasury is now planning to submit the Conduct of Financial Institutions Bill to Cabinet in the first half of 2023. As the Bill is the responsibility of National Treasury it is difficult to be more precise. The COFI Bill is by far the single, most significant piece of legislation that will impact financial services providers since the implementation of the FAIS Act in 2004. COFI will replace the FAIS Act as the primary market conduct legislation that will regulate financial advisory and intermediary services.

By comparison COFI is FAIS on steroids (mainly because of volumes). Currently the FAIS Act and its subordinate legislation (Fit & proper requirements and the General code of conduct) comprise of roughly 160 pages of legislation. COFI must be read with the provisions of the Financial Sector Regulations (FSR) Act, and together these represent more than 600 pages of primary legislation, whilst the subordinate legislation such as the Fit and proper requirements and Conduct standards, will comprise of roughly another 300 pages. Therefore, the first implication for financial services providers is volume. This brings complexity, potential confusion, more administrative duties, pressure on human resources, and it will add significantly to the cost of compliance. Moving from 160 pages to over 900 pages of legislation is not going to be easy.

Secondly, COFI will call for FSP’s to register as a financial institution (FSP) as defined in the FSR Act for the activities listed in Schedule 6 of the COFI Bill, with reference to ‘financial advice’ and ‘distribution’ (sales and execution). Imagine the administrative burden of having to re-register your FSP and then add to that the cost of registration.

Thirdly, the FSCA proposed that under COFI, all financial institutions will have to submit a compliance report called OMNI-CBR (Conduct of Business Return) on a quarterly basis. The CBR for financial service providers contains three times more information that will be required compared to the former annual compliance report. Not surprisingly, the industry bodies have made firm submissions to the Regulator to reconsider the voluminous nature of these returns and also to reconsider the proposed quarterly submissions. Hopefully the Regulator, in view of their commitment to apply proportionality, will have empathy with institutions. Small to medium sized financial services providers are already struggling to cope with the burden of over-regulation.

To avoid the risk of allowing compliance to drive the business of advisers and intermediaries, the implementation of COFI will demand serious attention from key individuals and managers of every FSP. Although I respect and appreciate the role of compliance officers; key individuals simply cannot afford to outsource COFI to compliance. If they do, these FSPs will become compliance driven instead of being business driven in a compliant way. There is a significant difference between the two.

It is easy to simply highlight all the problems. However, what now? The illustration below is an executive summary of the building blocks of any FSP in South Africa, which COFI, read with the FSR Act and its subordinate legislation, will regulate. These components form the essence of what FSPs will have to master, not only to survive the new legislation, but to thrive. These business fundamentals applied before FAIS, during FAIS and they will continue to serve those who are committed to stay in business under COFI.

Practical tips:

Firstly, key individuals will have to familiarise themselves with the key aspects of the legislation that apply to FSPs. They must make every effort to understand how the next wave of market conduct legislation will impact their business.

Secondly, they will have to revisit the fundamentals of their businesses that are already in place and assess whether these fundamentals will also apply under COFI. Cautionary : Be careful to make too many assumptions here. Key individuals must consider two key aspects pertaining to these fundamental FSP building blocks, namely best practice principles and the regulatory requirements that underpin each of these business components. As Stephen R Covey famously stated: seek first to understand.

Thirdly, start planning towards your move from the Financial Advisory and Intermediary Services (FAIS) Act to the Conduct of Financial Institutions (COFI) Bill. Don’t wait too long! There are enough fundamental principles that are laid down in the Financial Sector Regulation (FSR) Act and the COFI Bill to prepare the foundation for the migration from FAIS to COFI.

Lastly, don’t simply outsource this to your compliance officers. COFI is a business issue, not a compliance issue. As a key individual, you remain accountable for the management and oversight of the business, and compliance cannot be outsourced to its full extent. Compliance officers are responsible for compliance but as a key individual you remain accountable for the business to be compliant.