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The weighty Conduct of Financial Institutions Bill (Cofi), which will probably be tabled in Parliament by the end of the year, is to be welcomed by financial services providers.

It is not just another piece of legislation in an industry already overburdened with legislation. It will reduce regulatory complexity and the necessity for petty rules and be an enabler for business.

This is the view of Richard Rattue, managing director of financial services compliance firm Compli-Serve, which recently hosted a seminar at which Kershia Singh, the director of market conduct at National Treasury, unpacked Cofi and its implications for financial services participants.

Singh explained that Cofi would provide the overarching legislation under which the Financial Sector Conduct Authority will regulate the market conduct of all financial institutions.

It has been designed eventually to replace existing laws (such as the Financial Advisory and Intermediary Services, or Fais, Act), but for the time being will exist beside them. Similar to legislation enacted overseas, it is grounded in a fundamentally different approach to law, being principles based instead of rules based, with the Treating Customers Fairly (TCF) principles at its heart.

As such, there will be less need for the many different acts regulating the industry.

A major shift from previous legislation, Singh said Cofi is characterised as being:

  • Activity-based. The law will regulate the activity - such as designing life insurance, giving financial advice, managing investments - regardless of the institution performing it. This will do away with licensing of operators in the different industry sectors under sector-specific acts.
  • Principles and outcomes focused. Provisions will make it clear what the outcomes of the activities are expected to be. Financial services providers will have to demonstrate that they are upholding certain principles and enabling certain outcomes rather than simply complying with the letter of the law.
  • Risk-based and proportionate. The degree of regulation will be proportionate to the risks posed by the operator. Therefore, a smaller operator will be less regulated than a large one that would pose far greater risk to the public.
  • Supportive of transformation and inclusion. Companies will be required to have transformation policies in compliance with B-BBEE codes, and policies that promote financial inclusion.
  • Supportive of competition and innovation. Smaller and new entrants, such as fintech start-ups, will not bear the same compliance burden as larger, more complex businesses.

Chapters 3 to 8 align closely with the TCF principles:

  • Chapter 3 sets out culture and governance requirements for financial institutions, making the fair treatment of consumers central to an institution’s culture.
  • Chapter 4 sets requirements for the design of products that are appropriate to customers’ needs.
  • Chapter 5 sets requirements for financial services that take into account the needs, circumstances and expectations of consumers.
  • Chapter 6 aims to ensure that consumers are provided with ample information about a product across its life cycle.
  • Chapter 7, which is closest to the provisions of the Fais Act, provides for distribution models that support the delivery of appropriate products and provide access to suitable advice.
  • Chapter 8 sets requirements to ensure that customers do not face unreasonable post-sales barriers when wanting to change products or providers or to submit a claim or make a complaint.

Singh says a major consideration in the design of the bill, which is still open for input from the industry, has been to force industry to move beyond its characteristic “tick-box” approach to regulatory compliance towards a culture of fair treatment that is integral to a business.

This will ensure stronger accountability at executive and senior management level in financial services companies.

Rattue says the new legislation will require companies to balance their hitherto strict letter-of-the-law approach with fair and positive outcomes for clients.

“The attitude of how close you can sail to legislation and get away with it is yesterday’s news,” he says.

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