Everyone’s cup of COFI?

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By Thato Mkhize, Candidate Attorney, and Wildu du Plessis, Partner and Head of the  Banking & Finance Practice Johannesburg


A brief outline of the Conduct of Financial Institutions Bill, its effect on the financial industry and implications for consumers.

It is fair to say that there has been a steady increase in financial sector conduct regulation over the last decade, not only in South Africa but indeed globally. Some financial industry experts are of the opinion that this is evidence of a true paradigm shift towards the redesign of the global financial industry.

In South Africa, different regulators have implemented different methods for regulating the conduct of financial institutions. For example, the Competition Commission’s market enquiry into the retail banking sector, the introduction of the draft Treating Customers Fairly principles and the implementation of a Twin Peaks model of financial sector regulation through the promulgation of the Financial Sector Regulation Act in 2017, are amongst some of the notable efforts made by regulators and legislators to contribute to a financial sector that is inclusive and receptive of new market entrants.

In 2018, a working group established by National Treasury gathered once more to reflect on the foundations laid by previous legislation in regulating the conduct of financial institutions in South Africa. The outcome of that discussion was a new piece of legislation that aimed to provide a consolidated regulatory framework for the conduct of financial institutions – the Conduct of Financial Institutions Bill or COFI for short.

COFI proposes a consolidated financial sector regulatory framework that will not only be applicable to financial services or products but also to supervised entities that have not traditionally been defined as financial institutions. This is to eliminate the silo approach and regulatory arbitrage that often comes with the implementation of fragmented financial sector regulation. Further, COFI proposes to transform the licensing process and requirements for financial service providers, introducing gradual compliance with current licensing requirements, after application to the relevant authority. It also echoes the activity-based approach to licensing of financial institutions, which is followed by the newly established Financial Sector Conduct Authority (FSCA).

Financial service providers are often concerned with the increased burden of compliance when faced with new legislation. Although COFI presents consolidated compliance requirements and principles contained in other pieces of financial legislation, financial services providers can be expected to comply with requirements and obligations unique to COFI. Notably, COFI proposes substantial changes to the conduct of the financial institutions in their approach to regulatory compliance and customer services.

In addition to the new licensing framework discussed above, COFI focuses on the corporate culture of the financial institutions, as well as the processes and procedures governing its financial products and services. Financial institutions, in their efforts to promote a sound corporate culture, are expected to entrench principles of fair treatment of customers, promotion of customer-appropriate financial products and services, as well as to enhance transparency in its dealings with customers. These are familiar concepts within the financial sector, accordingly financial institutions would merely have to reflect on the governance procedures and processes, which are already in place and establish whether they present compliance gaps and how the risk thereof could be minimized.

Further, in addressing the culture and governance of financial institutions, COFI addresses the potential risks that emanate from the core business of financial institutions – the provision of financial services and products. COFI, as observed in the Financial Advisory and Intermediary Services Act, proposes principles such as transparency, efficiency and suitability, which promote the interests of the financial customer and are flexible enough not to hinder or cripple innovation. Financial institutions are expected to design products and provide services which are customer centric, are subjected to a product approval process led by senior management, and are regularly reviewed to ensure alignment with the product oversight arrangements. COFI requires that these compliance requirements should be reflected in the institution’s governance policy, and compliance with such policy and procedures should be monitored on an ongoing basis.

COFI is explicit in its support of transformation. COFI’s definition of transformation is aligned to the BBBEE Act and transformation is included as one of its main objectives. The Explanatory Paper on COFI states that financial institutions will be required to report on the implementation of their transformation policies to the FSCA. This emphasizes the fact that regulation of the conduct of financial institutions in South Africa is no longer considered to be mutually exclusive from the implementation of transformation in the financial industry.

Financial sector regulation in South Africa, through COFI as well as its predecessors, has already achieved noteworthy strides in its effort to ensure a stable financial services sector. The successful implementation of the principles contained in COFI has the potential to further transform the industry and open the market to competition, increasing the options available to consumers. And with customers’ needs already the core focus of the business strategies of the majority of financial institutions in South Africa, complying with these regulations should hopefully not be too onerous.