Sat, Jun 22, 2024

The official Financial Regulation Journal of SAIFM

Conduct of Financial Institutions Bill: National Treasury publishes second draft for comment

Deanne Wood and Catherine Stark

The National Treasury has published for comment a second draft of the Conduct of Financial Institutions Bill (“COFl”). The first draft of the Bill was published for comment in December 2018 and closed for public comment in April 2019. The revised draft follows the review of extensive comments and public consultation between key industry players and the National Treasury. On 28 September 2020, the National Treasury announced that it will accept comments on the revised draft until 30 October 2020. It aims to finalise the Bill for Cabinet’s approval before submitting it to parliament early next year.

COFI is part of the Twin Peaks model adopted by the government for the regulatory reform of the financial sector. COFI is aimed at consolidating the conduct standards of financial institutions housed in various pieces of legislation into one statute. This is a move away from the regulation of conduct according to the specific activity undertaken by that institution. Over and above the streamlining of the financial sector conduct regulation, COFI is also aimed at the implementation of the Treating Customers Fairly (“TCF”) principles. The inclusion of TCF principles in COFI will render those principles legally binding and enforceable across all financial institutions.

Chief among the changes in the revised draft is the interface of the Bill with other financial sector legislation. The proposed changes aim to reduce inconsistencies with other legislation and will lead to the amendment of some statutes and the repeal of others. As it currently stands, the following acts will be affected, among others:

To be amended to align with COFI:

  • Co-operatives Act, 14 of 2004
  • Collective Investment Schemes Control Act, 45 of 2002
  • Financial Markets Act, 19 of 2012
  • Financial Sector Regulation Act, 9 of 2017
  • Insurance Act, 9 of 2019
  • Medical Schemes Act, 131 of 1998
  • Pensions Funds Act, 24 of 1956

To be repealed:

  • Credit Rating Services Act, 24 of 2012
  • Financial Advisory and Intermediary Services Act, 37 of 2002 (save for Part I of Chapter VI and section 1(1))
  • Friendly Societies Act, 25 of 1956
  • Long-term Insurance Act, 52 of 1998
  • Short-term Insurance Act, 53 of 1998
  • Financial Institutions (Protection of Funds) Act, 28 of 2001

We consider some key amendments to the Bill:

Alignment with the FSR Act

The Financial Sector Regulation Act (“FSR Act”), considered the “backbone” to the Twin Peaks framework in South Africa, provides a framework for the establishment and conduct of financial sector regulators. COFI will operate alongside the FSR Act and provides for the conduct of financial institutions. COFI proposes amendments to the FSR Act to allow for the Financial Sector Conduct Authority (“FSCA”) and other regulators with jurisdiction in the financial sector to exercise their powers effectively in terms of the FSR Act.

For example:

  • the definitions of financial products and financial services in the FSR Act are to be aligned with COFI’s licensing schedule.
  • the licensing provisions in COFI have been shortened and key enabling provisions have been proposed for inclusion in the FSR Act.
  • a financial institution must have a license issued in terms of COFI and in compliance with the framework and requirements stipulated in the FSR Act.

Conduct Standards

In various chapters of the initial draft of COFI, detailed provisions enabling the establishment of conduct standards were provided for. These have been removed and the standard-making provisions in the FSR Act have been strengthened.

The enabling provisions in COFI empower the FSCA to set conduct standards, which standards are provided for in the FSR Act. This will also enable the FSCA to set joint standards along with the Prudential Authority (“PA”) and the South African Reserve Bank (“SARB”). This is aimed at ensuring consistency in industry standards and to avoid the duplication of requirements in COFI and the FSR Act.

Governance Requirements

The initial draft of COFI contained extensive provisions regarding culture and governance requirements:

  • The chapter has been revised from what was considered to be a burdensome requirement of a ‘governance policy’ to a less burdensome ‘governance arrangement’. High level requirements have been provided for, but detailed governance requirements for governance arrangements may be made in subordinate legislation.
  • In addition, the chapter has been refined to align with primary legislation. That is, it allows the PA and the FSCA to set and supervise joint governance requirements to avoid duplications or contradictions.
  • The provisions relating to culture have been refined to ensure that the culture and governance practices of financial institutions are aligned to the TCF principles and that the institutions operate fairly and with integrity in the markets.

Small enterprises

The initial draft proposed the exemption of smaller enterprises licensed under COFI from certain requirements. The objective was to avoid over-regulating small enterprises which may inhibit growth or burden entrepreneurship with unnecessary red tape. However, those exemptions have been removed in the revised Bill. The explanation for the removal of exemptions is that the exemptions were unnecessary because the requirements would not pose an undue burden on smaller enterprises. Further, it is envisaged that the principle of proportionality would be supported through tailored subordinate legislation to avoid a one-size-fits-all approach.


The revised Bill requires that financial institutions that are subject to or have undertaken to comply with the requirements of the Broad Based Black Empowerment Act, 53 of 2003 (“BBBEE”) and the Financial Sector Code for the BBBEE have a transformation plan with tangible targets in place. The Bill also authorises the FSCA to issue directives in relation to transformation policies and confirms the FSCA’s authority to utilise its supervisory and enforcement powers to ensure the adequacy and adherence to a financial institution’s governance frameworks regarding transformation. The reasons for these changes include better aligning the Bill with the relevant legislation and enabling the FSCA to achieve transformation objectives.

Wholesale/Non-retail market

A new licensed activity, ‘lending’, has been added to COFI to include the provision of non-retail credit. This is to regulate activities in the non-retail environment such as the arrangement of debt and equity advisory services and advisory services in relation to M&A activities; these services are normally undertaken by institutions such as investment banks and financial consultants. This inclusion is to close the gap on the regulation of agreements (such as non-retail credit agreements) which fall outside the scope of the National Credit Act, 34 of 2005.


As the financial sector gears towards full implementation of the Twin Peaks regulatory framework, the impact that COFI will have on the financial sector cannot be overstated. Institutions such as insurers, banks and credit providers will be duly affected. While this approach to regulation is aimed at bringing much needed certainty, stability and protection to our financial sector, it is vital that financial institutions prepare themselves for a more regulated field of play.

Stakeholders are encouraged to submit comments on the revised Bill to National Treasury before 30 October 2020.

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