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By Iniel van Zyl*
The financial services industry in South Africa has seen significant changes to legislation and regulation over the last decade and beyond. An increase in local and global corporate scandals highlighted weak points in the current legislative framework, which have been woven closed by even more complex legislation. The industry has, as a result, developed and matured over time. Even though it provides better protection to investors, the reality is that the framework has created a complex web of rules and regulations that are challenging to navigate.
The financial services industry is fragmented
The financial landscape in South Africa is intricate and often challenging for many professionals to construe due to an involuted composition of regulations and legislation that needs to be complied with. The result? A challenging practice to reconcile and interpret the rulings of various regulators. In 2018, various market players took time to reflect on the existing framework that regulates financial institutions in South Africa. As a result of their findings, they proposed an extensive reform of the framework. New legislation in the form of the Conduct of Financial Institutions (‘COFI’) Bill was drafted and in conjunction with the FSR Act, intends at providing a consolidated regulatory framework for financial institutions
The COFI Bill aims to,inter alia,protect financial customers by promoting fair treatment by financial institutions, support just, transparent, and efficient financial markets and promote trust and confidence in the financial sector. The first draft of COFI proposes to repeal 13 financial sector laws and replace them with a single, comprehensive market conduct law, resulting in the consistent application of consumer protection principles across the sector.
This year, the FSCA published its regulation plan for the next three years (1 April 2022 to 31 March 2025). The plan provides more detail on the FSCA’s intended strategy to reform various financial sector laws. According to Treasury, “The COFI Bill aims to significantly streamline the legal landscape for conduct regulation in the financial sector, and to give legislative effect to the market conduct policy approach”.
The current system regulated by FAIS
The Financial Advisory and Intermediary Services Act (37 of 2002) (‘FAIS’) governs the way financial services providers conduct business and how they interact with consumers. It also guides consumers in their day-to-day dealings with the product provider they have selected. In addition, FAIS regulates the activities of all financial services providers who advise or offer intermediary services to consumers of certain financial products.
In short, the current purpose of FAIS is to protect consumers of financial products and services, regulate the selling and advice-giving activities of FSPs and ensure that consumers are provided with adequate information about the financial product they purchase, as well as the people and institutions who sell these financial products. All of this must be undertaken in a competent and open manner to establish a well-regulated financial services profession.
The proposed system regulated by the FSR Act and the COFI Bill
The Financial Sector Regulation Act (FSRA) was promulgated in 2017 with the aim of developing a more unified legislative platform, while at the same time aligning South Africa’s financial laws with global practices to encourage financial stability in our financial sector. This would be achieved by the adoption of the Twin Peaks model. The positive news is that the new FSR Act, through the adoption of the Twin Peaks model, also aims to streamline our banking laws. This promises to simplify the landscape for all practitioners.
The Twin Peaks model
The Twin Peaks model includes two bodies who together are responsible for regulating the industry:
- Peak 1: The Prudential Authority: responsible for drafting and enforcing prudential regulations that are designed to prevent a financial crisis.
- Peak 2: The Financial Sector Conduct Authority (FSCA): responsible for the protection of consumers of financial products and services and the prevention of misconduct.
The two peaks in the Twin Peak model have different roles but they have equal mechanisms that will support them in achieving their respective goals.
FSRA and COFI – what they aim to achieve
The FSRA provides consumers and financial institutions with an indication of what to expect from financial sector regulators. The COFI Bill outlines what industry players and consumers can expect from financial institutions.
The COFI Bill aims to move away from a ‘rules and regulations’ approach to a ‘principles and outcomes-based approach. This means that instead of setting more rules and regulations, the bill will set principles that define the regulation’s intent. It is a positive move away from technical compliance to achieving specified principles. It will also focus much of its attention on the fair treatment of customers.
The development of COFI includes three phases that will progress alongside each other:
- The high-level design of the regulatory framework: the overall design of the regulatory framework is reviewed.
- The harmonisation of regulatory frameworks: the identification of critical conduct themes. This phase is already underway. The FSCA is developing cross-sector conduct standards for the financial industry. If necessary, sector-specific conduct standards will supplement cross-sector conduct standards.
- The transition to the COFI Bill framework: in this phase existing subordinate legislation will be harmonised to fit into the COFI Bill framework.
Even though the full implementation of the COFI Bill seems a distance away, the FSCA is already hard at work with preparations. Treating Customers Fairly (TCF), as you may know, is leading their interpretation and enforcement of existing regulatory frameworks.
Developing a universal and consistent regulatory framework for all major financial services providers is a major shift from the current fragmented version that is complex and cumbersome. The shift from rules-based to principles-based regulation will also require ongoing time and attention from multiple industry players. All financial sector participants need to start preparing for these changes, including those already in the industry, and those who are in the process of moving into this space for the first time. The COFI Bill is paving the way for a vastly refreshed regulatory landscape.
* Iniel van Zyl is a Financial Planner, Admitted Attorney and Head of Brenthurst Fourways.