COFI Licensing: What Financial Institutions Need to Know Now

Joleen John, Group Managing Director of Masthead

COFI will bring significant changes to the way financial institutions are licensed, moving towards an activity-based framework. Here’s what financial institutions need to know about the proposed changes, what they could mean for existing licences and why understanding your activities now is key to a smoother transition.

As the Conduct of Financial Institutions (COFI) Bill moves closer to implementation, one topic continues to generate questions across the financial services industry: licensing.

While much of the detail is still being developed, financial institutions do not need to wait for the final framework before preparing. A practical first step is to understand which activities they perform and how those activities may be licensed under COFI. This will help them assess their future licensing position and identify areas that may require attention as implementation approaches. 

A move to activity-based licensing

A significant change proposed under COFI is the shift to activity-based licensing. Under the current framework, different types of financial institutions are often regulated under separate licensing regimes. For example, a financial service provider (FSP) is licensed under the Financial Advisory and Intermediary Services (FAIS) Act, while banks, insurers and other financial institutions operate under their own regulatory frameworks. COFI is expected to move towards a more activity-based approach, where the focus shifts from the type of institution to the activities being performed.

This means regulators will be less concerned with what a business calls itself and more concerned with what it actually does.

The intention is to create a more consistent regulatory framework across the financial sector. Similar activities should be subject to similar conduct requirements, regardless of the type of institution performing them.

Although the final licensing framework has not yet been published, financial institutions should already be thinking about how their current activities may fit into future licensing categories. 

What could this look like in practice?

Consider two Category I FSPs that both hold a FAIS licence for Short-Term Insurance Personal Lines. At first glance, the businesses appear almost identical. Under COFI, however, the focus shifts to the activities each business performs.

Firm 1 provides advice by assessing clients’ needs and recommending suitable insurance products. When reviewing the activities listed in Schedule 1 of the draft COFI Licensing Framework, the firm identifies Financial Advice as its relevant activity.

Firm 2, on the other hand, facilitates the sale and placement of insurance products but does not make recommendations. When reviewing Schedule 1, the firm identifies Distribution: Sales and Execution as its relevant activity.

Although both firms hold the same FAIS licence today, COFI’s activity-based approach could result in different licensing requirements because they perform different activities.

This illustrates one of the fundamental principles of COFI: financial institutions should not start by asking, “What does my FAIS licence become under COFI?” Instead, they should begin by asking, “What activities does my business actually perform?” They can then work through the relevant Activity, Sub-Activity, Definition and Descriptor columns in Schedule 1 before moving to Schedule 2 to determine the applicable institutional form requirements. 

What will happen to existing licences?

A common concern among financial institutions is what will happen to existing licences once COFI comes into effect.

These concerns are understandable. Relicensing large numbers of financial institutions across the sector would be a significant administrative undertaking, and some industry participants have expressed concerns about the potential for delays or regulatory backlogs during the transition.

However, current indications from the regulator suggest that the transition will be phased rather than abrupt. Existing licences are not expected to simply fall away when COFI takes effect. FSPs, for example, are expected to continue operating under their existing FAIS licences while transitioning to the new framework and applying for any additional licences required under COFI. This should allow financial institutions time to understand their future licensing requirements and adapt in a structured manner.

That said, financial institutions should not take a wait-and-see approach. Organisations that take steps now to understand their activities and potential licensing requirements are likely to be in a far stronger position when the new framework is implemented. 

Why licensing is about more than licences

While licensing is often viewed as a regulatory formality, COFI’s approach reflects a broader shift in regulatory thinking.

The new framework is expected to place greater emphasis on conduct risk, governance and client outcomes. As a result, licensing is likely to be more closely linked to how institutions perform their activities and manage conduct risks.

For financial institutions, this means that preparing for licensing changes is not simply about paperwork. It is also about ensuring that governance structures, oversight mechanisms and business practices support the outcomes regulators expect to see. 

What should financial institutions be doing now?

Although uncertainty remains, financial institutions should not wait for every detail of the licensing framework to be finalised before taking action. There are practical steps they can take now to better understand their future licensing position and prepare for the transition.

One of the most useful starting points is a high-level gap analysis. By identifying the activities performed across the business and assessing how these may align with future licensing categories, financial institutions can begin identifying potential gaps, overlaps or activities that may require additional permissions under the new framework.

This exercise can also help institutions determine whether their governance, oversight and reporting structures adequately support those activities.

The better an institution understands its activities today, the easier it will be to assess its future licensing position. 

Focus on progress, not perfection

COFI licensing represents a significant change in regulatory approach, but it should not be viewed as a reason for alarm.

The transition is expected to take place over time, giving financial institutions an opportunity to assess their activities, identify gaps and make improvements in a structured way.

For most institutions, the priority now is not to predict every detail of the final framework. It is to understand their business, strengthen existing foundations and begin preparing for a licensing model that focuses increasingly on activities, conduct and client outcomes.

The institutions that approach the transition in this way are likely to find that COFI licensing is about understanding their activities, identifying gaps and aligning their business with a more structured and consistent regulatory framework.