COFI? Still percolating…

The South African financial advice community will have to wait a while longer before the long-awaited COFI Bill is enacted. Katherine Gibson, recently-appointed Deputy Commissioner at the Financial Sector Conduct Authority (FSCA), told the 2021 Financial Planning Institute (FPI) Professional Convention that the Authority was optimistic that the Bill would be submitted to Parliament before the end of 2021. And industry stakeholder will no doubt be holding thumbs that the regulator’s expectation proves accurate.

Three years and counting

The Conduct of Financial Institutions (COFI) Bill was first published in 2018, with a revised Bill circulated for a further round of public comment in 2020. Since then, the FSCA and National Treasury have been working through the hundreds of pages of feedback submitted by industry stakeholders. “The COFI Bill will streamline the legal framework for conduct regulation by giving legislative effect to the market conduct approach; strengthening customer protection through a single comprehensive conduct law; and delivering improved flexibility and tools for enforcement,” said Gibson. She added that the Bill will support overarching policy objectives such as competition, financial inclusion, innovation and transformation. 

Industry stakeholders were told that they can expect a cleaner, simpler regulatory framework following the enactment of the COFI Bill. The COFI Act, which will be supported by various industry-specific conduct standards, is seen as one of the final components in the harmonisation of financial sector laws and rules. “This is a complicated process whereby we looked at all the existing laws … to identify critical areas and carry these through into the new framework,” Gibson explained. The outcome will be a ‘best of breed’ conduct framework that applies consistently to all financial institutions. Once the harmonisation phase is complete, the industry will complete its transition into the new regulatory framework. 

Governance across the twin peaks

The FSCA and National Treasury claim that the new twin peaks environment will be more efficient; but it also introduces layers of complexity that the regulators themselves sometimes struggle to navigate. For example, to appropriately regulate corporate governance requires inputs from both the FSCA and the Prudential Authority (PA), with the need for joint conduct standards in addition to the countless other laws and rules. “We will be developing a consolidated and comprehensive governance framework across the two peaks, which will be given effect through joint conduct standards,” said Gibson. 

As we near the final COFI enactment and implementation, the regulators are assessing which of the existing regulatory instruments will be repealed, which will be accommodated under the COFI Bill, and what may be required in addition to the COFI Bill. And this means the future regulatory framework will feature the COFI Act overlaying various cross-sector conduct standards… For example, the Fit and Proper requirements, which financial intermediaries are quite familiar with, will be contained in a single conduct standard applied across the financial services sector, alongside additional industry-focused conduct standards. And that, dear reader, does not sound complicated at all!

The RDR is on the backburner for now

The financial planners in the audience were keen to know when, and how, the outstanding proposals in the Retail Distribution Review (RDR) would be accommodated. David Kop, CFP® and Executive Director: Relevance at the FPI pointed out that the RDR had been a collaborative process. “We have avoided the situation where proposals are made, the legislation is put in place, and we only then figure out that the proposals are not right,” he said, adding that lengthy delays were a consequence of extensive collaboration between industry and regulators. 

According to Gibson, part of the RDR process was in limbo as the regulators figured out which of the remaining proposals could be tackled in the COFI Bill, and which not. “The one proposal that is being pushed through now is proposal TT on low income, and we will be publishing something on this soon,” she said. “And some of the outstanding remuneration matters are being accelerated through the existing process too”. It is likely that proposals dealing with premium collection and remuneration could be advanced soon, though further industry engagement would take place prior to finalisation. 

But those hoping for clarity on the proposal for adviser categorisation and investments will have to wait a while longer. These items are closely integrated with the COFI Bill activity processes because of their potential impact on the FSCA licensing framework. Kop noted that adviser categorisation had ended up being the most contentious RDR issue, even surpassing the debate about remuneration. “I thought we would get stuck on the remuneration issue; but there was more concern about what we were going to put on our business cards, and what we would call ourselves within an FSP,” he said. 

For both Kop and the FPI, the priority remains to establish financial planning as a profession and ensure that consumers perceive financial advice and financial planning as regulated activities. “Adviser categorisation is important from a consumer protection viewpoint, because when a consumer looks for a financial planner they must appreciate that the planner has gone through a rigorous process, including meeting stringent education and ethics requirements,” said Kop. Furthermore, if the financial adviser or planner steps out of line, the consumer must have confidence that there is a channel for complaints resolution and an oversight body that can take enforcement action if deemed necessary. 

The frontline of financial product risk

There was some good news, in that the FSCA is considering ways to make it easier for financial planners to navigate the complex regulatory environment and get a better grasp of the laws and rules applicable to them. One possibility is the introduction of a digital interface that could guide planners through a more simplified and streamlined licensing process. 

The distribution channel was singled out as an important weapon in the war against evolving risks. Gibson said that the regulator was concerned about increasing cyber risks due to remote working alongside the financial risks introduced by consumers’ growing appetites for crypto assets, among others. “Crypto assets are highly controversial,” she said. “We know that customers are getting into crypto assets and we know that they see these instruments as big opportunities [to generate return]; but we also know that there are a lot of abusive practices happening around these assets”. Financial planners are the frontline, or human element, that need to insulate consumers from such emerging risks. 

The key industry feedback following the FPI Convention regulatory panel, was that the COFI Bill, although still percolating, will be ready for pouring soon. Lelané Bezuidenhout, CFP® and CEO at the FPI asked whether the rumour of a third round of public consultation on the COFI Bill was true. Gibson responded that this was unlikely and that National Treasury was keen for the Bill to be submitted, through Cabinet and on to Parliament, before the end of the year. “Treasury has said that notwithstanding the Parliamentary process, there will still be ongoing and active engagement with industry participants,” she concluded. 

Writer’s thoughts:
Advisers, brokers and financial planners have long complained about the complexity of the financial sector regulatory environment and the cost and resource ‘drag’ that compliance has on their businesses. All agree that regulation is necessary; but the preference is for certainty and simplicity. Has your business been adversely impacted by delays in the finalisation of RDR and / or the multi-year COFI Bill process? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za