Like TCF on steroids

Financial services providers (FSPs) who are stressing out over the impact of the soon-to-be-enacted Conduct of Financial Institutions (COFI) Bill on their businesses can rest easy. According to Danny Joffe, Head of Legal at Hollard Insure, those who have ingrained the Treating Customers Fairly (TCF) principles into their business conduct approach have already done the heavy lifting and should have little to fear. Joffe had been invited to the 2022 South African Underwriting Managers Association (SAUMA) Conference to shed some light on the impact of the pending law and when it was likely to see the light of day.

Finally, summitting twin peaks

FAnews readers do not need a refresher on the COFI Bill; but to make sure we are all on the same page, some basics need restating. The COFI Bill is the last piece of primary legislation needed to complete our migration to the twin peaks regulatory framework… This is the journey that started with the enactment of the Financial Sector Regulation (FSR) Act and Insurance Act in April 2018 and July 2018 respectively. So, we have the FSR Act that creates the structure of our current joint authorities, the Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA); we have the Insurance Act that describes how the PA must perform its prudential governance and oversight role; and we await the COFI Act to instruct the FSCA on its governance and oversight role for all financial institutions. 

“The COFI Act will be to the conduct space what the Insurance Act is in the prudential space,” explained Joffe, who added that compliance with prudential matters was far easier under a single Act. The hope, therefore, is that financial institutions will also benefit from a single conduct-focused Act rather than having to rely on bits and pieces of the old Long-term and Short-term Insurance Acts and the Financial Advisory and Intermediary Services (FAIS) Act. According to Joffe, the COFI Bill, once enacted, will bring about a synergy between the conduct regulators and the financial institutions that it oversees. And this synergy, or common strategy if you prefer, will hinge on doing what is best for the customer. 

Far along the COFI journey

FSPs and product suppliers are much further along the COFI journey than they realise. “It is not like COFI is introducing a new regulatory environment, or that this is the first time market conduct is being regulated domestically,” said Joffe. “In fact, TCF has been in place since as early as 2014,” and the six principles that make up the TCF framework have been integrated into South Africa’s regulatory framework at every opportunity since. For example, the subordinate regulations contained in the Policyholder Protection Rules: Long-term and Short-term (PPRs), are already quite specific about how insurers should conduct themselves. Likewise, the binder regulations and proposed changes to premium collection practices deal with market conduct, with TCF and fair consumer outcomes at their heart. 

According to Joffe, the PPR can be seen as a prelude to COFI, or a type of COFI Lite. “Effectively, insurers have been given time to put these rules in place in their businesses; the main points or intentions contained in COFI are already in the PPR,” he said. “If you are applying these rules properly, handling premium collection properly and governing your binders property, then you are already doing conduct properly”. More to the point, it appears that the best way to view the pending COFI Act is as the primary legislation that will formally enshrine the six TCF principles in law and amalgamate the insurer-specific conduct rules contained in the PPR and the advice-specific conduct rules contained in the FAIS Act into one law, applicable to all financial institutions. That is quite the sentence; but this writer thinks it gets the point across. COFI and TCF are virtually indiscernible. 

FSPs under twin microscopes

Ironically, advice focused FSPs could soon find themselves trading under a double layer of conduct scrutiny, because the COFI Bill will put a larger onus on product suppliers to perform proper due diligence of their distribution channel. “You will no longer be able to rely on FAIS to govern the FSPs in your distribution channel, those days are on their way out,” noted Joffe. “COFI will bring in slight differences in the way insurers monitor intermediaries [and insurers will have to] be quite serious about how they govern and oversee third parties selling their product on their behalf”. This requirement has anyway been addressed through the PPRs, which stipulates that insurers can only use intermediaries that are competent, trained and fully able to sell their policies. 

Perhaps the most impactful change in the pending COFI Act is its focus on the policies that all financial institutions will have to have implement. Top of the list is a governance policy that must deal with how a firm tackles TCF principles and, more importantly, plans to address transformation. “There is a belief that the sector has been slow in transforming fully, and there is going to be a much higher push for transformation in the financial services sector,” warned Joffe. He noted that the COFI Bill allowed the regulator to make certain transformation requirement part of the licensing process, such as requiring an FSP to submit a transformation plan. 

Product suppliers, meanwhile, will also have to draw up policies for financial product oversight and processes and procedures for the approval of promotional and marketing material. According to Joffe, the COFI Bill places big emphasis on how insurers and UMAs oversee their products, from design, to implementation and on to ongoing oversight… Products must remain relevant and offer the intended value to consumers, whether they are personal lines or commercial policyholders. 

Still unclear? Read the Act…

The preamble or short summary that introduces any Bill, Draft Bill or Act is a great place to figure out what its many chapters, sections and clauses hold in store. The standout phrase in the COFI Bill is “to protect financial customers [and] promote the fair treatment of financial customers by financial institutions”. The Act also intends to support fair, transparent and efficient financial markets; promote innovation; promote sustainable competition; and promote financial inclusion, among many other noble objectives. Joffe closed his presentation by reiterating that FSPs and product suppliers that complied with the current regulatory framework had little to fear from COFI. 

In summary, the pending COFI Act will adopt a market conduct approach that aligns with the TCF principles, with the bulk of its operational requirements set out in various yet-to-be-issued Conduct Standards. Joffe noted that it was impossible to comment on the “meat of COFI” which would be contained in these standards, as few had been published to date. The COFI Act will also require all FSPs and product suppliers to be re-licensed based on the activities they perform; and this could be where the COFI transition runs into some headwinds. “With the insurance Act, we saw a big rush to get the re-licensing done, and that was just for existing insurers and reinsurers. Under COFI the authority will have to re-license the whole financial market from large firms to one-man businesses,” concluded Joffe. “This is a much bigger group, and we can only hope there will be enough capacity to carry out the task”. 

Writer’s thoughts:
We remember commenting on the growing oversight of financial and risk advice practices around the time the 2017 Policyholder Protection Regulations (PPRs) were introduced; but the pending COFI Act seems to up the ante in this regard. It seems that brokerages will soon be churning out detailed compliance-type reports for each of their product suppliers in addition to the long list of FSCA requirements. Are you concerned about the double layer of scrutiny that could be brought to bear on advice focused FSPs? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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