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Re-harmonising the dump-truck full of FS laws

17 August 2022 Gareth Stokes

My heart goes out to the compliance professionals that have to wade through the rising tide of laws and regulations applicable to South Africa’s financial services providers (FSPs) and product providers. Likewise, my thoughts to the struggling small, medium and micro-enterprises (SMMEs) plying their trade in the fast-paced worlds of financial and risk advice. It is hard enough to meet month-to-month operational targets these days without worrying about the new laws being conjured up by the twin peaks regulators. Things are so stretched that even the regulators struggle to keep up, as we discovered during a recent compliance presentation, hosted by Compli-Serve.

Singing from the same regulatory hymn sheet

Hannelie Hattingh, Senior Specialist Market Conduct Strategy at the Financial Sector Conduct Authority (FSCA) was on hand to comment on the ongoing transition of the FSCA to its new mandate as South Africa’s dedicated market conduct regulator. It turns out that the authority, confronted as it is by a sea of primary and subordinate legislation, is busy with a multi-year harmonisation journey to figure out which chords and notes to retain in tomorrow’s regulatory hymn sheet. According to Hattingh, this harmonisation journey will unfold over the next three to five years, largely underpinned by the eventual implementation of the Conduct of Financial Institutions (COFI) Bill, already in progress since 2018. 

“We hope that the COFI Bill will be introduced in Parliament and become effective in the next year or so,” said Hattingh, confirming that despite being four years in the making, and having completed two rounds of public comment, there is still no clarity on when the primary conduct regulation will be enacted. Fortunately, there is some clarity insofar as the COFI Bill’s intent. “The main aim of the COFI Bill is to introduce the holistic conduct framework for financial institutions, and the intention is that it will apply across all the sectors that we regulate,” she said. The conduct framework, which will be entrenched in law when COFI is enacted, promises to be outcomes-based, principles-based and proportionally applied. 

Proportionality: fair or unnecessarily complicated?

As an aside, while the regulators seem mightily impressed with the idea of proportionality, many industry stakeholders are concerned with the complexities that might be introduced by holding different size firms up to different levels of compliance scrutiny. How, one wonders, can the regulator propose lower hurdles for a sub-set of the advice or product market that is likely to pose greater risk to end-consumers? This is, in the writer’s view, one of the regrettable consequences of attempting to embed non-financial ideologies within the financial sector regulatory framework. In other words: we have a market conduct regulator that has declared financial inclusion and transformation alongside financial conduct matters as among its primary legislative outcomes. 

COFI will take some getting used to, beginning with the concept that a single market conduct authority will oversee multiple industries, and companies of all sizes within each of those industries. “The Bill introduces activity-based licencing [and] although the licencing will happen in terms of the Financial Sector Regulation (FSR) Act, COFI will be the primary legislation that you will then have to comply with once licenced,” said Hattingh. “There will of course be transitional measures for those entities already licenced under the sector laws that the FSCA regulates”. These sector laws include the Insurance Act and the Financial Advisory and Intermediary Services (FAIS) Act, among others. Activity-based licensing would also mean that any financial institution that performs one of the activities set out in the FSR Act will need to be licenced, irrespective of the type of business. And, of course, individual product providers may have to hold multiple activity-based licences. 

Outcomes- and principles-based focus remains

According to Hattingh, the emerging regulatory framework encompasses both principles and rules. “There will be a balance between principles and rules,” she explained. “In some instances, rules will be appropriate for a specific market or element that we are regulating but the main aim is for an outcomes- and principles-based approach”. The best news from the short regulatory overview was that the COFI Bill, once enacted, will result in the repeal of the market conduct requirements in the FAIS Act and Long and Short-term Insurance Acts. As such, the FSCA is focused on ensuring that all the mechanisms are in place for seamless regulation and supervising once COFI makes its way through Parliament. 

The FSCA’s harmonisation project is aimed at eliminating potential inconsistencies in the regulatory environment. “The aim under the new COFI Act is to make sure that [all the regulations] are harmonised in how they are applied,” said Hattingh. In the future, the COFI Act will be the main conduct law that will apply to all financial institutions performing any of the activities listed in the FSR Act. The COFI Act will also hold the main conduct requirements from a financial institution facing perspective, with Conduct Standards making up the so-called secondary regulation. Additionally, the FSCA will use guidance notices and interpretation rulings to inform and strengthen regulatory outcomes. 

At least 15 cross-cutting laws

The slide that resonated with this writer, was one that shared the 15-odd cross-cutting themes that the FSCA singled out for attention during the harmonisation process… “We extracted all the requirements from the various laws that we regulate, relevant to each of 15 specific themes, and also looked at some international developments with regards to these themes [from which] we will develop a principles-based requirement that will be applied across all of the sectors,” commented Hattingh. It is envisaged that these cross-cutting themes will be encapsulated in the various Conduct Standards over time. The FSCA is also working closely with the Prudential Authority (PA), with the likelihood that functions such as governance and outsourcing will require compliance with both Conduct and Prudential Standards. 

Once the dust settles, compliance officers and other financial services stakeholders can look forward to the COFI Act as the principal law, supported by cross-cutting Conduct Standards. “You may have a conduct standard that deals with both cross-cutting requirements and individualised sector-specific requirements,” concluded Hattingh, using Fit and Proper as an example. “You may have experience requirements that are principles-based that will apply across the sector, but the same Conduct Standard will contain specific requirements that will be, for example, applicable to key persons or representatives”.

“There will be a harmonised Conduct Standard, but it will deal with both the cross-cutting elements that can apply across the sector, as well as individualised elements that may require more specific rules”. In English, the regulators are reducing the body of primary law; but replacing it with an incredibly complex spider web of Conduct and Prudential Standards. A process best described as keeping things simple, regulator style! And with that, all that remains is to wish our compliance colleagues the best of luck in singing from the soon-to-be harmonised regulatory hymn sheet. 

Writer’s thoughts:
One of the ironies about the shift from rule-based to principles-based regulation, often held up as a way to simplify the regulatory environment, is that the compliance and reporting burden continues to mushroom exponentially. Have you had time to assess the impact of the looming COFI Act plus Conduct Standards regulatory environment on your advice or risk practice, or are you too busy keeping your creditors at bay? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comments

Added by Gareth Stokes, 18 Aug 2022
If only we could go into that level of detail @Humphrey... It might be an interesting exercise for one of those product actuaries out there - mind you, they might be reluctant to share where the bulk of the client's monthly premiums end up!
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Added by Gareth Stokes, 18 Aug 2022
Interesting point @Ari ... As a content specialist and writer I have not had the time to dive into the detail around COBR. 800 data points sounds insane though!
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Added by Gareth, 18 Aug 2022
Thank you for your comment @Anne-Marie... I love the imagery in "traipsing behind a hearse". My sympathies to the SMMEs that struggle to keep up with this evolving regulatory landscape.
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Added by Humphrey, 18 Aug 2022
Intermediaries have to disclose fees and commissions. I wish there was a way of quantifying the cost each policyholder pays towards legal compliance (of all in the value chain - i.e. insurers and brokers). This should be prominently displayed on policy documentation. I also wish there was a way of doing a cost benefit analysis to the policyholder of how much bang he gets for his buck from this compliance legislation. In reality probably very little.
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Added by Ari, 18 Aug 2022
No mention of the recently launched "Omni-CoBR" - where every FSP will be required to report quarterly on aspects of its conduct - where complainants will have to be categorised by gender, age, income group and nature of the complaint. There are 15 types of complaint.
In all, there are over 800 data points that will have to be provided in each report.
I wonder how that is going to be managed??
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Added by Gareth, 17 Aug 2022
Agree with @justsaying on the impact of compliance on costs - it has always been difficult to reconcile financial inclusion with cost of advice / product... And @Cynical Simon summarises the picture perfectly... Practitioners face an avalanche of rules- and principles-based regulation that will likely have many unexpected outcomes.
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Added by Anne-Marie Olivier, 17 Aug 2022
You have eloquently verbalised our deepest, worrisome (keeping us awake at night) thoughts about this rabbit run without end. Constant increase in expenses and for a micro enterprise yet another very present nightmare to overcome. Instead of inspiring and motivating us all, this is like traipsing behind a hearse.
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Added by Cynical Simon, 17 Aug 2022
Alas! The more things change the more they remain exactly the same. One can be excused for thinking that OUTCOMES AND PRINCIPLE BASED regulation sounds more and more like
COLLATERAL DAMAGE AND UNEXPECTED OUTCOMES BASED. How exciting to learn that rules will still be applied in some instances whilst outcomes and principles in other: "overgeset synde :al drie sal nou van toepassing wees. Rotse val op ons en kranse bedek ons!!!"
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Added by justsaying, 17 Aug 2022
Death by a thousand cuts... A stranglehold leads to increased prosperity for whom exactly? The costs of these escalating compliance related fees is simply passed onto the brokers/advisers/clients. This will lead to more being excluded in this space as the rising costs will cut them out by default. How is this benefit more in future?



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