Red tape or reform?

As the Conduct of Financial Institutions (COFI) licensing framework reshapes the financial industry, financial service providers face a range of challenges and opportunities.

Understanding the potential impacts, regulatory burdens, and benefits of these changes is crucial for navigating this evolving landscape.

FAnews spoke with Lisa Teixeira, Masthead Compliance Specialist, and Anri Dippenaar, Masthead Head of Compliance, about the implications of the new framework.

COFI brings additional compliance responsibilities

Teixeira noted that the licensing requirements will significantly impact operations, “Under the new system, there will be a bigger focus on what activities they do. So, regardless of what the financial institution identifies as, for example, a bank, an FSP, or a product provider, if they carry out more than one identified activity - which many financial institutions do - they only need one licence, but they will have to obtain authorisation for each activity and add it to their licence.”

Dippenaar elaborated on whether additional compliance responsibilities will be introduced by the expanded licensing scope. “While the new framework may initially bring with it additional compliance responsibilities, such as providing the Financial Sector Conduct Authority (FSCA) with the assurance of the financial institution’s governance, expertise and capacity in terms of these specific activities, it aims to streamline requirements for FSPs, product providers, and some other financial services participants. It seeks to simplify the regulatory landscape, ensuring that businesses are clear about the regulations they need to follow to be compliant with conduct standards, avoiding confusion and multiple sets of rules.”

Increased red tape

Concerns have been raised about the potential for increased red tape with the licensing framework.

Teixeira stated, “Concerns were raised that without careful assessment and deliberation among all stakeholders of the impact of the proposed framework, the new approach to market conduct would only be a ‘FAIS plus’ approach, combining the principles-based application of the FAIS Act with the more prescriptive application in other legislation. There is a fear that these principles will serve simply as a ‘catchall’ for the regulators.”

This concern is echoed in the Explanatory Policy Paper accompanying the COFI Bill.

COFI amplifies and extends the principles of market conduct regulation introduced by FAIS. However, it is much more than that - it is a comprehensive overhaul of South Africa’s financial sector regulation, designed to streamline oversight, promote fairness, and foster trust in financial institutions. Its broader scope and systemic impact make it a transformative piece of legislation, not just an enhanced version of FAIS.

For financial institutions, the benefits anticipated are reduced regulatory duplication, enhanced customer trust, and better market conduct which can outweigh the perceived increase in red tape.

The impact and implications

The impact of the licensing framework will vary between smaller and larger financial institutions. Dippenaar explained, “COFI requires licensed financial institutions to have governance arrangements proportionate to the nature, size, scale, and complexity of its conduct risks or business model and activities. The Bill also emphasises proportionality in consequential changes to the Financial Sector Regulation Act. From an intention perspective, the principle-based model should allow smaller entities to do what is required to maintain good client outcomes, as opposed to having to comply with the same ‘rules’ at the same level that applies to larger corporations.”

On another note, Teixeira discussed the implications of COFI’s licensing changes for financial innovation and technology adoption. “The focus on consumer outcomes allows financial institutions to quickly identify consumer needs and market gaps and will likely increase competitiveness because innovation can happen faster. However, the ability to better identify issues, needs, and market gaps is largely dependent on the ability to gather and inspect relevant data. Technology and tools (even at a lower and simple level) will help FSPs and other participants to have a view of the data, but if the same data is very manual and needs to be produced by primarily manual interventions, this will take more time away from other activities in the business - like production.”

Preparing and adapting

To prepare for and adapt to the licensing requirements under COFI, Dippenaar advised financial institutions to begin early analysis. “The final licensing application form is not yet available, but the second draft of the COFI Bill includes a list and definitions of licensing activities. These activities may still change, but financial institutions can still use them to prepare. We have already started helping our members by providing an early view of these activities, allowing them to analyse their business operations and identify potential concerns or uncertainties.”

The potential benefits of the licensing framework, however, extend to consumers and the financial industry as a whole. Teixeira explained, “The new licensing framework under COFI offers several potential benefits. Unlike the current system, which licenses financial institutions based on their type, the new framework focuses on the activities they perform. This means that institutions carrying out multiple activities will need only one licence but must obtain authorisation for each activity. This change addresses flaws in the existing system, ensuring that all relevant services are regulated, enhancing consumer protection.”

In her concluding remarks, Dippenaar added that the COFI Bill is a critical development that will shape the future conduct framework. She noted that while the exact timeframe for the Bill is yet to be confirmed, the FSCA has moved forward, establishing an industry reference group - the COFI Bill Transition Working Group under the Market Conduct Committee - in the second half of 2024. This group aims to assist the FSCA in refining the draft-themed frameworks and providing guidance and support for the transition process.

Writer’s thoughts

As the financial services industry prepares for the implementation of the COFI licensing framework, understanding the regulatory changes and the potential for streamlined oversight will be key for financial institutions to navigate this evolving landscape. By embracing these changes, institutions can not only enhance consumer protection but also improve operational efficiency and foster greater trust in the financial services sector. Do you agree? Please comment below, interact with us on X at @fanews_online or email me your thoughts myra@fanews.co.za