Complacency is not your friend

As we come to the end of the CPD cycle, we are getting a clearer picture about the new approach that the Financial Sector Conduct Authority (FSCA) and National Treasury (Treasury) want to take when it comes to the conduct of the financial services industry. The various pieces of regulatory reform that the industry has had to deal with will eventually come together and be governed by the Conduct of Financial Institutions (COFI) Bill when it is finally implemented.

At a recently held compliance workshop, which was hosted by Compli-Serve South Africa, Kershia Singh – Director of Market Conduct at Treasury – pointed out that there are a few key aspects of the COFI Bill that the industry needs to pay attention to. 

Core principles

Singh pointed out that there are a number of principles that will be entrenched by the COFI Bill. 

“The Bill signals a shift away from institutional to activity-based regulation. The licensing schedule under COFI will set out the financial activities requiring licensing. With regards to this, the same regulation will apply to similar activities regardless of the institution performing the activity. These were some of the main concerns that were raised through comments that were sent to the FSCA,” said Singh. 

She added that provisions have been drafted which will aim to set certain principle-based requirements in law. This will allow the regulator to monitor and enforce the achievement of outcomes rather than compliance with the letter of the law. 

The reformation hymn sheet

The FSCA and Treasury embarked on a major campaign some years ago to indicate that the regulator is changing its ways and that it wants to move towards an outcomes-based method of regulation. 

Originally, this caused a bit of a stir in the industry as insurers were confused as to what this would mean for their business. Further, would a smaller insurer be expected to comply with the same regulatory requirements faced by larger insurers? 

“The COFI Bill is designed to be risk-based and proportionate. Proportionality will affect the regulator’s supervisory approach, the standards it sets, and the enforcement action it takes. Chapter 1 of the COFI Bill sets out guidelines for what the FSCA should consider in applying a proportionate approach. A smaller insurer will face regulatory compliance relative to the activities that the company does and the risks that the company undertakes. Companies will not be painted with the same brush across the whole industry,” said Singh. 

While the FSCA has increased its focus on customer outcomes and the fairness thereof, a core mandate of the FSCA is that it needs to ensure that the financial services industry is sustainable, innovative and competitive. The regulator does not only exist to serve the needs of the customer. 

Innovation and competition are principles that are central to the COFI Bill. Singh pointed out that the Bill will allow for different licensing and supervisory requirements to be applied to different types of companies.

 “This means that smaller/new entrants that pose less risk will not be required to bear similar compliance burdens as larger and more complex businesses,” said Singh.

 Chapter Three

One of the important chapters of the COFI Bill that financial institutions need to be aware of is Chapter Three. 

“Chapter Three will set out culture and governance requirements for financial institutions. This is important for financial customers to feel confident that they are dealing with firms and key individuals where the fair treatment of customers is central to the corporate culture,” said Singh. 

“A principle-based approach does not mean the absence of rules. The key test for culture and governance will be Treating Customers Fairly (TCF). Are insurers – no matter their size – entrenching TCF outcomes into every interaction that they have with clients? Further, when the FSCA and Treasury engage with insurers over matters relating to culture and governance, the insurer must be able to substantiate and motivate why they acted in a specific manner,” said Singh. 

Chapter Five

Chapter Five is another important chapter that needs to be paid attention to. 

“Chapter Five will set out requirements to ensure that financial services that are provided to customers are suitable and consider the needs, circumstances and expectations of financial customers. This includes customers who may be indirectly impacted as a result of the financial services provided by a financial institution,” said Singh. 

The purpose of regulatory reform was that the FSCA issued Board Notices to the industry that basically served as a list of do’s and don’ts when it came to certain aspects related to the provision of their activities. Will the impending implementation of the COFI Bill mean that the existing Board Notices will fall away, and that the regulator will have to start from square one? 

“In future, all of the existing laws that govern the industry will be repealed and consolidated into the COFI Bill. Repealing provisions in existing sectoral laws (or the laws themselves) will not result in subordinate regulation (Board Notices) issued under those laws falling away. A careful transitional process will be followed to ensure that required subordinate legislation remains effective under the COFI Bill framework until migrated into conduct standards,” said Singh. 

Editor’s Thoughts:
It might not be a Van Gogh or a Da Vinci, but the painting regarding the future conduct standards of the financial services sector is becoming clear. Is the FSCA and Treasury being prudent enough in the painting of this picture to ensure that they do not cause unintentional potholes that will make doing business in the industry difficult or impossible? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.