One act to rule them all
COFI Act set to replace 13 sectoral laws governing SA's financial institutions
The conduct of South African financial institutions will soon be regulated under a single piece of legislation aimed at building a sustainable financial services industry. Caroline da Silva, Division Executive: Regulatory Policy at the Financial Sector Conduct Authority (FSCA) told delegates at the 46th annual African Insurance Exchange (AIE 2019) – held 14-17 July 2019 in Sun City, South Africa – that a dedicated market conduct authority was crucial to improve consumer trust and maintain integrity throughout the sector.
Da Silva – who addressed the conference as part of a panel discussion on the changing regulatory environment – acknowledged the cost implications of a rapidly expanding regulatory environment before reminding firms that much of their expenditure on compliance-related IT systems would have been incurred in the normal course of business as they sought to remain relevant in a fast-paced digital world.
Financial institutions are under significant pressure to reinvent their product and service offerings in a world dominated by new technologies like artificial intelligence (AI), big data, cloud computing, digital platforms and the Internet of Things, to name a few. These technologies can be deployed to meet consumer demands for instant gratification and ‘always on’ service while contributing to efficiency gains in product pricing and delivery.
“We are living in a highly connected world where data is part of the competitive environment,” said Da Silva. Against this backdrop she questioned whether a new regulation that stipulated the appropriate storage and utilisation of customer data should be viewed as a regulatory or business cost.
The FSCA was established on 1 April 2018 as stipulated in the Financial Sector Regulation (FSR) Act and will transition into its role over the next three years. The FSR Act not only changed the jurisdiction of the old Financial Services Board by including banks and service providers in the credit market, but also revised its mandate from a mixed ‘prudential and conduct’ regulator to a ‘conduct only’ authority.
According to Da Silva the new legislation requires the FSCA to be proactive, pre-emptive and intrusive in safeguarding financial consumer outcomes. This explains the conduct authority’s focus on promoting a sustainable financial services sector, building trust between consumers and financial institutions; and dealing with issues around competition and inclusion.
The ongoing Retail Distribution Review (RDR) is a perfect example of an intrusive regulatory approach. “We are no longer patrolling the perimeter to catch the bad guys, but actively changing the system so that it delivers better outcomes,” said Da Silva. She explained that RDR was not an act that would be tabled at parliament, but rather a set of 50-odd principles which would be introduced incrementally by way of amendments to existing acts or regulations. “About 21 of the RDR principles have already been passed and are contained in the amended Policyholder Protection Rules, in the Insurance Regulation and in the FAIS Fit and Proper and General Code of Conduct among others,” she said.
There are more than 12,000 financial institutions that fall under the conduct authority including asset managers, banks, financial services providers and insurers (both long-term and short-term). Institutions in the collective investments environment will be added to the list after three years with a strong possibility that medical schemes will be included too.
The FSCA has already adapted a future-fit structure comprising a single licensing department and a single supervision department (for all financial institutions barring pensions and capital markets. “In the future we are going to have one piece of conduct law – the Conduct of Financial Institutions (COFI) Act,” said Da Silva. She adds that all 13 existing sectoral laws will eventually be collapsed, repealed and replaced by this comprehensive, proportional act.
The COFI Bill was tabled in parliament on 18 December 2018 accompanied by a lengthy Explanatory Policy Paper issued by National Treasury. Regulators are now sorting through the 850 pages of feedback they received during the public comment ‘window’ before taking the legislation to the next stage. It is unlikely that a final version of the bill will be tabled this year; but work has already started on a review of the sectoral laws to incorporate TCF principles and ready them for assimilation into COFI.