The Conduct of Financial Institutions (COFI) Bill represents the next step of legislation aimed at reforming the financial sector with the first step being the Financial Sector Regulation Act (FSRA) No 9 of 2017, which gave effect to the Twin Peaks model that saw the establishment of the Prudential Authority (PA) and the Financial Sector Conduct Authority (FSCA) in 2018.
The FSRA defined the roles of the regulators whereas the COFI Bill is focused on the conduct of financial institutions. It is expected to replace the conduct provisions of most existing financial sector laws in an effort to streamline the market conduct framework for all financial sector institutions.
The Bill is a refreshing and mature piece of legislation. It presents an eloquent response to addressing the untidiness of multiple standards of legislation through consolidation under a single framework, explicitly articulating the government’s expectations of financial sector institutions. COFI signifies, as explained in the Explanatory Policy Paper accompanying the draft Bill, “a shift away from the traditional prescriptive approach to financial sector legislation and regulation – which has typically led to a tick-box approach to compliance – toward an outcomes-focused approach supported by principles-based legislation, regulation and supervision”.
In recent years the National Treasury has come under attack for introducing legislation that is aligned to global standards but insensitive to the domestic environment. This time it is different. The Bill responds directly to the frustrated calls made by marginalised Black South Africans for a financial sector that is both transformed and transformative. It recognises that very little progress has been made through B-BBEE Codes and Charters and that concerns around concentration of the sector, high barriers to entry for new Black entrants, the need for support of Black industrialists as well as the prevalence of financial exclusionary practices remains ubiquitous and requires urgent attention.
In response, the COFI Bill explicitly supports transformation by making it an objective of the Bill and giving responsibility to the FSCA to support the participation of Black businesses in the provision of financial products and services, and strengthen the protection of vulnerable consumers. This is a big step for the National Treasury who in the past (prior to the enactment of the Insurance Act of 2017) have generally shied away from directly giving legal effect to the B-BBEE obligations of regulated entities.
For many years, Black-owned financial sector enterprises have voiced their discontent with the “one-size-fits-all” approach that all financial sector participants have to play according to the same set of rules yet incumbents, who control the majority of market share, got a head start amassing significant resources prior to 1994. This is particularly relevant when it comes to meeting the stringent licensing requirements which can act as a barrier to entry. The COFI Bill seeks to remedy this through adopting a developmental framework which sees the inclusion of a number of provisions:
It allows the FSCA to exempt new entrants from provisions of the Bill for developmental reasons, meaning that it provides the ability to set a tailored regulatory dispensation that allows for gradual compliance with certain regulatory requirements over time, rather than needing to be fully compliant before engaging with the regulator.
The licensing approach is similarly supportive. Licence conditions can be set that allows for the development of a licensee to meet requirements over time, to facilitate transformation.
The Bill also supports a proportionate approach to regulation that allows for regulatory requirements to be tailored to the nature of the financial institution and the level of risk it poses, thereby preventing undue regulatory burdens on smaller institutions.
The COFI Bill further proposes that the regulator monitors the business models of regulated entities for a demonstration of compliance with transformation legislation. Thus, it is proposed that a financial institution is required as part of its governance framework to design, publish and implement a transformation policy that should satisfy the requirements of the B-BBEE Act and the Financial Sector Code and report to the FSCA on how it is achieving its policy. The transformation policy should demonstrate:
What transformation means to the entity.
How their policy relates to their overall strategic plan.
Who is responsible for transformation across the entity, at the consolidated level and across the various line departments.
Approval and oversight processes, including by the Board.
Goals with timelines and an implementation schedule.
Institutions falling short of targets may also be subjected to fines. This is a hard-line position that will test the resilience of lawmakers against resistance from dominant private sector institutions which have been slow to transform.
On the whole, the COFI Bill is a welcome piece of legislation. The proof of the pudding will be in the ability of the regulator to carry out its mandate with competency and its proficiency in measuring outcomes for evidence of inclusionary progress. DM