To an outsider, the way that the financial services industry is governed in South Africa could be quite confusing. There’s the Prudential Authority (PA) and the Financial Sector Conduct Authority (FSCA), both established as part of a “Twin Peaks” regulatory system under the Financial Sector Regulation (FSR) Act. The PA supervises safety and soundness of financial institutions, while the FSCA is mandated to make sure that financial institutions conduct business with integrity and treat customers fairly. 

Cofi, the FSCA’s long-awaited Conduct of Financial Institutions Bill, is still in draft form. Once promulgated, it will add further oomph to the FSCA’s conduct regulation.

“Although the Cofi bill was first distributed for public comment in early 2019, with a second draft in September 2020, the final version has not yet been published,” says Jessica Blumenthal, a director at law firm ENSAfrica. 

“But the writing is on the wall: the FSCA has already published a conduct standard for banks to implement the principles of the Cofi bill – it’s only a matter of time before Cofi is passed into law and these principles will then apply more widely to other financial institutions.”  

Treating Customers Fairly

Driving the legislative changes are the FSCA’s six Treating Customers Fairly (TCF) outcomes. These inform how financial institutions should operate, from the culture and governance within the institution through to how services are rendered to customers, financial products are designed and how complaints are managed. Put simply, they target the full customer experience when dealing with a financial institution. 

Of particular interest to established FSPs and start-ups alike is TCF outcome #2, which states that products and services marketed and sold in the retail space must be designed to meet the needs of identified customer groups and targeted at those customer groups.

To anyone involved in business in 2021, this seems like a no-brainer. Of course you need to pitch a product at a clearly defined target market – it’s Marketing 101! But if you actually think about it, getting this right is easier said than done, especially when you’re dealing with limited data – spread across multiple sources – to inform product design. 

The more data at an FSP’s disposal, the better “fit for purpose” the products it develops could be, and the better off the customer will be at the end of the day. And the FSP in question will be keeping on the right side of the law.

Join the data revolution

This is where open finance can be tremendously valuable. The concept is already in play in various countries around the world and is busy being reviewed by the FSCA for adoption in South Africa. 

For those not familiar with open finance, it’s a framework where an individual can provide consent to share their personal financial data with trusted third-party companies, in order for those companies to develop financial products and services that will improve the individual’s life. 

We could see fewer policy lapses, for example, because an insurer can make sure that its customers can afford the cover it sells; and fewer defaults, because a lender can use alternative data to more accurately underwrite applicants. With your permission, an institution may also be able to identify a gap in your investment or insurance needs before you realise it yourself. 

The insights to be gained from a safe and secure open finance framework are too valuable for companies to ignore, and for customers, the long-term benefits are obvious: better financial products, greater access to financial services and a positive step towards economic growth and financial inclusion.  

It’s fitting, then, that the move towards transparency and data sharing is dovetailing with legislative changes in the financial space that put the customer front and centre. 

Companies that fail to deliver on either front will simply fade away. BM