In 2011 South Africa began implementing a new regulatory framework for the evolving financial sector. Dubbed the ‘Twin Peaks’ regime, South Africa is the eighth country in the world to adopt such an approach to governance. With the Conduct of Financial Institutions Bill (the ‘COFI Bill’) National Treasury intends to level the playing field by rewriting the rules of engagement in order to enable better customer outcomes in the financial sector. So what does this mean for financial services partners, and ultimately for consumers? It means that the way individuals are treated by the financial services sector will be an area of legislative concern.
What is the Twin Peaks regulatory framework?
In terms of the Twin Peaks approach, two regulatory bodies are authorised; one charged with maintaining the stability of the economy (known as prudential regulation) while the second is accountable for market conduct and consumer protection – the “good conduct” peak of the framework. This two-pronged approach is intended to address shortcomings found in other models generally used to regulate banks and the financial services sector, and before we adopted the Twin Peaks method, South Africa used the sectoral model, in which banks were regulated separately from other financial firms, such as insurers. This model needed to be replaced because it did not adequately address the fact that, with the rise of digital technology, institutions now often overlap multiple sectors. With Twin Peaks, all financial firms, regardless of whether they’re banks, or insurers, are included in the ambit of the prudential peak, while the other peak good conduct peak monitors conduct of all entities, regardless of the type of product or service it offers consumers. The new Twin Peaks model was formalised when the Financial Sector Regulation (FSR) Act was passed in early 2018, establishing the two financial sector regulators – the Prudential Authority and FSCA.
Where does the Conduct of Financial Institutions Bill fit into this picture?
Where the FSR Act gives customers and financial institutions an indication of what to expect of financial sector regulators, the COFI Bill outlines what customers and industry stakeholders can expect of financial institutions. The COFI Bill – and it remains a bill at present, with the second draft closed for comment in October 2020 – falls into the government’s Twin Peak financial sector regulatory reform masterplan. As clarified by National Treasury, the overhaul aims to centralise current conduct standards that regulate financial institutions through a patchwork of statutes, into a single piece of legislation.
The COFI Bill is the next step in legislative reform that will strengthen the regulation of the financial sector in respect of customer treatment and general market conduct. Applicable to financial service institutions, the COFI Bill will define the specific requirements which institutions will be required to meet. One of the most important advancements in this legislation is the proposed implementation of the Treating Customers Fairly (TCF) principles, which will make them legally binding and enforceable for all financial institutions.
Consumers will find it increasingly important to be able to ascertain that they are dealing with firms where TCF is ingrained in the organisational purpose – a mark of reliability and with the COFI Bill, the National Treasury intends to see that South Africa’s financial sector provides consumers and businesses with fair services and value-for-money products. In terms of the proposed legislation all financial products and services promoted and sold in the retail market must meet the specific needs of identified consumer groups, and tailored accordingly.
COFI will standardise the principles to apply to all customers in the financial sector in terms of which customers must:
- Be provided with advice that is suitable to their unique circumstances.
- Be provided with clear information and kept appropriately informed before, during and after the point of sale.
- Not face unreasonable post-sale barriers should they wish to switch products or switch providers.
In short, COFI focuses on putting the client first
Compliance with the provisions of COFI will become increasingly important for financial service providers, especially when it comes to licensing, application of conduct standards, and treating of customers fairly. Adopting a joint approach towards financial sector technology advances (particularly in FinTech) the Prudential Authority, the Reserve Bank and other regulators will work together to help the industry to understand new ways of doing business and disruptive technologies.
The timeline for this legislation has been interrupted by the Covid-19 pandemic, and at this stage it is unclear when the COFI Bill will be tabled in Parliament. Despite this delay, the financial sector must prepare for full implementation of the Twin Peaks regulatory framework. The scope of application will cover institutions such as insurers, banks and credit providers, which will bring certainty, stability and protection to the financial sector, allowing for more positive consumer outcomes. As a result, it is vital that financial institutions prepare themselves adequately for a more closely-regulated field of play, or find themselves in the position of losing their licensing, due to non-compliance.
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