Cofi Is Coming – And That’s Good News for Consumers

In April, Finance Minister Enoch Godongwana announced in the Government Gazette that the Conduct of Financial Institutions (COFI) Bill would be presented to Parliament. He gave no specifics about when, and the final version of the bill is still to be made public. However, we do know that the new legislation marks a big step in the restructuring of the financial services industry. This process, which began over a decade ago, has given increasing priority to the consumer.

As far back as 2011, a set of principles, known as Treating Customer Fairly (TCF), has informed and guided legislation (see “Treating Customers Fairly: The Legal Framework and its Application”). These principles first cropped up in regulations under the Financial Advisory and Intermediary Services (FAIS) Act governing the conduct of financial advisers towards their clients. All subsequent legislation, including the separation of regulators according to the “Twin Peaks” model into the Prudential Authority (safety and soundness) and the Conduct Authority (consumer protection and fair business practices), has been formulated with TCF in mind.

The bill, once enacted, will govern how all financial institutions – including banks, insurance companies, retirement funds, asset managers, credit providers, and advisory practices – conduct their business and deal with the consumer, setting minimum standards of expertise and fiduciary responsibility. 

In a series of blogs explaining COFI, Hilah Laskov, director of Werksmans Attorneys, says the bill introduces a new licensing regime for financial services providers based on the activities they engage in, rather than their institutional type. “Under COFI,” Laskov says, “it is not what you are but what you do that counts.” 

For example, if a bank offers insurance and asset management in addition to its banking functions, its licence would require multiple authorisations to cover those activities. Tied to these would be the types of financial products related to each activity and the category of customer to whom the product or service is directed.

Laskov says COFI also incorporates the principle of proportionality, “recognising that regulatory requirements should be applied in a manner that is appropriate to the size, nature and complexity of a financial institution”. 

Addressing the National Council of Provinces’ Select Committee on Finance at the beginning of June, Financial Sector Conduct Authority Deputy Commissioner Katherine Gibson said COFI recognises the changing financial sector, where institutions that once operated separately are increasingly part of large groups offering a broad range of products and services. Alongside these have emerged new digitally-based and other “non-traditional” providers. 

She said firms would need to be able to show how product design, marketing, distribution, advice and recourse mechanisms were built around consumer interests rather than only profitability.

Given the expected disruption in transforming the industry, COFI will be implemented in phases over several years. 

How will COFI enhance the adviser-client relationship?

Consistent across providers, products and services will be the emphasis on fair outcomes for the consumer. 

Pedri Reyneke, CEO and Fund Manager of fund management firm Findotec, says that advisory firms that see COFI as a compliance problem will end up being uncompetitive. “The firms that recognise the regulatory shift as a catalyst for a far bigger shift in client expectations will be in a different conversation entirely. They will not be defending their margins, they will be growing them,” he says.

Keith Peter, Advice Manager for Old Mutual Personal Finance, says COFI moves the industry away from a box-ticking regulatory approach towards a model that places greater emphasis on risk management, customer outcomes and professional accountability. 

Peter says customer dissatisfaction does not automatically indicate poor advice. However, advisers who manage their clients’ expectations, fully explaining the risks involved in a particular course of action and maintaining a detailed record of advice, will be best placed to thrive under the new system. 

“If advisers genuinely engage with risk management and outcomes-based thinking, the industry will become stronger and more trusted. Customers will ultimately benefit from better aligned and fit-for-purpose advice as well as more transparent professional standards,” he says. 

Peter reminds advisers that most of them are already doing it right. “Advisers who have adhered to FAIS when providing advice will have no trouble complying with the TCF principles being embedded though COFI,” he says.