The Conduct Standard for Financial Institutions Bill, 2020 ("COFI") could be published in third draft or tabled in parliament COFI is one of the final steps in the twin peaks reform. It is intended to address regulatory arbitrage and ensure fair customer outcomes are achieved by all providers of financial instruments, services and products.
When COFI is enacted, it will expand the current licensing regime. Lenders who currently are not required to be registered credit providers under the National Credit Act, 2005 ("NCA") and who are not required to be licensed under the Financial Advisory and Intermediary Services Act, 2002 ("FAIS") as financial services providers ("FSPs") will, under COFI, need to be licensed to continue to extend loans to consumers. This will enter them into the regulated space for the first time.
While the NCA regulates the conduct of credit providers, its scope is limited. It does not apply to "large transactions" where a consumer is a juristic person with an asset value or annual turnover in excess of ZAR1-million, or where the credit agreement is for more than ZAR250 000.
FAIS regulates the conduct of FSPs, however loans are not currently considered to be "financial products". Accordingly, financial services rendered in respect of loans fall outside of FAIS.
The Financial Sector Regulation Act, 2017 ("FSRA") defines a "financial product" to include the provision of credit under a credit agreement regulated in terms of the NCA. This inclusion does not apply to the FSRA, which provides that the Financial Sector Conduct Authority ("FSCA") may regulate and supervise a financial institution's conduct by way of conduct standards. Furthermore, while the FSRA empowers the FSCA to regulate the conduct of FSPs who are also registered credit providers, it can only do so by way of conduct standard in so far as it relates to the matters listed in section 108 of the FSRA. COFI provides the conduct regulation required to fill these gaps.
The second draft of COFI defines "lending" as the provision of credit under a lending agreement not regulated in terms of the NCA. It stipulates that no person may lend, give financial advice in respect of lending or provide general administration services relating to lending, unless issued with a licence under COFI, or appointed as a representative of a financial institution that is appropriately licensed. Once COFI is enacted, providers of credit to non-retail customers will be required to be licensed in respect of their activities, albeit that COFI will have a limited application to these entities.
A credit provider will also incur responsibilities under COFI as a product provider. COFI includes, within the sub-categories of the activity of providing a financial product, the provision of credit in terms of a credit agreement. These responsibilities will be limited to ensure that there is no overlap between COFI and the NCA.
A license will also be required by persons providing financial advice or general administration services in respect of retail credit (the provision of which is governed by the NCA), as well as financial institutions providing debt collection services in respect of debt that originates from a loan issued under the NCA.
The responsibilities imposed on these entities under COFI seek to ensure that customers interacting with these entities do not fall between the regulatory cracks and can be assured of fair outcomes. Ensuring fair outcomes for all customers in the financial services eco-system not only supports financial inclusion and stability, but also fortifies the principle that financial institutions (and all companies for that matter) have a responsibility to their customers, as stakeholders, which responsibility cannot be overlooked for the profit imperative. This is ESG (environmental, social and governance) integration at work.
The provisions of COFI amplify the conduct regulation principles already infused in existing South African financial sector law. However, as the licensing ambit is extended and previously unregulated businesses transition into the regulated space, there is homework to be done to ensure that these newly regulated entities are aligned with principles long applicable to regulated businesses, but perhaps somewhat new to them.
The enactment of COFI will change the lives of providers of credit to non-retail customers. Not only will they be required to be licensed within four months from the date on which schedule 4 of COFI comes into operation, they will also need to ensure compliance with the applicable provisions under COFI (discussed further here), as well as applicable conduct standards, if such standards are issued by the FSCA in the future. Registered credit providers will also be affected by COFI's enactment and will need to comply with the provisions of COFI applicable to them and which are indicated here.
All financial institutions, even those currently regulated, will need to grapple with whether COFI requires "business as usual", or if it warrants a substantive re-think of how things are done. Certainly, with the increased focus on culture and governance, most financial institutions would be encouraged to undergo some introspection against the principles enumerated in COFI.
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