Introduction
I had the privilege of co-presenting with the FSCA’s Zareena Camroodien at this years’ Pension Lawyers Association annual conference on the topic of the Draft Conduct Standard prescribing conditions in respect of pension fund benefit administrators.
In this article I will highlight some of the important changes.
Board Notice 24 of 2002
Section 13B(1) of the Pension Funds Act, 1956 provides that no person shall administer on behalf of a pension fund the receipt of contributions or the disposition of benefits provided for in the rules of the fund, unless such a person is approved by the FSCA and continuously complies with such conditions as may be prescribed.
Currently those conditions for benefit administrators are set out in Board Notice 24 of 2002 (BN 24). These conditions include, among other things, the requirement for the administrator to:
- Enter into administration agreement with the fund which agreement must contain certain provisions as set out in BN 24.
- Appoint an auditor and furnish annual reports to the FSCA.
- Obtain and maintain professional indemnity insurance and fidelity guarantee insurance.
- Meet requirements relating to pension fund monies and documents of title.
Draft Conduct Standard
BN 24 was published 23 years ago. Since then, there has been significant regulatory and policy developments, including the implementation of TCF as well as RDR which outlines a more proactive and interventionist regulatory approach and proposed to shift away from a purely rules-based compliance approach to a more outcomes- and principle-based approach.
On 29 March 2018, the Financial Sector Regulation Act became effective and created the Twin Peaks architecture. One of its main objectives was to move to a more consolidated and streamlined conduct framework which ensures more consistent outcomes across the financial sector and that facilitates a more proactive, forward looking and outcomes focused approach.
BN 24 is one of the regulatory frameworks that has, to date, not sufficiently evolved to adapt to the broader developments explained above. For this reason, the FSCA identified a need to strengthen the current regulatory framework governing benefit administrators and to ensure that the framework supports the delivery of outcomes that are consistent with the outcomes set out in other financial sector laws supervised by the FSCA.
In July 2021, the FSCA accordingly published a draft Conduct Standard titled “Conditions Prescribed in respect of Pension Fund Benefit Administrators” for public comment. The intention is that the Conduct Standard, once finalised, will replace BN 24.
The draft Conduct Standard repeats some of the conditions that are currently prescribed in BN 24, however, the requirements relating to these conditions have been expanded on and improved.
New conditions include:
- Business principles, culture and governance: The draft Conduct Standard places an obligation on benefit administrators to conduct their business in accordance with certain basic business principles, including achieving the relevant TCF outcomes. It also provides for relatively detailed governance requirements and sets out the obligations of the governing body of a benefit administrator and the responsibility to adopt, document, implement and monitor the effectiveness of governance arrangements within the financial institution.
- Fit and Proper requirements: Contrary to BN 24, the draft Conduct Standard does not impose specific requirements relating to shareholders of benefit administrators, other than requiring that a benefit administrator must notify the FSCA if a change in shareholding occurs. The draft Conduct Standard prescribes fit and proper requirements relating to directors, senior managers and heads of control functions.
- Outsourcing: The draft Conduct Standard prescribes conditions relating to outsourcing by benefit administrators, including the management, oversight and review of outsourcing arrangements. The administrator will require the funds prior consent to enter into an outsourcing arrangement.
- Conflicts of interest: The draft Conduct Standard prescribes conditions relating to conflicts of interest, which requirements build on and supplements those contained in section 13B(5) of the PFA.
- Communication, disclosures and Complaints management: The draft Conduct Standard prescribes conditions relating to communication with and disclosures to the fund, as well as members of the fund, during and after contracting. It also prescribes requirements relating to the management of complaints by benefit administrators, including requirements relating to the establishment of a complaints management framework.
- Data management and maintenance of records: The draft Conduct Standard prescribes conditions relating to data management, including where the benefit administrator relies on third parties to retain data. It also sets requirements relating to the maintenance of record, including a minimum period for retaining records.
- Financial matters: The draft Conduct Standard prescribes conditions relating to a variety of financial matters, including financial accounting, procedures and controls, auditing and statutory returns, management of trust and suspense accounts, and the like.
- Operational ability: The draft Conduct Standard prescribes conditions relating to operational ability which are aimed at ensuring a benefit administrator must have the operational ability to effectively perform its administrative functions and ensure that accurate and complete data and records are maintained.
Final draft
The FSCA initially placed this Conduct Standard on hold pending the implementation of the Conduct of Financial Institutions Bill. However, as explained in the FSCA’s 2023 Regulation Plan and, more recently, the 2024 Regulation Plan, the FSCA subsequently took a decision to progress this Conduct Standard.
Based on the FSCA’s view that the amendments made to the initial draft subsequent to the consultation process did not result in the draft Conduct Standard being materially different, the decision was made not to publish it for another round of public consultation.
Instead, the FSCA approached industry bodies who commented on the previous draft Conduct Standard and afforded them the opportunity to view the amended draft and related documents (including their responses to previous comments) whereafter it would then be submitted to Parliament.
Over 350 submissions were made and highlighted (among other things) the following:
- General comments: Commentators proposed changes to address the scenario where the benefit administrator is also a licensed insurer, as there are overlapping requirements in this Conduct Standard and the regulatory framework that applies to insurers. FSCA confirmed that no such distinction is needed – where the benefit administrator is also a licensed insurer, it will have to comply with both the Standard and the insurance regulatory framework.
- Sharing of information with the new administrator at termination of the administration agreement: The draft Conduct Standard proposes the sharing of certain information by the previous fund with the new fund in an electronic format “that can be assimilated into the fund’s or the newly appointed benefit administrator’s system” – the FSCA agreed to remove reference to assimilation with the new administrator’s system as the old and new administrator may have differing admin systems. Instead, the final draft refers to providing information in a format that will support effective and efficient transfer thereof.
- Definition of “benefit administrator”: Certain commentators queried whether this definition includes self-administered funds. The FSCA confirmed it does not – the intent of this draft Conduct Standard is to regulate the relationships between funds and benefits administrators with whom they have contracted. Should the COFI Bill be promulgated prior to this Conduct Standard coming into effect, the appropriate steps will be taken to transition this standard into the COFI framework and also to deal with self-administered funds.
- Definition of “complaint”: The definition of “complaint” as set out in the draft Conduct Standard differs from that as set out in section 1 of the PFA, which some commentators believed would cause confusion. Clarity was thus sought on who is ultimately responsible for complaints. The FSCA confirmed that “Complainant” as defined in the Conduct Standard is in relation to benefit administrators specifically. The definition in the PFA is in the context of complaints against funds submitted to the Pension Funds Adjudicator. Whether the PFA or the draft Conduct Standard is applicable to a complaint will thus depend on the nature of the complaint.
- Conflict of interest policies: In terms of the draft Conduct Standard, benefit administrators are required to adopt, maintain and implement a conflicts of interest management policy. Comments received highlighted that some administrator’s policies are set at a group level and as such confirmation was requested as to whether this would suffice. The FSCA confirmed that a Group level COI policy would be sufficient if it complies with the requirements set out in the Conduct Standard. FSCA also agreed to consider publishing a prescribed format for COI incident reporting.
- Capital adequacy requirement: Several concerns were raised that the capital adequacy requirements could make it very difficult for new, smaller and independent administrators to enter the industry. FSCA agreed, and as such the minimum capital requirement was deleted. Other requirements relating to financial matters were significantly simplified.
- Transitional arrangements: The draft Conduct Standard proposes a 6-month period within which to comply. The FSCA conceded it might be too little time and thus agreed to a staggered implementation – some conditions will therefore come into effect on publications whilst others will allow for either a 6 or 12-month transition period, depending on the condition.
Conclusion
The FSCA has confirmed that the amended draft Conduct Standard and supporting documents were submitted to Parliament on 1 April 2025.
It is important to note that, in terms of COFI, a regulatory instrument issued under a provision of a law being repealed through COFI will remain in effect until replaced. The Conduct Standard will, however, eventually be transitioned to the COFI Bill.