The Conduct of Financial Institutions Bill (CoFI) has been quite the enigma. It first surfaced in draft form over seven years ago. It’s been widely reported that CoFI is going to be enacted this year, but there has not been much public disclosure of the contents of such an important piece of legislation. The rumoured three-year transition period hardly assists for it assumes all is in order with CoFI and this is not the envisaged consultation process in our law.
Background
CoFI represents the overhaul of South Africa’s financial sector conduct regulation, aiming to consolidate fragmented laws into a unified, principles-based framework under the FSCA. While intended to enhance customer protection and market integrity, CoFI raises substantial legal and practical concerns regarding vagueness, implementation burdens and potential over-reach.
CoFI seeks to repeal conduct provisions from at least 13 existing statutes, including the Financial Advisory and Intermediary Services Act (FAIS Act) and various insurance and pensions laws, replacing them with a single market conduct regime. Its objects include protecting financial customers, promoting fair markets, trust, innovation, competition, inclusion, and transformation, while aiding financial stability.
CoFI adopts an activity-based licensing model, shifting from sector silos to rather regulate similar activities uniformly across entities, supplemented by principles (e.g., fair treatment) and FSCA-issued conduct standards. This aligns with the Twin Peaks model under the Financial Sector Regulation Act 2017, empowering the FSCA for its outcomes-focused supervision.
Key provisions
Licensing and governance
CoFI mandates licensing for activities in Schedule 1, with one licence per institution covering categories/sub-categories of activities, imposing institutional form requirements. Governing bodies bear accountability for culture and compliance, requiring governance arrangements proportionate to risks, including remuneration policies, conflict management, and transformation plans.
Fair treatment principles underpin product/service provision, advertising/disclosure, and post-sale obligations, with proportionality exemptions for inclusion and innovation.
Enforcement and standards
The FSCA gains broad powers to make conduct standards, conduct inspections, and enforcement, including debarment of representatives. There is also provision for the FSCA to provide guidance to industry, provide interpretation rulings, enter into enforceable undertakings and to impose penalties.
Strengths of the framework
CoFI is intended to address regulatory gaps by capturing overlooked activities and harmonising oversight, closing silos that enabled arbitrage. Its principles-based outcomes-focused approach shifts from rigid rules to substantive compliance, fostering innovation, with proportionality for smaller entities.
Legal deficiencies
Vagueness and legal certainty
It remains unclear why the matters now being attempted to be prescribed in CoFI were not addressed in Conduct Standards. No less than the FSCA implicitly admitted this when the regulator noted that it would issue conduct standards in the interim to partially address the delay in promulgating CoFI.
More concerning is that CoFI attempts to make what are ‘general’ conduct standards on a whole range of matters, but the FSRA (which has been characterised as the primary and regulator-facing financial services law) is clear that only the FSCA can make conduct standards. The FSRA is clear about the FSCA’s standard-making powers, so it is concerning, and legally questionable, that the legislature can intervene or usurp the FSCA’s authority in such a manner.
Moving to other concerns, CoFI’s heavy reliance on high-level principles (e.g., “fair treatment”, “due skill, care and diligence”) and delegated standards may contravene constitutional imperatives for accessible, certain law. Some decry this as a “FAIS plus” hybrid, risking “creative compliance” or arbitrary enforcement without clear rules. Principles like “proportionality” lack defined criteria, inviting judicial challenges akin to those under the FAIS Act’s fit-and-proper requirements.
An outcomes-based regime demands regulators exercise judgment, yet CoFI fails to mitigate accountability gaps, potentially violating administrative justice under The Promotion of Administrative Justice Act, 2000 (Act No. 3 of 2000) (“PAJA”). Oral complaints, for example, exacerbate uncertainty in recording and appeals.
Implementation and compliance burdens
Activity-based licensing demands resource-intensive overhauls – IT upgrades, training, governance restructuring – straining smaller institutions amid economic pressures. Transition risks “fragmented” standards under FSRA if delayed, prolonging uncertainty.
Remuneration/conflict rules and transformation reporting impose unquantified costs, potentially stifling SMEs and fintechs without adequate exemptions. In any event, the transformation provisions in CoFI are unimpressive and lack-lustre to say the least and gives little power to the regulator to progress this critical imperative in the South African economy.
Enforcement silos persist with NCR overlap (credit providers excluded per policy), risking dual regulation and regulatory arbitrage. No comprehensive impact assessment appears to have preceded these burdens.
Practical and economic implications
Staggered rollout (post-2026) heightens preparation difficulties due to draft flux. Fintech exemptions are promising but undefined, potentially chilling innovation. Broader effects include elevated barriers from fit-and-proper expansions and auditor liabilities, consolidating market power among incumbents.
Comparative insights
Internationally, the UK’s principles-based model (FSA Principles) succeeded via clear guidance, unlike CoFI’s nascent standards. Australia’s Banking Executive Accountability Regime offers lessons in senior accountability without vagueness. At the very least, given South Africa’s context, particularly its low financial literacy, demands hybrid rules for vulnerable retail customers.
Recommendations on the way forward
While the critical ‘existential’ issue around CoFI needs to be addressed, there are other steps the legislature should consider:-
- Embed indicative “grey lists” of unfair practices and composite fairness criteria in CoFI for certainty.
- Mandate pre-enactment regulatory impact assessments, with sunset clauses for some standards.
- Strengthen proportionality via tiered requirements (e.g., scaled for SMEs) and fund transitional support.
- Clarify NCR/FSCA delineations and oral complaint protocols.
- Legislate good faith duties as an anchor principle.
Parliament needs to refine CoFI via rigorous scrutiny. Enactment without amendments risks litigation, delayed implementation, and sub-optimal outcomes. A phased, consultative rollout post-2026, anchored in evidence, remains essential for legitimacy.
