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Decoding COFI: Helping our members prepare

Posted on 11 Apr 2024

Ensuring a smooth transition to the Conduct of Financial Institutions (COFI) Bill hinges on preparation. Here is how we’ve been helping our members navigate the forthcoming regulatory changes.

The COFI Bill has sparked significant concern among independent financial advisors (IFAs), and many smaller advisory firms have been told that they’ll struggle to adapt. However, with the right preparation, IFAs can successfully adjust to COFI’s regulatory changes.

From incorporating the Treating Customers Fairly (TCF) Outcomes into our audit processes and having conversations about outcomes-based reporting through Omni-CBR to enhancing our own services and systems, we’re actively preparing and guiding our members through the forthcoming changes.

Enhanced focus on TCF

COFI aims to improve client outcomes within the financial services sector, and while the exact timing of the bill is still uncertain, the Financial Sector Conduct Authority (FSCA) is already working towards this goal. For example, their recent Statement on Consumer Vulnerability, published on 19 March 2024, encourages a better understanding and monitoring of consumer vulnerability and market conduct threats, a crucial step in implementing TCF principles.

In line with the FSCA’s and COFI’s strengthened approach to TCF, our Compliance Officers have since the beginning of last year intensified their emphasis on these principles during their compliance audits. (For more on how COFI will bolster TCF, read our article Decoding COFI: Giving Teeth to TCF.)

While our audits continue to evaluate adherence to existing regulations, such as the Financial Advisory and Intermediary Services (FAIS) Act and the Financial Intelligence Centre (FIC) Act, they now also encompass various TCF elements. This includes modifying parts of the existing Masthead audit monitoring framework to reflect a TCF perspective and introducing new TCF-related monitoring areas.

Furthermore, our visits have started moving towards a more qualitative, outcomes-based testing approach, aiming to gain deeper insight into how FSPs measure their TCF outcomes. Our Compliance Officers now delve into more detailed TCF discussions with FSPs, seeking explanations and evidence regarding their execution of activities for collecting, analysing and utilising data to ensure TCF outcomes are met effectively within their business operations.

Addressing data collection practices

The formalisation of data collection in the form of Omni-CBR (Conduct of Business Return) reporting is another significant regulatory shift. The Omni-CBR integrates components of the COFI Bill and other conduct indicators. Instead of a tick-box approach to compliance, FSPs will now be required to collect and report on data to substantiate TCF Outcomes and submit it to the FSCA via Omni-CBR reports.

Our Compliance Officers have started having conversations with our members to guide them in assessing their data collection practices. These conversations encourage FSPs to start evaluating their data collection methods, identify market conduct indicators in their FSP and determine if they are capturing the right types of data to measure outcomes effectively.

Furthermore, our Compliance Officers are incorporating data collection inquiries into our TCF-related compliance visits, ensuring that FSPs are adequately prepared for the Omni-CBR reporting requirements.

Moreover, in 2022, as part of our commitment to facilitating this transition and to ensure that smaller IFAs were heard and taken into consideration during the Omni-CBR development process, some of our FSPs were involved in a test run of the FSCA’s draft Omni-CBR template. Leveraging our extensive nationwide member base, we identified FSPs from various categories and regions. The insights gained from this participation enabled us to provide detailed and valuable feedback to the FSCA on the first draft of the Omni-CBR template, further contributing to our members’ preparedness for the regulatory changes ahead. FSCA is expected to publish a revised version of the draft Omni-CBR template by 1 July 2024.

Smoothing the transition to the new licensing framework

COFI will also bring about a comprehensive overhaul of the licensing requirements, marking a notable shift from the current institutional-based licensing approach. The current system issues licences based on institutional categorisation, for example a bank, FSP or insurer. Under the new system, however, there is a greater focus on what activities these entities participate in. So, institutions engaging in multiple activities will still require only one licence, but they will have to obtain authorisation for each activity and add it to their licence. (For a more detailed explanation of the new licensing framework, read our Decoding COFI: Navigating the new licensing landscape article.)

While the final licensing application form remains pending, important insights can be gleaned from the second draft of the COFI Bill, which includes a comprehensive list of licensing activities alongside their respective definitions.

Recognising the importance of early preparation, we have provided our members with an early view of these activities, and we have asked them to thoroughly analyse their business operations against these activities in advance. This proactive approach gives them enough time to properly identify the activities they perform and potential areas of concern or uncertainty.

Preparing our members – and ourselves

While we are assisting our members in preparing for COFI through various strategies, our commitment extends beyond that. We are also actively enhancing our internal systems and procedures to align with the upcoming regulatory shifts.

One of our primary initiatives involves upskilling our staff to ensure they possess the knowledge and expertise to navigate the intricacies of COFI effectively. Additionally, we are developing and refining our systems and procedures to streamline processes and enhance service delivery.

Despite the apprehension and uncertainty prevalent in the financial services industry, we believe that with proper preparation, IFAs can transition successfully to the new regulatory landscape.

MASTHEAD IS

A national supplier of risk management services to independent financial advisors and other licensed financial service providers (FSPs). Established in 2004, we help our clients overcome their risk management challenges so they can grow and thrive in an increasingly regulated industry. Providing professional guidance and practical support, our team of specialists is passionately committed to delivering tangible solutions.

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