A pivotal change anticipated with COFI is the comprehensive revamp of the licensing requirements for financial institutions. This article delves into these changes and offers valuable insights for financial service providers (FSPs) to prepare for this transformation.
Amid the many facets of COFI that will reshape the financial industry, a big focus is the new licensing framework, which is a substantial departure from the existing system.
Even though the release of the licensing application forms, which was meant to be published towards the end of 2023, has experienced delays, valuable information regarding the potential activities for which FSPs might seek licences is already available.
This presents a strategic opportunity for FSPs to proactively prepare for the new licensing framework, positioning themselves to complete the forms swiftly and accurately once they are made accessible.
COFI’s single licence solution
How will the new framework differ from the existing one? Currently, financial institutions are licensed on an institutional basis, as a bank, an insurer, a collective investment scheme, and so forth.
Under the new system, there will be a bigger focus on what activities they do. So, regardless of what the financial institution identifies as (for example, as a bank, an FSP or product provider), if they carry out more than one identified activity – which many financial institutions do – they only need one licence, but they will have to obtain authorisation for each activity and add it to their licence.
Why the change? According to a COFI explanatory policy paper by the Department of National Treasury, the current licensing system has flaws that can be exploited. For example, some businesses that offer products and services that “behave” like financial services or products can structure themselves in such a way that they fall outside regulatory definitions. Thus, they avoid being regulated and licensed.
In addition, while the new framework may initially bring with it some additional admin, it aims to streamline requirements for FSPs and product providers. It seeks to simplify the regulatory landscape, ensuring that businesses are clear about the regulations they need to follow, avoiding confusion and multiple sets of rules.
Getting ready for the new framework
Here, preparation is key. The final licensing form isn’t yet available, but a list, including definitions for each, of the licensing activities can be found in the second draft of the COFI Bill. While these activities could still change slightly in the future, financial institutions can still use them to prepare.
We have, for example, already begun assisting our members by providing them with an early view of the activities listed in the second draft. This allows them to analyse their business operations ahead of time to identifying the activities they perform and potential areas of concern or uncertainty. Additionally, it’s crucial to carefully review the definitions of these activities and their scope because they may differ from your current understanding.
If FSPs delay their business analysis until just before the new licensing framework is implemented, they risk overlooking crucial activities, or they’ll be forced to make important business decisions without having time to consider the impact. This rush might result in incomplete or inaccurate licensing applications.
To avoid this, it’s advisable to start the analysis well in advance. Taking a proactive approach also allows time for seeking clarification from your compliance provider on any uncertain activities.
Readiness is crucial
Hastening through the licensing application process may result in inaccuracies, potentially causing complications for your business.
By investing time and effort now and adopting a proactive and meticulous approach, you position yourself to navigate the upcoming COFI licensing landscape with greater ease and accuracy.
Interested in learning more about COFI?
Explore how the upcoming legislation aims to bolster Treating Customers Fairly (TCF) within the financial services sector in our first Decoding COFI series article: Giving teeth to TCF.