ASHBURTON INVESTMENTS: Expert Opinions: Edition July / September 2019


COFI to include
alternative investments

There are far-reaching implications.
Certain clarities are urged by Rowaine Naidoo,
legal advisor at Ashburton Investments.

The Conduct of Financial Institutions Bill (‘COFI’), likely to be tabled in Parliament this year, is said to represent the next phase of legislation aimed at remodelling the financial-sector framework toward a Twin Peaks model.

It is expected to replace and improve the conduct requirements in existing financial-sector laws by addressing aspects of the current multi-pronged policy approach through building a market conduct legislative framework for all institutions performing financial activities.


The Financial Sector Regulation Act of 2017 was the first step in implementation of the long-awaited Twin Peaks model. This model, based on the Australian regulatory system, seeks to strengthen and address the gaps in the regulation of South African financial markets by polarising the financial market into two ‘peaks’ and regulating for them accordingly. 

The emphasis will move away from a regulator being responsible for a type of entity but rather a type of activity. The two ‘peaks’ are system stability and market conduct. COFI will be the legislation that enables the conduct pillar.

What does it mean for us?

COFI seeks to regulate all market conduct dynamics, including treatment of customers.

Treatment of customers had previously been codified in certain pieces of legislation such as FAIS, the Consumer Protection Act of 2008 and the National Credit Act of 2005.

However, all these acts had taken different approaches as to how this objective is to be achieved. They’ve failed to keep up with the ever-changing landscape and realities of South African financial markets.

The result of this disparate regulatory system was an uneven playing field across the various financial institutions, with some financial institutions having a much higher standard with which they needed to comply in comparison to others. Yet the risk or prejudice faced by all of them was equivalent.

The Financial Sector Conduct Authority tried to address this by issuing papers and guidance notes on standards/considerations relating to treating customers fairly (TCF) and retail distribution. But as these were not codified into law, the application and acceptance of what these papers and guidance notes sought to achieve continued to be an afterthought for many financial institutions.

It is important to note that the outcomes of COFI are broader than the TCF outcomes. The TCF outcomes are aimed mainly at retail customers, whereas COFI is intended to have scope of jurisdiction across the financial sector and is not limited to the retail environment.

Aligned with the spirit of the Twin Peaks model, COFI has been drafted on the premise of four interdependent approaches. These are principle-based, outcomes-based, activity-based and risk-based and proportionate.

A principle-based approach seeks to set principles that specify the intention of regulation, rather than set rules for financial institutions. An outcomes-based approach enables the regulator to focus on the outcomes that they require institutions to achieve, rather than setting overly prescriptive process requirements.

An activity-based approach seeks to regulate an activity notwithstanding the financial institution performing such activity. Lastly, a risk-based and proportionate approach requires the regulator to assess risks (now and in the future) and apply/enforce appropriate measures.

To achieve these principles, COFI has been drafted on the basis that it will contain minimum principles and expected outcomes. Also where they’re required, conduct standards, interpretation rulings and guidance notices will be used to address the nuances in each sector.

This approach is also seen as supporting sector diversification and competition by recognising that, while uniformity is crucial, a one-size-fits-all approach would be catastrophic to the South African financial market system.

Inclusion of alternatives

The current market dynamics have seen a shift towards alternative assets classes. These have to date been regulated very differently to traditional financial products.

Consistent with the theme of uniformity, COFI seeks to include alternative investment funds. While this approach is applauded, the current definition in COFI has perhaps taken it a step too far by defining an alternative investments fund as including one or more investors whereas a collective investment scheme is defined as including two or more investors.

It is unclear if it was the intention of the regulator to catch bilateral contracts such as investment management agreements, or if the intention was to only catch alternative investments funds used for pooling such as a private equity fund.

We don’t believe it is the intention of the regulator to catch all relationships under this definition, especially those between two financial institutions. But until the next draft of COFI is circulated, we can only hope that clarity will prevail.

Naidoo . . . market dynamics