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November 10, 2020

4 of 2020

Second Draft of the Conduct of Financial Institutions Bill (COFI)

The first draft of the Conduct of Financial Institutions Bill (“COFI”) was published for comment in December 2018. The second draft of COFI was published by National Treasury on 29 September 2020 and is open for comments until 30 October 2020. National Treasury aims to finalise and submit it to Cabinet for approval early in 2021.

COFI aims to entrench better financial customer outcomes in the South African financial sector. It proposes a set of rules that sets out the requirements for financial institutions to meet and outcomes for them to deliver to customers. It also aims to significantly streamline the legal landscape for conduct regulation in the financial services sector, and in doing so, incorporate the Treating Customers Fairly (TCF) principles.

Application

COFI will be applicable to all financial institutions. Retirement funds must also comply with its provisions.

Licensing, eligibility criteria, fit and proper requirements and governance in terms of COFI

The second draft of COFI refines the approach to licensing of financial institutions to provide for a more comprehensive licensing framework for the Prudential and Market Conduct regulatory authorities. The intended effect of this approach is that an entity will require a licence issued under the COFI Act, but the provisions that set out the framework for licensing is prescribed in the Financial Sector Regulation Act (“FSRA”).

A financial institution that provides a financial product or a financial service is subject to licensing. A retirement fund that performs its own administration must be authorised for benefit administration in addition to the activity of providing a financial product (retirement benefits).

In this draft of COFI, it is no longer a requirement that retirement fund board members must be licensed under COFI. Eligibility criteria, fit and proper requirements and governance of boards of management will be regulated in terms of conduct standards. Different conduct standards may be applicable for different types of funds and types of boards.

Provision is made for exemptions from the application of COFI

The FSCA may exempt financial institutions from any part of COFI where practicalities impede the application, or where any existing legislation also regulates an activity.

Culture and governance

A retirement fund must conduct its business in a manner that promotes fair treatment of members, enhances and supports the efficiency and integrity of financial markets, supports trust and confidence in the financial sector, and promotes transformation in a manner reasonably consistent with its transformation plan.

A retirement fund must promote accountability of its board of management and ensure that board members possess the necessary skills, knowledge and expertise to fulfil their functions, and perform those functions fairly, and with integrity, honesty, and due skill, care and diligence. It must provide for mechanisms to identify and where appropriate, remove persons whose conduct materially increases the risk of the fund not achieving the principles mentioned above.

Obligations of board of management

The board of a fund is accountable for compliance with the requirements of COFI. The board must endorse, and is ultimately responsible for, the ethical culture within the fund.

Remuneration and compensation practices

Remuneration of board members and service providers must be reasonable and commensurate with the activity performed or service provided and not be structured in a manner that impedes the fair treatment of a member.

Transformation plan

If a licensed financial institution is subject to, or has undertaken to comply with the requirements of the Broad-Based Black Economic Empowerment Act, 2003 38 (Act No. 53 of 2003) and the Financial Sector Code for Broad-Based Black Economic Empowerment issued in terms of section 9(1) of that Act, it must have a plan in place to meet its commitments in terms of promoting transformation of the financial sector in line with those requirements.

Boards of management and principal officer (key person)

  • Fit and proper requirements will be prescribed for board members and the principal officer.
  • The role of the principal officer is expanded and the principal officer will also have fiduciary duties towards the fund. The principal officer must be independent and have the requisite knowledge and experience in relevant laws and will be accountable to the FSCA.
  • The provisions applicable to “key persons” will apply to principal officers and deputy principal officers of retirement funds, which means that the principal officer must at all times be a fit and proper person. The FSCA may, if it reasonably believes that the principal officer does not comply, or no longer complies with the requirements of COFI, direct the fund to make arrangements that are satisfactory to the FSCA to address the non-compliance within a specified period, or subject to appropriate conditions. This may include:

(a)       providing additional education or training to the principal officer;

(b)       utilising external resources to support the principal officer;

(c)        outsourcing the functions and duties of the principal officer; or

(d)       suspending or removing a person from the appointment as a principal officer.

If the fund fails to make these arrangements, the FSCA may vary the fund’s licensing conditions, withdraw the licence, or direct the fund to terminate the principal officer’s appointment.

Conduct standards by FSCA

The FSCA may issue conduct standards for and in respect of licensed funds.

Communication

Retirement funds must ensure that risks, benefits, costs, obligations and recourse in case of a dispute are properly disclosed to members. Disclosures must be clear, plain and unambiguous.

Safeguarding of assets

The assets of a fund must always exceed its liabilities. Should a fund fail to comply with this requirement, it must notify the FSCA and submit a remedial plan, which plan must be implemented within four months.

 Public sector funds

Public sector funds will be included in the definition of “retirement fund”. This means that such funds will be subject to conduct requirements such as licensing and for instance, members will be permitted to lodge complaints with the Adjudicator. The rules of public sector funds must be aligned with the requirements of the Pension Funds Act, within a period to be prescribed.

 Transitional arrangements regarding repealed legislation

Despite the repeal of the Long-term Insurance Act, the Short-term Insurance Act, the Financial Institution (Protection of Funds) Act, the Financial Advisory and Intermediary Services Act, and the Credit Rating Services Act, any pending proceedings before a tribunal, a court, an arbitrator or any other person or body, may be continued and concluded.

 Other consequential changes to the Pension Funds Act

The following changes to the Pension Funds Act are proposed in COFI:

  • The term “pension fund” is replaced with “retirement fund” and the Pension Funds Act will be known as the Retirement Funds Act.
  • Different fund-type definitions are introduced to ensure that different conduct standards may be issued for different types of funds.
  • Funds will no longer be “registered”, but rather “licensed”.
  • Beneficiary funds will be able to receive benefits payable on the death of an insured person in terms of any insurance policies, even policies not linked to the employer. This means that all death benefits payable to minors may be housed in one vehicle.
  • The assets and liabilities of each participating employer in a type A umbrella fund must be held separately.

Unclaimed benefits

  • Unclaimed benefits may not be reduced or utilised for any other purpose by a fund.
  • The establishment of a central unclaimed retirement benefit fund with a board appointed by the FSCA is proposed, but little information regarding this fund is given.
  • An unclaimed benefit that remains unclaimed in the central unclaimed retirement fund after 30 years, may be used for another purpose as determined by the FSCA and published in the Gazette.

Section 14

  • Transfers of unclaimed benefits will not be subject to section 14(1), but rather section 14(8) (no submission to the FSCA).

Auditors and financial statements

  • The FSCA may refuse approval of the re-appointment of a fund’s auditor if such auditor has already served as auditor for a prescribed period.
  • The FSCA may withdraw the approval of an auditor if the auditor is convicted of an offense of which dishonesty is an element, if the auditor is under the investigation by the Regulatory Board for Auditors, or if the auditor fails to disclose any conflict of interest.
  • The period for the submission of a fund’s financial statements is shortened from 6 months to 4 months.

Intervention in management of a fund

  • The provision for the appointment of a statutory manager, already provided for in the FSRA, is brought into the Pension Funds Act. The statutory manager will manage the fund together with the board, but in the event of a disagreement, will have the final say.
  • Should the FSCA have reason to believe a board member is no longer fit and proper to hold office, it may direct the board member to vacate office, or replace the board member with another person. The board may then fill the vacancy, failing which the FSCA may appoint an independent person to the board if that is in the interest of the fund or its members.

Deregistration

  • The FSCA may reinstate the license of a retirement fund which was cancelled, with retrospective effect to the date of cancellation, if satisfied that the retirement fund had not ceased to exist, or that the cancellation was as a result of a genuine.

Powers of the FSCA

  • The FSCA may prescribe standards that are necessary and appropriate for achieving the purposes of the COFI.
  • The FSCA may also determine administrative and penalty fees in respect of matters contemplated in COFI and, in relation to those fees, the person by whom the fee must be paid, the manner of payment of the fees, and, where necessary, the interest payable in respect of overdue fees.

Section 37C

  • When a fund becomes aware of the death of a member, it must use its best endeavours to trace dependants and benefits must be paid within two months of tracing a dependant.
  • Where the fund has successfully traced a dependant or dependants, the benefit must be paid to the dependant or dependants within two months of the fund tracing the dependant.
  • If a fund cannot trace any dependant within 12 months and there is a nominee, the benefit or portion of the benefit must be paid to such nominee. If there is a nominee who is not dependant, the deceased’s estate must first be made solvent, and the nominee paid.
  • On the death of a pensioner who receives an in-fund living annuity or life annuity, the benefit must be paid to the pensioner’s nominees, or where the pensioner has not designated any nominees, to his/her estate.
  • A death benefit will only become unclaimed in respect of an already allocated portion if the beneficiary could not be paid within 24 months of allocation.

Section 37D

  • A fund may deduct any amount due by a member to his employer on the date on which the member’s employment with a participating employer in a fund is terminated, and not only when a member ceases to be a member, which means that deferred or paid-up members will also be subject to section 37D.
  • It is proposed that divorce division be made applicable to paid-up members, pensioners and deferred retirement members, as well.
  • Interim maintenance orders may also be deducted from a member’s benefit in a retirement fund.
  • Where a member has an outstanding housing loan which was granted before the date of divorce, the member’s pension interest is deemed to be the amount as contemplated in the definition of pension interest in the Divorce Act, reduced by the outstanding loan amount as at the date of divorce.
  • If a fund is aware of a pending divorce order, the fund will not be allowed to grant a housing loan without the consent of the non-member spouse.
  • Future maintenance must be paid in monthly payments, or annually in advance where a fund is unable to make monthly payments.
  • A non-member spouse will be able to take the allocated portion in cash and transfer the balance to another fund (currently this split is not allowed and the non-member spouse must either take the whole benefit in cash or transfer the whole benefit).

Consequential changes to the FSRA

In order to achieve its objective, the FSCA must promote transformation of the financial sector. Conduct standards may include matters relating to transformation.

The FSCA may issue conduct standards for inter alia supervised entities and key persons. Employers will be regarded as “supervised entities” in relation to their obligations as currently provided for in section 13A of the Pension Funds Act. This will mean that certain powers may be exercised by the FSCA in relation to the obligation of employers.

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