Wake up and smell the CoFI – P3

This is the third and final article about the Conduct of Financial Institutions (CoFI) Bill. In the first article, which I co-authored with Anton Naude, we explained what CoFI is, how it is different from existing legislation, and the expected timelines for implementation. In the second, I discussed who will be impacted by the Bill and how they will be impacted. In this article, I’ll talk about what you need to start thinking about now, to ensure that you have a thriving business in a post-CoFI world

Guy Holwill is the Chief Executive of Fairbairn Consult. He is a qualified Civil Engineer and Chartered Accountant and has worked in financial services for more than two decades. Guy is passionate about creating business models that thrive in the changing worlds of regulation and customer experience.

By Guy Holwill, Chief Executive, Fairbairn Consult

Most of our regulatory changes have had long timelines to give people sufficient time to make the necessary adjustments. Just think about the lead-up to the Commission Regulations in 2009, or that only a few of the RDR proposals from 2014 have been implemented to date. The effect of this is that some advisers do not adequately engage new legislation until it becomes effective. Whilst this has not been a disaster for some of the smaller changes, the wide-ranging impact of CoFI requires everyone to start thinking about this now so that the changes proposed by CoFI are manageable.

Whilst CoFI changes the regulatory landscape completely, it is important to keep in mind that its core purpose is to improve customer outcomes by strengthening the conduct requirements of financial advisers. At the same time, we need to remember that we’ve moved away from “rules-based legislation” to “outcomes-based legislation”. This means that the CoFI Bill and its conduct standards will not be a long list of dos and don’ts. Instead, it will require you to have processes and controls in place to ensure certain customer outcomes are achieved, i.e. that a culture of Treating Customers Fairly (TCF) is key to the adviser’s success.

As we’ve seen with other big regulatory changes, some advisers will find the change too difficult to comply with and will proactively choose to exit the industry, while there will be others who simply cannot adapt and will be exposed to regulatory sanction and have to exit the market. The same will happen with CoFI, and this creates a huge opportunity for the advisers who can adapt.

If you are going to merge, are you going to merge with other smaller firms or are you going to merge into a larger firm.

As CoFI becomes law, you must make some decisions that you should not take lightly. The first is whether you want to remain in the industry? If you are going to leave, consider things like lining up a buyer for your practice so that you don’t end up giving away an asset that you’ve spent years building. If you are going to stay, you need to assess whether your business already complies with the new regulations.

Assuming you want to remain in the industry, and that you’re in the vast majority who will need to make significant changes, are you going to make the changes yourself or are you going to merge with other firms? If you are going to adapt your own business, you need to carefully consider whether you have the skills and resources to implement the changes that are required.

If you are going to merge, are you going to merge with other smaller firms or are you going to merge into a larger firm. Merging with other smaller brokerages makes sense if you have a group of like-minded people with complementary skills and access to resources. After all, it doesn’t make much sense to merge with people who don’t have the skills to implement the systems and processes, or those that don’t have access to capital. It’s also important to consider whether your merged firm will have turnover in excess of R10 million, which will require your B-BBEE status to be verified by a verification agency.

The easier option is to merge into a bigger firm that already has the operational processes in place and is appropriately capitalised. There are several options to choose from and you need to think carefully about whether such a move will be good for you, your practice, and your clients. Be wary of firms that offer you money to join and ask questions about things such as restraints of trade, in-house products, house views, succession options and exit terms – because you may find that these will restrict your choices later on.

In conclusion, CoFI is by far the most significant regulatory change that we’ll see in our industry and it will certainly improve customer outcomes. It will disrupt everyone with an FSP license from insurers to banks and from discretionary fund managers to brokerages. In some cases, business models that are currently thriving will be severely disrupted and it will be those who embrace the change who will come out on top. It is almost certain that the “broker market” will consolidate and you need to carefully consider who you will partner with to thrive in the new world.

Fairbairn Consult is a licensed Financial Services Provider and a member of the Old Mutual Group.