As highlighted in some of my earlier articles, the Conduct of Financial Institutions Act (COFI) will significantly impact financial services providers (FSPs) and key individuals when the new market conduct legislation is implemented. However, key individuals and representatives will be relieved to know that, apart from technology innovation, very little will change in the lives of representatives when they transition from the Financial Advisory and Intermediary Services Act (FAIS) to COFI.
This is mainly because many business and legal principles in our industry have been firmly cemented over the decades. If one considers that Old Mutual was established in Cape Town in 1845 as South Africa’s first mutual life assurance society, the financial services industry has been around for almost 180 years.
This means that, as we approach the promulgation of COFI, we are the beneficiaries of well-established, sound and even timeless business and legal principles that have sustained successful FSPs for decades. In addition, under FAIS, legal and compliance principles that apply to representatives have been tried and tested over close to 20 years. The same principles will continue to apply under COFI.
Principles-based market conduct legislation
COFI is based on a set of key principles that will focus more on outcomes within the spirit of the law (Treating Customers Fairly) rather than a tick-box approach to compliance according to the letter of the law (rules-based). Principles-based regulation means moving away from reliance on detailed, prescriptive rules and relying more on high-level, broadly stated principles that set the standards by which FSPs must conduct their business. A classic example of a principle-based provision is found in section 2 of the General Code of Conduct, which states that a provider must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.
Principles refer to behavioural standards, for example, “integrity”, “skill, care and diligence” and “reasonable care” with which FSPs conduct and organise their businesses and the fairness with which they treat customers and manage conflicts of interest.
Key issues that will not change for representatives when COFI is implemented
A few fundamental, timeless principles will never change, regardless of whether services have been rendered before FAIS, during FAIS, under COFI or beyond. I highlight some of the most important ones:
Firstly, trust will remain part of an advisor’s job description. Regardless of legislation, trust has always been and will always be the most important ingredient of any relationship between advisors and their clients. It has always been and will always remain an economic necessity for advisors to build, establish and maintain trusted relationships with their clients because every relationship and every transaction is based on trust. This principle cannot be over-emphasised.
Secondly, every transaction between advisors and clients in terms of the common law and under any legislation is based on the law of contract (agreement) – offer and acceptance. It is a timeless principle that the law of contract fundamentally underlies the rendering of all financial services under FAIS,[1] and it, therefore, comes as no surprise that this principle has already found its way into the COFI Bill.[2]
It is of fundamental importance for every representative to understand that advisory and intermediary services in terms of the FAIS Act and COFI necessarily imply the existence of an agreement or contract between the person who furnishes the advice or renders the intermediary services and a client as defined in the legislation. Transactions are either based on a proposal by a representative and acceptance of the proposal by the client, a request or an instruction (offer) by the client and acceptance by the representative to execute the instruction. It is for this reason that the following provision in the FAIS General Code of Conduct is regarded by legal experts as the foundation of FSP and representative accountability under the Act, as it states:
The service (advice and/or intermediary service we render to clients)[3] must be rendered by the contractual relationship and reasonable requests or instructions of the client, which must be executed as soon as reasonably possible and with due regard to the interests of the client which must be accorded appropriate priority over any interests of the provider.[4]
This principle was further confirmed and recorded by the Financial Services Tribunal:
The liability of an FSP is usually based on a breach of contract. The rule is that failure to execute a mandate with the necessary diligence, skill and care required of a reasonable professional person has to be resolved on the principles of contract, not delict.[5]
Thirdly, some activities in the client engagement process also stand the test of time. The 10-step process of professional client engagement, as illustrated below, has been followed by advisors in one form or another long before FAIS and during FAIS. They will continue to do so under COFI and even beyond.
One would think, with the imminent and significant changes in market conduct legislation, that the compliance standards in the client engagement process would also change significantly.
Fortunately for representatives, over the last 19 years, the FAIS Ombud’s office and the Financial Services Tribunal have provided the industry with many determinations and decisions based on well-researched and well-debated principles of law.
Therefore, The COFI Act has a library full of supporting material that contains well-established and tried-and-tested principles that will be as important for representatives under COFI as they have been for the last two decades under FAIS. Based on these tested principles, I do not foresee that the conduct standards under COFI will differ materially from the provisions contained in the FAIS General Code of Conduct. My thumb-suck estimate is that 90% to 95% of the principles published in the General Code of Conduct will find their way into the conduct standards, leaving no more than 10% of the conduct standards to impact representatives when COFI is implemented.
In the fourth place, the principles and rules in the FAIS fit-and-proper requirements, as published in Board Notice 194 of 2017, will also be included in the COFI conduct standards with minimal changes expected. The FAIS subordinate legislation has laid a sound foundation for the COFI conduct standards still to be published.
Representatives to embrace technology
Taking a leaf out of Gary Keller’s number one Wall Street Journal bestseller book, The One Thing, apart from establishing trusted relationships with clients, the single most important thing that representatives will have to do if they want to excel during the transition from FAIS to COFI and beyond, is to embrace technology innovation fully. The reason for this statement can be found in the book, Practice Made Perfect, which was published almost 20 years ago, when authors Mark C Tienergien and Rebecca Pomering identified the lack of capacity to service clients as the number one challenge of advisors, and I firmly believe that this is still the biggest challenge for advisors today.
It has always been and will always remain an economic necessity for advisors to build, establish and maintain trusted relationships with their clients.
Collectively, all the political, economic, loadshedding, crime and corruption challenges in South Africa have harmed the general productivity of advisors. In addition, the significant increase in compliance administration over the years has put further pressure on advisors’ capacity to service clients. Yet, at the same time, we are all facing one constant factor, namely, we still only have 24 hours in a day. When the number of hours in your day is the constant factor in your practice, and all the other variables and regulatory requirements escalate, logically, the lack of capacity to service clients increases. At the risk of stating the obvious, in these circumstances, the need to find “the one thing” that can close the gap is essential.
Technology has been and will continue to be the game changer for representatives who want to be more efficient and create better client experiences in a highly competitive industry. Few successful advisors, if any, will disagree that technology plays an essential part in managing an effective, efficient and profitable practice.
Unfortunately, many representatives must still make the paradigm shift to optimise technology to ensure that they will be able to cope and excel before, during and after COFI is implemented.
In closing
Although there may be aspects in the client engagement process that will always remain constant and highly relevant regardless of legislation, technology innovation, which is always evolving, is here to stay. Embracing it and keeping up with continuous innovation must be a key priority for representatives as we face the forthcoming implementation of COFI. For those, like me, who know that you are not using technology optimally, I want to encourage you to make every effort to enhance your skills in this area. We are going to need it to remain competitive.
Trusted Advisor
