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Market conduct licence categories under COFI

The implementation of the “twin peaks model” includes the enactment of the Conduct of Financial Institutions (“COFI”) Bill. COFI will be an umbrella piece of legislation embodying the principles of “treating customers fairly” (TCF) in order to regulate market conduct, and shall be governed by the FSCA. COFI will replace significant legislation including the Long-Term and Short-Term Insurance Acts and the current Financial Advisory and Intermediary Services Act 37 of 2002 (“FAIS”). The FSCA submitted the first version of the COFI Bill for public comment in December 2018 and, after receiving substantial industry feedback,  published a second version  for public comment in September 2020. 

Schedule 1 of the second draft version of the COFI Bill includes the traditional financial services licence categories to be expected, particularly in the retail space. These include provision  of a financial product, financial advice, product distribution, discretionary investment management and fund administration. 

Of interest, however,  is the inclusion of a number of new market conduct licenses categories or subcategories to be regulated by the FSCA for the first time in the non-retail space. For example, there is a new licence category for “corporate advisory services” which is defined as “providing proposals or guidance, valuation, analysis or solutions, by any means or medium, in respect of a juristic person’s (a) changes in capital structure, including the arrangement and structuring of debt and equity, (b) mergers, acquisitions or disposals, including potential mergers, acquisitions or disposals or (c) any other advice in relation to industrial strategy.” This would essentially apply to investment banking activities, excluding research and lending and should also not include attorneys providing corporate legal support. There also seems to be provision for counterparties to “opt out” as a category of financial customer under COFI,  thereby circumventing the requirement for this licence. However,  this licence requirement may have far reaching consequences for those operating in the corporate advisory space that have never been obligated to be licensed before.

There is still no indication as to when the COFI Act will come into effect. The second draft version of the COFI Bill makes provision for financial institutions that were already licensed under the FSR Act for a similar activity to a category or subcategory under COFI, to be viewed as a licenced financial institution under COFI. These provisions continue to apply until these financial institutions are granted a licence under COFI and authorised to perform the similar activity, or until the FSCA directs that a financial institution cease performing the activity. There do not, as yet,  seem to be any prescribed timelines  for this transition process. Furthermore, for COFI licence categories or subcategories, where a financial sector law did not require licensing before COFI, such as for corporate advisory services, the person or entity has up to 4 months from the effective date of COFI to apply for the appropriate licence, and may continue operating until the application has been approved or denied by the FSCA.

The second draft of the new COFI Bill is still subject to amendment, but it gives a clear indication of the wide scope of the FSCA’s market conduct regulation. It is recommended that all operators in the financial services industry, including those without any current licence requirements, review Schedule 1 of the second draft of the COFI Bill,  and consider the potential implications of the impending future licensing requirements under COFI.

Kerry Kopke

Kerry has a BBusSci LLB (cum laude) and MCom (Financial Management) and was admitted to the New York bar in 2008 and as an attorney in South Africa in 2012. She currently lectures a module fin the Economics Analysis of Financial Markets at the University of Cape Town. She has worked as an associate at Davis, Polk & Wardwell LLP in New York, at Bowman Gilfillan and at Arthur Cox in Dublin. Kerry also has substantial in-house corporate experience having worked for a number of large asset managers in South Africa. Kerry has extended her scope of work to include public financial management consulting with governmental departments and multilateral organizations. She joined Caveat in 2017 and specialises in financial services law, investment funds and public financial management.

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