COFI | Why FSPs should start planning now for proportionality

After years of uncertainty, the Conduct of Financial Institutions (COFI) Bill is finally gaining momentum. While its scale may appear overwhelming, smaller financial services providers have a powerful ally in their corner: the principle of proportionality.

This long-anticipated legislation is a cornerstone of South Africa’s Twin Peaks regulatory model. It aims to establish a unified, streamlined framework for governing the conduct of all financial institutions. First published in 2018, the Bill has undergone extensive drafting and consultation. The latest version has been cleared by the state law advisers and is expected to reach Parliament by early 2026, with promulgation likely later that year.

However, full implementation will still take time. Drawing comparisons with the FAIS Act – which took about 18 months from promulgation to enforcement – COFI is only expected to come into full effect by 2028.

Despite the long lead time, concern lingers among FSPs about the Bill’s complexity and the sheer volume of legislative requirements. But at a COFI update session hosted by the Financial Planning Institute of Southern Africa on 17 June, practice management and compliance expert Anton Swanepoel offered reassurance.

“What excites me tremendously,” Swanepoel said, “is the fact that the FSCA is going to apply the principle of proportionality to the various sizes and complexities of businesses. And that should give you a lot of encouragement. It’s one of the reasons, colleagues, you don’t have to fear.”

Not one size fits all

The principle of proportionality means the Financial Sector Conduct Authority will not apply the same market conduct requirements to small FSPs as it does to large banks, insurers, or asset managers.

“We are going to have to help the FSCA immediately to recognise that you’re a small, small-to-medium, medium-sized FSP,” Swanepoel said. “Because they must take their foot off the pedal and not press forward and apply all the voluminous legislation on you.”

But this will not happen automatically. Swanepoel said FSPs have to proactively define and position themselves within the correct size category – small (maybe up to five representatives), small to medium (maybe 5 to 20 reps), or medium-sized (maybe up to 50).

“We need to define everybody’s profile so that when the FSCA and when the FIC visits your business, when your PI insurer evaluates your business, your corporate FSP profile makes it very clear that you’re a small business, or a small-to-medium-sized or medium business,” he said.

He urged FSPs to begin this work immediately, even if only for professional indemnity (PI) insurance purposes.

Compliance isn’t optional

Swanepoel also cautioned that under the COFI regime, sole proprietors may no longer be permitted to operate without a compliance officer.

He said although such an arrangement might make sense from a managerial perspective, it posed serious accountability concerns. Having one person act as the “captain, the linesman, the referee, and the player” created a risk, particularly when the same individual served as the key individual, representative, internal compliance officer, and FSP, with no oversight or support. In such a scenario, he warned, that person would be in trouble.

He emphasised that this was his personal view but said he would support the FSCA not allowing sole proprietors or one-man shows to operate without a compliance officer.

“I would not register an FSP, regardless of my skill set, I will not register an FSP without an external compliance officer supporting, helping, being the professional soundboard that I need. Because one man alone with all these volumes of legislation – FICA, FAIS, FSR Act, POPIA – how do you operate without compliance officers?”

He pointed out that larger institutions such as banks, insurers, and asset managers have entire compliance and risk functions.

“They’ve got compliance – maybe up to three or four compliance officers – simply because the organisation is too big. They’ve got risk managers. Why? For compliance? No, because some of those risks clearly threaten the sustainability of the business.”

According to Swanepoel, compliance is not there to slow down the business – it’s there to keep it on course.

“Who would not, in a big corporation, want risk managers and compliance officers to cover them while the salespeople run? Compliance is there to make sure they don’t have free rein. Because let’s face it, our industry is still full of sales, and without sanity prevailing through existing legislation and putting that into practice, it will be a free-for-all – blood on the streets.”

He acknowledged that many people are unhappy about the cost of complying with regulations, but said it is important to remember the far greater cost of regulatory failure:

“One of our senior executives at National Treasury said, ‘You think legislation is expensive? Think about no legislation. How expensive is that going to be for us?’”

Act with intention

Ultimately, Swanepoel believes proportionality will be the key that helps smaller FSPs not only survive but thrive under COFI. But it requires intention and planning.

He advised FSPs to build their corporate profiles deliberately – from the structure of the executive team and number of representatives to qualifications and operational size – so that both the FSCA and the Financial Intelligence Centre can clearly identify them as small- or mid-sized businesses.

“Then, through proportionality, we are going to strip out the magnitude of legislation – FSR, COFI and the FAIS Act.”

Swanepoel also said the FPI will play a leading role in advocating for small FSPs during the transition.

“The FPI has to advocate for the small FSP to ensure its sustainability, and that’s how we’re going to position the principle of proportionality.”

He hinted that more engagement is on the way: “The FPI hasn’t committed to it yet, but I see this – it’s going to come in the next few months, where we’re going to have a meeting specifically directed to the small, small-to-medium, medium-sized FSPs, and have a proportionality discussion that will be very helpful to all of you.”