The FSCA has highlighted key upcoming changes in the retirement industry as the Conduct of Financial Institutions (COFI) Bill moves closer to enactment, including a new provision that will bring employers under the Authority’s regulatory oversight as supervised entities.
In a pre-recorded presentation for the 2024 EBnet Evolutionaries Conference, Zareena Camroodien (pictured), head of the FSCA’s Retirement Funds Supervision: Fund Governance and Trustees Department, discussed “Evolutions in Regulation”, with a focus on the COFI Bill.
The Bill, currently in its final stages with National Treasury, is expected to be submitted to Parliament later this year. Camroodien described the Bill as the “next evolutionary step” for the retirement industry, following the roll-out of the two-pot retirement system.
“And the next step is the COFI Bill, because the enactment of the COFI Bill, as we trust, is imminent,” she said.
In discussing the Bill, Camroodien noted its goal of creating a comprehensive and streamlined framework for market conduct regulation across South Africa’s financial sector. The Bill aims to apply consistently to all financial institutions, including retirement funds, to ensure unified standards in customer treatment, regardless of whether they interact with the banking, insurance, or retirement sectors.
“It seeks to standardise the application of customer protection principles,” she explained, “so that we don’t have disparate treatment of customers.”
A central theme of the Bill is the commitment to “treating customers fairly” by enhancing customer protection and enforcing transformation and financial inclusion requirements. According to Camroodien, this will bring a significant shift from a rule-based approach to a more nuanced regulatory style.
“It’s activity-based, it’s principles-based, it’s risk-based, it’s outcomes-focused, and it’s proportionate,” she noted.
The Bill also introduces several consequential amendments to the Pension Funds Act (PFA), which will be renamed the Retirement Funds Act (RFA), and updates to the Financial Sector Regulation Act (FSRA) to align with COFI’s principles and broadened mandates.
Additionally, it will broaden the FSCA’s mandate, giving the Authority a more active role in driving transformation within the financial sector.
Practical consequences of the licensing architecture
The Bill introduces a shift from registration to licensing of retirement funds. It is proposed that retirement funds will be required to be licensed under both the RFA and the FSRA.
“This is what I will refer to as the conduct licence, and it is subject to the requirements in both laws. So, in other words, it’s subject to the FSR Act, as well as the Pension Funds Act, now renamed the Retirement Funds Act, and again, that is to ensure the consistency of treatment of members of retirement funds,” Camroodien said.
Described as the two-keys approach, institutions will have to have two keys to be able to operate.
“It might be the prudential key for prudentially regulated institutions – such as retirement funds, banking, and insurance – and it also needs the conduct key. However, the licensing process will be streamlined for retirement funds so that the fund will only be required to submit one application.”
From ‘registration’ to ‘licensing’
The terminology in the RFA will be updated from registration to licensing. However, Camroodien noted that the licensing of a retirement fund will continue in terms of the PFA. The licence establishes the fund as a juristic person and includes the approval by the FSCA of the fund’s rules.
“So not that much has changed in this regard. Persons, however, that intend to establish a retirement fund – which may range from an employer to a trade union or a financial institution acting as a sponsor – will be referred to as ‘commercial sponsors’.”
She added that although separate licensing won’t be required, retirement funds must still meet minimum standards to demonstrate compliance with licensing requirements before the licence can be formally issued.
“However, financial institutions that are ‘commercial sponsors’, will be required to be licensed.”
The ‘activity’ for which a licence is required
The activity for which retirement funds will be required to obtain a conduct licence is “providing retirement fund benefits”. Funds that do their own administration will also have to be licensed for retirement fund self-administration, a sub-activity of the administration activity.
Camroodien noted that retirement benefit administrators will, in future, be licensed and authorised solely under the FSRA. They will be licensed for third-party retirement fund administration, also a sub-activity under the administration activity.
Transitional arrangements regarding licensing will be provided for in Schedule 7 of the FSRA.
“A financial institution licensed under the existing financial sector law (in other words, registered under the PFA) will have its licence converted into the new regime following a mapping process of its activities to the new framework over a staggered period.”
Camroodien explained that the mapping process, which will be led by the FSCA, will involve ongoing engagement to assist financial institutions understand for what they must be authorised and what obligations are imposed as a result.
What happens after the ‘effective date’
On the Bill’s effective date, all registered retirement funds will be permitted to operate as if they already hold a conduct licence alongside their current registration. The FSCA will have up to four years formally to issue these licences, a phase Camroodien refers to as the “conversion period”.
Existing retirement funds must be licensed within four years after the effective date of COFI.
The FSCA must publish a licensing framework within six months of the effective date, giving effect to this schedule.
New applications in respect of retirement funds are to be processed within three years.
“Institutions performing activities that didn’t previously require a licence – for example, funds performing self-administration – may also continue with that activity,” she clarified, “but they are required to apply for the licence within four months from the effective date.”
The FSCA must convert or grant a licence of retirement funds and administrators, unless the Authority believes it is not in the public interest to convert or grant the licence.
“Also, if the financial institution wasn’t actively conducting the business of the retirement fund or administration business within a reasonable period prior to the effective date, that might also lead to the application or the conversion being declined. But audi alteram partem (‘listen to the other side’) will be applicable, and it will be set out in the regulation or the framework that will be passed,” she said.
Public sector funds will fall under the remit of the FSCA
Another significant change introduced by COFI is that public sector funds will come under the FSCA’s oversight, as outlined in section 4A of the RFA. Under section 4, these public sector funds will also be required to obtain a licence – an adjustment brought about as a consequential amendment of the Bill.
Camroodien explained that the RFA will apply to public sector funds, as will COFI and the FSRA. Public sector retirement funds must be licensed in terms of both the RFA and the FSRA.
“A public sector retirement fund that, at the date of commencement of this provision, is not licensed in terms of the Retirement Funds Act must be licensed in terms of the two pieces of legislation within a period after the date of commencement of this provision, which will be determined by the Minister [of Finance] by notice in the Government Gazette,” she said.
The licensing of a public sector fund is subject to any exemptions that the FSCA may grant in terms of the FSRA, or COFI, or any of the provisions that may be applicable in terms of the RFA – the conduct standards and regulations issued in terms of those Acts.
“The public sector retirement funds will accordingly fall under the remit of the FSCA, and it would accord greater protection to members,” Camroodien said.
Stricter standards for board members’ governance and conduct
One of the key shifts under the COFI Bill is the amendment to section 108 of the FSRA, which empowers the FSCA to set heightened standards for board members’ fit and proper requirements.
“It also allows us to make conduct standards in respect of governance,” Camroodien explained.
She highlighted that the FSCA and the Prudential Authority are collaborating on a joint conduct standard aimed at strengthening governance across retirement funds and other financial services entities. Beyond governance, this will enable the FSCA to establish standards related to transformation, remuneration practices, compensation arrangements, and incentive schemes.
FSCA’s power to tackle non-payment of retirement contributions
The launch of the two-pot retirement system on September 1 triggered a surge of member withdrawals from their savings component, revealing widespread maladministration. Many employers, including security firms and municipalities, have been withholding contributions, a longstanding issue where deductions are made but not forwarded to the funds. The FSCA identified thousands of employers last year who failed to remit these contributions.
Camroodien pointed out that a significant change introduced by COFI is that employers will be classified as supervised entities under the RFA. This change will strengthen the Authority in addressing non-compliant employers who neglect their obligations under section 13A, which governs contribution payments.
“We believe that this will go a long way to assisting us in regulating employers more effectively, so that members actually receive the benefits that are provided for in the rules of the fund,” she said.
