The Financial Sector Conduct Authority this month announced it has submitted to Parliament a Conduct Standard that will impose new compliance obligations on administrators of retirement fund benefits.
The FSCA highlighted that the Conduct Standard will require benefit administrators to design and implement governance arrangements and other control mechanisms that prioritise the fair treatment of “customers” – that is, the fund on whose behalf the administration services are performed. Notably, “customers” include the fund’s members and beneficiaries.
Administrators will also have to demonstrate to the FSCA that they consistently deliver “fair customer outcomes” when providing their services.
The provisions of the “Conditions Prescribed for Pension Fund Benefit Administrators, 2024” will come into effect on different dates once the Standard has been published on the Authority’s website. Some provisions will take effect immediately from the date of publication, whereas others will come into operation six or 12 months thereafter.
The Statement of Need discloses that the Authority is introducing the Conduct Standard because it regards the current regulatory instrument for benefit administrators, Board Notice 24 of 2002, as out of date.
“BN 24 of 2002 does not capture any of the TCF [Treating Customer Fairly] outcomes, nor does it address a variety of fundamental conduct focus areas which are addressed in many of the other financial sector laws, such as governance, fit and proper, outsourcing, conflicts of interest, and the like,” the FSCA said.
“This outdated framework results in a variety of conduct risks in the benefit administrator environment and outcomes that are not on par with the rest of the financial sector. For this reason, the FSCA has identified a need to strengthen the current regulatory framework governing benefit administrators and to ensure that the framework supports the delivery of outcomes that are consistent with the outcomes set out in other financial sector laws supervised by the FSCA.”
New compliance requirements
The Conduct Standard retains certain conditions from BN 24 of 2002, including those related to administration agreements (and their termination), indemnity and fidelity guarantee insurance, maintenance of current assets and liquidity, trust accounts, safe custody of title documents, and procedures for ceasing, dissolving, or liquidating a business. The Conduct Standard has, however, revised some of these conditions.
The Standard also introduces conditions not in BN 24 of 2002. These include requirements relating to the following:
Business and governance. Benefit administrators are obliged to follow basic business principles, including achieving the relevant TCF outcomes. The Standard also sets out detailed governance arrangements, including responsibilities for documenting, implementing, and monitoring the effectiveness of these arrangements.
Changes in business information. The FSCA must be notified of certain changes, such as the administrator’s name or contact details, and changes in key personnel.
Fit and proper requirements. Standards are set for directors, senior managers, and heads of control functions.
Outsourcing. Conditions are prescribed for managing, overseeing, and reviewing outsourcing arrangements.
Conflicts of interest. Among other things, administrators must adopt, maintain, and implement a policy to manage conflicts of interest and ensure that their employees are aware of the policy. These requirements build on section 13B(5) of the Pension Funds Act (PFA).
Communication, disclosures, and complaints management. Conditions are prescribed for communicating with and disclosures to a fund and its members. It also establishes a framework for managing complaints, including allocating responsibilities, processes for escalating and reviewing complaints, communicating with complainants, and maintaining records of complaints.
Data management and record maintenance. The Standard prescribes conditions for data management (including third-party data retention) and record-keeping, with a minimum retention period specified.
Financial matters. It sets requirements for financial accounting, auditing, trust and suspense account management, and statutory returns.
Operational procedures and controls. Conditions are prescribed for ensuring operational capability, data security, and accurate record-keeping to support administrative functions and compliance.
Development of the Standard
The Conduct Standard followed a multi-year consultation process. The FSCA introduced the draft in July 2021 for public consultation, marking the beginning of efforts to establish conditions for benefit administrators.
However, the 2022 FSCA Regulation Plan shifted focus, stating that “various regulatory framework developments will be collapsed into the COFI Bill transition work”, including the draft, to align with the broader Conduct of Financial Institutions Bill framework.
This changed with the 2023 FSCA Regulation Plan, which highlighted ongoing “problems in the section 13B administrator environment” exacerbated by the lack of a suitable framework. The FSCA reconsidered its approach and explored a “slightly ‘watered down’ version” of the draft Conduct Standard to address critical issues while avoiding conflicts with the future COFI structure.
By 2024, the FSCA had finalised its assessment and committed to advancing the revised Conduct Standard. The 2024 Regulation Plan scheduled informal consultation for the second half of the year, with plans to submit the draft to Parliament thereafter. This informal consultation took place as planned in August and September 2024.
The details of both the formal consultation from 2021 and the informal process in 2024 are documented in the Consultation Report.
Cost implications
The FSCA said the consultation process disclosed a range of stakeholder perspectives on the Conduct Standard’s impact, although those predicting a substantial impact often failed to pinpoint which requirements would have a specific impact.
There were specific concerns about the cost implications of the new compliance requirements.
The Authority acknowledged that legislative interventions inevitably have a cost implication. However, it has amended the Conduct Standard by removing requirements that, in its opinion, will potentially have the most significant impact on benefit administrators.
One of the changes to the draft Standard is the removal of the capital adequacy requirement of R3 million. Some commentators said this requirement threatened the viability of administrators, particularly smaller ones.
The FSCA said it has also eased the cost pressures on administrators by revising and simplifying the auditing requirements and removing the audit assurance requirements.
But the Authority stood firm on other requirements that commentators believe will add to administrators’ costs.
Regarding complaint-handling, one commentator projected costs of R500 000 a year to meet the Standard’s requirements.
The FSCA countered that “complaints management is a critical component of a robust conduct framework and if not introduced for benefit administrators now, it will in any case be introduced in future”.
At the same time, the Authority did not necessarily agree that a new person has to be appointed. “We would assume that administrators currently have complaints management procedures in place. If not, this in itself is a concern. A benefit administrator would therefore be able to leverage from existing structures and resources instead of having to appoint a new person.”
Commentators also said that appointed key persons could lead to substantial cost increases.
The FSCA said the Standard does not require the appointment of certain key persons; “it merely provides that the key persons (already appointed, or to be appointed), must meet the fit and proper requirements”. To clarify this, the qualification “where applicable” has been inserted in clause 6(1).
It was submitted that the Conduct Standard will result in the duplication of costs and effort because some of its requirements are already dealt with in Prudential Standards and the FAIS Act.
The FSCA accepted there might be some duplication across frameworks, but it disagreed that this would result in duplicate costs.
“Processes and controls can be streamlined to ensure the same controls are relied on to meet the requirements in both frameworks. We reiterate that requirements contained in Prudential Standards are not enforceable by the FSCA, hence the reason why similar requirements have to be provided for in the conduct framework.”
The FSCA asserted that revised Conduct Standard “strikes an appropriate balance between mitigating key risks whilst not creating an excessive cost burden for benefit administrators”.
‘Proactive supervision’
The FSCA said it will monitor adherence by using “proactive supervisory approaches” in which potential areas of concern, with a greater emphasis on pre-empting negative customer outcomes where possible, are identified. This will include addressing risks at both the individual administrator level and across the sector.
The Authority will develop a reporting framework, and data obtained through this framework will be used as an offsite supervisory tool to identify conduct risks and trends specific to a particular benefit administrator and for benchmarking purposes across the sector. On-site supervision will also be conducted to examine and assess processes and management information relating to the fair treatment of customers.
When risks are detected, the FSCA will engage with administrators to remediate issues, prevent consumer harm, or seek redress if harm has occurred.
