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By Guy Holwill, Chief Executive, Fairbairn Consult

This is the second in a series of three articles about the Conduct of Financial Institutions (CoFI) Bill.  In the first article that I co-authored with Anton Naude, we explained what CoFI is, how it is different to existing legislation and the expected timelines for implementation.   In this article, I’ll discuss who will be impacted by the Bill and how they will be impacted.

As you read through this, it is important to remember that the intent of CoFI is to consolidate and strengthen market conduct laws in the financial services industry, and once legislated, it will repeal many of the financial sector laws that we’re accustomed to – in short, it is going to change our industry.  It will impact all financial institutions, such as all Financial Services Providers (FSPs), banks, insurers, credit providers, Discretionary Fund Managers etc. If you have an FSP license, then CoFI is going to disrupt your world.  While it has significant impacts on businesses across the financial service sector, I’m limiting the commentary in this article to FSPs/brokerages.

One of the key objectives of CoFI is to improve customer outcomes by regulating how financial advisers conduct themselves.  It formalises the implementation of the TCF principles and covers everything from the solutions that are developed and implemented, to the culture within each organisation.  Beyond this, there are three structural areas that will have major impacts on brokerages.  I will discuss each of these and make it practical through examples of matters that you’ll need to consider in a post-CoFI world.


Operational Processes

Under CoFI there will be additional focus on compliance with the conduct standards and fair customer outcomes.  To comply with this, brokerages will be required to have robust systems and processes in place.  While this is not going to be a big issue for businesses that have implemented proper Customer Relationship Management (CRM) systems and use comprehensive advice tools, it is going to be considerably more challenging for businesses which do not have the skills, resources and capital to implement these systems.

Question to consider: Can you demonstrate that you have the systems and processes to ensure that you conduct regular reviews on your clients, and that you record the engagement/discussion?

In most cases, it will be smaller businesses that will be most severely impacted.  In many cases, these businesses do not have the skills, resources and capital to implement such systems or the time to spend on increased compliance.


Operational Capital

To be classified as a going concern today you need to have enough capital to cover potential losses as well as any net liabilities for a period of up to 12 months from the date that your annual financial statements are signed.  This changed significantly a year or two ago when accounting standards were changed to require us to raise a “contract liability”, which is the total amount of commission that would be clawed back by product providers if all relevant life policies lapse at the balance sheet date.  The capital requirement under CoFI is even more onerous because it states that all brokerages will need to be adequately capitalized to cover “the risks to which it is exposed or is likely to be exposed to in the future.”

Question to consider:  Given the experience during COVID, can you demonstrate that you have enough capital to ride out a global pandemic where markets may crash 30% or more and many of your clients lose their businesses or become unemployed?

The requirement to capitalise brokerages will impact businesses both big and small, except for those that are already adequately capitalised, as well as those with wealthy shareholders who are prepared to invest further.



CoFI gives the FSCA meaningful power to effect transformation of our industry.  All brokerages with annual turnover exceeding R10 million will be required to have a transformation plan that will lift them to a minimum of a level 4 B-BEEE contributor.  Brokerages that fail to demonstrate progress towards their plan will face significant fines.

The pressure won’t only come from the regulator because product providers will be scored on their procurement spend – which means that they will be negatively impacted by paying commission to untransformed brokerages.

Question to consider: Will you be able to demonstrate that you have documented, adopted and implemented a Governance policy, which includes a transformation policy, and how this is monitored.

The R10 million threshold means that it will be bigger brokerages that will be impacted, but it won’t take long for small firms that merge to reach the threshold as well.  It is going to be almost impossible for large white one- or two-person brokerages to meet these requirements, and the only option for many of these advisers will be to merge into a transformed organisation.



Most brokerages will need to make changes to fulfil the conduct requirements to demonstrate good outcomes for clients.  Beyond this, all brokerages will need to think carefully about how they will meet the requirements for operational processes, operational capital and transformation.

It is likely that small firms will merge to implement adequate operational processes and to solve the challenge of increased compliance.  These larger firms will create capacity through scale to free up people to focus on compliance and to bring in people with the appropriate skills to implement the required systems.

While mergers may overcome the additional compliance and system requirements, they will not make much difference to the operational capital that is required, since the merged business will require roughly the same amount of capital as each of the smaller businesses combined.  In all cases, you will need shareholders who have the funds to inject the required capital.

Finally, it is important to consider that merging firms will mean that many brokerages will cross over the R10m threshold, which will require them to have transformation plans to lift them to a level 4 B-BEEE contributor, with penalties for those who do not take this seriously.

The combination of these aspects will mean that many small, medium and large brokerages will need to adopt different business models to thrive in a post-CoFI world.

Guy Holwill is the Chief Executive of Fairbairn Consult.  He is a qualified Civil Engineer and Chartered Accountant and has worked in financial services for more than two decades.  Guy is passionate about creating business models that thrive in the changing worlds of regulation and customer experience.

Fairbairn Consult is a firm of Registered Financial Advisers. We are a licensed FSP and a member of the Old Mutual Group.