Page 90 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 5

Hot Tips?
The definition of advice under FAIS is deliberately broad in order to be as inclusive as
possible. Does this mean that the exchanging of share tips on the golf course between
friends is regulated by FAIS?
The answer, as a rule, is no. The FAIS definitions involve advice to a client given as part of the
regular business of the FSP. Loose talk between mates is therefore not at issue. But a financial
advisor playing golf with his clients needs to be careful: investment tips given at the 19th hole would
be subject to FAIS rules.

Removal of medical schemes for the meantime
Streamlining of the interaction between the Financial Markets Act and COFI
Application of COFI to non-retail business (eg, where clients are corporates or where
clients are professional investors)
Conduct of Financial Institutions (COFI) Bill
Part of the Twin Peaks initiative is the intention to move away from institutionally-based
regulation to a more activity-driven regulatory environment. Although the FSRA is now law, the
shift from the current sectoral licensing model to a more centralised, activity-based licensing
model is still in progress.
COFI will in time replace existing laws (such as FAIS) but will initially exist beside them.
As noted in the explanatory policy paper that accompanied the first draft, COFI represents “a
shift away from the traditional prescriptive approach to financial sector legislation and regulation –
which has typically led to a tick-box approach to compliance – toward an outcomes-focused
approach supported by principles-based legislation, regulation and supervision.”
The licensing function under COFI will be a significant shift from the current system. Financial
institutions in SA are granted licences on an institutional basis, an approach that is too broad to
effectively regulate conduct across disparate activities.
COFI provides that financial institutions will be authorised separately for each activity.
Institutions that carry out multiple activities – as many financial institutions do – will still obtain a
single FSCA licence, but with multiple activity authorisations.
Under the second draft of the COFI bill, the framework for licensing will be established under
the FSRA (Financial Sector Regulation Act) rather than under COFI itself (although some licences
will be issued under COFI). This will allow authorities to better control licensing across all aspects
of the evolving Twin Peaks legislative and regulatory framework. A new license category of
corporate advisory services has also been added under the second draft.
The key themes of the COFI can be summarised as follows:
Activity-based
Under COFI, the licensing regime will focus on the defined activities that a prospective licensee
wishes to perform, not on defined sectors. This is a change from existing regulations, which tend to
apply rules according to a classification of institutions rather than activities.
Conduct Standards
The first draft of COFI contained enabling provisions for making conduct standards in different
chapters. These have been removed in the second draft and the standard-making provisions in the
FSR Act have instead been strengthened. The FSCA will thus be empowered, through the
conduct-standard making provisions in the FSR Act, to set conduct standards under the COFI Act.
Principles-based
The draft legislation specifies standards related to the intention of the regulation rather than
lists of compliance rules. The intention is to enable the regulator to focus on the spirit rather than
the letter of the law (ie, to monitor and enforce outcomes rather than procedures).

88 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts