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THE CONDUCT OF FINANCIAL OF INSTITUTIONS BILL – 2025

THE CONDUCT OF FINANCIAL OF INSTITUTIONS BILL - 2025

To understand the Conduct of Financial Institutions Bill (known as COFI), we need to take a step back and look at the regulatory reform journey South Africa has been on for some time.

In 2018 the Twin Peaks regulatory model was formalised by the Financial Sector Regulation (FSR) Act, to strengthen financial sector regulation and oversight. The Twin Peaks regulatory reform was a direct response to the weakness of the financial services regulatory system revealed by the 2008 global financial crisis, such as inappropriate market conduct and the systemic risks of large insurers.

The FSR Act established the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) as the primary regulators, with the former focusing on market conduct and the latter responsible for prudential regulation. As one of the final steps in the Twin Peaks reform process, the COFI bill was drafted in conjunction with the FSR Act and published for comment in December 2018.

At a high level, COFI is an umbrella piece of legislation governing financial institutions, to replace existing industry-specific conduct regulation, where there are many gaps and many overlaps. COFI will streamline and harmonise the legal landscape that financial institutions operate in, by providing a single, holistic legal framework for market conduct regulation in South Africa that is consistently applied to all financial institutions.

At its heart, COFI’s focus is regulating the general market conduct of financial institutions and the fair treatment of customers.

Principles underpinning the COFI bill

- Activity-based approach: There are currently 13 different financial sector laws that regulate and supervise financial institutions. These laws are specific to each institutional definition, for example, retirement funds, financial services providers, etc. The new legal framework under COFI will shift away from this sectoral approach and will focus on the activities being performed instead. In other words, the law will cover the activity, rather than the type of institution.
- Principle-based approach: COFI moves away from a rules-based approach to compliance (tick box exercise) and sees the industry and regulator shifting towards making sure that their actions and processes are geared towards desired outcomes (or the spirit of the law). Financial institutions will thus need to support and uphold principles rather than simply follow rules – and regulators will have wider latitude to supervise the spirit, and letter, of the rules.
- Outcomes-focused approach: Regulators will test institutions on the delivery of the outcomes, but the institutions can decide what processes and actions are required to meet the outcomes.
- Risk-based approach: The new framework enables the regulator to identify and address areas that pose higher risks to customers and financial stability. This approach supports transformation and financial inclusion while ensuring compliance with relevant codes like the B-BBEE Code.

Objectives of COFI

Under COFI, financial institutions will have to comply with the Financial Sector Code. Institutions will have to design, publish and implement a transformation policy, and then report on how they are meeting the set targets.

- Regulate how financial institutions treat their customers, aligning with the Treating Customers Fairly principles.
- Consolidate the existing range of laws applicable to the financial sector
- Promote:
  - trust and confidence in the financial sector
  - innovation
  - competition
  - financial inclusion
  - financial literacy
  - transformation
  - governance
  - Support fair and efficient financial markets

COFI and transformation

Fair treatment of customers

A core objective is to ensure that financial institutions prioritise the fair treatment of customers. This includes designing products and services that meet the needs of identified customer groups and providing clear, understandable information to customers.

Licensing

Currently, the licensing of financial institutions is done on an institutional basis, for example, as a bank or an insurer, etc. The bill proposes a comprehensive licensing schedule for all regulated entities and envisages that a financial institution carrying out one or more identified activities will have to be authorised for each activity. A licence will be granted on three levels: activity being performed, product involved and targeted customer.

The proposed licensing requirements emphasise the importance of robust governance structures within financial institutions, including the appointment and debarment of representatives.

COFI and retirement funds

It has been proposed that initially, retirement funds will have to be licensed under both the Pension Funds Act (PFA) and COFI to ensure consistency in the way customers are treated. Over time, conduct requirements will however be shifted from the PFA to COFI.

Retirement fund administrators and other service providers currently regulated under the PFA, will, in future, only be licensed and authorised under COFI. There will be a transitional period to ensure alignment between the provisions of the PFA and COFI.

Boards of management of retirement funds will remain responsible and accountable for compliance with all applicable legislation as part of their wider fiduciary duties. Given this important function, boards will have to comply with certain fit and proper requirements to be prescribed by the FSCA under COFI, which will be issued as conduct standards.

A trustee who is elected by the employees, the participating employer or the fund’s sponsor will not be required to be licensed under COFI. Professional or independent trustees will however have to be licensed and will also be subject to fit and proper requirements as part of their wider regulatory obligations.

The Financial Sector Code currently only applies voluntarily to the top 100 retirement funds. If these transformation principles are now made law under COFI, it could mean that all retirement funds will have to comply with the transformation requirements prescribed by the Code.

Retirement funds can also expect enhanced supervision. The FSCA will adopt a more proactive and intrusive supervisory approach, which may include desktop reviews and on-site visits for high-impact funds. This could lead to more rigorous oversight and enforcement of compliance standards

Overall, COFI will require trustees to be more proactive in ensuring that their governance practices, decision-making processes and operational systems align with COFI’s objectives of fairness, transparency, and customer protection

When will COFI be published?

In their latest 3-year regulation plan, the FSCA confirmed that the development of a “holistic, cross-sector, robust, and customer-focused regulatory framework” under COFI remains a top priority. The COFI bill is a critical development that will shape the future conduct framework, and many of the FSCA’s current conduct regulatory framework projects have some dependency on its promulgation.

Given the sweeping changes by COFI, it is expected that the FSCA will follow a phased approach to its implementation:

- Phase 1: The initial high-level design of the new regulatory framework, which will inform the development of the underlying regulatory frameworks.
- Phase 2: Targeted consultation on the themed frameworks.
- Phase 3: Transition the regulatory instruments under the existing sectoral laws into COFI.

To date, no firm dates have been provided. The FSCA has confirmed that “Timelines for completion are outside of their control but support will continue as long as necessary.”

In the interim, the FSCA will regulate financial institutions using conduct standards.

In summary …

COFI is a significant piece of legislation in South Africa aimed at reforming and strengthening the regulation of financial institutions, aligning with global best practices. It seeks to enhance the existing regulatory framework by:

- focusing on the conduct of financial institutions,
- ensuring fair treatment of customers, and
- promoting financial stability.

COFI is part of a broader effort to enhance South Africa’s financial regulatory environment and aims to create a more transparent, efficient and customer-centric financial sector. The implementation of this bill will require significant changes in how financial institutions operate, including retirement funds.

COFI is set to reshape South Africa’s financial sector. Stay ahead—assess your compliance strategy and prepare for the changes. Need guidance? Get in touch today!

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UNDERSTANDING THE ROLE OF GAP COVER IN SOUTH AFRICA’S PRIVATE MEDICAL LANDSCAPE

Understanding the Role of Gap Cover in South Africa’s Private Medical Landscape

South Africa’s private healthcare system is renowned for its high-quality services but at the same time notorious for the significant year-on-year cost increases. Medical schemes obviously provide much-needed financial support for unplanned medical expenses, but many South Africans are discovering that their medical aid plan alone is often insufficient to cover the full costs of healthcare. This is where gap cover becomes essential.

Gap cover is a short-term insurance product regulated by the Short-term Insurance Act with a statutory annual benefit limit of R210 580.00 that bridges the financial gap between what a medical scheme pays and what healthcare providers charge when you are hospitalised. We will explore three critical reasons why gap cover is becoming indispensable for medical aid members by ensuring your future financial well-being.

1. Shielding Members Against Rising Healthcare Costs

Healthcare inflation in South Africa consistently outpaces general inflation, with annual increases in medical expenses surpassing what many medical aids are willing to cover. The fees charged by specialists in hospitals often exceed the prescribed tariffs set by medical schemes, leaving medical aid scheme members responsible for the shortfall which can be unaffordable to the average person.

For instance, a specialist may charge 300% of the medical scheme rate, but your medical aid plan might only cover up to 100%. Without gap cover, members face out-of-pocket expenses that can quickly become financially crippling. Gap cover ensures that members are protected from these excessive charges, providing peace of mind in an era of continually escalating costs.

2. Supporting Members Downgrading Medical Aid Options

As economic pressures mount, many members are forced to downgrade their medical aid plans to save on monthly premiums. This trend has been exacerbated by a challenging economic environment where medical scheme contribution increases continue to outpace both inflation and concomitantly, salary increase adjustment. Our recent article analysed the recent medical aid increases and furnished some advice to employees. click here to access the article

Downgrading to a more affordable plan typically results in reduced benefits, including lower cover for in-hospital procedures and penalties for non-network hospitals. Gap cover becomes a critical safety net in such situations. By filling the void left by reduced benefits, it enables members to maintain access to high-quality healthcare without incurring unexpected financial burdens.

3. Covering Co-Payments and Deductibles

Even the most comprehensive medical aid plans impose co-payments and deductibles, particularly for specific procedures, specialist fees, or high-cost treatments in hospital. For example, a member undergoing an MRI scan might face a co-payment of several thousand rands, while certain elective surgeries may require significant upfront co-payments and deductibles.

These out-of-pocket expenses can quickly add up, especially for families or individuals who require regular treatment. Gap cover policies often include provisions to cover such co-payments, ensuring that members are not left scrambling to pay these unforeseen costs.

Conclusion

In the evolving landscape of private healthcare in South Africa, gap cover is no longer a luxury – it is a necessity. It protects members from the financial shock of uncovered expenses, mitigates the impact of downgrading medical aid plans, and provides a safety net for co-payments and deductibles. For medical aid members, gap cover represents a vital tool for maintaining access to quality healthcare without the fear of financial hardship.

When selecting gap cover, it is essential to review the terms of the policy carefully, ensuring that it aligns with your medical aid plan and healthcare needs. With the right gap cover in place, members of medical aid plans can safeguard their health and finances in the face of an increasingly challenging healthcare environment.

Reach out to Axiomatic today to ensure your employees are protected and empowered, with solutions that make financial and healthcare sense for all.

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DEATH BENEFIT INVESTIGATIONS IN TERMS OF SECTION 37C

Death Benefit Investigations in terms of section 37C of the Pension Funds Act

Section 37C of the Pension Funds Act governs the distribution of retirement fund benefits upon a member’s death. These benefits must be paid to dependants and nominees, ensuring that the interests of dependants are prioritised. It also sets out the process that trustees must follow when deciding who qualifies as a dependant or nominee, and how much to allocate to them.

This piece of legislation aims to prevent disputes over pension payouts and to protect vulnerable beneficiaries. In order to discharge this duty fully, S37C gives trustees 12 months in which to conduct a thorough investigation of who the dependants are and the extent of their dependency.

Section 37C(1)(a) reads as follows:

“(a) If the fund within twelve months of the death of the member becomes aware of or traces a dependant or dependants of the member, the benefit shall be paid to such dependant or, as may be deemed equitable by the fund, to one of such dependants or in proportions to some of or all such dependants.”

Recent High Court ruling on investigation period – case number 4544 / 2023

In South African Retirement Annuity Fund v Pension Funds Adjudicator and S Viljoen, the High Court had to consider when this 12-month period starts – whether it starts on the date of the member’s death, or once the fund becomes aware of the member’s death.

The facts in this case were that a member of the fund died in December 2019. The benefit that became payable from the fund amounted to about R52 000. His spouse, a housewife who had been fully dependent on the member and who was surviving on an old age SASSA grant, was not aware of this benefit. The member left no will and had not signed any beneficiary nomination form. He also left a relatively small estate (with a value of less than R250 000) and initially, no executor was appointed. The spouse only became aware of the benefit about 3 years later when she consulted with a financial planner to assist her in finalising the deceased’s affairs. She submitted a claim to the Fund in March 2022.

The fund, based on section 37C(1)(c) of the Pension Funds Act, paid the benefit to the deceased’s estate.

Section 37C(1)(c) of the Act reads as follows:

“If the fund does not become aware of or cannot trace any dependant of the member within twelve months of the death of the member and if the member has not designated a nominee or if the member has designated a nominee to receive a portion of the benefit in writing to the fund, the benefit or the remaining portion of the benefit after payment to the designated nominee, shall be paid into the estate of the member or, if no inventory in respect of the member has been received by the Master of the Supreme Court …, into the Guardian’s Fund or unclaimed benefit fund.” [our underlining]

The member’s spouse submitted a complaint to the office of the Pension Funds Adjudicator, who found in favour of the spouse and determined that the 12-month period referred to in Section 37C(1) starts when the board of a fund becomes aware of the death of the member.

In her determination she stated the following:

“The general rule expressed in section 37C(1) of the Act that the death benefit does not form part of the estate is subject to three exceptions. The Fund can pay a death benefit into the deceased’s estate only under the following circumstances:

It has not identified any dependant and there is no nominated beneficiary, but the estate’s liabilities exceed its assets; or
The deceased has no dependants and did not designate a nominee in writing; or
The deceased has designated a nominee only to receive a portion of the death benefit, and the remaining balance must be paid to the estate …”

She further referred to the decision of the High Court in Masindi v Chemical Industries National Provident Fund, in which where the court stated the following:

“Whilst section 37C(1) does not expressly state that the 12 month investigation period to trace the dependants of a deceased only commences once the Fund has obtained knowledge of the death of the deceased, the only logical interpretation of this section is that a Fund cannot comply with its obligation if the legislative requirement for its imposition, namely the death of a member, is not made known to the Fund. In Government Employees Pension Fund Provincial Government of Gauteng v Buitendag & Others it was held that the employer in that matter had the obligation to provide the Fund with information pertaining to the dependents of the deceased. By implication, the employer had to inform the Fund of the death of the deceased as well. The 12 month period could only have commenced to run from the time that the respondents became aware that the deceased had died.”

Aggrieved by the decision of the Pension Funds Adjudicator, the fund applied to the High Court to have the determination set aside. The Court agreed with the interpretation in the Masindi case, namely that the 12-month period only starts when the fund becomes aware of the death of a member, and held that:

Any other interpretation would be absurd and defeat the purpose and spirit of section 37C of the Pension Funds Act. It would also fail in ensuring that the fund carries out its mandate to trace the dependants of a deceased member and investigate their dependency on the deceased member.
The fund’s interpretation would shorten the 12-month period, as in almost all cases, the fund will not be aware of a member’s death on the date of death.
The interpretation in Masindi appears to be in line with approved general approach in many other similar provisions, to the effect that the countdown of a period only commences when one is made aware of the root cause, as opposed to the date of the root cause.
The fund’s interpretation was too rigid, and in the process, it forgets the purpose for the existence of the same statutory provision it attempts to interpret. It is for this reason that in Fundsatwork Umbrella Pension Fund v Guarnieri and Others8, the SCA said, where there is doubt about the identity of the dependants who are to receive a distribution, or as to the correct distribution among those dependants, the board is not bound by the twelve months period, but may delay for a time necessary to resolve the issue.

The order of the Pension Funds Adjudicator was confirmed.

Expert Support for Section 37C Death Benefit Investigations Don’t let complex regulations leave your loved ones vulnerable. We provide expert assistance to ensure benefits are distributed fairly and in line with the Pension Funds Act. Reach out to us for a consultation and peace of mind.

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SECTION 14 TRANSFERS UNDER THE TWO-POT SYSTEM

Section 14 transfers under the two-pot system

One of the important matters currently under question is the Section 14 transfer process after 1 September 2024, the implementation date of the two-pot system. Many funds may be in various stages of the transfer process between funds, and it is important to seek clarity.

The technical issues around the section 14 transfer process have been dealt with in three main communications issued in 2024, namely:

Draft Amendments to FSRA Conduct Standard 1 of 2019 (PFA) – Conditions for amalgamations and transfers in terms of section 14 of the Pension Funds Act, 1956 (Act No. 24 of 1956) (known as the Draft Amendments)
FSCA Communication 21 OF 2024 – Draft Forms for Section 14 transfers
FSCA Communication 31 of 2024 – Exemption of funds from certain provisions of the FSRA Conduct Standard No.1 of 2019 (PFA)

A brief summary of the background:

The FSCA published the S14 Conduct Standard on 5 August 2019 – known as “the S14 Conduct Standard”. The S14 Conduct Standard prescribes conditions for amalgamations and transfers, and included, as part of the appendices to the Conduct Standard, the various types of forms that pension funds have to complete when submitting an application under section 14 of the Pension Funds Act (PFA).
The legislative amendments catering for the two-pot system on 1 September 2024 resulted in a misalignment between the current prescribed section 14 application forms and the two-pot regulations, in that the section 14 application forms only allow for a single transfer value, whereas the two-pot regulations require that transfer values be differentiated in two parts in the forms. As such, the section 14 application forms need to be formally changed to reflect the changes to the retirement funds framework brought about by the two-pot.
The problem is two-fold:
- Because the current S14 transfer forms are appendices to a Conduct Standard, changing them requires a lengthy legislative process, and
- The forms need to be changed to cater for the various components (or pots) under the two-pot legislation.

Draft Amendments to FSRA Conduct Standard 1 of 2019 (PFA)

– Conditions for amalgamations and transfers in terms of section 14 of the Pension Funds Act, 1956 (Act No. 24 of 1956) (known as the Draft Amendments)

On 8 May 2024, the FSCA published the draft amendments to FSRA Conduct Standard 1 of 2019 (“the Draft Amendments”) for public consultation. Submissions are due on 19 June 2024.

The Draft Amendments proposed to:

Remove the Section 14 application forms from the Conduct Standard itself, so that the forms could be amended without the lengthy legislative process of amending a conduct standard each time that a change to the forms is required, and
Enable the FSCA to determine the manner of submission, content and format of the section 14 application forms.

No significant concerns were raised in the consultation process, so the Draft Amendments did not undergo substantial changes.

FSCA Communication 21 of 2024 – Draft forms for Section 14 transfers

At the end of June 2024, the FSCA published Communication 21 of 2024. The purpose of which was to:

Invite public consultation on the Draft Forms to be used for transfers under the two-pot system.
Interested stakeholders had until 31 July 2024 to submit comments. The majority of industry stakeholders and bodies have submitted their comments. The final forms have yet to be published.
Clarify the treatment of section 14 transfers with the implementation of the two-pot system.
The communication also provided clarity to retirement funds and administrators on how to treat transfers from one fund to another in terms of section 14 during the transition to the two-pot system.
The communication specifically provided clarity regarding:
- seed capital allocation;
- payment of saving withdrawal benefits; and
- allocation of transfer values across the various components.

FSCA Communication 31 of 2024 – Forms for Section 14 Transfers

At the end of June 2024, the FSCA published Communication 21 of 2024. The purpose of which was to:

Since the Draft Amendments have not yet taken effect, the FSCA has, as an interim measure, granted exemption to all funds from the requirement to use the forms prescribed under FSRA Conduct Standard 1 of 2019. The exemption is granted subject to the requirement that funds must use the revised forms proposed under the Draft Amendments instead.

The exemption will be withdrawn once the Draft Amendments are finalised and the determination notice is published on the FSCA’s website.

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NAVIGATING SOUTH AFRICA’S MEDICAL AID INCREASES FOR 2025

Rising Healthcare Costs: A Guide to South Africa's 2025 Medical Aid Increases

South African medical aid members are preparing for another year of significant contribution increases in 2025, with all the largest schemes announcing above-inflation adjustments. Year-on- year consumer inflation in August 2024 was 4.4% ; however medical inflation is significantly greater than this.

It is that time of the year when members can make option changes effective 1 January 2025, but it is crucial for members to carefully evaluate and understand their medical aid plans to avoid being caught off guard by rising costs and changing benefits.

OVERVIEW OF 2025 MEDICAL AID INCREASES

The announced increases which are subject to Council for Medical Scheme (CMS) approval for 2025, are among the highest in recent years, reflecting rising healthcare costs and pressures (both on the supply side and the demand side) within the sector. Here are the weighted average increases for some leading schemes:

FIVE YEAR TRENDS IN MEDICAL AID INCREASES

The increasing trend is obvious from the above – 5% to 8%, 8% to 10% and now 9.3% to 12.8%. Medical schemes have explained the increase in medical inflation as follows:

increases in the price of healthcare services, typically in line with consumer inflation; and
increases in the demand for healthcare services, because of a gradually ageing membership, increasing prevalence of chronic illnesses, and an increasing proportion of high-cost claimants; and
increases in the supply of healthcare services through new medicines, new medical technologies, advances in medical procedures and increased need for specialised care.

HOW TO APPROACH THE OPTION CHANGE SEASON

Given the significant increases, members must carefully reassess their healthcare needs and budgets. Here are some tips for choosing the best option during the option change season, which will help the discussion with your healthcare broker:

Evaluate Usage Trends: Analyse your claims history to determine whether a comprehensive or basic plan is more appropriate.

Review Scheme-Specific Changes: Certain medical schemes, for example, have introduced enhancements such as improved maternity and wellness benefits, which might make specific plans more appealing.

Compare Plans Across Schemes: While some option increases are on the higher side, they may offer value-added services that could justify the cost for some families and specific high-cost needs while certain more cost effective options may impose co-payments, exclusions and network providers.

Gap Cover and Supplementary Insurance: Consider gap cover to protect against shortfalls for in-hospital benefits, especially when considering downgrading to lower plans which offer limited provider networks and co-payments.

Plan for Financial Sustainability: Align your chosen option with your healthcare needs for the next year.

The 2025 medical aid increases underscore the importance of making informed decisions during the option-change season. With schemes introducing significant hikes and benefit changes, selecting the right plan can be overwhelming. Aligning your healthcare needs with the right coverage is essential to avoid unnecessary costs and surprises down the road.

At Axiomatic, we pride ourselves on providing employer groups and employees with independent, expert guidance on the most appropriate healthcare and employee benefit solutions. Whether you need help comparing medical aid options, understanding benefit structures, or implementing gap cover, we are here to support you.

Navigate South Africa's 2025 medical aid increases with expert advice. Learn how to choose the right option for your budget and needs.

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