Nearly two years separate the first and second drafts of a crucial bill that will entrench the rights of financial consumers in law. The Conduct of Financial Institutions Bill cannot come soon enough and is expected to be tabled in parliament early in 2021.

The bill will entrench into law the requirement for financial institutions to treat their customers fairly, an issue that came starkly to the fore recently with the refusal by short-term insurers to pay business interruption claims in the tourism and hospitality sectors arising from the Covid-19 lockdown.

Another long-standing bone of contention for customers has been the problem of unauthorised debit orders. The Treasury has pointed out that, while there has been some improvement in the treatment of customers in the sector, it has not been consistent across all players.

The first draft of the bill was released in December 2018. While one could accuse the Treasury and drafting team of tardiness, this would overlook the immense complexity of what needed to be done and the extent of consultations required.

A key task was to determine the scope of the bill and what activities would be covered. A measure of its complexity is that different aspects of the bill will apply differently to various activities depending on the nature of the product and the customers.

The bill will empower the Financial Sector Conduct Authority (FSCA), established under the Financial Sector Regulation Act, to set conduct standards and to regulate the operations, culture, product design, selling, marketing, advertising and internal procedures of financial institutions, including banks, insurers, retirement funds and collective investment schemes.

It will also regulate the behaviour of financial advisers and intermediaries. Medical schemes are excluded for the moment.

The bill will bring the market conduct rules for different financial sectors into a consolidated, comprehensive and consistent regulatory framework. The proposed law also deals with governance arrangements, remuneration and conflicts of interest.

It will empower the FSCA to set conduct standards after consultation with the Reserve Bank and Prudential Authority. The authority will have wide powers, including the power to impose penalties and suspend a licence in certain instances.

Financial institutions will have to conduct their business in a manner that promotes the fair treatment of customers. This will be legally binding. They must also conduct their business with integrity, honesty and fairness.

Clear, fair and unambiguous

Other controversial issues that will come under the scope of the proposed law will be the sale of inappropriate products to unsuspecting customers and the skewed incentivisation of intermediaries to sell their products, at all costs, to the detriment of fair treatment.

Products must meet the expectations created by the financial institution and marketing and advertising must be clear, fair and unambiguous, and not misleading or fraudulent.

Regarding disclosure, the financial institution will be obliged before, during and after the conclusion of a contract to make the customer aware of all the relevant facts that could affect their decision, including the benefits, risks and costs of the product.

Only fit and proper people will be able to be appointed as representatives and the financial institution will be responsible for anything done or omitted by its representative as if it had expressly allowed this. A non-compliant representative can be debarred.

Transformation is included in the obligations imposed on financial institutions.

The bill will also require the licensing of financial institutions by the FSCA in addition to the Prudential Authority. The FSCA licensing will act as a gatekeeper to keep potentially rogue institutions out of the system and remove unfit ones when necessary.

Financial institutions will be required to maintain sufficient financial resources to carry out their activities and to fulfil their obligations, and their assets must, at all times, exceed their liabilities, failing which the authority may intervene.

The bill gives extensive powers to the FSCA that will, if used prudently, be to the good of the sector.

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