This is part 5 of a series of articles that is inspired by legendary author, the late Stephen R Covey, whose bestselling book, The seven habits of highly effective people, impacted millions of people around the world. FSPs will do very well to consider the habits highlighted in these articles. To recap-
The first habit – Defining reality and to be proactive. The reality is that the Conduct of Financial Institutions Act (COFI) is upon us, and it will impact your business. Our advice: Be proactive and start preparing for the next wave of regulatory reform.
The second habit – Seek first to understand, then to be understood
In the previous articles I highlighted the importance of seeking first to truly understand the fundamentals of COFI before expressing an uninformed opinion and potentially leading your team in the wrong direction. I also mentioned the significance of understanding the purpose or objective of the Act and that COFI does not stand on its own. It must be read with the Financial Sector Regulation Act as the FSR Act created the regulatory foundation for COFI to exist. FSPs should be aware that the principles of Treating Customers Fairly (TCF) will be officially incorporated into the COFI Act. In the previous article the significance of culture took centre stage. This article puts the magnifying glass on understanding more about the meaning, significance, and outcomes of good governance.
According to the Oxford Business English Dictionary, governance means the activity of controlling a company, organisation, or country. Corporate governance is the means of directing and controlling business corporations. Practically, governance simply refers to the values, policies and processes that help the corporation progress toward its goals, whilst adhering to legislation. Logically for any business to be successful, it needs a “governing body”. In relation to a financial institution, ‘‘governing body’’ is defined in the Financial Sector Regulation (FSR) Act as a person or body of persons, whether elected or not, that manages, controls, formulates the policy and strategy of the financial institution, directs its affairs, or has the authority to exercise the powers and perform the functions of the financial institution. In the context of an FSP, company directors and key persons, as defined in the FSR Act, currently commonly referred to as Key individuals as defined in the FAIS Act, are accountable for Governance.
An FSP without good governance is like a train without a track. As highlighted in my previous article, Governance is one of the cornerstones of any successful business. Governance is synonymous with the principles published in 2016 in the King IV Report on Corporate Governance™ for South Africa. PwC reported in their summary of the King IV Report that in SA, a hybrid system of corporate governance has developed over time, meaning that some practices of good governance are legislated (for example in the Companies Act, 2008) in parallel with the voluntary King Code™ of governance. However, it is important to note that, if there is a conflict between legislation and the King Code™, the law prevails. In the PWC Report, it is recorded that the King IV Code™ contains principles, practices and governance outcomes that interact as follows:
Sound principles are fundamental to good corporate governance and hold true across all organisations. It is important to note that COFI is also based on a principles-based approach.
Practices are recommended at the level of leading practice. The practices associated with a particular
principle should be applied so that they support and give effect to the aspiration as expressed in that
principle. Practices may be scaled in accordance with proportionality considerations, which is also consistent with the principle of proportionality expressed in COFI.
Governance outcomes are the benefits that organisations could realise if the underlying principles – and therefore, ultimately, good governance – are achieved. PWC assert that these governance outcomes are:
— Ethical culture;
— Good performance;
— Effective control; and
In view of the specific focus on Culture and Governance in the COFI Bill, Key persons/individuals can be sure that they will be required to review their governance strategies and policies when COFI is promulgated. One of the ripple effects of COFI will be an increased focus on accountability and some of the key take-aways from this article are the following good governance principles:
Purpose and strategy
The governing body plays an important role in setting the vision, articulating the purpose and strategies of the FSP, helping everybody in the business to understand these and establishing the plans to implement them.
Culture and ethics
The governing body of the FSP sets the tone for ethical and responsible decision-making throughout the business.
Structure and composition
The governing body must employ the right people, with particular regard to each individual’s background, experience, skills, strengths, and weaknesses. It also needs to understand how the addition of an individual to the group impacts the collective capability and effective functioning of the governing body.
Roles and responsibilities
There should be clarity regarding governing body expectations of executives, the various committees, and the individual roles and responsibilities of executives.
It is important that the governing body of the FSP ensures that the following elements are in place:
– A strategy to create an ethical and treating customers fairly culture;
– A flow of information to the governing body and board that aids proper decision-making;
– Transparency and accountability to external stakeholders and to employees throughout the FSP; and
– Safeguarding the integrity of financial statements and other key information.
By putting in place an appropriate system of risk oversight and internal controls, the governing body can help increase the likelihood that their FSPs will deliver on their objectives.
Proper governance requires time, thought, planning and effective execution from committed leaders who understand the benefits of aligning every level of an FSP to produce the desired results within the regulatory framework. Good corporate governance ensures an ethical culture, fairness, transparency, and that employees can be held accountable for their actions. I have no doubt that Key persons/individuals will have to review some of their governance policies and processes as COFI approaches.