Twin Peaks – Reform of the South African financial services sector
Author John Gillmer
The need for reform of the South African financial services sector became a topic of serious discussion in the aftermath of the 2008 financial crisis. Twin Peaks, a model for financial sector regulation which has been adopted by various countries across the globe, has since also become the chosen model of regulation in South Africa.
The Financial Sector Regulation Bill (the Bill), which was tabled in Parliament in October 2015, will serve as the legislative foundation for the adoption and implementation of the Twin Peaks model of regulation, and will be followed by the enactment of further legislation and the extension of existing regulation. A primary purpose of the Bill is to harmonise and coordinate the currently fragmented market conduct regulatory landscape.
In essence the Twin Peaks model seeks to separate prudential regulation from market conduct regulation within the financial sector. The model comprises:
- the prudential peak, regulated by the “Prudential Authority” (PA), which is primarily concerned with the stability and reliability of regulated institutions, such as banks, securities firms and insurance companies; and
- the market conduct supervision peak, regulated by the “Financial Sector Conduct Authority” (FSCA), which aims to protect consumers of financial services by regulating and supervising the market conduct of banks, insurers, financial intermediaries, retirement funds and administrators, investment institutions and financial markets.
The model also seeks to achieve a more stable and reliable economy in South Africa and a financial services sector which treats customers fairly and protects consumers from financial service providers (FSPs) which make use of highly complex products and fee structures. Other key policy objectives include reducing and combatting financial crime and increasing access to financial services.
By splitting the regulators, the legislature hopes to strengthen the independence of each regulator and at the same time enhance their accountability. A Council of Regulators will also be established to ensure effective co-ordination between regulatory bodies.
The PA will be housed within the South African Reserve Bank (SARB) and will be responsible for ensuring, on a micro-economic level, that financial institutions are operating in a responsible fashion with the capacity to meet their obligations to their customers. It will seek to enhance the soundness and stability of regulated financial institutions. The SARB will remain responsible for macroeconomic stability with assistance from the Financial Stability Oversight Committee (FSOC) which will be established by the SARB to assist in maintaining financial stability and responding to financial crises.
The FCSA, which will replace the Financial Services Board (FSB) will be responsible for ensuring that customers of FSPs are not left vulnerable to exploitation. This will largely be done in accordance with the “Treating Customers Fairly” framework, which is an outcome-based regulatory and supervisory approach designed to ensure that specific, clearly articulated fairness outcomes for financial services consumers are delivered by regulated FSPs.
The Twin Peaks model differs significantly to the current financial regulatory framework in which the responsibility of prudential regulation and market conduct regulation is shared by the SARB, the FSB as well as the National Credit Regulator and the National Consumer Commission.
The implementation of the Twin Peaks model will follow a phased approach so as to reduce market shock and the inherent risk associated with a reform of this magnitude. The first phase will see the creation of the PA and the FSCA, and is expected to be implemented towards the end of 2016. In the second phase, legislative reform can be expected as industry specific legislation is repealed to make way for a new, harmonised set of legislation. The second phase is expected to be implemented towards the end of 2018.
The Twin Peaks model has recently been the subject of much criticism by various stakeholders for a number of reasons, not least of which is that the envisaged reform may lead to over-regulation of the financial sector.