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SINCE the 1990s, there has been considerable research and debate among policy makers regarding an appropriate model for financial regulation and supervision in both developed and developing countries.
One of the countries at the forefront of this debate was the UK, which debated what ought to be Britain’s regulatory model. During the debate, Dr Michael Taylor published a paper in 1995 entitled “Twin Peaks: A Regulatory Structure for the New Century,” in which he invested a new regulatory model.
In his paper, Taylor emphasised that there are two separate aims for regulating financial institutions. The first aim is to ensure the soundness of the financial system, while the second is to protect consumers.
Taylor called these two aims the Twin Peaks. His thesis proposed that the UK financial regulatory structure should address these twin peaks. Taylor even proposed the type of skills required for the staff in the two regulators.
The UK did not adopt Taylor’s proposal of Twin Peaks; instead, it adopted a single regulatory model. While the UK did not adopt Taylor’s proposal, the 2000 legislation was motivated on the basis of Twin Peaks justifications.
Twin Peaks today
Borrowing from Taylor’s thesis, Professor Eric Pan noted in 2011 that while financial regulation has two main goals, policy makers tend to emphasise the goal of ensuring safety of the system. This consists of three undertakings: (1) prudential regulation; (2) business conduct regulation; and (3) market stability protection.
What is clear is that Twin Peaks can be described as an approach to regulation where there is a separation of regulatory functions between two regulators. One regulator focuses on the safety and soundness of financial institutions, while the second focuses on supervision of business conduct and consumer protection.
There are alternatives to Twin Peaks, but what is important to keep in mind is that the "choice a country makes in adopting any regulatory model will depend primarily on a careful study of the existing industry structure, consumer protection and the nature of the relevant financial markets".
National Treasury’s proposal
The proposal by the National Treasury (NT), which is contained in the financial sector regulation bill read together with the NT discussion documents published in 2011 and 2013, is to adopt the Twin Peaks.
The bill proposes the establishment of two regulators, a prudential authority (housed within the Reserve Bank), which will focus on safety and soundness of financial institutions, and a market conduct authority (formerly the Financial Services Board), which will focus on business conduct and consumer protection.
I have a few concerns about the NT’s proposal, but I will discuss one major structural concern.
In its discussion documents, the NT failed to sufficiently explain why other alternative regulatory models were not considered most appropriate for SA.
What is more, in 1993 the Melamet Commission recommended that SA adopts a single regulator and yet the discussion documents fail to sufficiently explain why that recommendation is no longer suitable, except to conclude that it would be less disruptive to adopt Twin Peaks.
I find this to be a less compelling reason considering the dictates of the constitution, which are explained in the Grootboom case, and the importance of the decision to reform the regulatory structure.
In Grootboom it was said that the "State’s positive obligation towards social economic rights requires it to take reasonable measures.
"It will be necessary to consider social, economic and historical context and the capacity of institutions responsible for implementing the measures. Measures that exclude a significant segment of society cannot be said to be reasonable."
What is more, the NT justifies the adoption of Twin Peaks by arguing that “after the financial crisis broke out in 2007, there was a global shift away from the single-regulator model towards a Twin Peaks model. In line with international trends, SA will now be adopting the Twin-Peak model instead of a single regulator”.
While it is true that many countries across the globe have reformed their regulatory structures since the crisis, it is an exaggeration to say that there has been a global shift towards Twin Peaks. Only two countries have opted for it: the UK post the crisis, while Canada adopted a modified version of Twin Peaks also in the post crisis era.
The only two other countries that adopted Twin Peaks are Australia and Netherlands, but they did so before the crisis. Needless to say, the Netherlands had its own share of profound financial failures which Twin Peaks did not prevent.
Thus, in my view the adoption of Twin Peaks by two countries post the crisis cannot reasonably be said to represent a global shift which should justify SA’s adoption of Twin Peaks.
Is Twin Peaks suitable for South Africa?
While I agree that Twin Peaks is one of the most fashionable regulatory models, it is not suitable for all countries.
In fact, in his 2011 speech, Taylor warned countries against adopting Twin Peaks just because it is fashionable. He argued that individual countries need to be careful in selecting a regulatory structure for their peculiar circumstances. Taylor pointed out that he advocated Twin Peaks for the UK because two important conditions for this model exist in the UK.
The first condition is that banks in the UK do not dominate the financial sector, but occupy the sector with other non-bank financial institutions. The second is that the UK has a highly developed consumer protection regime.
His point was that these two conditions make Twin Peaks sensible for the UK - or any country where these conditions are prevalent.
However, he cautioned that countries where these two conditions do not exist consider alternative regulatory structures that speak to the particular circumstances of the countries concerned, because in his view Twin Peaks would not be sensible or suitable.
Thus, his advice to countries like South Africa is to consider very carefully their individual industry structures and circumstances and then design a regulatory system on the basis of those circumstances.
Taylor maintains that the adoption of Twin Peaks should come as a result of research and analysis of the type of industry one aims to regulate.
I believe Taylor’s advice and observations above are relevant to SA. The two conditions he mentioned do not exist in SA.
We do not have a well-developed consumer protection regime in SA, having only enacted the National Credit Act in 2005 while the Consumer Protection Act took effect on April 1 2011.
It will take many years for these acts to be developed and create an enabling environment for a Twin Peaks model. Moreover, banks dominate the financial sector in SA compared to non-bank financial institutions that play a limited role to warrant Twin Peaks.
Therefore, if one considers the advice and observations by Taylor, I believe there are questions to be asked. Is it suitable to implement the Twin Peaks in SA?
Shouldn’t we invent an African solution to an African problem when it comes to choosing an appropriate financial regulatory model? Or better yet, using our universities as a research base, shouldn’t we first define our problem and then invent a South African solution to a South African problem?
At the moment, I am not persuaded that Twin Peaks is a South African solution to a South African problem.
In examining the framework for SA’s pension adjudicator, Judge John Murphy once wrote that "while the British pension adjudication model has served us well, an indigenous model adapted to our peculiar circumstances (such as our legal system, political history and culture), may suit us better".
I believe the same should be said about Twin Peaks.
- Fin24
* Mtende Mhango is an associate professor who teaches and supervises post-graduate students in pension fund law at the University of the Witwatersrand, where he is also the deputy dean of the School of Law.
One of the countries at the forefront of this debate was the UK, which debated what ought to be Britain’s regulatory model. During the debate, Dr Michael Taylor published a paper in 1995 entitled “Twin Peaks: A Regulatory Structure for the New Century,” in which he invested a new regulatory model.
In his paper, Taylor emphasised that there are two separate aims for regulating financial institutions. The first aim is to ensure the soundness of the financial system, while the second is to protect consumers.
Taylor called these two aims the Twin Peaks. His thesis proposed that the UK financial regulatory structure should address these twin peaks. Taylor even proposed the type of skills required for the staff in the two regulators.
The UK did not adopt Taylor’s proposal of Twin Peaks; instead, it adopted a single regulatory model. While the UK did not adopt Taylor’s proposal, the 2000 legislation was motivated on the basis of Twin Peaks justifications.
Twin Peaks today
Borrowing from Taylor’s thesis, Professor Eric Pan noted in 2011 that while financial regulation has two main goals, policy makers tend to emphasise the goal of ensuring safety of the system. This consists of three undertakings: (1) prudential regulation; (2) business conduct regulation; and (3) market stability protection.
What is clear is that Twin Peaks can be described as an approach to regulation where there is a separation of regulatory functions between two regulators. One regulator focuses on the safety and soundness of financial institutions, while the second focuses on supervision of business conduct and consumer protection.
There are alternatives to Twin Peaks, but what is important to keep in mind is that the "choice a country makes in adopting any regulatory model will depend primarily on a careful study of the existing industry structure, consumer protection and the nature of the relevant financial markets".
National Treasury’s proposal
The proposal by the National Treasury (NT), which is contained in the financial sector regulation bill read together with the NT discussion documents published in 2011 and 2013, is to adopt the Twin Peaks.
The bill proposes the establishment of two regulators, a prudential authority (housed within the Reserve Bank), which will focus on safety and soundness of financial institutions, and a market conduct authority (formerly the Financial Services Board), which will focus on business conduct and consumer protection.
I have a few concerns about the NT’s proposal, but I will discuss one major structural concern.
In its discussion documents, the NT failed to sufficiently explain why other alternative regulatory models were not considered most appropriate for SA.
What is more, in 1993 the Melamet Commission recommended that SA adopts a single regulator and yet the discussion documents fail to sufficiently explain why that recommendation is no longer suitable, except to conclude that it would be less disruptive to adopt Twin Peaks.
I find this to be a less compelling reason considering the dictates of the constitution, which are explained in the Grootboom case, and the importance of the decision to reform the regulatory structure.
In Grootboom it was said that the "State’s positive obligation towards social economic rights requires it to take reasonable measures.
"It will be necessary to consider social, economic and historical context and the capacity of institutions responsible for implementing the measures. Measures that exclude a significant segment of society cannot be said to be reasonable."
What is more, the NT justifies the adoption of Twin Peaks by arguing that “after the financial crisis broke out in 2007, there was a global shift away from the single-regulator model towards a Twin Peaks model. In line with international trends, SA will now be adopting the Twin-Peak model instead of a single regulator”.
While it is true that many countries across the globe have reformed their regulatory structures since the crisis, it is an exaggeration to say that there has been a global shift towards Twin Peaks. Only two countries have opted for it: the UK post the crisis, while Canada adopted a modified version of Twin Peaks also in the post crisis era.
The only two other countries that adopted Twin Peaks are Australia and Netherlands, but they did so before the crisis. Needless to say, the Netherlands had its own share of profound financial failures which Twin Peaks did not prevent.
Thus, in my view the adoption of Twin Peaks by two countries post the crisis cannot reasonably be said to represent a global shift which should justify SA’s adoption of Twin Peaks.
Is Twin Peaks suitable for South Africa?
While I agree that Twin Peaks is one of the most fashionable regulatory models, it is not suitable for all countries.
In fact, in his 2011 speech, Taylor warned countries against adopting Twin Peaks just because it is fashionable. He argued that individual countries need to be careful in selecting a regulatory structure for their peculiar circumstances. Taylor pointed out that he advocated Twin Peaks for the UK because two important conditions for this model exist in the UK.
The first condition is that banks in the UK do not dominate the financial sector, but occupy the sector with other non-bank financial institutions. The second is that the UK has a highly developed consumer protection regime.
His point was that these two conditions make Twin Peaks sensible for the UK - or any country where these conditions are prevalent.
However, he cautioned that countries where these two conditions do not exist consider alternative regulatory structures that speak to the particular circumstances of the countries concerned, because in his view Twin Peaks would not be sensible or suitable.
Thus, his advice to countries like South Africa is to consider very carefully their individual industry structures and circumstances and then design a regulatory system on the basis of those circumstances.
Taylor maintains that the adoption of Twin Peaks should come as a result of research and analysis of the type of industry one aims to regulate.
I believe Taylor’s advice and observations above are relevant to SA. The two conditions he mentioned do not exist in SA.
We do not have a well-developed consumer protection regime in SA, having only enacted the National Credit Act in 2005 while the Consumer Protection Act took effect on April 1 2011.
It will take many years for these acts to be developed and create an enabling environment for a Twin Peaks model. Moreover, banks dominate the financial sector in SA compared to non-bank financial institutions that play a limited role to warrant Twin Peaks.
Therefore, if one considers the advice and observations by Taylor, I believe there are questions to be asked. Is it suitable to implement the Twin Peaks in SA?
Shouldn’t we invent an African solution to an African problem when it comes to choosing an appropriate financial regulatory model? Or better yet, using our universities as a research base, shouldn’t we first define our problem and then invent a South African solution to a South African problem?
At the moment, I am not persuaded that Twin Peaks is a South African solution to a South African problem.
In examining the framework for SA’s pension adjudicator, Judge John Murphy once wrote that "while the British pension adjudication model has served us well, an indigenous model adapted to our peculiar circumstances (such as our legal system, political history and culture), may suit us better".
I believe the same should be said about Twin Peaks.
- Fin24
* Mtende Mhango is an associate professor who teaches and supervises post-graduate students in pension fund law at the University of the Witwatersrand, where he is also the deputy dean of the School of Law.
