Twin Peaks changes financial services landscape

Dr Andy Schmulow, senior advisor: Datta Burton & Associates

First adopted in Australia two decades ago, the name of the model refers to two peak regulatory authorities it creates.

One peak, termed the system stability regulator, is charged solely with creating and enforcing prudential regulations, designed to prevent a financial meltdown. During the global financial crisis, the strength of Australia’s financial system was attributed to this regulatory model.

The second peak is responsible for deterring misconduct and protecting consumers of financial products and services. Consequently, this model creates clear and unequivocal goals that are separated between the two peaks. This is a core feature of Twin Peaks: a model that recognises that the two peaks can have contradictory goals, and then creates the peaks as separate, but equal.

Consumers come first

In South Africa, the first peak will be called the Prudential Authority and the second peak will be named the Financial Sector Conduct Authority. Both commenced operations on 1 April 2018. It is important for financial institutions to understand that this regulatory model abolishes the notion of multiple regulators – one each for banks, insurers, medical aid schemes etc. - and by implication, additional regulatory burdens with different interpretations from different regulators of regulations that are similar across various sectors.

“For consumers, this will create, ideationally at least, one of the most progressive and extensive consumer protection regimes in the world,” says Dr Andy Schmulow, senior advisor to DB & Associates, a member of the advisory panel to the South African National Treasury on the legislation.

For the industry, this implies that the following must now assume roles equal to that of preventing financial crises:

• Consumer protection;
• Treating customers fairly;
• Serving customers well;
• Addressing customer claims timeously;
• Conducting business ethically; and
• Contributing to the goals of increasing financial inclusion and financial literacy (without undermining the market).

Empowering regulators

These reforms will also introduce a new regulatory enforcement approach. Enforcement won’t be conducted in relation to alleged breaches of specific provisions; instead, it will focus on outcomes. “Those outcomes are often expressed in the new legislation in high-level terminology that defies precise interpretation. This gives the regulator an inherent advantage,” he says.

“Further, outcomes present a subtle shift in favour of how easily the regulator can win prosecutions; no longer must the regulator prove a particular breach took place, it can merely demonstrate that a group of consumers were disadvantaged. From a regulatory perspective, Twin Peaks will result in the empowerment of regulators in South Africa.

“In preparing to undertake this journey across a transformed regulatory landscape, financial products and services providers will need to understand not just the regulatory mechanics of the two new pieces of legislation that create Twin Peaks, but also the fine print. This calls for an understanding of the new legislation at an expert level to comply with the law.”