Abstract

Keywords

Twin Peaks; financial regulation; prudential authority; consumer protection.

……………………………………………………….

1 Introductory remarks

The 2007-2009 global financial crisis prompted an international wave of institutional reform in financial regulation. 1

 Howard Chitimira. LLB (Cum Laude), LLM (UFH), LLD (NMMU). Research Professor, Research Director and Professor of Securities and Financial Markets Law, Faculty of Law, North-West University, South Africa. E-mail: Howard.Chitimira@nwu.ac.za. ORCiD: https://orcid.org/0000-0003-1881-1242 . Research towards writing this article was supported in part by the National Research Foundation of South Africa (NRF), Grant Number 141933. In this regard, the authors wish to thank the NRF for its valuable support.

 Luck Mavhuru. BSc Hons Sociology (UZ), LLB (Wits), LLM (UCT), PhD (UCT). Postdoctoral Research Fellow, Faculty of Law, North-West University, South Africa. Email: mavhuruluck40@gmail.com. ORCID: https://orcid.org/0000-0002-0920-5489 .

1 Van Hengel, Hilbers and Schoenmaker "Experiences with the Dutch Twin-Peaks Model: Lessons for Europe" 185-199; Claessens et al 2010 https://www.imf.org/external/pubs/ft/wp/2010/wp1044.pdf 26; Godwin, Kourabas and Ramsay 2016 Int'l Law 273.

2 What is the Twin Peaks model of financial regulation?

The Twin Peaks model is the brainchild of Michael Taylor, who first advocated for it in 1995. 7

7 Taylor Twin Peaks 1-18; Bakir 2009 Public Administration 911; Van Niekerk and Van Heerden 2020 SALJ 109.

ensuring the solvency and soundness of financial institutions, the promotion of fairness, efficiency and transparency of financial markets, and the promotion of a stable financial sector. The model was designed to provide all the benefits and efficiencies of an integrated approach while simultaneously addressing the inherent conflict between the objectives of safety and soundness and consumer protection. Under the Twin Peaks model, it is essential to ensure that the objectives of each regulator and the boundaries, or ''regulatory perimeters'', between them are clearly defined. This is crucial especially when a market participant is subject to the regulation by both regulators. Proponents of the Twin Peaks model such as Mc Vea 15

15 Mc Vea "The impact of Global Financial Crisis" 44-60.

The strength of the Twin Peaks model lies in the fact that the two peak regulators are more likely to have dedicated objectives and clear mandates to which they are exclusively committed. 19

19 Godwin and Schmulow "Genealogy and Topography of Twin Peaks" 1-14; National Treasury 2014 https://juta.co.za/media/filestore/2015/03/2014_12_12_Response_

document.pdf 5-46.

objectively fulfil all its conflicting priorities timeously. Different financial sectors often have divergent needs and priorities. Balancing these interests without favouring one sector over another could be more challenging for a single or super regulator. Thus, a single or super regulator could struggle to provide unbiassed and equitable oversight in the financial sector. The likelihood of this occurring under Twin Peaks is lower due to the fact that both the prudential and the market conduct regulators are clearly focussed on their mandates and objectives. Nonetheless, the only weakness of the Twin Peaks model is that it could create challenges of regulatory overlap on dual-regulated entities.

3 Overview of the Australian Twin Peaks model

3.1 The history and structure of the Twin Peaks model

The introduction of the Twin Peaks model in Australia was spearheaded by the Wallis Inquiry, which was set up by the Australian government in 1996 to review its financial system. 22

22 Godwin and Ramsay 2015 https://papers.ssrn.com/sol3/papers.cfm?abstract_id =2657355 4; Godwin, Howse and Ramsay 2017 Journal of Banking Regulation 107. According to the Australian Treasury, in June 1996 the Financial System Inquiry (known as the Wallis Inquiry) was established to examine the results of the deregulation of the Australian financial system, to examine the forces driving further change, particularly technological, and to recommend changes to the regulatory system to ensure an "efficient, responsive, competitive and flexible financial system to underpin stronger economic performance, consistent with financial stability, prudence, integrity and fairness." The Inquiry was chaired by Australian businessman, Mr Stan Wallis, and was supported by a full-time secretariat.

implementation of this legislation signified a departure from a single regulator model to a Twin Peaks model, which empowers two regulators to oversee their specific mandates in Australia. Accordingly, Australia consolidated the functions for financial regulation into two regulators, namely the Australian Securities and Investments Commission (ASIC), which is responsible for the regulation of companies, market conduct and consumer protection, and the Australian Prudential Regulation Authority (APRA), which is responsible for prudential regulation. The Reserve Bank of Australia (RBA) is responsible for monetary policy and financial stability, including ensuring a safe and reliable payments system. 28

28 Section 10 and 11 of Reserve Bank Act 4 of 1959; Reserve Bank of Australia date unknown https://www.rba.gov.au/about-rba/.

3.2 The role of the APRA

APRA is an independent statutory authority established for the purpose of prudential supervision and for promoting financial stability in Australia. It is a body corporate with perpetual succession and it functions completely outside the remit of the RBA. 30

30 Section 13 of the APRA Act.

APRA Act provides that the APRA executive board should have at least three members and up to five members. 37

37 Section 16(1) of the APRA Act.

The division of APRA into the entities has led to greater efficiency and productivity. This partly explains why the Australian financial sector survived the 2007-2009 global financial crisis. The creation of specialised divisions in each industry, such as insurance and superannuation, ensures that each division focusses on a narrow set of tasks and/or functions. Furthermore,

specialised divisions make it easier to monitor and assess the performance of the relevant financial institutions in the financial sector. This enables a more accurate evaluation of outcomes and adjustments to improve performance by the APRA. As a result, decision-making is faster and more informed since individuals within a division will have a deeper understanding of the issues and challenges pertaining to their specific domain. Each division hires employees with appropriate expertise for their specific functions to increase efficiency.

3.3 The role of the ASIC

The ASIC commenced its operation in 1991, when it was known as the Australian Securities Commission (ASC). Put differently, its name was changed from ASC to ASIC in 1998. The ASIC is the business conduct regulator responsible for promoting market integrity and consumer protection across the financial markets in Australia. 45

45 Section 12A(2) of the ASIC Act; Comino 2009 Aust Jnl of Corp Law 23 6.

The ASIC operates under the direction of three full-time Commissioners appointed by the Governor General in liaison with the relevant Minister. 51

51 Section 9 of the ASIC Act; ASIC 2024 https://asic.gov.au/about-asic/what-we-do/how-we-operate/.

competency standards. The ASIC also ensures the compliance of financial institutions with client funds and it protects clients' property rights. 53

53 IMF 2012 https://www.imf.org/external/pubs/ft/scr/2012/cr12314.pdf 41. See related discussion on ASIC 2023 https://asic.gov.au/regulatory-resources/markets/market-supervision/.

In light of the above, it appears that the APRA Act and the ASIC Act provide clear responsibilities and objectives for each regulator. The ASIC promotes confidence and the informed participation of consumers and investors in the financial sector. There is clear demarcation between the roles of the regulators to combat possible overlapping challenges. Moreover, the APRA and the ASIC operate as independent bodies that are free from government or industry interference. To this extent, Australia is considered to have done well during the 2007-2009 global financial crisis because of the clear a delineation of responsibilities between the APRA and the ASIC. 55

55 Hill " Why did Australia Fare so Well" 203-300.

3.4 The role of the RBA

In most countries the central bank is historically responsible for financial stability, prudential regulation and the supervision of banks. 57

57 Lumpkin 2002 https://www.oecd.org/finance/insurance/2089622.pdf; European Central Bank date unknown https://www.ecb.europa.eu/pub/pdf/other/prudential supcbrole_en.pdf.

stability. 59

59 APRA date unknown https://www.apra.gov.au/sites/default/files/MoU-RBA-Reserve-Bank-of-Australia.PDF.

4 The South African Twin Peaks model

4.1 The history and structure of the Twin Peaks model

The Twin Peaks model of financial regulation was adopted by South Africa almost two decades after its adoption in Australia. 61

61 National Treasury 2018 https://www.treasury.gov.za/twinpeaks/Press% 20release%20Twin%20Peaks%20implementation%20March2018_FINAL.pdf.

international commitment to a sound and safe regulatory framework. 66

66 Qumba 2022 SALJ 84.

South Africa's Twin Peaks model established two separate regulators, namely the FSCA, which is the market conduct regulator, and the PA, which is the prudential regulator. However, unlike in Australia where these two separate regulators are governed by two different statutes, both the FSCA and the PA are established by the FSR Act in South Africa. 69

69 Masthead 2017 https://www.masthead.co.za/newsletter/twin-peaks-newsletter-issue-2-fsb-approach/.

4.2 The role of the PA

The PA is one of the pillars that constitute the South African Twin Peaks model. The PA is established in terms of section 32 of the FSR Act. It plays a similar role to that of the APRA in Australia and it ensures that financial institutions operating in the financial sector are safe and financially sound. 71

71 Section 33 of the Financial Sector Regulation Act 9 of 2017 (the FSR Act); SARB 2020 https://www.resbank.co.za/content/dam/sarb/what-we-do/prudential-regulation/PA%20Regulatory%20and%20Supervisory%20Strategy%202021.pdf.

supervision while the SARB is responsible for macro-prudential supervision and overseeing the financial stability in the financial sector. 73

73 Qumba 2022 SALJ 88; SARB 2018 https://www.resbank.co.za/en/home/ publications/publication-detail-pages/prudential-authority/PA-financial-sector-regulation/sector-regulation-act/2018/8800 1-27.

The PA is governed by the Prudential Committee, which consists of the Governor of the SARB (as Chairperson), the Chief Executive Officer (CEO) of the PA (who is also a Deputy Governor of the SARB) and other Deputy Governors of the SARB. 77

77 Section 36 of the FSR Act; SARB 2024 https://www.resbank.co.za/en/home/what-we-do/Prudentialregulation.

4.3 The role of the FSCA

The FSCA came into operation on the 1 April 2018 in terms of section 56 of the FSR Act. 78

78 Section 56 of FSR Act.

sector regulation laws. 82

82 Section 58 of the FSR Act.

5 Overview comparative analysis

One striking difference between the implementation of the Twin Peaks model in South Africa and Australia is that in the latter, the regulatory model is implemented by two different statutes, while in the former, one statute is used. The ASIC Act and the APRA Act govern the implementation of the Twin Peaks model in Australia while the FSR Act governs the same in South Africa. 88

88 Qumba 2022 SALJ 96; see the preamble of the FSR Act.

Africa, the financial sector is also regulated by other role players such as the National Credit Regulator (NCR), the National Consumer Commission (NCC), the National Consumer Tribunal (NCT) and the SARB. In terms of prudential regulations, the SARB monitors monetary policy and financial stability, including payment system safety and reliability. 89

89 South African Reserve Bank Act 90 of 1989; see s 10.

The prudential regulators are structured differently in Australia and South Africa. For instance, the APRA is a stand-alone independent body 93

93 Godwin and Schmulow 2015 SALJ 760.

prudential supervision. The approach could also enable the prudential authority and the central bank to timeously recognise and manage all potential threats to financial stability. Moreover, incorporating the PA into the central bank could enable it to develop better economic management policies as well as high standards of transparency and accountability. 97

97 Nier 2009 https://www.imf.org/external/pubs/ft/wp/2009/wp0970.pdf 2-64; IMF Country Report No. 20/33.

In addition to the above, cooperation and coordination between the two pillars are crucial for the Twin Peaks model to be effective. Regulatory frameworks that divide authority between multiple agencies require strong coordination mechanisms to ensure that issues needing regulatory oversight do not fall through the gaps. Many jurisdictions such as New Zealand and the United Kingdom have adopted a structure of Memoranda of Understanding (MOUs) and have financial stability committees in place to foster collaboration, information sharing and better coordination between regulators. 98

98 Schedule 17A of the Financial Services and Markets Act 2000; Qumba 2022 SALJ 108; also see European Central Bank Memorandum of understanding on cooperation between the financial supervisory authorities, central banks, and finance ministries of the European Union on cross-border financial stability.

noted that requirements for collaboration were inserted in the APRA Act after the collapse of HIH Insurance. The collapse was partly attributed to coordination deficiencies between the APRA and the ASIC. 104

104 Van Niekerk and Van Heerden 2020 SALJ 130; Godwin and Ramsay 2015 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2657355 2-46.

Like the position in Australia, the South African Twin Peaks model provides an equally non-binding system of cooperation and coordination among financial regulatory bodies. 105

105 Chapter 5 of the FSR Act; National Treasury 2014 https://juta.co.za/media/ filestore/2015/03/2014_12_12_Response_document.pdf.

non-compliance with a MOU does not affect a regulator's actions under the FICA and NCA. 117

117 Sections 26(4) and 77(3) of the FSR Act.

It is also important to note that both Australia and South Africa employ a risk-based regulatory system in their implementation of the Twin Peaks model. Such a system provides for the development of decision-making frameworks and procedures to prioritise regulatory activities and the deployment of resources, principal inspection and enforcement activities. 118

118 Baldwin and Black 2016 Journal of Law and Society 567.

The FSR Act requires the PA to consider the need for a pre-emptive, outcomes-focussed and risk-based approach so as to prioritise its resources in accordance with the significance of risks to the achievement of its objectives. 121

121 Section 34(4)(b) of the FSR Act.

participants. However, the FSR Act does not provide detailed guidance on how regulators should employ the risk-based approach. It is silent on the mechanisms and/or measures that should be employed when applying the risk-based approach in South Africa.

On the other hand, Australia has implemented a robust and detailed risk-based regulatory system to enforce its Twin Peaks model, which is enforced through the risk-based regulatory system which was modelled and shaped by the collapse of the HIH insurance company. 124

124 Black 2006 Law & Policy 2.

South Africa also adopts a risk-based approach to enforce the Twin Peaks model. However, unlike Australia, South Africa does not provide robust risk-based assessment mechanisms. It appears that South Africa has not yet

developed a detailed risk management mechanism because it has not yet experienced the same level of instability that was experienced in Australia when HIH insurance collapsed. In South Africa, both the PA and the FSCA are mandated to utilise the risk-based approach in fulfilling their objectives. On the other hand, only the APRA is obliged to rely on the risk-based approach to fulfil its functions in Australia.

The reliance on the risk-based approach empowers regulatory bodies to employ appropriate measures that are commensurate with the relevant risks that are posed to financial institutions. The risk-based approach requires resources to be directed where they are needed the most to curb high risk threats to the financial sector. If properly employed, the risked based approach reduces compliance burdens by minimising regulatory intervention where detected risks are relatively low. 133

133 De Sousa 2016 AIAL Forum 24.

In terms of the governance framework, individuals tasked with supervising the implementation of the Twin Peaks model are appointed in both South Africa and Australia. In South Africa, the Commissioners governing the FSCA are appointed by the Minister of Finance. 135

135 Section 61 of the FSR Act.

the FSCA Commissioner from office. 142

142 Section 36 and 39 of the FSR Act.

6 Concluding remarks

As noted above, South Africa and Australia have fundamentally sound designs of the Twin Peaks model. The model is not rigidly enforced in both South Africa and Australia. In this regard it has been carefully adapted to suit the socio-economic needs and circumstances of each country. In addition to the prudential regulator and market conduct regulator, the central banks still play a fundamental role in ensuring financial stability in both South Africa and Australia. Nonetheless, as indicated above, there are still some gaps and flaws that need to be addressed. Accordingly, it is submitted that the Twin Peaks model should be carefully enforced in both countries to foster cooperation and collaboration among the prudential regulator, market conduct regulator, central banks and other relevant role-players. Moreover, it is submitted that South Africa should consider following the Australian approach of not housing the PA in the central back to promote its independence and curb political interference. However, the complete separation of the prudential regulator from the central bank should be flexibly utilised so as not to discourage relevant cooperation and collaboration between the prudential regulator, the market conduct regulator, central banks and other relevant role-players. Both Australia and South Africa should carefully move away from the soft law approach of relying on MOUs to enact adequate statutory provisions in the APRA Act and the FSR Act to foster compliance, cooperation and collaboration between financial institutions, market participants, financial regulators and other role-players. This approach could ensure that all relevant parties are legally bound to comply with the MOUs and statutory provisions of the APRA Act and the FSR Act. The risk-based approach should be effectively utilised in Australia and South Africa to enforce the Twin Peaks model and detect, prevent and combat all systemic risks in their respective financial sectors. In relation to this, South Africa should consider amending the FSR Act to enact provisions that expressly and adequately stipulate the measures and/or mechanisms that should be used to implement its risk-based approach to enforce the Twin Peaks model.

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List of Abbreviations