Twin Peaks offers routes to summits already conquered

• New legislation complicates a regulatory process that has functioned adequately in the past

We keep hearing that the Financial Services Regulation Act is a step forward for companies and consumers. This act is known as Twin Peaks in reference to the popular 1990s murder mystery drama, which was recently revived. I think it would have been more honest to call the process the X Files.

Once again, in almost colonial fashion, SA has followed UK legislation. And it is about to do so again with the Retail Distribution Review. Is it a given that Twin Peaks will be an improvement on the current system?

For now, the Financial Services Board (FSB) focuses on nonbanking financial services, insurance being the largest, as well as collective investment schemes and securities.

Technically, it regulates the JSE, though in an unbelievably hands-off manner.

Over time, the staff at the FSB have built up specialist knowledge in their sectors. From personal experience I can tell you that wasn’t the case 10 to 15 years ago. The other regulator was the Reserve Bank, which oversaw the banks. This had always been a less adversarial relationship, so it was no surprise when the National Credit Regulator (NCR) was created to deal with the most embarrassing aspect of bank conduct, which the Bank was sweeping under the carpet.

As its name suggests, Twin Peaks means each company will now have to deal with two regulators. The successor to the FSB, the Financial Sector Conduct Authority (FSCA), will take charge of all market conduct issues. In some ways it will operate as it always has, with tight product regulation on unit trusts and negligible product oversight for products on life insurance licences. But the regulator will no longer be run on industry grounds, but on func- tional lines such as enforcement. It will be more difficult for the FSB to leverage specialist industry knowledge.

What seems illogical is that the NCR will stay independent, even though there is little doubt that abuse in credit granting is the single largest market conduct issue these days. Alf Lees, the DA spokesman on finance, says the exclusion of the NCR from the process means a third regulator will run parallel to the big two and so there is a weak conduct authority for millions in SA who buy on credit. There was a turf war between the Department of Trade and Industry and the Treasury, he says, which Treasury lost.

The Bank will remain as the other regulator and will look at prudential issues — basically, whether companies have enough capital. I can see this is vital, but as SA’s banks and life assurers are all generously capitalised it won’t be a very demanding job. There will be plenty of time to become scratch golfers in this agency. Prudential requirements are barely relevant to unit trusts and last I heard the balance sheets of pension funds will still be scrutinised by the FSCA.

Is Twin Peaks necessarily global best practice? Only three of the 140 countries in the International Association of Insurance Supervisors have tried it. We have already seen state capture in the UK as the authorities have handed over an agency to a large insurer. It is now called the Prudential Regulatory Authority.

In the US, the federal government regulates securities and is lead regulator of banks, but each state regulates insurance within its borders. That means there is a whole mountain range of peaks — the Rocky Mountain High model, you might say. That would not be the right model for us either: to appoint a separate insurance regulator for Mpumalanga or the Northern Cape.

But I am not sure what was wrong with the old model — certainly nothing the appointment of good competent staff couldn’t cure.

The FSB took a big step forward a few years ago when it appointed two private-sector heavyweights: Caroline da Silva from Mutual & Federal to its Financial Advisory and Intermediary Services unit and Rosemary Hunter, a lawyer from Bowmans, to run the pensions unit. Da Silva has remained and thrived; Hunter was a victim of the regulator’s often dysfunctional internal politics. And perhaps the best FSB executive, Jonathan Dixon, the deputy insurance registrar, is swanning off to take up a highly desirable job in Switzerland.

The Treasury has released a rather dull lists of reasons Twin Peaks needs to go ahead, none of which really persuades me that anything is broken and needs to be fixed. It says the leg- islation will confer on the Bank the mandate to protect and enhance financial stability. Am I missing something? Doesn’t it do so already? And, to be fair, it does a damn good job.

The legislation is also aimed at ensuring co-ordination and co-operation between the regulators, but shouldn’t this be standard? It also threatens to collapse the scheme for ombudsmen into a single regulatory body. But isn’t the present system working? I wonder if my friend Deanne Brown SC, the ombud for short-term insurance, would want to work in such a Stalinist-style institution.

The Free Market Foundation has played an often eccentric role in our national discourse, but it has done hundreds of hours of work on Twin Peaks.

It argues the new regime will cost R6bn to set up — even the Treasury admits it will be at least R4.8bn. Nothing else is more complex in South African law. The project will be financed by increased fees and stealth taxes.

The foundation also believes there will be fewer independent brokers around to give advice. Another worry is that the legislation gives generous enforcement latitude to public servants. The foundation suggests that no adequate due diligence was conducted to weigh up the benefits against the costs. I certainly agree that there has been inadequate public consultation.

The foundation argues that the new regulator will try to direct how financial services companies design their products and even the way they conduct their business. I am not sure about this, although the “treating customers fairly” regulations are a blunt instrument allowing interference. But I would welcome more oversight of insurance products to level the playing field with the much more regulated unit-trust and hedge-fund industries. Not that it would need the proposed spider’s web of new regulations.

THE TREASURY HAS RELEASED A RATHER DULL LIST OF REASONS TWIN PEAKS NEEDS TO GO AHEAD