SA joins the ‘Twin Peaks’ club

SA is preparing the ground to migrate to a new way of regulating its banks and financial markets. Known as the “Twin Peaks” model, the decision has sparked debate, even controversy.

The name was adopted in 1995 by Dr Michael Taylor, a Bank of England official. Taylor set about unpacking the failings of the way banks and the financial markets were regulated in the UK.

Regulation was based on a sectoral model – the assumption that banks should be regulated separately from other kinds of financial institutions such as insurers. This model was used in most countries at the time. It was applied in SA until April 1, 2018.

Twenty-three years ago Taylor argued that the sectoral model was no longer fit for purpose.

It was a throw-back to the days when there were clear delineations between different types of firms in the financial sector – banks, insurers, securities issuers. But when those firms began to amalgamate, the new firms presented a problem for regulators whose authority was divided along lines that mirrored the division between banks, insurers and other financial firms. Taylor referred to this as a blurring of the boundaries.

Even though his suggestions were rejected at the time, the intervening years – particularly the impact of 2008 financial crisis – underscored the need for a rethink of how financial institutions are regulated.

Instead of having a separate regulator just for banks, the new system creates two peaks: one for regulating to prevent financial crises (prudential regulation peak), the other to ensure good market conduct and consumer protection (good conduct peak).

SA has gone further to lay the foundation for a four-peak model. It envisages a role for the Reserve Bank in preventing financial crises and a role for the National Credit Regulator.

How it helps

Twin Peaks is the only model that separates oversight into two independent regulators – market conduct and consumer protection on the one hand, and prudential regulation on the other.

It envisions two regulators created as equals, with clear and unambiguous remits: one ensuring a sound and robust financial system, the other ensuring the financial system isn’t distorted through market misconduct, while also protecting consumers of financial services and goods.

Twin Peaks was also the first regulatory model to adopt the view that a range of financial institutions – not just banks but also insurers – should be subject to regulations that would ensure they were fit for purpose, and could withstand a crisis.

In the post-2008 world there is general acceptance that countries need to draw up more specific terms and conditions for firms in the financial sector. Those terms and conditions are the basis of regulations to protect big firms from financial distress, because if they fail, taxpayers will be forced to save them. In return, taxpayers have a right to impose regulations that will discourage conduct likely to lead to firms failing. Enforcement will be key.

Andrew Schmulow is senior lecturer in the Faculty of Law at University of Western Australia

This article was published on The Conversation and has been edited.