What Twin Peaks means for financial advisors

Last month the Financial Sector Regulation (FSR) or “Twin Peaks” Act was signed into law – the first step in implementing a wide new regulatory framework for financial services.

It establishes two regulatory bodies for the industry. The Financial Services Board (FSB) will be replaced by the Financial Sector Conduct Authority (FSCA); a Prudential Authority (PA) will be established within Sarb.

FSCA will oversee all financial services companies’ conduct; PA supervises financial institutions’ safety and soundness and ensures the sector’s stability.

The Act also sets up a Council of Regulators, including the National Credit Regulator, FSCA, PA and other regulatory bodies.

The Twin Peaks legislation is important for financial advisors because of what it heralds in broader industry changes.

The Retail Distribution Review, for instance, is essentially an extension of Twin Peaks. Other regulations and legislation around the Act will emerge in coming months that’ll impact advisors, says EY’s Abigail Viljoen.

One of the first is likely the Conduct of Financial Institutions (CoFI) Act. It’ll set the new framework for how financial service providers should conduct themselves, including standards for distribution and advice.

FSB’s Caroline da Silva says the approach to regulation will change significantly, from rulesbased to customer-outcomes.

“It will also move away from one-size-fits all approach of the Financial Advisory and Intermediary Services Act (FAIS). That has potentially created unnecessary costs for advisors because they had to follow certain rules even if they were inappropriate for their type of business.”

Now, the outcome will be more important than how financial services providers get there, Viljoen notes.

“There will be more flexibility for firms and individuals to operate within the framework, and more opportunity for them to exercise their judgment.” Firms must show how what they’re doing drives fair outcomes.

All financial services providers must be re-licensed under the new regime; the licences will be activity-specific. Activities to be licensed include giving advice, administration management and asset management, Da Silva explains. “It allows us to make the law more proportionate to the risks posed by the specific advisory firm.”