‘Twin peaks’ bill promises you better protection

Treasury plans to close current gaps in financial sector regulation with a drastic revision of authorities’ roles, writes Laura du Preez. CHANGES TO BE INTRODUCED OVER TIME

A bill outlining improved regulation of the financial sector proposes the establishment of two critical committees aimed at ensuring that the financial services you use are sound and you are not exploited by financial institutions.

The draft Financial Sector Regulation Bill, which was released this week, proposes the establishment of a Council of Financial Regulators through which two new authorities for financial services as well as other regulators that currently do not report to Finance Minister Pravin Gordhan will be expected to co-ordinate and co-operate in the regulation of all financial products and services.

The bill also proposes the establishment of a Financial Stability Oversight Committee to monitor and respond to risks in the financial system and to financial crises, such as the crisis of 2008.

According to the memorandum of objects published this week with the draft bill, the National Credit Regulator, the Council for Medical Schemes, the Competition Commission and the National Consumer Commission will be expected to participate in the Council of Financial Regulators to co-ordinate issues relating to financial stability, legislation, enforcement and the affect on consumers.

Ismail Momoniat, deputy directorgeneral of the National Treasury, says the council will facilitate the development of a common approach to the licensing of financial service providers and to determining which players are fit and proper and how they should behave.

The establishment of the council is expected to address some criticism of a lack of co-ordination between regulators, particularly between the National Credit Regulator (NCR), which regulates credit providers, and the Financial Services Board (FSB), which regulates a number of financial services players.

Suggestions have been made that the NCR should be absorbed into the FSB or the Market Conduct Authority, but the bill is silent on this, and the NCR recently issued a statement criticising the FSB for suggesting the NCR lose its independence.

TWO AUTHORITIES

The draft Financial Sector Regulation Bill, dubbed the “twin peaks” bill, sets up two new authorities, which, together with the Council of Financial Regulators, new measures to strengthen the ombuds schemes, and future Treating Customers Fairly legislation, are intended to ensure you are better protected, that all financial institutions are regulated and that regulatory gaps that allow you to be exploited are closed.

The twin peaks bill spells out how government plans to split the functions of regulating the market conduct and ensuring the stability of financial institutions between two new authorities.

If enacted, the bill will reconstitute the FSB as the Market Conduct Authority and The “twin peaks” bill doesn’t give a date on which, if passed, the Act would come into effect, but it indicates that the Minister of Finance will determine different dates for different parts of the Act by notice in the Government Gazette.

National Treasury’s deputy directorgeneral, Ismail Momoniat, says Treasury hopes to get the bill through Parliament in the first half of next year and to have the Market Conduct Authority and Prudential Authority established next year and fully operational in 2015.

A Treasury statement released with the draft bill states that it is the first in a series of bills that will give effect to the twin peaks model of financial regulation that was first outlined by Treasury in a document released with the 2011 Budget.

The statement says that in a second will establish a Prudential Authority, which will be headed by a deputy governor of the Reserve Bank and staffed by its employees.

The bill proposes that the Prudential Authority be under the oversight of a committee consisting of the governor of the Reserve Bank, the deputy governor, who will be the chief executive of the Prudential Authority, and the other deputy governors of the Reserve Bank.

The Market Conduct Authority will be headed by a commissioner and between phase of achieving the twin peaks model, existing laws will be amended or replaced to bring them into alignment with the new regulatory authorities.

It says that, at this stage, laws regulating market conduct will be introduced to give effect to the Treating Customers Fairly initiative. This will ensure a “comprehensive, consistent and complete approach to governing the conduct of financial institutions across the financial sector”.

The memorandum of objects to the draft twin peaks bill says that during this second phase all financial institutions will be brought into the regulatory net.

Treasury has invited comment on the bill which is available at www.treasury.gov.za. It should be sent to CommentDraftLegislation @treasury.gov.za before February 7. A public workshop on the bill will be held in January. two and four deputy commissioners.

An executive committee will be responsible for formulating the regulatory strategy of the authority and the current FSB Board will be dissolved.

Momoniat says the FSB will be largely absorbed into the Market Conduct Authority and some staff will move to the Prudential Authority, but senior staff are likely to have to apply for leadership positions in the Market Conduct Authority.

Under the proposed legislation, a financial institution will be categorised as per- forming mono- or dual-regulated activities – that is, according to whether its actions in the financial services market only need to be regulated or whether its actions and its safety and soundness need to be regulated.

Institutions performing dual-regulated activities, such as banks, long-term insurers, short- term insurers, securities exchanges and the national payment system, will be regulated by both authorities, while those performing mono-regulated activities, such as collective investment schemes, asset managers, financial advisers, credit ratings agencies and retirement funds, will be regulated by the Market Conduct Authority only.

Institutions subject to dual regulation will need the approval of both authorities to operate, and the authorities will be required to inform each other of actions taken against a dual-regulated institution.

In establishing the Financial Stability Oversight Committee, the twin peaks bill assigns duties related to responding to financial crises to the Reserve Bank, except where taxpayers’ money is at risk. In this instance the Minister of Finance is expected to manage any crisis.

The Council of Financial Regulators, the bill says, will be chaired by a Treasury representative and will meet at least twice a year. Sub-committees will be established on enforcement, legislation, standard setting, outcomes and any other matter that the chairperson deems necessary.

OMBUDS REVISITED

The twin peaks bill also seeks to amend the Financial Services Ombuds Schemes ( FSOS) Act to require all financial institutions to be members of at least one ombud scheme.

The role of the FSOS council is also broadened to allow it to approve the appointment or removal of an ombud and to set standards to ensure ombud schemes are independent.

The independence of financial ombuds came into question last year when Brian Martin, who was the Ombud for Short Term Insurance (Osti) until his contract was not renewed late in 2011, complained last year to the FSOS council about interference by the board which oversees the Osti’s office.

In addition, the bill proposes measures to enhance public awareness of the ombud system.

If the bill is enacted as proposed, the Market Conduct Authority, in conjunction with other financial regulators, will be required to establish a consumer education partnership and to monitor whether the industry is meeting your needs by providing you, as a financial services consumer, with appropriate products that offer value for money and are affordable.

The bill proposes a financial services tribunal to hear appeals against decisions taken by either the Prudential Authority or the Market Conduct Authority.

The bill was born out reviews of financial sector regulation following the financial crisis of 2008 and in particular comments from the international Financial Stability Board, under the auspices of the G20. The board highlighted the need for improved co-ordination between regulators in South Africa.