Foothills, two peaks, a moun­tain

The new reg­u­la­tory frame­work can be al­most as con­fus­ing as the cult TV se­ries of the 1990s

Financial Mail - - MONEY&INVESTING - Stephen Cranston

It is un­for­tu­nate that the name Twin Peaks has stuck for the new reg­u­la­tory regime for fi­nan­cial ser­vices.

It may be catchy, re­flect­ing a cult TV se­ries from the 1990s, even though that pro­gramme was highly con­fus­ing and no­body could agree on the out­come. The two peaks are the new Pru­den­tial Author­ity (PA) and the Fi­nan­cial Sec­tor Con­duct Author­ity (FSCA), for­merly known as the Fi­nan­cial Ser­vices Board (FSB). Trea­sury ad­mits SA’S reg­u­la­tory frame­work looks more like a moun­tain, two peaks and sev­eral foothills.

The moun­tain is the SA Re­serve Bank, which has not del­e­gated its re­spon­si­bil­ity for “macrosta­bil­ity”.

The foothills in­clude the Na­tional Credit Reg­u­la­tor and the Fi­nan­cial In­tel­li­gence Cen­tre, which re­main sep­a­rate. There is also a new co­or­di­nat­ing body, the Fi­nan­cial Sec­tor Over­sight Com­mit­tee, and it can’t be long be­fore this gets its own well-paid CEO and staff.

The two peaks still have to work out a mem­o­ran­dum of un­der­stand­ing be­fore they can jointly grant new li­cences to fi­nan­cial in­sti­tu­tions. The aim of Twin Peaks, says Caro­line da Silva, the FSCA’S deputy regis­trar for in­sur­ance, is to place equal fo­cus on pru­den­tial and con­duct risk, through the two sep­a­rate bod­ies. Pre­vi­ously, the FSB was re­spon­si­ble for both pru­den­tial and con­duct is­sues for all non­bank­ing fi­nan­cial in­sti­tu­tions. It will now fo­cus on mar­ket con­duct for all fi­nan­cial ser­vices, in­clud­ing banks.

The Banks Act makes lit­tle ref­er­ence to mar­ket con­duct in the bank­ing sec­tor, so there will be much greater em­pha­sis on this through the FSCA, and inevitably higher levies to pay for it. Da Silva says that a range of sec­tor-spe­cific laws gov­ern­ing con­duct will be re­placed by the Con­duct of Fi­nan­cial In­sti­tu­tions Act. The old FSB ex­ec­u­tive of­fi­cer will be re­named the com­mis­sioner of the FSCA, to give par­ity with the com­mis­sioner of the SA Rev­enue Ser­vice and of cor­rec­tional ser­vices.

Da Silva says the FSCA will make a shift from the back­ward-look­ing com­pli­ance-based ap­proach of the FSB and will be­come more unashamedly in­ten­sive and in­tru­sive. This will mean heavy re­cruit­ing to restaff the peren­ni­ally un­der­staffed FSB.

And the regis­trar of banks, housed in the Re­serve Bank, will now be­come the PA and look at the fi­nan­cial sound­ness of all fi­nan­cial in­sti­tu­tions. Clau­dia Jackson, a se­nior as­so­ciate at Nor­ton Rose Fulbright, says the author­ity will still pre­dom­i­nantly fo­cus on banks, but now also on in­sur­ers.

Un­der the new In­sur­ance Act all 176 in­sur­ers will need to reap­ply for li­cences over the next two years, which will give the PA a good chance to look un­der the bon­net.

Jackson says in­sur­ers will need to spec­ify ex­actly the type of in­sur­ance they plan to of­fer. But for now the FSCA will have sole ju­ris­dic­tion over pen­sion funds, and the PA will have lim­ited day-to-day in­volve­ment with fi­nan­cial ad­vis­ers.

The old FSB sys­tem of deputy reg­is­trars for sec­tors such as pen­sion funds and col­lec­tive in­vest­ments will dis­ap­pear and be re­placed by func­tional groups such as li­cens­ing, en­force­ment and con­duct of busi­ness.

The PA will be tied at the hip to the Re­serve Bank. The gov­er­nor and his three deputies will su­per­vise it through the pru­den­tial com­mit­tee, and the PA’S CEO, Kuben Naidoo, re­mains a deputy gov­er­nor of the bank. The PA in­tends to sup­port other reg­u­la­tors and help to adopt con­sis­tent reg­u­la­tory stan­dards.

It will un­doubt­edly be the de facto se­nior part­ner given its home in the Re­serve Bank of­fices. There will be du­pli­ca­tion be­tween the PA and the FSCA as both will be in­volved in li­cens­ing, su­per­vi­sory on-site in­spec­tions and en­force­ment ac­tion.

Robert Vi­vian, pro­fes­sor of fi­nance and in­sur­ance at the Univer­sity of the Wit­wa­ter­srand, ar­gues that there is noth­ing wrong with pru­den­tial reg­u­la­tion, which has aimed to keep banks ad­e­quately cap­i­talised since the 1890s. But mar­ket con­duct falls un­der the law of con­tract.

“Un­for­tu­nately, bu­reau­cra­cies are set up which be­lieve they are above such well-es­tab­lished le­gal prin­ci­ples,” says Vi­vian.

“The FSCA vi­o­lates the sep­a­ra­tion of pow­ers as it is part of the ex­ec­u­tive, yet takes away the pow­ers of the leg­is­la­ture to make law through its power to is­sue reg­u­la­tions.”

Vi­vian says that there is no ev­i­dence of pub­lic de­mand for th­ese new reg­u­la­tions, and it is not clear what prob­lem they are try­ing to solve.

He adds that the Re­serve Bank does not have the con­sti­tu­tional man­date to reg­u­late in­sur­ers, only banks. “Twin Peaks was started in the UK to get out of a hole af­ter the global fi­nan­cial cri­sis. But there is no need for change here.”

Twin Peaks was started in the UK to get out of a hole af­ter the global fi­nan­cial cri­sis. But there is no need for change here Robert Vi­vian

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