Twin Peaks: the good, bad and ugly

South Africa needs to learn from bank­ing cri­sis in Aus­tralia

Sunday Times - - Business Regulation - By ROX­ANNE HEN­DER­SON hen­der­[email protected]­day­times.co.za

● Com­mon­wealth Bank of Aus­tralia, that coun­try’s largest lender, this week ad­mit­ted that it had lost the records of 20 mil­lion ac­counts and had kept af­fected clients in the dark over its blun­der.

The rev­e­la­tion is one of many to have emerged in re­cent months and puts the coun­try’s fi­nan­cial ser­vices sec­tor, cur­rently be­ing probed by a ju­di­cial in­quiry, un­der fur­ther pres­sure.

Last month the chair and CEO of in­sur­ance gi­ant AMP, op­er­at­ing in Aus­tralia and New Zealand, re­signed as the sec­tor’s cri­sis deep­ened.

Since then, calls for the heads of Aus­tralia’s four large banks to step down and face pros­e­cu­tion have in­ten­si­fied.

Com­mon­wealth Bank alone has been sued for 53700 breach es of anti-money laun­der­ing and ter­ror­ism fi­nanc­ing laws.

The bank, which has a part­ner­ship with soon-to-be launched Tyme Dig­i­tal in South Africa, has also ad­mit­ted to us­ing out­dated med­i­cal def­i­ni­tions to refuse sick cus­tomers in­sur­ance pay­outs and in­voic­ing peo­ple for fi­nan­cial ad­vice a decade af­ter their deaths.

Aus­tralia’s banks, which are among the most prof­itable in the world by re­turn on eq­uity, have reached this cri­sis un­der the guise of Twin Peaks — the same reg­u­la­tory model that is be­ing im­ple­mented in South Africa.

“[Aus­tralia’s] bank reg­u­la­tor, ac­cord­ing to the Pro­duc­tiv­ity Com­mis­sion in the Aus­tralian gov­ern­ment, has used its reg­u­la­tory tools to al­low the four big­gest banks to be­come an oli­gop­oly with no mean­ing­ful com­pe­ti­tion,” said Andy Sch­mu­low, an Aus­trali­abased ad­vo­cate, fi­nan­cial reg­u­la­tion re­searcher and se­nior ad­viser to DB & As­so­ci­ates.

“There are prob­a­bly re­li­gious cults less mo­ti­vated by group­think than the bank reg­u­la­tor in Aus­tralia.

“[And banks] are mak­ing that money by suck­ing the eco­nomic po­ten­tial from the Aus­tralian econ­omy.”

In the Twin Peaks reg­u­la­tory model in South Africa, fi­nan­cial ser­vices will be regu- lated by two bod­ies, or peaks — the Pru­den­tial Au­thor­ity, housed in the Re­serve Bank, and the Fi­nan­cial Sec­tor Con­duct Au­thor­ity, which re­places the Fi­nan­cial Ser­vices Board. The goal is to strengthen the coun­try’s ap­proach to con­sumer pro­tec­tion and mar­ket con­duct in fi­nan­cial ser­vices, and cre­ate more re­silience and sta­bil­ity in the sys­tem.

Though there has been much de­bate around the mer­its of the model and whether it is nec­es­sary in South Africa, where banks are al­ready soundly reg­u­lated, there is no turn­ing back.

The Fi­nan­cial Sec­tor Reg­u­la­tion Act, which got phase one of the model’s im­ple­men­ta­tion off the ground, be­came law in Au­gust.

Last month the PA, which will reg­u­late all fi­nan­cial in­sti­tu­tions, and the FSCA, which will su­per­vise mar­ket con­duct and con­sumer pro­tec­tion, came into op­er­a­tion. Re­serve Bank deputy gov­er­nor Kuben Naidoo was ap­pointed CEO of the PA. The FSCA’s com­mis­sioner and deputy com­mis­sioner are ex­pected to be ap­pointed by the end of next month.

The two bod­ies will set out strate­gies later this year, with fur­ther de­tails and work plans to be de­vel­oped over the next three years.

South Africa is now gear­ing up for the next phase of the model’s im­ple­men­ta­tion un­der the Con­duct of Fi­nan­cial In­sti­tu­tions Bill.

But in Aus­tralia, for­mer prime min­is­ter Tony Ab­bott has called for one of the coun­try’s peaks, deal­ing with mar­ket con­duct and con­sumer pro­tec­tion, to be shut down as the fi­nan­cial sec­tor slips into fur­ther scan­dal.

One might ask why the model is be­ing adopted lo­cally, af­ter such a dis­mal run Down Un­der.

Ac­cord­ing to Sch­mu­low, the ar­chi­tec­tural Twin Peaks model ad­dresses bet­ter than any other model the in­dus­try’s chal­lenges, such as the blur­ring of bound­aries be­tween banks and in­sur­ers and the in­equal­i­ties that ex­isted be­tween var­i­ous reg­u­la­tory bod­ies in any par­tic­u­lar sys­tem.

But, he said, there was a dif­fer­ence be­tween ar­chi­tec­ture and plumb­ing, just like there’s a dif­fer­ence be­tween the model and its im­ple­men­ta­tion.

“The im­ple­men­ta­tion is go­ing to be ab­so­lutely cru­cial in South Africa,” he said.

What South Africa’s reg­u­la­tory au­thor­i­ties have work­ing in their favour is hind­sight. With Twin Peaks al­ready adopted in six other coun­tries apart from Aus­tralia, lo­cal au­thor­i­ties have the ben­e­fit of im­prov­ing on past fail­ures in other ju­ris­dic­tions.

Given events in Aus­tralia, South African au­thor­i­ties will know that they are sus­cep­ti­ble to cap­ture by in­dus­try and can pre­pare de­fences ac­cord­ingly.

That South Africa chose to host the PA in the Re­serve Bank may prove to be a risk, Sch­mu­low said, as it may end up tak­ing or­ders from the cen­tral bank rather than op­er­at­ing fully in­de­pen­dently.

“Hav­ing said that, one of the stand­out fea­tures of this coun­try is the very long and rich tra­di­tion of unim­peach­able in­de­pen­dence of the Re­serve Bank.

“Putting the Pru­den­tial Au­thor­ity into the Pic­ture: AFP

The im­ple­men­ta­tion is go­ing to be ab­so­lutely cru­cial Andy Sch­mu­low Aus­tralia-based fi­nan­cial reg­u­la­tion re­searcher

South African Re­serve Bank might ac­tu­ally be bet­ter for South Africa.”

Michelle Kelly-Louw, a pro­fes­sor of law at Unisa, said de­spite Aus­tralia’s reg­u­la­tory dif­fi­cul­ties the model had en­cour­aged deeper con­sumer par­tic­i­pa­tion in the fi­nan­cial ser­vices sec­tor, which South Africa needed.

She added, how­ever, that Twin Peaks may place too much re­spon­si­bil­ity to ed­u­cate and pro­tect con­sumers on in­dus­try play­ers, and that their rights needed bet­ter bal­anc­ing.

The model calls for an out­comes-based ap­proach to reg­u­la­tion, rather than a rules­based ap­proach, and places the pru­den­tial

and mar­ket con­duct and con­sumer pro­tec­tion peaks on equal foot­ing.

Odette de Beer, head of con­sumer con­duct at Hol­lard, said that while com­pli­ance with Twin Peaks could be bur­den­some, the re­newed fo­cus on con­sumer pro­tec­tion would give com­pa­nies that com­plied a com­pet­i­tive ad­van­tage over their peers.

“In­sur­ance is in­sur­ance is in­sur­ance, just like a bank is a bank is a bank. All we have is our brand . . . If we don’t change our ap­proach to com­pli­ance we won’t be around in 10 years and there are other com­pa­nies that will.”

There are prob­a­bly re­li­gious cults less mo­ti­vated by group­think than the bank reg­u­la­tor in Aus­tralia

Aus­tralia’s Com­mon­wealth Bank faces charges of money laun­der­ing dur­ing a probe of the fi­nan­cial ser­vices sec­tor by a ju­di­cial in­quiry.

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