Introduction to special issue – the twin peaks model of financial regulation and reform in South Africa

Since 1998, almost 80% of OECD countries have changed their financial regulatory architecture. Various factors, including the growing complexity of financial products, the increasing challenge of regulating large financial conglomerates, and the repercussions of the Global Financial Crisis, have made regulatory reform a key priority for many economies. One of the trends in recent years has been a move towards the Twin Peaks model of financial regulation. This model was pioneered in Australia and separates financial regulation into two broad functions: market conduct regulation (which includes consumer protection) and prudential regulation. Each of these functions is vested in a separate regulator. In Australia, market conduct regulation is vested in the Australian Securities and Investments Commission (ASIC) and prudential regulation is vested in the Australian Prudential Regulation Authority. The central bank, the Reserve Bank of Australia, remains responsible for monetary policy and financial stability, including ensuring a safe and reliable payments system. The model has subsequently been adopted by the Netherlands, Belgium, New Zealand (NZ) and the United Kingdom (UK). The model has also been considered by the US. There are at least two models with which the Twin Peaks model is generally compared. The first model, the “institutional model” focuses on the form of the regulated institution (e.g. a bank, insurer or a securities firm) and establishes a separate specialist regulator for that institution. Under this approach, the relevant regulator supervises all activities undertaken by the institution, irrespective of the market or sector in which the activities take place, and the institution is normally regulated by one regulator alone. The institutional approach is often referred to as an offshoot of the broader sectoral or “operational” approach, under which institutions are regulated by reference to the sector in which they operate or the products or business in which they engage. For example, where a financial institution offers banking products and life insurance, it might be regulated by both the banking regulator and the insurance regulator. The sectoral or operational model, like the institutional model, becomes increasingly difficult to operate as the complexity of financial products and financial institutions increases. This potentially causes coordination problems and regulatory overlap between the relevant regulators. The second model, the “unified” or “super-regulator” model, attempts to address the problems experienced by the institutional and sectoral approaches by creating a single regulator to monitor both the conduct of market participants and the prudential soundness of financial institutions. This model was championed by the UK prior to its move to the Twin Peaks model. One of the perceived problems with this model, however, is that “[p]rudential and conduct of business. regulation require[s] fundamentally different approaches and cultures and there may be doubt about whether a single regulator would, in practice, be able to effectively encompass these to the necessary degree. ” Another issue with the unified approach is that a single regulator “might not have a clear focus on the different objectives and rationales of regulation and supervision, and might not make the necessary differentiations between different types of institution and business. ” The Twin Peaks model is considered to have certain advantages. First, the two peak regulators are more likely to have “dedicated objectives and clear mandates to which they are exclusively committed. ” Secondly, there is less danger that one aspect of regulation – such as market conduct regulation – will come to dominate the regulatory landscape. Regulatory culture, which encompasses the attitudes, policies and practices adopted by regulators in fulfilling their objectives, can be fostered depending on the function of the regulator and the culture that it needs in order to perform its role effectively. This avoids the issue of having multiple “cultures” under the one roof, as might be the case with a super-regulator where different cultures arise because of different regulatory objectives. Thirdly, the model may be better adapted towards keeping pace with the growing complexity of financial markets and the continuing rise of financial conglomerates. Further, the Twin Peaks model may avoid the inherent conflict of interest that arises within a super-regulator. As was noted by the UK Joint Committee on the draft Financial Services Bill (JCFSB) in 2010: