Twin Peaks – the Big Bang of SA’s financial industry

by Dr. Andrew D. Schmulow

News24, (2018), published electronically.

ON April 1, a new regulatory model called Twin Peaks was implemented in South Africa. This will have a dramatic impact on the country’s future financial regulatory landscape.

Many companies may not be aware that this model will have authority over every South African firm or business that offers a financial product or service. The good news for consumers is that this will potentially create one of the most progressive and extensive consumer protection regimes in the world.

The Twin Peaks model, which was first adopted in Australia two decades ago, was so named because of the two peak regulatory authorities it creates.

One peak, termed the “system stability” regulator, is charged solely with creating and enforcing prudential regulations, designed to prevent a financial crisis. During the global financial crisis, the strength of Australia’s financial system was attributed to this regulatory model. The second peak is responsible for deterring misconduct and protecting consumers of financial products and services.

Consequently, this model creates clear and unequivocal goals that are separated between the two peaks. This is a core feature of Twin Peaks: a model that recognizes that the two peaks can have contradictory goals, and then creates the peaks as separate, but equal.

Total Loss-Absorbing Capacity: No ‘Tender Love and Care’ For Australian Regulators

by Dr. Andrew D. Schmulow and Dr. Patrick McConnell

Thomson Reuters Accelus, (2015), published electronically.

Regulators love acronyms. Each new set of rules creates new acronyms, comprehensible only to the initiated and unintelligible to the general public. This often creates a smokescreen of indecipherable language that confuses everyone but the highly educated or initiated.

This week, a newish acronym appeared in Australia, though it has been used for some time overseas: TLAC. This code does not stand for tender love and care, as some might have previously thought, but the much more ominous Total Loss-Absorbing Capacity.

TLAC adds to the tsunami of acronyms — such as CET1, LCR, HQLA, FSB, LRE and RWA — that flowed from regulations put in place after the GFC (yet another acronym).

TLAC concerns capital, a word that has bankers running for the smelling salts, since more capital usually means less profits and, more painfully, the potential for lower bonuses.

In non-banking terms, TLAC can be seen as the “reading of the will” when, the worthy having expired, those left behind divide up the estate. In this case, think of a regulator as being the executor of the will and a bank as the deceased.

In normal business, a receiver will be appointed to wind up an insolvent corporation. In theory, that is what should happen were a bank to be wound up. But despite their protestations to the contrary, banks are just not normal businesses, especially those that are “Too Big To Fail” (or TBTF in acronym-ese).

To Clean Up the Financial System We Need to Watch the Watchers

by Dr. Andrew D. Schmulow

The Conversation, (2015), published electronically.

Scandals involving Australia’s financial advice sector and the regulation of it have continued into another month, the latest chapter of which has involved NAB’s financial advice division.

But this is not the first time NAB has attracted attention for its behavior and the oversight of it.

There was the time when the Australian Investments and Securities Commission (ASIC) allowed NAB to review and massage ASIC’s own media statement about NAB malfeasance.

And the controversy when it was discovered senior lawyers from NAB had been allowed into ASIC, to work, observe, and no doubt given the chance, to advise, caution and warn. Followed by ASIC stating, on the record, that no NAB lawyers were allowed to infiltrate and contaminate its policy development branch. Only to be made fools of by their own evidence, that in fact NAB lawyers were present and working in the policy formulation space at ASIC.

Only when the problems at NAB were revealed was the public informed NAB had sacked 37 senior advisers for “failing to meet standards”.

This article first appeared in The Conversation. Also published at FatCat and MacroBusiness.

Time For Abbott Government and ASIC to Get Serious About Australian Banksters

by Dr. Andrew D. Schmulow

Independent Australia, (2015), published electronically.

The 14-year sentence handed to Tom Hayes, the Yen trader at the centre of the Libor-fixing scandal in the UK, is the longest sentence yet in a scandal that has cost his former employer UBS, and others, US$17 billion in fines.

Apart from his obvious guilt, Hayes went out of his way to antagonise the Court, and the Judge.

Hayes, described as the “Machiavelli of Libor”, will not be the last to suffer the consequences of this fraud. Unfortunately, however, it appears bank executives will not be among those punished. And this is curious. UBS either knew, turned a blind eye, or had such weak internal controls that Hayes was able to perpetrate this fraud for three some years.

UBS was no doubt motivated, in part, by the US$260 million Hayes made for it. All the while he was being courted by the usual suspects: Lehman Brothers and Goldman Sachs.

He then fell out with UBS, over pay, and joined Citibank. Within a year Citibank had discovered his fraud. What at UBS we were led to believe remained undiscovered for in excess of three years, Citi sacked him for.

This article was originally published on The Conversation under the title ‘Lie-bore: powerful bank regulators running out of excuses‘.

South African Consumer Credit Regulation — the Lessons For Australia

by Dr. Andrew D. Schmulow

Thomson Reuters Accelus, (2015), published electronically.

Africa is not a continent generally held up for its excellence in financial regulation but South Africa’s National Credit Act contains legislation the rest of the world would do well to take note of, particularly Australia.

Australia is grappling with a number of retail regulation issues at the moment around predatory and reckless lending practices. Payday lenders in particular are under fire, having been discussed several times in the Senate and awarded the 2015 “Shonky” award by consumer watchdog group Choice for their tendency to ‘sneak around government restrictions.’

Rent-to-buy schemes are also in the spotlight, with the Senate last month passing legislation placing such schemes off-limits for the financially vulnerable living on welfare payments.

While these examples are quite micro in terms of the broader economy, the underpinning philosophy of protecting the vulnerable from financial predation is extremely sound. The most stunning example of a failure in this regard was the financial crisis of 2008, where extraordinarily reckless lending in the United States almost led to the financial collapse of the Western world. Not to mention the social responsibility that regulators have to protect the weakest members of the economy.

So where does Africa fit? Well, it happens that South Africa’s regulatory treatment of lending practices sets a visionary framework. Not just for preventing unsavoury lending, but also stopping credit and asset bubbles from forming in the first place.

South Africa joins the club that regulates financial markets through ‘Twin Peaks’

by Dr. Andrew D. Schmulow

The Conversation, (2018), published electronically.

South Africa is preparing the ground to migrate to a new way of regulating its banks and financial markets. Known as the Twin Peaks model, the decision has sparked debate, even controversy.

So what is Twin Peaks? And what’s all the fuss about?

The name Twin Peaks was adopted in 1995 by Dr Michael Taylor, who at the time was an official with the Bank of England. The name was a riff on the popular US mystery horror television mini-series created by David Lynch.

In a seminal paper published that year, Taylor set about unpacking the failings of the way banks and the financial markets were regulated in the UK. Regulation was based on a sectoral model – that is on the assumption that banks should be regulated separately from other kinds of financial institutions such as insurers. This model was used in most countries in the world at the time. It was applied in South Africa until 1 April 2018.

Twenty three years ago Taylor argued that the sectoral model was no longer fit for purpose. It was an anachronism. A throw-back to the days when there were clear delineations between different types of firms in the financial sector – banks, insurers, securities issuers. But when those firms began to amalgamate, the new firms that were created presented a problem for regulators whose authority was divided along lines that mirrored the division between banks, insurers and other financial firms. Taylor referred to this as a…

This article first appeared in The Conversation. Also published at The Citizen.

A Pox on Everyone’s House

by Dr. Andrew D. Schmulow

Money Management, (2014), published electronically.

Andy Schmulow argues that the controversy surrounding ASIC and its handling of the Commonwealth Bank have seriously damaged the financial planning industry and left few people deserving of any real credit.

The scandal engulfing the Commonwealth Bank (CBA) and the Australian Securities and Investments Commission (ASIC) does no one any good – least of all financial planners who work hard to serve their customers, and who scrupulously put their customers’ best interests first.

The facts become more tawdry with every passing day. ASIC has failed demonstrably in its remit, and has let down the Australian public badly.

First, ASIC failed to act upon the voluminous information provided to it by whistle-blowers, who placed themselves and their careers at risk. Second, ASIC failed the victims of the CBA financial planning division, who were desperate – precisely the people that ASIC was created to protect. Third, ASIC allowed itself to be misled by CBA as to whether there was a problem at all.

For a Commission charged with investigating malfeasance, to have placed such faith in a bank, where there was prima facie evidence of criminality, is both depressing and pathetic. Under questioning, an ASIC deputy commissioner conceded he was concerned that legal advice to victims would be prohibitively expensive for the CBA! Not, mind you, concerned with the costs to consumers of CBA fraud.

Our Paradigm Of Banking Regulation Is Shot

by Dr. Andrew D. Schmulow

On Line Opinion, (2009), published electronically.

Sir Andrew Crockett is a highly respected economist and banker. He came to Melbourne in 1999 in the aftermath of the “Asian Crisis”. At the time he was chairman of the Bank for International Settlements (the central bank to the world’s central banks). He said the world’s financial architecture was fundamentally sound, and only the plumbing needed fixing. This just goes to show you shouldn’t hire an economist to design your house.

Since his address, the international financial edifice has been shaken to its foundations. China owns America’s debt. Barack Obama is now the world’s number one auto exec. Whole suburbs lie abandoned in America, and Gordon Brown thought it necessary to use anti-terrorism legislation to threaten a bankrupt Iceland.

What a calamity! The malpractices that caused this were many and varied. They included: ineffective tax cuts in the US enacted by an economically illiterate president; the deflationary effects of the dotcom bubble’s burst and the subsequent expansion of money supply by the US Fed; dodgy ratings provided by some of the most “respected” ratings agencies, including Moody’s; the growth of the non-bank financial sector, or so-called “shadow-banking”; the property bubble in the US that gave rise to dubious financial instruments such as the notorious low-documentation liar loans; the over-inflated salaries paid to CEOs, which weakened the very companies they were entrusted to lead; and, last and most importantly, a lack of enforcement of banking regulations.

OPINION: Will prudential inquiry into CommBank salvage APRA’s enforcement reputation?

by Dr. Andrew D. Schmulow

Thomson Reuters Regulatory Intelligence, (2017), published electronically.

The Australian Prudential Regulation Authority (APRA) announced this week it will convene an independent prudential inquiry into the Commonwealth Bank of Australia (CBA). The inquiry will focus on governance, culture and accountability frameworks and practices at the bank and report back within six months.

To this end, APRA will be able to rely upon Prudential Standard CPS 510, an enforceable standard that “sets out minimum foundations for good governance of an APRA-regulated institution”, such as CBA. Compliance with the standard in question is compulsory.

The timing, however, seems questionable, and for a couple of reasons. These include the fact that CPS 510 was promulgated on January 1, 2015. Since then APRA has had opportunities to use this standard to investigate an ever-growing list of scandals and incidences of potential governance failures.

These include significant examples of poor governance — including illegality, in Commonwealth financial planning, unreasonable denial of life and permanent disability claims at CommInsure, charging for financial services that were never provided, sale of credit card insurance in inappropriate circumstances (such as unemployment insurance to people already unemployed), CBA staff found complicit in running an A$76 million Ponzi scheme, and then the money laundering scandal which broke almost three weeks ago.

The scandals affecting customers involve tens of thousands of customers, and remediation is running into hundreds of millions of dollars. The number of alleged anti-money laundering (AML) breaches exceed 53,700 breaches, in amounts that were eye-watering.

New Twin Peaks model: The Big Bang of SA’s financial industry

by Dr. Andrew D. Schmulow

South African Business Integrator, published by Media Xpose, September 2018/February 2019 2018, pp. 47-48.

Many companies may not be aware that this model will have authority over every South African firm or business that offers a financial product or service. Dr. Andy Schmulow, Senior Advisor to Datta Burton & Associates, says that the good news for consumers is that this will potentially create one of the most progressive and extensive consumer protection regimes in the world.