Financial Regulation: Is Australia’s ‘Twin Peaks’ Model a Successful Export?

by Dr. Andrew D. Schmulow

published electronically in The Interpreter, 1 March 2016.

It is little known outside financial circles, but Australia is enjoying some success on the global stage as a policy exemplar.

Australia’s model for the regulation of the financial system – the Twin Peaks model – is being emulated world-wide. So-called because the model is characterized by two equal and independent peaks: the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). Because Australia fared relatively well during the GFC and because our regulatory model has been credited with much of our success, a number of other countries have adopted the model (the UK, New Zealand, South Africa) or have signaled a desire to adopt it (South Korea, Hong Kong, and the federal level of the EU).

Under the Twin Peaks model, one peak is responsible for financial system stability (in our case, APRA) while the other (ASIC) is responsible for good market conduct and consumer protection. Within this system the Reserve Bank remains partly responsible for financial system stability, and remains the lender of last resort. So in fact, the model is a misnomer. It is in fact more correctly called the Triple Peak model.

Fancy Dress Financial Regulators ASIC and APRA Must Go

by Dr. Andrew D. Schmulow

published electronically in The Sydney Morning Herald Online, 31 May 2016.

Recently, the federal government completed an inquiry into how we regulate the financial system. One of the inquiry’s proposals was that we need a board of oversight over ASIC – the consumer protection regulator – and APRA – the bank regulator.

That proposal was eventually dropped, doubtless with some push-back from the regulators. In fact, creating a Financial Regulator Assessment Board was the inquiry’s only recommendation that the Abbott government rejected.

Because of ASIC’s staggeringly poor performance, and all the recent banking and insurance scandals, there’s now a call for more than a board of oversight, there are calls for a royal commission. So that worked out well.

All the while a blowtorch has been held against ASIC, and for reasons that are both good, and that keep coming. But APRA has escaped scrutiny, when in fact it may be the unsung villain of the piece. Allow me to explain.

Also published in The Age and The Canberra Times Online.

Explainer: who will be doing what under South Africa’s new ‘Twin Peaks’ model

by Dr. Andrew D. Schmulow

The Conversation, (2018), published electronically.

South Africa has started implementing a new regulatory regime for the financial sector. Known as Twin Peaks, the approach was first adopted in Australia in 1998. South Africa has become the eighth country to adopt the model.

Under Twin Peaks two regulators are established. One is charged with maintaining the stability of the financial system – called prudential regulation; the other is responsible for market conduct and consumer protection – what the South African authorities have neatly abbreviated to calling the “good conduct” peak.

The new approach is designed to address weaknesses in the other models commonly used to regulate banks and the financial services sector. Prior to adopting Twin Peaks South Africa used the sectoral model – that regulated banks separately from other financial firms like insurers. That model’s been replaced because it didn’t address the fact that institutions from different sectors often merge. This is particularly true of banks and insurers (so-called bancassurance).

This article first appeared in The Conversation. Also published at BizCommunity and Middle East North Africa Financial Network, Inc. (MENAFN).

Doing It the Australian Way, ‘Twin Peaks’ and the Pitfalls In Between

by Dr. Andrew D. Schmulow

The CLS Blue Sky Blog, edited by Reynolds Holding, published by Columbia Law School, 2016.

The ‘Twin Peaks’ method of financial system regulation is widely regarded as the leading model for the regulation of a country’s financial system. Australia was the first to adopt the model in 1997, has been using it the longest, and fared the best among the G20 during the global financial crisis. As a result, Australia’s Twin Peaks model is being exported around the globe.

The model was first proposed by an Englishman, Dr Michael Taylor, in 1994. So-called because it proposes two, specialist, mega-regulators: one charged with the maintenance of financial system stability (ensuring banks don’t end-up bankrupt), and the other with market conduct and consumer protection (ensuring banks don’t make their customers bankrupt). And yes, Taylor did have David Lynch’s mini-series in mind when, somewhat tongue in cheek, he named it ‘Twin Peaks’. In Australia, the system stability regulator takes the form of the Australian Prudential Regulation Authority (APRA), and the market conduct and consumer protection peak takes the form of the Australian Securities and Investments Commission (ASIC).

Australia’s Federal Reserve, the Reserve Bank of Australia, has overlapping responsibility for financial system stability, and remains the lender of last resort. So in Australia’s case the ‘Twin Peaks’ moniker is a misnomer. It should more correctly be called ‘Three Peaks’. To date, other countries that have adopted the model include the UK, the Netherlands, New Zealand, Qatar and South Africa. Those that have signalled a desire to adopt it include South Korea, Hong Kong and the federal level of the Eurozone.

Do Not Enfeeble ‘Twin Peaks’ As UK Did

by Dr. Andrew D. Schmulow

Business Day, South Africa, 2015.

THE adoption of “twin peaks” in SA is arguably the most important raft of financial system re forms since the Union left the gold standard in 1932. Originally proposed by an English man, Michael Taylor, this system was first adopted by Australia in 1998. It consists (in Australia) of the Reserve Bank of Australia (the lender of last re sort), the Australian Prudential Regulation Authority (Apra, the guardian of financial system stability), and the Australian Securities and Investment Commission (Asic, the market conduct and consumer protection agency).

Also published at BD Live and Global Advisors.

Constructively tough? Neither side has committed to fully adopting perhaps the most important recommendation of the banking royal commission

by Dr. Andrew D. Schmulow

The Conversation, (2019), published electronically.

Among the many recommendations of the banking Royal Commission was a Board of Oversight for the two regulators in charge of financial institutions; the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority: ASIC and APRA.

Since then APRA’s own internal review conducted by deputy chairman John Lonsdale and NSW Supreme Court Judge Robert Austin, Australian Competition and Consumer Commission commissioner Sarah Court and UNSW professor Dimity Kingsford-Smith has found APRA to be soft on enforcement and timid by comparison to its international peers.

Nonetheless, and to demonstrate that APRA still doesn’t get what it doesn’t get, its chairman used Tuesday’s release of the review to announce a new mantra. From now on, APRA is to be: “constructively tough”.

Banking Royal Commission Should Be Paid For By Banks

by Dr. Andrew D. Schmulow

The Conversation, (2016), published electronically.

Banks are worried. Their employees have engaged in practices that they don’t want aired, so they’re pushing back, writes the UWA’s Andrew Schmulow (via The Conversation).

THERE ARE cultural and ethical malpractices prevalent in Australian banks which our regulations do not address and which our regulators have struggled to contain. Those malpractices appear to be spreading, and our banks have failed to act meaningfully. The potential effects can be dire, so we need to find solutions. The Financial System Inquiry failed to address the problem. A royal commission would.

It’s important to remember how the global financial crisis started out. It began with the subprime disaster: a large industry developed around writing dodgy loans, sold using pressurecooker predatory lending, by unscrupulous lenders — none more so than Bank of America’s Countrywide Financial.

When that was not enough, banks, including Bank of America, engaged in document fraud on an industrial scale (something CommInsure employees dabbled in too).

The point is, dodgy dealings and an unethical culture in the banking system can create catastrophic, national and international problems.

This article first appeared at The Conversation. Also published at Independent Australia and Econotimes.

Australia’s twin peaks model could draw on SA’s far superior version

by Dr. Andrew D. Schmulow

Published in Business Day, South Africa, 2018.

On April 1 SA adopted the Australian twin peaks financial system regulatory architecture – the sixth country, and the world’s first developing country, to adopt this model. This is the most significant reform to the regulation of the South African financial system since SA left the gold standard in 1932.

My colleagues and I had the opportunity to make wide ranging inputs into the drafting of the Financial Sector Regulation Act, which became law in August 2017. I was a member of the world’s premier research cluster analysing the Australian financial system regulatory architecture, and we were impressed by the knowledge and thoroughness of the South African Treasury as it undertook the drafting of the law.

Australia’s Banks Are Safe, So Deposit Levy Is Looking Like a Revenue Grab

by Dr. Andrew D. Schmulow

The Conversation, (2015), published electronically.

The closer one looks at the government’s recent decision to levy a deposit tax against Australia’s Big Four banks, the more it seems like a revenue grab. Nothing more, nothing less.

An inspection of the legislation reveals that in the event of the failure of an Australian bank, there is no need for a levy to fund a depositor bailout. That means this proposal is not a deposit levy. It is simply another tax, with little to do with protecting depositors in the event of a bank failure.

Three crucial factors substantiate this assertion: the Banking Act, the levels of retained capital, and hypothecation (the practice of pledging collateral against debt).

We’ll explain why.

Australia’s financial regulators need policing

by Dr. Andrew D. Schmulow

The Conversation, (2018), published electronically.

A Productivity Commission report analysing competition in the financial sector has pointed out that our finance regulators have become enablers of an industry that is an impediment to our economic competitiveness and exploitative of their most loyal customers.

It proves the need for a board to oversee the conduct of our financial regulators, policing the bodies that are supposed to be keeping our financial system in check.

It could not have come at a worse time for our big four banks. Perennially pilloried for their rampant market misconduct (fraudulently manipulating benchmark interest rates) and their equally rampant abuse of upwards of hundreds of thousands of consumers across every one of their retail operations at one stage or another – financial advice, life insurance and credit card insurance, just to name a few.

This article first appeared at The Conversation. Also published at Economic Reform Australia and Property Observer.