The Interpreter

by Dr. Andy Schmulow

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 characterised by two, equal, 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 credit with much of our success, a number of other countries have adopted the model (the UK, New Zealand, South Africa) or have signalled 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, the other 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. Crucial to the success of the model is the notion that both regulators are equal in power and importance, and that neither should play second-fiddle to the other. (

By so doing, the model recognises that if the two peaks are not equal – if one assumes the position of a lead regulator –invariably what follows is that the financial system stability regulator assumes the role of top dog, Thereafter policing good market conduct and protecting consumers is begins to decline in importance.

When you consider where the GFC originated – consumer abuse (reckless and predatory lending in the sub-prime industry) combined with market misconduct (fraud on an industrial scale, like that at Countrywide, and the design and sale of financial products designed to fail), you begin to appreciate the importance of a strong and forceful market conduct and consumer protection peak. As a result, in our advice to the South African Treasury in 2014/2015, on the first draft of their legislation adopting the Australian model (, my colleague Andrew Godwin in the Melbourne Law School and I advised the South Africans to jettison their provisions establishing on of their two peaks as a lead regulator.

The model has much to commend it. It provides a clear remit and certainty of jurisdiction. It ameliorates tendencies towards turf wars, confusion among regulatees as to which regulator may have authority in a given situation or in respect of a particular product, confusion among consumers in countries with multiple regulators, as to which one to turn to for assistance, conflicting and contradictory regulatory signals, like those produced in countries with multiple regulators, and opportunities to engage in regulatory arbitrage by regulatees. It enables the two regulators to build capacity and specialisation in their field, pool the resources and human capital that would otherwise be spread over multiple regulators, and present a unified front to government.

For good reason, then, Twin Peaks is the model favoured by the Basel Committee, the IMF, G20, World Bank and others. The question, however, is, is it transferable? Part of what may have contributed to the model’s success in Australia may not be available elsewhere. For example, much of what the model relies upon is inter-agency co-operation and collaboration. In Australia the three peaks have a demonstrated history of close co-operation. The relationship is not riven with rivalry and turf-wars. For the most part they are unfettered by political interference. Australian public servants are highly skilled and largely incorrupt. This is underscored by a professional legal fraternity, whose trials are adjudicated over by a fiercely independent judiciary, uncorrupted, and existing within a state based upon rule of law. By comparison, South Africa, the most recent adopter, either lacks some of those same attributes, or if it has them, they are not as strongly evident. Add to this the fact that at the advent of the GFC Australian banks were preoccupied with their home market, and therefore less exposed internationally. They possessed an investment profile that was vanilla – that is to say, less exposed to esoteric, highly leveraged and highly derived financial products. This is part of why, particularly during the GFC, Australia fared well. Future adopters, with banking systems more internationally inter-connected, may quite possibly under the same crisis conditions, fare worse.

That was certainly the case with the Netherlands – the second country to adopt Twin Peaks, in 2002. The GFC proved catastrophic for the Dutch banking sector, with total foreign claims on Dutch banks amounting to 300 % of GDP. Yet if you look across the characteristics that explain Twin Peaks’ success in Australia, you see the same characteristics strongly evident in the Dutch state. All except for a vanilla banking sector.

Added to an international failure of the model, are the domestic failures, most notably those of HIH and the near failure of Zurich, and the performance of ASIC in the financial advice scandals – a performance excoriated by the Senate. Consequently, while Twin Peaks does have much to commend it, it is by no means a panacea to financial crises and contagion. It is merely one arrow in an increasingly technical and disparate quiver.

Dr Andy Schmulow has a BA Honours and an LLB from the University of the Witwatersrand, and a PhD from the University of Melbourne. He is the Principal of Clarity Prudential Regulatory Consulting Pty Ltd, an Advocate of the High Court of South Africa, a Visiting Researcher in the Oliver Schreiner School of Law at the University of the Witwatersrand, and a Visiting Researcher in the Centre for International Trade at Sungkyunkwan University in Seoul. He is shortly to assume a role as a Senior Lecturer in the Law Faculty of the University of Western Australia. He may be reached on