Twin Peaks in South Africa

by Dr. Andy Schmulow

Without well-regulated banks, South Africa’s economy will not grow and develop. Without sound banks it may face a financial catastrophe. That could decimate the economy, impoverish a nation, wipe out the value of property and retirement savings, and cause millions to become jobless.

For these reasons South Africa is about to engage in the most far-reaching reforms to the regulation of its financial system since the abandonment of the gold standard in 1932. The goal is to provide a regulatory environment that will assure South Africa of a stable financial system, fit for purpose, and adequate to the needs of a globally integrated economy in the 21st century.

South Africa’s reforms are based upon the so-called ‘Twin Peaks’ model first adopted by Australia in the late 90s, and subsequently copied around the world, including in the UK, New Zealand, Qatar, and (independently) the Netherlands; and currently under consideration in a slew of other countries. The Australian model has become popular because of the perceived success with which Australia navigated the global financial crisis, and the strength and resilience of Australia’s financial system. In addition, there is a perception – only a perception mind you – that Australia enjoys good market conduct and that its banks are well regulated.

The Twin Peaks model uses two, peak government regulators. One is charged with ensuring good market conduct and consumer protection – the market conduct regulator. The other is tasked with ensuring a stable financial system – the prudential regulator. In South Africa the former will take the form of the Market Conduct Authority (MCA). The latter will be the Prudential Regulation Authority (PRA) – a division of the SARB.

This model enjoys a number of advantages. These include regulators that have a clear remit, focused exclusively on their task; no overlap or turf wars; clear responsibility and accountability; a capacity to concentrate expertise and specialist resources and finally; with equality between the peaks, an ability to avoid the inevitability of consumer protection playing second fiddle to the maintenance of financial system stability.

The last factor is especially significant. If the functions of the two regulators are combined into one, mega regulator, financial system stability almost always displaces protecting consumers. This leads, inevitably, to a slippery slope: any issue, when viewed broadly enough, will have stability considerations. When that happens, consumers are consistently abandoned in favour of protecting bank solvency. Separating these two tasks is, theoretically, one of the great strengths of Twin Peaks.

Unfortunately, in practice, Twin Peaks in Australia is proving less than satisfactory. The failings of our model have reached crisis point. With a Federal election less than two weeks away, one of the major campaign promises by the opposition is the establishment of a Royal Commission to investigate rampant malpractices in the banking and insurance industry, and the seeming torpor of our regulators – especially the market conduct regulator. Not a week goes by without another shocking revelation of market misconduct – from rigging interest rates and insider trading – to consumer abuse – banks defrauding their customers through their financial advice divisions, and the wholesale denial of valid life and disability insurance claims. Our market conduct regulator, ASIC, has been excoriated by Australia’s Federal Senate for doing nothing about the financial advice scandals, despite having voluminous documentary evidence, provided by courageous whistle-blowers.

Our prudential regulator has turned a blind eye to our banks exceeding their limits in the provision of home loans, to the point where Australia now has a property bubble with the most expensive residential property on earth – dearer than London, New York or Tokyo – and those same banks cooking the books on the quality of those loans, so they can avoid having to retain higher levels of capital.

It’s a non-stop merry-go-round of scandal, and the public has had a gutful. According to a recent Australian Broadcasting Corporation survey, 89 per cent of the public want a Royal Commission into banking. One assumes the remaining 11 per cent work for the banks. In response, desperate to look busy, ASIC last week announced they will be getting tough on misrepresentations made in the sale of pet insurance. Pet insurance! You couldn’t make this stuff up. So ASIC has gone from useless and lazy to useless and busy.

Doubtless part of the problem is design. ASIC’s remit is too broad. They are responsible for market conduct across every sector of the economy, not just the financial sector. At the very least we should develop the model further so that we have one division of ASIC that rules nothing other than banks and insurers. But doubtless also part of the problem is implementation. Our regulators are weak and timid.

So South Africa must proceed with great caution if it is to secure its future. The Twin Peaks model is not enough. What is needed is leadership – strong, principled, unwavering, uncorrupted, intelligent leadership to create feared and effective regulators like the Monetary Authority of Singapore. Anyone have Thuli Madonsela’s number?