Twin peaks: what SA can learn from Australia about financial regulation and market conduct policy (CompliNews)

by Dr. Andy Schmulow

Public consultation and workshops on the second draft of the Financial Sector Regulation Bill and the draft Market Conduct Policy Framework began in Gauteng this week, and move to Cape Town in the first week of February 2015.

The Draft Bill, when enacted, will be the most important financial regulatory reforms in South Africa, since the Union of South Africa left the Gold Standard in 1932.
Advocate Dr Andy Schmulow, a visiting researcher at Wits and Senior Research Associate in the Melbourne University Law School, who has provided advice to the South African Treasury on the Financial Sector Regulation Bill, has commended the ministry for its broad consultative approach.

A leading researcher in the Twin Peaks model of financial regulation, Dr Schmulow says:
“It is encouraging that the national Treasury has undertaken a thorough and detailed examination of the comments provided by industry and stakeholders, in respect of the first draft, numerous recommendations and suggestions have been adopted, and now appear in the second draft, including 22 of 25, recommendations that we made in our submission.”
“It is also encouraging that the national Treasury has kept an open mind in terms of drawing on experience from other jurisdictions, and designing a model that will hopefully respond to South Africa’s specific needs. However, it is still early days, and the effectiveness of the system will ultimately depend on how easy it is to implement in practice.”

For the new model to succeed, Dr Schmulow says South Africa can take a page from the experiences of Australia as the pioneers of the Twin Peaks model.

“One of the key lessons that South Africa can learn from Australia, is that the quality of inter-agency co-ordination and co-operation will be of critical importance to the successful implementation of the Twin Peaks model.”

A stand-alone regulator responsible for prudential supervision, with wide-ranging powers to intervene in the market, direct banks and insurers in respect of their capital adequacy levels and their lending profiles, and charged with the responsibility to enact and enforce regulations, is a more effective method than the current regime in South Africa.

Although the Draft Bill partly acknowledges this, Dr Schmulow is wary that the bank regulator (known as the Prudential Authority or PA) will be a division of the South African Reserve Bank.
“We are of the view that this is sub-optimal (at least in theory). The evidence indicates that the South African approach leads to higher inflation, and comports less closely with the Basel Core Principles. Part of the reason for this is that the PA tends to work at a micro level, whereas the Reserve Bank works at a macro level.”

“Consequently there is potential for conflicts of interest, and we are of the view that the Australian method is preferable, wherein the Australian Prudential Regulation Authority is separate from the Australian Reserve Bank, and statutorily independent”, he says.

Another lesson that South Africa can learn from Australia is that the regulatory regime itself is not enough. It is only part of the solution. Says Dr Schmulow: ‘Evidence of which is to be found in the experience of the Netherlands during the GFC. The Dutch too adopted Twin Peaks, but were nonetheless required to rescue three of their four largest banks. Other aspects which are equally important relate to how willing one or both of the two peaks are in taking on vested interests, or in taking on powerful elites – the so-called ‘top end of town.’ This comes down to the personalities of the people in charge, and the extent to which they are willing to ‘rock the boat’.”

Sharing his views on the stability of South Africa’s financial sector, and the impending changes, Schmulow stated:

“The adoption of a Twin Peaks method of financial system regulation in South Africa will, it is hoped, make the South African financial system more resilient, and better equip South Africa to avoid financial crisis, or at least manage a crisis once it has taken hold.”
Australia came through the Global Financial Crisis (GFC) almost unscathed.

“Various organisations such as the G20, the International Monetary Fund and the World Bank have identified the method of financial system regulation in Australia as responsible, in large part, for this success,” said Schmulow. He states: “at the end of the day Twin Peaks is merely a good start. To paraphrase Churchill, Twin Peaks is not the beginning of the end. It is merely the end of the beginning.”

Advocate Dr Andy Schmulow is a Visiting Researcher in the Oliver Schreiner School of Law at Wits University, pursuant to his work on the South African regulatory reform initiative. He is a Senior Research Associate in the University of Melbourne Law School, advises Dr Dion George, DA MP and Shadow Treasurer on this Financial Sector Regulation Bill, and is the founder of Clarity Prudential Regulatory Consulting Pty Ltd. He is an Advocate of the High Court of South Africa, and a graduate of the Universities of the Witwatersrand and Melbourne. He lives in Melbourne.

Advocate Andy Schmulow is available for media interviews on +61 405 380 987 or email