by Dr. Andrew D. Schmulow
Financial World, (2018), published electronically by The London Institute of Banking & Finance in association with the Centre for the Study of Financial Innovation (CSFI).
In 1995, Michael Taylor published a report with the Centre for the Study of Financial Innovation entitled Twin Peaks: a regulatory structure for the new century. That began a conversation that attracted world interest. Taylor’s proposal – two “peak” regulators for the financial system, one for system stability and the other for market conduct and consumer protection – was adopted as government policy in Australia three years later, and in the Netherlands a couple of years after that.
Following the global financial crisis, Taylor’s model was widely regarded as having provided the best response. As a result, it was adopted in Belgium, Qatar, New Zealand, the UK and, most recently, South Africa. Both in theory and in practice, this bifurcation of responsibilities is the best method of dividing what are, at times, competing and conflicting goals.
But how this is transmitted – the implementation and the enforcement of financial regulations (the plumbing) – remains problematic. This is because of challenges that all regulatory systems share. They include regulatory capture, regulator fatigue and under-resourcing, political interference, inappropriate priorities, excessive discretion leading to a capricious regulatory environment, and the difficulty of predicting why the next financial crisis may develop. It can, as with the subprime disaster, grow from market misconduct and consumer abuse. Regulators, therefore, face the challenge of foreseeing the unforeseeable.