Twin Peaks making grim progress

In the early days of “The Pill” the UCT rag magazine, Sax Appeal, reported on a new book by the Pope titled: “The pill’s grim progress.” No doubt, the same scepticism accompanies the Twin Peaks legislation in some quarters.

On 13 July, the Minister of Finance released a blueprint of how he plans to turn the economy around. Included in the 14-point plan is a call for the implementation of the Twin Peaks regulation by February 2018.

It is quite ironic that the summary of the plan states that the intention of Twin Peaks is to bring down banking costs. I suspect that the architect of the 14-point plan did not study the Twin Peaks regulations. It will most certainly add to the cost of banking.

Dr Azar Jammine, a leading South African economist, is of the opinion that the plan is an attempt to stave off further downgrades by rating agencies, rather than to address the issues which is strangling the economy. He lists a number of fundamental structural reforms needed to uplift the country’s longer-term economic growth rate.

“Issues such as education and skills development, the need to break down the concentration of power in South African business, reduction of overregulation, encouragement of small business and entrepreneurship, improvement of relations between public and private sector and above all, in the context of recent confidence-sapping events, the need to address corruption and State capture, clearly do not form part of the GIGAP.”

A recently released document titled “Memorandum on the objects of the Financial Sector Regulation Bill”, also known as the Twin Peaks Bill, provides a 15 page summary of what the Bill entails. The FSRB was passed in Parliament on 22 June 2017, despite being opposed by the DA and others.

“Twin Peaks is intended to be a comprehensive and complete system for regulating the financial sector, prioritising customers and protecting their funds. It represents a decisive shift away from a fragmented regulatory approach. This will be achieved by creating dedicated Prudential and Financial Sector Conduct Authorities.”

In addition to the two regulators, the approach establishes a harmonised system of licensing, supervision, enforcement, addressing of customer com¬plaints (including ombuds), a mechanism for the reconsideration of decisions and consumer education.

This “single system” supports regulatory consis¬tency, and reduces the scope for regulatory arbitrage or “forum shopping”. It also makes it easier for any customer experiencing a problem, as the customer is often confused about where to complain when experiencing unfair treatment from a financial institution.

Given the scale of the transformation in regulating the financial sector, the Twin Peaks system will be implemented in two stages. The first stage establishes the regulators and a uniform system and standards, with existing sub-sectoral (or activity-based) laws (for example on insurance and banking) remaining in place. This is possibly what the Minister referred to in his 14 point plan.

In the second stage, the focus will be to streamline the current activity-based legislation (separate for banking, insurance, credit, pensions, etc.) into consolidated legislation, to reduce the scope for regulatory arbitrage.

Industry reaction

Possibly the harshest criticism comes from the Free Market Foundation (FMF), who calls the FSR Bill “bad policy”.

The FMF is particularly concerned with what it terms the grossly inadequate Cabinet mandated Social Economic Impact Assessment (SEIA) required to precede all new policy.

“The analysis, which was done in the case of Twin Peaks, was wholly inadequate and misleading as it did not contain an analysis of costs versus benefits.”

In a nine-page media release prior to a public workshop on the Bill, it lists, amongst others, the following concerns:

  • “Twin Peaks” is a system that already exists in practice but under a single peak, rather that the proposed expensive and grossly inefficient split into two.
  • The Treasury and FSB have failed to give clarity on why this legislation is necessary when its stated objectives can and are being achieved under current, simpler legislation.
  • Insurance has been unnecessarily lumped in with banking and other financial services
  • Twin Peaks will further deter transformation, already greatly hampered by over-regulation.
  • Far from increasing competition – monopoly conditions are being created
  • Twin Peaks, so far, has failed to deliver in the UK
  • Twin Peaks will further compound the inefficiencies and massive costs introduced by FAIS

“International financial history and hard experience clearly shows that this model has not worked globally and will not work in SA. Not least because the authorities tasked with regulation do not understand the nature of the business they oversee. Therefore, all they can do is regulate harder and harder in an attempt to bring all insurance and financial business under their direct control.”

Academic view

In an interview with Business Day TV, Professor Robert Vivian, an outspoken critic of Twin Peaks, raised a number of concerns regarding the cost of the new legislation as well as the justification for the Bill.

He estimates that the cost of the two Regulators will be in the region of R6 billion. The FMF states that the current cost of FAIS is about R600 million.

Prof Vivian points out that banks pose systemic risk, while insurance houses do not. It therefore does not make sense to have the same system for both.

He is also of the view that the reason given for the new legislation, namely the failure of the current model, was never demonstrated.

He is also concerned that the Constitution provides the Reserve bank with a mandate to regulate banks, not insurance companies. To be able to do so under Twin Peaks will require a change in the constitution.

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