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Australia’s Twin Peaks model could draw on SA’s far superior version


On April 1 SA adopted the Australian twin peaks financial system regulatory architecture – the sixth country, and the world’s first developing country, to adopt this model. This is the most significant reform to the regulation of the South African financial system since SA left the gold standard in 1932.

My colleagues and I had the opportunity to make wide-ranging inputs into the drafting of the Financial Sector Regulation Act, which became law in August 2017. I was a member of the world’s premier research cluster analysing the Australian financial system regulatory architecture, and we were impressed by the knowledge and thoroughness of the South African Treasury as it undertook the drafting of the law.

The act was the first episode of twin peaks adoption. Now SA is gearing up for episode two of twin peaks: the implementation of the Conduct of Financial Institutions (Cofi) Bill. I was invited to be a member of the independent expert panel convened by the Treasury to provide advice on the contents and direction of Cofi and was struck by the knowledge, including the internationally comparative knowledge, the meticulous attention to detail, the comprehensiveness and the intelligence displayed in the drafting of the bill.

There are a number of innovative provisions that I suspect will be world firsts; there are provisions that will come to be regarded internationally as the benchmark against which other legislation for the regulation of financial systems will be judged elsewhere in the world.

"While the authority will enjoy the full suite of its powers only when Cofi is enacted, it will nonetheless be empowered under the Financial Sector Regulation Act to set conduct standards immediately"

While these reforms are modelled on Australia, the South African iteration is in my opinion manifestly superior to the Australian model. Australia has suffered scandalous abuse of consumers stretching back almost a decade, under the nose of market conduct and consumer protection agency the Australian Securities and Investment Commission, which has performed so poorly that in 2014 the Australian Senate described it as "weak, feckless and unduly deferential to the entities which it regulates". So widespread and so egregious have these instances been, in which consumers have been ripped off by banks and bank-owned insurers, that the victims run into the tens of thousands, possibly in excess of 100,000. Remediation for malpractice, dishonesty and outright fraud is running into the tens of billions of Australian dollars.

The Australian public has had a gutful, and in the face of unrelenting pressure the federal government announced a commission of inquiry into misconduct in the Australian financial sector — a withering rebuke of the peak responsible for policing conduct and a shameful and embarrassing chapter in Australian history.

The other peak, the Australian Prudential Regulation Authority, was blamed in a Productivity Commission report issued in March for enabling Australia’s four biggest banks to achieve a degree of market dominance that has made them the most profitable in the world, through their high margins and lack of meaningful competition thanks to the authority’s ham-fisted and incompetent use of macro-prudential tools. In the process it has also allowed them to sap the rest of the economy dry and drained the life-blood out of Australia’s capacity for economic growth.

I have not shied way from providing SA’s Treasury with my frank and unvarnished appraisals of where Australia has failed, and where and how SA can and should avoid the same mistakes. I have found the people I have worked with in the Treasury to be receptive to critical analysis, not mired in the kind of brain-deadening group-think and professional arse-covering I have observed in the Australian regulators.

One senior South African Reserve Bank official remarked to me that as far as she was concerned, "if everyone in a meeting is in agreement, then someone isn’t thinking". An impressive intellectual philosophy.

The aim of Cofi will be to regulate conduct — specifically to ensure that every entity that provides any form of financial service or financial product will be compelled to conduct itself in a manner that is ethical, and treats consumers of financial products and services fairly. The Financial Sector Conduct Authority (FSCA) which has just come into being, will be the new cop and will replace the Financial Services Board. While the authority will enjoy the full suite of its powers only when Cofi is enacted, it will nonetheless be empowered under the Financial Sector Regulation Act to set conduct standards immediately.

Providers of financial products and services should not underestimate the authority this new agency will possess, and from my interactions on the expert panel my view is that such providers should not underestimate the commitment of the personnel in this agency to enforce the law and use the powers at their disposal decisively.

Across every facet of the lifecycle of a financial product, and across every permutation of financial advice, this agency will be empowered to monitor and evaluate the how, why, when, by whom, for whom, at whose behest, subject to what policies and frameworks, how those policies and frameworks are constructed, evaluated, audited and monitored, the appropriateness thereof, and the outcomes of all of this on consumers. The new authority will have extensive powers to investigate and to take far-reaching corrective and, if need be, disciplinary action.

While I and other members of the panel of experts have provided guidance on where we think some of these powers permit too much discretion for the FSCA, on balance the goals and the underlying philosophy are unashamedly biased towards protecting consumers, and place the onus for ensuring good conduct and treating customers fairly on the shoulders of the providers. Australia could learn from this.

Under Cofi providers will have to engage in a root, stem, branch and seed analysis of what they do, how they do it, to whom they do it, with what objective, and how that affects their customers. It will be a significant undertaking, but well worthwhile, especially in a developing country with a large portion of vulnerable consumers who are in effect excluded from the financial system.

I have great confidence in SA’s regulators to steer this process. I and others will be observing closely and we will continue to assist wherever we can. If SA succeeds we will take the lessons learned and employ them in Australia, where, regrettably, I cannot muster the same confidence in our regulators.

Schmulow is an advocate and Wits alumnus now based in Australia. He served on the Treasury’s independent expert Cofi advisory panel.

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