On 1 April 2018 the regulatory terrain in the financial sector is going to change dramatically. South Africa will commence with a new regulatory model which will have authority over every firm or business that offers a financial product or service.
Known as ‘Twin Peaks’, the model was first adopted in Australia in 1998. The robust strength of the Australian financial system during the global financial crisis (GFC) was attributed to its Twin Peaks regulatory model. Under such a model there are two, peak regulatory authorities. One peak is charged solely with creating and enforcing prudential regulations, designed to prevent a financial crisis. This is the ‘system stability’ peak. In South Africa it will be called the Prudential Authority, and will commence operations on 1 April 2018. The second peak is responsible for deterring misconduct and protecting consumers of financial products and services. This is the market conduct and consumer protection peak. In South Africa it will be called the Financial Sector Conduct Authority. It too commences operations on 1 April, 2018.
This regulatory model abolishes the notion of separate regulators – and by implication additional regulatory burdens, and different interpretations from different regulators of similar regulations. It creates clear and unequivocal goals that are separated between the two peaks. This is a core feature of Twin Peaks: a model that recognises that the two peaks can have goals that can be contradictory, and then creates the peaks as equals.
In other words, consumer protection, treating customers fairly, serving your customers well, addressing their claims timeously, conducting your business ethically, and without undermining the market, while contributing to the goals of increasing financial inclusion and financial literacy, will now assume a role equal to that of preventing financial crises. “For consumers this will create, ideationally at least, one of the most progressive and extensive consumer protection regimes in the world” according to Dr Andy Schmulow (internationally recognised authority on financial regulatory architecture, and on Twin Peaks in particular. Andy is a senior advisor to DBA on South African Twin Peaks implementation).
What is less well-known is that these reforms will also introduce a new regulatory enforcement approach. No longer will enforcement be conducted in relation to alleged breaches of specific provisions. Instead, enforcement will focus on outcomes. Those outcomes are often expressed in the new legislation in high-level terminology that defies precise interpretation. This gives the regulator an inherent advantage: it gets to define, for example, unfair. Second, outcomes presents a subtle shift in favour of how easily the regulator can win prosecutions: no longer must the regulator prove a particular breach took place. It can merely demonstrate that a group of consumers were disadvantaged. From a regulatory science perspective, this creates regulators in South Africa that are well-armed.
In preparing to undertake this journey across a transformed regulatory landscape, financial products and services providers will need to understand not just the regulatory mechanics of the two new pieces of legislation that create Twin Peaks. They will need to understand, at a deep expert level, how to make sense of a new regime where some of the most serious obligations imposed on providers are expressed in terms that the regulator is yet to define. Firms will need to reconceptualise their processes for designing, marketing, and supporting their products and services, to comply with the law.
DB & Associates is partnering with Dr Andy Schmulow, a member of a panel of experts advising the South African National Treasury on the draft Conduct of Financial Institutions Act (COFI). COFI will be the principle piece of consumer protection legislation, and complements the Financial Sector Regulation Act, which was enacted in August 2017. After the confidentiality provisions surrounding COFI are lifted, Dr Schmulow will be leading DB & Associates in informing clients on how best to adapt.