Twin Peaks: the good, bad and ugly

The Sunday Times interview with Andrew Schmulow, DB & Associates


South Africa needs to learn from banking crisis in Australia


Commonwealth Bank of Australia, that country’s largest lender, this week admitted that it had lost the records of 20 million accounts and had kept affected clients in the dark over its blunder.


The revelation is one of many to have emerged in recent months and puts the country’s financial services sector, currently being probed by a judicial inquiry, under further pressure.


Last month the chair and CEO of insurance giant AMP, operating in Australia and New Zealand, resigned as the sector’s crisis deepened.


Since then, calls for the heads of Australia’s four large banks to step down and face prosecution have intensified.


Commonwealth Bank alone has been sued for 53700 breaches of anti-money laundering and terrorism financing laws.


The bank, which has a partnership with soon-to-be launched Tyme Digital in South Africa, has also admitted to using outdated medical definitions to refuse sick customers insurance payouts and invoicing people for financial advice a decade after their deaths.


Australia’s banks, which are among the most profitable in the world by return on equity, have reached this crisis under the guise of Twin Peaks — the same regulatory model that is being implemented in South Africa.


“[Australia’s] bank regulator, according to the Productivity Commission in the Australian government, has used its regulatory tools to allow the four biggest banks to become an oligopoly with no meaningful competition,” said Andy Schmulow, an Australiabased advocate, financial regulation researcher and senior adviser to DB & Associates.


“There are probably religious cults less motivated by groupthink than the bank regulator in Australia.


“[And banks] are making that money by sucking the economic potential from the Australian economy.”


In the Twin Peaks regulatory model in South Africa, financial services will be regulated by two bodies, or peaks — the Prudential Authority, housed in the Reserve Bank, and the Financial Sector Conduct Authority, which replaces the Financial Services Board. The goal is to strengthen the country’s approach to consumer protection and market conduct in financial services, and create more resilience and stability in the system.


Though there has been much debate around the merits of the model and whether it is necessary in South Africa, where banks are already soundly regulated, there is no turning back.


The Financial Sector Regulation Act, which got phase one of the model’s implementation off the ground, became law in August.


Last month the PA, which will regulate all financial institutions, and the FSCA, which will supervise market conduct and consumer protection, came into operation. Reserve Bank deputy governor Kuben Naidoo was appointed CEO of the PA. The FSCA’s commissioner and deputy commissioner are expected to be appointed by the end of next month.


The two bodies will set out strategies later this year, with further details and work plans to be developed over the next three years.


South Africa is now gearing up for the next phase of the model’s implementation under the Conduct of Financial Institutions Bill.


But in Australia, former prime minister Tony Abbott has called for one of the country’s peaks, dealing with market conduct and consumer protection, to be shut down as the financial sector slips into further scandal.


One might ask why the model is being adopted locally, after such a dismal run Down Under.


According to Schmulow, the architectural Twin Peaks model addresses better than any other model the industry’s challenges, such as the blurring of boundaries between banks and insurers and the inequalities that existed between various regulatory bodies in any particular system.


But, he said, there was a difference between architecture and plumbing, just like there’s a difference between the model and its implementation.


“The implementation is going to be absolutely crucial in South Africa,” he said.


What South Africa’s regulatory authorities have working in their favour is hindsight. With Twin Peaks already adopted in six other countries apart from Australia, local authorities have the benefit of improving on past failures in other jurisdictions.


Given events in Australia, South African authorities will know that they are susceptible to capture by industry and can prepare defences accordingly.


That South Africa chose to host the PA in the Reserve Bank may prove to be a risk, Schmulow said, as it may end up taking orders from the central bank rather than operating fully independently.


“Having said that, one of the standout features of this country is the very long and rich tradition of unimpeachable independence of the Reserve Bank.


“Putting the Prudential Authority into the Picture: AFP


South African Reserve Bank might actually be better for South Africa.”


Michelle Kelly-Louw, a professor of law at Unisa, said despite Australia’s regulatory difficulties the model had encouraged deeper consumer participation in the financial services sector, which South Africa needed.


She added, however, that Twin Peaks may place too much responsibility to educate and protect consumers on industry players, and that their rights needed better balancing.


The model calls for an outcomes-based approach to regulation, rather than a rulesbased approach, and places the prudential and market conduct and consumer protection peaks on equal footing.


Odette de Beer, head of consumer conduct at Hollard, said that while compliance with Twin Peaks could be burdensome, the renewed focus on consumer protection would give companies that complied a competitive advantage over their peers.


“Insurance is insurance is insurance, just like a bank is a bank is a bank. All we have is our brand . . . If we don’t change our approach to compliance we won’t be around in 10 years and there are other companies that will.”




This article first appeared in The Sunday Times

© 2019 DB & Associates South Africa Pty Ltd