Twin Peaks Regulation – What Does It Mean to South Africa?

March 8, 2013

iStock_000019945301XSmall[1]In 2011, the National Treasury of South Africa released this policy document which proposed a twin peaks model of financial regulation.  On February 1, 2013 the Financial Regulatory Reform Committee released its plan to implement this regulation.  So what is twin peaks regulation and what does it mean to South Africa? 

 

Twin peaks regulation is one of four primary approaches to regulation.  These are:

Institutional (e.g., China and Mexico)—a firm’s legal status determines who regulates it and what business activities are permissible.  The definition of permissible activities is open to interpretation and inconsistencies can arise over time, clouding the delineation between entities and resulting in different regulators overseeing the same activities is different ways.

Functional (e.g., Italy and France)—the type of business being transacted determines oversight, regardless of a business’ legal status.  With this approach, if the activities don’t fall into a defined category, oversight may become difficult.

Integrated (e.g., Germany and the UK)—one regulator oversees all aspects of regulation in all sectors.  While this approach removes the lines of responsibilities and streamlines oversight, conflict is likely to arise between prudential and market conduct regulation, given that the former considers the financial institution’s perspective and the latter considers the consumer’s.

Twin Peaks (e.g., Australia and the Netherlands)—here the regulation is divided between safety and soundness of financial institutions and a focus on the consumer, notably regarding the conduct of business.  This is considered a more objective approach and one that gets different skill sets to regulate different areas.

In South Africa, the goal of implementing a new approach to regulation has four main priorities:

  1. Financial stability
  2. Consumer protection and market conduct
  3. Expanding access through market inclusion
  4. Combating financial crime

International standards also play an important role, evidenced by South Africa’s participation in many international institutions and forums such as the IMF, G20, and the Financial Stability Board, to name a few.  The intense focus on both local and global issues reflects South Africa’s commitment to making the financial sector safer and better.

Given the goals described and the government’s commitment to improvement, it makes sense that the proposed framework is designed to be:

  • Transparent
  • Comprehensive and consistent
  • Appropriate, intensive and intrusive
  • Outcomes-based
  • Risk-based and proportional
  • Pre-emptive and proactive
  • A credible deterrent to non-compliance with prescribed standards
  • Aligned with applicable international standards 

The detailed implementation plan describes the changes that will need to take place in order for the new approach to be successful.  Many guidelines are offered in a number of areas, including enforcement and conflict resolution.  The plan proposes a two-stage implementation:

Stage 1 – 2013-2014:  Development and discussion of supporting legislation

Stage 2 – subsequent years:  Broader harmonization of regulatory systems and frameworks

Both local and international support for this type of approach is strong, as seen in the recent endorsement by the international Financial Stability Board.  While the board does have some concerns, overall it believes that the streamlined approach to regulation is a good one and that the emphasis on market-conduct regulation is well-timed.

Any new regulation tends to strike a chord of fear amongst those in operational roles.  Using flexible and powerful systems that support transparency and control over data is critical.  PORTIA’s advanced reporting capabilities can provide you with the tools you need to be transparent and compliant.  We at PORTIA will stay on top of these regulatory changes and encourage you to talk to us about how our capabilities can help support your evolving needs.

 – Markus Allard, PORTIA Regional Business Development Manager

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