“The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath (1939)
The banking and financial system is for many a monster that is not being controlled effectively. Ensuring that a financial system is adequately regulated is a fine balancing act.
On the one hand if there is limited regulation then events such as the 2008 financial crisis are likely to occur. However if you over regulate this important industry then market productivity suffers.
In an ideal world you would have a regulatory system which is able to straddle seemingly opposing forces by allowing banks to perform their business sustainably whilst protecting customers and the stability of the financial system.
Since 2008 governments and regulators all round the world have been working on ways to make the financial sector more stable and to create better protection for customers. South Africa is no different and the Financial Sector Regulation (FSR) Bill tabled on 15 October 2015 plans to overhaul how the local financial sector is regulated in an effort to maintain and enhance the financial health of financial institutions as well as to promote sustainable growth for institutions and customers alike.
To achieve this goal the FSR Bill gives effect to a 2011 government decision to move towards a “Twin Peaks Model” of financial sector regulation. It is hoped that the FSR Bill will be enacted this year, to enable implementation soon thereafter.
But what is a Twin Peaks model?
Under the Twin Peaks system two regulators for the financial sector will be established, namely
- A Prudential Authority (PA) situated within the South African Reserve Bank
- A new Financial Sector Conduct Authority (FSCA) which will replace the current Financial Services Board.
The objectives of the Prudential Authority will be to:
- supervise the safety and soundness of financial institutions and market structures,
- promote and maintain, as a whole, the stability of the financial system of South Africa
- managing and resolving any crises in the financial sector
The objectives of the FSCA will be to:
- enhance and support the efficiency and integrity of the financial system; and
- protect financial customers by overseeing the manner in which financial institutions operate by:
(i) promoting fair treatment of customers by financial institutions; and
(ii) providing customers and potential customers with financial education programmes; and
(iii) promoting financial literacy and the ability of customers and potential customers to make sound financial decisions
- assist in maintaining financial stability.
The Twin Peaks approach is consistent with international standards and has been used in countries such as the UK, Netherlands and Australia.
What will be the likely impact of this new model?
Twin Peaks represents a fundamental change to South Africa’s regulatory structure of the financial system. Once the Twin Peaks system has been fully phased in there should be a more harmonised system of licensing, supervision, enforcement, customer complaints, appeals and consumer advice across the financial sector. The Twin Peaks approach, in essence, will replace the current fragmented regulatory approach with one that is more holistic and aimed at reaching a common purpose. The Twin Peaks model will also reduce the possibility of regulatory arbitrage or forum shopping. It also seeks to close various gaps in the regulatory system.
- Co-ordination between the FSCA and PA.
Whilst the FSCA and PA have different mandates and objectives there is a potential for a conflict of interest. Conceivably you could have a scenario where the FSCA seeks interest rates to be raised whereas the PA would prefer them to be lowered. The FSR Bill does make provision for co-ordination by obligating the FSCA, the PA and the Reserve Bank to enter into a memorandum of understanding. It remains to be seen how the various parties co-ordinate in practice.
- Added cost to business and regulatory fatigue.
The FSR Bill seeks to protect the interests of customers acquiring or using financial products and financial services by ensuring that financial institutions treat customers fairly and by providing financial customers with financial education programs. These are fairly broad objectives and we will have to wait to see how the new regulatory bodies enforce these provisions in practice. This could lead to financial institutions being unduly burdened as well as having their product offerings curtailed. Regulatory fatigue could be an issue for financial institutions.
- Stringent inspection provisions
The FSR Bill provides for procedural matters such as information sharing arrangements, information gathering and for supervisory on-site inspections and investigations into the affairs of a financial institution. These are fairly stringent measures and financial institutions will need to be aware that all their information and premises are subject to inspection without notice.
The FSR Bill on the whole is a step in the right direction and aligns South Africa with many leading economies in the world. We will have more certainty once the bill is enacted later this year as to how the new regulatory bodies interpret and act upon their objectives. It is hoped that the more harmonised and certain regulatory landscape detailed in the FSR Bill will occur in practice. Whilst financial institutions may be wary of a changing regulatory environment, a more harmonised and certain regulatory landscape has to benefit all parties involved in the financial system.
Tim has a BA and LLB from UCT and was admitted as an attorney in 2000 after having completed his articles at Bowman Gilfillan. He then undertook two legal advisory roles before joining London’s Bank of New York Mellon, where he worked as Vice President of the legal department for almost 8 years. In 2009, he returned to South Africa and continued consulting to BNY Mellon, joining Caveat Legal in 2015.