A comparative analysis of the Twin Peaks model of financial regulation in South Africa and the United Kingdom

• Author: Qumba, M.F.
• DOI: https://doi.org/10.47348/SALJ/v139/i1a3
• Published date: 23 February 2022
• Date: 23 February 2022
• Citation: (2022) 139 SALJ 78
• Pages: 78-113

78

https ://doi.org /10.4734 8/SALJ /v139/i1a3

A COMPARATIVE ANALYSIS OF THE TW IN

PEAKS MODEL OF FINANCIAL REGULATION

IN SOUTH AFR ICA AND THE

UNITED K INGDOM

MMISELO FR EEDOM QUMBA†

Lecturer, University of P retoria

This arti cle examines the r ecent adoption of t he Twin Peaks model by the Unit ed

Kingdom and South A frica. An inte rnational an d comparative analysi s is provided.

It observes that t here is a gradual paradig m shift across the wo rld towards the Twin

Peaks model of n ancial regula tion. There ar e slight variations in t he design of the

two countrie s’ Twin Peaks models. The va riations in regul atory design in dicate the

exibility of the Twin Pea ks model and its ada ptability to suit loc al conditions,

regulatory cu lture, and the country’s specic n eeds. Therefore, while the S outh African

model has drawn sign icantly from the exper iences of other Twin Peaks jurisdic tions,

particular ly the UK, South Afr ica has adopt ed the model to acco mmodate its own

needs and unique ch aracteri stics. It is imperat ive for the success o f the Twin Peaks

model that it clearly del ineates the objec tives and func tions of each regul ator, and

achieves e ective co- ordination betwee n them. This ar ticle warns t hat, given the

potential overl aps and high levels o f co-operat ion required between t he dierent

regulatory bodi es in South Afr ica, there could b e detrimental c onsequences i f this

complicated  nancial regul ation regime is not p roperly managed.

Twin Peaks – na ncial sect or regul ation – UK – Sout h Afr ica

I IN TRODUCTION

This ar ticle exam ines the recent adoption of the Twin Peaks model by

the United Kingdom (‘UK’) a nd South Afr ica (‘SA’). This has been a

fundamental shi ft. The nancial ser vices sector has become one of the

dening features a nd purveyors of econom ic global isation. Its positives

are undeni able. Its key social function s include the systematic mobil isation

of savings, allocat ion of capital, a nd manag ement of nanci al risks.1

This provide s other sectors w ith much-needed capital, expanding growth

opportun ities and propel ling compa nies to unprecedented protabi lity.

In fact, the soph istication and robustness of a country’s na ncial ser vices

sector sign icantly determi nes its grow th potentia l and trajectory, its

prosperity, and its level of inuence among nations. However, this ca n

conceal the enormous greed and the neg ative behavioural tendencies of

relevant players. Exce ssive risk-t aking ex poses the v ulnerabi lity of the se ctor.

† LLB (WSU) LL M (Pretoria).

1 United Nation s Report of the Commission of E xperts of the President o f the United

Nations Gene ral Assembly on Reforms of t he International Mon etary and Financia l System

(2009) 47, available at https://www.un.org/en/ga/econcrisissummit/docs/FinalReport_

CoE.pdf, acc essed on 30 Aug ust 2021.

(2022) 139 SALJ 78

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A COMPARATI VE ANALYSIS OF THE T WIN PEAKS MODE L 79

https ://doi.org /10.4734 8/SALJ /v139/i1a3

It is, thus, a cr itical but deeply sensitive sect or susceptible to dierent for ms

of risk. Its sen sitivit y reects its centrality to the economy.2

Unsurpr isingly, regulati ng the sector ha s become a common public

policy imper ative for many countries. Pr ivate self-reg ulation has proven

to be catast rophic.3 The cycles of banking and nancial cr ises across the

world have underscored this. Excessive risk-tak ing, fuel led by perverse

incentives and informat ion asym metry, almost always undermines this

ultimate public function.4 Indeed, the 20 08 Global Fi nancia l Crisis

(‘GFC’) illus trates the danger of exce ssive risk-taking a nd lax regulation to

global nancial stability.5 To avoid a recurrence of this outcome, n ancial

systems ac ross the world have been reform ing their regul atory architect ure,

target ing nance and relate d industries, actor s’ behaviour, and instit utional

make -up.6 Accord ing to the UN Commis sion of Experts on the Reform

of the International Moneta ry and Fi nancia l System, ‘modern reg ulation

is predicated on a mu lti-prong approach that includes d irect restrict ions on

behaviour as wel l as restr ictions aecting the determinants of behav iour.

The most important determinants are incentives and competition’.7

This is understand able because, over the year s, nancial regu lation

and supervision in many cou ntries has been organ ised around specialised

agencies that have distinct and separate responsibilities for the banking,

securities and insu rance indust ries. However, the emerg ing trends in

recent years have favoured a depart ure from th is institutional model of

nancia l regul ation. Thi s model tends to focus on the nature a nd form

of regulated entities as the key regul atory deter minants. Therea fter, a

separate reg ulator would be established to oversee the regu lated entit ies.8

With the increa sing sophistication and complexity of n ancial m arkets,

2 John Ar mour, Dan Awrey, Paul Dav is et al Prin ciples of Financial Regulatio n

(2016) 22.

3 Niam h Moloney, Eilis Fer ran, Jen nifer Payne et a l The Ox ford Handbook of

Financial Regulation (2 015) 68.

4 Andrew Schmulow ‘T he four methods of  nancia l system r egulat ion:

An inter national comparat ive survey’ (2015) 26 Journal of Bank ing and Financ e and

Practi ce 151 at 158.

5 D ouglas W A rmer & Mich ael W Taylor ‘The Global Fi nancia l Crisi s and

the Finan cial Sta bilit y Board: Ha rdening t he soft law of int ernation al na ncial

regul ation’ (2009) 32 Unive rsity of New South Wales L aw LJ 488 at 493.

6 Corl ia van Heerden & G erda van Nieker k ‘Twin Peaks in Sout h Afr ica:

A new role for the centr al bank ’ (2017) 11 Law and Financ ial Markets Re view 154

at 158.

7 United Nations op cit not e 1.

8 Group of Thirty Con sultat ive Group on Inter nationa l Economic and

Monetar y Aairs Inc S pecial Report by Worki ng Group on Financia l Supervision

‘The stru cture of  nancia l supervi sion — Approaches a nd challe nges in a g lobal

marketpl ace’ (6 October 20 08) 38, avai lable at http://group30.org/images/uploads/

publications/G30_Structure Finan cialSupervi sion2008.pdf, accessed on 1 June 2 020.

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80 (2022) 139 THE SOU TH AFRICAN L AW JOURNA L

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the shortcomings of this model have been exposed.9 There has been a

gradua l move towards what is ca lled the ‘Twin Peaks’ model of nancia l

regulation. This model was rst espoused in theor y by Michael Taylor in

1994 .10 Operationally pioneered by Austral ia in 1998, the model ha s since

been adopted by Netherlands, Belg ium, New Zealand, the UK and SA.

The Twin Peaks model compri ses two separate but equa l regulators. There

is, in the case of SA, the Prudential Author ity (‘PA’), which is located

within, and admi nistered by, the SA Reser ve Bank (‘SARB’). There is

also a market conduct regul ator known as t he Financi al Sector Conduct

Authority (‘FSCA’), which is responsible for protecti ng consumers of

nancia l services, thereby promoti ng condence in the SA nancial

system.11 The responsibi lity for consumer credit reg ulation is vested in the

National Cred it Regulator (‘NCR’). The NCR reports to the Depar tment

of Trade, Industr y and Competit ion.12

The title ‘Twin Peaks’ in the SA context is a misnomer. This is because

the SARB constitutes another ‘peak’. The SARB is responsible for

monitoring monetary pol icy and n ancial st abilit y, including ensu ring

the safety a nd reliability of the pay ment system. In addition, it pre serves its

tradit ional role as a lender of last resor t and provider of emergency l iquidity

assistance (‘ELA’).13 Consequently, the SA model is not a ‘pure’ Twin Peaks

system as Taylor orig inal ly contemplated.14 A ‘pure’ Twin Peaks i n this

sense is one that consists of two regulator s only, one overseeing n ancial

system stabi lity and the other overseeing market conduct and con sumer

protection. A thoroug h examination of SA’s nancial service reg ulator y

framework will be undertaken below. It suces to say, by contra st, in the

UK, the Pr udential Reg ulation Authority (‘PR A’) is part of the Bank

of England . The PRA is in charge of prudential reg ulation of deposit-

taking instit utions, systematica lly impor tant institutions and insurance

rms, while the Financial Conduct Authorit y (‘FCA’) is responsible for

prudentia l regulation of other na ncial in stitution s, consumer protec tion,

and regul ation of nancial institutions’ business conduct.15 In addition,

the most noticeable refor m is the establishment of the Financia l Policy

Committee (‘FPC’) inside the Bank of England. It is charged with

9 Michael Taylor ‘“Twin Peaks”: A regulator y struct ure for the new cen tury’

Issue 20 of DSFI se ries publi shed by the Centr e for the Study of Fi nancia l

Innovation, 1995, at 2 a nd 3.

10 Ibid at 3.

11 Section 57 of the Fin ancial S ector Regu lation Act 9 of 2017.

12 The Nationa l Credit Regu lator is e stablis hed in term s of the Nationa l

Credit Act 34 of 2 005.

13 Joh ann de Jag er ‘The South A frica n Reserve Ba nk: An eva luation of the

origi n, evolution and st atus of a cent ral ban k’ (2006) 18 SA Merc LJ 159 at 174.

14 Taylor op cit note 9 at 4.

15 Section 9B of the Fina ncial Services Ac t, 2012.

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