The importance of a legislative framework for co-operation and collaboration in the Twin Peaks model of financial regulation

• Date: 17 March 2020
• Author: Van Niekerk, G.
• Pages: 108-144
• Citation: (2020) 137 SALJ 108
• Published date: 17 March 2020

108

THE IMPORTANCE OF A LEGISLATIVE

FRAMEWORK FOR CO-OPERATION AND

COLLABOR ATION IN THE TWIN PEAKS

MODEL OF FINANCIAL REGULATION

GERDA VAN NIEKERK†

Senior Lectu rer, School of Law, University of L impopo

CORLIA VAN HEE RDEN‡

ABSA Chair in Ba nking Law in Afri ca and Professor of L aw,

University of Pretoria

The enac tment of the Financial Sec tor Regulation Act 9 of 2017 (‘the FSR Act’) on

21 August 2017 marks the rst stage of Sou th Africa’s transition from a sectoral to a

Twin Peaks model of nan cial regulation. O n 1 April 2018 — the comm encement

date of the FSR Act — tw o regulators, the Pr udential Author ity and the Finan cial

Sector Condu ct Authority, were esta blished. This ar ticle consider s the mechanism s

introduced by the FSR A ct to facilitate co -operation an d collaboration betw een the

South Afric an Reserve B ank (‘SARB’) and the  nancial sec tor regulators, and

other organs of sta te as well, by compar ing these measu res to those available i n

Australia. The co -operation an d collaboration in Sou th Africa are di scussed on two

levels namely, rst, th e focused co-op eration and collabo ration enabling the S ARB

to full its na ncial stability m andate and, secondly, the broade r co-operati on and

collaboration for th e eective ope ration of the Twin Peaks model. T his is compared

to the co-op eration and collabo ration in Australia betwee n the Reserve B ank of

Australia and the othe r two regulatory a gencies, APR A and ASIC. It appears that

immutable aspe cts of co-op eration and co- ordination should pref erably be captured in

legislation, esp ecially aspec ts such as con ict resolution and lin es of co-ope ration and

collaboration in cr isis times.

Financ ial sector reg ulation — Twin Peak s model — role-player c ollaborat ion

I THE TW IN PEAKS MODEL OF F INANCIA L REGULATION

Llewellyn rem arks that a st able and ecient na ncial sys tem has a potentia lly

powerful i nuence on a countr y’s economic development. This i s so not

only because it m ay have an impact on the level of c apital form ation and

eciency in the a llocation of capit al between compe ting cla ims, but al so

because it aect s the condence th at consumers have i n the integr ity of

the nanci al system . In this contex t, he emphasise s that a well-s tructu red

regula tory regime contr ibutes to the eciency and stabi lity of the nanc ial

† BCom LLB LLD (Pr etoria). https://orcid.org/0000-0002-8020-1616.

‡ BProc LLB LLM ( Unisa) LLM ( Pretori a) LLD (RAU). h t t p s :// o rc i d .

org//0000-0002-9584-5342.

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(2020) 137 SALJ 108

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COLLABO RATION IN THE TWI N PEAKS MODEL 109

system.1 A model for such a well-str uctured  nancia l regulat ory regi me

was devise d by Michael Taylor, who proposed in 1995 that na ncial

services b e regulat ed in such a way that the st abilit y of the whole nanci al

system is protec ted (‘system ic protection’) while pro tection of consumer s

is simult aneously ensu red (‘consumer protect ion’). According to Taylor,

systemic prot ection would include de signin g prudentia l measures t o

ensure the n ancial soundness of i nstitutions. Consu mer protection would

include measure s to protect ind ividual consu mers, such as depo sitors,

investors and pol icy-holders, f rom fraudulent ac tions or incompetence

and abuse by lar ge instit utions. In order to en sure such eective  nancia l

regula tion, Taylor proposed the Twin Peaks model of n ancial reg ulation,

where two separa te regulators, na mely a prudential regu lator and a market

conduct regul ator, are responsible for s ystemic protec tion and consumer

protection, res pectively. By establish ing separ ate sector-wide pr udentia l

and market conduct re gulat ion and supervi sion, Taylor argued that t he

focus of the Twin Peaks reg ulator y approach would be bala nced between

the two peak reg ulator s. Each authorit y would be dedicated t o its clearly

demarcated o bjective of prudenti al and ma rket conduct regul ation and

supervi sion, respectively, whi le both authoritie s would focus on na ncial

stabilit y at the same time.2

The need for a regu latory model which takes a hol istic and even-handed

approach to prudent ial and ma rket conduct regul ation is clear: pr udentia l

regula tion aims to en sure the safety and sound ness of nanc ial inst itutions,

inter ali a, by imposin g measures to i ncrease thei r loss absorbenc y and lim it

their ris k-taking , while mar ket conduct regula tion aims to pr event and

root out unsound ma rket practices a nd to insti l market di scipline.3 A s the

2008 glob al nanc ial cri sis revealed, bot h these area s of regulat ion have

1 David T Llewellyn ‘I nstitut ional str ucture of  nancia l regul ation and

supervi sion: The basic i ssues’. Paper presented at a World Ban k Semina r

‘Aligni ng superv isory st ructu res with count ry need s’, Wash ington DC, 6 a nd

7 June 2006 at 5 , available at ht tp://siteresources.worldbank.org/INTTOPCONF6/

Resources/2057292-1162909660809/F2FlemmingLlewellyn.pdf, acce ssed on 30 May

20 17.

2 Michael Taylor ‘“Twin Peaks”: A regulat ory str ucture for the new centur y’

published by the C entre for the Study of Fina ncial Innovation, 1995 — Fi nancial

Service I ndustry — Issue 2 0 of DSFI series at 2 and 3. See a lso Andrew Schmu low

‘Financ ial regulat ory governance i n South Africa: T he move towards Twin Peaks’

(2017) 25 African Jou rnal of Intern ational and Comp arative Law 393 at 394.

3 Johann de J ager ‘The South A fric an Reserve Ba nk: Blowi ng winds of

change ( part 2)’ (2013) 25 SA Merc LJ 492 a t 508; Group of Thi rty Con sultati ve

Group on Intern ational E conomic and Moneta ry A airs Inc — S pecial Repor t

by Working Group on Fi nancia l Supervi sion ‘The str ucture of n ancial

supervi sion — Approaches a nd challen ges in a globa l market place’ 6 October

2008 at 38, av ailable at http://group30.org/images/uploads/publications/G30_Structure

FinancialSuper vision2008.pdf, accessed on 1 Ju ne 2017.

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110 (20 20) 137 THE SOUTH AFR ICAN LAW JOURNAL

a crucia lly impor tant role in the conte xt of promoting a nd mainta inin g

nancia l stability, and wit hout the one or the other, a stable nancia l system

is not possible.4 Appropri ate and adequate pr udentia l and market conduct

regula tion thus need to operat e in tandem to a ssist with t he promotion and

mainten ance of nanci al stabi lity. It is fur ther essentia l that these a reas of

regula tion not only focus on the prudent ial safety and s oundness and market

conduct of individ ual na ncial ins titutions, but t hat nanc ial inst itutions

are also re gulated a nd supervi sed on a system-wid e or macro basi s.5

The Twin Peaks model of na ncial reg ulation is reg arded by ma ny

as the optim al regu latory model for e nsurin g that tra nsparency, market

integr ity and consu mer protection receive suc ient priorit y.6 Llewellyn

mentions the adva ntages of the Twin Peaks mo del as being th at the two

regula tors responsible for pr udential a nd market conduct reg ulation

each has its own d edicated object ives and clear ma ndates to which e ach

is exclusively comm itted; account abilit y is clear becaus e of these clearly

dened objective s and mandat es of each regul ator; there is no d anger that

one of the areas of reg ulation w ill come to dom inate the othe r; and if

conicts a rise bet ween the two area s of supervi sion, they are more li kely

to be resolved inter nally w ithout publicit y.7 Schmulow also mentions

benets such as the remova l of regul atory duplicat ion and overlap; the

creation of reg ulator y bodies with a n exact area of op eration; the crea tion

of mechanism s for resolvin g conicts b etween the objective s of nancia l

services r egulat ion; and the encoura gement of a regul atory proces s which

is open, tra nsparent and publ icly accountable.8

4 Departmen t of National Treas ury (Re public of South A frica) ‘A safer

nanci al sector to ser ve South Africa bet ter’ 23 Febru ary 2011 at 9–22 , available

at http://www.treasury.gov.za/twinpeaks/20131211%20%20Item%202%20A%20safer

%20nanc ial%20sector%20to%20se rve%20South%20Afri ca%20better.pdf, acces sed

on 9 November 2015. The lesson s learned f rom the globa l nanci al cris is were

considered, a nd the structure a nd characterist ics of South Africa’s nanc ial sector

were assessed for gaps and weaknesses.

5 Er ik Denter s ‘Regulat ion and super vision of the g lobal na ncial sy stem.

A proposal for i nstitutional refor m’ 200 8–2009 Amsterdam Law F orum 63 at 78.

6 Depa rtment of Nat ional Treasu ry op cit note 4 at 29; S chmulow op cit

note 2 at 396; Andr ew Godwin , Guo Li & Ian Ram say ‘Is Austr alia’s “Twin

Peaks” syste m of nancial reg ulation a model for Ch ina?’ Centre for Inter national

Finance a nd Regulation (‘CIFR’) Paper 102/2016, 11 April 2016 at 6, avai lable at

https://ssrn.c om/abstract=2763300, accessed on 23 M arch 2017.

7 Llewellyn op cit note 1 at 28. S ee also An drew D Schmu low ‘Twin Peaks:

A theoretica l analy sis’ CIFR: Rese arch Working Paper S eries 064/2015 Projec t

E018, 1 July 2015 at 28, avai lable at https://papers.ssrn.com/sol3/papers.cfm?abstract_

id=2 625331, a ccessed on 10 March 2 018. The single objec tive of each regu lator

mini mises overl ap and tur f wars bet ween them. Schm ulow mentions th at, over

time, overlap c an dim inish i f clear line s are draw n for responsibi lities an d if key

partie s are deter mined to co- operate.

8 S chmulow op cit note 2 at 39 6–7. Schmulow refers to f ailure s under the

regul ators Austr alia n Prudenti al Regul ation Author ity (‘APRA’) and Aust ralia n

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