TWIN PEAKS – A brave new world

Richard Rattue, MD, Compli-Serve SA.

As many of us are now aware, the current regulatory structure is heading towards major change, specifically a move towards the so-called "Twin Peaks" model which was given some more detail with the second draft of the Financial Sector Regulation Bill (FSR) and draft Market Conduct Policy Framework discussion document, which were released by National Treasury for comment.

The updated drafts take into account comments received on the first draft published in 2013, and which in itself was a development from the so-called "Red Book" released by Treasury in 2011.

In effect, the new regulations are putting into place the 2011 decision to move the existing regulatory model and align with international best practice, specifically the separation of a Market Conduct Authority and a Prudential Authority. One has to look at the financial crisis of 2007/2008 to trace back the origins of the Twin Peaks model after regulators were largely caught with their pants down when the first rumblings of financial mismanagement started to emerge, and as we all now know, steamrollered into a near collapse of the Eurozone banking system, which was only averted after intense levels of Central Bank intervention not seen since the end of the Second World War.

The governments of affected countries breathed a collective sigh of relief when the storm waters subsided, however, in the post mortem it was decided that a Twin Peaks regulatory model would better serve the financial services market, and checks and controls were put in place to ensure the stability of those firms deemed "too big to fail", and more stringent checks were placed on firms operating in the financial sector. It is of course hoped that this will seek to prevent a repeat of the cataclysmic events that gave birth to the model in the first place.

The local flavour of Twin Peaks will see two new regulators established, namely a Prudential Authority within the South African Reserve Bank, and a new Financial Market Conduct Authority “FMCA” which will between them effectively replace the current Financial Services Board.

The safety and soundness of banks, insurance companies and other financial institutions will fall under the Prudential Authority, while the FSCA will supervise the conduct of financial firms and the way they treat customers.

Of course, one must not forget the Treating Customers Fairly initiative which has likewise been in place now for some time and hogged headlines in 2013/2014, as the Financial Services Board sought to roll out this methodology, which once again has been applied in other jurisdictions, although with a mixed bag of success. At its heart, it requires firms to ensure that they have the necessary controls, training and oversight structures in place to ensure they are able to demonstrate to the Regulator that customers are given fair treatment at the hands of their employees.

At a high level, Treasury is seeking to harmonise and simplify the legal framework for market conduct which is currently somewhat confusing with different pieces of legislation which are not always aligned to each other, and this has become an ever-increasing problem as new legislation is passed and older legislation has to keep up-to-date.

The simplification process will also apply to the ombud system which is likely to see a more integrated approach going forward than the current splintered offerings which often confuse consumers as to where they should take their complaints.

Insofar as the impact of Twin Peaks on the financial market participants is concerned, it is likely to be phased in, and while the Regulator will certainly act more quickly in areas where it is felt that business is not adhering to either the letter or the spirit of the law (recent directives in respect of inducement payments/sign-on bonuses is a good example here), the sheer size of the task and the importance of ensuring that it is done on a calculated and planned basis, will no doubt mean that it will be many years before the market goes through the Twin Peaks reorganisation and emerges on the other side. The relicensing of financial service providers into the envisaged financial institution regimes by itself is a vast undertaking, and will certainly not be done in a matter of months, but is more likely to take years to achieve the finished result.

With the Twin Peaks and Market Conduct Regulations, we are effectively seeing the ushering in of a plethora of new regulations and legislation, which will fundamentally alter the regulatory and oversight structures that are applied to the industry, and indeed have serious impact on all providers who render financial services from large corporates to the smaller firms.

I would strongly urge individuals to at least read a decent summary of the draft regulations as they go into some detail to give you a good indication of what we can expect in years to come. As ever, chance favours the prepared mind.