Twin Peaks is no silver bullet

Richard Rattue, Managing Director at Compli-Serve SA.

Bank collusion and the apparent breakdown of internal controls have been used as motivating factors for the implementation of the Twin Peaks model, which has just been signed by President Zuma. But, Twin Peaks is no silver bullet to prevent collusion and other misdeeds altogether. It should, however, help to achieve through regulatory pressure, fairer outcomes for customers, and should positively impact company culture.

Headlines in the past state that certain individuals in the forex space have colluded for years on pricing, allowing greed to supersede ethics. In this case, customers were seemingly denied a market related trade rate, instead transacting on an artificially fixed rate. Organisations motivated by bonuses and rewards based on profit margin can, and have, led to various individuals – normally senior, perhaps with the assistance of some junior staff – to earn rewards irrespective of whether or not their actions were in the best interests of their customers. Such practices are in direct contradiction to the FSB’s “equivalence of reward” principles and wider fair outcomes for customers.

The whole point of the Twin Peaks model is to create a more robust financial system and strengthen oversight of market conduct. It is a more direct approach to consumer protection and market conduct across financial services.

How does collusion go undetected?

The compliance function is typically geared towards checking company operations and policy, but individuals who collude are operating completely off that grid. In cases like these, an entirely rules-based compliance approach will struggle to detect this type of skulduggery. Instead, a joint rules/ principles-based approach is needed.

Through adhering to a set of principles, it is easier for an organisation’s company culture to be measured as well as assist with detection of internal misdeeds. Indeed going forward, it is going to become essential to ensure a principles-based culture within every financial services organisation. This will hopefully usher in a culture overall whereby everyone works towards doing the right thing for customers as opposed to chasing profit margins at any cost.

Organisations will have to change reward structures by no longer allowing them to be solely based on the amount of profit a division makes, and instead insert some quality controls. Fair treatment for all customers must be the priority, so organisations will need to turn their heads to that.

While Twin Peaks will by no means herald the end of market / customer abuse, it will put in place a framework, which if correctly applied, make strides towards customers getting a better deal.

That has to be good news for us all.