The twin peaks approach to regulating the financial services industry has been given the thumbs up by the international Financial Stability Board.
The first legislative steps required to implement twin peaks should be taken this year.
Twin peaks is aimed at giving investors greater protection against unacceptable practices, as well as the assurance that the money you invest will be available at maturity.
The Financial Stability Board, which is based in Basel in Switzerland, was established in 2009 to prevent a repeat of the global financial meltdown in 2008.
Despite endorsing twin peaks, the board, in a report on financial regulation in South Africa, says it is concerned about whether the current proposals are sufficiently comprehensive, or will leave parts of the financial services industry out on a limb.
The twin peaks model proposed by National Treasury in 2011 will:
* Place the prudential regulation of the financial services industry under the South African Reserve Bank. Prudential regulation aims to ensure that financial services institutions are sound and do not constitute a threat to the entire financial system.
* Place market conduct regulation under the control of a “transformed” Financial Services Board (FSB).
The Financial Stability Board’s endorsement of twin peaks follows the release of a National Treasury discussion paper earlier this month that provided a rough outline of the proposed legislation and a sche-dule for its implementation.
In a statement, the Financial Stability Board says it welcomes the planned reforms. It agreed “that a shift to a twin peaks model provides a good opportunity for South Africa to streamline responsibilities and elevate the importance of market conduct regulation, which has historically played a less prominent role in certain financial sub-sectors, such as banking”.
However, the board is concerned that the National Credit Regulator (NCR), which shot into the headlines last week when it recommended that African Bank be fined R300 million for alleged reckless lending, falls outside the proposed structure.
There are still problems with the relationship between the Reserve Bank and the NCR, “despite regularly working together on specific projects to address issues of mutual concern”, the board says.
There has been discussion, but little progress, on the establishment of a Council of Financial Regulators as a mechanism for enhancing co-operation and information-sharing between the various bodies responsible for enforcing financial services legislation, the board says.
The council, when it was proposed two years ago, was intended to prevent unethical and unscrupulous operators from taking advantage of the gaps in regulation and supervision.
The board says: “The South African authorities are aware that one particularly important issue that needs to be addressed under the twin peaks model is the future role of the NCR.”
It says the responsibilities of the transformed FSB as the regulator of market conduct, which will include retail banking, will overlap to a certain degree with the mandate of the NCR.
The board says that discussions are under way, and the options include:
* Merging the NCR with the transformed FSB; and
* Removing financial institutions that are crucial to the well-being of the financial system from the mandate of the NCR. These institutions would be subject to the prudential regulation of the Reserve Bank.
The board states that although the twin peaks proposals do not seem to reduce the number of agencies involved in regulating and supervising the financial sector, they do provide more clarity on the assignment of responsibilities and the concentration of related expertise.
It warns that the introduction of a new regulatory structure is not an easy task and requires careful planning. Such planning should include steps to ensure the effective supervision and management of risks during the transition to the new structure, as well as the harmonisation and rationalisation of the various laws that apply to the different types of financial institutions.
* National Treasury is seeking public comment on its recent twin peaks discussion document, entitled “Implementing a twin peaks model for financial regulation in South Africa”.
The document is available on the websites of the FSB (www.fsb.co.za) and National Treasury (www.treasury.gov.za).