The Big Picture
After years of planning, deliberation and stakeholder input, the implementation of the Twin Peaks regulatory framework is on our doorstep, and will restructure the way that providers of financial services and products in the country are regulated.
“Pivotal to implementing this framework is the acknowledgment that Twin Peaks will require a learning curve towards further strengthening South Africa’s financial sector, which has been resilient in the past,” says Executive Officer of the Financial Services Board (FSB) Advocate Dube Tshidi. He adds that the proposed regulatory framework has three key objectives which are; to make sure that consumers are protected, that there is integrity in the market and that institutions within the sector are financially sound.
Although the new structure as prescribed by the Financial Sector Regulation (FSR) Bill focuses specifically on addressing the current fragmented approach of market conduct and prudential regulation in the country, the proposed amendments also form part of a much bigger overhaul of regulatory and supervisory infrastructures across global financial systems.
The financial crisis was a rude awakening for finance ministries across the globe, who realised that financial markets could no longer be managed along national borders and that traditional distinctions between financial institutions and the array of products they make available no longer apply.
To ensure confidence was restored to financial markets and that global regulators stay abreast with innovation and evolution within these markets, G20 lawmakers committed to the implementation of global standards, and a more integrated approach to regulation.
In the local context, policymakers have also recognised the role that financial institutions could play in achieving economic growth and how the implementation of higher standards of governance, improved customer treatment and better risk management strategies could support the achievement of that goal.
Chief Director of Market Conduct at National Treasury, Katherine Gibson says that the financial sector plays a key role in facilitating the achievement of key national policy priorities such as housing and infrastructure.
Therefore, she says, the key question arises: Is the financial sector working as effectively as it could be to support these policy priorities?
Katherine also highlights the interconnectedness of the South African financial sector. ”The banks are not separate from the insurers, who are in turn not separate from the investment industry. Further lessons relate to past perceptions that the safety and soundness of financial institutions is separate from the conduct of these institutions,” says Gibson.
The FSR Bill and other reforms that are still in the pipeline all form part of the over-arching strategy of ensuring and strengthening confidence in the local financial sector, she adds.
Making Sense of Twin Peaks
Watch Adv. Dube Tshidi of the FSB and Katherine Gibson of the National Treasury explain Twin Peaks on Business Day TV. (Episode 1, Part 1)
In line with global imperatives, and the local development agenda, the South African Cabinet in 2011 approved the financial sector reform strategy, as outlined in the discussion document: ‘A safer financial sector to serve South Africa better’.
Since then a number of reforms have been introduced including Basel 3 capital requirements to strengthen banking prudential regulation and various amendments to financial markets regulation to address certain risks that existed within capital markets.
Participants in the local financial system are now preparing themselves for the introduction of new regulatory mandates for two new supervisory authorities, one within the South African Reserve Bank (SARB) and one to replace the Financial Services Board (FSB), when the FSR Bill is expected to be passed into law later this year. Currently, the banking industry is prudentially regulated by SARB while the FSB is responsible for both prudential and market conduct regulation of financial services that fall outside the banking sector such as insurance, capital markets and pension funds.
The move to a Twin Peaks model addresses the fragmented nature of these regulatory bodies’ current mandates which focus on pockets of the financial sector, while not considering the sector as a whole. In future, the institutional structure will be based mainly on the key objectives of financial regulation. On the one hand, the Prudential Authority (PA) – which will be established as a dedicated entity within the SARB - will have the objective of maintaining and enhancing the safety and soundness of financial institutions such as banks, insurers and market infrastructures. The responsibility of ensuring that institutions are capable of meeting their financial obligations to customers will thus fall under the PA.
On the other hand, the Financial Sector Conduct Authority (FSCA), which will replace the FSB, will take responsibility for market conduct regulation and supervision. The FSCA will have the role of protecting financial customers by promoting their fair treatment, as well as enhancing and supporting the efficiency and integrity of financial markets.
The FSCA will therefore focus on regulating and supervising the market conduct of all financial institutions, including banks, insurers, financial intermediaries, retirement funds and administrators, investment institutions and financial market infrastructures.
The SA Reserve Bank, will be responsible for the country’s financial stability as a whole. It will focus on the big picture to ensure the entire financial system remains stable. Both the PA and the FSCA will, in addition to their primary mandates, be required to support the SARB in fulfilling its stability mandate. The National Credit Regulator regulates all retail credit provision, including by banks. It will continue to do so in the Twin Peaks framework, in close co-operation with the FSCA.
Rigorous coordination and cooperation arrangements between the PA, the FSCA and the National Credit Regulator is envisaged by the FSR Bill, aimed at ensuring that all prudential and conduct risks are holistically managed within an overarching financial stability policy framework.
