Twin Peaks

Research led by Melbourne Law School has had a direct influence on financial regulation legislation expected to be implemented in South Africa later this year.

Led by Andrew Godwin and Professor Ian Ramsay, the research team made submissions on the legislation as part of a Centre for International Finance and Regulation (CIRF)-funded project.

Many of the team’s recommendations, which came from two rounds of submissions across an 18-month period, were accepted in the final framework.

Under the framework, South Africa will move to a ‘Twin Peaks’ model of financial regulation, under which regulation will be vested in two main regulators, one which will regulate market conduct and consumer protection, the other prudential regulation – standards that require banks and other firms to control risks and hold adequate capital to protect markets from meltdowns.

It is hoped the switch from South Africa’s current model - which adopts a sector-based approach to financial regulation, with a number of regulators across a broad range of sectors within the financial system – will underpin financial reform and help to improve a sliding economy.

South Africa is the continent’s second-largest economy behind Nigeria.

Its mainstay in exports remains minerals, notably gold, diamonds and platinum (it is the world’s largest producer).

However, weakening commodity prices, a falling rand, high unemployment rates, income inequality and growing public debt have pushed South Africa closer to a recession.

The Jacob Zuma-led government is hoping the Twin Peaks model will protect financial customers from unfair treatment and the risk of failing institutions, and reduce the risk of using taxpayer funds to protect the economy from systemic failures.

Melbourne Law School’s Andrew Godwin, an expert in banking and finance law, says his team’s research has had a direct impact on the design of the new proposed framework for financial regulation in South Africa.

“A number of our recommendations have been accepted and are reflected in the design of the framework and the specific legislative wording,” Mr Godwin says.

“We had quite a bit of input, particularly in terms of the design of the coordination arrangements in South Africa and how effective coordination should be achieved between the two Twin Peak regulators.”

Other recommendations were made in relation to the accountability of the regulators; their relationship with the executive government; issues relating to operational independence; and the basis on which members of the regulators are appointed or dismissed.

“(Drafting the legislation) has been quite a lengthy process but one in which there has been extensive consultation and submissions from both within and outside of South Africa.”

Australia was a pioneer in adopting the Twin Peaks model in 1998, following the release of the Wallis Report that concluded the nation’s financial service providers wanting to compete in a global market were being disadvantaged by inconsistencies in the regulatory framework.

The model has since been adopted by other jurisdictions such as New Zealand, the Netherlands, Belgium, and the United Kingdom.

Mr Godwin and corporate law governance expert Professor Ramsay’s research has also extended to the Asian continent - a key aspect of their research examines the extent to which Twin Peaks and the Australian experience might serve as a model for reform in China.

“The main motivation behind this project is to look at our experience in Australia, in relation to the Twin Peaks model, and what lessons or insights our experience might offer to China as it considers reforms to its own system of financial regulation,” Mr Godwin says.

“China is very much at a crossroads at the moment because it adopts the traditional institutional model. This model is more limiting than the sector-based model as there is a separate regulator for each type of institution such as banks, insurance companies and securities firms.”

“But in China, because of the increase in financial conglomerates, and increasing innovation in financial markets, the institutional approach to financial regulation is struggling to meet China’s modern needs.”

In 2013, Chinese authorities put together a financial reform agenda aimed at making critical progress by 2020.

Banner Image: Cape Town, South Africa. Picture: Flickr