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Question

Vibhuti Lalloo, Prudential Director of Ernst and Young Financial Services Africa (2018),
suggests that The Twin-Peaks structure enables a holistic approach for supervising financial
institutions. This results in more prudential requirements being added to the regulation of these
corporations. Twin Peaks is considered beneficial to the entire financial services industry
especially as South Africa is changing from a sector-based system (banking and insurance
sectors are primarily being supervised by different regulators) to a more consolidated
regulatory framework.The consolidation of regulatory processes, shown in Figure 2, creates a platform that promotes
regulatory consistency, leading to a reduction in the scope of potential regulatory arbitrage. In
support, Schumlow (2015:4) presented the following arguments for applying a Twin Peaks
regulatory model:
• Regulators can be more effective, with each having clear objectives that do not overlap;
• Regulators can, as a result, be more accountable and more focused;
• It creates checks and balances between agencies and their objectives;
• It allows each regulator to create its own culture that best suits its objectives; and
• It allows each regulator to acquire expertise specifically required to meet its objectives.
Thus, Schumlow (2017) suggested that the main advantage of implementing the Twin Peaks
Model is the creation of a separation regulation between the prudential stability oversight and
the market conduct and consumer protection, thereby ensuring that one peak does not dominate
the other. The key pillars of The Twin Peaks system being implemented in South Africa are to protect consumers and ensure fair treatment by financial institutions in terms of respect to
market conduct, policy and law. Godwin (2017) added that the advantages of implementing
The Twin Peaks Model are as follows:
• The two-peaks regulator is more likely to have dedicated objectives and clear mandates;
• There is a lower chance of one aspect of regulation dominating the other which solves
the issue of fostering many cultures under one roof, which previously was an issue in
the Super-Regulator Model;
• This Twin Peaks Model is designed to accommodate complexities that may arise in
financial markets and conglomerates as posed in the Institutional model; and
• The Twin Peaks Model addresses the contentious issue of conflict of interest currently
being experienced in the Unified Model.Van Heerden and Van Niekerk (2017) see the first step toward implementing The Twin Peaks
regulatory model as being encapsulated in the Financial Sector Regulation (FSR) Act, which
puts its regulatory architecture in place. The objective of the FSR Act is “to achieve a stable
financial system that works in the best interest of financial customers and supports balanced
and sustainable economic growth in South Africa” (Van Heerden & Van Niekerk, 2017). This
is achieved by establishing, in conjunction with other financial sector laws, a regulatory and
supervisory framework that promotes financial stability; safety and soundness of the financial
institutions; the fair treatment and protection of financial customers; the efficiency and integrity
of the financial system; prevention of financial crime; financial inclusion and confidence in the
financial system.
The effective implementation and functioning of the Twin Peaks Model is highly dependent
on the cooperation and collaboration between the various role players in the financial system,
in particular amongst the three main regulators (three main peaks) in the South African Twin
Peaks Model namely the SARB, FSCA and the NCR2
.
The transformation of the FSB to the FSCA is viewed as a mechanism to create a dedicated
market conduct regulator. The primary goal is to make South Africa’s approach to consumer
protection and market conduct in financial services more robust and to create a more resilient and stable financial system. The debate is, however, why South Africa should consider
changing the current regulatory system, which according to many, is still effective. The change
to Twin Peaks further burdens the taxpayers as the implementation costs amount to several
billion Rand with no guarantee of success. Furthermore, the central bank will be expected to
regulate both the insurance and banking sectors, creating possible regulatory complexities and
overlaps. Some financial market experts even believe the proposed role of the model to provide
a financial system that functions in the best interest of consumers and supports balanced and
sustainable economic growth, to be misguided. They argue that in reality, the model negatively
impacts economic growth. They explain that a regulatory system driven by both Twin Peaks
and the FSR Act merely adds a huge financial burden to already cash-squeezed consumers due
to an increase in the resultant high administrative costs required for the implementation. These
costs are passed on to consumers through either increased fees or charges in an environment
where fewer innovative products are now available. The implementation of The Twin Peaks
regulatory system could also reduce the number of independent brokers who provide the
necessary advice to consumers, particularly in complex financial products. Table 3 shows Ernst
and Young’s view on the main benefits and challenges presented by The Twin Peaks regulatory
model.

Answer 1

Vibhuti Lalloo of Ernst and Young highlights the benefits of the Twin Peaks regulatory model for financial supervision in South Africa, transitioning from a sector-based approach to a consolidated framework. This structure aims to enhance prudential requirements and promote regulatory consistency, reducing potential regulatory arbitrage. Schumlow (2015) argues for its effectiveness, accountability, and creation of checks and balances between regulators, emphasizing that it separates oversight of prudential stability from market conduct, ensuring balanced regulation. The Financial Sector Regulation (FSR) Act is identified as a crucial step towards this model, aimed at achieving a stable financial system that benefits consumers and supports economic growth.

However, the transformation raises concerns about increased costs to taxpayers and consumers, as well as potential regulatory overlaps, especially with the central bank overseeing both insurance and banking sectors. Critics argue that this could hinder economic growth and lead to higher consumer fees due to administrative burdens. Moreover, the shift may threaten the viability of independent brokers who provide essential advice, particularly for complex financial products. Despite the anticipated benefits, challenges and financial implications underscore the contentious nature of implementing the Twin Peaks regulatory model.