South Africa: Twin Peaks: Regulation – Has It Gone Too Far?

Last Updated: 9 October 2013
Article by Gareth Bird

The South African financial services regulatory environment is in flux! It is experiencing significant regulatory change, which is becoming increasingly burdensome to financial institutions operating in the South African financial services sector. While the intentions behind the new wave of regulations may be sound, the implications to market participants are significant and challenging.

The source of this burgeoning South African financial services regulatory landscape is primarily rooted in the recent global financial crisis. Since the beginning , governments, politicians and regulators around the world have been calling for additional and stricter regulatory oversight, and South Africa is no exception. This has seen the introduction of laws and regulations that have impacted on the activities of South African financial institutions and the manner in which they conduct business. While the need to protect the taxpayer from ever having to bail out the banks again is laudable, we need to ask the question, has regulation gone too far, especially in the South African context of no bank bailouts during the financial crisis?

The financial services industry needs regulation that serves the economy in which it operates however this does not necessarily mean "just" more. Increased regulation has both a negative and positive impact, it will increase compliance costs, increase the need for additional staff to monitor compliance which in turn can reduce the availability of resources for innovation, change and can impact the way investors see their opportunity of return. For customers this may mean reduced credit offering, trade finance and risk management services. Similarly we cannot discount the benefits of regulation. The objective of the regulation reforms is to enhance stability, consumer protection, access to financial services, coordination between regulators and comprehensiveness whereby businesses operating in the financial services sector are licensed and registered.

All stakeholders, local and international, have a key role to play in striking a balance between the cost of regulation and that of economic growth. After all, operating in the financial services industry does not mean a zero-risk business, failures may occur from time to time.

Increased regulation could be viewed as looking ahead to prevent the possibility of another financial crisis or alternatively viewed as filling the voids exposed by the last one.

The Life cycle of regulation

The principle objective of government and regulators has been first and foremost to make the financial system safe and to ensure public/customer confidence. The perception of the financial environment has been negative since 2008. The rate at which regulatory reform has flowed from the financial crisis has been significant but at what cost?

Certain costs associated with the implementation of regulation have increased, reducing the availability of lending and services to customers. For example, in order for the banks to raise additional capital and liquidity, their lending margins have been impacted, which in turn creates lower loan to value rates and thus impacting lending in the wider economy.

Looking specifically at the reforms in South Africa there are a number of new, amended and proposed regulations such as;

  • The Financial Services Board (FSB) is in the process of developing a new risk-based solvency regime for South African short-term and long-term insurers, known as the Solvency Assessment and Management regime (SAM). This will align the South African insurance industry with international standards
  • The FSB is formulating a high level TCF (treating customers fairly) regulatory framework
  • Proposals have been discussed to reform the retirement industry, with a focus on governance, preservation, annuitsation and harmonisation of retirement funds
  • The FSB Intermediary Remuneration Review where the objectives of the review are to ensure that the definition of intermediary services and related remuneration structures in the insurance sector promote appropriate, affordable and fair advice, services to potential and existing policyholders and support a sustainable business model for financial advice.
  • New Binder Regulations and Directive 159.A.i. means that all insurers will need to re-contract with all brokers who are mandated in any way, irrespective of whether they perform binder functions, or simply outsource administration functions, should their existing agreements not meet certain requirements.
  • Proposed regulation of hedge funds. The proposal is to regulate and supervise certain hedge fund structures under the existing Collective Investment Scheme Control Act, 2002 (CISCA) with the creation of a new and separate category for hedge funds as a collective investment scheme.
  • Amendments to regulation 28 of the Pension Fund Act where trustees will be guided in the investment of funds and an investment strategy specific to the fund and the appointment of investment managers who will implement the strategy, and places an onus on the trustees to monitor performance and regularly review the strategy

Proposed amendment to the National Credit Act (2005) to amend certain definitions, tighten measures related to debt counselors, allow debt counselors to voluntarily cancel their registration, tighten requirements that credit providers must adhere to in respect of marriages in community of property and provide for the registration and accreditation of Alternative Dispute resolution structures

Update the Financial Services Laws General Amendment Bill which incorporates all the above and

The introduction of a Twin Peaks model.

Although we see a number of Acts and Standards relating to the financial sector being passed or amended, the most note worthy of these is the implementation of Basel III this year. This third instalment of the Basel Accords was developed in direct response to the deficiencies in financial regulation exposed by the global financial crisis. Basel III was intended to further strengthen banks capital requirements by increasing bank liquidity and decreasing bank leverage.

All the above are being introduced in an attempt to control and better regulate the financial sector. A culture of non compliance may have existed in the past and the financial crises merely exposed this culture. It is this "non compliance" that the government is trying to address.

Financial regulation is beginning to encourage banks to change their approach to transparency, market integrity and consumer protection as proposed in the structural separation known as "Twin Peaks".

TWIN PEAKS

Background

In 2007 a formal review of the South Africa financial regulatory system was undertaken and as a result it was proposed that South Africa move towards a "Twin Peaks" model of financial regulation.

In the 2012 budget speech the Minister of Finance (Pravin Gordhan) said:

"As announced last year, we intend to shift towards a twin peaks system for financial regulation, where we separate prudential from market conduct supervision of the financial sector. Consultations will continue this year, with a view to tabling legislation in early 2013."

The move to a "Twin Peaks" model is an effort to address the shortcomings in the current regulatory structure and cause the least amount of disruption to the financial industry and the current regulators. The "Twin Peaks" model is seen as giving transparency, market integrity and consumer protection sufficient priority.

Flowing from this the two regulators will namely be the "Prudential regulator" and the "Market conduct regulator". The prudential regulator will form part of the South Africa Reserve Bank (SARB). It will enhance financial stability by promoting safety and soundness of regulated institutions.

The market conduct regulator will form part of a restructured Financial Services Board (FSB). It will protect consumers of financial services and promote confidence.

The twin peaks model aims at achieving 2 broad objectives. This first being to create a more stable financial system and the second, to strengthen South Africa's approach to market conduct regulation. Through the twin peaks model, South Africa is aiming to improve consumer confidence thereby increasing employment, development and economic growth, ultimately creating a more sustainable financial sector.

Both the SARB and the FSB will base their regulatory framework on the same comprehensive set of principles however each of these regulators will place varying degrees of significance onto each principle.

This model differs significantly to the current financial regulatory framework in which the responsibility of prudential regulation and market conduct regulation is shared by both the South African Reserve Bank; the Financial Services Board as well as the National Credit Regulator and the National Consumer Commission.

Prudential regulation and supervision

Under the Twin Peaks model, the prudential regulation and supervision will focus on the "big picture" applied to financial institutions such as banks, securities firms and insurance companies with the objective to maintain and enhance the safety and soundness of such financial institutions. This will ensure that they are financially sound and capable of meeting their obligations to customers. The prudential regulation in South Africa will be the responsibility of the South African Reserve Bank (SARB).

Market conduct regulation and supervision

Market conduct will focus on regulating and supervising the market conduct of banks, insurers, financial intermediaries, retirement funds and administrators, investment institutions and financial markets.

It will ensure consumers are not vulnerable or exploited and will complement the prudential regulation and supervision. The Financial Services Board (FSB) will take the responsibility for market conduct regulation in order to promote and maintain confidence in the South African financial system.

Conclusion

The enhanced "Twin Peaks" model which follows that of the UK is the first of many right steps in planning for the future which incorporates the new, amended and proposed regulations referred to earlier regulated by the FSB and SARB. The wave of new, proposed and amended acts will prevent institutions working in parallel and realigning their goals and objectives so as not to duplicate work effort but at the same time reach a common purpose.

In the medium term in order to implement future planning to prevent the next financial crisis, further costs are likely to be incurred but will be beneficial in the long term.

Politicians must recognise the role financial institutions play in economic growth, similarly financial institutions must deliver higher standards of governance, improved customer treatment, increased risk management and regulators being accountable for multiple reforms while there are many unfinished parts of current regulation.

Regulations need to be comprehensive and rigorous enough to ensure that the financial sector does not once again blemish its reputation. It is important to find a balance between cost and benefit, between those regulations necessary to make a safer financial system and ultimately an improved economy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions