Jurisdictions such as the United Kingdom, the Netherlands, South Africa and Australia have substantially reformed their banking and financial sector regulators by adopting a "twin peaks" regulatory structure.
The global financial crisis did not affect Netherlands and Australia as much as it did the United States and the United Kingdom. This does not have to do with only the regulatory structure but also the two markets that have invested in the securitization assets the most were the US and the UK. But still the regulations in the respective markets must be examined.
The Netherlands adopted a Twin Peaks Approach to financial services regulation. Unlike Australia, in the Netherlands, the central bank (DNB) also serves as the prudential and systemic risk supervisor of all financial services, including banking, insurance, pension funds, and securities. The Netherlands Authority for the Financial Markets (AFM) is responsible for all conduct-of-business supervision. Its overall objective is to promote transparent markets and processes and to protect the consumer. The work of the agency is guided by three further objectives: to promote access to the market; to ensure the efficient, fair, and orderly operation of the market; and to guarantee confidence in the market. Both the DNB and the AFM have enforcement authority. Until the late 1990s, the Netherlands employed the Institutional Approach to financial supervision. Regulators were divided along the traditional lines of banking, insurance, and securities. This model was abandoned in favour of a Twin Peaks Approach due to the consolidation of the Netherlands financial sector into one dominated by companies conducting business across multiple product lines, and the development of complex financial products that have cross-sector elements.1
The critics there argued that such an increase in regulation would increase compliance costs and the need for additional staff to could, in turn, reduce the availability of resources for innovation, and for customers mean a reduction in credit
Doctor Taylor said. "Twin Peaks is not something that should be adopted just because it is the current fashion to do so. You need to analyse the type of industry you are aiming' to regulate."
Has the switch to twin peaks regulatory structure been good for the UK? Is it worth it? Can it help prevent another financial crisis?
Whenever a regulatory failing occurs, the lawmakers tend to make the mistake in believing that if the system is changed and made more complex, the same regulators who failed in the previous system somehow wouldn't fail in the new amended system. However, this belief is far from being accurate.
Since 1986 all the has happened is new complex expensive regulatory systems have been created under the mistaken belief, or in any event, parliament has been persuaded to believe, that once created these regulators will somehow know what to do. Experience has shown that this belief or confidence is greatly misplaced. The newly created regulatory systems have never even come to close the identifying the underlying causes of the financial failures. Thus, the Bearings Bank failure led to the FSA which morphed itself into a Market Conduct regulator never solving the very problem it was created to solve, bank failures. The 2008 world financial crisis demonstrated clearly the FSA was a failure which has now led to the Twin Peaks Regulatory System. Once again there is no indication at all what in fact it will do to prevent another banking crisis. As before it is created with the forlorn belief the regulators will know what to do. They do not, and they will not. They never have.2
"Prudential and conduct of business ... regulation require[s] fundamentally different approaches and cultures and there may be doubt about whether a single regulator would, in practice, be able to effectively encompass these to the necessary degree."3
The twin peaks model does has multiple advantages. First of all, two headed regulation system is deemed to have more dedication towards achieving their respective objectives and specific rules that the rulers are bound with.4 The second advantage is that it is less likely for the regulatory system to surpass the general regulatory domination overall..5 The regulatory culture which is composed of the manners, activities and policies that the regulators apply to achieve their purposes can be amended according to the cultural features and regulator's functions in order for the system to function effectively..6 This flexibility prevents the concern of containing several different cultures under a single roof which can occur in situations where there is one regulator at the top and different cultures come to existence from diversified regulatory purposes.7 Another benefit is that the twin peaks model can better comply with the constant changes and emerging complexities on the financial markets and continuous boom of the financial conglomerates. The final advantage to be mentioned can be the ability of the twin peaks model to prevent the complications arising from a system with a super-regulator. This advantage is also strengthened with the draft Financial Services Bill prepared by the UK Joint Committee (JCFSB) which states that:
`[T]he evidences of the recent financial crisis suggest that mixing functions can contribute to a lack of focus on rising macro‐prudential risk and difficulties in moving to a 'war footing' when that risk becomes substantial. In addition, the incentives are different. For example, consumer protection can be well served by keeping a bank open, while stability is well served by closing it. `8
There are also several perceived disadvantages of the twin peaks model.9 First, twin peaks may create a regulatory overlap with dual‐regulated entities. The twin peaks model means that it is 'inevitable that two separate regulators would have two separate rule books and two separate systems.'10 This could place a 'considerable burden'11 on regulated entities and lead to poor information‐sharing and coordination.
Secondly, there is a general risk that cooperation and coordination between the regulators will not be enough12with potentially serious consequences.13While these risks can be managed through robust coordination and liaison channels, it nevertheless remains a key concern for jurisdictions that have adopted the model.14 15
Added to the international failure of the model which occurred in the Netherlands, are the failures of Twin Peaks in Australia. These include the collapse in 2001 of a large and significant insurer – HIH – under APRA's watch, and the near failure of Zurich Insurance Australia in 2000. Then there is the dismal performance of ASIC in the financial advice scandals that have rocked Australia continuously since 2014 – a performance excoriated by Australia's Senate.16
"New structures do not guarantee better regulation...Any country that thinks that tinkering with the structure of agencies will, by itself, fix past shortcomings is doomed to relive its past crises" (Carmichael, 2003)
1. G30 structure financial supervision 2008
3. See D Llewellyn, "Institutional Structure of Financial Regulation and Supervision: The Basic Rules", Paper presented at a World Bank seminar Aligning Supervisory Structures with Country Needs, Washington DC, 6 and 7 June 2006, 26 (2006).
4. ibid 27‐8.
5. ibid 27‐8.
6. ibid 27‐8.
7. Hengel, Hilbers and Schoenmaker 'Experiences with the Dutch Twin Peaks Model: Lessons for Europe' in Kellermann, Haan & Vries (eds), Financial Supervision in the 21st Century (Springer 2013) 186‐7.
8. Joint Committee on the draft Financial Services Bill (JCFSB), Draft Financial Services Bill – Report, together with formal minutes and appendices (HL 2010‐12, 236, HC 2010‐12, 1447) 73 .
9. Andrew Godwin (2017) Introduction to special issue – the twin peaks model of financial regulation and reform in South Africa, Law and Financial Markets Review, 11:4, 151-153, DOI: 10.1080/17521440.2017.1447777
10. ibid para 286.
11. JCFSB, above n 15, para 285.
12. This was considered in the New Zealand context: The New Zealand Institute of Chartered Accountants, Submission to the Commerce Select Committee, Financial Markets (Regulators and Kiwisaver) Bill, November 2010, para 32.
13. This was a serious concern in the HIH Report, as discussed in Part IV below: see generally Commonwealth, The HIH Royal Commission, The failure of HIH insurance: A corporate collapse and its lessons (April 2003).
14. New Zealand Treasury, 'Financial Sector Regulatory Agencies – Regulatory Impact Statement' (14 September2010). Available at (http://www.treasury.govt.nz/publications/information/releases/ris/pdfs/ris‐med‐fsra‐sep10.pdf/view)
15. Is Australia's 'Twin Peaks' System of Financial Regulation a Model for China? Andrew Godwin, * Guo Li** and Ian Ramsay***
16. Doing it the Australian Way, 'Twin Peaks' and the Pitfalls in Between By Andy Schmulow
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