Regulation: Foothills, two peaks, and a mountain
The new regulatory framework can be almost as confusing as the cult TV series of the 1990s
It is unfortunate that the name Twin Peaks has stuck for the new regulatory regime for financial services.
It may be catchy, reflecting a cult TV series from the 1990s, even though that programme was highly confusing and nobody could agree on the outcome. The two peaks are the new Prudential Authority (PA) and the Financial Sector Conduct Authority (FSCA), formerly known as the Financial Services Board (FSB). Treasury admits SA’s regulatory framework looks more like a mountain, two peaks and several foothills.
The mountain is the SA Reserve Bank, which has not delegated its responsibility for "macro-stability".
The foothills include the National Credit Regulator and the Financial Intelligence Centre, which remain separate. There is also a new co-ordinating body, the Financial Sector Oversight Committee, and it can’t be long before this gets its own well-paid CEO and staff.
The two peaks still have to work out a memorandum of understanding before they can jointly grant new licences to financial institutions.
The aim of Twin Peaks, says Caroline da Silva, the FSCA’s deputy registrar for insurance, is to place equal focus on prudential and conduct risk, through the two separate bodies. Previously, the FSB was responsible for both prudential and conduct issues for all nonbanking financial institutions. It will now focus on market conduct for all financial services, including banks.
The Banks Act makes little reference to market conduct in the banking sector, so there will be much greater emphasis on this through the FSCA, and inevitably higher levies to pay for it. Da Silva says that a range of sector-specific laws governing conduct will be replaced by the Conduct of Financial Institutions Act. The old FSB executive officer will be renamed the commissioner of the FSCA, to give parity with the commissioner of the SA Revenue Service and of correctional services.
Da Silva says the FSCA will make a shift from the backward-looking compliance-based approach of the FSB and will become more unashamedly intensive and intrusive. This will mean heavy recruiting to restaff the perennially understaffed FSB.
And the registrar of banks, housed in the Reserve Bank, will now become the PA and look at the financial soundness of all financial institutions. Claudia Jackson, a senior associate at Norton Rose Fulbright, says the authority will still predominantly focus on banks, but now also on insurers.
Under the new Insurance Act all 176 insurers will need to reapply for licences over the next two years, which will give the PA a good chance to look under the bonnet.
Jackson says insurers will need to specify exactly the type of insurance they plan to offer. But for now the FSCA will have sole jurisdiction over pension funds, and the PA will have limited day-to-day involvement with financial advisers.
The old FSB system of deputy registrars for sectors such as pension funds and collective investments will disappear and be replaced by functional groups such as licensing, enforcement and conduct of business.
The PA will be tied at the hip to the Reserve Bank. The governor and his three deputies will supervise it through the prudential committee, and the PA’s CEO, Kuben Naidoo, remains a deputy governor of the bank. The PA intends to support other regulators and help to adopt consistent regulatory standards.
It will undoubtedly be the de facto senior partner given its home in the Reserve Bank offices. There will be duplication between the PA and the FSCA as both will be involved in licensing, supervisory on-site inspections and enforcement action.
Robert Vivian, professor of finance and insurance at the University of the Witwatersrand, argues that there is nothing wrong with prudential regulation, which has aimed to keep banks adequately capitalised since the 1890s. But market conduct falls under the law of contract.
"Unfortunately, bureaucracies are set up which believe they are above such well-established legal principles," says Vivian.
"The FSCA violates the separation of powers as it is part of the executive, yet takes away the powers of the legislature to make law through its power to issue regulations."
Vivian says that there is no evidence of public demand for these new regulations, and it is not clear what problem they are trying to solve.
He adds that the Reserve Bank does not have the constitutional mandate to regulate insurers, only banks. "Twin Peaks was started in the UK to get out of a hole after the global financial crisis. But there is no need for change here."