Twin Peaks in South Africa: a new role for the central bank

Abstract

This contribution explores the newly introduced South African Twin Peaks model and its unique features. The main focus of the article is on the comprehensive financial stability mandate imposed on the South African Reserve Bank as central bank by the Financial Sector Regulation Act 9 of 2017. The legislative framework enabling the execution of the SARB's financial stability mandate is interrogated and the strengths and weaknesses of the model, from the perspective of the promotion and maintenance of financial stability are considered.

Notes

1 D Warner & M W Taylor “The Global Financial Crisis and the Financial Stability Board: Hardening the Soft Law of International Financial Regulation.” (2009) University of New South Wales law Journal 488.

2 National Treasury policy document “A safer financial sector to serve South Africa better” (2011) available at http://www.treasury.gov.za accessed on 8 November 2017 (hereinafter “A safer financial sector to serve South Africa better”) 28. See also 38 for a table setting out the various regulators and the specific institutions that fell within their regulatory remit.

3 The SARB was established as central bank with the enactment of the Currency and Banking Act 31 of 1920. It is currently regulated in terms of the South African Reserve Bank Act 90 of 1989 and its position of central bank is entrenched by s223 of the Constitution of the Republic of South Africa, 1996. See further De Jager “The South African Reserve Bank: An Evaluation of the Origin, Evolution and Status of a Central Bank (Part 1)” (2006) 18 South African Mercantile Law Journal 159–174 and De Jager “The South African Reserve Bank: An evaluation of the Origin, Evolution of a Central Bank (Part 2)” (2006) 18 SA Mercantile Law Journal 274–290 for a historical overview.

4 National Credit Act 34 of 2005.

5 “A safer financial sector to serve South Africa better” 4.

6 The National Credit Regulator is established in terms of s26 of the National Credit Act 34 of 2005 and is the primary body that enforces that Act. The Competition Commission was established in terms of s 26 of the Competition Act 89 of 1998 as primary enforcer of the Competition Act. The National Credit regulator can for example investigate banks in terms of section 80 of the National Credit Act in respect of alleged reckless lending practices. The Competition Commission issued the “Banking Enquiry Report” (2006) after an investigation into price fixing between banks with regard to ATM fees.

7 “A safer financial sector to serve South Africa better” 1–83.

8 A safer financial sector to serve South Africa better 13.

9 “A safer financial sector to serve South Africa better” 1–33. See also De Jager “The South African Reserve Bank: Blowing Winds of Change (Part 2)” (2013) South African Mercantile Law Journal 492 at 499.

10 “Implementing a Twin Peaks model of financial regulation in South Africa” published by the National Treasury on 1 February 2013 available at http://treasury.gov.za accessed on 8 November 2017.

11 “A safer financial sector to serve South Africa better” 8.

12 M Taylor “Financial regulation in the UK: a structure for the 21st century” (1996) The futures & derivatives law review 7–17. See also A Schmulow “Financial regulatory governance in South Africa: the move towards Twin Peaks” (2017) 25 African Journal of International & Comparative Law 393.

13 “A safer financial sector to serve South Africa better” 31. Initially it was envisaged that the FSB would be restructured to serve as the market conduct authority but in later drafts of the Financial Sector Regulation Bill, the establishment of a new market conduct authority, the FSCA was introduced.

14 S 2(g) and s3(g) read with s58(2) and (5) FSRA.

15 After the first draft of the Financial Sector Regulation Bill was published, extensive comments were received and various communications between stakeholders followed. Early in 2014 the National Treasury published the second draft of the Financial Sector Regulation Bill as a revised version of the first draft of the Bill for further public consultation. The introduction of a Twin Peaks model gained further momentum when the Revised (Third) Draft of the Financial Sector Regulation Bill was tabled in parliament on 27 October 2015. The tabled version of the Bill was amended in July 2016 and in November 2016 a further slightly amended draft of the Bill served before the National Assembly. See July 2016 draft accompanying response matrix for submissions made on tabled version of the FSR Bill available at http://www.treasury.gov.za/twinpeaks/Comparison%20of%20proposed%20revised%20bill%20with%20tabled%20version%20of%20Bill%20July%202016.pdf accessed on 8 November 2017.

16 S 7 of FSRA.

17 In terms of s1(1) of the FSRA “financial institution” means a financial product provider; a financial service provider; a market infrastructure; a holding company of a financial conglomerate; or a person licensed or required to be licensed in terms of a financial sector law.

18 S 10 of the Reserve Bank Act 90 of 1989. See also JJ De Jager “The South African Reserve Bank: Blowing winds of change (Part 2)” (2013) 25 South African Mercantile Law Journal 496.

19 H.J. Allen “What is “financial stability”? The need for some common language in international financial regulation” (2014) Georgetown Journal of International Law 929–952.

20 S 1 read with s4 of the FSRA.

21 S4(2) provides that a reference to “maintaining” financial stability includes, where financial stability has been adversely affected, a reference to “restoring” financial stability.

22 “A safer financial sector to serve South Africa better” 31. See also Goodhart “ The changing role of central banks” BIS Working Papers No 3 CAE (November 2010) 9 who supports the view that central banks with the variety of functions such as those of the SARB is best placed to oversee financial stability.

23 Schedule 4, FSRA.

24 S 26 and s 76 to 86 respectively.

25 Established in terms of s 20 and 25 FRSA respectively.

26 S79 FSRA. The FSCR is comprised of the Director-General of Treasury; the Director-General of the Department of Trade and Industry; the Director-General of the Department of Health, the CEO of the PA; the Commissioner of the FSCA; the CEO of the National Credit Regulator; the Registrar of Medical Schemes; the Director of the Financial Intelligence Centre; the Commissioner of the National Consumer Commission; the Commissioner of the Competition Commission; the Deputy Governor of SARB responsible for financial stability matters; and the head of any organ of state or other organisation that the Minister of Finance may determine S79(3).The FSCR must establish working groups or subcommittees in respect of the following matters: enforcement and financial crime; financial stability and resolution; policy and legislation; standard-setting; financial sector outcomes; financial inclusion; transformation of the financial sector and any other matter that the Director-General of Treasury may determine after consulting the other members of the FSCR.

27 S83(2) FSRA.

28 S 11(2)(a)FSRA.

29 S 8 FSRA.

30 S 11(2)(b) and (c). An example of such an organ would for instance be the Department of Trade and Industry who by means of determining interest rates pertaining to credit agreements governed by the National Credit Act 34 of 2005, exercises a power that may significantly impact on the economy.

31 S26(2) FSRA.

32 “A safer financial sector to serve South Africa better.” 27.

33 S12(a) FSRA.

34 S12(b) FSRA.

35 S12(c) FSRA.

36 S13(1) and (2) FSRA.

37 S 13(3) FSRA.

38 A systemic event is broadly defined in s 1 of the FSRA as “an event or circumstance, including one that occurs or arises outside the Republic, that may reasonably be expected to have a substantial adverse effect on the financial system or on economic activity in the Republic, including an event or circumstance that leads to a loss of confidence that operators of, or participants in, payment systems, settlement systems or financial markets, or financial institutions, are able to continue to provide financial products or financial services.”

39 S 14(2) FSRA. See further s14(3) to (5): The determination that an event is systemic must be kept under review and may be amended or revoked by the Governor at any time, after having consulted the Minister of Finance.

40 S 15(2) FSRA.

41 S 16(1) FSRA.

42 S 16(2) (a)-(c) FSRA.

43 M W Taylor “Twin Peaks: a regulatory structure for the 21st century” (1996) The futures & derivatives Law Review 7; M W Taylor “The road from “Twin Peaks” –and the way back” (2009–2010) 16 Connecticut Insurance Law Journal 64; A J Godwin and A D Schmulow “The Financial Sector Regulation Bill in South Africa, Second Draft: Lessons from Australia” (2015) 132 The South African Law Journal 756 at 758.

44 S 33(c) and s57(c) FSRA respectively.

45 S26(1)(a)–(d) FSRA.

46 S 17(a) and (b) FSRA.

47 S 26(2) FSRA.

48 S 27(1) FSRA.

49 S 27(2) FSRA. It is further provided in s 27 (3) that a copy of a MOU must, without delay after being entered into or updated, be provided to the Minister and the Cabinet member responsible for consumer credit matters. S 27(4) states that the validity of any action taken by a financial sector regulator in terms of a financial sector law, the National Credit Act or the Financial Intelligence Centre Act is however not affected by a failure to comply with s 27 or a memorandum of understanding contemplated in this clause. This provision is problematic as it may compromise the effectiveness of the MOUs.

50 S 18(1)-(3) FSRA. S 81(4) provides that the National Credit Regulator is obliged to comply with a directive issued to it in terms of s18(1) or (2), provided that the Minister of Finance has consulted the Minister of Trade and Industry who is responsible for consumer credit matters, on the directive.

51 S 19(1) FSRA.In terms of clause 19(2) any unresolved issues between the Minister of Finance and the relevant Cabinet member must be referred to Cabinet.

52 S 20 and 22 FSRA. The SARB must provide administrative support and other resources, including funding, to the FSOC to ensure its effective functioning.

53 S 20(2) FSRA.

54 S 21 FSRA.

55 S 25(2) FSRA. The FSCF gets its administrative support and other resources, including funding, from SARB and must meet at least every six months.

56 S L Schwarz “Systemic risk”(2008) 97 Georgetown Law Journal 193; South African Reserve Bank policy document entitled “A new macroprudential policy framework for South Africa” (November 2016) 9 available at http://www.resbank.co.za accessed on 11 November 2017.

57 J R Barth, A P Prabha & P Swagel “Just how big is the too big to fail problem? (2012) Journal of Banking Regulation 265; A D Morrison “Systemic risks and the ‘too-big-to-fail-problem’” (2011) Oxford Review of Economic Policy 498.

58 “A safer financial sector to serve South Africa better” 26. See also Financial Stability Board (2011) “Policy measures to address systemically important financial institutions” available at http://www.fsb.org/wp-content/uploads/Policy-Measures-to-Address-Systemically-Important-Financial-Institutions.pdf accessed 9 November 2017.

59 E Avgouleas & C Goodhart “Critical reflections on bank bail-ins” (2015) Journal of Financial Regulation 3; S Lucchini, J Moscianese, I de Angelis, F Di Benedetto “State Aid and the Banking System in Financial Crisis: From Bail-out to Bail-in” (2017) Journal of European Competition Law & Practice 88.

60 S29 (5) FSRA.

61 S 29(1)–(3) FSRA.

62 S 30 (1) FSRA.