Australia’s Trek towards Twin Peaks – Comparisons with South Africa

Abstract

This paper traces the evolution of the Twin Peaks model of financial regulation in Australia, outlines certain key aspects and draws comparisons with the model that is being implemented in South Africa. It also highlights ongoing areas of debate in Australia and what the debate reveals about the operation of the Twin Peaks model generally.

Notes

1 Oxford Dictionary, available at https://en.oxforddictionaries.com/definition/trek accessed on 13 November 2017.

2 Oxford Dictionary, available at https://en.oxforddictionaries.com/definition/great_trek accessed on 13 November 2017.

3 See the introduction.

4 Much has been written about the twin-peaks model of financial regulation. The model was first recommended by Michael Taylor. See M Taylor, “Twin Peaks”: A Regulatory Structure for the New Century (Centre for the Study of Financial Innovation, London, December 1995); See also M Taylor, “The Road From “Twin Peaks” – And the Way Back” (2000) 16(1) Connecticut Insurance Law Journal 61. Even countries like the USA, which have for a long time argued that the complexity of the financial system made it difficult to streamline the financial regulatory system, have flirted with the idea of adopting a twin-peaks model. See, Department of the Treasury (USA), “Blueprint for a Modernized Financial Regulatory Structure” (2008) 136–80. For a thorough analysis of the various models, see D Llewellyn, (2006) “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; E Wymeersch, “The Structure of Financial Supervision in Europe: About Single Financial Supervisors, Twin Peaks and Multiple Financial Supervisors” (2007) 8(2) European Business Organization Review 237; J Kremers and D Schoenmaker “Twin peaks: Experiences in the Netherlands” (LSE Financial Markets Group Paper Series Paper 196, December 2010); E Pan, “Structural Reform of Financial Regulation” (2011) 19 Transnational Law and Contemporary Problems 796. For discussion about financial market regulation in South Africa and proposed reforms, see E Botha and D Makina, “Financial Regulation And Supervision: Theory And Practice In South Africa” (2011) 10(11) International Business & Economics Research Journal 27; A R Adewale, “Financial Regulation, Credit Consumption and Economic Growth – An Analysis of the National Credit Act In South Africa” (2014) 30(2) The Journal of Applied Business Research 367; P Hawkins, “South Africa’s Financial Sector Ten Years on: Performance Since Democracy” (2004) 21(1) Development Southern Africa 179; H Falkena, R Bamber, D Llewellyn and T Store, Financial Regulation in South Africa (2001).

5 Cross-reference to Gail’s paper.

6 The Wallis Inquiry was established in June 1996 to examine the Australian financial system. For the recommendations of the Wallis Inquiry, see http://fsi.treasury.gov.au/content/downloads/FinalReport/overview.pdf (the “Wallis Report”) accessed on 13 November 2017.

7 Wallis Report, “Overview”, supra n 6, 14.

8 For a comparative analysis of jurisdictions that have adopted the Twin Peaks model, see A Godwin, T Howse and I Ramsay, “A Jurisdictional Comparison of the Twin Peaks Model of Financial Regulation” (2016) 18(2) Journal of Banking Regulation 103, 106–109.

9 See, eg, Republic of South Africa National Treasury “A Safer Financial Sector to Serve South Africa Better” (Report, 23 February 2011) at 3: “[South Africa] has survived the crisis relatively unscathed, and continues its strong performance of the last decade.” See also IMF, “South Africa: Financial System Stability Assessment, Including Report on the Observance of Standards and codes on the following topic: Securities Regulation” (Report, 2008) at 1: “South Africa’s sophisticated financial system is fundamentally sound and has so far weathered the global financial market turmoil without major pressures”. Recent IMF reports have found that “the regulatory framework for banks [in South Africa] follows international standards”, and that the existing model also “[has] a high degree of compliance with the IOSCO Objectives and Principles of Securities Regulation.” International Monetary Fund “Financial Sector Assessment Program: Detailed assessment of implementation on the IOSCO objectives and principles of securities regulation” (IMF Country Report No 15. 15/17, March 2015), 6.

10 “Twin Peaks legislation expected to reach Parly in May” (online) South African Government News Agency (25 November 2014) http://www.sanews.gov.za/south-africa/twin-peaks-legislation-expected-reach-parly-may, 5 accessed on 13 November 2017. The sectoral model in South Africa has been described as “fragmented … result[ing] in a “silo” approach to regulation of the various industries, with different standards and requirements applying to different industries … allow[ing] for regulatory arbitrage”. Republic of South Africa National Treasury, supra n 9, 10.

11 Republic of South Africa National Treasury, supra n 9, 9–10.

12 Kremers and Schoenmaker, supra n 4, 1.

13 Pan, supra n 4, 855.

14 International Monetary Fund “Basel Core Principles for Effective Banking Supervision: Detailed Assessment of Compliance – South Africa” (IMF Country Report No. 15/55, February 2015), 5.

15 Ibid, 10.

16 See D Llewellyn, (2006) 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.

17 Ibid, 23.

18 Republic of South Africa National Treasury, supra n 9, 10.

19 Ibid.

20 Ibid, 6–7.

21 Ibid, 10.

22 International Monetary Fund, supra n 14, 6.

23 Wallis Report, supra n 6, Recommendation 1.

24 Ibid, 17. According to the Wallis Report, 17–8 “[r]egulation for the integrity of market conduct, consumer protection and the regulation of companies have significant synergies. These functions should therefore be combined.”

25 See Australian Securities and Investments Commission Act 2001 (Cth).

26 Financial Sector Regulation Act 2017, s 56(1).

27 Republic of South Africa National Treasury, supra n 9, 9–10. The National Credit Regulator was established in 2005 to supervise the market conduct of all credit providers, including banks.

28 See Part B4 below for a discussion about regulatory coordination.

29 Wallis Report, “Overview”, supra n 6, Recommendation 31. This would involve transferring all prudentially regulated financial corporations from state jurisdiction to Commonwealth jurisdiction in a move away from the state-based regulation as is still much the case in the United States.

30 For a discussion about macro-prudential regulation, see Part C4 below.

31 Wallis Report, “Overview”, supra n 6, 21.

32 The RBA, Australia’s central bank, is responsible for monetary policy and financial stability, including ensuring a safe and reliable payments system.

33 Wallis Report, “Overview”, supra n 6, Recommendation 32. Coordination and cooperation were to be achieved by making provision for “full information exchange between the RBA and [APRA]” and for “RBA participation in [APRA] inspection teams”. Further, “[a] bilateral operational coordination committee, chaired by an RBA deputy governor, should be established to coordinate information exchange, reporting arrangements on financial system developments, and other ongoing operational cooperation between the RBA and [APRA], including cooperation in establishing clear procedures for the management of regulated entities which experience financial difficulties”: Wallis Report, “Overview”, supra n 8, 11–2.

34 Australian Prudential Regulation Authority Act 1998 (Cth) (the “APRA Act”), s 13.

35 For an outline of the arguments on each side, see Godwin, Howse and Ramsay, supra n 8, 109–111.

36 Wallis Report, “Overview”, supra n 6, 17. In addition, separation would clarify that there was no implied or automatic guarantee of any financial institution or its promises in the event of insolvency. See Godwin, Howse and Ramsay, supra n 8, 110.

37 For a discussion about “the potential of synergy arising from knowledge of monetary policy and financial market developments within supervisory practice”, see M van Hengel, P Hilbers and D Schoenmaker, “Experiences with the Dutch Twin-Peaks Model: Lessons for Europe” in Kellermann, Haan & Vries (eds) Financial Supervision in the 21st Century (2013), 187. The benefit of combining the functions needs to be weighed against the risk of a conflict of interest emerging within the Central Bank. For example, it has been suggested that “a central bank with responsibility for preventing systemic risk is more likely to loosen monetary policy on occasions of difficulty”: Llewellyn, supra n 16, 29.

38 HM Treasury (2015), Bank of England Bill: technical consultation, 3.

39 Financial Sector Regulation Act 2017, s 32(2).

40 As explained by the National Treasury, “[t]he PA as a juristic person can act in its own name, enter into contractual agreements, sue or be sued separately from the Reserve Bank. While the PA will operate within the administration of the Reserve Bank, these are two distinct entities with separate legal identities in law and have different mandates and objectives.” Republic of South Africa National Treasury “Financial Sector Regulation Bill – Comments Received on the Second Draft Bill Published by the National Treasury for Comments on 11 December 2014” (2015), 76–7, http://www.treasury.gov.za/twinpeaks/Consolidated%20comments%20received%20on%20the%20second%20draft%20of%20the%20FSR%20Bill%20published%20in%20December%202014.pdf, accessed on 13 November 2017.

41 See International Monetary Fund “Institutional Models for Macroprudential Policy” (Staff Discussion Note 11/18, November 2011), 12. The Bank of England and Financial Services Act 2016, which was enacted on 4 May 2016, ended the PRA’s status as a subsidiary and constituted the BoE as the PRA, the functions of which are exercised by the BoE acting through the Prudential Regulation Committee.

42 See, for example, the comments of Deloitte: Republic of South Africa National Treasury “Financial Sector Regulation Bill – Comments Received on the Second Draft Bill Published by the National Treasury for Comments on 11 December 2014” (2015), 76–7, http://www.treasury.gov.za/twinpeaks/Consolidated%20comments%20received%20on%20the%20second%20draft%20of%20the%20FSR%20Bill%20published%20in%20December%202014.pdf, accessed on 13 November 2017.

43 This is consistent with the belief that central banks in emerging countries are better placed to undertake banking supervision and distance themselves from political interference. See V Sundararajan and B Baldwin, “Regulation of Financial Conglomerates” in T.T. Ram Mohan, Rupa Rege Nitsure and Matthew Joseph (eds) Regulation of Financial Intermediaries in Emerging Markets (2005), 150–51. See also A Godwin, T Howse and I Ramsay, “Twin Peaks: South Africa’s Proposed Financial Sector Regulatory Framework” (2017) 134 South African Law Journal 665, 675.

44 T Fiennes and C O’Connor-Close, “The Evolution of Prudential Supervision in New Zealand” (2012) 75 Reserve Bank of New Zealand: Bulletin 5.

45 See Wallis Report, “Overview”, supra n 6, Recommendation 108. This subsequently changed following the reforms introduced as a result of the HIH Report. See further below.

46 The former section 19 of the APRA Act provided that the Board would consist of the following members: “(a) a Chair; (b) the CEO; (c) 2 members, each of whom is either the Governor or the Deputy Governor of the Reserve Bank or an officer of the Reserve Bank Service; and (d) 1 member who is also an ASIC member of an ASIC staff member: and (e) 4 other members.”

47 For details of the HIH Royal Commission and the HIH Report, see http://www.hihroyalcom.gov.au/ accessed on 13 November 2017.

48 Ibid, lxi. See Recommendation 18.

49 Ibid, 210, Recommendation 20. According to the HIH Report, the evidence suggested that “staff may have assumed that necessary exchange of information would be occurring at board level obviating the need for communication at a working level.” Instead, the HIH Report suggested that coordination “should be developed through regular formal and informal mechanisms involving agency staff at various levels” and that “the Council of Financial Regulators, which has representation from the Treasury as well as the agencies, would … be a more appropriate forum for the strategic consideration of issues affecting the financial services sector.” HIH Report, supra n 46, 209.

50 See http://www.bankofengland.co.uk/about/Pages/people/prapeople.aspx accessed on 13 November 2017.

51 Financial Sector Regulation Act 2017, s 59.

52 Ibid, s 60(1).

53 Ibid, s 60(2), s 61(2).

54 Ibid, s 61(3).

55 Ibid, s 35.

56 Ibid, s 41(1).

57 Financial Sector Regulation Act 2017, s 41(2).

58 Ibid, s 42(a).

59 Ibid, s 43(5).

60 Republic of South Africa National Treasury, “Financial Sector Regulation Bill – Comments Received on the Second Draft Bill Published by the National Treasury for Comments on 11 December 2014” (2015), 76–7, http://www.treasury.gov.za/twinpeaks/Consolidated%20comments%20received%20on%20the%20second%20draft%20of%20the%20FSR%20Bill%20published%20in%20December%202014.pdf, accessed on 13 November 2017.

61 Basel Committee on Banking Supervision, “Core Principles for Effective Banking Supervision” (September 2012): “Principle 3 – Cooperation and collaboration: Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.”

62 See Wallis Report, “Overview”, supra n 6, Recommendation 112.

63 HIH Report, supra n 46, 223–4.

64 Section 10A of the APRA Act. Interestingly, this is the only provision that expressly refers to coordination in the legislation governing APRA and ASIC.

65 HIH Report, supra n 46, 223.

66 HIH Report, supra n 46, lxxi, Recommendation 40. There are now several memoranda of understanding in place between APRA and foreign regulators.

67 Australian Securities and Investments Commission, Submission, Financial System Inquiry, April 2014, 191.

68 Commonwealth, Parliamentary Joint Committee on Corporations and Financial Services, “Inquiry into the collapse of Trio Capital” (Report, May 2012).

69 Ibid, xix–xx.

70 Ibid, 77.

71 Ibid, 84.

72 A Camacho and R Glicksman, “Functional Government in 3-D: A Framework for Evaluating Allocations of Government Authority” (2014) 51 Harvard Journal on Legislation 19, 56.

73 Financial System Inquiry, Interim Report (July 2014), 3–119. Details of the FSI, the submissions and the reports are available on the FSI website: http://fsi.gov.au/publications/, accessed on 13 November 2017. See further in Part C below for an overview of the Financial System Inquiry and its recommendations.

74 See the comments of M Edey, “Macroprudential Supervision and the Role of Central Banks” (Regional Policy Forum on Financial Stability and Macroprudential Supervision Hosted by the Financial Stability Institute and the China Banking Regulatory Commission, 28 September, 2012):

Key aspects [of coordination] include an effective flow of information across staff in the market operations and macroeconomic departments of a central bank and those working in the areas of financial stability and bank supervision. Regular meetings among these groups to focus on risks and vulnerabilities and to highlight warning signs can be very valuable. A culture of coordination among these areas is very important in a crisis because, in many instances, a stress situation is first evident in liquidity strains visible to the central bank, and the first responses may be calls on central bank liquidity.

75 See A Godwin and I Ramsay, “Twin Peaks – The Legal and Regulatory Anatomy of Australia’s System of Financial Regulation” (2015) 26 Journal of Banking and Finance Law and Practice 240, 260–264.

76 Australian Prudential Regulation Authority, “Annual Report 2013 – 14” (Report, 2014) Chapter 4.

77 Australian Securities and Investments Commission, “Speech to Australian Prudential Regulation Authority Leadership Team” (30 June 2011), <http://web.archive.org/web/20140212234835/http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Speech-to-APRA-leadership-team-1.pdf/$file/Speech-to-APRA-leadership-team-1.pdf>, 5–7, accessed on 13 November 2017. These practical measures were also reflected in the APRA 2013–2014 Annual Report. APRA, “Annual Report”, supra n 75, Chapter 4.

78 The Council of Financial Regulators, “Memorandum of Understanding on Financial Distress Management between the Members of the Council of Financial Regulators” (18 September 2008).

79 The Council of Financial Regulators, About the CFR (11 May 2015) http://www.cfr.gov.au/about-cfr/index.html, accessed on 13 November 2017.

80 RBA, Submission, Financial System Inquiry, March 2014, 66. For an outline of the views of the regulators and Treasury on the benefits of the existing “soft law” framework, see Godwin and Ramsay, supra n 74, 265–267.

81 See, eg, Commonwealth Bank of Australia, Submission, Financial System Inquiry, March 2014, 88; KPMG, Submission, Financial System Inquiry, 31 March, 4.

82 Financial System Inquiry, Final Report (November 2014), 234.

83 Financial Sector Regulation Act 2017, s 79(2), s 76(1).

84 The FSOC is a committee whose primary objectives are to “support the Reserve Bank when the Reserve Bank performs its functions in relation to financial stability” and “facilitate co-operation and collaboration between, and co-ordination of action among, the financial sector regulators and the Reserve Bank in respect of matters relating to financial stability”. See the Financial Sector Regulation Act 2017, s 20(2). The nearest equivalent to the proposed FSOC is the UK’s FPC, which has “responsibility for regulation of stability of the financial system as a whole.” International Monetary Fund “United Kingdom: Financial System Stability Assessment” (Report, July 2011) at 37. For further discussion, see Part C4 below.

85 The primary objectives of the FSCF are “the identification of potential risks that systemic events will occur” and “the co-ordination of appropriate plans, mechanisms and structures to mitigate those risks”. Financial Sector Regulation Act 2017, s 25(2).

86 The Financial Sector Inter-ministerial Council is a unique initiative that does not appear in other twin peak jurisdictions. Its purpose is “to facilitate co-operation and collaboration between Cabinet members responsible for administering legislation relevant to the regulation and supervision of the financial sector by providing a forum for discussion and consideration of matters of common interest”. Financial Sector Regulation Act 2017, s 83(2). The National Treasury has described the inter-ministerial council “as a useful platform for high-level decision making [that is] especially important given the responsibilities of the respective departments within the financial system”. Republic of South Africa National Treasury, supra n 60 at 123.

87 South African National Treasury “Stakeholder consultation workshop: Second draft of the Financial Sector Regulation Bill” (Presentation, January/ February 2015), 22.

88 Financial Sector Regulation Act 2017, s 79(2).

89 Financial Sector Regulation Act 2017, s 79(3).

90 Financial Stability Board (FSB) “Peer Review of the Netherlands” (Report, November 2014), 14–5.

91 Memorandum of Understanding between the NBB and the Financial Services and Markets Authority, Article 24.

92 In Australia, the APRA Act states that it is the “intention” that the regulators cooperate. This falls short of being a legally binding duty. APRA Act s 10A.

93 Financial Sector Regulation Act 2017, s 76.

94 Financial Sector Regulation Act 2017, s 77.

95 Financial Sector Regulation Act 2017, s 27(1).

96 Financial Sector Regulation Act 2017, s 50(2) (a).

97 Financial Sector Regulation Act 2017, s 50(3) (a), (b).

98 Financial Sector Regulation Act 2017, s 83(2).

99 Basel Committee, “Core Principles”, supra n 60, Principle 2.

100 International Association of Insurance Supervisors, “Insurance Core Principles” (October 2011), Principle 2.

101 Wallis Report, “Overview”, supra n 6, 37.

102 Explanatory Memorandum, Australian Prudential Regulation Authority Bill 1998 (Cth) para 4.13.

103 Ibid, para 4.41.

104 See APRA Act s 50(1) and s 50(1A).

105 International Monetary Fund, “Australia: Basel Core Principles for Effective Banking Supervision—Detailed Assessment of Observance” (IMF Country Report No. 12/313, November 2012), 26.

106 Australian Prudential Regulation Authority, Submission, Financial System Inquiry, 31 March 2014, 29–30.

107 ASIC, “Submission”, supra n 66, 18. In its 2012 assessment of Australia, the IMF stated that “[t]he independence and sufficiency of resources of ASIC [had been] hampered by the flattening of its overall operating funding over the last three years and a not insignificant dependence on non-core funding.” The IMF recommended that “the authorities consider alternative possibilities to arrange the funding of ASIC in such a manner that it will be best equipped to respond to the current and emerging challenges in securities regulation both domestically and globally” and that the Government “ensure that ASIC’s core funding will be sufficient to meet the future regulatory and supervisory challenges, also in light of the global regulatory commitments.” IMF, “Australia: IOSCO Objectives and Principles of Securities Regulation—Detailed Assessment of Implementation” (IMF Country Report No. 12/314, November 2012), 30, 47.

108 The FSB was funded through levies imposed on financial institutions.

109 Financial Regulatory Reform Steering Committee “Implementing a twin-peaks model of financial regulation in South Africa” (Report for public comment, 1 February 2013) Financial Regulatory Reform Steering Committee, 33.

110 Ibid.

111 Financial Sector Regulation Act 2017, s 50.

112 Republic of South Africa National Treasury, supra note 9, at 30. See Financial Sector Regulation Act 2017, s 51(1).

113 The Hon Joe Hockey MP, Treasurer of the Commonwealth of Australia, “Financial System Inquiry” (Media Release, 20 December 2013) <http://jbh.ministers.treasury.gov.au/media-release/037-2013/> (“FSI Media Release”), accessed on 13 November 2017.

114 Details of the FSI, the submissions and the reports are available on the FSI website: <http://fsi.gov.au/publications/>, accessed on 13 November 2017.

115 FSI Media Release, supra n 113.

116 Australian Government Treasury, “ASIC Enforcement Review Taskforce consults on strengthening penalties” (media release, 23 October 2017, http://kmo.ministers.treasury.gov.au/media-release/104-2017/, accessed on 13 November 2017.

117 FSI, supra n 81, 239. As noted by Treasury on its website, “Ministers issue Statements of Expectations to statutory agencies. Through issuing a Statement of Expectations, Ministers are able to provide greater clarity about government policies and objectives relevant to a statutory authority, including the policies and priorities it is expected to observe in conducting its operations”: http://www.treasury.gov.au/Policy-Topics/PublicPolicyAndGovt/Statements-of-Expectations, accessed on 13 November 2017.

118 ASIC, “Submission”, supra n 67, 62. For a discussion about accountability, which is an issue that is the subject of ongoing debate in Australia, see Schmulow.

119 Minter Ellison, Submission, Financial System Inquiry, April 2014. Minter Ellison noted that it did not expect that the primary regulator regime would apply to all regimes (e.g. the investigation and enforcements powers of the Australian Taxation Office in relation to the taxation of financial institutions).

120 E Wymeersch, “The Structure of Financial Supervision in Europe: About Single Financial Supervisors, Twin Peaks and Multiple Financial Supervisors” (2007) 8(2) European Business Organization Review 237, 262.

121 It is understood that South Africa rejected the “primary regulator” approach along similar lines.

122 For a discussion about regulatory overlap, see A Godwin, S Kourabas and I Ramsay, “Twin Peaks and Financial Regulation: The Challenges of Increasing Regulatory Overlap and Expanding Responsibilities” (2016) 49(3) The International Lawyer 273. In the UK, the Treasury has the power to establish the “boundaries” between the two regulators. This effectively allows the Treasury to determine who should be the lead regulator in a regulatory investigation. In this way, the UK has deliberately built features into its Twin Peaks model to ensure that only one regulator will act where necessary.

123 For a discussion about this development, see O’Brien.

124 For a detailed discussion of these arguments, see A Godwin, S Kourabas and I Ramsay, “Financial Stability Authorities and Macroprudential Regulation” (2017) 32(2) Banking & Finance Law Review 223.

125 Ibid.