Revised US financial regulation bill clarifies ‘Twin Peaks’

By added on 18/12/2014

The Treasury has published a revised bill on the "twin peaks" model of financial regulation, which is intended to protect consumers and make the financial system safer, Business Day reports.

The second draft of the Financial Sector Regulation Bill includes recommendations to improve its legal enforcement and clarifies the role of regulators. Under the twin peaks model, regulation of the financial sector will be split into prudential and market conduct.

Prudential regulation, which monitors the risks affecting the soundness of financial institutions and the whole financial system, will be the responsibility of the South African Reserve Bank.

Market conduct — including reckless lending practices, excessive fees and unfair product terms — will fall under a new financial sector conduct authority that replaces the Financial Services Board.

Treasury deputy director-general Ismail Momoniat said this week that an overhaul of financial regulation is necessary to incorporate lessons learnt from the 2008 global financial crisis. SA could not be complacent in dealing with regulatory gaps and weaknesses as regulatory bodies can only be considered to have been "partially successful" given the failure of African Bank, high household indebtedness and the proliferation of payday lenders, he said.

Market conduct regulation requires higher standards than general consumer protection laws as consumers often do not understand complicated financial products and the fees charged, he said.

The Treasury has also released a draft market conduct policy framework discussion document open to comment until April 8. This is a first attempt to draft a comprehensive framework for how the market conduct regulator will operate, with its mandate to make sure financial institutions treat customers fairly.

The regulations will look at how financial institutions conduct their business, what products they sell and the disclosures they make about those products.

Mr Momoniat said financial institutions compete on products, which are often opaque and difficult to compare. "The competition needs to shift to pricing rather than products," he said.

The revised twin peaks bill — open to comment until March 2 — includes changes to improve its legal enforceability and to give authorities the powers they need to enforce laws. It introduces the legal framework to allow regulators to supervise not just financial institutions, but also financial groups to which they belong.

This would remedy the problem the Bank had when African Bank ran into trouble.

The Bank was only able to act on problems in the bank, not those of its parent African Bank Investments Limited, or subsidiary Ellerines.