Two heads are better than one: Assessing South Africa’s ‘twin-peaks’ financial regulation model
Submitted by Aretha Linden on Wed, 30/11/2022 - 10:12
Read time: 4 mins
The Financial Sector Regulation Act (FSRA) was signed into law in August 2017. This event saw South Africa joining a short list of countries that have switched to a ‘twin peaks’ model of financial regulation.
The ‘twin peaks’ model involves regulatory jurisdiction over financial services players(banks, insurance companies, pensions administrators and so on) now being exercised by two separate, independent agencies: the Prudential Authority (PA), part of the administrative structure of the South African Reserve Bank, and the Financial Sector Conduct Authority (FSCA), a reincarnation of the former Financial Services Board.
UFH researcher Professor Patrick Osode’s study of the ‘twin peaks’ model resulted in an article published in the Interdisciplinary Journal of Economics and Business Law. The article seeks to understand the rationale behind the adoption of the ‘twin peaks’ model by South Africa and then assesses its fitness for the purposes intended by those responsible for its adoption in this country.
In the article, Professor Osode comes to the conclusion that, although the design of the model is fundamentally sound, some aspects are flawed. One problem identified by Professor Osode relates to a section of the FSRA that requires the PA to support sustainable competition in the provision of financial products and related services. According to Professor Osode, this clearly leaves space for the PA to undertake its mandate of promoting competition without the consent, support and/ or collaboration of the Competition Commission, something which would clearly be desirable given the importance of alignment and synergy between competition promotion initiatives as well as the very real prospect of regulatory turf protection.
Another problem for Professor Osode relates to the role and powers allocated to the Minister of Finance to hire and fire the PA’s Chief Executive Officer as this raises the possibility of political interference in the functioning of the PA itself. For Professor Osode, this represents a failure, on the part of lawmakers, to ensure the PA’s immunity from political interference and is a design flaw in the South African ‘twin peaks’ model.
The potential for political interference is also highlighted in the fact that the Finance Minister (as political head of the National Treasury) is vested with the power to remove the FSCA Commissioner from office. Given that the Minster is a political appointee, the way is left open for political interference.
Professor Osode argues that international best practice and the academic literature draw on the need for financial sector regulatory agency heads, such as the FSCA Commissioner, to be immune from political interference and manipulation. As the FSRA already makes the FSCA accountable to Parliament, vesting the power both to appoint and remove the FSCA Commissioner in the Finance Minister in order to further secure accountability to the government of the day is problematic. Depending on how it is configured, and although accountability to Parliament alone could occasionally result in the FSCA’s paralysis because of deadlocks, Parliamentary oversight would protect the FSCA from being captured by powerful political and private interests.
Important in the FSRA is that one of the few mandates given to the FSCA is the responsibility to promote financial inclusion, something which is clearly very important in a country such as South Africa where divides between the ‘haves’ and the ‘have nots’ are so stark. However, the means by which financial inclusion would be achieved were only beginning to emerge in 2020, three years after the FSRA became part of national legislation.
In spite of this, the success of the FSCA in delivering on its closely related mandate to design and deliver financial education programmes for current and future financial service consumers as well as the general public has already shown the potential to impact on financial inclusion in the country.
In spite of being able to identify problems with the implementation of the model in South Africa, Professor Osode comes to the conclusion that other countries could learn from South Africa’s implementation of the ‘twin peaks’ model. Professor Osode cites Australia’s recent Hayne Report which looked into misconduct in the banking, pension and financial services industry noting that Australia could learn from the design of South Africa’s ‘twin peaks’ regulatory architecture.
In turning a critical eye to the implementation of the ‘twin peaks’ model in South Africa, Professor Osode once again shows how the expertise and insight of Fort Hare researchers have much to offer the country. Those involved in the next round of financial services law reform would do well to take heed of his perspicacity.
Source: UFH 2021/2022 Research Report