Three major reasons of 2018 regulatory and supervision financial reform.
In the past twenty years, the World over have witnessed an increasing number of jurisdiction adopting the Twin Peaks model of financial regulation.
This model was pioneered in Australia, and has since been adopted by the Netherlands, Belgium, New Zealand, and the United Kingdom. In South Africa, it was adopted and implemented in July 2018, while in the United Stated it is still being considered. In South Africa, the adoption of this financial regulatory regime was as a result of the 2007 -2010 global financial crises and it was adopted to circumvent any financial crisis in the future by implementing a robust regulatory and supervision financial reform. The global financial crisis was seen to have been caused by lack of proper supervision of financial institutions. One of many examples is the Northern Rock bank case study.
“Northern Rock had a share of about 20% of the British mortgage market. The bank was offering mortgage four to five times what people can afford, and these loans were not financed by deposits but by borrowing in the financial markets so called wholesale markets. Because of this reckless behaviour and the credit crunch in the US, those markets dried up. Liquidity issues started to crop out. These liquidity issues caused a run on banks and the banks could no longer trust each other and as a result this led to them not lending each other. This was blamed on incompetent managers; failure by supervision authorities; and the rating agencies, who were not rating these financial institutions properly. Rating agencies were giving AAA ratings to these financial institutions regardless of the risk of subprime lending issues and bloated balance sheets of assets which were overvalued.”
A second critical reason for the change from the old financial regulatory regime to the new one was to move to forward-looking, proactive, judgement-based supervision versus an old style reactive approach. The essence of judgment-based approach is a willingness by the Regulator to intervene when the Regulator judges the outcomes will, in the future, be at variance to its mandate, even if the firm does not agree. Such judgements and interventions are necessary and should be proportionate and justified.
Another reason for the reform is market developments. Due to continuous pressure for efficiencies, financial systems evolve over time. Intermediation processes and institutional design in the past several decades have gone through striking developments. Companies have become conglomerates which house everything under one roof. It is common for a group company to own a bank, an insurance entity and a financial brokerage under one stable. Disintermediation and the disappearance of traditional sectoral boundaries between banking, securities, and insurance can be seen as particular forms of organizational evolution, just as is the unbundling of different kinds of financial activity within a group. Therefore, from the perspective of financial regulation and supervision, it is important to create a supervisory system that accommodates non-sectoral boundaries.
Needless to say, that Twin Peaks foundational objective is about the firm-specific supervision for banks, insurers, investment firms and financial brokers, carried out by two separate supervisory bodies, one for prudential (PA) and another for conduct (FSCA) regulation. These two supervisory bodies are mandated to make their own, separate, set of regulatory judgements against different objective. They are supposed to coordinate internally to maximise the exchange of information which is relevant to their individual objectives, and are required to seek to ensure that regulatory data is only collected once and there is no duplication or double effort of collating regulatory data.
Written by: Gcobisile Rasmeni
Gcobisile Rasmeni is a seasoned risk and compliance specialist, who in the past served as a member of Audit and Risk Committees for South African Municipalities, as well as holding executive roles in Governance, Risk, Compliance and Legal in the financial services sector. He is a risk practitioner with many years of experience, in combining real world expertise and experience with a solid grounding in global best practice, in implementing internal controls in different environments including Banks, and Insurance Companies.