Financial Reforms: South Africa’s Twin-Peaks Regulation

The South African banking sector is a very well regulated sector. This factor is a key contributor to the ability of the sector to withstand the financial crisis precipitated in the USA and spreading to Europe in 2008. Other factors contributing to this are the responsible and conservative business models adopted by SA banks and their relatively risk-averse nature. The Global Competitive Report rates the SA banking sector as the second most stable banking sector in the world, which is further testimony to the effectiveness of the regulatory environment and the sound business practices of banks.

The Bank’s Act is the primary regulatory instrument for banks in SA. The primary regulator is the S A Reserve Bank (SARB), effectively through the Office of the Registrar of Banks. However, banks are also subject to a plethora of other regulations effected through a range of government departments. Some of these are:

• The National Credit Act (NCA) under the Department of Trade and Industry (DTI)
• The Consumer Protection Act under DTI
• The Financial Advisory and Intermediary Services Act administered by the Financial Services Board (FSB)
• The Public Protection of Personal Information Bill under the Department of Justice
• The Financial Intelligence Centre Act under the Department of Finance
• The Home Loans Mortgage Disclosure Act under the Department of Human Settlements

These, and other, areas of regulation, promoted by different departments, create an uncoordinated regulatory environment. This increases costs, makes efforts towards financial inclusion difficult and militates against the broader financial industry and government engaging to discuss the industry at a strategic level.

The Banking Association SA (BASA), on behalf of its members, has welcomed the intention of National Treasury to implement a twin-peaks model of regulation for the industry. We considered, in welcoming the twin-peaks model, the regulatory landscape referred to above.

The following is pertinent to our position on the twin-peaks model:

The SARB, and particularly the Office of the Registrar of Banks, has been a very good prudential regulator of the banking sector. Their regulatory approach is one that engages the sector substantially and arrives at its regulatory decisions after such engagement. The engagement includes discussion on the role of the sector, the national and global context and any possible unintended consequences of regulation. Yet, such engagement does not detract from the robustness of regulations and the independence of the regulator. BASA is of the view that SARB is the appropriate body to oversee the regulation of the entire financial sector, given its performance to date in regulating the prudential business of banks. Our engagements assure us that the capacity of SARB will be enhanced to include expertise in prudential regulation of non-banks sectors of the industry. We have thus supported the prudential regulation peak under SARB.

We are in favour of the market conduct peak under the FSB. We are assured, in discussion with National Treasury, that the capacity in the FSB will be enhanced to include market conduct expertise in the banking sector. This is necessary because the FSB has in the past been responsible for regulating the non-bank financial sector primarily.

We also take the view the twin-peaks model provides an opportunity to create a coordinated market conduct regulatory regime, just as the prudential peak coordinates prudential regulation in the industry. We are thus proposing that all market conduct regulation be included in the market conduct peak under the FSB, irrespective of which government department is currently responsible for such regulation. We believe this will afford the Market Conduct Regulator an overview of the entire industry, together with regulations relevant to the industry. We are convinced a single ministry, The Ministry of Finance, overseeing the totality of the regulatory environment for the entire industry will be a critical factor in the success of the twin-peaks model. We believe this will also be a critical factor in ensuring the appropriate regulation of the industry and enabling the industry to remain at the cutting edge of international best practice, while broadening financial inclusion.

The global financial crisis beginnings in the USA, and ultimately affecting the global economy, lead to a fundamental review of the regulation of the financial sector. The National Treasury has introduced discussion and debate on the implementation of the twin-peaks model as an appropriate regulatory regime for the industry. Separate prudential and market conduct peaks, under the political guidance of National Treasury is an appropriate model. However, we would be missing an opportunity if we do not, as a country, agree financial industry regulation must be coordinated and all regulation affecting the industry must be brought under one of the two peaks! The financial industry is a critical asset of our country. We must be proud of the industry and we must regulate the industry to maintain, and develop, this asset.

By Cas Coovadia,South African Banking Association