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Understanding the Twin Peaks architecture

The regulatory model is designed to prevent a financial crisis and protect consumers.

WARREN THOMPSON:  Twin Peaks regulation came into effect on April 1, but the rollout and implementation will take much longer. We spoke to Dr Andy Schmulow regarding the process.

ANDY SCHMULOW:  One of the advantages that the Twin Peaks model presents is really on an emotional and ideation level. It emphasises the importance of consumer protection. It places consumer protection on an equal footing to prudential regulation. Prudential regulation is concerned with ensuring that South Africa doesn’t suffer a financial crisis. So effectively what Twin Peaks has done is it’s taken what otherwise unquestionably has been regarded as the single most important priority, which is to prevent the occurrence of a financial crisis. And it says equal to that there’ll be the protection of consumers.

And so, if you are a consumer of financial products or financial services, this is going to reach far better outcomes for you.

WARREN THOMPSON:  Just give us a little bit around how it actually works, with respect obviously to the name as well. How is this set up to work, and how does it differ from what we had previously?

ANDY SCHMULOW:  What South Africa has had up to very recently is a sectoral emphasis. So entities are regulated depending on what sector they are from. There is a different regulator for banks and there’s a difference regulator for insurance companies and for securities issuers. That regulatory model is long past its best-before date and is not and has not been for a very long time fit-for-purpose.

The reason for that is that there have been changes in the financial sector and those changes involve entities in one particular sector purchasing entities in another sector. So now, instead of having these bright clear lines of delineation, banks on one side, insurance companies on the other, you now have banks that own insurers and insurers that own banks. And so the sectoral approach to regulation is simply no longer able to cope with developments in the modern financial industry. That’s the sectoral model and that’s the model that South Africa has had up to now. That’s one of four models.

There are another three models, and Twin Peaks is one of those three. The remaining two, also for other reasons, simply are no longer fit-for-purpose, no longer able to regulate the institutions that they are required to regulate, and are no longer able to do this in a manner that is reliable and fit-for-purpose.

So those three other regulatory models have now and are being abandoned elsewhere in the world, and they are being abandoned in favour of this so-called Twin Peaks model. ay.

The Twin Peaks model gets its name from the fact that it separates out these two core functions – on the one hand, prudential regulation. So prudential regulations are regulations which are designed to compel banks to act in a prudent manner. And by the means you can compel them to act in a prudent manner, because if they don’t act in a prudent manner they can precipitate a financial crisis. So we’ve got prudential regulations under one peak.

And then, under the other peak, we have a government agency, whose sole responsibility is to ensure that consumers are protected and that players in the market don’t engage in market misconduct. The reason why we know that is so important is because of the lessons we learnt during the global financial crisis.

The global financial crisis began as the subprime disaster, and the subprime disaster was a case of market misconduct and consumer abuse on an industrial scale. So the Americans had completely abandoned notions of market conduct and consumer protection. The way the Americans do things, it was survival of the fittest and we had very significant banks – Bank of America being one of them – engage in predatory lending and reckless lending to vulnerable communities. And when they’d done enough of that, those malpractices were actually able to metastasise into a financial crisis which swept the globe.

So today we understand very clearly the importance of consumer protection, and we understand that consumer protection is not only a word, a thing to do in and of itself, not only is it good and right and proper and just, it is also important because, if you don’t protect consumers, that can also became a source of financial crisis.

Now, one of the other models that’s out there, is the mega-regulator model, which is used in the United Kingdom and is still used in places like Singapore. They call their regulator in Singapore the All-seeing Eye. There are mega-regulators, single regulators elsewhere in the world.

But one of the things that we know today is that prudential regulation and consumer protection are, if not mutually exclusive, then they are at the very least frequently contradictory. So if you have only one agency, and that one agency does prudential regulation and consumer protection, then you can be absolutely sure that it’s not going to do one of those two things, because it can’t move in opposite directions at the same time.

WARREN THOMPSON:  Okay. So it’s very important  that the consumer-protection element is looked after as well. But just give me an idea – you alluded off-air to the fact that the Twin Peaks model in Australia is in crisis. Why is that?

ANDY SCHMULOW:  By way of background, let me say first that from my perspective and the perspective of my colleagues, and the research that we’ve engaged in and the data that we’ve analysed, there is absolutely no doubt in my mind that Twin Peaks is the superior regulatory architecture. But there is a very important and very significant difference between the regulatory architecture and its implementation. So it’s what I would describe as the difference between architecture and plumbing.

The architecture in Australia is world class, but the implementation of that regulatory model has been catastrophic and bad. So we have had scandals in the financial industry in Australia. But now go back 11 years, and those scandals have been producing banner headlines and really significant industry-rocking scandals at a rate of probably one every two months on average for the last 11 years. And through the breadth and the depth of those scandals we have had probably in excess of half a million consumers who have been ripped off in one way or another by one of the big four banks.

Those consumers who have been ripped off, the remediation for those consumers is now running into the tens of billions of dollars. And where has the regulator been while all this has been going on? Asleep at the wheel.

The situations have now got so bad in Australia that it almost brought the government down in November of last year. And the current prime minister, Malcolm Turnbull, sitting … on the most … majority in parliament – that’s a whole other story. The governing party did not have a majority in parliament, and he faced the threat of a revolt in his complete backbench MPs and said to them, if you don’t call for a royal commission next week, we are crossing the floor and we will bring the government down.

We have now established a royal commission of inquiry into the conduct in the banking sector and in the first ten days of this royal commission of inquiry, a commission which will run for a year, in the first ten days enough evidence has been produced before the commission and the commissioner has said I am now able to make findings of guilt on a whole range of issues in which the law has been broken, and I want to … from the regulator why it is that I have heard so much evidence from so many people who have said there are instances where the regulator contacted us to say, please don’t that because you’ll be breaking the law – and we ignored them. And then they contacted us to say, well now you’ve done it, you are breaking law and you must stop. We told them to [get lost] and they politely [got lost]. That has been the pattern of our regulatory enforcement in Australia.

The pattern of our regulatory enforcement in Australia is almost non-existent. And probably what was the ultimate culmination of 11 years of misconduct in our banking industry was a scandal affecting the biggest bank in the country, the most valuable company in the country, the most profitable company in the country, Commonwealth Bank, which was charged by the anti-money-laundering and counter-terrorism financing regulator for having breached money laundering and terrorist-financing laws 53 700 times. Let me just repeat that for your listeners tonight, who may think I didn’t hear that correctly. The biggest bank in our country, a bank that is underwritten by the Australian taxpayer, a bank that was guaranteed by the Australian taxpayer during the global financial crisis, breached money-laundering legislation 53 700 times. They were washing a billion – not a million– dollars a month in cash.

Who … needs to move a billion dollars a month in cash out of the country with no paper trail? The Salvation Army, …those funds? No, the methamphetamine trail. So the Commonwealth Bank, that is a bank, the most significant bank, the most significant financial institution in Australia, has been the conduit for an ice epidemic that is ravaging the country Australia. And thy were warned by the Australian Federal Police repeatedly. They were told repeatedly you are breaking the law, you are laundering money. We think some of this money is going to Lebanon, and from Lebanon it’s going to Isis so that it can fund their activities, cutting people’s heads off …

It has been revealed in internal emails Commonwealth Bank turned round and said, don’t worry about it. … We are Commonwealth Bank.

So the extent of lawbreaking, the extent of contempt for the law, the extent of the sheer depravity of what has been going on, the manner in which retirees have been fleeced of their life savings by criminal elements in the financial planning units which belong to – have a guess – Commonwealth Bank, these experiences of what is so expensive, they are … they have happened on so many occasions that we now have a Royal Commission of Inquiry to try and figure out why our financial industry simply regards itself, quite frankly, as above the law.


ANDY SCHMULOW:  So one of the things I’ve done – I was asked to serve on a panel advisors to advise the South African National Treasury on a new piece of legislation which will be the second piece of legislation to create twin peaks. I was asked to sit on this panel of experts to provide advice to the South African government, and I kept emphasising to them, over and over again, I’m so happy that you are going to adopt the Australian Twin Peaks architecture because it’s the best architecture. But please, for goodness sake, don’t make the mistakes we’ve made in Australia.

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“advantages…. on an emotional and ideation level…etc” ??!!
Incomprehensible garbage. Just take the existing rules and the regulators do their job properly instead of adding more layers of consultant billable time-wasting nonsense

Well, we can reach only one conclusion after reading this article. The regulators are human, just like the people they are trying to regulate. So, they make the same mistakes in the enforcement of the regulations that the banks make in the implementation of the regulations. The regulators developed such a sophisticated tool that no person that is willing to work for the salary of a regulator will be able to understand and implement it. Then the same politician who made the law, looks the other way to “support the economy and grow jobs.” This is the age-old cycle of financial crisis leading to more legislation, leading to a stagnant economy, leading to the scrapping of of legislation, leading financial growth.

“When a hammer is the only tool you have, every problem looks like a nail”. Those with the power to make laws, believe legislation is the magic cure to human nature, but they never realize that the same fallible humans have to enforce the legislation.

The more socialist society becomes, the more they believe in the power of the state, that central planning will protect them from themselves. In a socialist society individuals hand their individuality over to the state because they fear the responsibility of taking care of themselves.

End of comments.






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