Media release: Twin peaks or twin daggers for the insurance industry and consumers?

The Financial Services Board (FSB) and National Treasury is lulling consumers, Parliament and the public into a false sense of security into thinking that Twin Peaks, the new regulatory system for SA’s financial sectors will solve perceived financial stability and consumer related problems. It won’t. Twin Peaks will not provide any more protection than already exists in current legislation and common law but will massively increase compliance costs for the industry and therefore consumers.

This is according to Professor Robert Vivian, WITs School of Economic and Business Sciences and Leon Louw, executive director, Free Market Foundation (FMF), speaking at a FMF media briefing this week.  The FSB operations are increasingly violating the rule of law and separation of powers.

“Twin Peaks” is not new; the two regulatory peaks have existed from some time. What is new is the new regulatory system to be introduced by proposed Financial Sector Regulation Bill (FSRB), which separates the existing peaks allocating these to two regulatory bureaucracies. Peak one - Prudential regulation - will move to the South African Reserve Bank while the FSB will be given Peak two - ‘market conduct’. Regulation of the two existing peaks will be split for the first time.  Two different regulators will now regulate each institution. A third government body will oversee the inevitable conflicts that will arise from two regulators, trying to regulate the same financial institutions. Existing legislation already covers the actual regulatory aspects. For example, it is often said financial products are mis-sold.  FAIS was specifically enacted to deal with this issue and, by their own admission, failed dismally. All Twin Peaks does is add billions in additional cost per annum without benefits.

In introducing the new regulatory system, South Africa will be following the UK system, instituted to replace the earlier failed regulatory system. The new system has no identifiable benefits and is being launched in times of economic hardships when it can least be afforded.

According to Vivian, this will constitute the most expensive and ambitious regulatory experiment, “a power grab”, in the history of South Africa. Insurance that has its own proven, cost effective holistic system of regulation that has worked successfully for 110 years. In the current system prudential and market conduct, one regulator is responsible for both peaks.

“These Bills will have far reaching and damaging effects on financial markets including the insurance industry, which is fundamental to SA’s economy. The Twin Peaks merely creates a new regulatory regime and there are no substantive details of what will make the market more secure,” said Vivian.  

“In reality Twin Peaks should be called Twin Daggers,” said Louw. “It compounds complexity, red tape and costs by multiplying regulatory agencies, regulators and staff. It will stifle innovation, reduce consumer choice and destroy jobs mainly in the dwindling number of smaller black brokers already struggling to survive under the crippling impact of the Financial Advisory and Intermediary and Services Act 37 of 2002 (FAIS) making it profoundly anti-transformational”.

Vivian said that a conservative cost estimate for Twin Peaks is R4.8 bn per annum with no quantification of costs (government or private) or identified benefits while placing a heavy compliance burden on companies whose customers will pick up the cost in higher premiums and other charges.

Louw said all legislation should address some ‘basic mischief’, some known problem that the law seeks to remedy which the FSB has failed so far to explain. Instead the FSB uses amorphous statements such as ‘global financial crisis’, ‘problems’, ‘risks’, ‘international obligations’ and ‘abuses’ which do not stand up to scrutiny. For example, there are no ‘international obligations’, only recommendations from voluntary industry bodies which SA is under no obligation to accept.”

According to Louw, there is no rational nexus (between measures and benefits) and no attempt to understand the unintended consequences of the proposed legislation. Crucially, no independent regulatory impact assessment (RII) study has been undertaken as required before any new law is passed.

Louw said that Professor Vivian’s description of the FSB being “a unitary state within a state” captured the violation the rule of law and separation of powers. “The FSB renders Parliament redundant: it now legislates its own laws without Parliament, executes these laws, tries and convicts offenders with its own institutions without the judiciary, imposes and collects its own taxes, negotiates then keeps the fines. “This last point is why the FSB says it operates at no cost to the Treasury – it raises income from private companies who are too scared of its powers to raise objections to levies or fines or to new, absurd FSB legislation”, said Louw.

The way forward is to undertake a comprehensive independent analysis of the perceived problems, the “mischief” the legislation is supposed to address and conduct a full risk assessment impact study. Then a frank and cooperative industry/government review of the supposed “mischiefs” and agreement on the best way, if any, to correct these should follow. Without a known problem, there should be no new legislation. As it stands, Twin Peaks, will not solve any of the problems consumers and Parliamentarians are being told it will and consumers and taxpayers will pay, as always.





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