Twin Peaks; twin fallacies

Are National Treasury and the Financial Services Board once again attempting to stampede Parliament? Have they embarked on an entirely unprecedented, improper and transparent marketing campaign to lull members of Parliament and the public into a false sense of comfort about “Twin Peaks”, the proposed new regulatory system for South Africa’s banks and insurers? Are they able to justify their claim that the Financial Services Regulation Bill (FSRB) will solve so many vague, unspecified and ill-researched financial stability and consumer related “problems”?

Twin Peaks will provide no more protection than already exists under current legislation. All the necessary laws and regulatory facilities already exist within the purview and under the aegis of a single regulator, the FSB. The FSRB however, spectacularly increases bureaucrats’ powers to make laws without the oversight or rigour of Parliament. Moreover, it introduces a sense of schizophrenia into our legislation by demanding that one industry should now serve two masters, with each one being kept in sync by yet a third new bureaucratic body. In addition, it is so designed as to massively increase costs for all South African consumers.

The well-established first ‘peak’, that of “prudential regulation” (solvency), is to be hived off to the South African Reserve Bank. The second ‘peak’, that of “conduct regulation”, is the one that raises real concern. Here government officials intend grabbing untrammelled powers to set “standards” by which banks and insurers will be instructed as to what products they should provide, how to design them, how much to charge for them, how to advertise and sell them, who may sell them, what to pay for such distribution, who may buy them and what benefits and provisions should and should not be included. Market innovation will become the realm of the regulatory committee, inevitably including wards of the state in protected employment.
A conservative initial cost estimate for Twin Peaks calculated by a Wits finance professor is R4.8bn per annum. To quote a Treasury official, the intention is to have “pre-emptive, intensive and intrusive” powers to interfere in the operations of private banks and insurers to ensure market activity befitting a particular paradigm set by the bureaucracy. Moreover, with Twin Peaks South Africa will be importing rapidly failing regulation that is still experimental in the UK and now under ‘Brexit’ review.

All this, yet apparently no Socio-Economic Impact Assessment (SEIA) is deemed necessary. They say that because they have been working on this split-personality idea for five whole years, who needs an impact assessment?

Since neither the Bill nor any of the accompanying voluminous documentation provides any detailed or objective criteria for what “conduct regulation” might actually be, Parliament is being railroaded into authorising unaccountable bureaucrats to do something unknown and unknowable.

For over a century South Africa’s system of financial regulation has been successful with very few failures. It is based on a simple golden rule: One market, One regulator. The schizophrenic idea of splitting oversight between two regulators will create enormous and sometimes irreconcilable difficulties for companies already straining under excessively burdensome regulation. Naturally, the consumer will pay through yet higher premiums and reduced choice.

This intricate and complex piece of legislation is riddled with flaws and obvious unintended consequences. It should be returned to Treasury immediately with an instruction to resubmit it according to stated Cabinet policy with a properly conducted, independent Social and Economic Impact Assessment (SEIA). Without that Parliament is in no position to consider this Bill.
The SEIA should of course include an empirical study of the actual problem to be addressed and an analysis of how the constitutional separation of powers will be compromised when regulators apply, adjudicate, penalise, fine and keep for themselves monies taken according to laws that they have created for themselves.

Author: Chris Hattingh, Free Market Foundation intern. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

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