Edition: May/July 2018


Big costs, questionable benefits

The new system for regulation of financial institutions is cause for serious concerns, Robert Vivian* believes.

In SA, before the Financial Advisory & Intermediaryn SA, before the Financial Advisory & Intermediary Services Act (FAIS) became effective in 2004, the regulatory paradigm was the rule of law. The relationship between financial institutions and their customers was determined by it, specifically by the common law of contract with disputes being resolved by the ordinary courts presided over by ordinary judges.

This simple system was the product of a long evolutionary process. In the West there’d been a strong dislike and distrust of special courts and specialist judges. Then came FAIS, now followed by Twin Peaks.

With FAIS, in line with the then prevailing philosophy, Acts were passed for a given specific reason. The expression used at the time was to correct a “manifest evil”. There had to be a manifest problem which, parliament felt, needed to be addressed.

The original purposes of FAIS have long been forgotten. It is now an entirely purposeless piece of legislation. Without a purpose, it acquired a life of its own. No measurable metrics having been maintained or reported since 2004. FAIS is a failure.

Against this background, over the years I’ve frequently asked: “What is the specific purpose of Twin Peaks?” To date, no answer has been provided.

An attempt was made to undertake a cost-to-benefit study. But as the Twin Peaks legislation has no defined measurable purpose, no estimate could be made of the value of its supposed benefits. At best it has this logic: “There was a global banking crisis around 2008. So now, at an annual cost of up to R6bn, we must have Twin Peaks.”

This is meaningless. The legislation contains not a single provision that could prevent either a local or global “banking crisis”.

Instead of maintaining the present regulatory system, National Treasury told parliament’s standing committee on finance that it needed a “draconian and intrusive system”. With unlimited arbitrary powers of intervention, Twin Peaks is the rule-of-law antithesis.

It has the objective of unelected and unaccountable regulators interfering as much as they deem necessary in the running of private financial institutions. And Treasury’s own conservative estimate of its annual costs is between R4,8bn and R6bn. These costs will be paid by stealth levies on financial institutions’ clients.

Moreover, Twin Peaks is not designed to operate within the framework of the rule of law. Precisely the opposite. It empowers the regulators to pass their own arbitrary “laws” through what are euphemistically referred to as “regulatory instruments”.

Parliament has been sidelined and is now largely irrelevant. So too are the courts as the regulators are empowered to adjudicate and impose fines on those whom they find “guilty” of regulatory breach.

There is to be an ever-growing number of “ombuds” with an overarching committee controlled by the regulator to ensure uniformity. The “ombuds” are not to be bound by the laws of parliament, the common law as developed by the courts or the contracts entered between parties. They needn’t follow the due process of law or even their own precedent.

These are the most disconcerting elements of the Twin Peaks system that SA is about to have.

* This is an edited version of a recent presentation by Robert Vivian, professor of finance and insurance in the Wits School of Economic & Business Sciences.