As Parliament mulls the new regulatory framework to govern South Africa’s financial industry, the sector is preparing for its promulgation; however, it will require a complete “rethink” of the way regulators guide financial institutions.

The tabling of the Financial Sector Regulation (FSR) Bill in Parliament, in October, was the first step in implementing the new multipronged ‘Twin Peaks’ approach that aimed to plug the structural weaknesses in financial sector supervision revealed in the wake of the global financial crisis in 2008.

The Twin Peaks framework comprised two primary financial regulators – one to ensure the financial safety and soundness of financial institutions, such as banks, insurers and financial conglomerates, and the other to ensure the integrity and efficiency of financial markets, better protect financial customers and ensure that they are treated fairly by the financial institutions.

However, the adoption of the new framework would require a restructure of the current regulators’ approach to see a shift into the mode dictated by the new regulations – a “complex” task that would likely take a number of years to complete with a significant amount of collaboration and upskilling, it emerged at the Banking Association South Africa Banking Summit 2015, held in Rosebank, on Thursday.

While the industry supported the aims and processes of the incoming regulations, there seemed to be some apprehension around organisational and structural challenges, as well as undetermined costs, that would face the financial sector, as a full overhaul and redesign of the processes and systems to comply with the new laws were implemented.

“It is going to be a journey of discovery . . . over the next year or two or three as the Bill is promulgated,” commented Association for Savings and Investment South Africa deputy CEO Peter Dempsey.

The adoption of the regulations was aimed at improving the efficiency and effectiveness of the financial regulations of one of the most interconnected financial systems in the world, added Financial Services Board (FSB) deputy executive officer Jonathan Dixon.

He added that Twin Peaks would lead to a fundamental paradigm shift in market regulation, bringing about a change in scope in the way markets were regulated.

The first phase, which would kick off in the months following the passing of the Bill, would see the establishment of a new standalone market conduct authoritym the Financial Sector Conduct Authority (FSCA) and a Prudential Authority (PA), which would operate under the auspices of the South African Reserve Bank (SARB), replacing the FSB and the SARB’s supervision department respectively.

The FSB was in the process of reviewing its structures, frameworks and resources in preparation for the shift to its new Twin Peaks focus and its new role as the FSCA overseeing the conduct of financial institutions, including the fair treatment of financial customers, the enhancement of the efficiency and integrity of the financial system and the provision of financial programmes to educate the consumer in financial matters.

Regulators would be required to shift from a backward-looking, compliance-based, once-size-fits-all, silo approach to one that was forward-looking, preemptive and proactive, outcomes- and risk-based, comprehensive and consistent, intensive and intrusive – all informed by the “treating customers fairly” or TCF principle.

However, Dixon assured that, after five years, a lot of progress had already been made in putting the required measures in place.

Meanwhile, the PA, which would supervise the safety and soundness of financial institutions, would also see a significant shift in its approach.

SARB deputy governor Kuben Naidoo said the mechanics to establish the PA were advanced, as the regulations shifted to the supervision of financial conglomerates and not just individual institutions such as banks and insurance companies.

“It will take us some time to figure it out, [to learn to] oversee financial conglomerates,” he said.

The PA was expected to be established and absorbed into SARB within six months of the FSR’s promulgation, with plans to start requesting information from financial conglomerates early next year.

The SARB was responsible for the regulation’s financial stability oversight committee, financial market infrastructure and resolution authority.

The second phase of the reform process would be even more far-reaching, with the legal frameworks for the prudential and market conduct regulations developed, harmonised and strengthened.

Once fully phased in, the Twin Peaks system would facilitate a more harmonised system of licensing, supervision, enforcement, customer complaints, appeals and consumer advice and education across the financial sector.