Twin Peaks and Financial Regulation: The Challenges of Increasing Regulatory Overlap and Expanding Responsibilities

In recent years there has been a renewed emphasis on improving the regulatory frameworks of financial systems, in part as a response to the global financial crisis (‘GFC’). This has included a focus on how institutional design can promote financial stability. Support for the continued importance of institutional design in financial stability has often looked to the relatively positive performance during the financial crisis of some countries, including Australia, which have implemented the so-called ‘Twin Peaks’ model of financial infrastructure. This has led several countries to consider adopting various forms of the Twin Peaks model.

In a paper we recently co-authored (available here), we examine how the Twin Peaks Model in Australia has responded to financial collapses and challenges since its implementation. Although isolated corporate collapses do not necessarily indicate regulatory failure, it is useful, in light of the wholesale rethink that is taking place after an event such as the GFC and the increased move towards some form of the Twin Peaks Model of regulation internationally in response to the GFC, to consider whether these experiences suggest ongoing regulatory challenges. By exploring these common themes in financial regulation by reference to various financial collapses and challenges, we provide an indication of where, even in the absence of a major financial crisis, Australia might focus its reform agenda and improve the current financial regulatory framework.

We argue that the Twin Peaks Model in Australia continues to face regulatory challenges in certain areas. The first challenge relates to the coordination mechanisms between Australia’s key financial regulators. Although reforms have been made to address challenges identified through various collapses, there continues to be a preference for informal bilateral and multilateral coordination mechanisms over formal, statute-based mechanisms. Where coordination has been identified as a problem, regulators have responded by enhancing regulatory memoranda of understanding and establishing informal information-sharing measures to make sure that each regulator is aware of the role of other regulators in the system. Although such coordination mechanisms appear to have served Australia well to date, it is likely that the regulators will continue to face the difficulty inherent in a multi-agency regulatory structure such as the Twin Peaks Model where the performance of one regulator is often dependent on that of the other regulator.

The second challenge is that of establishing the borders of financial regulation and allocating functions between the market conduct regulator, the Australian Securities and Investments Commission (‘ASIC’), and the prudential regulator, the Australian Prudential Regulatory Authority (‘APRA’) (what we refer to as ‘border challenges’). In particular, the increased focus on systemic stability and macroprudential regulation has resulted in regulatory overlap between the two regulators and a debate regarding the regulatory tools that ASIC should have, and whether these should include tools that have traditionally been associated with prudential regulation, such as the power to impose capital requirements.

The challenges explored in our paper provide an opportunity to reflect on Australia’s current regulatory framework and its relative strengths and weaknesses. Although Australia did not experience the same negative effects from the GFC as many other jurisdictions, it is important to review the regulatory framework to ensure that it meets the needs of Australia’s evolving financial system. The analysis is also useful in highlighting these challenges so that foreign jurisdictions considering implementing a model similar to the Twin Peaks Model are aware of the potential challenges that may arise under such a model.

Andrew Godwin is an Associate Professor at Melbourne Law School.

Steve Kourabas is a Lecturer at Monash University Faculty of Law.

Ian Ramsay is the Harold Ford Professor of Commercial Law at Melbourne Law School.