Is Australia's ‘Twin Peaks’ System of Financial Regulation a Model for China?

Countries have adopted different approaches or structures to financial regulation. The ‘institutional approach’ focuses on the form of the regulated institution (e.g. a bank, an insurer or a securities firm) and establishes a separate specialist regulator for that institution. This approach is often referred to as an offshoot of the ‘sectoral approach’, under which institutions are regulated by reference to the sector in which they operate. These approaches become increasingly difficult to operate as the complexity of financial products and financial institutions increases.

The ‘integrated’ or ‘super-regulator’ structure attempts to address the problems experienced by the institutional and sectoral approaches by creating a single regulator to monitor both the conduct of market participants and also the prudential soundness of financial institutions. One of the problems with this model, however, is that market conduct and prudential regulation are said to require fundamentally different approaches and cultures, and involve competing priorities and conflicts of interest.

The ‘twin peaks’ structure, on the other hand, regulates the market in accordance with two broad regulatory functions: first, market conduct integrity and consumer protection; second, prudential regulation and financial system stability. Each objective is pursued by a separate regulator, thus lending the name ‘twin peaks’ to the structure. Past experience reveals that some countries have frequently changed structures, particularly in response to financial collapse. Significantly, however, no country has yet changed from a twin peaks structure to another structure. Since it was pioneered in Australia in 1998, the twin peaks structure has been adopted by the Netherlands, Belgium, New Zealand and the United Kingdom. South Africa is currently in the process of changing to this structure, and it has also been considered by the US.

As China’s financial system has become more complex and integrated, calls have intensified for structural reform. In particular, many commentators have called for China to move towards the twin peaks structure of financial regulation. Our paper identifies various challenges associated with China’s current financial regulatory system and considers the insights that the experience of Australia and other twin peaks jurisdictions might offer as China contemplates reform. Although China’s move towards a twin peaks structure is by no means certain, particularly in view of the different reform proposals that have been advocated and the divergent voices within the current debate, it is important to be clear about what a twin peaks structure might look like as there is no archetypal twin peaks structure and various choices need to be made before it can be implemented.

The paper (1) provides an overview of the main structures of financial regulation and outlines the perceived advantages and disadvantages of the twin peaks structure; (2) examines the challenges in China under its current regulatory structure and the various reform proposals that have been advocated; (3) considers Australia’s experience by reference to two features that are critical to the effective implementation of the twin peaks structure - clarity in terms of regulatory objectives and effective regulatory coordination - and compares the approach in Australia with that in other twin peaks jurisdictions; and (4) explores insights that the experience in Australia and other twin peaks jurisdictions offers and which version of the twin peaks structure might be appropriate for China.

If China decides to move towards a twin peaks structure, it is important to consider which version would be appropriate. Our research on the experience in Australia and other jurisdictions that have adopted the twin peaks structure suggests that three questions are fundamental to the design of the twin peaks structure and to the selection of the appropriate version: (1) where should the prudential regulator be housed?; (2) how should the functions and objectives of the regulators be expressed?; and (3) how should effective coordination be achieved?

Andrew Godwin is a Senior Lecturer in Banking and Finance Law at Melbourne Law School, Guo Li is a Professor of Economic Law at Peking University Law School, and Ian Ramsay is the Harold Ford Professor of Commercial Law at Melbourne Law School.