‘Twin Peaks’ financial regulation

By Andrew Godwin

SINCE 1998, almost 80% of OECD countries have changed their regulatory architecture. The growing complexity of financial products, the increasing challenge of regulating large financial conglomerates, and the global financial crisis (GFC) have made effective regulation a key priority for economies around the world. One of the identified trends in recent years has been a departure from the sectoral or institutional model of regulation – under which entities are regulated according to the sector in which they operate, or their legal form – and a move towards the “Twin Peaks” model.

This column outlines the three main models for financial regulation and introduces a new book on the Twin Peaks model of financial regulation.


The dominant models of financial regulation can be summarised as falling into three broad categories: the “institutional” or “sectoral” model; the “integrated” or “super-regulator” model; and the “Twin Peaks” model.

The institutional or sectoral model

The institutional or sectoral model focuses on the form of the regulated institution (e.g. a bank, insurer or a securities firm) and establishes a separate specialist regulator for that institution. Under this approach, the relevant regulator supervises all activities undertaken by the institution that fall within the scope of financial regulation, irrespective of the market or sector in which the activities take place, and the institution is normally regulated by one regulator alone.

'Twin Peaks' financial regulationThe institutional approach is often referred to as an offshoot of the broader sectoral approach, under which institutions are regulated by reference to the sector in which they operate, or the products or business in which they engage. For example, where a financial institution offers banking products and life insurance, it might be regulated by both the banking regulator and the insurance regulator.

China’s model of financial regulation can best be described as a modified institutional model, with a separate regulator for the banking and insurance sector – the China Banking and Insurance Regulatory Commission (CBIRC) – and a separate regulator for the securities sector, the China Securities Regulatory Commission (CSRC).

The sectoral or operational model, like the institutional model, becomes increasingly difficult to operate as the complexity of financial products increases, as well as the complexity of financial institutions, as reflected in the emergence of financial conglomerates. This potentially causes co-ordination problems and regulatory overlap between the relevant regulators.

The integrated or super-regulator model

The integrated or super-regulator model 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.

This model was championed by the UK prior to its move to a Twin Peaks model in 2012. One of the perceived problems with this model, however, is that prudential regulation and market conduct regulation often involve different regulatory cultures and approaches. Another issue with this model is that a single regulator is less likely to have a clear focus on the different regulatory objectives, and might end up focusing on one objective over the other objectives.

The Twin Peaks model

The third regulatory model is the Twin Peaks model. In the past two decades, this model has gained significant traction since it was pioneered in Australia in 1998. The Twin Peaks model of financial regulation sees regulation split into two broad regulatory functions – market conduct regulation and prudential regulation – with a separate peak regulator for each function.

Put simply, prudential regulation concerns the regulation and supervision of specific institutions, such as banks, insurance companies and superannuation funds, to ensure that they are financially sound and are able to meet their financial promises to their clients. The primary focus is therefore on the financial soundness of these institutions. In Australia, this function is vested in the Australian Prudential Regulation Authority (APRA).

Market conduct regulation, on the other hand, concerns the regulation and supervision of all firms that hold a financial services licence, to ensure that they comply with all applicable laws and regulations and that consumers are adequately protected. The primary focus is therefore on consumer protection and compliance with the rules. In Australia, this function is vested in the Australian Securities and Investments Commission (ASIC).

The Twin Peaks model has been adopted by the Netherlands, Belgium, New Zealand, the UK and, more recently, South Africa. The model has also been considered by the US.

According to the International Monetary Fund (IMF), part of Australia’s relative success throughout the GFC was its “well-developed regulatory and supervisory structure”. Despite the model being severely tested in Australia as a result of various financial institutions’ collapses, financial crises and scandals, it appears to have maintained its resilience. It is relevant to note that no jurisdiction that has adopted the Twin Peaks model has yet changed to another model.


When compared with the institutional model, the Twin Peaks model is less susceptible to functional overlap and the resulting territorial conflicts that emerge when two or more regulators are responsible for one area of regulation, such as prudential regulation. When compared with the integrated – or super-regulator – approach, the Twin Peaks model is less susceptible to the internal conflicts of interest that arise as a result of the concentration of regulatory functions in one regulator.

Further, regulatory culture, which encompasses the attitudes, policies and practices adopted by regulators in fulfilling their objectives, can be fostered depending on the function of the regulator and the culture that it needs to perform its role effectively. This avoids the issue of having multiple “cultures” under the one roof, as might be the case with a super-regulator where different cultures arise as a result of the different regulatory objectives. Finally, the model may be better adapted towards keeping pace with the growing complexity of financial markets and the continuing rise of financial conglomerates.

There are also a number of perceived disadvantages of the Twin Peaks model. First, it may create regulatory overlap with dual-regulated entities. Second, there is a general risk that co-operation and co-ordination between the regulators will not be sufficient, with potentially serious consequences. While these risks can be managed through robust co-ordination and liaison channels, it nevertheless remains a key concern for jurisdictions that have adopted the Twin Peaks model.

A new book I have co-edited with Andrew Schmulow titled The Cambridge Handbook of Twin Peaks Financial Regulation, published by Cambridge University Press in June 2021, contains contributions from more than 30 scholars and senior regulators. It provides an in-depth analysis of the similarities and differences in the Twin Peaks regimes that have been adopted around the world, and offers a comparative look at the potential suitability of the model in leading non-Twin Peaks jurisdictions, including mainland China and the Hong Kong Special Administrative Region. In his foreword to the book, Professor Howell Jackson of Harvard University notes the following:

The Cambridge Handbook of Twin Peaks Financial Regulation does an admirable job of reconstructing the history of the Twin Peaks revolution, with contributions from those who were present at the founding, as well as expert commentators on all of the major jurisdictions that have adopted the Twin Peaks regime, along with several others from jurisdictions likely headed in that direction in the near future. With this volume, the readers will find a richly documented education of the paths that Twin Peaks reforms have followed, as well as the most promising steps forward. One of the virtues of this collection is that it includes chapters exploring the implications and potential value of Twin Peaks reforms for countries such as Israel or China that maintain more traditional regulatory structures.

I am pleased to recommend this book to readers.

Andrew GodwinA former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s other book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.law.asia. Andrew is currently on secondment to the ALRC as special counsel to assist with its inquiry into corporations and financial services regulation.