‘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.

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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.