The proposed Financial Services Commission Act has caused a considerable controversy, leaving financial experts, particularly those belonging to banking sector, in a state of not being certain about what is happening, what they should do and what something means.
There is also some confusion about what the correct procedure should be in relation to the proposed law. The State Bank of Pakistan has expressed fears while the Securities and Exchange Commission of Pakistan denies that the proposed Financial Services Commission Act 2007 could shift the regulatory oversight of the banking and money market services in the country.
According to the SECP, it is not involved in any underhand attempt to create a unified regulator for the financial sector and the intention to place the draft law for discussion is only "work in progress".
When the agenda for the SECP Policy Board meeting was issued, the SBP asked for a copy of the draft law. The SECP concedes that there was a delay in providing the draft to the central bank. However, the SBP was provided with the first draft as well as the amended draft just a day before the convening of a Policy Board meeting scheduled for the day. That meeting, however, could not be held due to the Advisor on Finance's visit to China.
The SECP official said that draft laws are always approved by the Federal Finance Ministry before these are placed to invite comments from the stakeholders. This time around, the SECP decided to take the drafts of FSC Act; Securities Act and Demutualisation Act to its Policy Board for discussion, prior to the submission for approval of the government, and, subsequent placement for comments before the stakeholders.
On the other hand, the banking sector as well as well-placed sources in the SBP are of the opinion that the reorganisation of the regulatory structure at this critical juncture is ill-advised as there are more pressing financial and economic issues than the introduction of a model of unified financial services commission. The banking sector faces major imminent challenges and contemplating a massive reorganisation of the regulatory function might deflect attention from the problems in hand.
It is felt that at present there is very limited inter-connectedness between the various segments of the financial sector ie the insurance, securities, pensions and banking sectors and hence maintaining the status quo would be more appropriate.
Furthermore, it is pointed out that Pakistan does not have enough financial resources and well-trained human capital to deal with the implementation of unified financial services commission. The concern is with regard to a potential reduction in regulatory capacity through loss of key personnel.
Many of the best bank supervisors may either prefer to remain with the State Bank of Pakistan or move to the private sector in view of perceived reduction in pay or status risks which joining a specialist regulatory body would possibly entail. The concern is that seasoned workers and qualified professionals that the Association interacts with would be lost. This is a serious consideration if the regulatory and supervisory function is not particularly strong or well staffed.
By and large, there is consensus that the State Bank of Pakistan already has an efficient system of regulation and supervision and hence structural improvement is not necessary. In most jurisdictions the unified system was introduced where the Central Bank did not appear to have an efficient system of regulation and supervision.
Multiple regulatory authorities take different approaches to regulation and supervision, yielding valuable information that would not be available by a single approach.
THERE ARE DIFFERENT MATRICES ADOPTED BY THE FEW UNIFIED REGULATORY AGENCIES WORLDWIDE. THESE ARE:
(i) Combined Securities and Insurance regulators
(ii) Combined Banking and Securities regulators
(iii) Combined Banking and Insurance regulators
(iv) Unified Supervision (within Central Bank)
(v) Unified Supervision (outside Central Bank)
It is therefore surprising that without any debate on the above matrices, the draft Act has been circulated.
It is feared that a single large regulatory and supervisory authority would not only have excessive powers but would also become excessively bureaucratic and inefficient.
In Pakistan, banks are the conduits through which changes in short-term interest rates are transmitted; the State Bank of Pakistan needs to have accurate and timely information about the conditions and performance of banks as a precondition for effective conduct of monetary policy. In addition, without "hands on" Bank Regulation and Supervision responsibility, the State Bank of Pakistan may take too little account of conditions in the banking sector when setting monetary policy.
Further, the State Bank of Pakistan needs to have access to information on the solvency and liquidity of banks in order to exercise its function of lender of last resort. Having such information in a timely manner is especially crucial in times of financial crises, and the best way to ensure access is by assigning on-going banking supervision responsibility to the State Bank of Pakistan. Having supervisory power may also aid the State Bank of Pakistan in acting quickly and precisely via the banking system in time of crisis.
Also, internationally it is well recognised that countries with banking regulation, supervision and monetary policy combined in their central banks had fewer bank failures.
Independence for bank supervisory authorities enhances their ability to enforce actions. The State Bank of Pakistan has a strong statutory guarantee of their independence, so assigning them with bank supervision promotes the kind of independent action necessary for successful banking system supervision. Clearly the strategy of entrusting Bank Regulation and Supervision to the State Bank of Pakistan is particularly important in emerging market economies, in order to increase the chances of avoiding "politicisation of bank regulation."
It is emphasised the State Bank of Pakistan has an advantage in recruiting and retaining the best staff, due to its ability to provide superior compensation and professional development to its personnel. It is the only regulator in Pakistan where we have seen effective and meaningful career development and recruitment on merit.
Although the draft Act defines Financial Services, it does not exclude banking and money market services, thereby giving more credence to bankers contention that the SECP is overreaching its position. In addition, the law also empowers the new Commission to freeze bank accounts directly without any reference to the State Bank. The powers as given in the Act are even wider than what are available to the State Bank under the Banking Companies Ordinance, 1962.
The above powers coupled with the power (retained by the new Commission) to include the banking laws to the First Schedule to the Act demonstrates the intent of the legislative draftsman to also take the banking and supervisory function within the ambit of this draft Act at a future date without making any amendment in the law and without the need to go hack to parliament.
According to legal sources, the Banking Companies Act only infers that the SBP will regulate bank and money market services and to put any other regulator in its place would lead to a serious conflict and could become a nightmare.
Therefore, in order to give, what is termed as a 'belt and braces' comfort the draft FSC Act 2007 the definition clause must clearly state that 'Financial Service Markets' excludes banking and money market services.
Business Recorder along with Pakistan Banks Association and Overseas Chamber of Commerce was officially provided with a copy of draft FSC Act by the SECP on Friday last.
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