SECP objects SBP proposal

The Securities and Exchange Commission of Pakistan has strongly opposed the State Bank of Pakistan's proposal to obtain oversight of 23 Non-Bank Financial Companies (NBFCs) and business groups managing both financial and commercial concerns.
Oversight of 23 NBFCs, groups simultaneously managing financial, commercial concerns:
The proposal is required to be examined from an operational and legal point of view as it will result in overlap and multiplicity of regulatory jurisdictions over financial and non-financial entities.
The proposed amendments proposed by SBP for consolidated supervision in banking law would be a "retrogressive step" as it will effectively turn the Central Bank into a corporate and securities regulator, argues SECP.
Further, the concerns raised by SBP have been addressed internationally though introduction of Unified Regulation but away from the Central Bank whose primary role is the formulation of Monetary Policy, Payment system and overall stability of the financial system, the SECP adds.
SECP has asked the Federal Government to take a holistic view of how the overall financial regulatory framework of the country be framed since SBP's proposal to the Ministry of Finance only offers "a piecemeal solution". Further, it needs to be examined from an operational and legal point of view as it will result in overlap and multiplicity of regulatory jurisdictions over financial and non-financial entities.
SBP's stated cause of concerns, SECP feels, can be addressed through prudential regulations and co-ordination among regulators and also does not follow international trend. Prior to formulation, the proposal needs to be discussed with important stakeholders, ie, market representative associations, ICAP, etc.
The need to ring-fence a bank from a contagion risk (elsewhere) but within the owner group can be contained through effective prudential regulation eg restriction on investment in associated companies, related party transactions and shareholding restriction.
Reputional risks cannot be contained even through consolidated supervision, while arbitrage can be addressed through prudential regulation and co-ordination. As far as NBFCs are concerned, the issue of Double Gearing has already been addressed in existing laws. SECP recalled that effective co-ordination between SECP and SBP addressed the default by the defunct Crescent Investment Bank Limited.
According to SECP, SBP proposal fails to define deposit taking. Public at large is exposed to risks not only in cases of direct deposit taking but also through investments and product offered by market eg insurance, securities, private business, COI/COD, Musharika etc.
SECP point out that even banks can fail or be in distress like the Bank of Punjab, therefore government needs to take a policy decision whether government (in effect tax payers) should guarantee solvency for private sector institutions in a post-privatisation scenario.
Banks and NBFCs are primarily geared towards different markets. When operating in the same market, they however offer different products which are economically beneficial, this also increase competition. Therefore, NBFCs need different regulatory treatment than those required for banks, SECP emphasised.
It also needs to be recalled that it was on SBP's initiative NBFCs were transferred to SECP - just five years ago. The reasons for transfer need to be studied before any reversal and leasing companies were always with SECP. SECP emphasised the need for not only consulting the stakeholders but also underscored the need for undertaking a Regulatory Impact Assessment exercise before any governmental decision on the SBP proposal for consolidated supervision.
GROUP REGULATION: SECP said SBP's proposal does not provide any definition of what constitutes a "Group". Existing laws offer different definitions ie for group of companies, business group etc and different relationships among companies and individuals is used to define "group".
Group of companies are defined in a restrictive sense. It only includes holding company and its subsidiaries; while business group include companies, undertakings, not for profit organisations etc - too complex and wide - as holding could be in the name of individuals. Shareholding patterns can be overly complex and designed to veil ownerships.
The Finance Bill FY07 aimed to simplify the current holding structures and provided incentives to existing business groups to adopt the SECP proposed holding company structure. Therefore, tightening of regulatory framework will be counterproductive. Sequencing of reform process is essential and ownership structure should be simplified first, SECP added.
BASLE PRINCIPLES: SBP has initiated the implementation of the new Basle-II minimum capital adequacy requirements. Among other things, SBP has now proposed consolidated supervision of all aspects of the business conducted by the group world-wide to be compliant under Basle-II.
SECP points out that CP-24 is more in reference to cross border supervision than domestic supervision. It talks more about information sharing and co-ordination among supervisors. Further, CP-20 also does not lay down the concept of lead regulator - which SBP wants to be.
SECP feels that SBP's proposal not only lacks clarity but is also contradictory. The role and scope of lead and functional supervisors is not defined and powers proposed for SBP as lead regulator contradict the proposal for the functional supervisor.
Since regulation making, inspections and action taking is being sought by SBP as a lead regulator with functional supervisor devoid of any responsibility. In effect, says SECP, SBP now the sole banking sector regulator after amendments proposed in BCO would turn into a corporate and securities regulator having overlapping and multiplicity jurisdiction with SECP.
As a result, they will create ambiguity for market players and also increase their regulatory cost. The bottom line as far as SECP is concerned is that "financial and non-financial companies within a group cannot be treated with the same yardstick."
ADB: Realising that the capital market loan from Asian Development Bank is basically meant for balance of support purposes and the government is keen to avail this loan by quickly meeting the conditionalities therein, the corporate regulator has pointed to contradictory conditionalities in different programme loans. Thus clarity is required on these conditionalities and previous and completed reform processes should not be linked with new ones. Financial Sector Law (FSL) and NBFC law conditionality form part of the second generation Capital Market Reform.