Regulatory rules

In the midst of the political turmoil, the pressing priority for government and its allies is to repair the financial systems and restore the economy. Just as important, however, will be addressing the serious flaws in regulatory rules. Some of these laws have been written decades ago. In addition, many ad hoc changes have been made over time to these regulations. As a result Pakistan's financial sector is suffering from governance breaches and inconsistencies. The need is thus for pursuing comprehensive regulatory reforms to rebuild the confidence of the investors, people familiar with the matter say.
In Pakistan, there are a number of regulatory organisations involved in oversight of the market. Such as the Securities and Exchange Commission of Pakistan, the Competition Commission Pakistan, the Federal Board of Revenue, the State Bank, etc. It is very likely here that two financial companies providing virtually identical products with similar economic attributes may be regulated quite differently. Thus, the regulatory system evolves in an unpredicted way and allows the regulatory arbitrage.
A range of regulatory experts has urged the SECP to reconsider its rules in the areas ranging from insurance, non-banking financial companies, the derivatives and short selling, to the practices of Moradabad and credit rating agencies claiming that the review would be welcomed by investors. Critics of the rules accuse however, that the big financial regulators such as the SECP, the State Bank and CCP make rules by issuing circulars. They opine that in order to insure transparency, the regulators should publish the draft of the proposed regulations, which should clearly state the objectives of the new regulations, the problems they seek to address, the expected outcome and a cost-benefit analysis of the proposed regulations. This should be made available for public comments and before turning the proposals into regulations, the regulators must publish all the comments they received and a general account of their response to these comments.
But when we put this critique to financial experts they concede that the critics have a point but add: Past efforts at reform have been stonewalled by country's big-business lobby. Experts say there is still a risk that the regulator will give in to lobbying. Thus, the amendment to the SECP's rules such as the 2000 Insurance Ordinance, 1969, Securities and Exchange Ordinance and the 1984 Companies Ordinance would be challenging but it would be unfortunate if the review gets dust just because of disagreements.
The traditional regulatory mechanism for dealing with corporate wrongdoing has always been to enhance the rules. Executives and academics agree, however, that updating the regulations and market practices would not be enough. According to them, reforming and modernising our regulatory architecture is necessary. They reason that with uneven capabilities and competition among themselves the regulators would remain unable to address the root cause of the problem. Consequently, to extend focus on new regulation would create chaos: we must also revolutionise the regulatory system, executives add.
The renewed interest of investors in our equities has the impetus for doing what many, including myself, have repeatedly called for: the reassessment of regulatory balance between ethics and rules and reforming the regulatory architecture.
Regulators across the globe are adopting a less rule-based approach to address the complex regulatory challenges. The UK Financial Services Authority (FSA) leads the way in the development of ethics-based regulation of the financial services industry. The emphasis on integrity and ethics is the hallmark of the agency's regulatory approach today. Since taking on the role of chief executive at the UK's new Financial Conduct Authority (FCA), Martin Wheatley has been outspoken about implementing new reforms in the financial sector. He has delivered a number of recent speeches about his agency new approach to regulations. For example, in a speech at Mansion house, last year, he defined some of the overarching principles for financial services industry. Wheatley stated: The traditional mechanism for dealing with a lapse has been to beef up the rules. Quoting Roger Steare, author of the behavioural finance book Ethicability, he added: "'At their worst, rules, laws, regulations and red tape have a tendency to multiply because they remove our responsibility for deciding what is right'."
Most fascinating, however, has been the vigorous push for reforms from die-hard resisters of change - the US Securities and Exchange Commission. The regulator's renewed interest to rewriting the rules of financial markets in response to rapidly changing technology and market behaviour was detailed by Luis A. Aguilar commissioner, US Securities and Exchange Commission, in a speech.
Speaking at the Securities Enforcement Forum in Washington, the commissioner acknowledged that "the remedies and penalties did not effectively deter corporate crooks from engaging in egregious fraud." When trying to explain the need of new regulatory approach Luis said: The Securities and Exchange Commission (SEC) must re-evaluate the strength of its initial settlements and "specifically design" a program to combat fraudsters.
In a significant move towards less regulatory oversight, the government of Australia has slashed funding to the corporate watchdog the ASIC to promote the corporate self-regulation. According to confirmed news reports, ASIC's registry business - which includes oversight of business registrations, company searches and other documents also looks set to be privatised as part of the Abbott government's plans to 'reduce the footprint' of the federal government.
The voice for global regulatory reforms echoed with full force at Davos, Switzerland this year when Shinzo Abe, the Japanese prime minister told the world that he "would bore through the country's regulatory bedrock to unlock growth". According to the Economist, Abe's Liberal Democratic Party (LDP) will soon draw up new corporate-governance rules, including guidance for firms to have independent directors on their boards. Such a code, voluntary yet forceful (since firms would have to explain any variation from it), would be Japan's first. It would give backbone to the stewardship rules. For hundreds of Japanese firms and their shareholders, the combination of the two would be little short of revolutionary.
From the above discussion, it could be argued that a less rule-based approach is getting popular and days of sheriff are on the beat. In addition, the relationship has been explicitly made in regulatory discourse that what is ethical is very often virtuous for business, or at least that what is unprincipled generally effects undesirably on business.
(The writer is a regulatory analyst. The views expressed in this article are not necessarily those of the newspaper)