The federal government has not taken any input of stakeholders, including Investment Bank Association of Pakistan, on the most sensitive issue of bringing non-bank financial companies (NBFCs) into the regulatory framework of the State Bank of Pakistan (SBP).
When contacted, Rashid Mansur, Chairman, Investment Bank Association of Pakistan, told Business Recorder on Wednesday that it was too early to comment on this extremely sensitive issue. "We have read in the newspapers that the government may bring NBFCs within the purview of the SBP. However, we have not been consulted to submit our viewpoint on the issue. The association is looking into this matter, for which we would soon hold members'' meeting to study the whole issue, he said.
"Who regulates the financial institutions is not important, but how we are being regulated is our main concern. However, the timing of changing regulators for the NBFCs is not understandable. The existing timing seems to be not appropriate in view of the current micro-economic situation and market conditions", Mansur added.
Other stakeholders were of the view that the most important stakeholders ie the market representative associations, Institute of Chartered Accountant of Pakistan (ICAP) etc, were not consulted on the issue.
The regulatory powers of the NBFCs were transferred from the central bank to SECP five years ago under the financial sector reforms program. The SECP being specialised regulator was assigned the task to regulate the NBFCs in view of the reforms. Under the second-generation capital market reform, implementation of the NBFC laws was a conditionality of the reform program. The completed reform processes should not be linked with new ones, they said.
In the past, the transfer of regulatory powers of NBFCs from central bank to the SECP took place on the argument that complex regulations required specialised regulator. When the regulator''s powers were given to SECP, it was strongly recommended that the Commission had gone through reforms and it would be the right department to monitor and supervise the role of the NBFCs.
Now, just after a few years, the government intends to reverse its decision, which seems to be not clear, under the financial sector reforms. The supervision of NBFCs, transferred from SBP to SECP, was done just 5 years ago and reasons for this transfer need to be studied before any reversal of the decision.
The leasing companies always remained within the regulatory framework of the Commission. Therefore, there is a need to carryout a ''regulatory impact assessment'' before taking any decision, and market players have to be consulted in this regard.
Sources referred to the investment banking law in the United States, where the regulations were changed after a long period of over 60 years. The investment bank law promulgated in 1993 was repealed in 1999 through introduction of a financial law by the US.
The question arises why the regulatory powers of the NBFCs were given to SECP when the central bank had been regulating them five years ago? They said that internationally the role of the modern-day regulators is not limited to supervision of the financial institutions. The regulator should also facilitate and create an enabling environment for financial sector of the country.
Commenting on the proposal, experts opined that the role of the central bank as lead regulator does not take a holistic view of how the overall financial regulatory framework should be framed. It seems that the whole issue was not examined from operational and legal point of view. It might result in overlap and multiplicity of regulatory jurisdictions (financial and non-financial entities).
They said that investment risks within the NBFCs can be contained through effective prudential regulation, eg restrictions on investment in associated companies, related party transactions, shareholding restrictions.
The reputational risks cannot be contained even through consolidated supervision, but the arbitrage can be addressed through prudential regulation and co-ordination. The past experience of effective co-ordination among SBP and SECP in case of a financial institution was a clear example of joint investigation by both regulators.
As far as international best practices are concerned, sources said that the concerns raised by the SBP may be addressed through introduction of Unified Regulation. The central bank''s primary role included monetary policy, payment systems and overall stability of the financial system, as the retrogressive step would make the SBP a corporate and securities regulator.
About group regulations, experts opined that there was no definition of what constitutes a ''Group''. The existing laws offer different definitions ie group of companies, business group etc. Different relationships among companies and individuals used to define ''group''.
The group of companies only includes holding company and its subsidiaries, which seems to be a restrictive definition. On the other hand, business group would include companies, undertakings, not-for-profit organisations etc. This definition of business group seems to be too complex and wide, as holding could be in the name of individuals.
Sources said that the existing holding structures needs to be simplified; holding company structure is being introduced by providing incentives to existing groups; tightening of regulatory framework will be counterproductive and sequencing of reform process essential---ownership structure should be simplified first.
So far, the role and scope of lead and functional supervisors has not been defined. The powers proposed for the SBP as lead regulator contradict the proposal for the functional supervisor, as all powers of the functional supervisor eg regulation making, inspections and action taking being sought by SBP.
These powers will effectively make the bank a corporate and securities regulator which might result in over-lapping and multiplicity of jurisdictions. It may also increase regulatory cost and ambiguity for the market players and financial and non-financial companies within the group cannot be treated with the same yardstick, experts said.