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Regional Seminar onRegional Seminar onNon Bank Financial InstitutionsNon Bank Financial Institutions

Session 3:

Regulatory Powers and Enforcement

By Iqbal Rajahbalee

Chief Executive

Financial Services Commission

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Regulatory EffectivenessRegulatory Effectiveness

NBFI Development in Africa Unregulated NBFI sector

= Cause of crisis

Why regulation? To reduce market failures Regulatory StructureRegulatory Powers and Enforcement

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Zero Failure ExpectationZero Failure Expectation

“To survive and be effective, banks must be willing and able to take risk…. While public policy needs to limit the financial and social costs of bank failures, we should not view every bank failure as a supervisory and regulatory failure”

Alan GreenspanChairman Federal Reserve Bank

18 May 2001

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Zero Failure ExpectationZero Failure Expectation

“Supervision cannot and should not provide an absolute assurance that banks will not fail. The objectives of protecting the financial system and the interests of depositors are not incompatible with individual bank failures.”

Basel Committee on Banking Supervision

March 2002

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Zero Failure ExpectationZero Failure Expectation

“Regulation, or any form of official intervention is only justified in the presence of a substantial market imperfection, and where the cure is not worse than the original disease.”

Howard DaviesFormer Chairman

Financial Services Authority (UK)1998 Thornton Lecture

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Regulatory PowersRegulatory Powers

• Subordinate Legislative Powers• Making rules, standards and guidelinesAdministrative

Powers• Licensing Powers

• Licensing, amendment and revocation of licences• Investigation Powers

• Onsite Visit, Request for Information• Enforcement Powers

• Direct, Order, Prohibit, Levy Fines

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LICENSINGLICENSING

Fit and Proper Test on Directors, Management and Staff.

Detailed Business PlanOwnership RestrictionsCapital Requirements

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ON-GOING REGULATORY ON-GOING REGULATORY OBLIGATIONSOBLIGATIONS

Market structure requirementsDisclosureMarket Conduct RulesRules of GovernanceLimits on Assets and Liabilities.Valuation of Assets and LiabilitiesLiquidity Requirements

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SURVEILLANCESURVEILLANCE

Monitoring ComplianceInvestigation of complaintOff-site MonitoringOn-site Inspections

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ENFORCEMENTENFORCEMENT

Pre-emptive Action Rehabilitation Work-up Directions – mandatory, prohibitive Revocation of license Prohibition Injunction by Court Winding up Administration Prosecution

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Exercise of PowersExercise of Powers

Prudential Regulator Market Conduct Reg’tor

Establish capital requirements

Prescribe conduct rules

Proactive Approach Reactive Approach

Rehabilitation Enforcement

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Exercise of Powers:Exercise of Powers:Common to MC/P RegulatorsCommon to MC/P Regulators

Power to licencePower to request informationPower to conduct routine on-site inspectionsPower to investigate suspected breaches of

financial lawsPower to issue administrative sanctions and

levy penaltiesPower to issue directions.

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Exercise of Powers:Exercise of Powers: Particular to Prud’tial Regulators Particular to Prud’tial Regulators

Power to impose rules on ownership and control of licensed entities– Fit and Proper Test; rules on concentration and

conglomerate relationships Power to appoint external expert Power to require “whistle-blowing” Power to appoint statutory manager or

administrator Power to transfer business or to wind up

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Exercise of Powers:Exercise of Powers:Common Law IssuesCommon Law Issues

Power of ArrestPower to ProsecuteCoordination between law-enforcement

agenciesCivil Law Remedies: DisgorgementLocus Standi Time in Court Actions

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Check on Exercise of PowersCheck on Exercise of Powers

Internal Control– Governance

TransparencyAccountabilityJudicial Control

Powers of Supervisory Agencies*Powers of Supervisory Agencies*

* Sample includes: Australia, Canada, Iceland, Korea, Latvia, Mexico, Norway and Sweden

Regulatory and Supervisory PowersRegulatory and Supervisory Powers % of % of AgenciesAgencies

1. Conduct on-site examinations1. Conduct on-site examinations 100%100%

2. Conduct off-site examinations2. Conduct off-site examinations 100%100%

3. Impose sanctions and fines3. Impose sanctions and fines 100%100%

4. Set regulations on credit, market and liq. Risks4. Set regulations on credit, market and liq. Risks 88%88%

5. Set accounting and disclosure rules5. Set accounting and disclosure rules 75%75%

6. Set rules on the composition of capital6. Set rules on the composition of capital 75%75%

7. Set licensing requirements7. Set licensing requirements 63%63%

8. Approve/ revoke a license to an intermediary8. Approve/ revoke a license to an intermediary 63%63%

9. Set minimum capital requirements9. Set minimum capital requirements 50%50%

10. Consumer protection10. Consumer protection 25%25%

Powers of Supervisory AgenciesPowers of Supervisory Agencies

Regulatory Regulatory and Supervisory Powersand Supervisory Powers

1.1. Set licensing requirements.Set licensing requirements.2.2. Approve and revoke license to a Approve and revoke license to a

financial intermediary.financial intermediary.3.3. Set accounting and disclosure rules.Set accounting and disclosure rules.4.4. Set rules on the composition of Set rules on the composition of

capital.capital.5.5. Set minimum capital requirements.Set minimum capital requirements.6.6. Set prudential regulations on Set prudential regulations on

market, credit, and liquidity risks.market, credit, and liquidity risks.7.7. Conduct on-site examinations.Conduct on-site examinations.8.8. Conduct off-site examinations.Conduct off-site examinations.9.9. Impose sanctions and fines. Impose sanctions and fines. 10.10. Consumer protection.Consumer protection.

Country ExamplesCountry Examples

AgencyAgency IntermediIntermediaries*aries*

%f powers %f powers they havethey have

KoreaKorea B+S+IB+S+I 100%100%

CanadaCanada B+IB+I 90%90%

AustraliaAustralia B+IB+I 80%80%

LatviaLatvia B+S+IB+S+I 80%80%

IcelandIceland B+S+IB+S+I 70%70%

MexicoMexico B+SB+S 70%70%

SwedenSweden B+S+IB+S+I 70%70%

NorwayNorway B+S+IB+S+I 30%30%

* B=Banking, S=Securities, I=Insurance

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FINANCIAL SERVICES FINANCIAL SERVICES COMMISSION (MAURITIUS)COMMISSION (MAURITIUS)

• Financial Services Development Act 2001• Came into force on 1st December 2001• Merger of

• The Insurance Division of the Ministry of Fin Services

• The Stock Exchange Commission, and• The Mauritius Offshore Business Activities

Authority

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FSC: The Integration ProcessFSC: The Integration Process

Institutional Integration Identifying its functions

Sectoral Integration– Coping with Conglomerates

Product Integration– Easing Market Developments

Vertical Integration Offshore to Global Business

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FSC ObjectivesFSC Objectives

Market Integrity Market Integrity Consumer ProtectionConsumer Protection Safety and StabilitySafety and Stability Global ReputationGlobal Reputation Sustainable industry developmentSustainable industry development

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ITU

L & RL & R

PORPOR

ENFENF

SURSUR

Insurance&Pension

Global Business

Investment Business

Conglomerates

S.14 Activities

Approved Pensions

Programming Website

DevelopmentSystem AdministratorHardware

Networking

ComplianceMonitoring

Offsite Examination

Onsite InspectionFinance

Administration

Logistics

Investigation

Prosecution

Compensation

Penalties

Consumer Education

Complaints

Communication

CIUHRU

FAL

Policy

Research

StatisticalAnalysis

HR PoliciesHR Management

Personnel

Corporate Finance

Market conduct

FSC STRUCTURE

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FSC:A REGULATORFSC:A REGULATOR

Legal Authority

Risk Based Supervision

Corporate Governance

Risk Management

Anti Money Laundering/Terrorist Financing

Graduated Enforcement

Information Security

Cooperation

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Approach to Changes Approach to Changes

Shift in Mindset Compliance

– Black Letter Law– Principle-based Regulation

Voluntariness and Compulsion Sanctions

– Hard: penalties– Soft: Why not?

Time RequiredTime Required to Merge Supervisory Agencies to Merge Supervisory Agencies

Main TasksMain Tasks Average No. of Average No. of Years RequiredYears Required

1. Set the definitive organizational structure of the new 1. Set the definitive organizational structure of the new merged entity.merged entity.

2.02.0

2. Set the strategic (business) plan of the new entity 2. Set the strategic (business) plan of the new entity describing its objectives, strategies and actions needed to describing its objectives, strategies and actions needed to achieve them.achieve them.

1.41.4

3. Set in the legal framework the scope of legal powers, 3. Set in the legal framework the scope of legal powers, responsibilities and goals of the new regulatory agency.responsibilities and goals of the new regulatory agency.

1.31.3

4. Integrate the IT systems of the merged entities.4. Integrate the IT systems of the merged entities. 1.11.1

5. Reallocate personnel and define new roles.5. Reallocate personnel and define new roles. 1.01.0

6. Integrate budgetary processes.6. Integrate budgetary processes. 0.80.8

7. Appoint (confirm) the heads of the new departments 7. Appoint (confirm) the heads of the new departments of the merged entity.of the merged entity.

0.70.7

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Powers of Supervisory AgenciesPowers of Supervisory AgenciesRegulatory

and Supervisory Powers

1. Set licensing requirements.2. Approve and revoke license to a

financial intermediary.3. Set accounting and disclosure rules.4. Set rules on the composition of

capital.5. Set minimum capital requirements.6. Set prudential regulations on

market, credit, and liquidity risks.7. Conduct on-site examinations.8. Conduct off-site examinations.9. Impose sanctions and fines. 10. Consumer protection.

Country ExamplesCountry Examples

Agency Intermediaries*

%f powers they have

Korea B+S+I 100%

Canada B+I 90%

Australia B+I 80%

Latvia B+S+I 80%

Iceland B+S+I 70%

Mexico B+S 70%

Sweden B+S+I 70%

Norway B+S+I 30%

* B=Banking, S=Securities, I=Insurance