It is important to have a snap survey on the regulatory framework from other markets internationally.
By Allen Choruma
THIS article looks into calls for unified (harmonisation) of the regulatory framework (structure) of financial services in Zimbabwe.
The debate on reform in financial services regulatory framework is aimed at seeking for solutions to create a unified, simple, efficient and reliable financial services regulatory environment, which will boost investor confidence, protect investors and consumers and allow efficient utilisation of limited national resources. Well governed financial services would also improve the country’s image and ranking as an attractive and safe investment destination.
It is important for us to have a snap survey on the regulatory framework from other markets internationally. What is the trend internationally, are countries favouring a unified or fragmented approach to financial services regulation?
In most cases countries are moving towards a harmonised (unified) regulatory framework. There is a significant shift from having a plethora of regulatory authorities within one country as is Zimbabwe. Examples are given below.
Europe
Europe, following the creation of the European Union, has been moving towards harmonising its financial services regulatory system with the objective of forming a single regulatory mechanism under the European Central Bank.
European system of financial regulation is made up of the following: European Banking Authority), European Securities and Markets Authority, European Insurance and Occupational Pensions Authority.
United Kingdom
In the United Kingdom, the integration of financial services regulation started in 1997 when there was a merger of banking supervision and investment services regulation under the Securities and Investment Board.
The Securities and Investment Board later changed its name to the Financial Services Authority.
The Financial Services and Markets Act of 2000 provided the legal framework that completed the whole restructuring process when it transferred all aspects of financial services and markets regulation in UK to a single regulator: Financial Services Authority (FSA). FSA regulated all financial services ie. banks (bank supervision), investment services and markets, insurance services etc. Due to the failure of some banks in UK (financial crisis 2007/2008), the FSA was, however, abolished on April 1, 2013 by the Financial Services Act of 2012.
The Financial Services Act of 2012 introduced a Dual Regulatory Framework in the UK comprising of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The FCA is responsible for financial activities and the banking system. PRA is responsible for financial firms, bank and building society supervision, insurance, pensions etc.
Australia
Australia has largely a dual regulatory framework. The Australian Prudential Regulatory Authority supervises banks, life and general insurance and superannuation funds, while the Australian Securities and Investment Commission is responsible for market integrity, consumer protection, investment banks and finance companies.
South Africa
Closer home, in South Africa there are only three financial services regulators. Financial Services Board; supervises non-banking financial services i.e. retirement funds, short and long-term insurance, funeral insurance, collective investment schemes, unit trusts, capital markets), financial advisers and brokers. Reserve Bank of South Africa is responsible for bank supervision, national payment systems, monetary policy, money supply, exchange control, market surveillance and intelligence, economic advise etc. The National Credit Regulator regulates credit industry, credit bureaux, debt counsellors etc.
Other cases
In some cases we have countries with fragmented regulatory framework where there are multiple regulators (a plethora of them) within one financial services system i.e. regulators for different financial sectors and sub-sectors.
Due to the complexity of financial systems and markets, level of economic development and the state and federal governance system, USA offers a unique and most fragmented regulatory framework for financial services in the world.
The United States financial services regulators are as follows:
• Federal Reserve System (Fed): State (Fed) banks activities, bank/securities holding companies, financial/securities holding companies, US branches of foreign banks, payment, clearing, settlement services etc.
• US Securities and Exchange Commission (SEC): Securities exchanges, brokers, dealers, clearing agents, investment advisers etc.
• Commodity Futures Trading Commission (CFTC): Futures exchanges, swaps etc.
• Federal Deposit Insurance Corporation (FDIC): Fed insured deposit institutions (including state banks).
• Office of the Comptroller of the Currency (OCC): National banks, Fed thrift institutions.
• National Credit Union Administration (NCUA): Fed chartered or insured credit unions.
• Office of Thrift Supervision (OTS) (dissolved in 2011).
• Consumer Financial Protection Bureau (CFPB): Non-bank mortgage related firms, private student lenders, pay day lenders etc.
• Federal Housing Finance Agency (FHFA): Home-loan lenders (Fannie Mae, Freddie Mac), Federal Home Loan Banks etc.
(Source: congressional research Service).
Zimbabwe, despite the size of its economy (Gross Domestic Product US$14,2 billion 2014), still maintains more regulatory bodies for financial services than South Africa (GDP US$350,6 billion 2013).
Consolidation of regulatory responsibilities
Internationally there is a general trend gravitating towards integrated or unified regulation as opposed to fragmented regulation.
This has been in response to the dynamic changes within the financial services themselves as many financial institutions have shifted from the traditional financial services such as banking and insurance into other sectors such as complex investment activities (derivatives, swaps, futures etc), securities trading, asset management, and stock broking, insurance and re-insurance services and so on.
This diversification of financial activities by financial institutions has posed big challenges to regulatory systems that are fragmented and based on sectoral activities.
Financial Services Authority Zimbabwe (FSAZ)
Zimbabwe’s economy is small and less sophisticated to warrant multiple regulators. We are proposing consolidation of regulatory responsibilities which are currently split amongst regulators.
The desire is to bring an end to overlap and duplication of functions, “net in” unregulated activities, improve co-ordination and ensure consistency in regulatory activities.
A dual regulatory framework, which will allow the Reserve Bank of Zimbabwe (RBZ) to continue with banking supervision (for stability)and creation of a new regulatory authority i.e. Financial Services Authority Zimbabwe (FSAZ)responsible for regulation of all other financial services (except banking), appears to be the best solution to strengthen the regulatory system in Zimbabwe.
Regulator: RBZ regulatory responsibility:
Monetary policy, bank supe-rvision, national payment systems, money supply, exchange control, market surveillance and intelligence, banker of government, banker of last resort, gold and precious minerals custodian, economic advise etc.
Regulator: FSAZ
regulatory responsibility: Capital/securities markets, investment advisers, commodity trading, insurance and re-insurance services, funeral insurance, pensions/retirement savings, mortgage lending (home loans), consumer protection and education, deposit protection, collective investment schemes, lending (micro finance/credit lenders), bureau de change, money transfers, estate agents, financial advisers, lotteries etc.
IPEC, DPB and SECZ will be abolished. FSAZ would bring all financial services(except banks) under one roof. The advantages to be realised from creating a single regulator are numerous and will be explored below.
Advantages of harmonisation
• Deliver an integrated/coordinated regulatory system that is not fragmented and overlapping in structure.
• Bring into fold “regulatory net” financial services that are operating outside the financial regulatory framework (posing risks to consumers) i.e. mortgage lenders (eg Homelink), estate agents, investment advisers (lawyers/accountants), lotteries, other lending activities i.e. pay day loans (unregulated) etc.
• Create a financial regulator with adequate resources (self-funded through levies/fees etc), and capacity to monitor and maintain a transparent, efficient and dynamic financial system.
• Robust investor, depositor and consumer protection.
• Maintain market confidence in the integrity of financial services and markets.
• Effectively address/manage significant risks (e.g. systemic, credit, market manipulation, fraud, insider trading risks etc) that challenge the financial systems and markets.
• Promote the public understanding (through investor/consumer education programs).
• Remove bureaucracy and red tape (that is increasing costs of doing business, promoting corruption etc) and create transparency, accountability and good governance of the regulatory system.
• Frugal (economic) utilisation of limited national resources: remove multiple regulators and costs associated with creating and running them (i.e. executive perks, infrastructure costs etc).
The above objectives would be supported by principles, which govern good regulation of financial systems. These principles are as follows:
•Resources utilised should justify (not far outweigh) the benefits of having a single regulatory authority.
•Regulation should not impede competition and innovation, cushion poor performance or discourage risk taking.
•Regulation should take into account the international nature of financial systems.
•Costs associated with compliance should be minimised in order to avoid creating an expensive regulatory system.
International trends highlighted above show us that fewer countries in the world have a fragmented financial regulatory system like that we have in Zimbabwe. Hence calls for the financial sector to adapt to international trends of financial services regulation, which have moved towards an integrated regulatory system.
Zimbabwe needs to: Act now, as opposed to being reactive when we have turmoil; adjust the system of regulation in response to the ever changing domestic and international financial markets; create a regulatory system that protects investor and consumer interests; create a regulatory system that creates efficiency, transparency and accountability of financial services providers; balance between prescribed regulation and self regulatory mechanisms to ensure that the financial system is not over burdened with regulation; and to minimise the occurrence of corporate scandals, financial crime and corruption.
Allen Choruma is an independent researcher and writer on corporate governance. Email: allenc17@juno.com
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