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Financial sector spotlight:Contemporary regulation issues

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One of the key outcomes of the placement of ReNaissance Merchant Bank Limited under curatorship and failure by several other banks to meet June 30 2011 deadline for the new regulatory capital requirements is a keener focus on the Reserve Bank of Zimbabwe’s regulatory function.

Resultantly, the Reserve Bank board recently appeared before Parliament’s Budget, Finance, Economic Planning and Investment Promotion Portfolio Committee to shed light on the bank’s activities.

As public anxiety over the state of the banking sector heightens, so must the regulator step up to the plate in order to preserve stability.

The regulatory noose will tighten around the banking sector’s neck but the key to coping is not to view regulation as a noose, rather as a leash which can fit snugly or chafe depending on what an institution does in relation to it.

This week we interrogate some contemporary issues of the prevailing regulatory terrain.

Regulatory capture: In late May Finance minister Tendai Biti instructed the National Social Security Authority (NSSA) to invest about $20 million in ReNaissance Merchant Bank Limited following revelations that the bank was undercapitalised.

A firestorm of protest ensued and he was accused of abusing his authority to bail out a personal friend using public funds.

Had that been true, it would have been a classic case of regulatory capture, which occurs when a regulatory agency or authority created to act in the public interest instead advances the commercial or special interests of the industry or sector it is charged with regulating.

The Ministry of Finance would have become a “captured agency” but fortunately, Biti was acting in the public interest to avert a possible collapse of the banking sector due to the domino effect. In the heat of that moment, it would have been remiss for him not to seek a course of action that sought to preserve stability.

Regulatory arbitrage: Though regulatory arbitrage is often cited as one of the causes of the global financial crisis — which as we know started in America, it is not a distant phenomenon which we only get to “hear” about.

In late May, Biti called for the establishment of a financial services authority to provide a one-stop regulatory service to the entire financial market after observing that current laws are so fragmented that it is difficult for a regulatory authority in one sector to pick misdemeanours in another.

Regulatory arbitrage — often abbreviated to “regarb”— is a practice whereby firms capitalise on loopholes in regulatory systems or exploit differences between economic substance and regulatory position with the aim of circumventing unfavourable or unwelcome regulation.

“We have to consider seriously the issue of the financial services authority, a regulator that regulates the entire financial services so that we do not have this eclectic piecemeal regulation where insurance, banks, asset management, equity houses, venture capital and companies listed on the stock exchange, each has its own regulator. We need one regulator with one uniform standard — that is the best practice,” Biti said.

Under South Africa’s “Twin Peak” model, the supervisory regime is comprised of the South African Reserve Bank which focuses on prudential supervision while the financial services board dedicates itself to the supervision of market conduct.

The revolving door:

Over the years, there has been a steady stream of people in both directions and at all levels between the Reserve Bank of Zimbabwe and the banking sector for purposes of employment.

This movement of personnel between roles as regulators and the industries or sectors affected by the legislation and regulation is called the revolving door.

The recent retrenchment exercise which put 75% of the Reserve Bank of Zimbabwe’s workforce back onto the job market with more set to join them will have increased the speed with which the door is revolving since those who wish to continue in formal employment will seek to be absorbed by the banking sector.

Experts claim that an unhealthy relationship can develop between private sector players and regulators, based on the granting of reciprocal privileges which can result in regulatory capture.

Despite its negative connotations, the revolving door is not without its saving graces.

It can enable regulatory agencies such as the Reserve Bank to leverage the experience of people with intimate knowledge of the regulated sector.

Another benefit is that influential private sector people may be required by a regulatory agency that seeks to build bridges with the private sector.

It is also argued that the revolving door can enhance political support if the government or its regulatory agency employs someone with loyalty to vested interests in the private sector.

The recent call by the Confederation of Zimbabwe Industries for appointment of a “super minister” nominated by them to oversee implementation of government policy is a case in point.

Those from the private sector who support the revolving door say its benefits include unfettered access to influential legislators or regulators, enjoyment of favourable policies and regulations as well as access to inside knowledge.

The naysayers however argue that there is a thin line between the so-called benefits and corrupt tendencies.

What’s your take on these aspects of regulation?

Weigh in with your insights on omen.muza@gmail.com.

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