With technology in business comes regulatory headachesThe financial sector has undergone major changes over the past decade, presenting huge benefits as well as regulatory challenges due to operational complexities. Growing footprints in the region by financial institutions coupled with the adoption of robust ICT tools have had a major influence on financial services and shows every sign of becoming the main thing in future. The Finance minister in his budget speech said the government would shortly start establishing a consolidated financial sector regulatory framework bringing together the Capital Markets Authority, the Insurance Regulatory Authority, and the Retirement Benefits Authority. In addition, the Banking Supervision Department would be re-established as an entity under a reviewed CBK Act with a clear mechanism allowing for coordinated and effective financial sector supervision. This move was informed by the need to strengthen supervisory capacity, safeguard stability, and enhance efficiency of financial sector regulators which appears to have faltered. Locally, there have been tendencies towards diversification of available products beyond financial services and establishment of conglomerates. The driving force behind this trend is the convergence of different markets as a consequence of a common technological platform or infrastructure to offer products caused by technological development. In spite of the noted developments, there has been no concerted effort towards addressing the regulatory complexities that have evolved over the time. The existing regulatory framework for the financial sector consists of a number of independent regulators, each charged with supervision of a particular sub-sector. This structure has been characterised by regulatory gaps, overlaps, multiplicity of regulators, inconsistency, and differences in operational norms. Although the move taken by the minister is praiseworthy, it is critical to appreciate that there is no single optimal model for the organisational structure of financial regulation. Prevailing circumstances, historical factors, and comparative advantage in any given country determine the structure of the integration. Thus, even if countries have much to learn from each other, different countries should adopt different integration approaches suitable to their unique circumstances. There are obvious risks of having disjointed regulatory bodies. Where there are regulatory overlaps, as is the case in Kenya, then having multiple regulators can allow entities to engage in arbitrage where firms opt to register products in those sub-sectors where rules are weakest or most cost efficient. With a consolidated regulator, uniform standards can be applied to all sub-sectors, hence eliminating the motivation for arbitrage. The most compelling argument for consolidated regulation is to enhance the mirroring of the structure of regulation to the structure of the industry. If entities are conglomerates covering banking, insurance, securities and pension, then it is difficult for a regulator of a particular sub-sector to draw a view of the overall risks facing the entity. A single regulator, on the other hand, will be able to understand and monitor risks across the sub-sectors and develop policies to address the dangers facing the entire conglomerate.

The financial sector has undergone major changes over the past decade, presenting huge benefits as well as regulatory challenges due to operational complexities.

Growing footprints in the region by financial institutions coupled with the adoption of robust ICT tools have had a major influence on financial services and shows every sign of becoming the main thing in future.

The Finance minister in his budget speech said the government would shortly start establishing a consolidated financial sector regulatory framework bringing together the Capital Markets Authority, the Insurance Regulatory Authority, and the Retirement Benefits Authority.

In addition, the Banking Supervision Department would be re-established as an entity under a reviewed CBK Act with a clear mechanism allowing for coordinated and effective financial sector supervision.

This move was informed by the need to strengthen supervisory capacity, safeguard stability, and enhance efficiency of financial sector regulators which appears to have faltered.

Locally, there have been tendencies towards diversification of available products beyond financial services and establishment of conglomerates.

The driving force behind this trend is the convergence of different markets as a consequence of a common technological platform or infrastructure to offer products caused by technological development.

In spite of the noted developments, there has been no concerted effort towards addressing the regulatory complexities that have evolved over the time.

The existing regulatory framework for the financial sector consists of a number of independent regulators, each charged with supervision of a particular sub-sector.

This structure has been characterised by regulatory gaps, overlaps, multiplicity of regulators, inconsistency, and differences in operational norms.

Although the move taken by the minister is praiseworthy, it is critical to appreciate that there is no single optimal model for the organisational structure of financial regulation.

Prevailing circumstances, historical factors, and comparative advantage in any given country determine the structure of the integration.

Thus, even if countries have much to learn from each other, different countries should adopt different integration approaches suitable to their unique circumstances. There are obvious risks of having disjointed regulatory bodies.

Where there are regulatory overlaps, as is the case in Kenya, then having multiple regulators can allow entities to engage in arbitrage where firms opt to register products in those sub-sectors where rules are weakest or most cost efficient.

With a consolidated regulator, uniform standards can be applied to all sub-sectors, hence eliminating the motivation for arbitrage.

The most compelling argument for consolidated regulation is to enhance the mirroring of the structure of regulation to the structure of the industry.

If entities are conglomerates covering banking, insurance, securities and pension, then it is difficult for a regulator of a particular sub-sector to draw a view of the overall risks facing the entity.

A single regulator, on the other hand, will be able to understand and monitor risks across the sub-sectors and develop p

Under certain circumstances where institutions are not in themselves conglomerates, the products they offer may defy conventional categorisation.

For instance, some banks are practising bankassurance, which poses more risks compared to convectional banking.

Another popular argument for consolidated regulation arises from cost efficiency gains that can be obtained by consolidating multiple regulators into a single body.

Certainly, a consolidated regulator will only have one set of service departments such as administration, finance, and human resources, hence reducing staff and other overhead costs.

Blame game

Where there are overlaps in registration and licensing, then consolidation will also bring cost cuts and efficiency gains by allowing regulated entities to have a one-stop licensing procedure as opposed to multiple registrations.

These gains are maximised where regulation is consolidated by function as opposed to consolidation by institutions.

Consolidated regulation also curbs the blame game among regulators. Blame may be passed from one body to another when supervisory failure occurs.

A consolidated financial regulator would be responsible for supervising all entities and products and duly held accountable.

In spite of the noted benefits, challenges abound in the implementation of a consolidated regulation.

It poses many risks, including reduced effectiveness and loss of focus. In addition, the actual process of integration is likely to be disruptive and expensive, watering down the expected benefits.

The case for consolidation appears weaker in Kenya as market developments have not seen the rise of truly universal conglomerates yet.

The writer is a tax expert with Ernst & Young. Email: david.wanyoike@ke.ey.com Views expressed are not necessarily those of Ernst & Young.

olicies to address the dangers facing the entire conglomerate.