Handle financial sector regulators’ reforms carefully

The Central Bank of Kenya headquarters in Nairobi. How we regulate and supervise the country's financial sector will be key to becoming a regional financial hub. Photo/FILE

By Mohamed Wehliye


IN SUMMARY
The regulatory reform process must not be guided by the need to consolidate supervision for the sake of it but rather by the need to come up with an appropriate model following a carefully planned process and consultation.
The good thing with a ‘‘twin-peak’’ structure is that it is a simple reorganisation of the current structure into two main bodies, the CBK and the FSA.
Both regulators will supervise the entire financial sector but one will do so from the prudential regulation perspective and the other from the market conduct and consumer protection perspective.

The recent Abdikadir Mohamed-led taskforce on parastatals reforms have proposed a new system of financial sector supervision that seeks to phase out multiple regulators.

The proposed model, if adopted, will entail the merger of four of the five current regulators — Capital Markets Authority (CMA), Retirement Benefits Authority (RBA), Insurance Regulatory Authority (IRA) and Sacco Societies Regulatory Authority (SASRA) — into one authority, the Financial Services Authority (FSA).

The Central Bank of Kenya (CBK), the regulator of banks is the other regulator.

Financial regulatory structure reform was needed even before the proposed parastatals shake up in order to prepare the country for developments in this sector.

The regulatory reform process must not be guided by the need to consolidate supervision for the sake of it but rather by the need to come up with an appropriate model following a carefully planned process and consultation.

Financial safety is fundamental to the economic development of any country. It is fundamental to the smooth operation of the economic system given that financial services are intermediate inputs to other areas of the economy.

Many services that the financial system provides to the economy at large are built on confidence that transactions will clear and that promises will be honoured. Without that confidence, overall economic efficiency can be seriously impaired.

The financial regulatory structure reform should thus be motivated and driven purely by the desire to have a competitive, efficient and effective structure that will support the kind of financial system we envisage to have in the future.

Merely lumping together four of the current regulators just for the sake of consolidation, is ‘‘lazy reorganisation’’ and could pose serious risk to the safety and soundness of the financial system.

The most appropriate basis for organising the institutional structure is in terms of the objectives of regulation.

Regulatory agencies are most effective and efficient when they have clearly defined, and precisely delineated, objectives and when their mandate is clear and precise.

Also, accountability is more effective and transparent when it is clear for what objectives particular agencies are responsible. We should use this opportunity to move on from our current ‘‘institutional based’’ supervision structure and not consolidate on the basis of the current structures but rather re-organise the financial regulatory bodies on the basis of a new and ‘‘objective based’’ supervision structure.

The general trend in most jurisdictions these days has been to keep the two functions of prudential and market conduct and consumer protection regulations separate.

The ‘‘twin peak’’ approach to regulating the financial services industry has been given the thumbs up by the international Financial Stability Board (FSB), a body that was established in 2009 to prevent a repeat of the global financial meltdown in 2008.

Best representation of ‘‘twin-peak’’ approach is Australia and the Netherland whose financial regulatory and supervisor oversight withstood the Global Financial Crisis of 2008/9 and which have been rated as the best in the world.