6th Asian Roundtable on Corporate Governance Theme II, Session 2 Ensuring Capacity, Integrity and Accountability of Regulators and Supervisors Jaweria Ather Securities and Exchange Commission of Pakistan Seoul, 2-3 November 2004

What is Regulation? The OECD definition refers to regulation as a diverse set of instruments by which governments set requirements on enterprises and citizens Regulation is aimed at correction of market failures and protection of public interest Regulators are a third party, overseeing transactions between firms and their customers – mandating limits on the behavior of different market players

Why Regulate? Protection of public interest Changing nature and increasing complexity of corporate sector Increasing responsibility of and expectations from regulators To restore public confidence in the wake of financial scams

Why regulate? (cont’d) Essential nature of some industries Competition might not be sustainable or might lead to unstable or undesirable outcomes To ensure quality and availability of services Social and Economic goals Economic development Conservation

Common problems in regulation Vested interests are able to manipulate regulatory legislation Volume and complexity of laws Inefficiency and lack of accountability within the regulatory bureaucracy Lack of expertise and knowledge on the part of regulatory staff Different layers of government imposing duplicative, conflicting and excessive regulation

How to go about regulation Regulation should be synthesized with objectives and targets for good governance The processes should be transparent and non-discriminatory Regulatory procedures should be backed by proper legislation Laws and procedures should be clear and easily understandable Regulatory legislation should take into account the interests of all stakeholders All regulatory actions and regulatory procedures should be publicly available

What does an effective regulation require Promotion of ethics and culture Planning and performance monitoring Internal accountability External accountability Evaluation

Achieving these goals for effective regulation is contingent upon capacity, integrity and accountability of the regulators

Capacity The regulatory staff knows the law, have resources to enforce and is able to take punitive action based on sound reasoning Capacity of regulator to carry out effective regulation is a function of Legal framework Enforcement powers Regulatory infrastructure

Legal framework Rules and laws must take into account ground realities and local conditions Legislation must give protection to regulators to discharge there regulatory duties Responsibilities of the regulators must be clearly defined and set out by law Laws must be consistent and avoid duplication and complexity

Powers of regulators Power to investigate matters pertaining to regulation and obtain data Ability to take action to ensure compliance with regulation Power to initiate or refer cases for prosecution Power to impose sanctions and seek orders from courts or tribunals

Regulatory infrastructure Cooperation between various regulatory bodies Regulator should have adequate resources to perform its functions Staff of the regulator should be provided with the requisite skills and knowledge of law

Integrity The staff of the regulator observes highest professional standards It includes: Avoidance of conflicts of interest Appropriate use of information obtained during the course of duty Observance of procedural fairness Observance of confidentiality and secrecy

Integrity can be promoted by: Adoption of consistent and clear regulatory processes Promotion of ethical values in regulation Ensuring independence of regulatory authorities Fair remuneration of regulatory staff

Accountability Regulator being responsible or answerable to stakeholders while upholding ethical standards and demonstrating financial responsibility and operational transparency We need to have a system of accountability of the regulator

System of accountability should ensure: Protection of legitimate rights of all stakeholders A review of the decisions Accountability to public in exercise of powers and functions Planning and performance monitoring Public disclosure of policies and procedures

Challenges Achieving a balance between performance, fairness and usage of funds Achieving depth and breadth of skills required Performance management and review Objective evaluation