1. 1 Regional Seminar on Non Bank Financial Institutions Session 3: Regulatory Powers and Enforcement By Iqbal Rajahbalee Chief Executive Financial Services Commission

2. 2 Regulatory Effectiveness NBFI Development in Africa Unregulated NBFI sector = Cause of crisis Why regulation? To reduce market failures Regulatory Structure Regulatory Powers and Enforcement

3. 3 Zero Failure Expectation “To survive and be effective, banks must be willing and able to take risk…. While public policy needs to limit the financial and social costs of bank failures, we should not view every bank failure as a supervisory and regulatory failure” Alan Greenspan Chairman Federal Reserve Bank 18 May 2001

4. 4 Zero Failure Expectation “Supervision cannot and should not provide an absolute assurance that banks will not fail. The objectives of protecting the financial system and the interests of depositors are not incompatible with individual bank failures.” Basel Committee on Banking Supervision March 2002

5. 5 Zero Failure Expectation “Regulation, or any form of official intervention is only justified in the presence of a substantial market imperfection, and where the cure is not worse than the original disease.” Howard Davies Former Chairman Financial Services Authority (UK) 1998 Thornton Lecture

6. 6 Regulatory Powers Subordinate Legislative Powers Making rules, standards and guidelinesAdministrative Powers Licensing Powers Licensing, amendment and revocation of licences Investigation Powers Onsite Visit, Request for Information Enforcement Powers Direct, Order, Prohibit, Levy Fines

7. 7 LICENSING Fit and Proper Test on Directors, Management and Staff. Detailed Business Plan Ownership Restrictions Capital Requirements

8. 8 ON-GOING REGULATORY OBLIGATIONS Market structure requirements Disclosure Market Conduct Rules Rules of Governance Limits on Assets and Liabilities. Valuation of Assets and Liabilities Liquidity Requirements

9. 9 SURVEILLANCE Monitoring Compliance Investigation of complaint Off-site Monitoring On-site Inspections

10. 10 ENFORCEMENT Pre-emptive Action Rehabilitation Work-up Directions – mandatory, prohibitive Revocation of license Prohibition Injunction by Court Winding up Administration Prosecution

11. 11 Exercise of Powers Prudential RegulatorMarket Conduct Reg’tor Establish capital requirements Prescribe conduct rules Proactive ApproachReactive Approach RehabilitationEnforcement

12. 12 Exercise of Powers: Common to MC/P Regulators Power to licence Power to request information Power to conduct routine on-site inspections Power to investigate suspected breaches of financial laws Power to issue administrative sanctions and levy penalties Power to issue directions.

13. 13 Exercise of Powers: Particular to Prud’tial Regulators Power to impose rules on ownership and control of licensed entities – Fit and Proper Test; rules on concentration and conglomerate relationships Power to appoint external expert Power to require “whistle-blowing” Power to appoint statutory manager or administrator Power to transfer business or to wind up

14. 14 Exercise of Powers: Common Law Issues Power of Arrest Power to Prosecute Coordination between law-enforcement agencies Civil Law Remedies: Disgorgement Locus Standi Time in Court Actions

15. 15 Check on Exercise of Powers Internal Control – Governance Transparency Accountability Judicial Control

17. Powers of Supervisory Agencies* * Sample includes: Australia, Canada, Iceland, Korea, Latvia, Mexico, Norway and Sweden Regulatory and Supervisory Powers % of Agencies 1. Conduct on-site examinations 100% 2. Conduct off-site examinations 100% 3. Impose sanctions and fines 100% 4. Set regulations on credit, market and liq. Risks 88% 5. Set accounting and disclosure rules 75% 6. Set rules on the composition of capital 75% 7. Set licensing requirements 63% 8. Approve/ revoke a license to an intermediary 63% 9. Set minimum capital requirements 50% 10. Consumer protection 25%

18. Powers of Supervisory Agencies Regulatory and Supervisory Powers 1. Set licensing requirements. 2. Approve and revoke license to a financial intermediary. 3. Set accounting and disclosure rules. 4. Set rules on the composition of capital. 5. Set minimum capital requirements. 6. Set prudential regulations on market, credit, and liquidity risks. 7. Conduct on-site examinations. 8. Conduct off-site examinations. 9. Impose sanctions and fines. 10. Consumer protection. Country Examples Agency Intermedi aries* %f powers they have KoreaB+S+I100% CanadaB+I90% AustraliaB+I80% LatviaB+S+I80% IcelandB+S+I70% MexicoB+S70% SwedenB+S+I70% NorwayB+S+I30% * B=Banking, S=Securities, I=Insurance

19. 19 FINANCIAL SERVICES COMMISSION (MAURITIUS) Financial Services Development Act 2001 Came into force on 1 st December 2001 Merger of The Insurance Division of the Ministry of Fin Services The Stock Exchange Commission, and The Mauritius Offshore Business Activities Authority

20. 20 FSC: The Integration Process Institutional Integration Identifying its functions Sectoral Integration – Coping with Conglomerates Product Integration – Easing Market Developments Vertical Integration Offshore to Global Business

21. 21 FSC Objectives Market Integrity Market Integrity Consumer Protection Consumer Protection Safety and Stability Safety and Stability Global Reputation Global Reputation Sustainable industry development Sustainable industry development

22. 22 ITU L & R POR ENF SUR Insurance& Pension Global Business Investment Business Conglomerate s S.14 Activities Approved Pensions Programmin g Website Development System Administrator Hardware Networking Compliance Monitoring Offsite Examination Onsite Inspection Finance Administration Logistics Investigation Prosecution Compensation Penalties Consumer Education Complaints Communication CIU HRU FAL Policy Research Statistical Analysis HR Policies HR Management Personnel Corporate Finance Market conduct FSC STRUCTURE

23. 23 FSC:A REGULATOR Legal Authority Risk Based Supervision Corporate Governance Risk Management Anti Money Laundering/Terrorist Financing Graduated Enforcement Information Security Cooperation

24. 24 Approach to Changes Shift in Mindset Compliance – Black Letter Law – Principle-based Regulation Voluntariness and Compulsion Sanctions – Hard: penalties – Soft: Why not?

25. Time Required to Merge Supervisory Agencies Main Tasks Average No. of Years Required 1. Set the definitive organizational structure of the new merged entity. 2.0 2. Set the strategic (business) plan of the new entity describing its objectives, strategies and actions needed to achieve them. 1.4 3. Set in the legal framework the scope of legal powers, responsibilities and goals of the new regulatory agency. 1.3 4. Integrate the IT systems of the merged entities. 1.1 5. Reallocate personnel and define new roles. 1.0 6. Integrate budgetary processes. 0.8 7. Appoint (confirm) the heads of the new departments of the merged entity. 0.7

26. 26 Powers of Supervisory Agencies Regulatory and Supervisory Powers 1. Set licensing requirements. 2. Approve and revoke license to a financial intermediary. 3. Set accounting and disclosure rules. 4. Set rules on the composition of capital. 5. Set minimum capital requirements. 6. Set prudential regulations on market, credit, and liquidity risks. 7. Conduct on-site examinations. 8. Conduct off-site examinations. 9. Impose sanctions and fines. 10. Consumer protection. Country Examples Agency Intermedi aries* %f powers they have KoreaB+S+I100% CanadaB+I90% AustraliaB+I80% LatviaB+S+I80% IcelandB+S+I70% MexicoB+S70% SwedenB+S+I70% NorwayB+S+I30% * B=Banking, S=Securities, I=Insurance