Financial Times

Surveillance of financial conglomerates

Did the Regulator fail the people?
By Ranel T. Wijesinha

I have been witnessing with considerable sadness the plight of many, after the collapse of finance companies here - particularly, Golden Key. My mind went to a message I gave to the Confederation of Asian and Pacific Accountants in 2002, an extract of which reads as follows: - “The collapse of corporates arising from sub par professionalism or poor governance can be disruptive. It can devastate what otherwise could have been only a continuation of a simple and less than extravagant life style for many who are less privileged …”

At a Transparency International (TISL) Round Table Discussion two weeks ago, I recommended that the “Regulatory Oversight (Scope) and Effectiveness” of all regulators, in the Financial Sector in particular must be subjected to a rigorous review. It is really a Legal or Statutory/Regulatory Review and Consumer Protection and Compensation measures that I seek. Once the above is done, a key consideration will be to then determine “institutional capacity inadequacies” (human/technical) and to design and implement capacity building initiatives. I am pleased that this recommendation was accepted and is embodied in a letter the Executive Director of TISL, J. C. Weliamuna, has written to the President. It is in this context that I wish to quote from the Central Bank’s current website in its webpage on Financial System Stability and under the subsection “Surveillance of Financial Conglomerates” which refers to an initial report of a Working Group of Regulators for Financial Conglomerates to be “completed in early 2007”. The full extract of the relevant section is as follows:

“Surveillance of Financial Conglomerates - The existence of large financial conglomerates, especially those that have banks as part of the conglomerate, is another area that has attracted increased supervisory concern in recent times. The regulation and supervision of such financial conglomerates is becoming increasingly more important and complex, due to the potential systemic risk that could arise from the interrelated nature of their activities. Large numbers of cross shareholdings, common directors and inter company transactions are areas that are of key interest in this regard, as it could result in conflicts of interests and abuse of power, which would not augur well for the stability of the financial system.

Since there are multiple regulators in the financial system, the supervision of conglomerates often falls under the purview of several regulators, requiring close co-operation and supervision. Therefore, a Working Group of Regulators for Financial Conglomerates comprising of the Central Bank, the Insurance Board of Sri Lanka, the Securities and Exchange Commission of Sri Lanka, the Accounting and Auditing Standards Monitoring Board and the Department of Registrar of Companies has been established to monitor the systemic risk of conglomerates.

The mandate of this working group includes identifying and defining financial conglomerates; identifying the functions of the separate regulators; assessing the systemic risk of such conglomerates by sharing necessary information among regulators, recommending a course of action for regulation and supervision of the respective institutions in a consolidated manner; and proposing necessary legal reforms to address the existing limitations relating to regulation and supervision of financial conglomerates. The initial report of the Working Group will be completed in early 2007.” (Extract of current Central Bank Website).

It is now a national imperative that the outcomes of this Working Group (if it had been completed) are critically reviewed to determine where it is incomplete in relation to the Central Bank’s regulatory oversight and effectiveness.

Perhaps we could have saved the monies of depositors and the public that would now go towards bailouts and stimulus packages if greater attention were paid to surveillance of financial conglomerates. I wonder what jurisdiction or remedy the Consumer Protection provisions of the Consumer Affairs Authority Act have over Banking, Leasing, Finance & related firms, their products and services? A matter for the Financial Ombudsman as well?

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