By James Anyanzwa
Finance minister Robinson Njeru Githae has proposed a new system of financial sector supervision, which seeks to phase off multiple regulators with the aim of deepening the growth and development of the financial sector.
The new model announced last week, if adopted, will entail the merger of the four regulators — Central Bank of Kenya, Capital Markets Authority (CMA), Retirement Benefits Authority (RBA), Insurance Regulatory Authority (IRA) and Sacco Societies Regulatory Authority (SASRA) — into a single authority.
The proposed system borrows heavily from the UK’s form of financial sector regulation which has, however, been criticised for being inadequate to deal with the financial crisis which hit major world economies in 2008/09.
Regulatory centre
Some of the failures identified that triggered the crisis that originated from the US included failure in risk management in private financial institutions and market discipline mechanisms.
The key players in the global turmoil included financial institutions such as commercial banks, mortgage companies, investment banks, insurance companies, hedge funds and pension funds.
“It is my wish at the Treasury to come up with one institution to regulate the financial sector,” Githae told reporters, adding that, “we want all those bodies to be under one financial authority so as to expand financial incentives.”
The minister’s proposal has, however, drawn mixed reactions with majority of market players who spoke to Business Weekly.
“There are advantages and disadvantages of the proposal and it is difficult to evaluate which of the two models — single financial services regulator or multiple regulators — is ideal says Habil Olaka, Chief Executive Kenya Bankers Association (KBA). “The proposal may have been as a result of the shortcomings of the current regime but we need to be alert to the disadvantages of having a single regulator.”
CIC Insurance Group Managing Director Nelson Kuria believes the country’s existing financial sectors are distinct and specialised so it would be difficult to put them under one regulator as this will compromise professionalism.
“These sectors are specialised and the dangers of having just one regulator could comprise professionalism,” Kuria told Business Weekly.
“I don’t think we are ready for a single financial sector regulator.”
The existing regulatory framework consists of the independent regulators each charged with the supervision of their sub-sectors.
The creation of RBA completed the shift from having departments under the ministry of Finance to establishing independent regulators for each sub-sector.
However, regulatory gaps, regulatory overlaps, multiplicity of regulators, inconsistency of regulations and differences in operational standards mar the current regulatory regime.
For example, some of the regulators enjoy partial exemption from the State Corporations Act while others do not, some have tax exemptions, and others do not. Some regulators have powers to issue regulations while in other cases the Finance minister retains the power.
It is against this background that all financial sector regulators unanimously agreed to work together towards the realisation of objectives of Vision 2030.
The Memorandum of Understanding (MOU), which was signed on August 30, 2009, provides for the amendment of relevant laws to facilitate information sharing among the regulators.
joint supervision
The joint supervisory framework is designed to integrate CBK, CMA, IRA, RBA and SASRA and possibly pave way for a single financial regulator.
The regulators also agreed to strengthen their collaboration by undertaking various joint activities.
“I think to a large extend the MoU has been serving us well,” says Kuria, adding that,” It is also good to experiment before implementation because it is not everywhere there is one financial regulator.”
However, Olaka says a single regulator would make it easier to promote initiatives such as credit information sharing, which requires the participation of all credit providers who are currently under different regulators.
He notes that with a single regulator, the problem of regulatory arbitrage is eliminated as the same standards are applied across the whole spectrum.
money laundering
For instance, in the anti-money laundering regime, regulators are required to issue guidelines to operationalise the anti-money laundering legislation. The inaction by any of the regulators would water down the efforts by others.”
The likely challenges of the proposed regulatory environment is that financial services are wide and require specializations, and hence to gather the level of skill base under one roof is not easy.
Olaka says some of the financial services may not have much in common making it difficult to operate as one unit.
Some sectors such as banking may require a bigger focus in terms of resources under control, importance to the stability of the overall economy, and even the level of resources deployed for the regulation.
“The idea of a single regulator first came up before the global financial crisis in 2008, but was not implemented. Since the global financial crisis it has been accepted that the inadequate regulation as happened in Wall Street can be a contributor to systemic risk and failure,” says Stephen Wandera, British American Insurance Company of Kenya managing director.
