ISLAMABAD, Sept 29: In an attempt to ease the tension between the State Bank of Pakistan (SBP) and Securities and Exchange Commission of Pakistan (SECP) over the Draft Financial Services Commission Act (FSC Act), the later on Saturday decided to “expressly exclude” the banking and money market services from the definition of the act.

The SBP fear that an attempt has been made in the draft act to bring the banking and the money market services under the SECP, which was tantamount to encroaching upon the jurisdiction of the central bank.

In a statement issued here, the commission has termed the fears of the SBP as “absolutely unfounded and baseless”. It said the commission had not even contemplated this move.

“We will also amend the Draft FSC Act appropriately where federal government will be competent to make amendments in the schedules to the draft law,” the statement added.

The SECP says changing the regulatory setup of the banking sector is the prerogative of the government only, therefore, the SBP’s view that SECP was attempting on its own to exceed its mandate was unjustified and impossible also.

“We are unable to agree that just by amending a schedule to the Draft FSC Act, the commission or the government would be able to change the entire regulatory framework of the banking business contained in numerous primary legislations,” it adds.

Legislations administered by the SBP e.g. Banking Companies Ordinance (BCO) 1962, specifically mentioned that State Bank was the regulator and shall exercise the powers and authority.

“Our understanding is that unless these legislations are amended by the legislature, such a drastic change is not possible by a mere inclusion of BCO in the schedule to the FSC Act,” SECP claims.

As Parliament has the power to amend any laws, the SECP says it would like to refer to section 505 of the Companies Ordinance and also section 42 of the newly enacted Anti-Money Laundering Ordinance 2007. Most of the latter law is administered by the State Bank itself. Both these sections empower the federal government to amend the schedules to the aforesaid laws.

The commission has stated that the SBP should be aware that the banks are outside the ambit of SECP only as far as their banking business is concerned as the State Bank is the regulator of banking business. However, if banks are doing any particular business or activity which under law is regulated by SECP they fall in the jurisdictional ambit of SECP,” the commission said.

For example those banks which are listed have to comply with numerous laws and rules administered or supervised by SECP, e.g. Listing Regulations, Takeovers Ordinance, 2002, Underwriters Rules, and also those provisions of the Companies Ordinance, 1984 which are not in consistent with the BCO.

The SECP is of the view that the draft FSC Act had been proposed and drafted by consultants of the Asian Development Bank (ADB) keeping in view the expanded mandate already given to the commission by the government.

The Draft FSC Act has been formulated to overcome the shortcomings of the SECP Act, 1997, which was not drafted for this expanded mandate.

For above reasons, the name Securities and Exchange Commission is considered to be misleading and hence the name Financial Services Commission was proposed by ADB consultants, the SECP claimed.

The SBP has also commented upon the constitution and powers of the policy board of the proposed commission.

“However, these comments contradict each other. On one hand, it is stated that the policy board powers have been enhanced to the extent that the autonomy of the commission becomes meaningless, and on the other hand it is proposed that the board should be empowered to ‘superintend’ the affairs of the commission,” the SECP statement adds.

It says the primary function of the policy board is to advise the commission on matters of policy. The board does not and cannot superintend the functions and affairs of the commission. The powers granted to the policy board under the draft FSC Act are identical to the powers currently available to the policy board, barring two additional powers/functions which are proposed to be given to the board under the Draft FSC Act. These are (i) supervision of the internal audit of the commission, and (ii) managing disciplinary proceedings against commissioners.

Power to freeze bank accounts: The SECP is empowered under its current jurisdiction to investigate very serious offences like fraud, deceit, insider trading and market manipulation etc, which may involve large sums of public money.

Any investigation which does not finally recover defrauded public money would be quite a futile exercise. It is for this reason that the commission has proposed that power to freeze accounts should be available during the process of investigation.

It is important to note that this power will be exercised by the independent Financial Services Tribunal and not by the commission itself. Similar powers are available to Securities and Exchange Board of India (SEBI). In Pakistan, National Accountability Bureau (NAB) has powers to freeze accounts.

It is pertinent to note that SBP appointed receivers of companies and firms under section 43AA of the BCO have the powers to freeze bank accounts of these entities.