August 11, 2008	Monday	Sha’aban 8, 1429

ISLAMABAD, Aug 10: The Securities and Exchange Commission (SECP) has criticised a move to empower the central bank to regulate a number of non-bank finance companies, saying it has not been consulted on the matter.

The move is part of an Asian Development Bank-funded programme.

The commission, in a letter to the finance ministry, warned that the proposal was against the spirit of the second generation multi-million dollar capital market reforms programme, also being funded by the ADB, and would create an overlap of jurisdiction and regulatory confusion.

The $500 million ADB-funded Accelerating Economic Transformation Programme has proposed that the State Bank of Pakistan (SBP) would retake from the SECP powers to regulate certain NBFCs. The SECP has been regulating the entire NBFC sector since 2002.

According to the proposal, 12 leasing companies, eight investment banks and three housing finance companies will be regulated by the SBP, and the remaining 98 NBFCs, mostly Modarbas and leasing companies, will remain under the SECP command.

The justification cited by the SBP was that these companies were involved in taking deposits from the public and, therefore, should be regulated by the central bank, like other banks. The SECP said that the proposal contradicted the conditionalities of an earlier reform programme, which was still under way. The second tranche of the programme, which is yet to be released, requires the government to introduce a new primary law for regulating the NBFCs, and which establishes the SECP as the regulator of all NBFCs and collective investment schemes.

The release of the tranche is linked to another condition — introduction of the new Financial Services Commission (FSC) Act to replace the SECP Act of 1997, which also establishes the SECP as regulator of the NBFC sector.

The SECP said that the proposal for excluding deposit-taking institutions from the definition of NBFCs, and consequently the supervision of the SECP, was never raised or discussed by the ADB during negotiations on capital market reforms.

“This abrupt change by ADB without our consultation is unfortunate and not based on any immediate necessity or obligation or the understanding reached with ADB,” the letter said. The SECP has also conveyed to the Finance Ministry that internationally, the SBP’s role is to regulate the financial sector and to control the corporate or securities side of the economy.

The letter said that in 104 countries, the central bank either had no direct supervisory responsibilities (50 countries) or acted only as the banking supervisor (54 countries). Hence the State Bank’s effort to become the consolidated supervisor was indisputably against international best practices.

“If we are not moving in the direction in which the world is moving, at least we should not be moving in the opposite one.”

The Financial Services Authority of United Kingdom, BaFin of Germany, the Financial Services Agency of Japan, Banking Finance and Insurance Commission of Belgium, the Financial Market Authority of Austria, and the Financial Supervisory Service of Korea were prime examples of how NBFCs were being controlled by corporate regulators, it said.

The commission requested the finance ministry not to implement the proposal because almost all other stakeholders had expressed their reservations over the issue.