The State Bank and the Securities & Exchange Commission of Pakistan are striving to get rid of overlapping functions, but they also are seeking closer coordination for better management of the sector.
The government is facilitating the two apex regulators in their quest for increasing institutional capabilities. “However, it still wants to keep some room to manipulate things to cover up its own inefficiencies,” according to a senior official of SECP. He says that the autonomy the SBP has achieved in the recent years is showing results. “But for us, it would take a few more years to become a truly independent regulator.” Hence the move to set Financial Services Commission of Pakistan (FSCP).
The draft Act of the proposed commission is ready and intra- government consultation on it are in progress. It might be tabled before the legislature sometime next year after eliciting views of the stakeholders including those from the private sector.
“The Act envisages creation of a regulatory body that would be regulating financial institutions minus banks,” a SECP official disclosed.
He said that the proposed entity would have supervisory and regulatory control not only over the institutions but also on the individuals like chartered accountants who provide financial services. Banks will continue to remain under the State Bank control.
He, however, revealed that the Act proposes that FSCP should have the powers to freeze bank accounts of the persons under investigation for a limited period.
This proposed empowerment of FSCP is unlikely to gain support from banks and the State Bank because any government can misuse it for political reasons and it can also impact negatively on the working of the banks. Those who like this idea argue that sometimes the erring bank settles a dubious account under investigation by the SECP-- before the account could be frozen through the SBP intervention.
A SECP source said that the case of multi-million dollar insider trading involving at least two Pakistani bankers earlier this year could have been handled more efficiently had SECP got access to their accounts on time.
The FSCP draft Act also proposes to establish the institutions of Financial Ombudsman and Financial Tribunal to ensure speedy disposal of complaints against NBFCs and reduce the workload of regular courts.
“But the proposed institutions will not interfere with the working of the Banking Ombudsman”, said an official. The creation of the institution of Banking Ombudsman and the setting up of SBP Banking Services Corporation (BSC) were the natural outcome of the banking sector reforms initiated in mid-1990s. Whereas BSC took over the non-core business of the central bank, the office of the Banking Ombudsman ensured that the end users of banking services do have recourse to justice.
And justice they sought because as banks began to transform under the 90s reforms they often overlooked the interest of the end user.
Having entrusted non-core business to SBP BSC and having set up the office of the Banking Ombudsman, SBP is more focused on achieving price stability.
The central bank is now promoting the idea that if it is allowed to practice inflation targeting, its monetary policy would become all the more successful in keeping inflation at the desired level. But it cannot start inflation targeting unless the government is under stricter self-discipline.
The creation of FSCP and the introduction of the Anti- Money Laundering Ordinance, meanwhile, would bring in more discipline and depth in the entire financial sector. That, in turn, would also exert additional pressure on the government to keep its financial house in order thus making the task of inflation targeting a bit easier.
Under the ordinance issued last week, the government would set up a Financial Monitoring Unit to properly monitor suspected transactions and check money laundering. The government would appoint a financial sector specialist, in consultation with the SBP, as director general of FMU and the office of the FMU would also be housed in the SBP.
The creation of FMU would give further space for the central bank to focus exclusively on the devising and implementing its monetary policy besides keeping a general regulatory control over banks.
“But as the financial sector becomes more and more integrated with the global financial markets, the SBP and the proposed FSCP would need to coordinate more closely for smooth functioning of the financial markets,” said a SBP official.
He said that under a memorandum of understanding signed by SBP and SECP a few years ago both regulators were supposed to exchange vital information and hold quarterly meetings to sort out complicated issues.
One important area of their coordination is to keep a check on the activities of financial conglomerates. The increasing growth and complexity in banking sector have given rise to new issues and challenges.
Industrial and brokerage companies now own banks and similarly banks own subsidiaries and associate companies that handle asset management, brokerage, insurance, housing and telecommunication businesses.
“These close linkages and cross ownership structure among the corporates and financial institutions expose the banks to related party transactions risks,” SBP Governor Dr Shamshad Akhtar remarked early this year while speaking to international bankers in Washington.
Financial experts say the SECP is all prepared for introducing the second-generation reforms aimed at bringing in more depth and diversification in the market and better regulating the non-bank financial sector. This would help both SECP and the SBP, which too has got rid of many of its non-core business to ensure that the financial system remains all-inclusive and that financial conglomerates do not corner small players.
Currently, SECP is not only updating the existing laws but is also busy developing Codes of Conduct for various professional service providers including stock brokers, analysts, voluntary pension fund managers etc. Lately it has circulated the draft Act of Real Estate Investment Trusts and invited input from all stakeholders.
Once this Act is finalised and passed into law, it would greatly expand the scope of financial products allowing even small and medium size investors to invest in the real estate, which has so far remained the exclusive domain of large investors.
National Commodity Exchange Ltd. has also become a reality and started functioning.
With so much happenings in both-- banking and non-bank financial sectors-- the end user of the financial services stand puzzled not knowing how to get the maximum value of his investment and how to protect himself against various kinds of the risks involved.
“Investors’ education, therefore, should be a corner stone of the second generation financial reforms,” said a senior executive of a foreign bank.