Regulators in Search of their Role

Financial regulators seem to be in search of their role far beyond the bee-line of notifications and circulars, as there is scarce little that appears to have been done to reform and govern. The banking and corporate regulators have shuffled their feet and shifted their gaze towards the Standing Committee of the Senate on Finance, when called upon to answer difficult questions.

No one is asking for the moon but keeping the written rules on the paper aside, what really has changed in the financial and corporate Pakistan over the years? Banking and corporate crooks abound under the stern stare of the country`s central bank—the State Bank of Pakistan (SBP) and the corporate regulator—The Securities and Exchange Commission of Pakistan (SECP).

The SBP is too quick to place the blame at the door of the government for the prevailing financial mess as its monetary policy is linked to the fiscal policies. That undermines the central bank`s authority to control inflation; streamline money supply and tap off flow of cash to the government, when it exceeds the borrowing limits set under the Act of 2005.

Bankers sympathetic to the SBP say that until the passage of reformed SBP bill now pending before the Senate, no governor of the central bank can stand up and say “No”, when the government already saddled with enormous sums in debt, asks for more. But where the SBP has clearly floundered is in the pro-active closer supervision of scheduled banks. The banks are still free to pursue bad practices that lead to such crisis as was seen in the Bank of Punjab.

If the governance of scheduled banks was not lax enough, could private and public sector financial institutions and banks have lent indiscriminately only to fatten their portfolio of non-performing loans, or worst still write them off as bad and irrecoverable?. After all, it is the depositors` money on which financial crooks that are able to secure loans, manage to flourish.

And what does the depositor who parks his savings in banking accounts get in return? A pittance. Despite `policy statements` by successive SBP governors, the scheduled banks continue to enjoy wide “spreads” between what they earn on loans and the yield they provide to the public. And does the regulator keep his eye on the “fit and proper criteria” a pre-requisite in appointments of directors on the boards of banks and insurance companies?

The other apex regulator — the SECP — is pleased to point out that it performs more than the role of regulatory body for the corporate sector and stock exchanges.

It would be inappropriate to name names, but apart from the expansion in market in terms of listings, which also has now dried up, most chief regulators who sat on the powerful seat in turns, could scarcely boast of having introduced significant reforms at the capital market, now capitalised at a staggering Rs3 trillion.

From the doves such as Mumtaz Abdullah to the hawks of the likes of Khalid Mirza, the SECP has seen more than half a dozen chief regulators of the corporate sector since the body was first formed in 1977. It was Corporate Law Authority (CLA) until re-named as SECP on December 19, 1997 by an Act passed by the then Majlis-e-Shoora. A former chairman of the apex corporate regulatory body said that the institution had minimal role, if at all, in the policy of privatisation, disinvestment and deregulation.

“Regulators work as the watch dog of not the policies (which are framed by the government) but their implementation”, he said. But how effective has the regulator been in putting policies into practice?

The SECP, headquartered in Islamabad, wields enormous powers to make rules and regulations and to enforce them. The regulator could argue and correctly that it has compiled laws for almost all sectors. It can also claim to have tightly monitored the trading practices at the stock exchanges. But if that were so, the KSE would have been spared of the four major crashes in one decade alone: in the years 2000; 2005; 2006 and 2008.

While enquiry reports of earlier crashes never saw the light of day and could be gathering dust in some corner of a government office, the reasons for the stock market meltdown of 2008 that started in April of that fateful year and went on to wipe out 70 per cent of the stock values, were not even investigated.

Small savers who dabbled in shares lost every rupee of their hard-earned money, yet no serious efforts were made to hunt down the corrupt brokers who fled the country defying the ban on their exit.

To this day, the apex regulator (SECP) and the front-line regulator (KSE) put the onus on one another for fixing the “floor” that eroded the equities of their value. The Stock Exchanges (Corporatisation, Demutualisation and Integration) Rules, 2008 approved and programmed to be in place by December 31, 2008, are dragging feet for over two years. The stock brokers have firmly blocked the path that would lead to the listing of the bourse, for fear of losing their grip of monopoly enjoyed for over half a century.

And after a former broker was put at the helm at the apex regulatory body, regardless of the `conflict of interest`, most small participants have been left at the mercy of a couple of big brokers who, one small fry complained, have the power to turn the tide of trading. But a reason for seemingly underperformance by the SECP could also be lack of capacity. In place of mandatory minimum five commissioners, the SECP has trudged along with just two till very recently.

As for the frontline regulator (KSE) suffice it to say that the managing director (MD) who stepped down recently managed to pocket a cool sum of Rs38 million in salaries-bonuses, not counting other benefits such as insider information and free foreign trips. And all that in the year in which the bourse had suffered an `operating loss`.

Earlier MDs must be green with envy, who made their living on pay package of a measly Rs10 million a year. Currently the country`s biggest bourse is run by an “acting” MD for want of appointment of a permanent person. Interestingly, this is in defiance of the Companies` Ordinance that has no provision for post of an “acting” MD. And what does the frontline regulator do, anyway, aside from holding endless meetings?

Admittedly, some sections of the “Code of Corporate Governance” have been strictly put into practice, but don`t the scores of fraudulent companies that sit on the KSE keep using accounting tricks to cook the books and post losses each succeeding year only to deny small shareholders their return on investment in company stock?.

Dig deeper and numerous unnoticed cases of corrupt practices of `insider trading` and `front running` by market players would surface. Then the question is: how many of the errant company directors or stock brokers have ever been prosecuted and thrown behind bars? Not to anybody`s knowledge.

The fundamental issue in all this could surely be the lack of autonomy and authority to the regulators to regulate the regulatee. It is clear that unless they are armed with those essential powers, the regulators will remain in search of their role.

The article was originally published in the Daily Dawn. Republished with permission.