Ideas & Debate

Why plan to merge financial service regulators is good for Kenya

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CMA chief executive Paul Muthaura, Financial Services Volunteer Corps president Andy Spindler and Bloomberg senior director Michelle Bond. PHOTO | SALATON NJAU | NMG

Kenya has in recent months been seeking to consolidate financial regulatory functions that are currently split among a number of agencies to improve coordination and surveillance of activities in this key sector through an Act of Parliament.

The aim is to create a Financial Services Authority (FSA) in line with a regulatory approach began in England in the 1990s in the wake of a series of financial scandals that caused the collapse of Barings Bank of England.

Founded in 1762, Barings was one of Britain’s oldest merchant banks, Queen Elizabeth’s personal bank and the bank that financed the Napoleonic Wars. Despite the rich history, one man, Nick Leeson, in the mid-1990s single-handedly bankrupted Barings owing to his poor speculative investments in futures contracts that cost him millions of pounds in losses.

Details of Mr Leeson’s story are contained in his book, Rogue Trader and later in a 1999 film bearing the same title.

This together with other financial sector scandals instigated a desire to bring to an end the self-regulation of the financial services industry in favour of a single agency with a broader mandate over the entire landscape.

In 1985, preceding the 1990s financial crisis, the UK’s Chancellor of the Exchequer, the equivalent of Kenya’s Treasury Cabinet Secretary, had established the Securities and Investments Board Limited (“SIB”) which had the legal form of a company, and operated it as a sole member of the company by way of delegation and in accordance with the then Financial Services Act of 1986.

Come 1997 in a quest to avert any future financial crisis, the name of the Securities and Investments Board was changed to the Financial Services Authority — a re-engineered, more robust, fully-fledged regulatory body with capacity to exercise statutory powers drawn from the Financial Services and Markets Act 2000.

This agency was charged with regulating banks, insurance companies and financial advisers and friendly societies under a consolidated arrangement.

After the collapse of major UK banks following the global financial crisis of 2008 that was characterised by a lending boom and subsequent burst, the FSA was widely blamed for inaction to the extent that it didn’t curb the risky trading of banks.

Subsequently, the Financial Services Act of 2012 was adopted, repealing the Financial Services and Markets Act of 2000. 

As a change of strategy, the new Act gave the Bank of England responsibility for financial stability and created a new regulatory structure consisting of the Bank of England’s Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority among other reorganisation efforts that were deemed to enhance regulatory function and protection of consumers and investors.

Near to home, South Africa is at an advanced stage of adopting a Financial Sector Regulation Bill, which is seeking to baptise this reformed UK approach into what is popularly referred to as the “twin peaks” model of regulation in reference to the proposed two separate independent bodies — the Financial Sector Conduct Authority (FSCA) and the Prudential Authority that shall have powers similar to those of England.

Kenya’s Presidential Taskforce on parastatal reforms of 2013 in its wisdom took note of the increased integration and convergence of financial products, services and providers in the financial services sector. In view of this, the taskforce proposed the merger of the regulatory functions of the financial sector services into a single financial services regulatory body.

The draft Financial Services Regulatory Authority Bill of 2016 (FSA) is a product of the taskforce’s proposals.

Upon perusal of the Bill it is apparent that it mirrors the UK’s financial services sector reform strategy that was deployed by way of an Act to avert future financial failures.

Akin to Britain’s regulatory dynamics, the Bill proposes the amalgamation of Capital Markets Authority (CMA), the Insurance Regulatory Authority (IRA), the Retirement Benefits Authority (RBA) and the Saccos Societies Regulatory Authority (SASRA) into one agency.

This new regulation is thought to have the advantage of strengthening dispute resolution mechanisms that have now been entrenched in law.

In Section 116 of the Bill, there is established an ombudsman with the powers to deal with complaints of consumers relating to financial products and service providers. Section 125 sets out the compensation criteria while, Part XIII - Section 133 establishes a tribunal that shall be responsible for reviewing the ombudsman’s decisions upon appeal.

The envisaged efficiency in regulation and improved consumer protection is a departure from the infamous court processes.

The onus is now on the stakeholders to use every single opportunity to interrogate this legislation so as to gain comfort that it would serve its intended purpose given Kenya’s circumstances.

On the other hand, Kenya has a golden opportunity to learn from the failures and impact stories of her former colony.

Further, beyond the FSAs adoption, it shall be prudent for the inaugural FSA officials to benchmark widely for purposes of ensuring that the best implementation approach is applied.