Times Of Swaziland: FINANCIAL REGULATION INSTITUTIONAL CAPACITY

FINANCIAL REGULATION INSTITUTIONAL CAPACITY
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Sanele Sibiya on 08/05/2024 07:43:00


I make reference to the ongoing spat between Ecsponent and investors trying to
recoup approximately E334million which disappeared without a trace. This is very
unfortunate, further disturbing is the fact that we seem not to have capacity to
regulate none financial industry and investment advisors in the country. It
boggles the mind how our financial intelligence could not pick up on a hefty sum
transferred outside the boarders of Eswatini and no alarms were raised on this
regard. Also, one wonders why the Financial Services Regulatory Authority (FSRA)
did not play their supervisory role effectively to curb this massive outflow of
funds.
Mandate of FSRA
According to information sourced from the FSRA website, the mandate of the
authority includes the following duties and responsibilities; Licence, regulate,
monitor and supervise the conduct of the business of financial services
providers; Carry out investigations and take measures to suppress illegal,
dishonest and improper practices in the financial services sector; take measures
for the better protection of stakeholders. I will only draw attention to these
points of the FSRA mandate because I find them pertinent to the point I seek to
drive home, they all speak to the protection of consumers and the supervision on
none-bank financial service providers.
Hence I ask the question, how effective is FSRA in executing its mandate to
supervise none banking financial sector? Is it an issue of capacity or it is
perchance time to call on the minister of Finance to restructure and reform
FSRA. It is very painful to note that emaSwati have lost money and pensions and
it seems there is no recourse in sight; people might just be forced to accept
that they have lost their investments. Systems must evolve and I strongly
agitate that financial services regulation in the country must evolve.
Evolution of financial service regulation
Empirical evidence and observation on the field of financial services regulation
shows that financial services evolve after every crisis. It is imperative for
the local financial services regulatory authority to put in place measures that
will deter managers in financial firms from acting in their best interests,
deviating from what the social planner would have them do. As an example, there
should be measures in place to ensure that managers do not make risky
investments with investor’s money. The issue of investment advisory presents a
typical agency problem best described in managerial economics.
The interest of the financial manager is not in making profits for the
investors; however, it also lies in making the best bets in the market,
cementing their place as the best trader in the market. Furthermore, since
managers do not invest their own money, they are likely to make risky bets since
they do not lose anything, except their reputation if the money is lost. It is,
therefore, prudent to have a strong financial services regulatory authority to
curb this moral hazard on the side of the manager. The interest of the investor
and those of the manager must be aligned through financial services regulation.
Required reforms
There is need to move from micro-prudential regulation focused on developing the
right incentives for managers to act in the best interests of the investor.
Micro-prudential regulation focuses on preventing the costly failure of an
individual firm. The country needs to consider macro-prudential regulation,
ensuring not only preventing the failure of an individual firm, but also
ensuring that failures in one entity do not trickle into other firms. Evidence
coming through the Ecsponent story shows that FSRA regulations have even failed
to ensure micro-prudential regulation. What we are witnessing through the loss
of the E334 million is a catastrophic failure within a firm. Even, more
striking, following the story shows that this is not a failure, but rather a
situation where the funds were funneled out of the country and we seem to be
failing to recoup those funds.
This presents in my eyes as libhanoyi leliphahlakile, these actions are
emblematic of a pyramid scheme which was being operated right under the nose of
the FSRA. If the FSRA cannot detect that a pyramid scheme is being run by a
registered entity, then they should introduce capital requirements and
disclosure requirements. There are malpractices that one cannot detect simply
from looking at financial statements, a deep dive into the operations of the
entity is required. Also, there is need to improve the licensing stage. The
company registration system needs to be integrated with the FSRA system, to
ensure that the authority can do proper due diligence. Also, we need to
integrate the authority with the financial intelligence unit, this will aid
supervise the transfer of funds by the entities within and without the country.
Regulation failure
Unabated regulation failure results in major leakages of funds for the economy,
thereby reducing the amount available internally to drive growth. Also, it
creates a bad image for the country and diminishes our ability to attract
sustainable investment firms. The micro-level loses have marked impact on
households who are driven into poverty because of the loss of income. We must
act now!