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Case for a single financial regulator

By Alex Tawanda Magaisa

THE government of Zimbabwe responded to the financial crisis that engulfed the country at the start of the year by introducing a plethora of legislative changes. These laws include am

endments to the Criminal Procedure and Evidence Act, the Anti-Corruption Commission Act, the Securities Act, the Asset Management Act and bank regulations.


Instead of perpetuating and adding to a multiple sector-based regulatory structure, Zimbabwe needs a unified structure of regulation with a single regulator in the financial industry at the centre.


The phenomenon of the single financial regulator such as the Financial Services Regulator (FSR) is not novel. It has become a major international trend with China being one of the latest countries to introduce a similar structure with the formation of the China Banking Regulation Commission last year.


Key international organisations such as the IMF have expressed support for typical institutional structural arrangements in the UK when it created the unified Financial Services Authority between 1997 and 2000.


Besides the UK, other countries that have introduced a single authority include Japan, South Korea, Iceland, Denmark, Norway, Ireland, Sweden and Luxembourg. In light of this, it would be well in line with the growing international trend to move towards the creation of a more unified regulatory structure for the financial industry.


This international trend is based on strong rationale.


The FSR would be responsible for the admission and registration of all financial entities and would set standards of regulatory compliance, which would be a departure from the current system where the players are licensed by a particular body and regulated by another. For example under the current regime the Ministry of Finance and Economic Development is responsible for the licensing and registration of commercial banks while the RBZ is responsible for the regulation. It would be more effective for the regulator to be in control of the licensing and registration of players. The FSR would be charged with the responsibility of supervising and regulating the financial industry as a whole.


The coverage of its role would include traditional banking, insurance, securities regulation, asset management, investment and pension funds etc. It would also be responsible for countering money-laundering, promoting investor protection, public awareness and maintaining market confidence.


Firstly, the traditional distinctions between business sectors and products in the financial industry are becoming blurred mainly due to the technological progress, financial innovation, globalisation and competition within the industry. The function-based institutional structures were traditionally designed for firms that dealt in a limited and specific set of functions such as insurance, deposit taking, lending, investment funds, etc.


However, the growth of conglomerates through mergers and acquisitions as well as internal growth means that many institutions cut across the traditional sectoral divisions in the industry.


As more companies move away from focussing on limited activities towards multi-sectoral areas such as deposit-taking, corporate finance, insurance, asset management, investment funds, it becomes necessary to bring the regulation under a single roof. It becomes harder to regulate on a functional basis since firms are no longer restricted to specific functions. Rather it is imperative to consider the financial group as whole in order to avoid a narrow function-based assessment.


As may have been apparent in some financial institutions during the crisis, the solvency of a company is best measured on a broader group inquiry. The growth of asset management firms occurred within a regulatory lacuna and authorities reacted only when the problems had matured. With the FSR dedicated to regulation of the sector, it would have been better able to react to these developments at an early stage and set up proper mechanisms for their regulation.


The FSR would also bring in efficiency gains for the regulator, the regulated and the investing public.


Firstly, it would reduce the number of multiple regulators involved in the different sectors. That would also reduce potential for conflict of interest and responsibilities between the different regulators dealing with the same entities. It is easier for consumers and investors to deal with a single channel of communication provided by the FSR.


Although better mechanisms of communication and co-ordination would ease problems in the present structure, it becomes more complicated and difficult to manage particularly with the blurring of functional distinctions in the industry.


It also avoids duplication of responsibilities and complexity. Regulation is costly for firms and these costs increase when they have to deal with multiple regulators. Most firms have had to create compliance departments filled with lawyers who have to attend to the regulatory issues concerning the firm. The more the regulators they have to deal with, the greater the need for more staff and systems. Indeed that entails the incidence of greater the expense. A single regulator would unify systems and ensure that there is a uniform playing ground with standards that are more systematic.

Clearly there are economies of scale to be gained from the unification of regulators into a single FSR.


In addition, the FSR would be more accountable both politically and publicly than under the current situation. The RBZ is more accountable to the politicians than to the consumers and the institutions that it regulates. It uses public funds for regulatory purposes and accounts to the government. The creation of an autonomous regulator would make it more accountable to parliament.


Like the Financial Services Authority in the UK, it would be required to produce an annual report and would be subject to review by legislative committees to ensure that there is accountability.


The objectives of the FSA are clearly stated in the law and its performance is measured against those standards.


Under the current set up in Zimbabwe, it is also very difficult to enforce legal accountability of the RBZ. Although no case has come before the courts it would be hard to succeed in a claim against the RBZ for regulatory failures. Although Time Bank is currently suing the RBZ, it is not precisely a case about regulatory failures. In the UK, the Bank of England is being sued by the liquidator in a protracted legal battle arising from the collapse of the Bank of Credit and Commerce International (BCCI) in the early 1990s.

An autonomous FSR would be directly responsible for its role as the regulator. In my view, courts are more likely to be willing to find such an authority liable compared to a central bank.


The removal of the regulatory function from the RBZ would also enable it to concentrate fully on its primary role as the monetary authority. It would increase professional levels and reduce the potential for conflict of interest within the bank. Under the present system, the RBZ might use public funds to rescue firms for purposes of covering its own regulatory shortfalls. It may also fiddle with interest rates to save ailing banks instead of concentrating on preventing inflation at the national level.


The regulatory function would also get better prominence than has been the case in recent years. That means that the single regulator will be able to retain and train human resources suitably qualified and remunerated for the work that they do. There are charges that in most cases the regulatory departments of the central banks are often under-capitalised and poorly resourced leading to general attitudes of neglect.


A single regulator would be able to build capacity from a wider pool of resources since it is the regulated institutions that primarily contribute to its funding. The removal of the regulatory function does not entail that the RBZ would be totally removed from the scene. It will still be necessary to retain key communication and co-ordination channels but it is far better for the RBZ to do that with one authority than with multiple regulators in different sectors of the industry.


The trend towards establishing a single regulatory authority in the financial industry has gained prominence in most countries. It is reflective of the dismantling of sectoral boundaries and international barriers. Traditional banks are no longer the only intermediaries that take money from the public.

There are more players and instruments such as asset management companies, insurance, investment units and while the protection of the uninformed investors is a key aspect of regulation it is not adequate to concentrate only on traditional banking institutions.


Similarly, the creation of a single authority brings in economies of scale and simplifies the regulatory platform for both the regulated and the consumers. The authority may be a government agency as in China but preferably it would be an autonomous organisation with primary funds coming from the regulated entities to which it is accountable. It is just a small step in restoring and developing the credibility of Zimbabwe’s financial system and bringing it in line with the growing international standards.



* Alex Tawanda Magaisa is Baker & McKenzie Lecturer in Corporate & Commercial Law at The University of Nottingham, UK. He can be contacted at: Alex.magaisa@nottingham.ac.uk

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