FINANCIAL REGULATION INSTITUTIONAL CAPACITY

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!

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