Transparency, fairness in financial regulation

Dr Alex T Magaisa

A CONSPICUOUS feature of the present regulatory financial system in Zimbabwe is the apparent lack of transparency and fairness in the handling of issues relating to individual institutions

by the supervisory and enforcement authorities.


This is characterised by the confusion among key stakeholders that include shareholders, consumers and creditors of ailing financial institutions with regards to the efforts of the RBZ as the chief regulator, to restore normalcy to the sector.


I argue that this is a consequence of a key shortcoming in the regulatory structure: the lack of a body that should be responsible for adjudicating on the claims and counterclaims between the regulator and the regulated entities.
 
A related problem is that the regulator appears to have no defined mechanism for distinguishing between its role firstly as a supervisor and secondly as an enforcer. The result is that some enforcement decisions are being made on the basis of information arising from its supervisory duties thereby circumventing a key investigative role which is necessary for purposes of carrying out fair, transparent and effective enforcement.


In this article, I suggest that the architecture of regulation be overhauled to achieve the following:


First, ideally, establishing an independent financial regulatory authority thereby following a growing and efficient international trend. Secondly, that authority must have an independent committee that makes decisions and imposes sanctions against regulated entities on the basis of evidence arising from properly conducted investigations.


Finally, there must be an independent and specialist financial servicestribunal which is res-ponsible for hearing appeals from regulated entities against decisions and penalties delivered by the independent committee of the regulatory authority.


In previous articles in this column, I have already argued the case for an independent financial regulatory authority, so I shall concentrate on the last two aspects against the background of the prevailing context of regulation in Zimbabwe.


First, an independent tribunal would serve three purposes:


*To adjudicate on appeals by affected entities against decisions of the independent committee of the regulator,

*To create fairness, transparency in the decision-making process and,

*To ensure a mechanism for holding the regulator accountable to regulated entities by creating checks and balances against the abuse of power and discretion.


The idea is to resolve the differences between the regulator and the regulated entities characterised by the fear that as both a supervisor and enforcer, currently the RBZ essentially plays the roles of the prosecutor, the witness and the judge in its own cause.


It may of course be argued that there is no need for a tribunal because the courts of law are available to play that role of dispute resolution. However, I argue that as events of the recent months have demonstrated, there are several limitations which can be overcome by establishing the suggested tribunal.


This is a specialised area where there is a demand for quick and effective dispute resolution. The use of experts in such a tribunal, who do not qualify to be judges in courts of law, will enhance the achievement of these goals. Such expertise is not readily available in the judiciary.


Secondly, the courts are already over-loaded with work in other key areas and might do without the increased burden of these disputes at the first instance.


Additionally, the existing backlogs entail that it may take months or even years before the matter is heard before a court of law unless it satisfies the stringent conditions to qualify as an urgent application. In order to enhance efficiency in the markets, it may be preferable to establish this avenue to deal specifically with matters of this nature. As in any other cases however, should the tribunal make decisions that are disputed, the door should be open to the courts of law.


However, if the tribunal is truly independent and enjoys the confidence of the players, it is unlikely that further appeals to the courts, though entertained, would be successful, which could deter spurious appeals in future. We already have precedents of similar tribunals such as the Labour Relations Tribunal which is specifically for labour matters.


This structure would enable regulated entities to bring challenges against penalties or being placed under curatorship or other decisions, which can be resolved quickly and efficiently. It would be free from procedural requirements that often delay litigation proceedings.


While it is true that current laws allow for such challenges, it is suggested that this is a more efficient way of dealing with the matters. One procedural issue that would remain at the core of the process is the evidence used in the decision-making. In my view, this is where the responsible independent committee plays a role.


The idea is that the regulator must perform on-going supervision but its investigative role springs up upon encountering any potential problems. It is on the basis of evidence arising from its investigative role (which is not the same as supervisory) that the matter is passed on to the decision-making committee.


The committee then makes its decision based on a proper analysis of the evidence. Provided that it retains its independence from the executive of the regulator, the committee should be free to make impartial and well-considered decisions. Nonetheless, if the regulated entities feel aggrieved by the decision, they have the alternative route of proceeding with their appeal to the independent tribunal. The tribunal will evaluate the evidence and process by which the decision was made and make a determination.


Regulated entities have a legitimate expectation that decisions of the regulator are made on the basis of specific, accurate evidence in compliance with normal legal standards. This process ensures that the regulator does not simply act on anecdotal and general evidence that may not stand under scrutiny.


The current environment whereby the regulator simply makes broad and general statements paint-brushing bankers as fraudsters hardly breeds confidence in the system. One could question whether certain decisions would have been made if individuals and entities had been given a fair opportunity to defend the claims and accusations without strong-arm tactics such as threats of arrests and detention being applied.


More significantly, by adopting an aggressive approach, did the regulator close off the opportunities of pursuing civil remedies against executives that might have yielded financial results which could have been used to save some of the ailing banks?


It seems to me that threats of criminal action at the expense of pursuing the necessary civil remedies at the outset may have scuttled such key opportunities.


The problem of the regulator making decisions based on flawed evidence was demonstrated most recently in the UK in the case involving Legal & General plc and the Financial Services Authority (FSA), responsible for regulating the financial industry.


The FSA had heavily fined Legal & General over a case involving mis-selling of mortgages to consumers. However, when Legal & General appealed, the financial tribunal found that the FSA had based its ruling on exaggerated and insufficient evidence. This has attracted criticisms of the UK regulator’s procedures which they are likely to reform to avoid any future embarrassment.


Now, this case is important because when one draws parallels with the way the RBZ has handled some cases in the financial sector, it is clear that there is a perceived lack of transparency and fairness by some regulated entities. This is demonstrated by Time Bank’s appeal to the courts against curatorship but in my view, the matter could be easily and efficiently disposed of if Zimbabwe has an independent tribunal to handle these regulatory matters. It would scrutinise the RBZ decision and the evidence from both sides before making a determination. Indeed, if the RBZ was wrong, this would be highlighted and could lead to some positive change in the way it handles matters in future.


Thus far, the RBZ appears to be using the strategy that once it finds a potential problem, it calls for the placement of the institution under curatorship and then rely on the curator to carry out investigations on its behalf. Although the law requires the curator to act in the interests of the key stakeholders such as shareholders and depositors, current reality appears to show that his primary obligation is to the RBZ.


His independence is therefore compromised and is likely to be partial towards the regulator’s interests. It is possible that whatever the curator produces is likely to put a cover on the supervisory shortfalls of the RBZ and simply be used to nail the perceived wrongdoers. Such practice will perpetuate a regressive normative culture from which we seek to escape.

The complaints against curators cannot simply be dismissed as unnecessary outcries of fraudsters. An independent tribunal could play a balancing role in this situation so that the curator acts impartially knowing that his evidence and activities will be under scrutiny. Meanwhile, the aggrieved may have to use the normal routes to courts of law, which is long-winding, complex and expensive.


In conclusion, we cannot simply assume (as we are made to believe), that the regulator did a perfect job and all scoundrels were in the regulated entities. Failing to scrutinise the decisions of the regulator and its role in the crisis will entrench a regressive culture among those responsible for supervision and enforcement.


*Dr. Alex T. Magaisa is Baker & McKenzie Lecturer in Corporate & Commercial Law at The University of Nottingham, UK Contact at:alex.magaisa@nottingham.ac.uk

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