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An assignment on “The Regulatory Framework of Mauritius”

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Assignment on “The Regulatory Framework of Mauritius” Table of Contents What do you consider to be the best regulatory framework for Mauritius? Regulatory Framework of Mauritius A unified regulatory body (Single Peak) A unified regulatory framework may also give rise to some difficulties. A non-unified regulatory body (Twin Peaks) What are the main recommendations of the steering committee on the establishment of a new regulatory framework for the financial services sector in Mauritius? References

What do you consider to be the best regulatory framework for Mauritius?

In every institution, there are limits that regulate all the individuals within the community. Regulation is the process of promulgation, monitoring and enforcement of rules that is creating a new law to monitor individuals and to ensure that every individual is obedient. If these rules are not enough to regulate individuals, the enforcement of rules is required. Likewise in the financial market, the need of regulatory bodies is required. It can take form of a public authority or government agency but there are also independent regulatory agencies which are not associated with government. Financial regulation is important to maintain integrity in the financial market. If a new financial institution is to be opened, it must abide to certain requirements, restrictions and guidelines. There is no restriction or exemption; all financial institutions whether big or small must follow the same rules.

Regulatory Framework of Mauritius

The existing financial structure of Mauritius is a non- unified one. The Financial structure should actually have been a transition one which would have firstly consisted of a Twin Peak Model which would lately have been merged together to form a unified structure. Nonetheless, there is still a regulatory body for the banking sector and another one for the non banking sector. The Bank of Mauritius (BOM) is the authority which has been set up for the regulation of banks. The non banking sectors, on the other hand are under the responsibility of the financial Services Commission (FSC). Both the FSC and BOM follow risk- based supervision approaches and formal strategies to centre their resources on those institutions and practices that include bigger risks. In recent years, the financial markets of Mauritius have undergone growth and have also been successful in weathering the global financial crisis reasonably well. Despite this, due to the emergence of complex financial structures with overlapping activities in different areas of the financial sector, it was perceived that it might prove more efficient to carry out an integrated form of regulation for financial services. Moreover, regardless of past issues and the minor problems that may have occurred with the ministry of finance or government, the regulatory bodies of Mauritius have been doing a rather good job. The Banking sector of Mauritius kept performing well even after the problem that it faced due to the Barclays bank. Mauritius’s Banking sector was ranked 15th out of 144 in ‘The Global Competitiveness Report 2012-2013 of the World Economic Forum’. Nevertheless, the issue of whether to have separate specialist bodies or a unified supervisory agency continues to provoke intense debate amongst academicians, practitioners and in government quarters. The structure of financial services sector throughout the world is undergoing dynamic changes. Will Mauritius need to redesign its financial regulatory structure to increase effectiveness and confidence remains the question. As there had been the past failure of 3 banks and 3 insurance companies, Mauritius requires vigilance and strong supervision in the maintenance of an overall stable financial system. Should Mauritius shift from a Twin peaks to a Single peak? First of all, we should keep in mind that having a Twin peaks or a single peak will not always guarantee effective supervisions. Both a unified and non-unified body will have its advantages and disadvantages.

A unified regulatory body (Single Peak)

  • Supervise both banking and non- banking sector
  • May lead to economies of scale in regulatory activities
  • Overall economic welfare increases as financial institution saves costs by adopting a single building with single disciplines
  • Maintains clarity and cohesion of the objectives
  • It is argued that an overlapping problem arises when there are separate agencies for regulations because the two functions are interrelated. This can be avoided by unifying the system
  • As Mauritius is a relatively small jurisdiction, its attractiveness as a financial centre of high standing might be increased with the adaptation of a single peak
  • A single manager structure would be responsible for overseeing all activities in the financial sector and this might ensure that some financial institution do not have an unfair advantage for competing for customers
  • It is also believed that a single regulator can respond much more quickly and effectively to market innovation and development
  • It strengthens accountability of supervisors
  • Unification would also result in cost saving through a single set of central support services by the sharing of infrastructure and administrative resources.
  • Unification also helps in retaining a body of skilled professional staff by developing coherent human resource policy
  • In a twin peaks, each supervisor will tend to defend his separate turf whereas in a single peak, both supervisors will cooperate and work together
  • Due to advancements in technologies, there has been the blurring of boundaries between the banking, securities and insurance sectors. Hence it is said that a single regulatory body might be more efficient

A unified regulatory framework may also give rise to some difficulties.

  • It might be difficult to set up a single set of objectives for both the banking and non-banking sector
  • Can suffer from the Christmas tree effect
  • If a problem arises, the whole sector can be affected
  • It may undermine the overall effectiveness of supervision by not recognizing the unique characteristics of the banking, securities and insurance industries.
  • May only work in certain countries and may be more suited for developed financial systems.

A non-unified regulatory body (Twin Peaks)

  • 2 different agencies supervising banking and non-banking activities
  • Might create conflicts between agencies. In the case of Mauritius, the Bank of Mauritius might make some decisions which the Financial Services Commission do not approve
  • If the staff are responsible and know their respective works well, it might be better to work in a non-unified regulatory framework rather than a unified one
  • Through a Twin Peaks, more emphasis might be put on the different sectors. For eg: If a problem arises in the banking sector and at the same time another problem arises in the insurance sector; tackling the problem might be easier as the BOM would concentrate only on the banking sector while the FSC on the insurance. This will also prevent work overload
  • If tomorrow a problem arises with a leasing company and a proper solution is not found. People might hold the regulatory body responsible. Hence, if there is a unified regulatory body, the banking sector as well might be affected as people will lose trust
  • When adopting a non-unified regulatory body, it may be possible to achieve more than the desired result if there are good cooperation
  • Even though it is believed that a single regulator can respond much more quickly and effectively to market innovation and development, the Twin Peaks as well might be as effective if the personnel is well trained and knows his responsibility
  • In UK it was seen that they are adopting the Twin Peaks model in the view that: Each supervisory arm would make their own, separate, set of regulatory judgments against different objectives while coordinating internally to maximize the exchange of information in what is termed "independent but coordinated regulation".
In the case of Mauritius it might be thought that swapping to a single peak framework might improve effectiveness and confidence. However it would all be determined by the global trends in the financial market, the social and economic aspects of Mauritius. To transform its goals into action, Mauritius has to respond more forcefully to its dynamic environment. Policies should be strengthened to reassure investors of the solidity of the economic sectors and the transparency with which economic information is disseminated to economic operators and users. Such an approach would promote good governance and investor confidence, which, in turn, would contribute to sustained economic growth. As Mauritius is a relatively small jurisdiction, it does not have the advantage of having a long established track record nor an efficiently operating financial market. Hence unifying the regulatory body may be considered as necessary to heighten the credibility and the quality of financial sector regulation and supervision in a strategic approach to develop Mauritius as a more credible financial centre. As stated by the Minister, Mr. Xavier- Luc Duval; “Making Mauritius a financial center is not an easy task.” It indeed takes some time to establish a good reputation and see it grow as a financial centre. To make this possible, the jurisdiction, existing laws and economic stability are very important. Unfortunately recent scandals such as the ‘white dot case’ and the ‘Sunkai case’ prompted the authority to sound the alarm. It must thus be noted with regret that without a good regulatory framework and enforcement of laws, some financial intermediaries would not at all hesitate to deceive investors. Hence, the government might consider a unified body to be the best regulatory framework for Mauritius but at the same time the government might also opt to continue with the existing framework that is ‘Twin Peaks’ but improve it. Mauritius would thus continue to be an attractive centre for financial services if well managed. It is very difficult to choose one of the financial regulatory structures. There is no best or ideal model that would fit every country.

What are the main recommendations of the steering committee on the establishment of a new regulatory framework for the financial services sector in Mauritius?

According to the Manraj report, the main recommendations of the steering committee are as follows:
  1. A unified financial regulatory authority, covering both banking and non-banking activities, be established in a phased manner, as follows:
Phase 1consist of the immediate establishment of a Financial Services Commission. Phase 2 consist of the eventual integration of the Financial Services Commission with the Bank of Mauritius.
  1. The Financial Services Commission will be responsible for the licensing, regulation and supervision of all non-bank financial services. It will also be responsible for the protection of the rights of consumers of financial services.
  2. The Financial Services Commission will take over the duties and functions of the Stock Exchange Commission, the Insurance Division and the Mauritius Offshore Business Activities Authority (MOBAA) as well as the regulation of all presently unregulated activities in the financial sector.
  3. The Financial Services Commission will be managed by a Board which will be chaired by the Managing Director of the Bank of Mauritius. There will also be the presence of a Vice Chairperson and such other members as may be appointed by the Minister.
  4. The Financial Services Commission will facilitate the smooth integration of the onshore and offshore activities.
  5. An appropriate legal framework is proposed for establishing the Financial Services Commission.
  6. A Financial Services Advisory Council will be established with the objective of giving overall direction and advice towards the development of the financial services sector. The Chairperson and Vice-Chairperson of the Advisory Council will be the Minister of Finance and the Minister responsible for Financial Services respectively. The other members will be the Governor of the Bank of Mauritius, the Chairperson and the Chief Executive of the Financial Services Commission, as well as practitioners from Mauritius and from overseas having an extensive exposure to financial sector development.
  7. The establishment of a Financial Services Promotion Agency (FSPA) is being proposed as a separate entity. It will act as a one-stop-shop for the development and promotion of the financial services industry. The FSPA will work in close collaboration with the Board of Investment to devise strategies to attract investors to the financial sector of Mauritius. The FSPA will also be responsible for human resource development and keep abreast of technological advances in that sector.

References

  • Business Mega; 9th April 2013
http://business.mega.mu/2013/04/09/preserve-integrity-financial-system-mauritius/
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