Public accountability is also essential and so regulators should be compelled to publish annual reports in which they must set out their major actions in the preceding year, the outcomes and their plans for the upcoming year. They should also outline key information about the sector that they regulate.
(4) Regulatory tools – An appropriate range of tools should be put in place to assist in the: review of existing regulations; design and development of new regulations; monitoring and supervision of regulations; and enforcement of regulations.
(5) Independence – It is extremely important that regulatory institutions can operate at arm’s length from the policymakers and lawmakers. Freedom from political interference will reduce the risk of knee-jerk reactions to perceived regulatory failures and will also make the sector and country attractive as an investment destination.
An overriding vision needed
Once the aforementioned framework is in place, the regulators put in place to regulate the financial sector should set out an overriding vision to their stakeholders so that everyone is aware of the rules of the game.
Financial regulators should publish rulebooks that are available to the public. For instance, the CBN, as the banking regulator, should publish a comprehensive Banking Rulebook which contains all of the regulations that a regulated bank must comply with. Any changes to this rulebook should be subject to prior consultation (except in emergency situations and in cases of systemic risk). This would be much more transparent and effective than the current system whereby the CBN habitually issues directives (in a manner not too dissimilar to, say, a military decree) for the sector to follow without due process or prior consultation.
Similarly, the NAICOM should publish an Insurance Rulebook which outlines all of the rules and regulations that an insurance company or a reinsurer must comply with at all times. The SEC does already have a rulebook published on its website and is therefore already ahead of the game in this respect. However, it should keep this updated and better publicise the existence of the rules.
Whenever a financial regulator (such as the CBN, NAICOM or SEC) wishes to change a rule, it should consult publicly. The consultation process should take account of the following:
(a) Market failure analysis (MFA) – In line with international standards, the policymakers should conduct an impact study, i.e., Quantitative Impact Study (QIS), to understand what the economic impact of the proposals might be.
(b) Options and alternatives – Policymakers should set out alternative regulatory and non-regulatory options that could achieve the objectives identified in the MFA. It should provide a description of each feasible option that explains how the option, if implemented, would achieve the desired outcome.
(c) Cost benefit analysis: A comprehensive assessment of the expected impact, in terms of costs and benefits, of each option should be carried out and published. The objective should be to choose the most appropriate option for resolving the identified problem and to provide readily-accessible evidence, where possible, to support this decision. The expectation should be that the benefits of the proposed option exceed its costs and represent (where appropriate) the option with the greatest net benefits (benefits minus costs) of all the alternative options considered.
(d) Regulatory impact analysis – Here, the regulator in question should systematically assess the impact of a proposed measure on affected stakeholder groups and set out other feasible alternatives for addressing the identified regulatory failure. This should endeavour to adhere to the principles of accountability, transparency and consistency.
In conclusion, regulation is now widely recognised as an important instrument in the economic development toolkit. The policy development aspect of regulation, when conducted properly, can support market-led growth and rapid development of the regulatory landscape. This can in turn be used to create a level-playing field for stakeholders, aid transparency and benefit from considerable buy-in by the market.
OLU OMOYELE ET AL
The writers Olu Omoyele, Tunde Akodu and Ola Omoyele are of Applied Capital Markets Ltd (ACM) – risk management consultants and publishers of ACM-Insight
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