Page 5 - newsletter
P. 5


2.	 Enabling market discipline to     goes that requiring companies         admitted that every penny of
    work effectively; and             to report on how they deal with       profit it earned over the past five
                                      certain issues will encourage         years had been spent on fines and
3.	 Encouraging better                them to take them seriously for       misconduct charges. However,
    performance and decision-         fear that investors will sanction     the point has really hit home now
    making by companies.              them if they do not have a good       that scandals are hurting the UK
                                      story to tell; either by using their  banking business and there is
Regulators have a range of tools      voting rights where they have         now a realisation that banks will
                                      them or by investing their money      lose their licence to operate if
at their disposal to achieve          elsewhere.                            they do not change.

these purposes – hard and             The third purpose that I              In Uganda, the Ugandan Central
                                      identified – encouraging better       Bank has ordered banks to
fast rules, “comply or explain”       performance and decision-             strengthen their balance sheets
                                      making – is in a way a variation      so that they can weather industry
codes, guidance, reporting            of the protection rationale. The      shocks better. With nine banks
                                      better that companies perform         having collapsed in the last 13
requirements,  inspection             over the long-term, the better        years, including the Co-operative
                                      that the interests of investors are   Bank, Greenland Bank, Trust Bank
and sanctions, “naming and            served. But the tools used to date    and International Credit Bank all
                                      have been closer to those linked      in 1999 and the Global Trust Bank
shaming”, empowering or               to market discipline.                 as recently as 2014 this would
                                                                            seem to be a sensible regulatory
working through third parties         Obviously I am specifically           policy.
                                      thinking here of the UK Corporate
and so on. Sometimes even just        Governance Code and the               Yet not everybody learns from
                                      “comply or explain” mechanism.        regulation or history. Four banks
threatening to take action can be     Organisations have learned over       have closed in about nine months
                                      time that slavish adherence to        in Kenya and in the US regulators
an effective way of bringing about    every precept in the Code is not      have notified some of the
                                      required if a particular provision    largest US banks that they have
change.                               is unsuitable for a particular        submitted flawed ‘living wills’. So
                                      organisation. Compliance has          what more can regulation do?
All of these are methods which        to be insightful because the
can work, provided regulators are     Code is a tool designed to raise      What has not worked and
clear about the reasons why they      governance standards. It is not       why
are taking action and they choose     a blunt instrument – in effect
the right tool for the job.           “comply or else”! A cogent            Wrong tool for the job/ unclear
                                      explanation of why a particular       or mixed objectives
So, for example, if the purpose of    precept has not been followed by
regulating is protection – whether    an organisation is just as much a     General examples of how
it be consumers, suppliers,           compliance as an application of a     choosing the wrong regulatory
employees or whomever – then          Code precept.                         tool can lead to regulation that
the regulator will tend to rely                                             is burdensome and ineffective
on binding rules backed up by         Overall I believe the Code has        would include giving the
sanctions.                            worked reasonably well, but for       enforcement role to those that
                                      reasons I will come back to I am      are unable or unwilling to use it; or
These tools are also used as a        doubtful whether adding to the        overusing reporting requirements
means of protecting investors.        Code will continue to be a useful     as a means of regulating (there is
But because of the “buyer             tool in the future.                   a view in the UK government that
beware” principle, investors must                                           the answers to everything are
bear the risk of choosing to invest.  Regulation: the panacea               the annual report and the public
The purpose of much regulation                                              procurement rules).
is more focused on ensuring that      Regulation has often been used
investors know what they are          as a panacea since the financial      The scope for confusion and
letting themselves in for than        crisis, sometimes successfully,       complication has increased
protection in absolute terms. This    sometimes not. Barclays recently      as understanding of what
often takes the form of reporting                                           “governance” covers has

Reporting requirements are
also used as a means of market
discipline – putting monitoring
and enforcement in the hands of
investors rather than regulators.

You will often hear the mantra
“what gets reported, gets done”.  
Whether that is always true is
a moot point. But the argument

                                      ONLINE JOURNAL FOR THE CAPITAL MARKETS INDUSTRY JULY-SEPT 2016 05/22
   1   2   3   4   5   6   7   8   9   10