Financial Sector: We should heed the warnings

There is a pressing need therefore to establish the country’s good credentials as a predictable and soundly regulated centre. Given the situation in which we got ourselves embroiled of late, it will be a real challenge for us to be highly persuasive in the coming global environment affecting financial business worldwide

Few would deny that Mauritius’ financial sector has been going through difficult times in past weeks since the 3rd of April, following the revocation of the banking licence of Bramer Bank. Thereafter more than a hundred thousand insurance policy holders of the British American Insurance Co (BAI) were thrown into disarray, not knowing the fate of the policies they had subscribed to over years. Uncertainty clouded the horizon for thousands of the group’s employees involved in different sectors of economic activity. Will they lose their jobs and how soon will that be?

This is not to condone excessive and undue liberties that the service provider, namely the BAI, may taken with money entrusted to it by the public. But there exist softer methods of dealing with financial misfeasance, if any, without throwing the baby out with the bathwater.

A toxic environment did visit upon Mauritius’ financial sector in 2003. However, depositors at the MCB were not as traumatized then as were and still are those who have subscribed to part of the long-term life insurance, notably the Super Cash Back Gold scheme of the BAI. Such is the scale of the latter’s suffering at what has been going on that those who subscribed to insurance policies of the BAI group are unquestioningly prepared to be paid back solely the capital they’ve subscribed – no benefits. At least, this much is being saved from disaster, they feel.

Shooting ourselves in the foot

The fact that regulators were also blamed for all the mishap has added another dimension to the havoc wreaked. The regulators were publicly blamed for allegedly having been ineffective in doing the duties assigned to them. Whom to trust, then?

The end product of all this is the projection in public, both inside and outside the country, of our financial sector as being subjected to different forms of misgovernance. It is certainly not a flattering picture or one capable of appeasing the various unjust criticisms that rival jurisdictions and uninformed people have been accusing us of, in a bid to bring disrepute upon us and to snatch away, in the process, both the international financial business we’re engaged in and the jobs from those who are currently working in the sector.

Bad publicity

Immediately after the setup of the National Commercial Bank in replacement of Bramer Bank, there were queries from certain capitals of Africa whether we were going for a policy of “expropriation”. From Singapore, the main question was whether we were publicly repudiating our financial regulators.

In its edition of 18th April, The Economist, addressing the question about how good a grip regulators have on money channelled through tax havens while taking a view that financial centres like ours will become more vulnerable to scams, noted that ‘Mauritius suffered another possible scandal involving Bramer Banking Corporation Ltd (BBCL), whose licence was revoked earlier this month “following strong evidence that BBCL is engaged in a Ponzi scheme which exceeds 25 billion rupees ($690m), according to the country’s prime minister’.

The Economist is widely read across the world from Wall Street to Timbuktu, but also by international financial standard setters like the FATF, the OECD, the IMF and the World Bank, amongst others. The latter keep us under hard scrutiny.

We’ve been able to build substance in our international financial sector over the years by being very strict in our financial regulation to the point that some local operators have kept accusing our regulators of “over-regulation” and thus thwarting their business. As the results of successive Financial Sector Assessment Programs of Mauritius conducted since 2003 by the IMF and the World Bank have acknowledged, Mauritius has not only complied with more core principles of international financial regulation than some of the advanced financial centres of the world. It has actually, contrary to some other renowned jurisdictions, also implemented them – i.e., not in words only.

The recent adverse international reporting on us undoes a part of the work done till now and renders us more vulnerable into the hands of those who keep accusing us unjustly of aiding and abetting financial crime.

Beware the unfolding international financial threats

Financial centres the world over have thrived on their predictability. In the case of Mauritius, we’ve consolidated this view by adopting, as the backbone of our financial system, the highest international standards of financial regulation which are well known to all operators. We have refrained from taking ad hoc decisions, which sends the wrong signals that we would be prepared to change the rules of the game if that suits our temporary convenience. This is the reason why we have been able to host some of the world’s top banks in our jurisdiction. It is a good track record and worth preserving.

It is in the context of accelerating globalisation as from the 1990s that top of the league international banks like Deutsche Bank, Standard Chartered Bank, Standard Bank, JP Morgan Chase, Citigroup, HSBC and BNP Paribas expanded their presence as global banks in select countries. The first three of these took up a banking licence to operate from Mauritius during this wave of financial globalisation. Along with HSBC and Barclays which have been here for long, and BNP also present in Mauritius at the time, we were able to showcase ourselves as a credible international financial jurisdiction hosting many of the best names in international finance.

All these big international banks involved themselves in a range of new activities when they went global, including cross-border securities trading from financial hubs, lending to and shifting money (currency trading and cash management) for multinationals in scores of countries and financing the global explosion of trade and capital flows worldwide. This has enriched the range of product offer from a place like Mauritius.

At the moment, however, these banks are shrinking their global presence, retreating from various markets they’ve been into, preferring to concentrate on their home markets. The main reasons for this new turn of events are: they have become too big and cumbersome to manage and, in the face of increasing competition for markets and faced with rising costs, including huge regulatory costs and ever larger capital requirements to be made under a new set of international rules for conglomerates under what is called Basel 3, they are finding it increasingly difficult to make reasonable returns on equity. They are under shareholder pressure therefore to move out of jurisdictions that don’t add significant value to their profit and loss accounts. We are likely to see the effects of this global move to shrink their international presence in the near future.

Those jurisdictions that have established a spotless reputation for themselves are likely to stem the exit tide that this situation is likely to provoke at the global level. Jurisdictions which can churn more business into their fold – not less – will be the beneficiaries of this evolving situation. There is a pressing need therefore to establish the country’s good credentials as a predictable and soundly regulated centre. Given the situation in which we got ourselves embroiled of late, it will be a real challenge for us to be highly persuasive in the coming global environment affecting financial business worldwide.

* Published in print edition on 1 May  2015