Why would financial regulators not do what they are expected to do
In the wake of the BAI debacle and the big financing gap that has surfaced of late, the question has repeatedly been asked as to why the financial regulators did not do what they were expected to do in order to bring better control to bear on the BAI before it was too late. There is a fair public concern that a big gap in the several billions of rupees has emerged between the liabilities of the BAI group to the public and the assets it has on hand to meet those liabilities.
Where were the regulators, some are asking? Why did they not prevent abusive diversion of funds to low-performing assets or investments which did not earn a return? Or exaggerated and/or fictitious expenditures depleting the group’s resources? Such are the questions being asked. The entire burden is sought to be shifted to the regulators. But other factors could have been at play.
It is the norm in all self-respecting jurisdictions to let financial regulators ensure the on-going stability of the financial system, thereby protecting the public which places its money with the financial institutions.
Financial regulators thus issue a number of regulations which regulated financial operators are required to comply with to prevent them from riding roughshod with money raised from the public. The regulators carry out inspections of those institutions from time to time to ensure that the finance companies in question are actually complying with those regulations dealing with safe operation of the business.
Regulators are not alone to ensure safe and sound management of finance companies in the ‘public interest’ however. There’s also the finance company’s board, its specialised board committees such as the Corporate Governance Committee, Credit/Investment Committee, the Audit Committee, the Risk Management Committee, Internal Audit as well as External Audit. All are accountable and expected to apply the brakes when necessary.
Then, the question arises as to why, despite a plethora of such controls, a finance group like the BAI has ended up with such a huge financing gap. To the point unpaid policy holders not seeing the prospect of being repaid their dues went on hunger strike to exert pressure on the government of the day to get repaid.
There are cases, in Mauritius and abroad, some of which are documented, of board and top management voluntarily overriding controls. Instead of the board of the company and its committees becoming watchdogs against mis-governance of the company’s affairs, they have themselves gone to great lengths in such cases to abuse the company and conceal its failings.
Enron and World.com (US) are examples where dominant board chair and chief executives depleted company resources, with the complicity of auditors, while painting a rosy overall picture of the companies all the while. It may also be recalled how several big global finance companies catapulted themselves into ruin during the 2007-08 financial crisis by wilfully sidelining financial regulations and accumulating liabilities far in excess of their capacity to redeem them. There are also examples of companies de-listing themselves from the stock exchange opportunely to avoid public scrutiny, so as not to abide by listing rules or simply to hide their misdemeanours and malfeasances. In short, not to make themselves accountable for misdeeds.
Let us digress a bit from the purely financial-regulatory failings of financial institutions to undue political interference in diverse fields, including in the life of companies. Consider the case of the US FBI director, James Comey who was fired from office by Donald Trump on 9th May 2017.
Early 2017, Comey was investigating Trump’s allies, including Michael Flynn, his national security adviser, about their involvement in the alleged Russian intervention to influence the outcome of the US 2016 presidential election. Facts were coming out in public about Flynn’s contacts with the Russian embassy in Washington DC. Before he was fired actually, Trump would have asked Comey to “drop the probe into Flynn”. Comey didn’t comply with the request. Flynn was pushed out. Although Trump has the power to sack the FBI director, it is difficult not to see a link between the President’s request to James Comey about Flynn and his eventual sacking from office.
Entrenched link-up between politics and business bosses can also deter many a financial sector regulator from doing their job as it should be done. It is an invitation for the concerned business bosses to do whatever they like, unchecked; they can transgress the rules and do as they like, even placing their men in strategic places with political blessing. Financial regulators can barely resist this kind of power, especially if they depend on their job for a living.
It takes lots of mettle for the head of an independent institution, whether a regulatory or a law enforcement body, like the FBI, to come up to the level of James Comey, who dared stand his ground in the face of political interference from the US President. Short of such a firm attitude, there are plenty of examples of public institutions having been seriously eroded in a number of developing and developed countries, due to the power business bosses have acquired from the political establishments of their countries. Long-outstanding unpaid huge bad debts to public sector financial institutions in India and China are not unrelated to the political-business nexus. That is why true regulatory independence is advocated all over the world to make finance safer.
The big mess the current government is facing in terms of a big financing gap in the case of the BAI group would thus not have suddenly materialised in 2015. It must have been building up for some time. The current government’s greatest failure has been the amateurism with which it has dealt with a huge accident that was waiting to happen. The thirst of vengeance has also landed it and the country into a terrible financial mess, the price of which will have to be borne for many years to come.
Had it and its regulatory agents not been amateurish, they would have acted cautiously, first bringing back into the kitty as much as possible of the money that would have been dilapidated away, in order to make it not so painful to pick up the catastrophe in the making since a long number of years before. Except insofar they are complicit in the commission of regulatory crime for reasons they best know, regulators are not alone to blame for the prevailing situation. Some of them might actually have been the victims of power-politics.
The BAI mess and consequent turmoil will not be put to rest any time soon. It’s the taxpayer who will have to pay the price for it to the tune of several billions of rupees. The taxpayer has the right to know how it all came about, whether there had indeed been failures at the level of the regulatory bodies, company boards and auditors – internal and external – and also political interference to sap the functioning of the public bodies, which might have allowed mischief to happen for a long number of years.
Politicians across the political spectrum, who have benefited from the ‘generosity’ of the BAI at election time, will not be inclined to the setting up of a commission of inquiry to shed light on all aspects of the BAI affair. Mauritians however need to know how and what went wrong.