The financial turmoil in which the country and large numbers of savers, investors, insurance policy holders and employees have suddenly been plunged into since last week could have been avoided.
On the basis of evidence available it would appear that the regulatory system in place governing banks, insurance companies and the financial sector, failed to prevent the situation from getting off track and putting at risk savers and insurance policy holders.
It seems that too many people entrusted with these key responsibilities including ministers and regulators did not, whenever warranted, put their foot down in the past to stem licence and assure the strict application of and rigorous compliance with statutory and financial rules at all times. Instead, there was unforgivable laxity in the face of evidence that compliance with prudent financial norms and legal requirements were going awry.
The string of unbridled events which built into a major crisis this week is a potent object lesson of what a combination of unsound decisions flouting statutory rules and regulatory oversight can lead to. It is also a crying reminder that tinkering with rigorous norms which must govern and underpin any reputable financial sector and national regulatory framework is fraught with risks and can cause serious collateral damage to savers and ordinary people as well as severely undermine the financial reputation of the country.
The allegation that what has been uncovered is a major scam and a Ponzi scheme is serious and an indictment of the regulators, the regulatory framework and all those assigned with the important responsibility of safeguarding and protecting the integrity of our financial sector. It has also blemished the reputation of our financial sector.
The Ponzi schemes uncovered in 2013 took time to be detected as they were covert. It is therefore disquieting that a licensed major insurance company can allegedly offer and market excessively attractive insurance policy products which are financially unsustainable, to the saving public for months without these being screened and validated or barred by the regulatory bodies.
Shouldn’t the regulators diligently monitor and vet all products including investment schemes, high interest rate savings instruments or high benefit insurance policies to ensure that they are bona fide and backed by sound business plans and adhere strictly to prudent financial norms and statutory requirements before they are marketed?
Such an approach should weed out the risk of Ponzi schemes from licensed financial operators causing losses and unnecessary hardships to savers and investors. Shouldn’t they also ensure that insurance companies can, as stipulated in the law, at all times meet their liabilities as they arise, are in compliance with the specified solvency rules and hold technical reserves required?
Mauritius has traditionally had a high propensity to save. The low savings rates applied by most banks since quite some time on deposits which resulted last year in a negative net rate has adversely affected the return obtainable by savers. In such a dire context of low return on saving deposits, savers have been obviously attracted by the higher rates offered by, for example, the Mutual Aid or banks and other financial institutions duly licensed to operate in Mauritius.
Savers seeking a better return cannot be blamed for having subscribed to capital protected higher earning investment instruments offered by banks, insurance companies or financial institutions authorized to operate in the country and whose operations are regulated by the regulatory bodies in place. People invest in such instruments in the belief that these have been vetted by the regulators and that the financial standing and practices of all the registered banks, insurance companies and other financial institutions are closely monitored by the regulators to ensure rigorous compliance with statutory rules and best practice.
It is true that Bramer Bank and its other investment and asset management companies such as Bramer Asset Management were offering more attractive savings rates than the range of similar low rates offered by the various banks of the generally staid and regimented banking set up prevalent in the country. Reports indicate that the higher returns promised have without fault been diligently paid to all investors.
Such policies have appealed to investors and rocked the boat of entrenched local banking practices. Standing out as a maverick, BAI/Bramer have in many regards challenged the comfort zones of the banking establishment. They also ushered intangible benefits such as inclusive employment, innovative ventures and healthy competition across their footprint in a wide range of activities in the economy. The sudden fall of the flagship companies of the BAI/Bramer Group results in the traditional banking set up to hold sway and assert its supremacy again.
Safeguarding investors against the domino effect
Government acting promptly has given firm guarantees to savers, insurance policy holders and the employees of the Bramer Bank and the British American Investment (BAI). This aims at preventing a rush on deposits at the bank which would undermine its financial sustainability. Owing to the close inter related links between the warren of companies forming the BAI/Bramer Group and an already triggered domino effect, there is a similar rush by investors to undo their investments in the asset management company of the group which would have similar adverse consequences for the numerous savers who have invested their savings therein and the employees concerned.
Government should therefore urgently take the necessary steps to also protect the interests of the savers who have invested in these affiliate companies as well as the employees concerned to stem the rush of apprehensive savers to undo investments. The savings of ordinary people must not be put at risk. Under these circumstances, mainstream savers in these affiliate companies should also benefit from an umbrella of protection from the State. Such an approach would also shore and preserve the market value of the assets of the group, in particular its various profitable entities in Mauritius and abroad so as to minimise any deficit in honouring the liabilities of the companies as established by the conservators.
In many ways, is the purported offer of sale of the BAI Group for a nominal Rs1 tell tale? It is essential to first allow a thorough due diligence exercise to be carried out on the group to establish a snap shot of the company and determine the extent of any toxic assets before moving forward. The decision of the State Bank of Mauritius (SBM) to back out from a takeover of Bramer Bank is also judicious.
A high value added and upmarket services sector will be one of the determinant factors driving the future quantum growth and prosperity of Mauritius. Services sectors such as the Information and Communication Technology (ICT) as well as the financial services sectors, etc., will play pivotal roles in giving a robust impetus to growth and employment provided we urgently induct the necessary foreign know-how, expertise and qualified personnel required to leapfrog Mauritius significantly up the value chain with the offer of more pointed and sophisticated services in these potentially high growth sectors.
Putting the house in order
It is therefore essential that the legal framework of the financial services sector is revisited and recast with the regulatory mechanisms robustly strengthened to prevent the recurrence of such damaging setbacks so detrimental to the standing and reputation of our financial services sector.
A sound, rigorously managed and assiduously monitored financial services sector free from any political interference are sine qua non conditions to build operator confidence and entrench the reputation of Mauritius as a transparent, clean and robust financial services sector bearing in mind the vital importance of the Double Taxation Avoidance Agreement DTAA) with India and the necessary diversification of the sector into a broader range of more sophisticated and high value financial services.
After the seismic repercussions of the financial turmoil, it is now time to measure and contain the collateral damages caused by the domino effect on other affiliate companies of the Group as well as safeguard the interests of savers and employees affected by the chain of events triggered by the crisis. It is also time to repair and re-establish the reputation of the financial sector of Mauritius as well as comprehensively beef up the regulatory framework governing the financial services sector, if it is to be a more potent vector of growth of the economy.
More importantly, we must ensure that regulators entrusted with this vital responsibility assume and implement their brief with utmost diligence and rigour to firmly ground the reputation of Mauritius as a financial sector and hub of excellence. A more rigorous mindset and determination to instil resolute best practice in the national ethos must prevail to ride out the storm and collectively charter as a nation a more ambitious growth path towards a substantively better future for the country.
* Published in print edition on 11 April 2015