Why You Save With The Bank And Not Your Pastor – The Paradox Of Financial Sector Regulation
Have you ever taken time to ask yourself why you put your money at the bank? Why not give it to your trusted friend? Why not give it to your pastor? The answer to all this dilemma is the paradox of regulation. This article takes a look at financial sector regulation and the perspective and reason for some decisions by regulators.
Regulation is basically a legal mandate to streamline activities in a particular activity or industry. In many situations, regulatory institutions such as boards, commissions, authorities define the end game in industries with regards to employees, standards of products, who does what, and which activities are within the capacities of private sector in an area of business. A typical example is Ghana Standard Authorities giving standards for all products in Ghana especially on inscriptions of products, what can be advertised and whether or not products meet minimum standards to protect life of citizens. In the same vein, financial sector regulators such as Bank of Ghana (BOG), National Insurance Commission (NIC), Securities and Exchange Commission (SEC) and National Pensions Regulatory Authority (NPRA) have the same mandate and implement structures which makes you feel safe giving your hard earned money to any regulated institutions without fear of losing your money.
The first part of this process is the licensing section where all market operators such as banks, insurance companies, pension funds, brokerage firms, stock exchanges among others are required to meet some minimum requirements to be able to operate. Unlike sale of goods and other activities where the customer leaves with a good or services, the financial industry services are actually “hanging waiting to be fully-enjoyed”. This basically means, the guy who places his money in the bank does not fully or really enjoy any service until all his money is withdrawn from that institution; likewise, a worker’s pension is a “hanging service” until he goes on retirement and gets almost all his or her funds from the pension fund. Because of this phenomenon, the minimum requirement for such services are a bit stringent as compared to the “waakye seller” on the street. There are specific requirements for directors, staff: since special skills are needed to run such organizations, there also minimum service requirements and limitation in business model for all market operators. Banks take deposit and give loans, investments banks take fund and invest in securities and whiles insurance companies underwrite risks with client funds.
Having a license does not mean you can operate into the infinite future, the business needs to renew their operating license with the regulator on an annual basis which is also subject to continuous operating requirements such as keeping proper books of accounts, proper use of clients funds, reasonable profitability among others. The regulators in Bank of Ghana, SEC, NPRA and NIC are required to work behind the scenes with the managers and directors of financial institutions to ensure clients’ funds are not misused. This requires directors to submit monthly financial statement, monthly use of clients’ funds, monthly additions and reduction in clients’ funds and other declarations specific to each institution to enable the regulator keep track of use of clients funds. The complaint of the general public about the failure of regulators to protect their funds is true and correct since there are various check and balances naturally in the regulatory structure to identify weak institutions and curb any rot as early as possible.
Market operators such as banks, investment banks, insurance companies and pension funds would always find innovative ways to play around the system and it is up to the regulator ensure sanity without limiting innovation in the financial space. Protection of client funds is the ultimate goal of the regulator and taking actions such as consolidation, closing down, fines, sanctions and withdrawal of licenses, suspension of trading are diverse forms of legal means regulators employ to ensure market operators are in line. They also have the authority of auditing the banks, insurance companies and other market operators on an annual basis to determine their level of compliance to rules and regulations which are basically aimed at protecting clients’ funds and information.
The proper implementation of financial sector rules and regulations would have curbed the current financial sector crisis in Ghana. Despite the demise of only banks, the ripple effect has trickled down to almost all financial sector players who are currently in survival mode.
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