Council studies proposal to set up a single financial regulator

The multi-sectoral Capital Market Development Council (CMDC) is studying a proposal to establish a single financial regulator by merging the Securities and Exchange Commission, the Bangko Sentral ng Pilipinas and the Insurance Commission.

CMDC chairman Chit Manabat said several members of the council have underscored the need to create a single regulatory body to oversee the financial markets in order to ensure tighter supervision over banks, publicly-listed corporations, brokerage houses, investment houses, mutual fund firms, and other market players.

"This would be subject to discussion by all members of the council. We’re still in the process of deliberation as to whether we should endorse it as a policy shift," Manabat said.

The SEC has been lobbying Congress for the consolidation of all financial market regulations into a single entity to enhance efficiencies and enforce uniform regulatory standards.

SEC Chairman Lilia R. Bautista earlier said this was not an entirely new idea since other countries like the United Kingdom and Singapore have already established a single regulator as part of efforts to modernize and strengthen their institutions to keep pace with the changes in the financial markets and the economic environment as well.

In the United Kingdom, the powerful Financial Services Authority regulates the banking, securities and insurance businesses. The same model was adopted by the Monetary Authority of Singapore this year. Bautista said the central monetary authority will report to the Monetary Board (MB) which will set policies covering both bank and non-bank financial intermediaries.

The SEC chief said the move will allow the MB to focus on its role of policy setting by transferring its regulatory powers to the central monetary authority.

She said bringing the institutions together will allow one to complement the other’s resources and prevent the duplication of functions.

The SEC and BSP have dual control over some areas and activities of investment houses. Investment houses which are subsidiaries or affiliates of banks are under the BSP because of their direct effect on their parent companies. The BSP has no responsibility over investment houses‚ securities regulated activities while commercial paper registration and undewriting is left with the SEC.

International studies showed that a regulatory agency which oversees all financial markets in the country would be able to rapidly carry successful ideas from one style of market to another.

The most important criticism about having a single regulator, however, is the quality of leadership that such a super-agency can obtain. There is a tremendous concentration of power into a few hands in such an agency, and this would attract power-seekers to these posts.

The Philippine Institute for Development Studies, the research arm of the National Economic Development Authority (NEDA), said changes should be made in the system of supervision and regulation of the financial sector to effectively monitor corporate frauds or failures.

The PIDS said the insolvencies that resulted particularly in investment houses, finance companies and commercial banks, had resulted in the loss of confidence of foreign investors in the Philippine financial market.

Two commercial banks failed in the aftermath of the Asian crisis – Orient Bank in 1998 and Urban Bank in 2000 – as a result of fraud and insider abuse.

For instance, the failure to detect problems in Urban Bank’s investment house subsidiary Urbancorp Investments Inc. had been attributed to some lapses in supervision/regulatory oversight that arose from confusion in the proper assignment of regulatory function over investment houses between the BSP and the SEC.

PIDS economist Melanie Milo said the consolidation of the financial sector supervision could be a solution to eliminate gaps in regulatory coverage.

She said the problem, however, lies on how to undertake such move, considering that the transition from institutional regulation to functional regulation is a complex process and will take time to implement.

Studies showed that the estimated time required to merge supervisory agencies was around eight years although the developed countries took considerable less time than that.

Under the New Central Bank Act, the BSP has to some extent become the de facto "super-regulator" of the financial system, with its authority to supervise and examine banks‚ subsidiaries and affiliates engaged in allied activities.

As such, she said designating the BSP as the "lead regulator"would make sense because of the dominance of banks.

As an alternative solution, Milo said the Philippines can set up a council similar to the Federal Financial Institutions Examination Council of the US composed of the heads of the various regulatory agencies, which was created in 1978 to promote consistency in the examination and supervision of financial institutions.