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February 20, 2019

A single financial agency tricky too

The Central Bank of Kenya building along the Halie Selassie avenue in Nairobi on January 7.
Photo/Enos Teche.
The Central Bank of Kenya building along the Halie Selassie avenue in Nairobi on January 7. Photo/Enos Teche.

The proposed Financial Services Authority will offer broad unified regulation merging the current regulators comprising the Capital Markets Authority, the Insurance Regulatory Authority, the Sacco Regulatory Authority and the Retirement Benefits Authority. This is line with the emerging trend towards a more consolidated regulatory structure globally; primarily because of the need to facilitate an overall risk assessment of the financial sector, and partly because of interconnections in the products being offered by players under different regulators. Besides, although opinions remain divided, there are persuasive arguments that unified regulation is superior in promoting financial sector safety, soundness and performance.
Many benefits accrue from unified regulation including more effective and accountable regulation, and economies of scale and scope. Overall, there are sufficient grounds for a unified regulatory agency, and much of this was covered in last week’s article. That said, there are also tangible challenges, and evidence is inconclusive about the link between financial regulatory structure and financial sector safety, soundness and performance. There are several drawbacks of a single financial services regulator in the local market.
One, the exclusion of the Central Bank supervision from it means the envisaged single consolidated view and other benefits of a single regulator will be limited to this extent. This is a significant limitation, particularly when we consider that CBK is in charge of overall financial stability of the economy and banks are leading in offering cross-cutting services such as insurance and share-trading. Consequently, the risk that no one single regulator has authority over the entire financial sector remains. Strong coordination between the CBK and FSA will be necessary to mitigate this risk to a certain extent.
Two, a single regulatory agency may result in unclear objectives. The consolidation involves the complex task of drafting specialised legislation to defining the purpose and charter of a new regulator. The process, often referred to as “sausage making” runs the risk of specific objectives of each regulator being replaced with generic and unclear objectives of the FSA, with the result that some key objectives may fall off. 
Third, there is the challenge of unrealised synergies. The rationale of any organisational merger is that the whole will be greater than its individual parts. There is, however, the risk that conflicting cultures, insufficient change management programmes may conspire and the meaningful synergies may fail to materialise.  
Fourth, a single regulator may suffer from the bureaucratic problems common with monopolies such as rigidity, slowness and substandard services. That said, sound implementation will be critical to the successful implementation of the Financial Services Regulator.  

Karen Kandie is a financial and risk consultant with First Trident

[email protected]

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