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Reducing the regulatory gaps and challenges in the Ghanaian financial system through the adoption of the twin peak model

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To date, Ghana’s financial regulatory approach has been closer to the traditional approach in China and Mexico where the regulatory authorities have been established alongside institutional or sector- based lines and separate regulatory authorities established to regulate and supervise the banking sector; insurance sector; securities sector and pension sector.

The current regulatory structure can be described as a sectoral regulation which maintains separate regulatory agencies across segregated institutional lines of financial services such as banking, securities, insurance and pension. The existing regulatory arrangements for financial services involve four regulators exercising jurisdiction over different sectors of the financial industry. It is fragmented with each regulatory agency being responsible for a particular segment.

The Ministry of Finance and Economic Planning is the apex body regulatory structure that has the overall regulatory oversight over all financial intermediaries in Ghana. This Sector Ministry has the overall responsibilities to develop, implement and supervise the financial governance structure in Ghana. The Sector Ministry is assigned the responsibility for also providing the policy framework for the financial sector while the actual regulation of the sector within the policy framework is assigned to the Bank of Ghana, Securities and Exchange Commission, National Insurance Commission and the National Pension Regulatory Authority.

The existing regulatory arrangement for financial services involve four regulators exercising jurisdiction over different sectors of the financial industry. It is fragmented with each regulatory agency being responsible for a particular segment. In many areas of financial sector operations, reasonably good laws and regulations exist. However, the difficulty has been the capacity of regulatory agencies to enforce the existing rules.

According to FINSSP 11, (2012), the search for growth and economies of scale and scope have led to a breakdown of barriers in the financial sector. Universalization of banking, for example, is reflected in the fact that banks are offering a variety of non-banking services alongside their traditional banking services.

Such services include insurance, stock brokerage, investment management, investment banking and financial advisory services. Similarly, insurance companies are offering investment related and retirement products. Ghana’s regulatory structure has not caught up with this convergence.

Fragmentation of regulation has resulted in the following anomalies: (i) Insurance companies offering investment management services and retirement plans but are not subject to the regulatory oversight of the SEC and NPRA which have regulatory responsibilities for investment advisory services and pension plans. (ii) Accountants, lawyers and banks are exempted from licensing as investment advisers while management consultants who offer the same services are not, (iii) Banks are dealers in the government securities market but are not subject to regulatory oversight by the SEC, thus leaving investors in the government securities market with less protection than what is envisaged in the Security Industry Law (FINSSP 11, 2012).

The regulatory response to this has been a trend in a number of jurisdictions towards the move to the twin peaks model of financial regulation. This allows a prudential regulator to supervise the range of activities more efficiently by taking a holistic view of the financial services market and market conduct regulator to ensure that customers and investor are well protected.

In the current regulatory framework, there are a number of regulatory authorities with responsibility for the financial sector regulation, each with substantially different powers and functions. This regulatory landscape, while largely ineffective is also fragmented and that has led to gaps in regulatory application in some instances and allowed for regulatory arbitrages in others.

The first challenge relates to the coordination mechanisms between Ghana’s key financial regulators. Although legal reforms have been made to address challenges identified through various collapses, there continues to be a preference for informal bilateral and multilateral coordination mechanisms over formal, statute-based mechanisms. Where coordination has been identified as a problem, regulators have responded by enhancing regulatory memoranda of understanding and establishing informal information-sharing measures to make sure that each regulator is aware of the role of other regulators in the system

Second, the current silo approach model of financial regulation has been a recipe for regulatory arbitrage. A potential danger with the multiplicity of agencies as experienced in the Ghanaian financial system is that overall effectiveness was impaired as financial institutions engaged in various forms of regulatory and supervisory arbitrages.

This problem has been put by Abrams and Taylor in the following way: regulatory arbitrage “can involve the placement of a particular financial service or product in that part of given financial conglomerates where the supervisory costs are lowest, or supervisory oversight is least intrusive. It has also led financial firms to design new financial institutions or redesign existing ones strictly to minimize or avoid supervisory oversight.

This has induced “competition in laxity” as different agencies compete to avoid a migration of financial institutions to the competing agencies. Mensgold saga is a case of regulatory arbitrage not regulatory failure as being paraded by some researchers and academia. There were series of institutional failures such as Economic Crime Agency, Financial Intelligence Center, Registrar General Department, Securities and Exchange Commission, Bank of Ghana, BNI and Ghana Police Service. The lack of a strong regulatory response, along with under-developed formal financial and regulatory institutions, has allowed Ponzi schemes such as Mensgold, Savanna Brokerage and Global Coin Community Help etc.

Third, the growing internationalization and regionalization of the Ghanaian financial system over the last two decades had provided the financial markets with cross border contagion issues, cross border supervisory and consolidated problems, pricing efficiency and risk dispersion and also encouraged product innovation and complexities.

Even though the Bank of Ghana since 2014 had reviewed its cross- border supervision and consolidated supervision, but other regulators such as National Insurance Commission and Securities and Exchange Commission are yet to undertake consolidated supervision despite the presence of foreign subsidiaries of insurance companies and the growing importance of financial conglomerates in Ghana.

The increasing internationalization and regionalization of the Ghanaian financial markets had also accentuated the international dimension to regulation which in turn has implications for the institutional structure of multiple agencies both at the national and international levels.

Fourth, the current fragmented approach is discredited for inefficiency, complexity, confusion and cost ineffectiveness to the regulated and government. The hallmark of fragmented regulatory regime is their inability to anticipate how to address future financial distress or crisis or adapt to market innovation and development. Additionally, it is argued that they are susceptible to capture by the regulated. Conceivably, because none of the regulators has capacity to “look at the financial market as a whole” no governmental agency commands all the necessary information to monitor systemic financial risk. The cardinal question is whether the foregoing challenges are sufficiently weighty to constitute the impetus for shift in regulatory paradigm.

Fifth, the emergence of financial conglomerates and universal banking licensing concept in 2003 had challenged the traditional demarcation between multiple regulatory agencies and had made the business of regulation more complex.

In particular, the issue arises as to whether a structure based on specialist agencies supervising different parts of the business of a financial conglomerate might lose oversight of the financial institution as a whole. According to IMF country assessment report (2011) on Ghana’s financial stability, it opined that the exact scope of financial conglomerates in the financial sector was not fully known.

However, the IMF noted that nine universal banks which accounted for about 55% of the total banking assets, had subsidiaries in securities firms as well as insurance companies. Since the banks were not supervised on a consolidated basis and there were also no mapping of shareholders and common directors.

Sixth, regulatory overlap remained another challenge in the Ghanaian financial services sector. The overlap between the regulatory objectives of financial regulators in Ghana appears to be more critical issue in a practical sense. Regulatory overlap refers to the situation where products or services, transactions and other activities undertaken in the financial services sector are subject to the regulation of two or more regulators, giving rise to potential conflict and difficulties in compliance.

Seventh, regulatory coordination has also been a major challenge for the multiple regulators in Ghana. There are no informal bilateral arrangements between each of the four regulators as well as no formal Council of Financial Regulators to facilitate coordination amongst the four Ghanaian regulators. There is a challenge of providing the effective coordination mechanisms required of a multi-agency system. It is broadly recognized that regulatory frameworks that divide authority between multiple agencies require strong coordination mechanisms to ensure that issues needing regulatory oversight do not fall through the gaps.

Therefore, the main arguments against the silo- based model included the fragmentation of regulatory arrangements, competition between regulators and confusion for the regulated population as a result of different objectives, staff, styles and information technology systems between regulators, with flow on-effects on the wider population and hence therefore a call for regulatory paradigm shift to the twin peaks model.

The twin peaks model of regulation in Ghana will seek to create a stable and more inclusive financial sector which is needed to support increased economic growth and development in Ghana.  At a macroeconomic level, a stable and well- developed financial sector will support real economic activity through the efficient channeling of savings into productive forms of investment, contributing to the country’s objectives on job creation and a more inclusive economy.

For individuals and firms, access to affordable and reliable financial products and services enables people to engage in economic transactions on a daily basis, to save for retirement and other long- term goals, to insure against varied risks and avoid an over reliance on debt and exploitative or reckless lending practices in Ghana.

Access to appropriate financial products and services in Ghana is necessary for economic growth and well -being is to be genuinely inclusive.

The rationale underpinning the adoption of the Twin Peaks model of financial regulation in Ghana can be seen in South Africa and other countries such as Australia and UK. The rationale for Twin Peaks Model reflects four primary considerations.

First, market developments in the post financial sector reform period in Ghana, increased financial conglomerates and the blurring of the boundaries between financial products and services. Second, the availability of economies of scope and the importance of allocating scare regulatory resources efficiently and effectively.

Third, the benefits of setting a twin peaks model would improve coordination and cooperation among regulators and fourth, the clarity of making both prudential regulator and market conduct regulator accountable for its performance against statutory objectives for the twin peaks regulatory model. Twin peaks model will be a comprehensive and complete system for regulating the Ghanaian financial sector.

It aims to ensure better outcomes for financial customers and the wider economy, by ensuring that customers are treated fairly, that their funds are protected against risk of institutions failing, and by reducing risk of using public funds to protect the economy from systemic failures. A twin peaks system also represents a decisive shift from the existing fragmented regulatory approach, minimizing regulatory arbitrages and overlaps or forum shopping. It will also focus on implementing a more streamlined system of licensing, supervision, enforcement, customers complain, and customer advice as well as education across the Ghanaian financial system.

The twin peaks model of financial regulation is a regulatory model which creates two regulators for the financial services sector: A prudential regulator regulating the solvency and liquidity of the financial service sectors and a market conduct regulator who regulates how financial services institutions (i.e. Banks, insurance, capital market and pension funds) conduct their business, design and how to price their products and treat their customers.

Twin Peaks Model: (i) reduces the risk of regulatory overlaps and duplication that can arise with multiple regulators and conversely, the risk of gaps in the regulatory coverage and enforcement, (ii) strengthen  the accountability of regulator (accountability does not diffuse across multiple regulators) and reduces the potential for blame shifting, (iii) increase economies of scale and scope in market supervision, potentially contributing to better use of resources, regulatory effectiveness and reduces administrative costs.

This is particularly important for small country and financial market such as Ghana, (iv) allow development and implementation of a unified and consistent approach to market conduct regulation, supervision and enforcement across the entire Ghanaian financial system reducing regulatory arbitrage, (v) allow better monitoring of issues affecting the entire financial system, as well as rapid policy responses, (vi) facilitates the regulation and supervision of financial conglomerates, where financial firms are operating in more than one segment of the financial market, and (vii) eliminates potential conflicts that can arise from different regulatory objectives between multiple regulators.

Here is a new paradigm for thinking about the way jurisdiction like Ghana can create and organize regulatory agencies.

The twin peaks model of financial regulation helps

  1. To strengthen Ghana’s approach to market conduct regulation which is non-existent in the financial services sector in Ghana thereby improve confidence and create a sustainable financial services sector.
  2. To create a more resilient, stable financial system that will help prevent distresses and crises from developing and more easily resolve those distresses and crises that occur, at a lower cost to customers, consumers and tax payers.
  3. To expand access to the financial services sector through financial inclusion and
  4. To combat financial crimes and money laundering activities in Ghana

 

Four key motivations for a twin peaks model of financial regulation:

  1. The need for regulator to deal with market abuses such as insider dealings and ensure adequate investors and consumer protection in the Ghanaian financial services sector.
  2. The need for legislation when financial services institutions experiences capital, liquidity or solvency pressures
  3. Under the twin peaks model of regulation there will be consistent regulatory standards for all financial services institutions
  4. Cooperation and coordination between regulators will minimize the regulatory gaps and arbitrages

 

Prudential Regulation Authority (PRA)

The prudential regulator’s strategic objective will be to maintain and enhance the safety and soundness of the regulated financial institutions. This will include macro and micro prudential regulation and supervision.

The prudential regulator will be responsible for assessing and addressing system risk across the financial services sectors and for the prudential regulation of banks, insurances, pension funds and capital markets. The new regulatory architecture will ensure that macro-prudential regulation of the Ghanaian financial system is coordinated effectively with the prudential regulation of individual financial firms, and that a new, more judgement focused approach to regulation of firm is adopted so that business models can be challenged, risks identified and actions taken to preserve financial stability.

 

Financial Sector Conduct Authority (FSCA)

The market conduct regulations strategic objective will be to protect consumers, and customers of financial services institutions and promote confidence in the Ghanaian financial service sectors. The regulation of business conduct within the entire financial system, including the conduct of firms towards their retail customers and the conduct of participants in the wholesale financial markets will be carried out by a dedicated single body with focused and clear statutory objectives and regulatory functions.

The Government through the Ministry of Finance and Economic Planning will therefore create dedicated consumer protection and market authority with primary responsibility to promote confidence in the financial services and markets. This objective will have two important components. First, the protection of consumer through a strong consumer regulator, and second, through promoting confidence in the integrity and efficiency of the Ghana’s financial markets.

 

The mandate for Financial Sector Conduct Authority will: –

  1. Promote the fairly treatment of financial services customers
  2. Protect and enhance the efficiency and integrity of Ghanaian financial markets, and
  1. Contribute to the financial sector’s policy objective of financial stability, financial inclusion and combating financial crimes and money lending.
  2. Perform the duties impartially and professionally will be funded through government subvention and levy- based system on the regulated financial firms.
  3. Provide financial customers and potential financial customers with financial education programs and otherwise promoting financial literacy and financial capability.

 

In summary, the move in Ghana towards a “twin peaks model” of financial regulation will be significant reform that will promote financial stability and strengthen Ghana’s ability to manage and mitigate the effects of financial crises. The most compelling argument for the twin peaks model is to enhance the effective management of systemic risks and consumer protection.

For instance, if entities are conglomerates covering banking, insurance, securities and pension then it may be difficult for a particular regulator for a particular sub-sector to draw a view of the overall risks facing the entity. A unified regulator under the twin peaks model, on the other hand would be able to understand and monitor risks across the sub-sectors and develop policies to address the risks facing the entire conglomerates.

The experiences of UK, South Africa and Kenya will provide some insights into the challenges that this model presents, particularly in the areas of coordination and the various ways in which these challenges might be overcome. One of the key lessons suggested by the South Africa experience will be legislative and regulatory framework which will be necessary- but of itself insufficient -element in terms of achieving the desired outcome, of equal importance will be the “culture of coordination” under which the main will be regulatory performance rather than regulatory structure.

There are two main features which stands out as being critical to the effective operation of the Twin Peaks model of financial regulation in Ghana. The first is clarity in terms of responsibilities and objectives of each regulator, which requires a clear demarcation between the roles of regulators and the minimization of regulatory overlaps and arbitrages.

The second, which is closely related to the first, is a framework of coordination that encourages both regulators to share information proactively and cooperatively in the performance of their supervisory and enforcement functions.

 

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Banking

Why are local banks lagging behind in quality customer service delivery

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IS IT A CASE OF POOR CORPORATE CULTURE OR JUST SQUARE PEGS IN ROUND HOLES?

Our local banks in Ghana (critically, the older banks) appear to be crippled by a cancerous cultural paradigm. These banks are usually unconcerned about the ongoing changes in the financial world. These banks behave as if they are rendering a favour to customers by serving them and as such portray a lackadaisical attitude and gross disrespect which have turned out to be norms in our banking system. Is this the culture?

Excuse me! Banking service is no favour. It is a high end business aimed at bringing in profit to the bank. Therefore, the Customer is King. The service a bank is delivering is aimed to make profit. Some of our local banks have an impregnable cultural paradigm. By Cultural Paradigm, I mean a set of assumptions held in common by all the staff and management yet taken for granted in the bank. These paradigms are often unspoken within the bank.

Some of our local banks have existed more than three decades in the Ghanaian banking market. Nevertheless, the annual financial performances of these old banks are nothing to write home about. One may ask the following question: Why are they not leading the pack? Why are they not able to raise the money to acquire the smaller and vulnerable banks who cannot meet the new minimum capital requirement? BANKING I believe it is because these banks do not have the balance sheet to give them the capacity to initiate acquisitions of this nature.

Corporate Culture, I believe, is a contributory factor to the poor financial performance of some of the banks. One may argue that just as we all can talk about different cultures such as French Culture, Arab Culture and Ghanaian Culture so can we equally give commentary on our local banks cultures; such as ADB Bank culture, Barclays Bank culture, Cal Bank Culture, Fidelity Bank culture, GCB Bank culture, Stanbic Bank culture Zenith Bank Culture, GHL Bank Culture etc. According to Charles Handy “Culture is the way we do things around here”. Culture is expressed as being the way people go about doing things around their environment where they belong or occupy.

Therefore, a corporate culture is the way staff do things around the company. This means the sum total of their belief, knowledge, attitudes, norms and customs that prevail in the organisation. The second tier of culture can be found in a sub-culture. A sub-culture is described as a group of people within a culture (whether distinct or hidden) which differentiates them from the larger culture to which they belong. A corporate culture has always aroused interest.

These interests in corporate culture have been sustained in both academic and professional environments and have been sustained and indeed raised by an increasing globalisation and knowledge. According to Andrzej Huczynski and David Buchanan (2001), organisational culture was originally introduced to managers predominantly by consultants. Corporate culture recently has proven to be very important.

  • Power Culture: Denoted by the Greek god “Zeus”, a Power Culture normally exhibits one major source of power and influence. It focuses on personal charisma and risk-taking.
  • Role Culture: A Role culture is denoted by the Greek god “Apollo”. In this version of culture, people describe their job by its duties, not by its purpose. So job descriptions dictate “the way we do things around here”. This form of culture is usually common in a bureaucratic organisation, where the organisational structure determines the authority and responsibility of individuals and there is a strong emphasis on hierarchy and status. This culture turns to focus on positions, bureaucracy, and hierarchy.
  • Task Culture: Task culture is denoted by the Greek god “Athena”. The emphasis here is on achieving the particular task at hand and staff may need to be flexible to ensure deadlines are met. People thus describe their positions in terms of the results they are achieving. Nothing is allowed to get in the way of task accomplishment. This is best seen in projects teams that exists for a specific task. Focus on problem-solving, teamwork, creativity.
  • Person Culture: Denoted by the Greek god “Dionysius”. Person Culture is characterised by the fact that it exists to satisfy the requirements of particular individual(s) involved in the organisation. The focus tends to be on individual needs (selfinterest) and independence. People in this type of corporate culture appear to ignore or breach corporate policies and procedures.

Once upon a time, I started my career as a bank clerk. I worked hard and was nominated as the First Male Teller in the bank I worked. In my experiences, some bank staff were seen as more cut for the Tellers (Cashiers) role than others. In those days, I saw it like “The Beauty and the Beast Contest”. The smiley types who wear a smile all the time, persons who were neatly dressed and presentable, persons who appear lively and bubbly all the time; these types of persons did well as Tellers because they smiled at you when you enter the banking hall. They were warm. Their smiles were always infectious. It is a big deal to us – customers – because it made customers felt welcomed. Just imagine when you walk into one of these institutions: a legal firm, a boutique shop, a nightclub, a bank or a hotel. What do you see that gives you your impressions about the place? A good corporate culture has good performance benefits to all stakeholders and as such we have to manage our corporate culture carefully because it impacts on:

• Customers

Poor corporate culture hinders quality customer service delivery. In a real case, one local bank failed to process a well labelled cheque paid into a customer of the bank’s account. The cheque was clearly labelled ‘special clearing’ instructions for more than 72 hours. Reason: Was mistakenly mixed with local clearing. Unbelievable excuse from the bank. It simply failed to deliver so the excuses were totally unacceptable.

• Team behaviour

In a Person cultured environment, some staff become powerful to the detriment of the team’s success. This is normally the case when people are appointed through introductions or referrals of a high placed director or shareholder. Such appointees assume unhealthy role of leaking team information to their referees. Consequently, they undermine the whole team’s togetherness and bonding. Some supervisors refuse to talk to these appointees for fear of intimidation.

•Easy decisions and control by Management

Staff who wield Person powers in a branch can frustrate management decisions because of fear of intimidation or reprisal. In one case study, one local bank junior staff who got employed through a connection with high-powered director(s) and or executive person(s) became a weaker link in the communication channel created by the bank. He/ She literally blocked management’s decision flow at his/ her desk because she/he knew a “director”.

• Staff performance and evaluation

In a person culture, individual staff performance becomes virtually impossible. In the case of the aforementioned example of the staff having a related link or relationship with an executive director or board member, some senior managers are not able to confront such staff on nonperformance issues. The said staff becomes untouchable. This leads to low performances in benchmark targets of the overall bank performance.

• Training and Development

In a very highly entrenched corporate culture, the people do not accept criticism of their behaviour. Consequently, training and development becomes impaired. Even when training is delivered, it is always watered down and not seen as a serious catalyst for change.

• Product development

Poor corporate culture generates poor products or services. It is strange but true that a poor corporate culture can so easily permeate an organisation’s values to dilute good product/service. This is especially relevant in a service industry such as a bank. A bank service is intangible. Therefore, a bank service can easily be incarcerated by a poor corporate culture.

This is due to the inseparability feature of a service and the deliverer of the service. Therefore, organisational culture varies from organisation to organisation while national culture differs from nation to nation.

In order not to be judgemental on a particular bank, (whatever the type of culture a particular bank has), let the bank’s management team ask themselves the question and answer themselves: Does our existing corporate culture impacts on our financial performance positively or negatively? Sometimes attitude, style and behaviours of staff towards a service delivery could fuel the anger of a customer.

On the contrary, some of the newer banks in the country are performing financially better than these older banks. Could these be attributed to culture or a case of wrong people placed in wrong roles? Although, the concept of organisational culture is not universally accepted it remains controversial, and the paradigm and definition wars continue to rage.

Others may reject the argument of different corporate cultures. Nevertheless, Corporate Culture is believed to affect organisational performance. Therefore, bank executives are expected to manage the respective corporate culture in their banking environment so as to improve the banks financial performance.

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