Being a Position paper presented at the Business Hallmark’ public Policy Forum on “Restoring Market Confidence – in an era of Economic Uncertainties: Challenges & Prospects†held at the Chartered Institute of Bankers House on November 03, 2011; 1030 hrs, Victoria Island, Lagos, Nigeria
“The golden age is before us, not behind us.” – William Shakespeare
The central argument is predicated on how you deal with the combination of an externally driven change to a system and an internal corrosion in process and practice of the system – one that creates a trust deficit.
The trust deficit can however be considered as a natural consequence of the basic human psychology that drives markets.
Yet, when this trust deficit is widened through the actions of regulators under a period of severe economic and political uncertainty, the gap is unduly expanded in such a way as to make the resolution more complicated than it should be,
To be talking about restoring market confidence in November 2011, must be the clearest indication yet that efforts till now, has done little to influence the correction desired.
This simplistic approach may not be a fair assessment of the work done so far by SEC/NSE to date but it offers the most honest assessment of the approach deployed to dealing with an unusual development/problem that may be revealing the gap we identified way back in 2009 in the NCM Report to the market.
The NCM report in February 2009 had concluded that the challenges we faced may not be the simple ‘market meltdown’ – local or externally induced; but a major ‘leadership meltdown’ in the management of not only the financial markets but the economy as a whole.
Today, all dramatis personae involved as at the time of the report are no longer in office.
So why do we still have the problem lingering on after the many awards, commendations and public acclaim given to the managers of the new economy?
The answer is a bit complicated we must admit, but at the very basics, it relates to the ability of the managers of the market and economy to work together.
That should not prove to damaging to the personal egos of this very strong characters presiding over institutions that in itself, are equally culpable of failures to discharge their statutory obligations when it was most required before their respective new leadership took office (and are still embarking of the usual BHD tactics).
At some point, we must all accept that the talk, while necessary, achieves little compared to action.
This is where the new leadership but one has failed in taking actions (not drama) that impacts investors’ perception that the trust deficit is evaporating.
Quite frankly, we missed a number of opportunities to confront the key deliverables that were required, some of which included the following:
1. The acknowledgement that the ‘gun-out-of-the-holster’ approach that delivered the bourse from the paralysis it found itself in did little to help the recovery but rather did more to empower the resistance to change – by infusing motives into the action of the regulators;
2. The opportunity to set the scene on a positive note – seen to be taking action against the big and untouchables – this must have informed the action taken earlier on by the regulators in the capital market but its management left a lot of unanswered questions as to the extended period of the cycle of negativity they unwittingly promoted, eroding the goodwill behind the intentions;
3. Building a safer capital market with better crisis management and a compelling solution for burden-sharing should have been a priority;
4. Recognising the nexus between matters related to fiscal or monetary policy as a risk factor for the capital market in a new era;
5. Not taking into account the futility of prosecuting a huge number of stakeholders without control over the plea-bargain process;
6. Avoiding raising expectations that reduce communications to a ‘wish list’ rather than action-based reviews.
In spite of the drawbacks, it would appear that we still have the opportunity to communicate to the market that things have changed for the better.
In this regard, the NSE has done a lot more to show that ‘it gets itâ€ÂÂ. The NSE appears to know what is important in shaping the market and will need all stakeholders to get on board to make it happen.
Key Imperatives for Market Confidence
1. Clarity of mandate for team/regulators
2. Setting the Scene
3. Restoring Investor Confidence indicators:
Investor Protection
Better Transparency
Market Integrity
Market Efficiency
Competitiveness of the Nigerian Financial Market
Quality of Supervision
How does this play out?
For the moment, stabilizing the financial system by “detoxing” the banks and injecting public funds into banks if necessary by AMCON was an important task that needed to be done and we must give kudos to those that delivered this, in spite of any reservations we may have.
For the moment, stabilizing the financial system by “detoxing” the banks and injecting public funds into banks if necessary by AMCON was an important task that needed to be done and we must give kudos to those that delivered this, in spite of any reservations we may have.
This process of restoring the financial sector to health however may not be a ‘slam dunk case’.
The post merger & acquisition phase is just the beginning and there are still more hurdles to overcome. Why? The adjustments in the financial sector have to work through: higher capital provisioning, reduced risks on balance sheets, lower trading exposures, and restructuring of business activities.
But besides these immediate actions it is of equal importance to start now with laying the groundwork for medium-term reform of the financial system.
A wide-ranging overhaul of the financial regulatory framework must be on the agenda.
In doing so, transparency becomes the key for maintaining market confidence and for crisis prevention.
The lack of a clear path to market confidence must therefore be one of the drawbacks to the cocktail of interventions undertaken by the myriad of regulatory bodies involved in our financial system.
The first step must therefore be the signal sent that the CBN, SEC, NAICOM, MoF, MoT&I can and do indeed work together to deliver a seamless regulatory environment.
The second would have to be the working relationship between the co-ordinated financials services regulatory body and the legislature to move beyond the ‘mouse trap’ approach to handling issues for political benefits but to rather step up to the plate and be counted as a facilitator of market development and not a post-development court yard.
The Planned House Probe
The planned house probe on the nationalised, M&A and other capital market related transactions has increased the stakes.
This is our position on the development.
The house is legally empowered to do all that the October 5th 2011 and subsequent follow-up letters to the SEC and related parties demands.
Some informed stakeholders reason that this is a needless exercise and smacks of nothing more than an opportunity for the members to enrich themselves. We differ to the extent that pecuniary benefits (a matter for the anti-corruption agencies) should not cloud the opportunity this presents the market to once and for all confront the legislature on what its core/primary responsibility is to the citizens of the Federal Republic of Nigeria.
Rather than attempt to take over the role of the SEC as the protector of the investor, its key role is that of expanding the relevance of the capital market as a creator or wealth making opportunities to the electorate and ensuring through the capital markets, that Nigeria is able to access long term capital to fund its infrastructural needs and deficits.
Ab initio, the transactions for which the House seeks to hold a public enquiry is a matter for the CBN and SEC and not for the buyers (who have simply followed the laws of the land – as is). To ask them to come and explain a regulator approved matter in public is the clearest attempt at ridiculing the regulator – and by extension undermining the market confidence effort we are all working towards.
For the avoidance of doubt, we do not advocate for a second, that the deal(s) are off limits to legislative oversight. That would be wrong and against the spirit of the constitution. Every citizen/institution must be entitled to an opportunity to use democratic means to understand, clarify and most importantly, resolve issues.
At proshare we see this development as the great opportunity to take head-on the lingering imbalance between the vision/objective of the house and the SEC. This issue predates the current office holders and quite frankly, the circus must stop.
The house should, first, be interested in the issue to provide a balance between professional/regulatory perspectives and the compromise; a much needed insight in resolving the primary impasse driving the inquest.
Second, the house must come to terms that while it will not abandon its oversight responsibilities, it must advance legislation that advances the interest of Nigeria through both the privatisation end-game (ensuring that no less than 25% – 30% of privatised entities are listed on the bourse) and regulation is passed for major operators in ‘key sectors of the economy like oil, telecoms, roads, food and health are listed on the bourse of the NSE.
The last one must be that the demutualisation to take place must therefore take into consideration the need to ensure that the stakeholding available to the majority of Nigerians is reflective of the decisions taken in the first two points above – thus leading to a minimum of 30% – 55% to the public; creating a float that could be akin to a national economic index.
Conclusion
Investors have a longer memory than the sell-side of the market. To regain their trust, intensive work needs to be done in the coming years.
Investors have a longer memory than the sell-side of the market. To regain their trust, intensive work needs to be done in the coming years.
In the capital market, we will need the support of a determined Nigerian legislature, a strong commitment from the CBN and Ministry of Finance, as well as active contributions from the OPS.
We believe that participants in capital markets share the same goal: To make them as efficient and effective as possible.
The ability to collect savings and allocate them to investment, and to allow all participants to defray risk, is at the heart of any successful modern economy.
This requires effective regulation that not only mandates common standards, but also promotes accountability, responsibility and transparency, while at the same time encouraging innovation.
Effective regulation must not impose undue costs, if markets are to remain efficient and effective.
However, regulators should be conscious that the crisis has been so deep that there is a collective need to go back to the basic principles of financial regulation and supervision.
Whilst the current priority must be to restore financial stability – by identifying, measuring and controlling systemic risks – we believe there is a pressing need to review the supervision and regulation of capital markets in order to restore investor confidence.
As our contribution to the debate, we strongly recommend that each regulation be seen in the context of its role in creating effective capital markets based on the principles outlined above.
To reiterate these principles, professional participants must strive to be:
Responsible: to understand their clients’ requirements and interests and act accordingly;
Accountable: agents will be responsible when they are accountable, and those charged with holding agents to account must be ready, willing and able to do so; and
Transparent: these conditions can only be met if independent agents have access to and provide relevant information that meets users’ needs.
All market participants should agree on these principles, as it is not possible to establish them by regulation alone.
As investor pulse analysts, we aim to provide useful support to any future efforts at regulation and to ensure that these efforts translate into the promotion of best practice.
Source: Proshare
