ETI depositors and public funds – An open letter to Eran Wickremaratne

Dear Minister – with due respect, it is the public deposits of the depositors of the ETI that are at stake here. They are not, repeat not, the private funds of the directors and the shareholders, notwithstanding that they have been fraudulently used as such! They are the legitimate funds of the public of this country, in a licensed, regulated finance company. So why then shouldn’t public funds be used to bail out these depositors, particularly where their funds have been used, fraudulently, by the directors of the ETI in breach of their fiduciary responsibility to the public at large? 

The ETI is not a Ponzi Scheme dear Minister, like the Golden Key was and where, quite audaciously, public funds were permitted to be used to pay up to as much as 40% of their claims! Why then the double standards when it comes to the participants of the licensed, regulated financial system of this country. Your statement only further erodes investor and depositor confidence in the integrity of the financial system of this country which is largely propped up by public funds of innocent depositors.

If the sale of the assets of the ETI are insufficient to pay out the legitimate claims of the ETI’s depositors, then they have every right to expect to be paid out of public funds, in the same way as the depositors of the illegal, unregulated, Golden Key were paid with ‘taxpayer money’. In the alternative, the ETI should be liquidated as it is insolvent, and has been so for well over a decade, and the legitimate claims of the depositors under the Deposit Insurance Scheme (DIS) paid, up to a maximum of Rs. 600,000. 

The majority of depositors will benefit from such a liquidation undoubtedly, instead of a meagre 30% of their deposits being paid after so much procrastination by the Central Bank. Surely this is common sense. Exercising the Right to Information, the Central Bank must inform the public about how many depositors will benefit from 100% of their claims being paid under the DIS. These depositors can then exercise their rights to demand that the company be liquidated.

The sale of assets can then take place by the liquidator through due process, to pay back all those depositors who have more than 600,000 in the company. If the majority of the depositors stand to benefit from the liquidation of the company then that is the just, equitable and common sense option the Central Bank should go for, if they are indeed acting in the best interests of the depositors and not to safeguard the interests of the directors and shareholders of the ETI.

What is at stake here? The credibility of the Central Bank as the regulator of the financial system of this country and the credibility of the safety net mechanism of the mandatory Deposit Insurance Scheme as an essential pre-requisite of a well-regulated, robust financial system.

We cannot be complacent about the delays in the legal process where criminal misappropriation of public funds has taken place so blatantly. Public servants such as the Minister must make every effort to pursue a more speedy expedition of justice for all those directors of these failed financial institutions to prosecute and imprison them. To date, not a single director of the many failed FCs, many of whom are prominent names in the business arena of the country, have been prosecuted and imprisoned. 

It was the eminent Singaporean economist Mahubani who gave the example of how Singapore dealt with fraud and corruption in sacking one of their Ministers, to show that it is those at the top who should be dealt with first, to send the message to the rest of society. On the contrary, we find that in the case of the ETI, the regulator is still talking to the errant directors through whom all investor interest is channelled as stated in the CBSL’s press releases, to whatever secondary mechanism the regulator has established. 

These are the directors, who in the words of the Minister, have consistently violated regulatory directives. They are now entrusted with the sale of the assets of the company which rightfully belong to the depositors. They have still not been asked to resign which is, inter alia, the prompt corrective action demanded from the regulator as soon as a deposit-taking, regulated, financial institution is insolvent. 

It therefore begs the question – Are those who wilfully caused the failure of the ETI with the fraudulent misuse of public funds, in breach of their fiduciary responsibility, now trustworthy to act in the best interests of the depositors in dealing with the assets of the ETI, which is the only salvation for the depositors? 

If indeed, the Minister says, the non-bank finance companies sector is not well regulated, he has been ill-informed. Since 1979 with the enactment of The Control of Finance Companies Act, No. 27 of 1979, the legal framework has been twice repealed and strengthened in reaction to the many FC failures, in 1988 and finally with a more robust piece of legislation in the form of the Finance Business Act, No. 42 of 2011. The FBA is well-equipped to deal with instability in the NBFI sector on par with the legal and regulatory framework applicable to the banking sector. 

Moreover, the legal framework is supplemented by a very effective and efficient offsite surveillance system which captures and disseminates to the supervisory staff, the early warning signs of impending problems which are reflected in the data received every month. Early intervention and prompt corrective action are the two critical elements thus in arresting any further deterioration in the financial condition of the FCs.

In this background therefore it is evident that this has not happened consistently over the last two decades. This is where the Minister should focus his attention – to find out how these insolvent institutions were permitted to function for almost a decade, alongside their strong, solvent peers, thereby deluding the depositing public from believing that they were financially sound. Is this not a breach of regulatory responsibility which is tantamount to regulatory failure, for which the regulator should be held accountable? What is the message these statements convey to the depositing public? If the regulator fails in its mandatory responsibility to effectively regulate these institutions, it should then surrender this responsibility to whoever else is capable of doing so. 

In the alternative it should progressively close down the non-bank financial institutions (NBFIs), or merge them with the banking institutions, taking the cue from Malaysia, and save the innocent depositing public from being misled into believing that they are safe and sound institutions in which they can repose their trust. As long as the NBFIs are permitted to function, it is imperative and obligatory that the regulator discharges its regulatory responsibility to safeguard the interests of the depositors in them. They cannot be permitted to abrogate this responsibility so easily.

In conclusion may I ask why there is so much complacency about the safety of the public funds of the depositing public in a, seemingly, regulated financial system, where fraudulent directors, legal delays, regulatory failure, are all taken for granted and the innocent depositors become the sacrificial lambs?

Aren’t the funds involved in at least two of the big failed institutions, The Finance and ETI, close to over Rs. 50 billion, much more than the much-publicised bond scam and where civil society and the media have raised such a furore? What does it take to evoke the same, or even greater commitment, to the plight of the innocent, depositors of the regulated financial system of this country, is the million dollar question that requires the immediate attention of public servants of the calibre of Eran Wickremaratne.

(The writer is former Director of Bank Supervision and Advisor to the Governor of the Central Bank, Independent Consultant and freelance writer to the financial press.)