Is the market over regulated or not?

IS the market over regulated or not?The two-day capital market workshop’s most active session was the one which debated the issue of whether the stock market is over regulated or not.

Despite it being the hot topic as well as a good exchange of views, the time allocated of around one-and-a-half hours on day two wasn’t sufficient, prompting most participants to opine that extra time could have been allocated or this issue taken up on day one.

Keynote speaker at this session was former Director General of SEC and now precedent partner of Nithya Partners Arittha Wikramanayake. It focused on the importance of effective, impartial enforcement to create confidence and a level playing field and balancing regulation, supervision and innovation in the capital market.

Session Chairperson was CSE Chief Executive Officer Surekha Sellahewa, whilst discussants were CSE Director Hiran De Alwis, SEC Director Investigations Dhammika Perera and Acuity Partners CEO Ray Abeywardena.

Here are some highlights:

Role of the regulator

Arittha at the outset of his impressive presentation said that the role of a regulator was always a challenge and that criticism was cheap and easy. Quoting from the SEC Act, he said that the regulator’s job was to promote, develop and maintain a securities market that is fair, efficient, orderly and transparent.

“This I must confess is a tall order, a task extremely wide, multifaceted and conflict at times with some mandates,” Arittha said. In support of the latter, he cited different regulations concerning brokers and investors. However, he said that a regulator could not operate in a vacuum, but needed to consider socio-economic issues as well.

“A regulator cannot keep everyone happy and has to be ready for constant change, be proactive and dynamic,” he said.

“Nowhere in the world has a regulator got it right, so we can’t expect perfection from a regulator. However, this doesn’t mean that the regulator shouldn’t be held accountable for their actions,” Arittha pointed out.

On the question of whether the market is overregulated, he said that to answer it was a dilemma as universally there weren’t accepted standards to assess on those lines.

However, he said that generally relevant criteria could be used to assess and noted that more laws meant greater regulation and considering the number in Sri Lanka, it was not over regulated.

Cost of compliance

Another criterion is cost of compliance, though here too there is no formal evaluation of cost of compliance in Sri Lanka. He said in general listed companies and market intermediaries have to bear cost of compliance. Another facet is whether regulations trifle bona-fide business. In this, regulations include rules on private placements, price bands and credit to clients.

Arittha said that these rules cast some shades of grey on the SEC even though some were applied in good faith. “In my view, rules such as price bands and banning broker credit to clients has given credence to claims of over regulation and level of dissatisfaction,” he said, adding that these also tantamount to a shift from disclosure-based regulation to merit-centric.

Enhancing awareness

Noting that the rise in penny stocks, active trading on those and market volatility though worrisome direct or indirect intervention by the SEC wasn’t the answer, he opined: “The regulator cannot control greed and foolishness on the part of investors or market. Instead the regulator can enhance awareness in the market on the ill effects in addition to enforcing existing laws strictly to prevent manipulations.”

The SEC should investigate and take action against “pump and dump,” he added.

Referring to the banning of broker credit, Arittha said the regulator shouldn’t take credit decisions on behalf of brokers. He also said that the regulator shouldn’t be dismissive of criticism and noted that regulation must be followed in word and spirit. He also called for fair treatment of private transfers.

Giving his personal view, Arittha declared that the said stock market “by and large” was not over regulated.

Effective regulation

He emphasised at the SEC workshop that the more critical issues was effective regulation or whether the market was well regulated. “Is there is general acceptance of regulation being transparent and fair? Over regulation can cause market discomfort. Good regulation must be facilitative. It requires industry input via constant and open dialogue with industry. This, however, does not exist in adequate measure,” Arittha added.

He said that the high level of insider dealing, pump and dump and market manipulation suggested a lack of effective regulation. “In the interests of all, put an end to this (manipulations) in cooperation with market participants. If there is truth in these activities, what actions has SEC taken and have people been punished? If not the role of the regulator can be increasingly marginalised,” Arittha added.

Lack of dialogue

However, he also faulted the industry associations for not being proactive and not speaking in one voice. This, he said, has resulted in a top-down imposition of regulations.

“An open and frank dialogue will ensure effective, transparent and industry-wide accepted regulations. This will ensure there is no need for constant tinkering of rules and laws by the regulator, which could be construed as a sign of weakness or incompetence on the part of the regulator,” he added.

“Once industry associations are co-opted for discussions, they cannot go back and complain about new regulations,” Arittha said, emphasising that the solution for effective regulation wasn’t easy but cooperation from the industry, which knows better some of the manipulative practices in the market, was critical going forward.

“In regulations there should be a consistent and predictable path. The regulator must avoid inconsistencies and the SEC mustn’t flex its muscles for the slightest reason.

Regulations should be carefully enforced when necessary as per the SEC’s mandate and not by unbridled freedom,” Arittha said.

The need for maintaining strictest confidentiality was raised as well as resistance against any conflicts of interests on the part of members of the commission. “Those who advise shouldn’t have a professional relationship with the commission. Good governance applies to the regulator as well,” he added.

In summing up, Arittha said solutions for effective regulation weren’t easy. “Cooperation from the industry which knows better on how manipulations take place is critical. There must be whistle blower provisions introduced and safeguarded. Sweeping issues under the carpet will only help those who make a quick buck, but admitting issues and addressing those will help all. The regulator and all stakeholders must build trust and confidence to ensure the desired future growth,” Arittha added.

Facilitative role

Hiran De Alwis said effective and impartial enforcement of existing laws was critical, whilst noting that the regulator must play a facilitative role and not a dampening one. “Efficient and fair market for future growth is key, whilst all stakeholders must realise the benefits of effective regulation,” he added.Abeywardena, who expressed the view that the market wasn’t over regulated, however emphasised that consultation with the industry was a must. “To get the broader regulatory role right with time to time imposition of directives, there must be consultation with market participants. This will ensure that the overall regulatory environment is aligned with the core objectives of capital markets,” Abeywardena added. He pointed two instances where, due to the lack of consultation, two directives had been problematic. One was the segmentation in the preferential basis of allocation on IPOs and the other was stopping broker credit to clients. He also called for enforcement of rules irrespective of whether the offense is committed by a big or small party. “The regulator is the last line of defence for the market participants,” he added.

CSE Chief Executive Officer Surekha Sellahewa who chaired the session also highlighted the benefits of such a consultative committee. She also said different stakeholders had diverse aspirations with regard to regulation.

CSBA President Sriyan Gurusinghe said that there was dialogue between the industry and the regulator, but most often it took place after new regulations were introduced.

Need for consultation

The sheer irony of apparent lack of consultation was well demonstrated by former SEC Commissioner now on the other side of the divide, Heraymila Securities CEO Ravi Abeysuriya. He admitted that whilst it was during his tenure at the SEC Commission that price bands were introduced and broker credit was stopped, having started a broking and investment banking firm, the ill-effects and cost of compliance of such moves were realised.

The original across-the-board price band prevented the market determining the prices, whilst formalisation of broker credit through margin provisioning has increased cost to the industry, he added.

Timely actions

Noting that regulations weren’t static, Dammika Perera of the SEC said that recent regulatory actions were in response to market’s reckless behaviour. “As the regulator we have to maintain a fair and orderly market as well,” he said, adding that a bubble was being created with industry aiding and abetting. “Our timely actions such as the price band were introduced with much reluctance, fortunately it prevented a Bangladesh happening in Colombo,” he said. In response to suspension of broker credit, he said that some brokers were providing credit beyond credit worthiness. He also said that Sri Lanka followed a mix of disclosure and merit based regulation though the emphasis was on the former. He added that the price band was in response to a crisis development and not merit based.