Chandra J calls for Financial Services Authority and Banking and Finance Commission

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24th August 2012

Dr. P. B. Jayasundera,

Secretary to the Treasury,

Ministry of Finance & Planning

The Secretariat,

Colombo 1.

Dear Dr. Jayasundera,

Establishment of a Financial Services Authority and a Banking and Finance Commission

I suggest for your consideration that you duly evaluate the long-term national economic benefits of enhancing effective fiscal management capability by including the undernoted proposals as a part of the Budget Proposals 2013, currently in development under your leadership:

1. Establishing a Financial Services Authority, as an independent public institution, with the undernoted objectives:

a. To network and coordinate with other regulatory institutions and the Ministry of Finance and Planning, the strategic actions essential in minimising the ill effects of the informal economy on effective fiscal governance and fiscal stability,

b. To network and co-ordinate with other regulatory institutions and the Ministry of Finance and Planning the strategic actions essential in minimising risks of money laundering,

c. To network and coordinate with other regulatory institutions and the Ministry of Finance and Planning the strategic actions essential in minimising risks of market operations by unregulated financial institutions, informal sector financial operations and distribution of unapproved financial instruments and financial services,

d. To network and coordinate with revenue collection authorities and law enforcement agencies the strategic actions essential in pursuit of the objectives stated under a, b and c above,

e. Conduct effective public awareness campaigns, promoting awareness and commitment to support the objectives of the Financial Services Authority

f. Act as an Ombudsman in supporting any individual, members of the public or any segment of society, seeking regulatory facilitation and/or protection, being persons aggrieved by the operations of unregulated financial institutions and/or negatively impacted by the distribution unapproved financial instruments and financial services,

g. Associate with regulatory institutions, professional bodies, chambers of commerce and good governance linked civil society organisations, in developing standards of professional and public life and codes of conduct and ethics, for due adoption and committed observance by all market participants,

h. All acts associated with and promoting the above objectives,

2. Appoint a Banking and Financial Services Commission under the Presidential Commissions of Inquiry legislation, to;}

a. Review the key issues and challenges that impacted on the financial services sector over the period since the last Banking Commission Report,

b. Specifically examine the key issues and challenges that impacted on the financial services sector, (including unregulated and informal financial

services sector), covering within the scope of review,

i. the negative effects on the economy and citizens, and

 ii. identification of lessons learnt from the global financial crisis, and

iii. identification of lessons learnt from the global financial crisis, and

iv. key issues and challenges of the local financial services sector over the period commencing from 2009 to date

c. Identify and review the key issues and challenges that may impact on the financial services sector over the next decade in Sri Lanka, and adversely impact on the vision of Sri Lanka becoming a vibrant, attractive and effectively regulated financial services hub of significance in Asia,


d. Develop recommendations and strategies towards realising the vision of Sri Lanka becoming a vibrant, attractive and effectively regulated financial services hub of significance in Asia, including therein legal, regulatory and institutional reforms, enhancement of capability, systems and controls essential towards realisation of the vision,

e. Identify the role, responsibility and accountability of all associated market participants in promoting the realisation of the vision of Sri Lanka becoming

a vibrant, attractive and effectively regulated financial services hub of significance in Asia,

f. Identify and recommend guidelines for best practice independent professional regulation, compliance certification, codes of conduct and ethics, tax structures and tax administration systems, dispute resolution mechanisms and judicial review processes

Placing the above recommendations in context, I would draw your kind attention to the statement made by India’s new Finance Minister, Palaniappan Chidambaram, in pledging to clarify tax laws and take measures to boost investments in the Indian economy, where he committed that: “Since investment is an act of faith, we must remove any apprehension or distrust in the minds of investors” and “Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution and an independent judiciary will provide great assurance to investors.”

I wish to place before you the following submissions re. financial services sector associated key issues, perceptions and challenges, which I believe justify the recommendations for the establishment of a Financial Services Authority and setting up of a Banking/Finance Commission of Inquiry;

1. The common perception that Sri Lanka has an annually growing shadow economy of a significant size in relation to the total economy, estimated at 30.4%, 35.3% and 43.7% of the official GDP in 1989/90, 1994/95 and in 2000/01 – “The Size and Development of the Shadow Economies in the Asia-Pacific”

2. The perception that Sri Lanka faces significant challenges in curbing the risk of money laundering. It is reported that a US congressman has told visiting External Affairs Minister G.L. Peiris, that for long-term stability in the post conflict era, it was important to put an end to the international money laundering racket. It is reported that according to Sri Lanka’s mission in the US, Rep. Royce has said he was specifically concerned about post-conflict international money laundering which was “vexing and problematic for the future”.

3. A recent phenomenon experienced by drivers, vehicle owners and passengers of vehicles, (when vehicles come to a halt over bridges entering and leaving the city of Colombo, especially near traffic signal lights) to be exposed to informal, verbal and written communications, promoting and offering short-term financial facilities for business and personal requirements without collateral.

This may be a clear indication of the existence of a parallel informal economy along with a linked financial services sector. These brief but very effective communications are presented to encourage the targeted persons to engage with a customer help desk via a mobile phone numbers listed in the marketing material introduced during the brief meeting.

The communications entice the target market with offers of financial facilities at commercial bank rates and terms, but free of any collateral. The offer are backed with a further inducement that the facilities are available merely on handing over five or six repayment instalments by way of post-dated cheques.

These brief verbal communications are supported by an information note in the form of a slip of paper, which only indicates mobile phone numbers of a purported manager in addition to the facilities on offer. When this number was contacted over the phone, the offer was further promoted, based on one-day loan services, with delivery of funds at the residences of the targeted customers as a promised unique selling proposition.

The offer of loans had a limit of up to Rs. 5 million, and was available for business purposes (excluding agriculture and poultry business) by merely handing over five or six equal instalment post-dated cheques computed at the rate of Rs. 22,000 per cheque for every Rs. 100,000 of funds released.

There are no stated processes for nor prior information needs for assessment of project viability, repayment capacity and customer financial standing. When further inquired, the respondent over the phone stated that they have neither a registered place of business nor a registered business name with all transactions being completed at the residence of the borrower, with full anonymity and without any declarations to tax or other governmental agencies.

4. The intermediaries calling over at private residences offering to the public, pseudo insurance type products based on a mirror image to the informally operating ‘Seettu’ system. The target customers upon agreeing to make regular subscription payments (similar to monthly premiums) are entitled after depositing six instalment payments, to receive loans of 20 times the regular instalments, with the loan facilities being “purported” to be offered at bank rates.

5. Informally advertised and widely distributed typical ‘pyramid scheme’ mirroring financial services product offers linked to the sale of items of nominal value or charged as club subscriptions, etc., which offer attractive returns to both intermediaries and prospective target market participants

6. Collections made by appointed intermediaries of deposits “purported to be re-invested in the stock market on a collective basis” (here collections are made by intermediaries by visiting homes and even at commonly patronised public places) providing initial attractive returns within six months. These returns are well above the official yield rates of approved financial institutions and even above the growth rates of the stock market.

In a marketing effort to get further investments initial returns are higher than the corresponding later returns. The level of returns offered, practically demonstrated after six months to the customers via distributed returns, is the marketing platform supporting distribution. The intermediary benefits associated with the scheme appears to clearly mirror a backing pyramid scheme. It is further noted that sometimes even customer documentation are in use backed by informal pseudo share certificates.

7. There are public perceptions that some of the investments in the local securities market, as foreign currency denominated government bonds, bank deposits, deposits in financial institutions, stocks, shares, debentures and investments may be tainted with funds derived or emanating from the informal economy. These funds may even be tainted with money laundering according to analysts.

The perception extends to some analysts expressing distress over the level of effectiveness of fund transfer tracking, transaction monitoring, know your customer and other validations, which they believe are not up to the required depth and degree of professionalism. These analysts believe that the essential regulatory control and enforcement processes and investigations by the appointed regulators and law enforcement authorities are also less than satisfactory.

8. The level of market chaos and extreme hardships caused to the investing public following the failure of leading financial institutions, both regulated and unregulated, consequent to financial crisis in 2009, makes it an imperative that the lessons learnt be examined critically, along with the resultant economic and social issues and challenges. Thereafter all necessary steps need to be taken for essential reforms and enhanced and effective regulations, carried out with commitment to realise the bench marks of a smooth and effective process of change management.

The submissions made above, viewed in the context of rapid and sustainable socioeconomic development adding value to Sri Lanka and its people whilst making Sri Lanka the emerging ‘Miracle of Asia,’ being the objective of the ‘Mahinda Chinthana,’ realised with democracy, rule of law, justice, and equity as the four key tenants of governance, I trust that the Budget 2013 will make clear commitments towards the establishment of a Financial Services Authority and the setting up of a Banking/Finance Commission of Inquiry.

Yours sincerely,

Chandra Jayaratne


H.E. The President and Minister of Finance

Dr. Sarath Amunugama, Snr. Minister of International Monetary Co-operation

Mr. Basil Rajapaksa, Minister of Economic Development

Mr. Geethanjana Gunawardena, Deputy Minister of Finance and Planning

Mr. D.E.W. Gunasekera, Chairman COPE,

Mr. Lalith Weeratunga, Secretary to H.E. the President

Governor, Central Bank

Auditor General

Country Director, International Monetary Fund

Country Director, The World Bank

Chairman, Ceylon Chamber of Commerce

President, Organization of Professional Associations

Chairman, Sri Lanka Economic Association

Chairman, Bankers Association of Sri Lanka

President, Institute of Chartered Accountants of Sri Lanka