The enforcement powers of both the Securitas Exchange Commission (SEC) and the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) are limited, observed international organizations of securities Commissions (IOSCO) in a review.
The survey points out that both have powers to initiate criminal action and, along with the Colombo Stock Exchange (CSE), have some powers to take administrative actions.
None of these authorities can take civil action. Criminal penalties are light by international standards and are not sufficiently dissuasive the survey further observes.
“There are very few formal co-operation arrangements between authorities with a role in regulating capital markets and the financial system, although with some, there is significant informal engagement.”
The SEC has an MoU in place only with SLAASMB. Formal engagement with the Central Bank of Sri Lanka (CBSL), the Registrar of Companies and Institute of Chartered Accountants of Sri Lanka (ICASL) is limited to ex officio membership of the Commission. There are no formal arrangements with the Attorney-General’s Department or the CSE.
There are also significant shortcomings in the operation of the regulatory framework, “The SEC does not currently employ a risk-based approach to supervision.”
There is no risk based framework in place to select and prioritize the regulated entities to be inspected nor the frequency or intensity of those inspections.
While the SEC undertakes a fair number of supervisory visits annually, these visits (particularly those for managing companies and investment managers) appear to be compliance audits. Although they do cover risks such as credit and operational risks, they are not sufficiently geared toward developing a holistic picture of the firms’ weaknesses and risks.
The RT notes the SEC advises it is gearing up to address this recommendation.
Despite steps to improve the quality of the cadre of supervisory staff, who are the public face of the SEC and provide front line contact with the market, scope remains to improve the level of understanding by staff of the entities regulated.
There is a need to develop staff in these areas and, where possible, to ensure new hires are drawn directly from the markets.
There are concerns that although the SEC does follow up on site inspections with a view to identifying deficiencies and issues of non-compliance, it has taken limited regulatory action. The RT notes SEC’s advice that it is making a concerted effort to raise standards, while remaining sensitive to the circumstances under which regulates operate.
Prosecution of breaches the SEC believes warrant criminal action is severely impeded by slow progress within the Attorney-General’s Department in considering references from the SEC. The SEC relies on the issue of cautions and warnings to deal with behavior it believes fall short of the requirements to establish criminal liability.
The SEC lacks consistency in the expertise and experience of staff at senior management level, in certain critical areas which are necessary in order to deliver on its core responsibilities. This has meant that talented middle level staff members in these areas lack the direction, mentoring and guidance needed to build a strong and effective cadre of regulatory professionals. These resourcing issues at senior management level also mean that the Director-General, and at times the Commission, play a greater role in operational decision making, limiting the time available to them to provide strategic direction to the SEC and to monitor its progress.
Communication and consultation with the regulated population about the SEC’s strategic direction and its policy positions needs to improve. The regulated population needs, and looks for, clarity and certainty in what the regulator is doing and plans to do.
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