The global standard setter for the securities sector, the International Organization for Securities Commissions (IOSCO) recently highlighted that a significant portion of Sri Lanka’s financial system is unregulated, with various regulators for the sector acting without formal cooperation.
“The activities of investment banks, financial planners and advisors, and the activities of employees of market intermediaries, are largely unregulated,” IOSCO said in its third Country Review for Sri Lanka’s Securities and Exchange Commission (SEC).
It added that the framework for regulating market intermediaries is different to the framework for regulating management companies of unit trusts, and that both are different to frameworks for regulating stockbrokers and stock dealers, which are inconsistencies and create risks.
Further, IOSCO noted that the trustees of unit trusts are subject to minimal regulation and oversight, and that issuances of unlisted corporate securities and debentures are subject to fewer regulatory requirements than the issue of listed securities.
IOSCO said that while there is some informal engagement, there is little formal cooperation between the capital markets and financial system regulators with the only Memorandum of Understanding existing between the SEC and the Sri Lanka Accounting and Auditing Standards Monitoring Board.
“Formal engagement with the Central Bank of Sri Lanka, the Registrar of Companies and Institute of Chartered Accountants of Sri Lanka (ICASL) is limited to ex officio membership of the SEC,” IOSCO said.
Neither the Attorney General’s Department, which is pursuing prosecution under the SEC Act in a slow manner, nor the Colombo Stock Exchange, which is regulated by the SEC, had formal arrangements with the market regulator, IOSCO said. IOSCO called on the SEC to expand its supervision of firms it regulates based on risks these companies have taken, instead of just checking their compliance with regulations.
“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,” IOSCO said, while noting that the SEC is attempting to improve in this regard. The report further added that despite SEC’s efforts to improve the quality of its supervisory staff, scope remains for further improvement, with the lack of expertise and experience at the senior management level hindering talented mid-level staff, and diverting the attention of the Commission and the Director General away from strategic issues. It noted that the implementation of the proposed revisions to the SEC Act should be a priority in order to give independence to the SEC, to allow the authorities to take civil action, increase the force of law for SEC directions and required corrective action and to bring regulate financial and capital market players that are currently unregulated.
“The SEC’s response to the Country Review findings was largely positive, acknowledging the significant persuasive value of the findings to support comprehensive capital market regulatory reform,” IOSCO said and noted that the SEC and the government have proposed measures to address some of the issues.