|Chinonyelum Uwazie||Vincent Iweze|
If recent speeches by the Director General of the Nigerian Securities and Exchange Commission are anything to go by, by 2012 Nigerian capital market operators will be exposed to a risk-based approach to supervision. As plans are underway to consolidate the risk-based approach, this paper considers some of its interesting implications for the Nigerian capital market.
A risk-based approach entails adoption of decision-making frameworks which are used to prioritise regulatory activities to focus them where they are most needed, so that regulators are able to manage risks that may impede the achievement of their regulatory objectives. C. Sergeant (2002) notes that the approach proposes that the purpose of regulation should be limited to addressing significant, actual or potential market imperfections and failures. MacNeil (2007), on the other hand, identifies that risk-based regulation has two important implications for enforcement.
First, that not all contraventions are necessarily subjected to enforcement action. The result of this, according to MacNeil, is that risk-based regulation envisages from the outset that enforcement will not be an automatic response to contravention. Second, specific priority areas may be targeted for action because of the implication they carry in terms of risk to the regulators statutory objectives.
In the case of the Nigerian Securities and Exchange Commission this would mean adoption of an approach that will further the regulatory objective proposed in the Nigerian Investment and Securities Act 2007 as follows: (i) protection of investors; (ii) maintenance of a fair, efficient and transparent market; and (iii) reduction of systemic risk.
This would be a welcome approach in a market that has struggled to regain investor confidence after several market infractions were left unchecked and eventually led to the collapse of the capital market in the wake of the Nigerian banking crisis in 2009.
Reports in the Nigerian media indicate that even top administrative staff of the Nigerian Stock Exchange were indicted in dealings that ultimately eroded investor confidence. The rise in the level of enforcement, however, would indicate that the current management of the Nigerian Securities and Exchange Commission is focused on addressing this trend.
However, challenges are known to flow from a regulators preference for a risk-based approach to regulation. Baldwin and Black (2007) argue that while risk-based regulation has significant advantages in ensuring that regulators focus resources on regulatory priorities, the flip side is that it means not doing things the way they were done before.
Consequently, they argue, regulators can fail to pick up new or developing risks and might tend to be backward looking and locked in to an established analytic framework. Further, risk-based systems usually focus on known and familiar risks, and may tend to neglect lower levels of risks which, if numerous and spread broadly, may involve considerable cumulative dangers.
These are some of the challenges that the Nigerian capital market regulator may need to watch out for to ensure that the proposed risk-based frameworks do not follow the trend seen in some more developed countries where regulators failed to appreciate the risks that were building up in their financial markets, which eventually led to the collapse of global financial markets.
The Nigerian regulator should instead ensure that its risk-based frameworks are tailored towards effective regulation, as that will ultimately culminate in a much-needed boost in investor confidence.
Furthermore, adoption of risk-based frameworks in the Nigerian regulation of capital market operations could potentially mean that current inclusion in the Consolidated Rules and Regulations 2011, which restates the Commissions position that a formal rule-making process is more effective than case-by-case adjudication, and equality of treatment among similarly situated persons, may need to be reviewed to accommodate risk-based frameworks.