Business Unpacked

Where was the regulator in the Alliance Capital fiasco?

 What started as a promising deal for individuals and corporates has kind of ended in tears as they are not guaranteed their anticipated returns on money saved with portfolio and investment management firm Alliance Capital Limited (ACL).

How the situation degenerated to the point of investors feeling short-changed without the Reserve Bank of Malawi (RBM), the regulator of financial services that includes the capital markets and insurance, noticing some red flags that something ain’t adding up beats my imagination.

Ideally, a regulator is supposed to be on top of the game in its area of expertise and be able to read the situation from a vantage point to swiftly move to save the consumers of the financial products.

But this did not happen as, embarrassingly, the regulator’s own subsidiary Export Development Fund (EDF) is among the victims of the souring deal.

According to our sister newspaper Weekend Nation, at stake is a whopping K24.7 billion investors’ money out of which K11 billion is owed to State agencies, including EDF whose K6.9 billion is the highest followed by Malawi Communications Regulatory Authority’s K1.2 billion. Malawi Electoral Commission is owed about K800 million.

In March last year, the High Court of Malawi Commercial Division gave ACL eight days to settle in full K373.5 million owed to one of its clients, a Blantyre-based family.

When ACL issues filtered into the public domain, RBM suspended the firm’s portfolio manager licence for “gross violations of financial laws” for a period of 12 months with effect from March 2021. In April this year, the regulator applied for the winding up of ACL on grounds that the company is insolvent with its net capital excessively below the minimum regulatory capital requirement of K50 million.

Ironically, the financial industry is a highly regulated one where issues of integrity and trust stand supreme.

But the case in point has exposed glaring weaknesses which call for the regulator to work extra hard to regain public confidence. It also raises questions on capacity. While it is generally accepted that RBM has developed expertise to regulate some areas of financial services, notably banks and insurance, the impression one gets is that emerging areas of financial services such as capital markets lack internal expertise.

In other jurisdictions, regulation of capital markets and pensions/ insurance is outside the central bank. But here, the RBM Governor wears the cap of regulator of all of them, not healthy. It may be an expensive undertaking to have separate regulators, but I feel it is worth exploring. In fact, efficiency does not come cheap.

Without undermining those involved in regulation, isn’t it right and proper that the officers involved should have hands-on working experience from the areas they focus on? In that way, responsible officers or “eyes of the regulator” will be on top of things in terms of what goes on as they say send a thief to catch a thief.

If the regulator did not sleep on the job, surely its own subsidiary, EDF would not have found itself in the mess it is in. This is a slap in the face of the regulator.

It is like a daring robber breaking into Inspector General of Police’s house and getting away with it.

What is more worrying to me is that while the investors keep waiting in the wings, the key “architects” of the mess, including the firm’s directors who borrowed the depositors’ funds, are freely roaming the streets. In fact, some of them have been allowed to leave the country without accounting for their actions.

Yes, RBM is seeking liquidation of the company whose net capital, as of April this year, was at negative K393.39 million. This is a company which has failed to settle matured investments due to liquidity challenges. Not a promising situation.

I still believe that if the regulator did not snore on the job, the mess could have been avoided. Surely, lessons have been learnt, albeit bitterly.

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