The Strengths and Weaknesses of the Regulatory Environment
01 Feb 09:35 AMSector : Banking & Finance Country : Qatar
By Ewald Muller
What was good practice in 2005, has been eclipsed by ongoing regulatory enhancements emanating from the crisis
Anecdotally, the GCC Regulators’ Summit showed strong support for cooperation across the GCC, including ultimate convergence of regulation
Fragmentation of the regulatory structures and resultant inconsistencies probably provide the most succinct synopsis of the greatest weakness in Qatar’s regulatory environment.
Fortunately, a significant part of that fragmentation is being addressed as a result of the new Qatar Central Bank (QCB) law that came into effect in February 2013. An important driver of that process is the establishment of the Financial Stability and Risk Committee, chaired by the governor of the QCB and including members from the Qatar Financial Markets Authority (QFMA) and the Qatar Financial Center Regulatory Authority (QFCRA). The governor also chairs the boards of the QFCRA and QFMA, who in turn have representation on each other’s boards.
This newly established collaborative effort is best enunciated in the strategic plan for the future of financial sector regulation in Qatar, jointly released by the QCB, QFCRA and QFMA in early December 2013. The strategic plan is the result of intensive collaboration between Qatar’s financial sector regulatory authorities. The plan establishes a framework for regulating the financial sector across the state, setting out a roadmap of strategic priorities for the next three years (2014-2016).
H.E. Sheikh Abdulla Bin Saoud Al-Thani, Governor of the QCB, said: “The strategic plan is a landmark document for Qatar. It sets out latest global regulatory thinking and the way the regulatory authorities will work together to help build a resilient financial sector that operates to the highest international standards of regulation and supervision. The QCB, QFCRA and QFMA have worked together to develop this plan for financial sector regulation in the context of both the Qatar National Development Strategy 2011-2016 and the Qatar National Vision 2030. The financial sector has a crucial role to play in realising the goals of the Qatar National Vision 2030. A strong financial sector contributes to the creation of jobs and encourages investment in a diversified competitive economy, so that future generations will be less vulnerable to the boom and bust of energy price cycles.”
The strategic plan is a comprehensive document containing six mutually re-enforcing goals, each supported by specific strategies and work plans within the QCB, QFCRA and QFMA. The goals are:
- enhancing regulation by developing a consistent risk-based micro-prudential framework
- expanding macro-prudential oversight
- strengthening financial market infrastructure
- enhancing consumer and investor protection
- promoting regulatory cooperation, and
- building human capital.
This joint initiative is pivotal in aligning regulation and governance in Qatar with international best practice, but certain constraints and challenges will need to be overcome. Many of these are structural and are rooted in culture, history and the limited size of the Qatari population. The insularity is best illustrated by the continuing limits placed on foreign share ownership on the Qatar Exchange (QE). While Qatar is not in need of investment inflows, the break-even oil price has been edging inexorably closer to current prices. Qatar’s National Vision 2030 also recognises the imperative of diversifying the economy. Also, the strategic plan’s focus is on the financial sector, but ultimately needs to encompass formal business in the broadest sense.
Timing is key and perhaps unfortunate in light of the world economy still struggling to return to health after the global financial crisis. The QE’s recent upgrade from frontier to emerging market could be argued to have preceded the requisite governance structures having been achieved.
An example of unfortunate timing can also be illustrated by the QFCRA’s current project to revise its regulatory reporting regime. While the structures put in place in 2005–6 have served the center well, this could be ascribed to Qatar having been fairly well insulated from the global financial crisis. What was good practice in 2005, has been eclipsed by ongoing regulatory enhancements emanating from the crisis. Regulation was largely conduct-oriented with minimal risk reporting. The introduction of a broader, risk-based reporting framework, still in a parallel run, has already revealed shortcomings in risk management practices within the QFCRA authorised firms. Much of this is exacerbated by reliance on foreign head offices due to a predominance of branch operations. Notable deficiencies have been identified in liquidity risk management and stress testing across market, liquidity and interest-rate risks.
Differing governance codes, admittedly driven by different environmental needs, illustrate fragmentation very well. This is further underscored by a perceived lack of enforcement, at least publicly. It was interesting to observe at the Gulf Cooperation Council (GCC) Regulators’ Summit 2013 that the participants overwhelmingly voted for increased enforcement, but there was no discussion of what constituted good enforcement versus bad. Enforcement of irrelevant or inappropriate rules serves no positive purpose.
Adherence to best international governance practices is constrained by the local factors mentioned earlier. These manifest themselves in the following deficiencies:
- A lack of relevant industry experience and accounting/reporting skills at board level and particularly on audit committees – a mix of skills is imperative, but a good balance of relevant expertise is equally essential
- Inadequate independence of board members
- Board members serving on too many boards
Good governance is further bolstered by appropriate monitoring and enforcement of governance structures and processes, corporate reporting practices and the audit profession. These are notably absent in Qatar, although the need is recognized. Initiatives have been launched to address some of these at a GCC level, a concept that makes a lot of sense to achieve economies of scale.
However, I believe that a similar initiative is required in respect of a regional professional accountants’ organisation that unites local and international accountants. Similarly fragmentation of business bodies, both at a country level and more so regionally, should be addressed. Anecdotally, the GCC Regulators’ Summit also showed strong support for cooperation across the Gulf, including ultimate convergence of regulation. The concept of a transient labor force that as a whole have no interest in enhancing Qatar’s position needs to be dispelled, but then the transients need to step up to the mark too!
Over and above the immediate need for collaboration and standardization, consideration must be given to international developments such as Integrated Reporting. By way of illustration, we have had the luxury with our QFCRA project to defer inter alia the following:
- Advanced Approaches to Risk Modelling and Measurement
- Leverage ratio
- Liquidity Coverage Ratio (LCR)
- Net Stable Funding Ratio (NSFR)
- Counter-party capital requirements per Basel III
- Securitization and re-securitization
This does not mean these can be left in abeyance, but need to be addressed in the medium term.
Similarly, Qatar still has the luxury of choosing a proportionate, appropriate approach; but diversifying the economy will require best practice to be instilled, monitored and enforced across the broad base of public-interest entities, not only finance. This is ultimately critical to achieving some of the stated objectives of Qatar’s National Vision 2030.