Key among regulatory developments aimed at enhancing financial stability in Botswana is the Collective Investment Undertakings (CIU) Act. The revised law was passed by Parliament in the July 2021 to permit the introduction of other investment vehicles, such as Limited Liability Partnership (LLP), in order to increase investment options for investors.
The Corporate Governance Guidelines for Insurers and Reinsurers have been introduced. Motshidisi, a highly-decorated financial services expert says the aim of these guidelines is to inculcate good corporate governance practices by insurers (including reinsurers) and those participating in the insurance industry space. He notes that this will ensure stability and soundness of the industry.
Motshidisi says in 2021, NBFIRA commenced a review of the Pension Investment (PFR) Rules and the Retirement Funds Act 2014 and Regulations to ensure their continued effectiveness and relevance, improve fund governance and sustainability of retirement funds, align the legislation with international standards and enhance the regulations for funds administration, among other things.
NBFIRA Act 2016
“The industry has been duly consulted about the proposed amendments to the Act to, inter alia, enable the Authority to meet the requirements for its application for ordinary membership to the International Organisation of Securities Commissions (IOSCO), which would enable the Authority to participate in information sharing with members of IOSCO on supervision and enforcement matters,” he says. The Authority will also qualify to participate in the governance structure of IOSCO, which is a privilege reserved for ordinary members. Related Party Guidelines are also under review to enhance transparency by requiring NBFIs NBFIs to disclose for approval significant exposures or relationships to their related parties and close associates.
Motshidisi says NBFIRA’s mandate was recently expanded following recent enactment of the Virtual Assets Act which mandates NBFIRA as the regulator of virtual assets and related businesses. Virtual asset refers to any digital representation of value that can be digitally traded, transferred or used for payment. Motshidisi sees this as an interesting and challenging responsibility as shown by the non-uniformity of regulatory approaches employed by jurisdictions that regulate virtual assets internationally. He confirms that the Authority is currently doing the requisite groundwork in preparation for implementing the Virtual Assets Act.
According to the CEO of NBFIRA, the Authority continually reviews supervisory tools to align them with international best practice and ensure their effectiveness and responsiveness in dealing with current regulatory issues. Among the most notable recent ones is the Macro-Prudential Framework. NBFIRA adopted the Macro-Prudential Framework developed under the aegis of the Financial Stability Council. “The framework for Botswana aims to enhance systemic stability and development of standby bail-out funds that could be activated to cushion investors or insured customers in case of financial failure of regulated entities,” he explains.
Another supervisory tool under review is the Regulatory Impact Assessment. Motshidisi says the Regulatory Impact Assessment methodology, was completed during the reporting period and is aimed at developing a framework for assessing the cost versus benefit of policy and/or regulatory interventions. Under review too are the Guidance Notes, which was necessary because NBFIRA provides education on a number of key issues, the latest of which is on detection of COVID-19 Related Crimes and Governance Guidelines for Insurers and Reinsurers.
At the Botswana Institute of Development Policy Analysis (BIDPA), researchers have noted how listed companies on the BSE have ample opportunity for expropriation and breach of corporate governance in an environment of little protection for the ordinary shareholder. Asked what his observation is and what loopholes he sees, Motshidisi points to the Securities Act 2014, under which the BSE has the primary responsibility of regulating and supervising the Botswana Stock Exchange and related activities to, among others, ensure that the securities market is operating in a fair and transparent manner. NBFIRA in turn, he says, regulates and supervises the BSE.
“We have made notable strides in our contribution to the stability of the local financial system,” he notes. “There is, however, always room for improvement as the Authority continually strives to improve the efficacy of the sector through regulatory and supervisory developments as already noted.”
Further, some regulatory developments are currently underway to assist in improving the protection availed to ordinary shareholders. According to Motshidisi, these include the Financial Stability Council’s Macro-Prudential Framework which has been adopted by the Authority and the Bank of Botswana. He emphasises that the framework required development of guidelines for the monitoring of Systemically Important Financial Institutions (SIFIs) in the setting up of bailout funds for policyholders and investors.
Another regulatory development underway is a review of the Securities Act 2014 that will require the BSE to update NBFIRA on outcomes of investigations and any disciplinary measures or cause of action taken as a result of investigations into market practice. Further, there is the Collective Investment Undertakings Act which was passed by Parliament in 2021. There is also the Self-Regulatory Organisation (SRO) Agreement signed between the BSE and NBFIRA where the two parties will collaborate and cooperate in the area of stock market supervision. Motshidisi explains: “Under the Agreement, some of the supervisory powers have been delegated to the BSE and in turn the BSE is required to report to NBFIRA on compliance matters.”
THE REGULATORY APPROACH
The Authority’s approach to regulation is two-pronged, consisting of Prudential and Market Conduct Regulation, according to the CEO of NBFIRA. “The former is prescriptive and seeks to safeguard the safety and soundness of regulated entities on core aspects of their sustainability, which include capital requirements,” he says. “The failure by entities to comply with prudential requirements may pose systemic risk to the stability of the NBFI sector and the wider local financial system.”
Motshidisi points out that on the other hand, Market Conduct Regulation focuses on consumer protection and preventing market abuse. Asked how NBFIRA detects suspicious trading activities, he explains that the Authority’s role in this regard is guided by the Securities Act 2014, which contains provisions for dealing with cases of insider trading and other offences. “Additionally, in order to mitigate occurrences of insider trading, the Authority has approved the BSE listing requirements that prohibits trading of listed company shares during a closed period,” he says.
BIDPA previously said there is incoherence in interpretation and enforcement of the regulation among the regulators who work in silos. Motshidisi says the Authority is a signatory to more than 20 local and internal Memoranda of Understanding (MOU), chief among the local MoUs is the Financial Stability Council (FSC) whose members are the Ministry of Finance and Economic Development (MFED), the Bank of Botswana (BoB) and the Financial Intelligence Agency (FIA). “The objective is to assess and coordinate the policy responses to safeguard the stability of the local financial system,” says Motshidisi.
IMPORTANCE OF REGULATION AND SUPERVISION
According to the CEO of NBFIRA, it is important for the Authority to build and sustain the confidence of local and international stakeholders in the integrity and orderliness of the NBFI sector. He emphasises that promoting a financially stable NBFI sector is central to this goal. To that end, the Authority is a member of several international standard setting bodies pertaining to the regulated industries. Such memberships, he says, provide, inter alia, accountability and access to leading research and technical assistance, thereby helping NBFIRA to remain aligned to global and regional trends. “This in turn provides our stakeholders with the comfort that regulatory and supervisory developments are not arbitrary but are based on established and acceptable standards and rules,” Motshidisi says.
He notes that NBFIRA strives to continually enhance stakeholders’ confidence in the local financial system through its regulation and supervision functions. The regulatory framework prescribes rules and or principles that set parameters within which entities may operate in a manner that will yield the desired outcome of financial stability. Regulated entities are also supervised through the Authority’s monitoring of their activities to ensure their adherence to industry-specific laws.
Significantly, Motshidisi says regulation and supervision strives to foster safety and soundness among non-bank financial institutions, the highest standards of conduct of business by non-bank financial institutions, fairness, efficiency and orderliness of the non-bank financial sector, stability of the financial system in the country in general, as well as reduction and deterrence of financial crime.