Establishment and Start of Business
On February 26th, 2009 Law Number 10 of 2009 was issued (and published in the Official Gazette on March 1st, 2009). This is the Law which established a new public authority dedicated to the regulation of non-bank financial markets and instruments, to be known officially as “The General Authority for Financial Supervision” (hereinafter FSA). Article nine of the Law stated that its provisions are to be applicable at the beginning of the month following the elapse of three months from the date of its publication. And since it was published on March 1st, then it shall be applicable as at July 1st, 2009.
Rationale for FSA
The purpose for the establishment of the FSA – according to its Preparatory Works – is to unify non-bank financial supervision in one authority in a manner that allows for the integrated supervision of multi-activity financial institutions, closes the gap between regulators, and consolidate human and other resources in one authority.
Scope of Regulation
The new Law states that it shall have jurisdiction over non-bank financial markets and instruments, including capital markets, future commodity markets, insurance, mortgage finance, financial leasing, factoring and securitization. But it is important to note that such jurisdiction is not exhaustive, in the sense that any new financial instruments which may arise in the future will be subject to the FSA scope of regulation as long as they are not banking instruments. This relatively broad scope of jurisdiction is one of the most important features of the new Law, because it allows the FSA to have the necessary regulatory flexibility to supervise new financial instruments and innovative products previously unregulated. This flexibility is important in light of the developments in world financial markets during the last six months, which underlined the importance of dealing effectively with financial innovation and covering the whole range of activity of multi-disciplinary institutions.
Merging Existing Authorities
In light of the fact that the new Authority will regulate activities previously supervised by other authorities, the new Law states that these authorities are to be merged into the FSA, namely the Capital Market Authority, the Insurance Supervision Authority, and the Mortgage Finance Authority, and thus their legal personalities are to be extinct as of the end of the day on June 30th, 2009. The FSA will from that date replace the three authorities in all their rights, obligations, legal positions, and their employees are to be transferred to the FSA. As regards the supervisory functions of the Investment Authority over financial leasing and factoring, both functions will be transferred to the FSA but without change in the Investment Authority’s legal status or employees.
The Application of Substantive Laws of Regulation
Perhaps the most important aspect of the new Law is that it merely establishes a new entity and merges the three existing regulators therein. However, no change of substance of regulation is introduced (except some minor aspects covered below). In other words, the laws of regulation – namely the Capital Market Law Number 95 of 1992, the Insurance Supervision Law Number 10 of 1981 and the Mortgage Finance Law Number 148 of 2001 – are unaffected by the new FSA Law, in fact they remain the same but the authority responsible for applying them is the FSA instead of the three existing authorities. This substitution of entities will not occur only with respect to the three “big” regulatory laws, but with regard to any other law where any of the three existing regulators had jurisdiction including the securities depository, money laundering and investment funds laws.
Management of the New Authority
The Prime Minister shall appoint the FSA’s Board of Directors, which shall be composed of a chairman and two deputy chairmen, all full time executives, in addition to six non-executive director: the deputy of the Central Bank of Egypt and another five experts in financial, economic and legal matters. The Board shall be appointed for a renewable four year term.
FSA’s Regulatory Role
As previously said, the FSA will undertake the regulatory functions already existing in the three “big” laws (capital market, insurance and mortgage finance) currently performed by the three existing regulators. However, in addition to this, the new Law has further clarified the following functions for the FSA:
- To maintain the safety and stability of the regulated markets.
- To develop the non-bank financial markets.
- To protect and balance the interests of those dealing with the markets.
- To license the various activities.
- To inspect the entities subject to supervision.
- To supervise the availability and distribution of information.
- To ensure competition and transparency in the provision of non-bank financial services.
- To undertake measures that prevent manipulation and fraud.
- To supervise the training of market participants.
- To coordinate and liaise with other regulators internationally.
- To participate in raising awareness about non-bank financial markets.
Again, it is important to note that the FSA has maintained other regulatory powers in the three “big” laws, but in addition the new Law has stated that no criminal prosecution may take place except upon the request of the chairman of the new Authority who also will have the powers to settle.
Independence of the FSA
The independence of financial regulators all over the world is an important component in assessing their capacity to perform their functions. However, there is an important distinction that needs to be drawn between financial regulators in general and central banks in particular. Central banks need to be operationally as well as politically independent as a consequence of the fact that they conduct the country’s monetary policies, which by definition may conflict with the wishes of governments. Other financial regulators which do not conduct monetary policy are required to be operationally independent but they continue to be an integral part of the government and politically accountable to it.
This is the basis adopted in Egypt for the new FSA Law, which states that the new entity will be accountable to the minister in charge (to be determined by Presidential Decree) and therefore will continue to be part of the government, but operationally independent as evidenced from the following provisions:
- The FSA is an independent legal personality.
- Its Board of Directors is appointed by the Prime Minister.
- The Board’s term is four years.
- Its decisions are final and not subject to review by any higher administrative authority (except obviously by judicial review in case of disputes).
- It is not subject to governmental rules.
- It is financially independent.
Arbitration
Arbitration is an alternative-dispute settlement method which allows disputing parties to avoid going to courts and instead resolving their issues by an independent and specialized panel often able to act in a speedy manner. There is, however, a key constraint in Egyptian Law on arbitration which is that constitutionally arbitration may not be compulsory in the sense that the parties to the dispute must elect to resort to arbitration. Once they do, the award by the arbitral panel is no longer optional but compulsory. Due to that reason, a provision in the Capital Market Law forcing arbitration on securities disputes was declared unconstitutional in 2002 (Article 52).
The new Law reintroduces arbitration in financial disputes but on a voluntary basis, whereby it states that an arbitration center in non-bank financial disputes shall be established, provided that parties to the arbitration must consent to resorting to it. This is a positive development because it will allow a speedier and more specialized process of dispute settlement to take place.
Training
The new Law also provides for the establishment of a “(Non-Bank) Financial Services Institute” – along the lines of the Banking Institute that is currently affiliated to the Central Bank of Egypt. Its purpose is to raise awareness and to improve the skill levels of those working in the financial services industry in Egypt.
Fees
Finally, the new Law allows the new FSA to collect fees for various services it provides – which is necessary for its financial independence – and has added a specific provision for a new fee called “Market Development Fee”, which would be used in improving the efficiency, skill and performance of the markets and participants and regulators alike. This fee would be determined by the Board of Directors of the FSA, but not to exceed two per thousand of the annual turnover the the regulated companies.
Conclusion
The new Law comes at an opportune time when the whole world is concerned by the need to tighten financial regulation – both banking and non-banking – and the need to rebuild financial regulatory capabilities. And in spite of the fact that countries’ experiences have been mixed with respect to unifying financial regulators, the model adopted by Egypt, whereby bank and non-bank regulation are kept separate, is likely to be a better model than full integration.
Change however does not occur as a result of the passing of a law, but as a function of the official support it gets, the resources dedicated to its implementation and the efficiency of the organization that implements it. This will need to be assessed in the coming months.
Establishment and Start of Business
On February 26th, 2009 Law Number 10 of 2009 was issued (and published in the Official Gazette on March 1st, 2009). This is the Law which established a new public authority dedicated to the regulation of non-bank financial markets and instruments, to be known officially as “The General Authority for Financial Supervision” (hereinafter FSA). Article nine of the Law stated that its provisions are to be applicable at the beginning of the month following the elapse of three months from the date of its publication. And since it was published on March 1st, then it shall be applicable as at July 1st, 2009.
Rationale for FSA
The purpose for the establishment of the FSA – according to its Preparatory Works – is to unify non-bank financial supervision in one authority in a manner that allows for the integrated supervision of multi-activity financial institutions, closes the gap between regulators, and consolidate human and other resources in one authority.
Scope of Regulation
The new Law states that it shall have jurisdiction over non-bank financial markets and instruments, including capital markets, future commodity markets, insurance, mortgage finance, financial leasing, factoring and securitization. But it is important to note that such jurisdiction is not exhaustive, in the sense that any new financial instruments which may arise in the future will be subject to the FSA scope of regulation as long as they are not banking instruments. This relatively broad scope of jurisdiction is one of the most important features of the new Law, because it allows the FSA to have the necessary regulatory flexibility to supervise new financial instruments and innovative products previously unregulated. This flexibility is important in light of the developments in world financial markets during the last six months, which underlined the importance of dealing effectively with financial innovation and covering the whole range of activity of multi-disciplinary institutions.
Merging Existing Authorities
In light of the fact that the new Authority will regulate activities previously supervised by other authorities, the new Law states that these authorities are to be merged into the FSA, namely the Capital Market Authority, the Insurance Supervision Authority, and the Mortgage Finance Authority, and thus their legal personalities are to be extinct as of the end of the day on June 30th, 2009. The FSA will from that date replace the three authorities in all their rights, obligations, legal positions, and their employees are to be transferred to the FSA. As regards the supervisory functions of the Investment Authority over financial leasing and factoring, both functions will be transferred to the FSA but without change in the Investment Authority’s legal status or employees.
The Application of Substantive Laws of Regulation
Perhaps the most important aspect of the new Law is that it merely establishes a new entity and merges the three existing regulators therein. However, no change of substance of regulation is introduced (except some minor aspects covered below). In other words, the laws of regulation – namely the Capital Market Law Number 95 of 1992, the Insurance Supervision Law Number 10 of 1981 and the Mortgage Finance Law Number 148 of 2001 – are unaffected by the new FSA Law, in fact they remain the same but the authority responsible for applying them is the FSA instead of the three existing authorities. This substitution of entities will not occur only with respect to the three “big” regulatory laws, but with regard to any other law where any of the three existing regulators had jurisdiction including the securities depository, money laundering and investment funds laws.
Management of the New Authority
The Prime Minister shall appoint the FSA’s Board of Directors, which shall be composed of a chairman and two deputy chairmen, all full time executives, in addition to six non-executive director: the deputy of the Central Bank of Egypt and another five experts in financial, economic and legal matters. The Board shall be appointed for a renewable four year term.
FSA’s Regulatory Role
As previously said, the FSA will undertake the regulatory functions already existing in the three “big” laws (capital market, insurance and mortgage finance) currently performed by the three existing regulators. However, in addition to this, the new Law has further clarified the following functions for the FSA:
- To maintain the safety and stability of the regulated markets.
- To develop the non-bank financial markets.
- To protect and balance the interests of those dealing with the markets.
- To license the various activities.
- To inspect the entities subject to supervision.
- To supervise the availability and distribution of information.
- To ensure competition and transparency in the provision of non-bank financial services.
- To undertake measures that prevent manipulation and fraud.
- To supervise the training of market participants.
- To coordinate and liaise with other regulators internationally.
- To participate in raising awareness about non-bank financial markets.
Again, it is important to note that the FSA has maintained other regulatory powers in the three “big” laws, but in addition the new Law has stated that no criminal prosecution may take place except upon the request of the chairman of the new Authority who also will have the powers to settle.
Independence of the FSA
The independence of financial regulators all over the world is an important component in assessing their capacity to perform their functions. However, there is an important distinction that needs to be drawn between financial regulators in general and central banks in particular. Central banks need to be operationally as well as politically independent as a consequence of the fact that they conduct the country’s monetary policies, which by definition may conflict with the wishes of governments. Other financial regulators which do not conduct monetary policy are required to be operationally independent but they continue to be an integral part of the government and politically accountable to it.
This is the basis adopted in Egypt for the new FSA Law, which states that the new entity will be accountable to the minister in charge (to be determined by Presidential Decree) and therefore will continue to be part of the government, but operationally independent as evidenced from the following provisions:
- The FSA is an independent legal personality.
- Its Board of Directors is appointed by the Prime Minister.
- The Board’s term is four years.
- Its decisions are final and not subject to review by any higher administrative authority (except obviously by judicial review in case of disputes).
- It is not subject to governmental rules.
- It is financially independent.
Arbitration
Arbitration is an alternative-dispute settlement method which allows disputing parties to avoid going to courts and instead resolving their issues by an independent and specialized panel often able to act in a speedy manner. There is, however, a key constraint in Egyptian Law on arbitration which is that constitutionally arbitration may not be compulsory in the sense that the parties to the dispute must elect to resort to arbitration. Once they do, the award by the arbitral panel is no longer optional but compulsory. Due to that reason, a provision in the Capital Market Law forcing arbitration on securities disputes was declared unconstitutional in 2002 (Article 52).
The new Law reintroduces arbitration in financial disputes but on a voluntary basis, whereby it states that an arbitration center in non-bank financial disputes shall be established, provided that parties to the arbitration must consent to resorting to it. This is a positive development because it will allow a speedier and more specialized process of dispute settlement to take place.
Training
The new Law also provides for the establishment of a “(Non-Bank) Financial Services Institute” – along the lines of the Banking Institute that is currently affiliated to the Central Bank of Egypt. Its purpose is to raise awareness and to improve the skill levels of those working in the financial services industry in Egypt.
Fees
Finally, the new Law allows the new FSA to collect fees for various services it provides – which is necessary for its financial independence – and has added a specific provision for a new fee called “Market Development Fee”, which would be used in improving the efficiency, skill and performance of the markets and participants and regulators alike. This fee would be determined by the Board of Directors of the FSA, but not to exceed two per thousand of the annual turnover the the regulated companies.
Conclusion
The new Law comes at an opportune time when the whole world is concerned by the need to tighten financial regulation – both banking and non-banking – and the need to rebuild financial regulatory capabilities. And in spite of the fact that countries’ experiences have been mixed with respect to unifying financial regulators, the model adopted by Egypt, whereby bank and non-bank regulation are kept separate, is likely to be a better model than full integration.
Change however does not occur as a result of the passing of a law, but as a function of the official support it gets, the resources dedicated to its implementation and the efficiency of the organization that implements it. This will need to be assessed in the coming months.