'Fit & Proper' for Financial Services

08 Feb, 2003

The Bank of England (BoE), before metamorphosing as the Financial Services Authority, with its over-arching regulatory framework, ensured that executives in banks and financial institutions were 'fit and proper' and well qualified to serve in the financial sector. There was much merit in this approach as the BOE clearly reviewed the credentials of the senior appointee's background, his or her track record and any if at all, past or present indiscretions or misdemeanours were ferretted out. The extent of qualifications and experience to do the designated job, in a sensible and responsible manner were assessed fully.

During those years, upto the 1980s, a mere phone call from the BoE or the raising of the eyebrows by its officials would make the bank employees sit up and not just take notice but post-haste, take remedial actions. The entire regulatory framework in the U.K. revolved around good ethical conduct and all deviants were named and shamed. This had a salutary effect of enforcing a discipline that is now beginning to break down not just in the U.K. (remember Barings or the insurance mis-selling fiascos etc.) but also more particularly in other parts of the world.

An aggressive style of 'whatever sells ultimately is good enough' i.e. ends justifying the means, has spread like an epidemic into the emerging markets. Many of them are replicating the so-called American model of hiring managers with the attitudes of second-hand car salesmen.

They tend to focus on upfront fees while the customary care and attention, and the more enduring service standards get diluted in the process. This is unfortunate, as much of what is bandied about as an American approach, is more of a myth than reality. The U.S. regulators prescribe stringent qualifications and go to town in terms of enforcing regulations, information and good practices. Yes, it is their free market philosophy that permits some of their institutions to sail close to the wind or push matters to the brink. But the retribution can be swift in the U.S, if lapses and blunders are found to have occurred. The hefty fines imposed by the likes of SEC on the investment firms such as Merrill Lynch or Citibank for research recommendations or the actions contemplated against the accounting / audit firms for alleged abuses, are cases in point.

It is in this context that the regulators in this region, will need to lay down clear criteria and qualifications for senior practitioners in banking, insurance etc. The UAE Central Bank has, in its more recent circulars, reserved the right to screen the credentials of senior executives in the banking sector, prior to their appointment. It needs to nudge financial institutions to increasingly greater degree of demonstrable professionalism and high standards.

Despite that oversight, we are suddenly witnessing an explosion of investment salesmen and brief-case peddlers in Dubai and in the Northern Emirates. We are also noticing 'free zone companies' and those with an operating license issued by the local or federal authorities for a particular purpose, are engaged in activities well outside the specified or permitted domains.

In an environment that allows free enterprise and laissez-faire, it would be stifling innovation, creativity and business flexibility, if there was a heavy-handed regulator, not robust enough to understand the intricacies of high finance. They may be out of step with the practices evolving in the international markets. Therefore, I would not recommend a 'dragon-net' approach but certain minimum qualifications are imperative for those selling financial products, before financial institutions recruit and permit them to sell. Paper qualifications such as Series 7 or CFA or other certifications issued by professional bodies are alone not important, although they fulfil a key criteria for filtering the personnel allowed to give investment advice to the common man. There ought to be sufficient weightage given to the executive's track record in terms of product innovation and responsible 'delivery' duties ('channel' management be it covering corporate, retail or private banking). Ultimately, it is a determination of 'quality' standards that this industry will need to apply across recruitment, market practices and in its products and services.

It would not be prudent to wait for a few disasters or mishaps to take place, prior to initiating action. There is a need to review and adopt a consulting role, as a helping hand to guide institutions to maturity by highlighting best practices. A retail approach may not be appropriate for anything other than deposits and personal loans say below AED 250,000. Similarly, advertising that hypes up or hides facts or can lead to misinterpretations ought to be eschewed.

Ultimately, banks and financial institutions thrive on trust. They need to sustain credibility with their customers; so that a relationship based on mutual respect can be forged. That is what will come under stress if semi-qualified or immature target-driven salesmen are encouraged to make a quick buck in terms of front-end fees and move on to the next target. That would be a folly and would be strictly, a short-term tactic to reap rewards.

The larger banks and financial institutions should set an example by promoting customer relationship and service and a common ethical framework. This could be in the form of a voluntary association to promote best practices. They can also prove to be a liaison point with the regulators; so that arbitrary and high-handed rules are not imposed to the detriment of everyone in the industry. Otherwise, a few deviants will end up spoiling the party for the rest.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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