The Financial Services Sector: Lapses and Opportunity for Redress

The Mauritian Financial Services Sector (FSS) has been in the limelight over the past weeks for ‘bad reasons’. What is happening to the FSS may be assimilated to an earthquake with dual epicenters bearing the names British American Insurance Co Ltd (BAI) and Belvedere Management (BM). Specialists of earthquakes reckon that when the epicenter of a large earthquake is located “offshore”, the seabed may be displaced sufficiently to cause a  HYPERLINK "" \o "Tsunami" tsunami. The case of BM, a company set up ‘offshore’ (in Mauritius) may in time metaphorically attest to this claim with the risk of our jurisdiction being engulfed by waves of doubt from international investors, unless corrective action is taken to reconstruct the FSS on more solid foundations.
The tremors from the BAI case are still being felt on various fronts, notably at the regulatory level. As indicated in my paper of 8 April 2015 (Forum – Le Mauricien), the use of the term “ponzi scheme” was likely to be lengthily debated over by politicians and the unfolding of investigations might indeed uncover evidence of a ponzi-like scheme. The Prime Minister indeed maintained, at a press conference last Friday, that BAI was an elaborate ponzi scheme - on the basis of its modus operandi and its promise of abnormally high returns to its clients. Mr Roshi Bhadain, the Minister of Financial Services and Good Governance, recently chastised the various regulatory bodies – notably the Financial Services Commission (FSC) – for not taking action against BAI while the general public had been relying on FSC’s licensing of BAI to “invest safely” in its insurance policies. Government did not wait long to wield the axe on various high ranking officers of these regulatory bodies.
The twin epicenter sending seismic waves beyond the Mauritian FSS bears the name of Belvedere Management (BM) and it has been the subject of an article published recently in The Economist. BM is a large  HYPERLINK "" \o "Financial services" financial services group which claims to have $16 billion of assets under administration. In March 2015,  HYPERLINK "" \o "Offshore Alert" Offshore Alert (a newsletter on financial crime) accused the group of being a giant  HYPERLINK "" \o "Ponzi scheme" Ponzi scheme and it is currently under investigation by regulators in Mauritius, Guernsey and South Africa. If these allegations are proved true, the regulatory bodies and professional-services firms involved (including auditors) might again face, justifiably or not, accusing fingers for not uncovering or preventing a scam of international proportions. Though the FSS is not currently in a situation of systemic collapse, stakeholders may seize the opportunity of its presence in the limelight to implement measures to counteract the recent bad publicity and to address the apparent lapses.
Whereas Government has already replaced the Boards of regulatory authorities such as the FSC, the system must be carefully re-jigged to prevent future meddling of politicians with these bodies through hand-picked Board members. For example, currently Section 4 of the Financial Services Act 2007 (FSA) provides that the Board of the FSC should consist of a Chairperson appointed by the Prime Minister and a Vice-Chairperson and 5 other Board members appointed by the Minister of Finance. The Chief Executive is appointed by the Board of the FSC with the approval of the Minister of Finance. The appointment process may be made more rigorous to mitigate the risk of (1) having the Board of important regulatory bodies subject to whims of politicians and (2) regulatory authorities being lenient towards politicians’ cronies – as is suspected in the BAI case. This could for instance be achieved by making the appointment process subject to parliamentary scrutiny, with parliamentary select committees holding pre-appointment hearings for certain high-profile public appointments as is currently being done in the UK. Hearings are in public and involve the select committee taking evidence from the candidates and publishing a report setting out the committee’s views on the candidate’s suitability for the post.
Sharpening the skills of professionals involved in the sector is also required. This is further accentuated by the Finance Minister’s announcement, in the 2015 Budget presentation, of the introduction of a special Financial Sector Incentive Scheme to attract international Asset and Fund Managers to relocate their front-office operations in Mauritius. This would imply that the FSS would be called to move up the value-chain and provide services to more complex funds. These require more skill to understand, service and regulate and any identified skills gap in the industry must be bridged to reduce the FSS’s vulnerability to scams of the ponzi-scheme type which Belvedere Management is accused of being (allegations being unproven so far). In that respect, the Minister’s proposal to set up a Financial Services Institute to provide specialised training courses is a welcome initiative and must be implemented without delay.
Conventional wisdom would tend to dictate that the bad publicity surrounding the two cases is likely to dent confidence in the Mauritian Financial Services Sector. However a contrarian’s take might be more relevant in today’s increasingly regulated financial world. As John Kenneth Galbraith, a renowned economist, pointed out: “There is the dangerous cliché in the financial world that everything depends on confidence. One could better argue the importance of unremitting suspicion”. With the sector facing scrutiny from the Mauritian public and the international investor community, industry players, regulators and Government will be inclined to tread cautiously and reduce vulnerabilities. Unremitting suspicion pays.