If ever, students of financial regulation need a case study on how not to take a regulatory action, the recent regulatory action taken by the Financial Reporting Council of Nigeria (FRCN) is a good example.
On October 26, 2015, the FRCN issued a press release announcing the suspension of four directors from further signing the bank’s financial accounts “until the investigation as to the extent of their negligence in the concealment, accounting irregularities and poor disclosures in the said financial statements is completed in accordance with Section 62 of the Financial Reporting Council of Nigeria.”
Most of the national media interpreted the action to mean that the directors of the bank have been sacked, creating panic in the financial system. Most customers also assumed the bank was in trouble.
Stanbic-IBTC was quick to respond to the alleged suspension, issuing a press release explaining its position but most importantly noting that the “FRCN’s allegations are inaccurate and unfortunate, and the manner in
which it has chosen to make them is procedurally defective.” The FRCN act allows the bank to disagree with FRCN and call in a third arbiter to resolve it. And where there is still a disagreement, FRCN can go to court to enforce its sanctions.
But FRCN simply jumped the gun contained in its own act in making public allegations of financial impropriety especially as it concerns a financial institution that survives based on perception without exhausting the procedure existing in its own act.
Stanbic-IBTC has not disclosed how much deposits or business it may have lost after the announcement was made, but the bank’s market value lost about N26 billion in just one week after the FRCN allegation.
The FRCN-Stanbic-IBTC case clearly shows why regulators have to be sensitive when making announcements that could have an impact on business performance, especially when the infractions are not material like in this case.
The allegations which FRCN made, even if they were not disputed by FRCN, were not material enough to impact on the bank’s capacity to stay in business. But the mode of announcement was capable of affecting the continuous viability of Stanbic-IBTC as a financial institution because of its impact on how it is perceived by the public.
A bank’s business is basically built on its reputation and damaging a bank’s reputation is equivalent to killing its capacity to stay in business.
Those who framed the FRCN act knew the importance of being careful in casting credibility around a company’s financials hence they put in place a clear and exhaustive process to ensure that before it becomes public knowledge, such allegations have been thoroughly vetted and found to be true.
It is therefore sad that an organization like FRCN that should play above aboard allowed itself to circumvent a process that was put in place to confer it credibility.
As the Central of Nigeria noted in its response to the FRCN sanction on Stanbic-ITBC- “such a regulatory decision and the manner of the announcement is not only capable of eroding investors’ confidence but also inimical to the financial system stability.”
The CBN response captures the FRCN debacle with Stanbic-IBTC. The FRCN cannot afford regulatory rascality or else it will erode rather than build confidence in the financial system.