Although this is a general statement, there may be some truth in it. We, as responsible regulatory authority, recon that over-regulation can kill the initiatives of the financial intermediaries, suppress innovations and market developments. There is, therefore, a clear responsibility for the financial regulators to ensure that financial intermediaries and markets are not over-regulated. It is also understood that regulation should be proactive and supervision should be risk-based and not compliance-based. While these underlying themes are recognized as important elements in financial regulations, it is also significant to note that regulators are compelled to bring in new regulations when market participants are non-compliant, non-cooperative and for not being prudent. This is where market discipline is important in avoiding new regulations. The non-compliance by one important financial intermediary will also lead to all other institutions being subject to regulations to avoid discrimination. In this respect we are democratic and fair. Sri Lanka’s financial regulatory environment There are 3 main financial regulators in Sri Lanka. They are the Central Bank of Sri Lanka, the Securities and Exchange Commission (SEC) and the Insurance Board of Sri Lanka (IBSL). The Registrar of Companies which registers banking and financial institutions is also seen as a regulator but not as a supervisory body. The Central Bank as the apex regulatory authority regulates and supervises about 70% of the financial sector. The IBSL regulates and supervises around 11% of financial institutions, mainly the insurance companies and SEC accounts for about 4% of the system, basically the capital market institutions.
Third, technology has advanced enormously in terms of both the capacity as well as sophistication. Countries have benefited immensely from these developments and, as a result, wide choices are available to savers & investors, borrowers & lenders together with greater flexibility & efficiency in the allocation of capital. Many institutions have sprung up in both money and capital markets. Similarly, the financial world has become more complicated with closer interconnectedness within and between individual firms, institutions and markets. In the meantime, the regulatory authorities have begun to focus on the achievement of specific objectives and found that they have to react to action by the financial markets by putting breaks to halt the rapid expansion, which would otherwise threaten the stability objectives. So, they brought in financial regulations to deal with the situations. Unabated by the tightening of financial regulation, financial markets continued to grow rapidly and ended up in crises and the world has learnt many lessons from financial crises. The outcome of the Mexican crisis in 1994, the Russian crisis from 1992 to 1995 and the Asian crisis from 1997 to 1998 was the further tightening of financial regulations and introduction of new ones. They were more reactionary and intrusive after the Enron and World Com failures in the USA. The Sarbanes Oxley regulations, which are considered somewhat draconian have come to stay, but may be with modifications.