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Who is to do it

Dr.Neelesh Gounder
Saturday, August 06, 2016

The Fair Reporting of Credit Act 2016 came into force on May 27. It provides for the legal framework within which credit reporting agencies will have to operate. The oversight will be provided by the Reserve Bank of Fiji (RBF). As the regulator, the RBF's powers include:

* Register, license and regulate credit reporting agencies, credit information providers and credit information recipients; and

* Set standards of conduct and credit reporting practices.

With this, RBF is now the custodian of a range of legislation. As a result, two questions arise. Are these clearly defined statutory objectives of the RBF? Could these additional legislation possibly undermine the foundation upon which the independence of the RBF (or central banks everywhere) is created?

These questions arise because RBF effectively moves on from its core objective of conducting monetary policy objectives to also act as a regulator directly engaging consumers and the non-financial sector.

This article explores the implication of RBF as a regulator.


of reserve banks

The case for an independent reserve bank (or central bank) is widely accepted. Empirical evidence through research in economics show that, on average, more independent reserve banks can contribute to supporting economic performance in the long run.

There are two aspects of independence; goal independence and instrument independence. Goal independence is related to the reserve bank's ability to pursue its goals. Instrument independence is the ability to freely choose the instruments through which to achieve its goals without political interference.

An ideal reserve bank is an independent one, free of political pressures. When economists talk about reserve bank independence, it implies instrument independence. This thus deals mainly with the behavioural aspect of independence.

From a policy perspective, reserve banks control the amount of money in the economy. If there is political interference, monetary policy decisions can weaken the credibility of the reserve bank.

If a government is able to take a position on monetary policy, it could lead to a perception that the reserve bank can be politically influenced. The argument here is that monetary policy is too important to be influenced by short-term agenda of politics.

Reserve Bank of Fiji

Part D within Chapter 8 of the 2013 Constitution of Fiji lays out the objectives, powers and legal framework (through an Act) relating to the RBF.

The principal purpose of RBF as contained in the Reserve Bank Act includes:

p Regulating the issue of currency, and the supply, availability and international exchange of money;

p Promoting monetary stability;

p Promoting a sound financial structure; and

p Fostering credit and exchange conditions conducive to the orderly and balanced economic development of the country.

The independence of RBF is also explicitly provided for in the Constitution. Section 153 (2) states that the "Reserve Bank of Fiji must perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the Reserve Bank of Fiji and the minister responsible for finance".

RBF as custodian

of additional legislation

The monetary policy element of reserve bank activity is subject mostly to pressures from government. This is the case everywhere. However, with this Act, the pressure as a regulator will originate mainly from businesses as well as consumers in the private sector. Remember the Consumer Council of Fiji played heavily into the debate regarding the closure of Data Bureau. There are two implications here.

First, it is the challenge of maintaining instrument independence. Credit information is used by both local and overseas companies. These include local hire-purchase retailers and foreign firms selling goods and services in Fiji on credit.

When the Data Bureau was in existence, its members included construction companies, hardware wholesalers, car dealers, auto spare parts dealers, household durable retailers, electricity and water utility providers, media companies, and so on. For the RBF, this essentially means stepping out of the boundary of the financial sector.

It is well known that regulatory and supervisory activities end up creating distributional consequences (costs and benefits) for the regulated stakeholders. As a result, a high degree of independence from the stakeholders (including government) is required so that RBF as a regulator can function effectively.

The outcome in terms of costs and benefits of aggregate monetary policy are widely and thinly spread. However, those arising from regulation are usually direct and focused distributional outcomes.

The question is whether instrument independence can be achieved if RBF acts as a regulator through Acts which may contain politically motivated goals set by the legislative or executive arm of the government.

From above, it is worth considering whether allowing RBF to be the regulator of the Fair Reporting of Credit Act 2016 can possibly undermine the instrument independence of the bank. The Act may not necessarily be a politically motivated one but the unintended consequences can sometimes be far reaching than expected. The last mile problem of economic policies is worth considering here.

The Fair Reporting of Credit Act 2016 deals with individual consumers as well. This can be tricky as consumers are the core of an electorate. Since voters are also consumers, it takes on a clear political significance.

It remains to be seen if RBF will be able to manage independence while also taking unpopular steps which appear to the public or retailers as unnecessary. These circumstances may also create reputational risks for RBF arising from these regulatory responsibilities.

Second, it is whether there is unnecessary burdening of RBF. The Act is about facilitating an efficient credit reporting system. What is the causal link with financial stability which warrants RBF as the oversight? Perhaps, one can argue that laws about credit reporting can have implications for credit and consumer lending. However, this is same as saying that RBF should be the oversight organisation for real estate agents.

Property booms and busts could have important implications for financial stability since property related exposures apply not only to households but also extend to banks and pension funds. Property price is related to interest rates, incomes, lending standards and supply of property.

Does RBF regulate all these? No, and rightfully so. In this regard, RBF manages the rate of inflation (since it impacts consumer incentives to take on debt) and maintaining lending standards. It does not directly regulate the real estate market which includes real estate agents. By placing RBF as the regulator of Fair Reporting of Credit Act 2016, the government could be creating unnecessary burden for the RBF.

Further remarks

An alternative regulator would have been the Fiji Commerce Commission.

The Commerce Commission exists as a multi-sector regulator of competition, pricing and consumer protection agency. It is thus in a better position to take an economy wide perspective as a regulator which would be handy in minimising the dangers of regulatory capture.

The government side of the rhetoric regarding the recent debate on Fair Reporting of Credit Act has mainly focused on consumers. The objectives of the Commerce Commission include the promotion of consumers' interests. Other objectives include effective and efficient development of industry and commerce by promoting efficient outcomes related to prices and outputs.

More importantly, within Commerce Commission there is a Fair Trading and Compliance Department which might be more effective in handling disputes related to the legislation. The last thing Government would want is to create separate roles between RBF and Commerce Commission which overlap, even if it happens at the margin.

* These are the views of Dr Neelesh Gounder and not of The Fiji Times nor of The University of the South Pacific where he is employed.

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