CBN seeks to tighten screws on bank holding companies

An 'exposure draft' of guidelines for the operation of financial holding companies in Nigeria was released by the Central Bank of Nigeria (CBN) in June, prompted by the need "to address observed gaps and align with evolving regulatory and market developments", according to Rita Sike, the central bank's director of financial policy and regulation. The industry and all others concerned have six months to mull over the draft before it solidifies into law. A critical measure contemplated in the draft regulation is to raise the minimum capital requirements of the financial holding companies to enhance their resilience, the CBN said in the statement. Regulators are also concerned about the use of 'shared services' by such entities, their potential abuse and the undue advantages that may accrue to them as a result. The document also sets new eligibility rules for running financial holding companies. This includes a requirement for holding companies to have a capital base that is, at least 20% more than the combined capital requirements of its subsidiaries. They must also have direct ownership of all the subsidiaries, with a minimum 51% stake, a condition that rules out proxy ownership using another company unit. "At first glance, this may appear to be another regulatory update, but it is more than that," said Oluwatosin Akanle, who teaches law at Crescent University, Abeokuta, north of Nigeria's biggest city, Lagos. "The draft signals a clear move towards tighter supervision of financial groups, especially those that operate through holding company structures." Banks that fall under this category include the industry leaders, most of whom adopted the holding company structure following regulatory changes in 2014. They include Access Holdings, which owns Access Bank, Nigeria's largest bank by assets; FirstHold Co., the parent company of First Bank, the country's oldest bank; Guaranty Trust Holding Co., which owns Guaranty Trust Bank; and, Stanbic IBTC Holdings Plc, which runs the Nigerian unit of South Africa's Standard Bank. Others in this category include Sterling Financial Holdings Plc, which owns Sterling Bank; the FCMB Group that owns the First City Monument Bank, and; FSDH Holding Company, which has an investment bank among its subsidiaries. Zenith Bank, another top-tier bank, is currently transitioning into a holding-company structure. Simultaneously, the central bank also released draft guidelines on 'ring-fencing the operations of closely linked entities' for review by stakeholders and the public. Both guidelines are intended to complement each other. While the former aims to strengthen the financial holding companies and create clear criteria for their operation, the latter looks to draw clear lines of conduct for related organisations. This the CBN seeks to do by creating "clear operational and functional boundaries among closely linked entities within the financial system as well as address regulatory arbitrage arising from the comingling of activities across different licence categories", according to its statement. The guidelines together provide new rules covering corporate governance, transactions within the groups, treatment of customer funds and data as well as the conduct of regulatory supervision. All stakeholders and members of the public had until 9 July to send in their observations, objections, or suggestions to the regulator before the release of the definitive version of the guidelines. In making the new regulations, the CBN says the overriding considerations are to "strengthen consumer protection, enhance transparency and accountability, mitigate contagion risks among closely linked entities, and preserve financial stability while supporting innovation and fair competition within the financial services sector." Incestuous relationships? Though the reforms that resulted in the birth of the financial holding companies were a first step towards regulatory clarity, officials at the CBN had been concerned in recent years about increasingly incestuous relationships between parent companies and subsidiaries that are inimical to transparent governance and fair competition. In the more than 12 years since the financial holding company model went into operation, they have undergone significant transformation, according to Eric Orji, a Lagos-based economist and market analyst. Most of the banks involved now have subsidiaries spread out across Africa while at home they have diversified into pension administration, insurance, asset, and wealth management as well as thriving fintech companies, he said. "As the holding companies and their banks grew in scale and diversity, the risk of contagion if any unit failed also increased," said Orji. "The recognition of this potential danger is what has prompted this regulatory action." At stake indeed is the sprawling, continuously growing asset base of these big banks and the leverage that comes with them. For instance, Access Holdings Plc has at least 25 subsidiaries, including 14 foreign units spread across Africa and extending to the UK and China (Hong Kong). Units outside its core banking operations include pensions, insurance, brokerage, and fintech. First Hold Co., for its part, has at least 15 other entities under its umbrella in addition to First Bank. Apart from seven foreign bank subsidiaries in Africa and the UK, there are pensions, investment banking, and brokerage units. The group also offers trustee, asset management, and fund management services. Units such as FBNQuest Merchant Bank, FBNQuest Capital, FBNQuest Trustees, FBNQuest Asset Management, FBNQuest Funds, and FBNQuest Securities hold distinct operating licences. Guaranty Trust Holding Company, which owns Guaranty Trust Bank, one of Nigeria's top 10 banks, has at least 14 subsidiaries. These include 10international banking units in nine African countries and the UK. Its non-banking subsidiaries include an asset management arm, a pension-funds administrator and a digital payments and e-commerce unit known as HabariPay. Another example in this category is Stanbic IBTC Holdings Plc, which is owned by Standard Bank of South Africa, Africa's biggest bank. Its operations include Stanbic IBTC group, which owns 10 subsidiaries directly and one indirectly in banking, pension administration, asset management, investment banking and corporate finance, and venture capital. Others are active in insurance services, brokerage, custodianship, and digital payments. The indirect subsidiary is Stanbic IBTC Nominees Ltd., wholly owned by Stanbic IBTC Bank. Even the relatively smaller organisations in this category still have sizeable units and assets. One is the FCMB Group Plc, which owns First City Monument Bank. Its other seven entities include a pension fund, an asset management arm, a stockbroker, and a fund manager. Sterling Holdings Company, a recent convert to the financial holding company structure, has two other entities outside Sterling Bank. These include SterlingFi Wealth Management and Alternative Bank Ltd, focused on non-interest Islamic finance. Holding company restrictions increase The draft regulations provide that ownership of the foreign subsidiaries of banks be ceded to the holding companies for ease of regulatory supervision. Shared services within a group will also come under stronger scrutiny, requiring cost audits to check against underpricing and quarterly reports on service providers, beneficiaries, and pricing. Despite assuming more responsibilities, the financial holding companies must still maintain their 'non-operating status' and the regulator expects them to refrain from advertising and direct business canvassing. They will be allowed to be included in connection with share offers. Among the most significant measures in the guidelines is a move to prevent financial holding companies from having a say in lending decisions and credit administration in their subsidiaries. It is an issue of concern reported across most of the holding companies, and one the regulator now seeks to resolve with the clarification in the guidelines. Analysts note that this has been a contentious issue across most of the various banking groups, with the top management in the holding companies often serving on their banking subsidiary's credit committee. The monetary authorities also want to enforce pertinent data rules. Under the new regulations proposed by the central bank, customer data collected by one subsidiary cannot be shared across other units of the company without the customer's consent. It creates a compliance obligation on the subsidiary and parent company in respect to customer data as envisaged by the law, officials said. Under the tightened governance environment prescribed by the CBN, a director of a holding company can only serve as a board member in one other subsidiary of the group. Overall, they are not to exceed more than 20% of the total board membership of a given subsidiary. The common industry practice of appointing employees of holding companies as non-executive directors in subsidiaries is being rolled back in the draft regulations. Concerned about the risks of insider trading and 'circular' ownership, subsidiaries will not be allowed to acquire the shares of both their parent companies and group subsidiaries. To reduce intra-group lending, credit advanced by the banking units to other entities in the group would be deducted from the bank's regulatory capital and considered a return of capital. Financial holding companies are also barred from using guarantees made by their subsidiaries to obtain financing unless the collateral would be limited to dividend income. They must also limit contingent liabilities they can take up on behalf of subsidiaries to no more than 20% of unimpaired shareholders' funds. CBN aims for consensus By releasing the draft documents, the CBN has offered the opportunity to build some consensus through feedback from the regulated entities. It remains to be seen if the six months for the conclusion of the changes envisaged by the regulator is realistic. One likely effect on the relevant companies is a spike in compliance costs as they review current exposures, said Oluwole. Some may have to change existing corporate structures, alter business plans, and change some existing governance structures to meet the requirements. In his view, all of these adjustments will improve resilience and boost confidence in the companies by reducing opaque transactions. "In a financial system where trust, capital strength and governance quality matter deeply, this reform speaks directly to systemic stability," he said.