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Regulators

FIRST PERSON By Alex Magno 
Updated March 12, 2009 12:00 AM
The Philippine Star

When regulators fail to do their jobs well, bad things happen.

And when bad things happen, the poor are injured more than the rich. Hard-earned savings are wiped off. Dreams of sending one’s children to the best schools are dashed.

When two large pre-need firms failed a few years ago, many parents were left holding a worthless bag of educational plans. They railed and ranted. They brought on court cases. But time passed and their children had to go through with their schooling, often choosing the second-best options given the circumstances.

In the case of those pre-need firms, public discussion was focused on the quality of management of the firms in question. The firms were the villains. In the melodrama of it all, the lines of combat were between hapless parents and reckless corporate titans.

Now we know better: the quality of our corporations depend very much of the quality of their regulation. When regulations are weak, corporations tend to be governed below par.

The present controversy over the unseemly fate of the Legacy group — which includes both thrift banks and pre-need firms — brings the necessity for more competent regulatory agencies more sharply into focus.

Before this latest rip-off, the man-on-the-street knew very little about what the Securities and Exchange Commission (SEC) does. For most of us, it was simply the registry of corporate entities. A place where company records may be accessed if we ever wanted to know who owned them and how much they were capitalized.

Last month, we learned that the Bangko Sentral ng Pilipinas had moved, four years ago, to close down rural banks affiliated with the Legacy group. The country’s chief banking regulator was stopped by a questionable temporary restraining order issued by a trial court judge. As a consequence, the pyramiding racket persisted for a few more years and additional billions in small investments were suckered in.

Only in the Philippines, we shook our heads, could the central bank be stopped by a trial court judge from performing its cardinal function of bank regulation.

Two days ago, a commissioner of the SEC was implicated in the activities of Celso de los Angeles, owner of the Legacy group of companies. Commissioner Jesus Enrique Martinez, due to retire today, stands accused of receiving impressive endowments from the failed pre-need operations of the Legacy group and has been forced to go on leave while an urgent investigation into his conduct is underway.

The implication of a SEC commissioner in the Legacy scam does add glitter to the scandal at hand — especially since Martinez was identified with a party-list group identified with Eddie Villanueva’s JIL and postures as an anti-corruption crusade. The photos of Martinez’s luxury SUV merited front-page treatment in some newspapers.

But the more useful focus of public appraisal of this event ought to be the ways and means by which we could improve the quality of our regulatory regime.

In much of recent political science literature, the Philippines would fall under the category of a “weak state.” What that means is that our institutions lack integrity as structures for regulating civil conduct and corporate behavior. They either lack resources to effectively exercise their vital functions in society or lack qualified personnel to lead them.

In a “strong state”, the public institutions discharge their duties with predictable regularity. They set norms, put up standards and impose penalties when there are required. Regulatory institutions exercise independence both from the sphere of political horse-trading as well as from special interest groups in the economy.

In a “weak state”, the regulatory institutions exhibit vulnerability to the phenomenon of regulatory capture: the tendency for the regulated to better influence the behavior and policy decisions of the regulator. In all areas of regulation in this country, from regulation of the power industry to regulation of corporate behavior, our institutions exhibit vulnerability to regulatory capture.

These institutions form the frontlines of our effort to evolve a modern society where rules are universally and predictably applied and where the most advanced standards of efficient and transparent corporate behavior are observed.

When these institutions do not function well, ordinary citizens become victims to, say, predatory pricing by utilities firms, overcharging through connivance of oil companies, weak governance in the banking system and all sorts of pyramiding scams.

Very often, the public pays very little attention to the quality of personnel selected to man regulatory institutions. Most of these institutions are led by political appointees and normally fall within the insidious dynamic of political leaders paying off political debts. That does not help bring about a high standard of governance for the country. The incidence of corrupt practices is merely a symptom of weak regulatory institutions.

We do tend to pay disproportional attention to appointments, say, to the Comelec, which supervises attention. I do not remember an instance where there was much public debate about appointments to the SEC, the PPA, the ERC, the NTC and other vital regulatory bodies.

If we are to take anything from what the controversy over the Legacy group has dealt us, it is that the public must now be extraordinarily vigilant about people appointed to regulatory institutions. These are the instruments by which we can achieve a fair, rules-based society. A society that is truly well-governed rather than one prone to corporate vultures and devious power-players.

Watching the political cockfights might be a lot more entertaining. However, the true measure of our progress might not be in the quality of people we elect but in the quality of unelected regulators we field to enforce rules and set fair policies.

March 12, 2009 - Posted by | Columns and Editorials | , , ,

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