Annex 6.A Regulation and Supervision of OFIs: A Few Guiding Principles
As one puts in place a regulatory framework for Other Financial Intermediaries (OFIs), some regulations common in traditional banking must be adjusted to accommodate those institutions. The challenges facing a given country’s supervisory agency—and the realistic obstacles to meeting those challenges—must be weighted seriously when examining proposals for the regulation of OFIs.
A. The regulatory framework should minimize adverse effects on competition and encourage competition.
1. Repressive and inappropriate regulation can have a negative influence on the development of OFIs. Examples of repressive regulation include restrictive licensing and pricing and investment regimes. Excessive regulation of banks can stimu
late the growth of non-banks or the establishment of non-bank subsidiaries as a means to circumvent regulation. Discriminatory tax treatment is an example of inappropriate regulation.
B. The regulatory framework should clearly define the power of the regulator and the permissible activities of OFIs.
2. 
The regulatory framework should be clear with regard to (a) the establishment and powers of the regulator and (b) the legal existence and the behavior of the entities being regulated. The regulatory frameworks also should be supported by adequate infrastructure such as accounting and disclosure rules, property rights, and contract enforcement.
3. The regulatory framework should define the permissible activities of OFIs, including the regulatory distinction between banks and non-banks, as well as the activities retained solely for banks. There should be no ambiguity as to the meaning of “bank,” “lease,” “factor,” or “deposit” or to what constitutes the illegal acceptance of deposit without a license.
C. Similar risks and functions should be supervised similarly to minimize scope for regulatory arbitrage.
4. “Banklike” financial institutions should be supervised like banks. The supervisory authority should also ensure that no new activity is undertaken without the prior consent of the regulator (e. g., taking deposits).
D. The links between OFIs and other players in the financial sector should be closely monitored.
5. Exposition to risks through investment and ownership linkages (particularly with banks) should be evaluated, because those linkages make each sector vulnerable to adverse development in other sectors.
E. The unique risks of OFIs should be recognized within the supervisory structure and when defining prudential norms. 6 7
F. Supervision should be proportionate and consistent with costs and benefits.
8. Simple and less-risky institutions should not be burdened by the full regulatory requirements imposed on more-complex and riskier institutions.
G. Resources and skills should be targeted to the higher-impact and more - complex OFIs.
9. 
The frequency of offsite supervision and the depth of onsite supervision should consider the scale of the institution to avoid having scarce supervisory resources be wasted or institutions be saddled with unnecessary compliance burdens.
10.Staff members responsible for supervising OFIs should have the resources and skills to understand the specific risk related to those institutions. The methodology used should help identify sources of risks (credit, market, liquidity, operational, legal, and reputation), as well as risk management practice.
11.Supervisory staff members should have guidelines to provide direction to reach appropriate conclusions on a consistent basis.
12.Staff members should have access to training for upgrading their skills to ensure that regulatory and supervisory frameworks meet the industry’s needs.
H. There should be a strengthening of the self-regulatory capacity.
13.Associations can play an important role in representing the OFIs’ views on appropriate regulatory and supervisory frameworks. They can also voice the opinions of the market participants to government authorities, particularly when there is no regulatory body directly involved with the regulation. Moreover, they can provide educational, promotional, legal, financial, and other services tailored to the needs of the OFIs.
3. Where the institutions are the beneficiaries of government tax incentives, subsidies, or other privileges, there is a case for imposing reporting requirements, additional disclosures, and even inspections and audit requirements to ensure that the incentives and privileges are not subject to abuse.
4. Comprehensive standards addressing financial instruments are essential if an accounting standards regime is to be credible. The International Accounting Standard (IAS) Board provides guidance for all financial instruments not only on disclosure and presentation (IAS 32), but also on recognition and measurement (IAS 39) at fair value or at amortized cost. See http://www. iasplus. com/standard/ias39.htm and chapter 10, section 10.2.
5. 
In some countries, the leasing industry is one part of the financial system that is not burdened by heavy government regulations. In the absence of a leasing law, however, leasing regulations are usually fragmented and unclear. Many countries have opted for a separate leasing law to avoid confusion and to clearly define the rights and obligations of the various parties (see International Finance Corporation 1996).
6. World Bank (1994) describes Pillar 1 as noncontributory state pension; Pillar 2, mandatory contributory; and Pillar 3, voluntary contributory. This classification is useful to the discussion of the social safety net, the redistribution of income, and the fiscal aspects of pensions.
7. For a discussion of risk management issues in the pension fund industry, see IMF (2004b).
---- . 2004b. “Risk Management and the Pension Fund Industry.” In Global Financial
Stability Report: Markets and Issues, 81-120. Washington, DC: International Monetary Fund. Available at http://www. imf. org/External/Pubs/FT/GFSR/2004/02/pdf/chp3.pdf.
OECD (Organisation for Economic Co-operation and Development). 2002. “Highlights of Recent Trends in Financial Markets.” Financial Market Trends 81 (April): 1-47. Available at http://www. oecd. org/dataoecd/19A/2080704.pdf.
Sopranzetti, Ben J. 1998. “The Economics of Factoring Accounts Receivable.” Journal of Economics and Business 50 (4): 339-59. Available at http://www. sciencedirect. com/sci- ence/article/B6V7T-3X6J8JJ-2/2/989f666d01da736e1ef28877aba328e4#fn1.
World Bank. 1994. Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth. World Bank Policy Research Papers. New York: Oxford University Press.
--- .1989. World Development Report: Financial Systems and Development. Washington,
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