THE REGULATORY LANDSCAPE HAS SHIFTED
IN February 2017, I wrote in an article entitled ‘Redefined Regulatory Landscape’ that “in just the past few months, we have seen a bustle of new regulatory developments that are remaking the Zambian corporate landscape and companies must proactively respond to this new imperative.
What has become an overriding question for the chief executive is how to balance between identifying and complying with existing regulation and meeting the challenges of the new regulatory changes?”
I think I jumped the gun, for since then, there has been a number of Acts enacted affecting companies in different sectors that have included The Companies Act, 2017, The Corporate Insolvency Act, 2017, and The Banking and Finance Act, 2017.
The Companies Act, 2017 was enacted in 2017 repealing The Companies Act, 1994 with the objective of promoting the development of the economy by encouraging entrepreneurship, enterprise efficiency, flexibility and simplicity in the formation and maintenance of companies and continue with its role of providing for the incorporation, categorisation, management, and administration of different types of companies was incorporated.
One of the major regulations forming part of this Act is the Auditor’s Rotation requirement. Section 257(3) provides that an auditor may be reappointed by an ordinary resolution by the company at the annual general meeting, but cannot be appointed continuously for a period exceeding six years.
It is not clear whether this section is introducing mandatory firm rotation or whether it is the mandatory Partner rotations that have been introduced in Zambia for all companies other than those that fit the small private company criteria.
The Companies Act, 2017 will only become operational when the Minister of Finance issues a statutory instrument to that effect.
Another significant legislation is The Corporate Insolvency Act, 2017. This is a new development for Zambia in that, in the past, most of the legislation forming part of The Corporate Insolvency Act, 2017 was part of the Companies Act, 1994.
The Corporate Insolvency Act, 2017 moves away from that construct as a way to provide a comprehensive code to regulate corporate insolvency in Zambia in the process providing a more robust revamped legal and regulatory corporate insolvency regime.
The Act aims to enhance transparency in receiverships and liquidations and strengthening accountability of receivers and liquidators. Perhaps the most important development in this Act is that a more robust mech- anism for salvaging financially distressed but viable companies has been introduced.
This mechanism would also act as a pathway for companies to be protected from its creditors during the period of restructuring. In a lot of ways, our insolvency laws have now moved in line with international best practice.
The Banking and Finance Act, 2017 is another significant legislation coming through in 2017. This Act provides for a licensing system for the conduct of banking or financial business and provision of financial services, to provide for the incorporation of standards, principles and concepts of corporate governance in institutional systems and structures of banks and financial institutions, to provide for sound business practices and consumer protection mechanisms and for the regulation and supervision of banking and financial services.
The Banking and Finance Act, 2017 repealed and replaced the Banking and Financial Services Act, 1994 to provide a better platform for managing the corporate governance requirements relative to those in the repealed Act.
Perhaps, what is far reaching more than the Act is the Bank of Zambia Corporate Governance directives have introduced some new reporting measurements on Banks and Auditors alike.
Some of the Corporate Governance directive particularly those in section 20.5 have been suspended and are currently undergoing refining to make compliance easier for the auditors and banks.
Although in the insurance sector, the Insurance Act, 1997 remains intact, save for the various amendments, there is also an expectation that a new insurance bill governing the regulation of insurance in Zambia will soon be introduced coupled with the increased prudential reporting requirements in this sector.
The increasing complexity in the environment and the developing focus on transparency globally means that the enactment of the new Acts has not been unexpected. Most of the Acts that have been repealed date as far back as 1990, whereas there have been various changes in the economy that needed supportive legislative environment.
Having noted the above, I have also recalled parts of my article titled ‘A critical look at the Securities Act, 2016’ written in March 2017 to just shed light on the changes in this space.
As a brief background, in December 2016, The Securities Act, 2016 was enacted which introduced some new reporting requirement for public traded companies, and their auditors.
The Securities Act, 2016 new significant requirement is that the board of director’s report on the effectiveness of the public traded company’s internal control system in its annual report and for the auditors of public traded companies to report on the existence, effectiveness, and adequacy of internal controls.
The Securities Act, 2016 also introduced a requirement that the chief executive officer (CEO) and the chief financial officer (CFO) or any other officers or persons performing similar functions in a public traded company to report and certify under threats of sanctions the accuracy of reported financial statements, to state that they have designed, have established and maintained internal control in their reporting on the adequacy of the internal controls in their filed report and to disclose all significant deficiencies and material weaknesses in the design or operation of internal controls, which would adversely affect the company’s ability to record, process, summarises and report financial data and have identified for the public traded company’s auditors.
While this Act had enacted the attendant rules were not yet developed to operationalise these requirements, In this vein, the Securities and Exchange Commission (SEC) put together a working group comprising the SEC, the Zambia Institute of Chartered Accountants, the Lusaka Stock Exchange and the Bankers Association of Zambia to facilitate the development of the rules that will guide the implementation of this legislation.
By early 2018 the draft rules were fully developed and were being circulated for comments by the SEC.
Since then, a number of comments have been received particularly from accounting firms on how the rules should be fashioned. The most common of the comments received thus far are in respect of transitional arrangement.
There has been however low participation from the companies that are going to be significantly affected. The consultation process is expected to be completed soon before the Ministry of Justice takes over.
Having noted the above, all the Acts focus on greater transparency and corporate governance could bring with it increased focus on the business of the company, while it is potentially true that the cost of compliance for all these regulations is likely to be significant because of an expected increase in the time and effort involved in complying with these regulations, which may also result into increased staffing and training needs.
Additionally, the increase in personal liability that is expected to accrue to Directors and key management including Auditors means the CEO and CFO have a personal stake in addressing the expanding compliance requirements.
The obvious first concerns for affected companies will be to escape the regulator’s attention, coming in way of financial penalties, or censure and to ensure that the company has adequate skills to meet the increased regulatory demands.
In this case, it is worth mentioning the SEC offsite 2015 monitoring findings which noted that the overall capital market compliance barometer was at 65 percent which effectively means that 35 percent were non-compliant. In terms of continuing obligation of issuers for 2017, the SEC found that the overall compliance barometer is about 26 percent.
That is a low statistic and perhaps justifies the increasing sanctions that are included in the Companies Act, 2017, Banking and Financial Services Act, 2017, Corporate Insolvency Act, 2017 and the Securities Act, 2017.
With the increasing focus by multilateral institutions on market transparency, there is a movement towards the realisation of specific regulatory and legal changes that help increase market transparency and reduce corruption to enhance consumer protection. Most of these enactment should be seen in light of that.
As a conclusion, it is worth restating my conclusion the aforementioned article in February 2017 as follows:
“It is necessary for companies to have an incentive to try and preempt any possible enforcement action by regulators by implementing, early and decisively, a strong compliance programme. And to be able to do so, the affected companies must invest in appropriate processes, systems, and technologies that will make compliance easier.
Companies further need to start reviewing and evaluating their procedures and related controls to make sure they’re effective, consider whether the compliance staff strength is appropriate as well as identifying compliance owners of the different processes that could impact on their internal control assessments.
It may also be that some companies will decide that to be adequately prepared, they would rather outsource the internal control compliance role.”
One things is clear, it is not business as usual, the regulatory environment has shifted.
About the author: Kelvin Chungu is an Assurance and Advisory professional and is contactable on +260976377484.