The Mauritian economy has experienced tremendous changes in its economic development, evolving from a mono crop economy towards a fast developing one. The success of the new economic development lies on the manufacturing, tourism, information and communication technology and the financial services sector.
Mauritius' expanding treaty network is an important gateway for the regional investment and its strategic position poses itself as a key interface between Asia and Africa. Our jurisdiction is seen as a serious and credible one, offering combination of quality services, reliability and security to investors through increase of value added services being offered on the island and of the sound regulatory framework. The financial market is opened to Foreign Direct Investment (FDI) and a number of restrictions have been removed on foreign transactions.
The diversification of the 1990s was focused on consolidating and modernising traditional economic sectors whilst creating new areas of growth to allow the economy to embark on higher levels of development, the financial services sector being one of the major areas. Thus, arousing the need of new laws was required to develop the financial services sector in Mauritius.
The regulatory environment in the financial services sector across the world has undergone a major overhaul in the last decade to such an extent that even the language and terminologies have changed (Rajahbalee, 2002). Mauritius has not been an exception. This trend began some twenty years back in some countries to integrate the supervision of financial services and financial institutions. In February 2001, following recommendations made on the Report of the Steering Committee appointed by the Honourable Minister of Economic Development, Financial Services and Corporate Affairs, the financial regulation in Mauritius has moved from an industry-based approach which was fragmented to a unified supervisory and regulatory structure.
In its new regulatory environment, the Financial Services Commission (FSC) is preparing principles and standards that are consistent with international regulatory organisations' guidelines (Rajahbalee, 2001). International regulatory organisations are the International Organisations of Securities Commission (IOSCO), International Association of Insurance Supervisory (IAIS) and the Basel Committee of Banking Supervisors (BCBS). Mr Rajahbalee even suggested that individual supervisors in every jurisdiction are left to establish their standards and principles in accordance with the internationally accepted ones while integrating country-specific elements. Through this process the specificities of each jurisdiction are taken into account and the financial systems is ameliorated to meet greater measure of risks that globalisation has brought about.
In line with the committee's suggestion, the decision was based on two stages; firstly, to establish a new regulatory institution namely the FSC, whose duty was to regulate and supervise the whole of the industry except the banking sector. Second, having carried out an assessment of the primary work of the FSC, the banking and non-banking sectors would be integrated under the same supervision to have a fully integrated supervisory structure.
2.2. Aims and objectives of the Commission
Established in December 2001, the FSC is the sole regulator of the non-bank financial sector, as per the Financial Services Development Act 2001 in Mauritius. The FSC is the repeal of former regulatory bodies namely, Stock Exchange Commission (SEC) for the Stock Exchange markets, the Insurance Division of the Ministry of Economic Development, Financial Services and Corporate Affairs and finally the Mauritius Offshore Business Activities Authority (MOBAA) for Global Business Sector (GBS). It is the regulatory body to license, regulate, monitor and supervise all non-bank activities namely, insurance, capital markets and the Global Business Activities (GBA).
The Commission commits itself to ensure that financial development is stable, sound and is a competitive international financial services centre. It sees to it that fairness, effectiveness and transparency are being respected by the financial institutions as well as protection of investors.
By ensuring, that business transactions are conform to the governing legislations and are in accordance with established norms of good and honourable conduct, FSC plays an important role in enhancing the credibility of the financial services sector in Mauritius. The professional and pragmatic regulatory approach, that the Commission has adopted improved the proportion of its services and by guiding operators has enhanced the competitiveness in the financial services sector. The vision of the FSC is to be "an internationally recognised competitive financial services supervisor committed to the sustained development of Mauritius as a sound and competitive financial services centre" (Annual Report, 2005).
Regulation immediately aims at protecting typically investors, shareholders in the general sense, but above all it aims to protect consumers of financial services. And this now is the statutory functions of the FSC under the FSDA, quite apart from licensing, regulating and supervising (Rajahbalee, 2002).
The statutory objects of the FSC are:
Market confidence
The FSC has to maintain a good level of confidence in the financial system so as to avoid the likeliness of systemic risks in the market.
Financial stability
It has to contribute to the protection and enhancement of the Mauritius financial services sector.
Consumer protection
The market needs an appropriate degree of protection for the consumers, so as to maintain their level of confidence in the industry.
Reduction of financial crimes
The organisation has the duty to reduce the extent to which it is possible for a business to be used for a purpose of which has a direct or indirect connection with any form of financial crimes.
The key objects of the FSC ACT 2001 are listed as follows:
To ensure the orderly administration of the financial services and Global Business Activities (GBA);
Elaboration of policies mainly directed at ensuring fairness, efficiency and transparency in the financial and capital markets in Mauritius;
Working out objectives and policies and set priorities for the sound development of the financial services industry and Global Business (GB) as well as making recommendations to the Minister concerned.
The Commission has the following key functions:
License, regulate, monitor and supervise the conduct of business activities in the financial services sectors;
Set rules and guidance governing the way businesses operate in financial services sector;
Establish norms and standards to preserve and maintain the good repute of Mauritius;
Establish and maintain such links and liaison with international agencies in the field of finance as may be necessary for the furtherance of its objects;
Carry out investigations and take measures to suppress illegal, dishonourable and improper practices, market abuse and financial fraud in relation to any activity in the financial services sector.
2.3. FSC's approach to regulation
Over the past years, discussions with the different industry professions, have led to a general consensus that regulation necessary for the safety, stability and credibility of the financial services sector. The FSC on the other hand has been very cautious in introducing changes in the regulation of various performances in the non-bank financial services sector. The purpose of regulation is yet to be understood making the task of the regulator that is implementation and regulation difficult. FSC's integrated approach aims at making it easier to coordinate supervision in the various sectors of the financial industry. In addition, integrated regulation helps the Commission to exercise its supervisory function into single teams.
Risk-based approach of all non-bank financial services to regulation and supervision is a means to simplify the different approaches adopted by individual regulators in the past. It seeks to identify and forms regulatory attention on financial institutions and activities that are likely to pose great risk to market confidence. The integrated approach helps to avoid any spill over effects in the event of failure of a firm.
In June 2003, within the context of the Financial Sector Assessment Program (FSAP), the joint mission of the International Monetary Fund (IMF) and World Bank (WB) found, pertaining to the financial services sector, 'a high compliance with internationally accepted norms and best practices', thus commending the FSC's approach in the r regulatory reforms and recognising the efforts undertaken by the Commission to enhance regulation and supervision in the area of non-bank financial services. (Annual Report, 2003, p.12)
To position and promote sustained growth of the jurisdiction as a first-class International Financial centre, FSC lays lots of emphasis on particular issues such as; operating a business and investor friendly environment; carrying on business in partnerships with the industry; enhancing capabilities and competences; and encouraging a national approach towards promoting Mauritius as a sound and stable financial centre.
2.4. Organisational Structure
The administrative and management Board of FSC consists of a Chairperson, a vice-chairperson and not more than five other members. The Chairperson is appointed by the Prime Minister while the remaining board members by the Minister concerned with the financial services sector.
The FSC operates as per a Matrix structure consisting of four directorates, namely; licensing, surveillance, policy and research and corporate services. Each directorate comprises of four clusters. The reason behind setting up such a structural framework is to achieve optimal efficiency, thus gearing the FSC into the global arena.
2.5. Regulatory structure of the FSC
2.5.1 Licensing directorate
The licensing directorate has the duty to process applications for licensees, the registration and authorisations for non-bank financial institutions operating in both the domestic and global business sectors under the remit of the Commission. The licensing process involves vetting firms at the entry level in order to allow only firms and individuals who provide satisfactory criteria of financial soundness, competence, integrity and honesty to engage in activities pertaining to non-bank financial services. As a general rule, any firm proposing investment products or financial business activities have to file in certain documents demonstrating the business and properties of the entity, past track records and profile of the promoters; products/services to be offered and other additional information/documents that the FSC may deem appropriate to consider.
2.5.2. Surveillance directorate
The responsibility of this directorate is to ensure that all regulated firms and financial institutions falling under the purview of FSC, comply on an on-going basis with the regulatory financial and disclosure requirements and with all other regulations with respect to conduct of business. It helps the FSC to achieve its consumer protection mandate and to maintain stability in the financial industry. Procedures concerning off-site and on-site inspections have been established for licensees and tailored to the risks associated with them. It allows FSC to identify compliance problems and deals with firm specific risks. Non compliance pertaining to financial regulations and disclosure requirements is brought to light and monitored until compliance is achieved.
The Surveillance directorate also involves in investigating licenses in cases of alleged offences. Serious breaches are referred to the Enforcement Unit which has the duty to investigate and take measures to suppress illegal or irregular practices, market manipulation, and financial scam pertaining to the non-bank financial services industry. The Unit may make recommendations as well to the FSC regarding disciplinary action against operators, revocations of licensees and enforcement of civil sanctions where the law empowers it.
Off-site inspection is mainly the review of audited financial statements and the statutory returns that have been submitted by licensees to the FSC. The aim behind is to ascertain compliance with relevant laws, regulations and codes issued by the FSC and licensing conditions set out for each licensee. The solvency and financial standing are also evaluated as part of the on-going assessment of licensees' fitness and propriety.
While on-site inspections are planned on a risk-based approach which implies the identification of risks inherent in a licensee's operations, i.e. the higher the risks, the greater the regulatory responsibility allocated.
2.5.3. Policy and Research directorate
The mission of the directorate is to 'act as a think tank in the formulation and implementation of financial regulation policies in line with international benchmarks and standards set by international standard-setters' (Annual Report, 2004). The Policy and Research team analyses, in particular regulatory developments, both locally and abroad, and proposes legislative changes with a view to upgrading current practices to international standards. The unit collects and analyses statistical data to capture the main trends of the financial markets and provide critical information to the industry and investors. A Coordinated Portfolio Investment Survey ('CPIS') is carried out annually as per the request of the IMF in order to obtain portfolio statistics. Since year 2003, FSC is responsible for the collection of data for the whole non-bank financial sector including the GBS. The data derived from the surveys are used for compilation of the balance of payments and international position and statistics for Mauritius. It also helps to monitor the size and composition of the financial services sector.
Literature review
3. Regulation and Supervision: The basic issues
3.1. Why regulate and supervise?
Non-bank financial services play an important role in the economic and financial development of a country. In the absence of an effective non-bank financial sector, economic and financial broadening tends to be retarded. Non-bank financial institutions (NBFIs) have a potential influence on the economy and yet can be source of risks. The control such risks is effective regulation and supervision schemes.
Economic theory suggests that regulation is only necessary and desirable in cases where independent actors in free economic exchange provide socially undesirable outcomes (Chuppe and Atkin, 1992). Financial regulation is less about the control of monopoly power and more about the maintaining systematic stability and consumer protection of financial services.
Government usually regulates for a number of reasons, for instance, they may be influenced by an economically powerful industry and act in its favour. Most of the rationales for regulating the industry may be described as instances of 'market failure.' Regulation in such cases can be justified based on the fact that an uncontrolled market place, will for some reasons, fail to produce behaviours or results in accordance with the public interest.
It is possible to divide financial regulation into three main types, although clearly it is difficult in practice precisely to delineate between them: (i) structural regulation, which covers the main types of activities that different forms of institution are permitted to engage in; (ii) prudential regulation, which covers the internal management of financial institutions in relation to capital adequacy, liquidity and solvency; and (iii) investor protection regulation, which is designed to shield investors from malpractice, fraud and collapse (Anderton, 1995).
3.2. Objectives of Regulation
Like every single private enterprise financial services providers, are more concerned about maximising their profit. Very often in so doing, they tend, to slacken off their level of cautiousness and take greater risks in their business processes, endangering the money and assets of their clients. From a supervisory angle the most important concern of the regulator should be to maintain the soundness of the financial system of the respective economy.
Usually markets are said to be effective at producing safe, efficient and welfare enhancing outcomes. As a matter of fact, this proposition can be said to be the basis of the market economy. The basis for regulation evolves by beginning with the fact that even the best of the markets can collapse for a number of reasons.
The objectives for regulation intervention will rest on the basis of market failure and a consequent impact of that failure upon the economic efficiency, safety and fairness. Regulatory requirements should be based on the fact that cost of market failure exceeds any other costs. Above all regulation is required to guarantee the payment mechanism and prevent the process of financial intermediation from falling.
3.2.1 Anti-competitive Behaviour
Governments support the nurturing of competition in the financial sector since it will bring several forms of benefits to the economy. The benefits would include improved access to capital needs for business, cheaper credit facilities; better match between the different financial needs of insufficient and excessive units, cheaper transaction costs and finally greater ability to manage risks.
The key determinant of competition is market forces. Therefore, regulation of competition in other words, is to ascertain that market forces operate effectively and are not influenced by other participants in the market.
3.2.2. Market Misconduct
Financial markets cannot operate with efficiency and effectiveness unless the participants do their work with integrity and there is adequate information on which judgements can be based on. This is the main reason why all markets are faced with problems related to the conduct or misconduct of the participants.
The areas of misconduct are:
Inequitable or deceptive conduct by market participants OR
Inadequate disclosure of information on which the companies can base their investment decisions.
The main purpose of market conduct regulation is to protect market participants and eventually to promote confidence that the market is operating is an efficient and fair manner. This type of regulation focuses on the conduct of business rules, disclosure of information, entry barriers through licensing, governance and fiduciary responsibilities, and some minimum financial strength conditions (e.g. minimum capital requirements depending on the nature of the financial activity undertaken).
3.2.3. Asymmetric Information: Adverse Selection and Moral Hazard
Asymmetric information is the third source of failure of financial markets. It normally arises where products or services are quiet complex that their disclosure is insufficient in itself to allow consumers to make correct knowledgeable choices. This happens when buyers and sellers of products and services are never equally informed, regardless of the amount of information they have. The issue of asymmetric information is complex with respect to the products and the institutions offering it. This is a common problem especially in the financial services area. Nevertheless, the problem does not stop here, since information asymmetry cause two major impediments for a financial system.
Adverse selection
Adverse selection occurs at the search/verification stage of a transaction, when a lender is selecting a potential borrower. It arises when the potential borrowers who are the most likely to produce an adverse outcome are the ones who most actively seek out a loan and hence are more likely to be selected. Because adverse selection makes it more likely that loans will be made to borrowers who are likely to default, lenders may decide not to lend at all, even though there are borrowers who are good credit risks in the market. (Mike Buckle and John Thompson, 2004,)
Moral Hazard
The second impediment is moral hazard, which occurs either before or after a loan has been made. Moral hazard before a loan will arise where interested borrowers may errantly produce documents that do not specify the specificity of the loans, e.g. purpose of the loan has not been mention. Whilst moral hazard, after a loan has been granted, is more concerned with the monitoring and enforcement stages.
In financial markets, moral hazard is said to be the risk where a borrower will engage in activities that are considered as undesirable or immoral from the lenders point of view. Consequently, jeopardise the repayment of the loan.
3.2.4. Systemic instability
It is a fundamental characteristic for the partners of the financial system to operate proficiently only to the extent that the market members have confidence in their aptitude to execute their roles. Thus, leading us to the last source of market failure, that is systemic instability.
The more advanced the economy, the greater will be its dependence upon financial promises, exposing the financial institutions to greater risk of failure.
Kane (1992) suggests that systemic risk is 'the possibility of a contagious spread of losses across financial institutions that threatens to harm the real economy (the production of goods and services).
Financial markets lie at the heart of an economy. Consequently a widespread failure of the financial intermediaries to meet their obligations to customers or to other market professionals can have severe impacts on the economy. This is because securities markets are closely intertwined with the rest of the financial system. Thus, there is the need to protect the economy from any possible spillover effects of unusual developments in the securities markets.
3.3. Regulatory Structure
The way in which a country organises its various agencies in charge of financial sector regulation is referred to as the regulatory structure. There are two fundamentally different models of regulatory structure, one is based on the regulatory functions while the other in based on institutional groups. Regulatory functions refer to the underlying functions of regulations; namely, addressing the various sources of market failure (Carmichael, 2002).
Regulatory framework around the world is typically more of a mixture of functional and institutional divisions. On the other hand, the global trend towards integrated financial regulation can be views as a trend towards restructuring regulatory agencies along functional lines, particularly with respect to prudential regulation (Carmichael, 2002).
Reddy (2001) notes that arguments against, the idea of a single regulator are equally strong. To begin with unification could lead to a lack of clarity in functioning since the way regulators work may differ considerably. Secondly, concentration of power could vitiate democratic policies. Third, there are diseconomies of scale as monopolistic organisations are more rigid and bureaucratic than agencies because they are too big and vast structures for effective regulation for the entire system. Fourth, there may be unintended consequence of public tending to assume that all creditors of supervised institutions will receive equal protection. And lastly, pooling of skills, it is not necessary that objectives and resources produce expected synergies.
Skipper (2000) highlighted that the larger the financial services market of a country, the greater the complexity and difficulty in moving into a consolidated regulation. On the contrary the more modest is a country's financial sector the easier it is to move to consolidated approaches. If there are economies of scale in regulation, a single agency might be especially appropriate for small countries (Llewellyn, 2001).
4. Insurance and Pensions
4.1. Introduction
The past decades have know unparalleled growth in contractual savings, that is, assets of insurance companies and pension funds, in several countries. Institutions dealing in contractual saving have become one of the most dominant figures in the financial services market. Their rapid development and growth have ranked very high in many governmental agendas. These contractual saving institutions have been promoting accumulation and investment of long term assets. It goes without saying that these companies play an important role in deepening and developing the financial markets.
Insurance companies, Occupational Pension Schemes both by private sector companies and statutory bodies, the National Pension Fund and the National Savings Fund, form the contractual savings institutions in Mauritius. Their economic importance has been demarcated by their mobilisation of savings and capital formation in the local financial system.
4.2. Insurance Sector
The Mauritian Insurance industry can be said to be a relatively well-developed one. The striking features of the market rest upon the extensive use of reinsurance facilities and free from pervasive premium products, investments and reinsurance controls. Life insurance has been largely favoured by generous tax incentives and benefits of the growth in pension business and housing finance. Even the non-life business is a well-organised one.
Our insurance industry is highly concentrated, whereby three of the major companies hold 84.2% of the market share. The insurance industry is highly competitive, operating with efficiency and reasonable profitability. Large and medium insurers are highly efficient with good profitability. While some of the smaller companies are weak in terms of financial ratios.
4.2.1. Institutional structure and performance
There are 24 insurance brokers at present in Mauritius. This is a large number for the size of our local market. However, some of the smaller companies serve segments of the market that are unattractive to larger institutions.
Total assets increased from Rs 61.7 billion to Rs 65 billion, representing an increase of 5.4%. Three insurers contributed 84.2% of the gross premiums generated by the long term insurance companies. The market share was consequently spread among the remaining 10 long term insurers. Like-wise, general insurance business was concentrated with 6 insurers representing 81.6% of the market share. (Annual Report, 2009)
Gross premium of the domestic market grew by 18.7%, from Rs 11.6 billion to Rs 13.8 billion during the period 2008-2009.
Year
2006
2007
2008
Total Assets (Rs m)
50,707
61,664
65,021
For LT Business
42,708
52,167
54,656
For General Business
7,999
9,497
10,365
Total Gross Premiums (Rs m)
10,509
11,647
13,826
Of which LT business
6,875
7,743
9,091
Of which General Business
3,634
3,904
4,735
Table 1: Total Assets and Gross Premiums of Insurers (2006-2008)
Source: Annual Report, 2009
4.3. Pensions
Occupational Pension Schemes cover three main types in Mauritius; the civil service pension scheme; pension schemes for various statutory bodies; and pension schemes established by the private sector entities.
All occupational pension schemes have to be approved by the Commission of Income Tax and must benefit from tax incentives. Most of the occupational pension schemes are insured and/or administered by Insurance Companies.
For the period 2006-2008, the FSC has continued consultations on the draft pertaining to the Private Occupational Pension Schemes Bill with representatives of the insurance and pensions industry. The proposed legislations aim above all at maintaining a fair, safe, stable and efficient private occupational pension industry for the benefit and protection of employees and the public. (Annual Report, 2009)
The Financial Act 2008 provides for the extension of the retirement age from 60 to 65 as a pension reform. Most of the Private Occupational Pension Schemes in our country are self managed or administered and managed by insurers, Pension Fund Administrators (PFAs) and Pension Scheme Managers (PSMs).
It should be noted that at 31 December 2008, Mauritius had 9 insurers and 4 PFAs and PSMs, with the duty of managing and administering private occupational pension schemes.
4.3.1. Institutional Structure of the Pension systems
The institutions of the Mauritian pension system can be divided into two separate groups: those that are occupationally based and those that are based on more general characteristics. The Basic Retirement Pension (BRP), National Pension Funds (NPF) and the National Savings Fund (NSF) belong to the second group whereas the Civil Service Pension Schemes and the funds established by statutory bodies and private companies form the first group. (Vittas, 2003)
Basic Retirement Pension (BRP)
This scheme is a universal pension scheme, financed from the general taxes. It accounts for 20% of the average earnings and is usually paid to all people above 60years.
National Pension Fund (NPF)
NPF is a compulsory scheme which has been derived to cover all employees of the private sector firms, except from those on very low wages and some sugar industry planters.
The NPF always had a satisfactory performance as an institution on its own. However, the MCB/NPF fraud of 2003 has had serious impacts on its image. The fraud had been going for nearly 5 years and had involved a time deposit of MUR 500 million with the Mauritius Commercial Bank (MCB), one of the oldest and largest banks of the island. The non-detection of the fraud for so many years brought forward a major deficiency in the internal audit and control systems.
National Savings Fund
This scheme is basically a defined contribution one offering a covered workers lump sum upon retirement.
4.4. Off-site - Surveillance
The fundamental functions of the off-site surveillance consists of the continuous assessment of the financial conditions and performance of the insurance and pension market players as well as close monitoring of solvency positions of insurers and assessing compliance with the prudential norms and the existing legal framework.
FSC has been conducting incessant surveillance of insurance companies and pension institutions, by means of in-depth examination of statutory returns and actuarial reports. The analysis of such reports is a means to provide early warning signals allowing the Commission to urge appropriate regulatory and prudential measures.
As part of its off-site supervision exercise, FSC assess applications for appointment of officers and other functionaries. Restructuring plans of insurance companies were reviewed and applications for the acquisition of significant shareholding in insurance companies were also checked. Off-site surveillance reports provide significant inputs to the implementation of on-site inspection programmes and to the formulation of policy recommendations.
5. Offshore financial centres
5.1. Definition and Background
There is no consensus among scholars and practitioners on what constitutes an Offshore Financial Centres (OFCs), even though various attempts have been made to define them. OFCs started to have an impact on the international financial in early 1970s. Many alternatives have been used for the term OFC, these would include International Financial Centres (IFC), International Banking Centre (IBC), International Banking Facilities (IBFs) and Offshore Banking Centre. McGhee (1997) states the term "Offshore" has no legal definition, even though it is widely used in financial planning process. According to him, the term is used in situation where a 'financial transaction is carried out from a jurisdiction which is at least one step remote from the client who has initiated that transaction.'
5.2. Origin, rationale and growth of OFCs
OFCs share common history with the Eurocurrency markets. The OFCs are said to be geographical extension of the Eurocurrency market outside the Western Europe. OFCs and Eurocurrency centres are basically the efficient response of international banks in attempt by governments in many advanced countries in the 1960s and 1970s to control capital flows through the imposition of restrictive domestic regulations. These regulations in many cases were intended to provide the government with more control over monetary policy, encouraging a shift of deposits and borrowing to less regulated institutions, to a large extent banks in OFCs and Eurobanks, which are exempted from such precincts.
The combined effect of increasing restrictive regulatory regimes onshore and new business opportunities abroad, provided and impetus to financial institutions and large multinational corporations to delocalise and increase the volume of their financial activities offshore. It is this massive delocalisation that continued to broaden and deepen the scope of markets in international currencies. By early 1970s, the geographical location of the markets shifted from being mainly Western Europe to Worldwide. Banks and later, securities and insurance firm began setting up offshore branches in a number of jurisdictions in the Caribbean, Latin America and Southeast Asian countries. It is these jurisdictions that are known today as Offshore Financial Centres.
5.3. Management Companies
Management Companies (MCs) are classified as Financial Service Providers. They play a major role intermediary role in the Global Business Sector (GBS). More specifically, MCs are licensed by the FSC to set up, administer and manage Global Business Companies (GBCs) or to provide trusteeship services to offshore trusts. MCs constitute an important element in the two-tier supervision system established by the Commission. FSC requires that all applications for a GBC license to channelled through a duly licensed management company. As such MCs have the responsibility of applying due diligence and Know-Your-Client (KYC) principles in screening and vetting their client. These companies act as intermediaries between offshore clients and FSC.
They operate under the Notes of Guidance for Management Company issued by the Board of FSC and the guidance includes, amongst others, matters relating to; obtaining references; conflict of interests; source of client's funds; provisions of directors; handling clients' money and assets; control of bank accounts; complaints handling; compliance and review; financial resources, records and reporting.
A MC is a corporation registered under the Companies Act 2001 and licensed by the FSC under Section 24 of the FSDA 2001. FSC has licensed 18 MCs during the period 2008/09 as compared to 12 MCs in the previous financial year. Even though there was a downturn in the economic situation as a consequence of the financial crisis this has not adversely affected the number of applications received during the current financial year.
5.4. Global Business Companies
Investors who wish to set up companies in Mauritius for global activities have the choice of two types of companies namely, either a Category 1 Global Business Company (GBC1) or a Category 2 Global Business Company (GBC2). These types of GBCs are incorporated under CA 2001 and licensed by the Commission to hold a Global Business License. Following the establishment of the Commission, former Offshore Companies have been designated as companies holding a GBC1 while the former International Companies are referred to as companies holding a GBC2 license.
Special purpose vehicles namely, Protected Cell Companies (PCC) can be formed to carry on global activities. Furthermore, other vehicles like Socièté (Partnership), Trust or Investment Companies as well can be set up to engage in global activities.
5.4.1. GBC 1
GBC1 may be incorporated as both a public or private company and can take advantage of the benefits of Mauritius' network of Double Taxation Avoidance (DTA) Agreements. GBC1 companies are liable to taxation as an incentive company at the rate of 15%. Companies can nevertheless, claim a deemed foreign tax credit of 80% which thus reduces the effective tax rate to 3%. This tax may be reduced to nil if the actual foreign tax paid is in excess of the Mauritius tax liability. GBC1 is therefore ideally suited for all investments to countries with which Mauritius has signed a DTA Agreement. As such GBCs 1 are often used as investment vehicles, particularly into India, China, South Africa or Luxembourg, with which Mauritius has favourable DTA.
Section 19 of the FSDA 2001 defines Qualified Global Business as '. . . any business or activity which is carried out from within Mauritius with non-residents of Mauritius and which is conducted in a currency other then the Mauritian currency. . .' The following activities eligible as a qualified global business under the Second Schedule of the FSDA 2001:
Aircraft financing and leasing
Asset management
Consultancy services
Employment services
Financial services
Funds management
Information and Communication Technology services
Insurance
Licensing and franchising
Logistic and/or marketing
Operational headquarters
Pension Funds
Shipping and ship management
Trading
A GBC 1 may set up by direct incorporation or by registration of a branch of a foreign company, or by way of continuation where it is allowed by law in the country of origin. A branch of a foreign company may access to Mauritius tax treaties provided that the local tax authorities are satisfied that effective control and management of the foreign company is in Mauritius and is carrying out any business activity within the country with persons all of whom are residents outside Mauritius and which is conducted in a currency other than Mauritian currency. GBC1 need to make an annual return, but must file its audited financial statement with the FSC within six months of the financial year-end. Accounts must be prepared in accordance with international accounting standards and tax returns must be filed with the Mauritius Revenue Authority (MRA).
For the period 2008/09, 1,277 Category 1 GBL were issued by the FSC. There was a record number of new incorporations in 2008. However, immediately after the financial crisis hit development markets there was a decline in the number of applications for new licenses.
5.4.2 GBC 2
GBC2 is a tax exempt low cost vehicle and does not benefit from the Mauritian DTA relief as it is not considered as non-resident for tax purposes. Besides, GBC2 cannot be used a public company or co-engaged in the provision of insurance, financial services or fund-related activities confidentiality and is suited for holding and managing private assets, trading, invoicing or collecting royalties.
The company can be established either by direct corporation or by way of continuation. It may be organised as a company limited by share and/or guarantee, or as an unlimited company. It shall at all times have a registered agent in Mauritius, either a MC or any such person as may be authorised by the FSC.
There is no requirement to file audited financial statements and annual returns with the FSC or the Registrar of Companies. However, the GBC2 must at all times have a registered office in Mauritius where all statutory books and records are kept.
1,550 Category 2 GBL were issued by the FSC, for the period 2008/09. Here again, the level of incorporations peaked during the calendar year 2007 but dropped as the financial crisis unfolded.
5.5. Off-site Surveillance
Off-site supervision is fundamental in monitoring the conduct of business activities of licensees. This exercise allows the FSC to ascertain compliance with and to identify breaches of applicable laws, regulations and licensing conditions.
Off-site supervision entails the review and analysis of audited financial statements of MCs and GBC1's for the year 2008/09. It should be noted that the FSC has revoked the license of 5 GBCs in 2010.
6. Capital Markets
6.1. Introduction
It was in the late 80s that Mauritius started promoting securities market development, with eventually an Exchange operational in 1989. Nonetheless it had to face serious challenges to continue with financial sector liberisation and promote open market policies. Already with the South East Asian crisis, a major decline was experienced in foreign portfolio of investment in Mauritius.
The Capital or securities market falls under the supervision of FSC. As per the FSDA 2001, FSC governs the Stock Exchange Act (SEA) 1988 and the securities (Central Depository, Clearing and Settlement) Act 1996 and elaborate policies to ensure fairness, efficiency and transparency in the industry.
6.2. Stock Exchange Mauritius (SEM)
Notwithstanding the repeal of the SEA 1988, the SEM continues to be in existence. It is deemed to be licensed as a securities exchange and is administered by the provisions of the securities act and FSC rules. It has regulatory functions and ensures that adequate supervision of the market operations and conduct of market participants. SEM investigates into the market misconduct by participants and into possible market abusers and it is answerable to FSC.
Despite being a public company, SEM has no right to make any change in its legal structure and public offers of its securities without the approval of the Commission. Where in discharge of its regulatory functions and investigations are carried out by the SEM, it shall inform FSC in writing of the nature of such investigations and the persons involved. It shall advise the Commission of the status investigation as per required by the Commission.
6.3. Central Depository and Settlement Company (CDS) Limited
The CDS Ltd started its operations for the clearing and settlement of securities in January 1997. Governed, by a set of legislations and rules, the CDS ensures fair practices and transparency. From the date of its establishment the rules and procedures of the CDS have constantly been amended to cater for changing market trend and customer satisfaction. CDS is a subsidiary of the SEM.
Under the Section 8 (a) of the CDS Act, the company has an obligation to establish and maintain a Guaranteed Fund for the purpose of providing indemnity against any default in respect of payments fee or delivery of securities by participants and obligations of the participants towards the CDS. Pursuant to Section 18 of the CDS Act 1996, the CDS should furnish the FSC periodic reports on the activities and operations of the company.
6.4. Off-site supervision
The FSC monitors the SEM Ltd and the Development and Enterprise Market (DEM) through the SEM Automated Trading System (SEMATS). The Commission exercises its supervisory functions to supplement surveillance carried out by the SEM Ltd. This is done through daily market watch. The market is supervised by FSC to ensure transparency, fair and equitable dealing in securities.
The Commission identifies situations that could pose possible threat of manipulation and initiates appropriate preventive actions. In cases of abnormal fluctuation, trade details are required from the CDS Ltd. FSC has the duty check for compliance as well by its licensees with the relevant laws and licensing conditions through submission of statutory returns and periodical disclosures.
7. Other Non-bank Financial Institutions (NBFIs)
7.1. Introduction
Prior to the FSDA 2001, NBFIs such as Insurance Companies, Stockbroking Companies and MCs were regulated by specific regulatory bodies under the relevant legislations. On the other hand, regulation of the different types of pension funds registered on Mauritius remains fragmented among several laws and tax regulations.
Section 14 of the FSDA gives necessary powers to the FSC to licence certain NBFIs which are not covered by any legislation. The activities listed in Part II of the first schedule are:
Financial Service Providers
Investment advisory services
Leasing business
Mortgage finance
Retirement benefit schemes
Services provided by a qualified trustee under Trusts Act 2001
Given the broad and complex nature of the financial services, FSC tries to accommodate as much as possible requests of different non-bank financial business wishing to be licensed under the FSDA 2001.
7.2. Licensing and Regulatory principles for NBFIs
The Commission implements a risk-assessment and prudential approach to the regulation of all licensed NBFIs. This new approach integrates and simplifies the different approaches adopted by the former individual regulators. The approach seeks to identify and focus regulatory attention on activities that are most likely to pose greater risk to the market and to act upon them so as to minimise spill over effects in the event of a collapse.
Integrated regulation approach facilitates the coordination of supervision of licensed entities with multiple authorisations operating in various sectors of the NBFIs. While prudential approach involves imposition of prescriptive rules or standards governing the behaviour of NBFIs. These rules are directed at specific areas of concern such as minimising the risks associated with the business activity of the licensed NBFIs.
7.3. Surveillance
FSC supervises the licensee's compliance with the laws, codes and licensing conditions. This is presently done through off-site surveillance. The latter involves a review of info and other data remitted to the Commission in accordance with the laws and licensing conditions.
The licensees are required to design and implement a clear set of policies aimed at prudential management of their financial and operational risks while maintaining ongoing internal control and external audit systems. The FSC has the duty to ensure that these systems are implemented effectively in the organisations.
