The Abraaj scandal continues to reverberate throughout the international media, and even after the record DFSA fine that was levied on two of its entities, the narrative continues to be that of a “loss in confidence” of the regulator.
This narrative, peddled by the Western media carries some weight to be sure, but it needs to be examined in the light of financial events that have transpired throughout the world over the last two to three decades.
First the obvious: any financial collapse triggers a loss in confidence. This is particularly true when the firm is a high profile one. Investors flee to the sidelines, as risk aversion ratchets higher, and any post-mortem analysis inevitably focuses on the regulator’s ability to have prevented the collapse in the first place.
However, there are a few distinctions here that need to be highlighted. First, in any “financialised” economy, there are bound to be failures and regulators can no more effectively prevent such failures than they can the sun from setting every evening.
Selective criticism from the past
High-profile collapses in the West over the last two decades includes the Lincoln Savings and Loans scandal, the Bernie Madoff saga, the Lehman Brothers collapse, the rigging of the US treasury bond market and the bailout of most banks in the 2007-08 financial market collapse.
Each of the failures mentioned above happened in the US; in none of the above cases was the narrative ever about a loss in confidence of the SEC (Securities and Exchange Commission).
Regulators will always strive to minimise failures. When these do occur, they update the regulatory framework and move on such that these events do not repeat themselves.
Repetition, however, does occur, and it often occurs because in an increasingly complex world of finance, regulators cannot see the linkages that cross-border transactions have. Or do not have the requisite skillsets of financial practitioners who can keep up with the sophistry of financial innovation (and deception) that are employed.
This is not to say that regulatory failure does not have a role to play in the collapse of such firms. Notice the difference in the narrative. In the West, each of these market failures comes accompanied not only with a bailout, but with a narrative that however culpable the guilty parties were, the shift in emphasis is one where the small investor must be protected.
The outrage that therefore stems from the collapse of an entity is therefore counterbalanced by the narrative of how to minimise the collateral damage. This occurs organically, and therefore the feedback that the regulator receives is one where the architecture of financial regulation improves.
This then creates a positive feedback loop where confidence quickly returns to the marketplace, and markets unfreeze — until the next crisis comes along.
An exemplary action on DFSA’s part
I have written at length about this asymmetry of narratives, and continue to be astounded by the lack of nuance that each op-ed piece displays about the topic. Despite Abraaj, the DFSA represents a triumph of regulatory autonomy in the financial world, and its growth rates reflect an underlying bedrock of confidence that continues to attract boutique and large-scale firms alike.
There is no doubt that there are many lessons to be learnt from the Abraaj saga. It is equally true that almost none of these lessons have been adequately addressed in the media, amid the cacophony of noise regarding the impact on confidence.
To be sure, in the years to come, there will be case studies that will analyse the impact and assessment that Abraaj had on the economy, from regulatory oversight to corporate governance. When these do occur, the conclusion will be clear: failures, no matter how large, are ultimately part and parcel of the market economy.
And over the long term, they show up as but blips on the overall growth trajectory as long as the regulator continues to upgrade its architectural framework. This has been happening since the formation of the DFSA, and will continue to do so in the years ahead.
Nasser Malalla Ghanem is Senior Partner at the law firm of NM Associates, which has a joint venture with GCP.