As the rule of Law in financial services diminishes, the dead weight cost increases

The rule of law states that law governs us not individual government officials. No branch of government is above the law, and no public official may act arbitrarily. The rule protects us either from wilful abuse or pig ignorance. No person may be prosecuted for acts not punishable by law, nor can officials sanction someone for violating a poorly worded regulation. Vague regulations confer too much discretion upon officials charged with regulating. The more a decision is based on discretion, the less it is based on law. Laws and regulations should be clear, non-retrospective and published in advance, and any discretion must be exercised in accordance with Constitutional and Administrative Laws.

An illustration is the Indian General Anti Abuse Rule or GAAR which has caused uncertainty surrounding the Double Taxation Treaty Agreement or DTA between Mauritius and India. If you obey the law no harm should come to you, but GAAR suspends this principle with regard to taxation. If you lawfully lower a tax burden the Indian authorities can suspend any benefit where they view that you have acted immorally. Consequently investors into India under the DTA are subject to uncertainty. 

The rule is essential to fundamental rights and economic prosperity. Where a law or regulation is uncertain we suffer loss in prosperity as a dead weight cost. It is the loss of business opportunities, where investors move to alternate jurisdiction as a result of uncertainty. This is clear by the decrease of our market share FDI into Indian and the increase in share of Singapore. However, the bleeding continues internally, where government agents have excessive discretion and the citizen has limited legal recourse. Unfortunately, the commercial reality is that businessmen invariably abide by an abusive decision rather than take legal action.

Another example is the Financial Services Commission (FSC). Here my perception is that the commission has many objects to fulfil, however emphasis is on its functions, specifically to regulate, monitor, supervising the conduct of business activities, set rules and guidance governing the conduct of business in the financial services sector and of global business.

This description in my view is reminiscent of Big Brother. Beyond the very wide powers under the Financial Services Act 2007 akin to unlimited discretionary powers, the FSC can make rules, increase fees and give directions as they deem fit, and failure to observe these rules and directions constitutes an offence punishable by law. 

So armed with extraordinary “powers”, the FSC has over time persistently moved the goal posts of regulation. Annual fees and licenses have increased dramatically, some have become variable and based on turnover, resembling more an additional indirect tax. Whilst anti-money laundering laws apply to all citizens, the financial services sector has been subjected to unproductive, and disproportionate levels of compliance. This has more to do with milking the providential cow, or appeasing the whims of the Indian government when faced with accusations of round tripping, or to assist the American government to chase its citizens for taxes. Then there are the misguided recommendations of the OECD, IMF and other international bodies in their so called fight against money laundering or to avoid another world crisis. The true reasons are closer to their wish to stop their business and taxes from migrating to bona fide low tax jurisdiction like Mauritius. We are on the white list of financial centres, and first in Africa for most things, so this systematic imposition of compliance is nothing more than disguised protectionism.

“Substance” is an elusive concept which we are obliged to suffer. The regulator understands this to mean, bringing value to the economy and creating jobs, then it provides a long list of criteria, with a subjective application. The sector as a whole has brought value and created jobs for the last twenty years. To subjectively analyse each individual stakeholder would be a betrayal and fundamental move from the concept of an industry approach, to an arbitrary approach, more so as the rules of substance in India, UK or Singapore have no application here, and will serve only to divide the industry in two, big operators, and small and medium size operators.

Global business vehicles were light cost effective financial vehicles, now all these selling qualities have disappeared. We guaranteed confidentiality, now we apply changing rules of transparency and exchange of information. Soon competitors will have open access to sensitive industry information, or perhaps they will just send foreign consultants to regulate and inspect us.

High costs of compliance and doing business are continuously increasing and may soon surpass the advantages of doing business in a low tax jurisdiction. As the rule of law diminishes, the dead weight cost increases, and operators will have no choice but to divert business to alternate jurisdictions.

The regulator is so overbearing that you can’t even hire staff, a director or even acquire shares in a company without authorisation, and as it extends its powers, Mauritius will inevitably no longer be a pleasant jurisdiction to do business, in even for Mauritians.