Stanbic IBTC: FRC did not follow due process—CBN

04112015C emefiele CBNLAGOS — The Central Bank of Nigeria, CBN, has condemned in strong terms recent sanctions approved by the Financial Reporting Council of Nigeria, FRCN, against the board and management of Stanbic IBTC Holding, SIBTCH, saying the council did not follow due process.

The FRCN had, amongst others, sacked four directors of Stanbic IBTC, including its Chairman, Mr. Atedo Peterside, for alleged infractions, while also calling for the withdrawal of its financial statements for the years ended December 31, 2013 and 2014.

But in a five-page letter, dated, November, 2, 2015, and signed by the CBN Governor, Mr. Godwin Emefiele, which was obtained by Vanguard, the apex bank also said the FRCN action was capable of eroding investors’ confidence as well as causing financial instability in the system.

After a careful review of the issues, apart from bluntly turning down FRCN’s request to take disciplinary action against StanbicIBTC, the CBN also advised the board of the embattled bank to discountenance the FRCN’s sanctions.

The CBN said: “In the light of the foregoing facts, which clearly show that FRCN did not follow due process, the bank regrets to inform you that it is unable to accede to your request to take disciplinary action against SIBTCH. Indeed, the CBN does not see any reason to advise/compel SIBTCH to obey the sanctions metted to it by the FRCN.”

The letter was addressed to the Executive Secretary/Chief Executive Officer, FRCN, and was entitled: Re: Regulatory Decision in the Matter of Financial Statements of Stanbic IBTC Holdings Plc for Years ended 31st December 2013 and 2014.

The CBN letter with reference number: GVD/GOV/CON/DGF/93/113, also read in part: “We are seriously concerned that such a drastic regulatory decision could be taken on an entity under the regulation and supervision of the Central Bank of Nigeria (CBN) without any form of consultation with the bank, especially as the CBN is responsible for promoting safe, stable and sound financial system. Yet, such a regulatory decision and the manner of the announcement is not only capable of eroding investors’ confidence but also inimical to the financial system stability.”

To underscore the implications of FRCN’s action on Nigeria’s financial system stability, the CBN further noted: “Indeed, the FRC’s action has already precipitated a fall in the value of the shares of Stanbic IBTC by about 18 per cent since the announcement of the Regulatory Decision.”

CBN observations

The CBN in a 13-point observation faulting the FRCN’s actions also observed as follows:

lContrary to the allegation of the FRCN that Stanbic IBTC (SIBTC) did not obtain approval from the National Office for Technology Acquisition and Promotion (NOTAP) for the payment of affiliate software license, our review revealed that the bank actually obtained the necessary approval from NOTAP to pay affiliate software license from the Standard Bank South Africa (SBSA), for a period of three years covering June 2012 to May 30, 2015. The remittance from June 2015 to date is still awaiting approval from NOTAP.

lWith regards to the allegation of non-disclosure of intangible assets in SIBTC’s 2013 and 2014 financials, we note that the bank adequately recognised the software as an intangible asset in its 2011 financials and sufficiently disclosed the disposal of the software in the 2012 financials. Consequently, the said software could not have been reported as an intangible asset in the succeeding years 2013 and 2014.

    With respect to the allegation of lumping several expense items under “Others”, we are of the view that the items were not material enough to appear as line items in the Income Statement and that the non-disclosure of the items did not materially affect the true and fair view of the financial statements.

lWe agree with FRCN that SIBTC erred in the classification of some line items. However, the identified misclassifications did not understate or overstate its assets and liabilities, neither did it increase nor decrease its income or expenditure, such as would have caused a material misrepresentation of the financials.

lSIBTC used its judgment to capture the donation of M275 million under “Others” because it was of the opinion that it was not a charitable donation but a mandatory contribution towards the victims of terrorism in the country. For the avoidance of doubt, this contribution was agreed at a Bankers’ Committee Meeting, with the share for each bank clearly spelt out. Therefore, we agree with SIBTC’ s position, as presented.

lContrary to FRCN’s conclusions, our review of lAS 37 and lAS 32.19 indicate that SIBTC had an obligation to accrue the relevant provisions toward the settlement of the franchise and management fees as agreed between it and SBSA.

lWithout prejudice to the foregoing financial issues, the CBN is concerned about the apparent failure of the FRCN to follow due process as laid down by its own FRCN Act and Regulations, in arriving at the Regulatory Decision. In this regard, the bank wishes to make the following observations:

lln conducting investigation into possible breaches of the FRCN Act and/ or the Regulations, the FRCN is required to give the Entity concerned sixty (60) days from the service of Final Notice to restate its accounts where both the Panel and Entity agree on the need for restatement. In this case, our understanding is that FRCN called a meeting with the board of SIBTCH at 11.00 a.m on the 26th October 2015. But rather than holding the meeting, FRCN went ahead to convene a press conference at 8a.m on the same day to announce its sanctions against SIBTCH. Our review further indicates that both FRCN and SIBTCH did not agree on a need for restatement of the accounts before the sanctions were announced.

lAccording to the FRCN Act, an entity is only punishable under the Act upon conviction by a court of competent jurisdiction. Yet, in issuing the Final Notice, the FRCN had already meted out some punishments to the affected entity, without any conviction by a court.

lWhile FRCN may, following approval of the minister, review applicable fines, there is no power for compounding offences and imposing penalty in lieu of conviction as was done in this case.

lBoth the FRCN Act and the Regulations provide for the outcome of the investigation to be made known to a registered professional or a public interest entity and a right of appeal to the Technical and Oversight Committee before resorting to prosecution. In this case, however, there is no evidence that time was allowed to elapse for the appeal process before the imposition of sanction.

lThe Regulation provides that if the Entity fails to accept FRC’ s position at the end of a Notice period, the Council shall institute legal action against the entity, rather than mete out sanctions. Yet, in this case, sanctions have been meted out without evidence that legal action has been fully exhausted.

*A combined reading of both the Act and the Regulations shows that there are three types of sanctions that may be imposed for contraventions by Entities.

*These are: lmposition of monetary penalty/fine; Imprisonment for a term of years; Deregistration of a professional or issuance of a Warning Notice.

*There is however, no authority for suspension of registration of a professional as was done in this case.

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