Nigeria: A new era of regulatory enforcement
The Nigerian government has certainly been feeling the pinch since the oil price slide began to hammer public finances. Against this backdrop, a recent wave of landmark fines issued against major commercial players signal as much a drive to source alternative revenues as to implement stricter regulatory compliance following years of relatively lax enforcement.
Recent fines imposed on companies include: the Financial Reporting Council’s N1bn/$5m fine against Stanbic IBTC; the Central Bank’s sanctions against three major commercial banks, First Bank (N1.9bn/$9.54m), UBA (N2.9bn/$14.57m) and Skye Bank (N4bn/$20m); the Food and Drug Control Agency’s N1bn/$5m penalty on Guinness; and the Communications Commission’s staggering N1.04trn/$5.2bn fine against communications giant MTN. Combined, these fines represent roughly 1.1% of forecast 2015 GDP and 12.5% of the proposed 2016 budget – and a whole lot of regulator activity in the space of just three months, adding to investor unease.
Interconnected factors are at play. On the one hand, the pro-transparency, anti-corruption leanings of the present administration are easily transposed to ensuring accountability and ‘good governance’ in the private sector, meaning emboldened regulators can be expected to come down harder on perceived breaches of local regulation. On the other hand, the drastic drop in oil revenue and the resulting dire financial situation makes revenue generation a major concern for the new government, with few options for raising immediate funds beyond turning to the international markets for potentially costly borrowing. Stricter regulatory enforcement – sometimes leading to accusations of arbitrary treatment – and a renewed drive to improve tax collection are likely to remain features of the business landscape in the coming months.
The regulatory environment in Nigeria is complex creating challenges even for companies that strive hard to be compliant. The country has an array of legislation and by-laws to regulate almost every area of economic activity. However, this creates scope for arbitrary interpretation or ambiguity, while enforcement – even in rudimentary matters – is often uneven or non-existent. The abundance of laws also means there are frequently overlaps.
Further adding to this complexity, in several industries operators have to deal with two or three regulatory bodies, operating independently of, and sometimes in obvious competition with, each other. While this means that companies have periodically operated with impunity and disregard for the law, sometimes playing one regulator off against the other, it also means companies are sometimes unaware of legislation that applies (or does not apply) to them. This increases the risk of regulatory breach, and restricts the channels through which firms can address compliance issues when they arise.
Whether the changing regulatory landscape is due to an acute appetite for revenue generation, or whether it is rooted more in a long-term aspiration to improve compliance in the business environment, the implications for industry are the same. Government agencies are under pressure to fulfil expectations for increased government revenue within an atmosphere of transparency and anti-corruption, and they appear to have the backing of the Presidency to toe a hard line with regards to compliance.
Besides telco giant MTN, banks have been the worst hit so far, followed by FMCG companies. The latter are probably the most exposed to the pluralistic nature of regulatory oversight in Nigeria, with NAFDAC, the CPC and SON all having authority to sanction or prosecute violations of product quality standards. With more fines possibly on the way (NCC has hinted it may sanction operators for failing to address data migration requests), the compliance stakes have never been higher. The electricity companies are easy next targets (Ikeja Disco has already been fined by the Electricity Commission) as are operators in the aviation industry where consumer complaints are commonplace.
While the services sector currently bears the brunt of the regulatory hammer, it is not a stretch for authorities to tighten the compliance noose on the primary and secondary sectors. Taxes may not increase anytime soon, but tax default penalties can be expected to multiply in the near future (the tax laws allow a penalty of 10% of the unremitted tax plus interest at the prevailing Central Bank rate). The appointment of the immediate past tax chief of Lagos Tunde Fowler, credited with increasing the state’s tax collection rate by 600%, to the Federal Authority is a neon sign for stricter tax enforcement.
Nevertheless, within this stricter regulatory space, there is likely to remain considerable scope for engagement with the authorities over issues that arise. Some of the fines meted out – notably MTN’s record fine – are likely to result in negotiated compromises rather than being fully enforced. And provided companies can demonstrate a clear commitment towards improving compliance and engaging constructively with the authorities on issues that arise, further crippling sanctions are likely to be avoided. This is because key government decision-makers are wary of the negative impact the fines could have on the operations of such strategic business partners, not to mention the broader negative message that high-profile commercial disputes can send to other potential investors.
Within this challenging state of regulatory flux and uncertainty, we also see an opportunity for companies to improve their local positioning and risk management approach. In the short term, they can achieve this by performing the necessary compliance audits and investing in internal capacity-building around compliance issues. Meanwhile, in the longer term and perhaps more importantly, companies should prioritise engagement and seek to build durable relationships not just with regulators but across a broader base of key public sector stakeholders. Engagement will deepen understanding of regulators’ priorities and facilitate dialogue that will improve policy formulation, and consequently help companies to shape the business environment around their operations.