OVERVIEW OF CIRCULAR DIRECTING BANKS AND OTHER FINANCIAL INSTITUTIONS TO ESTABLISH CUSTOMER COMPLAINTS HELP DESK.

INTRODUCTION

The Central Bank observed significant increase in the number of complaints received from customers of financial institutions most especially deposit money banks on various banking products and services.

The complaints range from allegation of excess charges, unauthorized deductions, excess commission – on – turn over (COT), other frivolous charges, frauds etc. The situation is a clear indication that customers are dissatisfied with the quality of services offered by and the absence of proper redress mechanism within the financial institutions.

To this end, it became necessary for banks and other financial institutions to adopt appropriate and effective mechanisms to address customers’ grievances reduce the spate of customer complaints, enhance public confidence and customer satisfaction.

THE DIRECTIVE

Banks are therefore directed by the Central Bank to establish customer help desks, the help desk should be managed by an officer not below the grade of Assistant General (AGM) and/ or senior banking officer of considerable years of experience in banking at the head office and branches respectively. And the Central Bank further directed:

a.       All deposit money banks, discount houses and other financial institutions to establish e- mail addresses dedicated to customers’ complaints.

b.      That complaints must first be filed with the Bank for resolution and copied to Director, Financial Policy and Regulation Department of the CBN.

c.       That such complaint should be resolved within 2 weeks from the date of receipt.

d.      That if unresolved, such complaint with evidence of action taken should be forwarded by the Bank within the 14 - day time frame to the Director, Financial Policy and Regulation Department and advise the complainant accordingly.

e.       All financial institution must submit monthly returns on customer complaints, the number resolved and number not resolved to Central Bank for intervention.

WHAT IS THE RATIONALE FOR THIS CIRCULAR

 In Nigeria, the indifference of the financial institutions in addressing consumer complaints and the lack of an effective report mechanism for financial consumers was breeding lack of trust and confidence in the financial institutions.

So I believe this Circular was issued among other reasons, to regulate the conduct of financial service providers, to engender trust and confidence in the financial system and ensure sound and stable financial system in Nigeria.

WHAT ARE THE KEY DELIVERABLES FROM THIS CIRCULAR

The immediate deliverables of the Circular include; the development of the consumer protection framework to serve as a policy document to address the issue of financial regulation as it affects the plight of the consumers of the financial product and services in Nigeria.

Another deliverable item is the deployment of consumer compliant management system. This is an automated system that is going to ensure a seamless complaints handling process. Although certain categories of complaints might take a longer time to resolve.

CONCLUSION

This regulation is clear, that financial institutions must resolve all complaints within two weeks of receiving such. And that any complaint that cannot be resolved within two weeks must be referred to the CBN in line with this circular.

Banks and other financial service providers are under the regulatory purview of the CBN, so the aim of the Circular is to ensure fair treatment and to inculcate ethical practices among financial service providers in their relationship with consumers..

YinkaOlaiya

OPINION: THE SUPREME COURT, LAGOS STATE AND VAT

BRIEF FACTS

Lagos claimed against the Federal Government as follows:
“That the House of Assembly of Lagos State of Nigeria is the body entitled, to the exclusion of any other legislative body, to enact laws with regard to the imposition and collection of tax on the supply of all goods and services within Lagos State of Nigeria and that the Lagos State of Nigeria, or any agency of the State, is the body entitled, to the exclusion of any other body, to assess and collect such tax, and that the revenue of the Lagos State Government has been and continues to be affected by the enforcement of the provisions of the Value Added Tax Act, Cap V1, Laws of the Federal Republic of Nigeria, 2004 (hereinafter referred to as ‘The VAT ACT’.”
Lagos State sought for the following reliefs:
“A declaration that the Value Added Tax Act Cap V1 Laws of the Federal Republic of Nigeria 2004 is, to the extent that it provides for the imposition and collection of taxes on goods and services in Lagos State (and other states of the federation), outside the legislative competence of the National Assembly and is therefore unconstitutional, null and void and of no effect whatsoever.
A perpetual injunction restraining the Federal Government of Nigeria by itself, its servants or any of its agencies from continuing to give effect to the provision of the said Value added Tax Act to impose and collect taxes on goods and services within the Lagos State of Nigeria.”
The Federal Government instead of confronting Lagos frontally, by going into the merits of the case, filed a preliminary objection on the grounds that (a) the cause of action relates to the acts of a federal organ and cannot form the basis of invoking the original Jurisdiction of the Supreme Court, which requires that the Supreme Court’s original jurisdiction can only be invoked in disputes arising between a State and the Federation or between States; (b) that the entire suit constitutes an abuse of court process and should be struck out.
The Supreme Court found that the thrust of the claim of Lagos State are encapsulated in the following paragraphs:
“… the Lagos State Government is entitled, to the exclusion of any other body, to collect any tax charged on the supply of all goods and services within the Lagos State of Nigeria under any law passed by the Lagos State House of Assembly and no other body or Government is entitled to a share of such tax may be collected.”
“The Federal Government continues, through it agents, to administer the Value Added Tax Act and to assess and collect tax thereunder with regard to the supply of goods and services within the Lagos State of Nigeria and within the territories of other States and distribute such tax in accordance with the fee sharing formula.”

The Supreme Court painfully came to a conclusion that the claim of Lagos relates to the revenue of the Government of the Federation, consequent upon which the taxes one of its agencies levies and/or seeks the interpretation of the Constitution as to how the operation of the Constitution affects the Federal Government or any of its agencies, is at the wrong court hence the Court declined jurisdiction.

ISSUES FOR DETERMINATION

Whether the Supreme Court’s original jurisdiction can be invoked considering the circumstances of this case.

ARGUMENT

The original jurisdiction of the Supreme Court is provided for under section 232(1) of the 1999 constitution; that for the original jurisdiction of the Supreme court to be invoked, the plaintiff’s claim must disclose a dispute between the federation and a state or states as constituent unit or units or between the states and the dispute must be one in which the existence of a legal right in their capacities as such is involved. See AG BENDEL V. AG FEDERATION (1982) 3 NCLR1,.AG KANO STATE V. AG FEDERATION (2007) 3 SC 59 @ 1.

The plaintiff in this case was seeking clarifications as to whether the VAT or consumption tax is within the purview of the exclusive power of the federal government or a matter within the purview of the residual power which the state government could make laws.The Supreme Court in the case of OGUN STATE v. ALHAJI ABERUAGBA [1984] SC 20 held, amongst others, that both the Federal and State Governments had the residual power to impose Sales Tax on any matter within their respective legislative competence.

The Supreme Court further held that only the Federal Government had the power to make Laws in respect of international trade and commerce and interstate trade and commerce while the State Government had the power to legislate on intra-state trade and commerce.

Further, the 1999 constitution do not confer exclusive jurisdiction over sales tax on the federal government. So it is a residual matter over which the state government could make laws.

The Supreme Court of Nigeria defined residual legislative competence in the case of Attorney General of OgunState v Aberuagba& 6 othersper Bello JSC:

By residual legislative powers…is meant what was left after the matters in the Exclusive and ConcurrentLegislative Lists and those matters which the Constitutionexpressly empowered the Federation and the States tolegislate upon had been subtracted from…. The Federation has no power to make laws on residual matters.With regard to taxation, the Exclusive Legislative list provides „items… (16) Customs andExcise Duties… (25) Export Duties… (58) Stamp Duties… (59)Taxation of incomes, profitsand capital gains…‟ are within the exclusive legislative competence of the Federal Government as represented by the National House of Assembly.

The Concurrent Lists also makes reference to „taxation of profits, incomes and capital gains in items 7 and 8.While the Constitution makes reference to „profits, incomes and capital gains‟ it is silent on„taxation of sales and or consumption.‟This implies that same is a residual matter withinthe exclusive legislative competence of the State House of Assembly;

the NationalAssembly therefore lacks the legislative competence to legislate on VAT and or any

consumption tax whatsoever.

Further the Plaintiff was challenging the constitutionality of the Value Added Tax Act and the illegality of the collection of tax pursuant to the Act. The Plaintiff’s grouse in the suit was not really about the act of the collection of these taxes by the F.I.R.S., an agency of the Federal Government, but rather on the legality or otherwise of the legislation on which the acts of the F.I.R.S. are founded. The Plaintiff, submitted that it has no dispute with the Federal Board of Inland Revenue which remains a mere agent but with the legislative competence of the Federal Governmentvis-a-vis the taxes collected by the Board. Were the Plaintiff’s quarrel to be in relation to the act of collecting this tax by Federal Government agent without more, it would have been impossible to bring Plaintiff’s claim within the purview of Section 232 (1) of the 1999 Constitution that provides for the Supreme Court’s original jurisdiction.

However, painfully the Supreme Court came to a conclusion that the claim of Lagos relates to the revenue of the Government of the Federation alone byits agency the Federal Board of inland Revenue , hence the Court declined jurisdiction. The court neglected and failed to address the fundamental   issue of competence of the Federal Government in legislating on consumption tax which form the basis of the suit.

The question now is when can the original jurisdiction of the Supreme Court be invoked. In the recent case of AG FEDERATION v. AG LAGOS:The federal government (before the Supreme Court) challenged the right of Lagos State to make laws on tourism specifically where the National Assembly had already legislated on the same issue through the NTDC Act. In this case the supreme court did not declined jurisdiction rather the apex court dismissed the federal government’s suit and delivered its judgment in favour of Lagos state. It was the view of the court that the NTDC Act went beyond its powers as stated in the Exclusive Legislative List of the Constitution which is to regulate “tourist traffic”. This effectively challenged the constitutionality of the NTDC’s powers to unilaterally regulate and control of hotels and tourism in Nigeria. The court therefore validated the respective laws of Lagos State.

The crux of the above stated case was that Lagos State Government had in 2009 enacted the Hotel Occupancy & Restaurant Consumption Law (HORCL) which places a consumption tax of 5% on personal services enjoyed in a hotel or restaurant or event centre. Such services include food and drinks. This consumption tax contained in the HORCL is similar to VAT, which is also 5% of the value of goods supplied or service rendered.

 In my humble view looking at the semblance of the two issues the Supreme Court has jurisdiction to entertain this suit.  According to M. T Abdulrazaq “ the just resolution in this matter was that this case was squarely within the provision of section 232(1) of the 1999 constitution that ....... the Supreme Court shall, to the exclusion of any other court, have jurisdiction in any dispute between the federation and the state…. It is clear like an IfaOpele, the Supreme Court has provided a solution to the dispute between Lagos State and the Federal Government of Nigeria. Was this appropriate solution in the circumstance? Frankly, I think not.”

CONCLUSION

Going by the provisions of the constitution it will be right to ask where does the VAT Act get its validity from since the Federal Government is only permitted to legislate on taxation of income, profits and capital gains?

Flowing from this, and as the Constitution is silent on which of the levels of Governments

has legislative competence with regards to consumption tax, it automatically falls into

residual category over which the States have exclusive legislative competence.

The Lagos State Government is therefore apt, by invoking the original jurisdiction of the of the Supreme Court, in filing an actionagainst the Federal Government asking the court to interpret the provisions of the Constitution to determine who has competence to legislate over the

imposition and collection of tax on the sales of goods and services. The suit also challenges

the validity of VAT.

A humble opinion is that the apex Court might not want to invalidate VAT in its entirety because of the instant financial disaster that would arise from nullifying a nationaltax law. Instead, the Court ought to havetow the path of its predecessors in Aberuagba’s caselimiting its scope to international and inter-State transactions and not declining jurisdiction in its entirety without addressing the substantive suit.

YinkaOlaiya

DERIVATIVE AS A CAPITAL MARKET INSTRUMENT

INTRODUCTION
A derivative is a financial contract which derives its value from the performance of another entity such as an asset, index, or interest rate, called the "underlying” Its price is dependent upon or derived from the underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. They are essentially called derivatives because the value of the derivative contract is at every point determined by the difference between the agreed value placed on the item at the time of entering into the contract but to be performed at a future date (the notional value) and the actual market price of the item on the relevant maturity date.
Derivatives are one of the three main categories of financial instruments, the other two being equities (i.e. stocks) and debt (i.e. bonds and mortgages).
INVESTORS AND INVESTMENTS
The attitude of investors in developed economies towards risk has evolved from the initial position of diversifying risk exposures between varying portfolios of assets into the treatment of risk as an asset eligible for trading on regulated markets. The extent to which an investor is willing to take up risk is now being given particular attention in the form of risk packaging such that various risks associated with an item or asset is separated and the risk packages are sold to investors willing to take up such risks in accordance with their risk appetite.
 Simply put, in a credit transaction, the creditor is ordinarily accustomed to seek a guarantee to protect itself from any risk of default; In effect, if the debtor defaults, the guarantor owes an obligation to the principal to make up the default to the extent of the guaranty. It is almost often a tripartite contract. However, with a derivative, the creditor may simply enter into a separate and independent contract with the aim of mitigating or hedging his risk exposure.
THE RISKS IN DERIVATIVES
Some of the risks which will typically be transferred include credit risks, interest rate risks and currency exchange risks.
 Credit risk: is the risk that a debtor may not repay principal and pay interest to the creditor at the agreed date.
Interest rate risk :  is the risk that changes may fluctuate negatively with respect to the interest rate to be paid on an agreed principal sum particularly where the interest rate is calculated on a floating rate basis.
Currency risk:  is the risk that fluctuations may occur negatively as regards the exchange rate of a relevant currency used in a transaction.
These risks are very often encountered in daily contracts starting from the basic sale and purchase agreements to the extremely complex financing transactions. A party to a contract may then decide to protect itself from the relevant risk associated with the transaction to which it is involved by entering into a derivative contract.

 COMMON DERIVATIVE CONTRACT TYPES

Some of the common variants of derivative contracts are as follows:

1. Forwards: A tailored contract between two parties, where payment takes place at a specific time in the future at today's pre-determined price.
2. Futures: are contracts to buy or sell an asset on or before a future date at a price specified today. A futures contract differs from a forward contract in that the futures contract is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold; the forward contract is a non-standardized contract written by the parties themselves.
3. Options are contracts that give the owner the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an asset. The price at which the sale takes place is known as the strike price, and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. In the case of a European option, the owner has the right to require the sale to take place on (but not before) the maturity date; in the case of an American option, the owner can require the sale to take place at any time up to the maturity date. If the owner of the contract exercises this right, the counter-party has the obligation to carry out the transaction. Options are of two types: call option and put option. The buyer of a Call option has a right to buy a certain quantity of the underlying asset, at a specified price on or before a given date in the future, he however has no obligation whatsoever to carry out this right. Similarly, the buyer of a Put option has the right to sell a certain quantity of an underlying asset, at a specified price on or before a given date in the future, he however has no obligation whatsoever to carry out this right.
4. Binary options are contracts that provide the owner with an all-or-nothing profit profile.
5. Warrants: Apart from the commonly used short-dated options which have a maximum maturity period of 1 year, there exists certain long-dated options as well, known as Warrant (finance). These are generally traded over-the-counter.
6. Swaps are contracts to exchange cash (flows) on or before a specified future date based on the underlying value of currencies exchange rates, bonds/interest rates, commodities exchange, stocks or other assets. Another term which is commonly associated to Swap is Swaption which is basically an option on the forward Swap. Similar to a Call and Put option, a Swaption is of two kinds: a receiver Swaption and a payer Swaption. While on one hand, in case of a receiver Swaption there is an option wherein you can receive fixed and pay floating, a payer swaption on the other hand is an option to pay fixed and receive floating

Swaps can basically be categorized into two types:

·         Interest rate swap: These basically necessitate swapping only interest associated cash flows in the same currency, between two parties.

·         Currency swap: In this kind of swapping, the cash flow between the two parties includes both principal and interest. Also, the money which is being swapped is in different currency for both parties

Types of Derivatives

OTC and exchange-traded

In broad terms, there are two groups of derivative contracts, which are distinguished by the way they are traded in the market:

1         Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, exotic options – and other exotic derivatives – are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts is difficult because trades can occur in private, without activity being visible on any exchange.

2         Exchange-traded derivatives (ETD) are those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange.A derivatives exchange acts as an intermediary to all related transactions, and takes initial margin from both sides of the trade to act as a guarantee.

The main reason for entering into derivative contracts is to facilitate risk management (hedging) and to create price discovery (such that the pricing for an item is based on supply and demand factors). Derivative contracts can also be used in various sectors to transfer risk which an entity or investor is not willing to retain. On the converse, the purchase of a derivative can serve as an opportunity to invest in a sector which a party will otherwise not be open to invest. In the banking sector for example, the risks imminent in loan agreements between the bank and its customers can be offloaded to investors willing to take up such risks. This will have the attendant resultant effect of helping the bank avoid costly liquidations.
Investors in derivative contracts also stand the chance of benefiting from minimal transaction costs as opposed to parting with the full value of the item in the event of an outright purchase. With investments in options contract for example (where the buyer of the option has a right and not an obligation to purchase the underlying item on the maturity date), the transaction cost would typically be the premium paid by the buyer at the time the option is purchased.

Economic function of the derivative market

Some of the salient economic functions of the derivative market include:

1. Prices in a structured derivative market not only replicate the discernment of the market participants about the future but also lead the prices of underlying to the professed future level. On the expiration of the derivative contract, the prices of derivatives congregate with the prices of the underlying. Therefore, derivatives are essential tools to determine both current and future prices.
2. The derivatives market reallocates risk from the people who prefer risk aversion to the people who have an appetite for risk.
3. The intrinsic nature of derivatives market associates them to the underlying Spot market. Due to derivatives there is a considerable increase in trade volumes of the underlying Spot market. The dominant factor behind such an escalation is increased participation by additional players who would not have otherwise participated due to absence of any procedure to transfer risk.
4. As supervision, reconnaissance of the activities of various participants becomes tremendously difficult in assorted markets; the establishment of an organized form of market becomes all the more imperative. Therefore, in the presence of an organized derivatives market, speculation can be controlled, resulting in a more meticulous environment.
5. Third parties can use publicly available derivative prices as educated predictions of uncertain future outcomes, for example, the likelihood that a corporation will default on its debts.

In a nutshell, there is a substantial increase in savings and investment in the long run due to augmented activities by derivative Market participant.
 DERIVATIVE IN NIGERIA CAPITAL MARKET
The growth of derivatives has increased tremendously over the last decade with a record of about US$638,923 billion as the notional value of derivatives as at end June, 2012, derivatives is yet to be embraced in its fullest capacity in Nigeria. Its presence is however slowly creeping into the financial system in Nigeria. Very recently, the CBN issued guidelines for the introduction of FX derivatives which essentially permitted certain variants of derivatives to be employed as hedging tools in the foreign exchange market by authorized dealers and investors alike on a strictly regulated basis. Mr. Oscar Onyema, CEO, Nigerian Stock Exchange has also indicated commitment to expand product offering on the Nigerian Stock Exchange with the creation of an options market by 2013/2014 which will essentially trade stock options, bond options and index options. A futures market is also proposed to be created in 2016 comprising of currency futures and interest rate futures.

The multifaceted impact of derivatives in the financial sector in Nigeria will also come to bear in securitization transactions upon the passage by the National Assembly of the Securitization Bill. Various forms of derivatives will without doubt be employed to credit enhance the structures and to hedge against interest rate and currency exchange rate risks that may have an impact on the transactions. This will evidently have a huge effect on the Capital Market and in readiness for transactions of this nature, the Securities and Exchange Commission, the apex regulator of the Capital Market in Nigeria, has in furtherance of its goal to develop the market taken steps to enhance the capacity of its officers on securitization, mortgage backed securities, and other exotic financing mechanisms
Conclusion

These developments are no doubt a step in the right direction towards liberalizing the Nigerian Capital Market and ensuring that the much clamored diversification of investments becomes a reality in Nigeria. However, given the vulnerability that derivatives may pose where it is left unregulated, it is important that care is taken to ensure that adequate regulation is introduced to protect the market. It may also be instructive to ensure that the regulation so introduced is not such that will limit the potential of derivative transactions in Nigeria.

YinkaOlaiya