By Dennise Williams, Staff ReporterONE OF the results of the financial meltdown of the 1990s was the trimming of the number of operators in the financial services industry. There are six commercial banks, seven merchant banks , around 40 financial service houses, plus a number of building societies, pension funds, and credit unions.
So with the lean and mean industry in Jamaica, is there really a need for two powerful watchdog agencies- the Bank of Jamaica (BoJ) and the Financial Services Commission (FSC)? Yes, says the industry under watch. According to industry experts, there is a need for both agencies because it forces the industry to organise its products and services into clear lines. Said Leo Williams, managing director of JMMB Securities, "the financial industry has to segregate their business. Supervision by both agencies encourages the financial institutions to recognise what type of business they are in. It is not over-regulation."
What is clear is that each agency looks at a different aspect of the financial services industry in Jamaica. In essence, the BoJ in its regulatory capacity, looks at deposit taking institutions (commercial banks, merchant banks, pension funds and building societies) and regulates the foreign exchange market while the FSC regulates everybody else in the financial services industry.
The BoJ states, "there are two primary reasons why we regulate and supervise licensees: 1. To promote their safety and soundness so as to protect confidence in and integrity of the banking system and the interests of depositors. 2. To promote an efficient and effective banking system that finances economic growth, allocates credit and meets the needs of the customers and communities they service. Supervision of these deposit-taking entities is necessary, as the main source of funding for their loans and investment activities is the savings and deposits of members of the public."
The FSC operates under the Securities Act which "requires individuals or companies wishing to enter the securities industry as dealers, investment advisors or their representatives to be licensed by the FSC."
The FSC demands that certain educational and financial requirements be met. So both regulators are very important because while the financial services industry in Jamaica is relatively small, the funds under management is not. Peter Chin, president of the Jamaica Securities Dealers Association, tells the Financial Gleaner that, "The last I heard, assets under management by dealers is around J$280 billion and J$240 billion managed by banks. This is a lot of money. Even when you convert it to US dollars, that is around US$4.5 billion managed by each side of the industry.
"I would say it is necessary to have the separation and the supervision. Even in the smaller entities, the regulator has to go through the book and this is time consuming." It is the expressed understanding by experts in the industry that the BoJ could not do everything and so an additional agency is needed to look at areas the BoJ could not. Said Charles Ross, managing director of Sterling Asset Management Ltd, "In theory, if each institution sticks to its mandate it shouldn't create an additional burden. Because the BoJ has other things to concentrate on such as monetary policy, it may be appropriate to have the FSC in existence which has a soley supervisory role."
Chin tells the Finanical Gleaner that his association has 35 members that fall under the supervision of the FSC. However, when dealing with foreign currency accounts, it means that the BoJ would also have to give an eye. But Chin states that both agencies are, "under the constraints of size and funding." So the task to regulate the industry is daunting. While the FSC would not give details as to their methodology, the BoJ provided an insight as to their method of regulation. In fostering the objectives of safety and soundness in the financial sector, the BoJ assesses:
1. How much risk each licenses is undertaking
2. Resources available to manage these risks - these may be tangible (capital) or intangible (internal control systems, management experience and competence).
3. Whether the identified level of resource(s) is/are sufficient to manage the risks. Additionally, the BoJ has eight areas critical in the operation of a licensee:
1. Capital management
2. Credit risk management
3. Foreign exchange risk
management
4. Interest rate risk management
5. Internal controls
6. Liquidity management
7. Real estate appraisals
8. Securities portfolio management
According to Ross, "there is room in the market for both agencies. Each should stick to their mandate and avoid overlapping each other."
