More changes coming for financial holding companies
The Bank of Jamaica (BOJ) is set to begin consultations next year with financial holding companies (FHCs) with the aim of developing a new set of policies to guide how they relate to their subsidiaries.
The regulations which are “fairly new” have become necessary since the central bank started licensing FHCs in 2021, under new laws that were passed in 2019 that require any financial group with a deposit-taking institution, ie a commercial bank, building society or merchant bank, to reorganise itself for consolidated supervision to ensure that subsidiaries that are not normally regulated by the BOJ are not presenting risks that could destabilise the group, or worse, cause contagion risks.
So far, the BOJ has licensed six FHCs – NCB Financial Group, JN Financial Group, JMMB Financial Holdings, Sagicor Group Jamaica, VM Financial Group and Scotiabank Jamaica Group with the expectation that a seventh will be so licensed by the end of the year, according to responses provided by the central bank to the Jamaica Observer. Barita Financial Group Limited is the latest entity seeking to become a licensed FHC as it appeared in the Supreme Court on October 15. Of note, an FHC is a company that owns or controls one or more financial institutions, such as banks, insurance companies, or securities firms.
Yet, despite issuing FHC licenses, the BOJ is yet to fully define some of the regulations that will guide how these entities should operate.
“[The] BOJ is in the process of developing capital and liquidity requirements for FHCs. Additionally, heightening regulations that would apply to intra-group transactions are currently being considered. This body of work is still in its embryonic stage, as such timelines for completion and implementation have not yet been set,” said the Financial Institutions Supervisory Division of Bank of Jamaica in an email to the Sunday Finance.
These are part of sweeping changes the central bank is undertaking as it seeks to “protect depositors, pensioners and investors” it was pointed out as it operationalises the framework under which it will be supervising FHCs.
One key development is the update to the Standard of Sound Practice on Fitness and Probity. This revised guideline provides a framework for assessing the fitness and probity of individuals holding senior positions in financial institutions, ensuring they possess the necessary skills, integrity, and reputation.
Additionally, the BOJ has issued a Standard of Sound Practice on the Management of Cyber Risks. This new guideline aims to strengthen cybersecurity measures in financial institutions, protecting sensitive data and mitigating potential risks.
The BOJ is also progressing with the implementation of Basel III requirements. This global regulatory framework focuses on enhancing capital adequacy, risk management, and liquidity. As part of this effort, the BOJ is revising current Capital Regulations to align with the Standard of Sound Practice on Minimum Capital Requirements.
The revised Capital Regulations will ensure that financial institutions maintain sufficient capital to cover potential risks. The Standard of Sound Practice on Minimum Capital Requirements document is available on the BOJ’s website, providing transparency and accessibility to stakeholders.
Still, the changes do not stop there.
BOJ shared guidelines called Corporate Governance: Board Oversight in May 2023 with FHCs, which are like a rule book for how these institutions should manage their affairs, making sure they follow the Banking Services Act, 2014, and other related laws. The main goal is to promote good governance practices, like independence among boards of financial institutions, to prevent undue influence. This means each board should make decisions without being controlled by others. Good corporate governance provides a structure for achieving company objectives and monitoring performance, ensuring the board and management work in the company’s best interests.
“[The] guidance went into further detail specifying that boards should have directors with sufficient knowledge of risks inherent in banking (such as credit risks, market risks, liquidity risks, operational risks, and business model risks), as well as the mechanism to manage these risks effectively. This is to enable directors to have a good understanding of relevant issues and challenge senior management where necessary,” the BOJ told Sunday Finance.
Additional changes are also to be made in relation to who sits on the boards of these financial institutions. Currently, the Banking Services Act requires banks and FHCs to have at least one-third independent directors. However, the Bank of Jamaica recommends a majority of independent directors with banking expertise to ensure effective governance. This aligns with international regulatory standards, emphasizing the importance of independent oversight.
To protect depositors’ interests, banks’ boards must prioritize the bank’s well-being above related parties and prevent conflicts of interest. Significant cross-directorships that compromise the bank’s health are not permitted. Additionally, the law prohibits individuals from holding dual or multiple positions within a financial group that create conflicts or simultaneously serving as chairman and CEO of a bank or FHC, except for foreign bank branches.
The Bank of Jamaica aims to update legislation to require a majority of independent directors on boards, ensuring operational independence and safeguarding depositors’ interests. This guidance is grounded in law, specifically section 33(d) of the Banking Services Act, which requires licensees to prevent conflicts of interest unless approved by the supervisor in extraordinary circumstances.
The BOJ is currently gearing up to become the super regulator of the financial sector through the twin peaks model over the next two years and implement the special resolution regime (SRR) which is meant to create a mechanism to have an orderly resolution of troubled regulated entities. The proposed size of the SRR fund is $40.1 billion which is set to be funded by contributions by regulated entities over a 10-15 year period. These moves for stronger financial conglomerate supervision and protection measures occur nearly three years after the International Monetary Fund (IMF) indicated that stronger supervision was needed in the sector.
“The financial sector is dominated by complex financial conglomerates that operate in multiple jurisdictions. Some large groups’ headquarters are based in jurisdictions that have different oversight practices, and cross-border and financial subsectors linkages are concentrated in a few entities. Risks arise from concentrated ownership, related party and large group exposures, and off-balance sheet positions,” the IMF stated in its article IV consultation with Jamaica in November 2021.
Source: Jamaica Observer
See more: Linkedin alums launch Persana AI, a superapp pioneering the future of sales intelligence with $2.3M
See more: Blockchain Life 2024 gathered the leaders of the crypto community from 120 countries in Dubai