A major overhaul of the financial services sector is being planned to give the Central Bank new powers to immediately shut down troubled finance companies, and introduce new laws to push the sector into the 21st century. According to Governor, Ewart Williams, the failure of the legislation to keep up with the rapid developments in the financial sector has served to increase the vulnerability of the sector and has contributed to the recent problems in the non-bank sector in particular.

“The changes to financial legislation and the Bank’s methodology have lagged behind the pace of innovation and expansion of the financial system, and the current laws must be updated to deal with the new business environment,” says the Central Bank Governor at the launch of the Financial Stability Report last week. He said the main piece of financial legislation, that is, the Financial Institutions Act (FIA) dates back to 1993, with a few amendments made in 2006 to address particular issues.

In addition, since the enactment of the Insurance Act (AI) in 1980, there were minor modifications in 2004 to effect the transfer of supervisory authority over the insurance industry from the Office of the Supervisor of Insurance in the Ministry of Finance to the Central Bank in 2006, to address the investment limits for pension plans. “In recent years, the central Bank has embarked on a concerted effort to upgrade the legislation and to enhance supervisory practices.

Initiatives on the legislative front have included the enactment of the new FIA in late 2008 and the addition of emergency powers in the IA, pending the introduction of new insurance legislation to be presented to Parliament towards the end of the year.” He said the Bank is also proposing new credit union legislation to govern the prudential regulations of these institutions, and thereby replace the Co-operative Societies Act that dates back to 1971. The Bank will be hosting public consultations on the proposed credit union legislation starting tomorrow morning at the Hilton.

Williams said new legislation would also be introduced to cover the operations of occupational pension schemes. “The new FIA has addressed some of the obvious deficiencies of the old legislation. Since some of these major shortcomings are also contained in the current insurance act, several provisions will also be harmonised,” he added. “Some of the new provisions relate to the supervision of consolidated companies, the establishment of Financial Holding companies, the application of credit exposure limits, the Central Bank’s ability to respond to non-compliance, the establishment of audit committees, the certification of the internal financial controls and the development of policy to guide related party transactions.”

The Central Bank Governor said in February 2009, the Central Bank Act was amended to give the Bank the legal authority to take steps to protect the interests of policyholders of any insurance company licensed under the IA 1980. This authority was exercised to contain the repercussions from the run on the two insurance companies of the CL Financial Group. At that time, the IA was also amended to give the bank the authority, as regulator, to issue compliance directions to ‘cease and desist’ or ‘to perform’ a particular action.

He said the Central Bank now has the ability to issue an immediate compliance direction in cases of urgency, without giving prior notification to the insurer, and these powers will be extended further as regulator. The Bank can also suspend operations of any insurer or take control of a troubled company and suspend its operations. Depending on the situation, this period of regulatory control could lead either to the resolution of difficulties and the resumption of normal business activities, or a recommendation by the Central Bank that the company be wound up.