The value of sector regulation on financial well-being

People need regulated financial markets to be able to secure their financial well-being and that of their dependants on a sustained and long-term basis.

The Government has provided for this through legislation and regulation and itself benefits from the overall impact on the economy through the economic growth it fosters.

The Government carries out its oversight of financial institutions and the people who own and manage them and serve the public, through legislation such as the Securities Act and the Financial Services Commission Act, and through regulatory institutions such as the Financial Services Commission, FSC, and the Bank of Jamaica.

Regulators license and register institutions and people as the case may be. Their role is to ensure that the entities are financially sound and well-managed and that their owners and employees are qualified, competent, and of unquestionable integrity.

Regulation is necessary to ensure that the financial system is stable and that the public has confidence in it. Because trust is the foundation of the financial sector, high standards of professional conduct have to be maintained, companies must be financially sound and strong, and the people who make decisions and serve the public must be competent in that they must be well-trained and knowledgeable and sufficiently skilled to carry out their functions in the best interests of the public that they serve.

The BOJ, the central bank, has oversight of deposit-taking financial institutions – commercial banks, merchant banks, trust companies, and building societies, as well as credit reporting companies, microfinance companies, remittance companies and bill payment companies. Credit unions will eventually come under its full supervision.

The role of the BOJ is to promote confidence in and the safety of the integrity of the banking system and the interests of depositors. Two ways by which it does this is by continuously assessing the quality of the licensee’s operations and financial condition, and by ensuring that each licensee has an appropriate level of technical, financial, and personnel services to enable it to carry out prudent, sound and profitable operations on an ongoing basis.

Although the BOJ requires the regulated entities to have personnel who meet ‘fit and proper’ criteria, it does not approve applications for licenses, this being done by the designated minister. Nonetheless, it assesses the applications.

It is important that deposit-taking institutions are properly regulated because they are the main source of loans and investment funding and the main repository of the savings of the members of the public.

ROLES

Currently, the FSC regulates the securities, insurance, and private pension industries, but the BOJ will soon assume that role.

The FSC is charged with the responsibility to build confidence in the securities industry. Its authority comes from the Securities Act and the Financial Services Commission Act. It has authority to, or refuse to, license and register individuals and entities desiring to offer investment products and services to the public. It is also empowered to suspend or revoke licenses in cases in which licensees fail to meet regulatory requirements.

Other responsibilities of the FSC include ensuring that licensees meet capital adequacy requirements; testing the integrity, competence, and judgement of the officers and directors of securities firms consistent with ‘fit and proper’ criteria established by law; introducing measures to reduce fraud and money laundering in licensed institutions; and taking action to reduce manipulation of the securities market.

The primary role of the FSC in regard to insurance is to protect the interests of policyholders as regulator, supervisor, and watchdog of the insurance industry. It supervises the operations of brokers, agents, sales representatives, consultants, and loss adjusters.

The following are examples of what the FSC is empowered to do: grant, refuse, suspend, or cancel an insurance company’s licence; approve policies before they are offered to the public; verify the competence and integrity of shareholders with holdings of more than 10 per cent of the company’s shares, directors, managers, and other decision makers consistent with the ‘fit and proper’ requirements of the law; and satisfy itself that companies meet minimum capital requirements.

Under the Pensions (Superannuation Funds and Retirement Schemes) Act, individuals and companies desiring to function as a trustee, investment manager or administrator of an approved superannuation fund or a retirement scheme must be licensed or registered by the FSC. Individual trustees, corporate trustees, and responsible officers must be registered, and administrators and investment managers licensed, and are required to satisfy ‘fit and proper’ criteria. They must also be financially sound, among other requirements.

If satisfying ‘fit and proper’ criteria stands out, it is because it indicates that the licensees have the character, diligence, judgement, and reliability to perform their duties; have strong moral principles; can live up to their position of trust; and have the requisite experience and educational qualifications.

Regulation significantly reduces the risk of deposit-taking institutions, investment and insurance companies failing, as well as of retirement savings being lost, all of which happened in Jamaica in the 1990s. It makes it more feasible for people to save and borrow to acquire assets and realise other financial goals, to replace damaged or destroyed assets, to provide funds for the beneficiaries of individuals, and to provide income for those who have retired.

Significantly, effective regulation makes economies stronger, thereby creating employment and investment opportunities to generate income and improve financial well-being.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com