Cedric Stephens | FSC v SSL, a requiem for the regulator

Justice David Batts’ 40-page Supreme Court ruling on the matter between the Financial Services Commission (claimant) and Stocks and Securities Limited (1st defendant) and Caydion Campbell (2nd defendant) offers useful lessons about the regulation of financial entities in jurisdictions like Jamaica, risks, and insurance.

Does the claimant’s executive director’s June 4 public statement about the ruling demonstrate that he, members of commission’s executive, and the central bank folks who will assume responsibility for the prudential regulation of those entities that are now being supervised by the FSC, understand the implications of the ruling? They should.

Cited in the preface to Justice Batts’ ruling were the following lines from Orlando Patterson’s book, The Confounding Island: Jamaica and The Postcolonial Predicament: … it is one thing to know and learn the declarative knowledge of an institution but quite another to learn the procedural knowledge or know-how to practice it successfully. This seems to be the judge’s subtle way of throwing members of the FSC’s leadership under the bus!

The title and quotation sounded familiar. I have been reading the book for several weeks. It is about what the blurb describes as “the central dilemmas of the Jamaican example of globalisation, economic development, poverty reduction, and post-colonial politics”, Justice Batts’ decision to use those words in the introduction to his ruling, drove me to read pages 84 to 89 to gain a deep insight of the context in which Professor Patterson made his observations and to interpret the court ruling.

This column, whose history pre-dates that of the commission, has been a constant critic of the FSC and how it discharges its consumer protection functions, specifically as the insurance regulator.

Even though most of my training and work experience has been in the local, regional, and United Kingdom insurance industries, I was directly involved the start-up of firms in the local securities industry. I also managed a large pension fund. These activities are supervised by the FSC. I have served as a director of an insurance company, several intermediaries and other firms in the local financial services industry.

Additional information

One family member, I learned recently, has been an SSL client for years. I know the founder of SSL because of this connection, but do not have a business relation with him or SSL.

Usain Bolt is an SSL client. Some US$12.7 million was reportedly entrusted to SSL for investment via a company owned by Mr Bolt. Most of it is said to have been stolen.

A Financial Investigations Division December 2023 report noted that “more than 200 accounts at SSL were affected by fraudulent events exceeding US$30 million, or more than J$4.6 billion”.

SSL carried employee dishonesty insurance up to a limit of US$1 million. The identity of its insurer was not disclosed.

No information is publicly available about the factors that led to the selection of the US$1 million Employee Dishonesty limit, who made the decision to recommend or buy coverage that was limited to 0.005 per cent of the funds under management, or who expressed an independent opinion about its adequacy given SSL’s financial position and its system of internal controls.

The US Federal Deposit Insurance Corporation’s “Risk Management Manual of Examination Policies” offers for commercial banks in the United States the following information about some of the factors that may influence the selection of limits for buying employee dishonesty (or fidelity) insurance. Some of them may apply to entities in Jamaica’s securities industries:

Determining an adequate amount of fidelity insurance is a difficult task that cannot be based solely on one precise factor. It requires the use of management and (FDIC’s) examiner judgement. An entity’s level of risk exposure is influenced by many variables, only one of which is deposit size. Therefore, an overall assessment of the effectiveness of the internal operations must be considered. Other factors which may increase exposure and should be given consideration are the amount of cash and securities; the number of employees and their experience level; delegations of authority to employees; personnel turnover rates; the extent of trust, information technology, or off-balance sheet activities; and whether the institution is experiencing rapidly expanding operations.

Missing model

The Bank of Jamaica, BOJ, regulates local commercial banks. It should therefore be familiar with the risk transfer programmes of these institutions and the strategies they employ to safeguard thousands of customers and ultimately, the monetary system against a variety of risks including employee dishonesty.

In assessing the adequacy of SSL’s employee dishonesty insurance did FSC’s Securities Division consult its counterparts in the FSC’s Insurance Division, who supervise the insurance industry, or the BOJ, or the Cayman Islands Monetary Authority, or the Securities Commission of the Bahamas, or the Securities Division of Barbados’s Financial Services Commission, or the Trinidad & Tobago Securities Exchange Commission in order to satisfy itself that SSL’s US$1 million limit for employee dishonesty was appropriate especially given the enhanced level of supervision to which it was subject?

The FSC represents Jamaica on a body known as the International Association of insurance Supervisors. Was the advice of a few members of that body sought in assessing the employee dishonesty insurance limit of SSL?

Would the outcome have been different when news broke about the size of the fraudulent activities if SSL had employee dishonesty insurance coverage for up to US$30 million (or 15 per cent of the funds under management) placed with top tier insurers with international financial strength ratings?

SSL is one of two companies facing winding up, that I know about, due partly to inadequate levels of insurance coverage. In one case the company ceased operations.

Contrastingly, in another case, the company survived a claim for tens of millions of dollars due to the protection afforded by its insurance coverage with a limit of hundreds of millions of dollars. Some directors of the company had thought the limit was “over the top”. Today that company is thriving and has expanded its operations across the Caribbean. It has learned and applied procedural knowledge and know-how, successfully, for over five decades.

Mr Justice Batts’ indirect criticism of the FSC’s actions post-January 2023, has, in my opinion, strengthened the decision of the Minister of Finance and Public Service to narrow the commission’s mission and place its remaining functions under the direction of the central bank.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com.