I am responding to the points made by Central Bank Governor, Jwala Rambarran, in his 6 November speech to the T&T Coalition of Service Industries.
This speech attempted to both re-affirm the Central Bank’s important role in our economy –
…as the country‟s prime financial regulator, the Central Bank has an almost fifty year record of maintaining the safety and soundness of the financial system…
and to distinguish Rambarran’s tenure as Governor since July 2012 –
…These are just a few of the initiatives the Central Bank has been working on over the last fifteen months to rebuild confidence, strengthen financial stability and to help create our future financial system…
Rambarran’s focus was “…First, “How did it all happen?” and, second…“What is being done to prevent a similar event from happening again?…”
The first question was answered by a list of reasons which echoed those given by the Central Bank in January 2009 and the second question was answered by specifying five initiatives being taken.
I was pleased to note the five initiatives –
- Regulatory reform;
- hiring new supervisory staff;
- deepening the approach to supervision;
- Central Bank supervision to be extended to ‘Systemically Important Financial Institutions’ and
- the proposal for a Single Financial Regulatory Authority’.
That said, this still requires a critical response to cover these issues –
Too Big to Fail
This is at the heart of the CLF issue and although Rambarran identifies it as such, there was no solution offered. That is simply inadequate given the importance of this element in the CLF crisis. At the time of the collapse, about 55% of the insurance premiums paid in our country were to CLICO. That kind of over-concentration of risk is incompatible with sustainability and stability, which is why anti-trust laws to limit this are part of the regulations in advanced jurisdictions. At the very least, I think that the Central Bank should prepare outline anti-trust proposals for the financial sector and publish those for discussion.
Apart from that structural aspect of size and its consequences, there are real ‘soft’ issues of attitudes and ethics to be grappled with. Those may be labelled as soft issues, but dishonest attitudes from people in positions of trust can have consequences which are very hard indeed.
The absence of consequence is inimical to any true development – personal, corporate, national, or regionaI. When one considers the CL Financial failure and bailout, we are living with the collective consequences of the absence of individual consequence.
This series of welcome approaches to the regulation of the financial sector must include the picking of ‘low-hanging fruit‘. That is the only way to really tackle those soft issues of dishonest and harmful attitudes.
The challenge I am putting to the new Governor is to use the tools which are now in hand, together with the information already on the record to take decisive steps to change attitudes in our financial sector.
The key element in this approach would be for the Central Bank to use its powers under its Fit & Proper Guideline to disqualify offending persons from becoming Directors or Officers of Financial Institutions.
The ‘low-hanging fruit‘ in this approach are dangling in three bunches, just here.
- Firstly, the Inspector of Financial Institutions is the Central Bank’s chief regulator and his Circular Letter of 10 May 2011 to all Financial Institutions stresses that special care needs to be taken when considering people who have been “…employed or involved with a failed or failing financial institution…” What that tells me is that all the Directors of CL Financial and its failed subsidiaries, as identified in the MoU and the Terms of Reference of the Colman Commission, are eligible to be disqualified. In addition to the parent company, the other financial companies were CLICO, British American Insurance, Caribbean Money Market Brokers (CMMB) and CLICO Investment Bank (CIB). Even though those individuals are not currently Directors of financial institutions – Bhoe Tewarie is now a Senator, performing as our Minister of Planning & Sustainable Development and Faris Al Rawi is an opposition Senator, to cite two examples – the Central Bank will have acted after a prolonged and inexplicable period of inactivity.
- Secondly, the Securities & Exchange Commission (SEC) was recognised as having a critical role as the other main regulator of the financial sector, with several new laws being outlined. Rambarran also outlined the benefits of a single financial regulator and the need for comprehensive supervision. The SEC has published details of various contraventions by listed companies which have broken the Securities Industry Act, mostly in relation to their failure to publish audited accounts. In some of those cases, it is clear that the breaches identified in the Settlement Agreements are continuing, so the intended corrective effect is absent. As I wrote previously on this issue
…I was pleased to see the SEC taking this firm action…it is an important and necessary intervention. I am not at all sure what, if any, ongoing penalties are being applied. If there are no ongoing punishments or fines, this important regulator needs to take a tougher stand. It is simply not good enough in my view for the regulator to levy these fines and allow the companies to carry on with ‘business as usual‘. That would be like a dutiful policeman ticketing a motorist for smooth tires, no seatbelt and no headlights – issuing the ticket and then letting that motorist drive off. The SEC needs to consider heavy daily fines and banning orders against Directors of these companies in breach of the law, if such do not already exist…
In addition to the SEC taking a more active role in terms of these issues, the Central Bank also has the responsibility to properly exercise its duties under fit & proper so that these offending Directors can be disqualified. This kind of breach identified by the SEC is specified at 8.1.3 of the Fit & Proper Guideline
…8.1.3 Whether the person has been the subject of any adverse findings or any settlement in civil proceedings, particularly in connection with banking or other financial business, misconduct, or fraud;…
Can we take these new approaches from our Central Bank seriously if even the existing, admittedly inadequate, rules are not being enforced?
Finally, consider the CIB Tax Returns, as identified in the 16 April 2010 affidavit of Carl Hiralal, the Inspector of Financial Institutions. At para 23 he states
…With respect to the Creditors of the Petitioner, the Petitioner has met the statutory obligations for the Board of Inland Revenue (except for Corporation Tax Returns for 2007, 2008 and 2009 which are being prepared and remain outstanding)…
At the time of the collapse in January 2009, the Board of Directors of CLICO Investment Bank (CIB) comprised Mervyn Assam (Chairman), Amjad Ali, Anthony Rahael, Maria Thorne, Michael Callender and Faris Al Rawi. The failure to file Corporation Tax returns is an unlawful act and those laws are financial in nature, the declaration having been made under oath by the Central Bank’s chief regulator.
In closing, Rambarran named Home Mortgage Bank as one of five ‘Systemically Important Financial Institutions’ and my question is as to its ownership status. I can recall the furore over the State acquiring HMB’s shares from one of Andre Monteil’s companies, but yet it is still not shown on the Ministry of Finance list of State Enterprises.
Also, National Insurance Board is not state-owned, that is a common fallacy. The NIB is a tripartite, with the State owning a one-third share.
Finally, a good way to reduce the likelihood of another financial crisis is to create some effective channels for whistleblowers.
This Governor will have to take decisive actions to overcome the deep scepticism arising from his predecessor’s behaviour. That is a serious challenge.