Dr. Trevor A. Carmichael looks at the potential benefits of regulatory consolidation under the FSC.
Barbados’ very important international business and financial services sector will have a new regulator from mid-2010 – a much-anticipated Financial Services Commission. In addition to certain domestic institutions, its reach will extend to several international business entities engaged in non-banking business, hitherto regulated by a mix of individual agencies.
The New Regulatory Regime
Barbados’ law offers international investors a wide variety of legal entities through which to set up operations within the jurisdiction. At present, the jurisdiction uses an institutional model of financial services regulation and supervision with separate, specialist regulators for different types of financial services institutions1. The Ministry of Finance has overall responsibility for the financial sector, but direct regulation and supervision of entities carrying on financial services business is undertaken by:
In June 2010, the jurisdiction will undergo a partial unification of financial services regulation with the establishment of a Financial Services Commission (“FSC”). It is proposed that the FSC will consolidate the functions currently performed by the office of the Supervisor of Insurance, the Securities Commission, the International Business Unit and the Registrar of Co-operative Societies, thereby ensuring that regulation of the non-banking financial sector (both domestic and international) is no less strict than what obtains for banks. The Central Bank will retain regulatory oversight for the banking sector, working in collaboration with the FSC to police Barbados’ growing financial services industry, the second highest foreign exchange earner after tourism.
Under the new regime, a number of international business entities will be subject to the FSC’s authorisation, supervision, and enforcement powers, if they are engaged in non-banking financial services business. These include:
The New Imperative
A Financial Services Commission for Barbados was first suggested in 2006. International concerns about financial regulation amidst the global financial crisis, and closer to home, the collapse in early 2009 of a major Trinidad-based Caribbean conglomerate with important insurance subsidiaries in Barbados, have helped to give reinvigorated appeal to the case for consolidating regulation in an FSC. The liquidity problems and subsequent bailout of the CL Financial Group by the government and Central Bank of Trinidad and Tobago spurred interest in Barbados about the extensive insurance business of the parent company’s Barbados subsidiary, Clico Holdings Barbados, and its regulation by the office of the Supervisor of Insurance and the Ministry of Finance. This in turn highlighted concerns that the regulation of important non-banking institutions in Barbados may perhaps be less robust than the Central Bank’s regulation of the banking sector. Although these concerns were not justified, it is clear that concerns within the market – whether justified or unjustified – may undermine confidence; and maintaining confidence in the financial market is indeed an overriding objective of any financial services regulator. Fortunately for Barbados the events in the financial services market that underscored the need for regulatory reform were of a reasonably routine nature, unlike the financial meltdown which occurred in Jamaica in the mid-1990s, and which led to the establishment of a Financial Services Commission there in 2001.
Currently, few details of Barbados’ FSC legislation, apart from those already set out above, have been made public, as the draft Bill has not yet been circulated for comment. Commentators have welcomed the news of the FSC’s imminent establishment, pointing to the improved consistency and efficiency that should come with the centralisation of regulatory functions2. A consolidated FSC with increased powers should be better positioned to identify risk for individual financial institutions, and in conjunction with the Central Bank, should be able to identify a better picture of overall risk across the system than was previously the case.
Practice and Effectiveness
The FSC’s effectiveness will, however, depend on ensuring a mandate and structure adequate for effective regulation3. Currently, the financial services regulators pay close attention to the licensing/registration aspect of regulation and have been very effective in this gate-keeping function of denying rogue entities access to the market. However, it is in the areas of supervision and enforcement that some deficiencies are more likely. According to the International Monetary Fund (“IMF”) these weaknesses are largely due to gaps in the legislative teeth4, as well as human and financial resource constraints.
If the centralisation of regulation is to be the chief source of benefits to be derived from the FSC it could, paradoxically, also be the chief source of disadvantages. The range of institutions under the FSC’s supervision will be very diverse, and there is a risk, as a result of consolidation, of adopting a set of one-size-fits-all approaches. Each institution’s level of risk, and by extension, the required type and extent of regulation, will need to be assessed based on the nature of its particular and unique business.
In practice the new regulator must be capable, too, of responding rapidly to developing trends in the dynamic financial services sector. Developing adequate early warning and early intervention systems are important and will depend on effective disclosure, efficient monitoring, and timely reaction.
Fortuitously, a very promising development is the recent announcement that an internationally-accredited Institute of Financial Risk and Regulation is planned for the Barbados campus of the University of the West Indies. It will train financial professionals in the areas of anti-money laundering, financial regulation, corporate governance and risk management. This proposed development has the potential to dramatically improve the overall quality of financial services regulation and compliance in Barbados.
Implications for Advisors
What, then, are some of the current practical implications for Barbados’ professionals retained by the many offshore entities which will fall under the purview of the FSC by virtue of carrying on non-banking financial services business? Attorneys will need to manage the transition at the client level, so as to ensure that clients do not see the change to a new regulator as a necessary evil, but rather as a welcome reform. For by protecting against rogue entities and unwholesome practices, it will protect the market, and by extension, the interests of legitimate users of the jurisdiction.
Essentially, there are two classes of clients which attorneys and other advisors will need to consider:
Advisors to clients who will be affected by the change need to ‘represent’ their clients’ interests before the finalisation of the Act by ensuring that the shaping of the final FSC legislation takes into account any fundamental concerns which international investors have raised regarding the old regulatory framework, so as to determine to what extent, if possible, these concerns may be reformed in the new framework. Advisors and clients will no doubt give their input in the coming months, most likely through the Barbados International Business Association (BIBA), a private sector grouping of international business interests. However, law firms with the relevant professional responsibility will need to make necessary representations on the draft legislation. They are able to play a vital role in articulating how important commercial concerns can be translated into workable, legally sound legislative provisions.
At the risk of stating the obvious, attorneys will need to be fully conversant with the new regulatory requirements if they are to properly advise their clients and avoid professional negligence5. It is also a basic duty of attorneys, under Part IV of the Barbados Legal Profession Code of Ethics 1988, to act in the client’s best interest and offer competent and zealous representation. Being fully seised of the substantive law is certainly a prerequisite for competence. Under s. 90 (2), while a breach of this duty does not always constitute punishable professional conduct, it would be considered a “derogation from the high standards of conduct expected from an attorney-at-law” and. depending on the circumstances of the particular case, may indeed amount to punishable professional misconduct or be a material ingredient in such a dereliction of duty.
However, it is not merely the substantive new regulatory law with which attorneys must be concerned. There is also the important client care issue of providing clear and consistent communication on the new regime in the lead-up to, and following, the inauguration of the FSC. Some promotional work in this area will certainly be undertaken by Invest Barbados, the government agency engaged in attracting and sustaining international investment for Barbados. However, its laudable work should not be seen as a substitute for ‘personalised’ communication between law firms and their international clients. Providers of legal and advisory services will find it beneficial to develop clear, comprehensive, and user-friendly checklists of requirements, procedural steps and relevant timeframes for clients, so as to ensure that they are fully aware of the FSC’s licensing, registration, filing, reporting, inspection and investigation requirements for their type of non-banking financial entity. Highlighting significant departures from the previous requirements, particularly those which impose stricter responsibilities on clients, will enhance clarity and greatly assist in forward planning. Advising clients on processes for strengthening the work of their compliance departments/officers should also be an important consideration.
The establishment of the FSC is seen as a key component in dealing with the concerns surrounding the hazards of regulatory systems in a time of global financial crisis. While there are obvious benefits to be derived from the process, these shouldn’t be considered as automatic. It would be a missed opportunity if the birth of the FSC saw only an administrative restructuring of functions with no actual improvement of statutory powers and no implementation of more efficient enforcement. Equally, the other extreme of regulatory overkill is in no-one’s best interest. Given that there is a perceived wish to quickly introduce the process, it is unlikely that a gradualist approach, similar to the UK Financial Services Authority’s phased consolidation of regulatory powers between 1998 and 2005, will be used. The transition to an FSC will therefore have to be seamlessly managed so as to avoid uncertainty, excessive bureaucracy and undue delay – all of which would undermine Barbados’ hard-earned, sound reputation as a place where it is easy (and enjoyable) to do legitimate business.
1 s. 10(1)(d) Legal Profession Act CAP. 370A, Laws of Barbados.
2 ‘Focus on Barbados Budget 2009’ - Ernst & Young Caribbean, Christ Church Barbados, W. I.
3 p. 1 IMF Country Report No. 09/64: Barbados. International Monetary Fund, Washington, D.C. 2009
5 Legal Aspects of Financial Services Regulation and the concept of a Unified Regulator, Kenneth Kaoma Mwenda, 2006,The World Bank, Washington DC
Sir Trevor Carmichael QC
Sir Trevor Carmichael, KA,LVO,QC. was born in Barbados and educated at Harrison College and the University of the West Indies, Mona, Jamaica. After pursuing post graduate studies in the United States, he was called to the United Kingdom Bar as a member of the Middle Temple in London and the Barbados Bar in December of 1977. He is a member of the International Bar Association, the Inter-American Bar Association and a Committee Member of the Inter-American Bar Foundation as well as an associate member of the Canadian Bar Association. He holds membership in the International Tax Planning Association, the International Fiscal Association and was one of the parties responsible for establishing a Barbados Chapter of the International Fiscal Association of which he is Charter President. He is the Barbados Country Chairman of the International Litigation Committee on Business Law of the International Bar Association and a former Deputy Secretary General of the International Bar Association. He is a Life Fellow of the Institute for Advanced Legal Studies in the United Kingdom, a Life Member of the Commonwealth Magistrates and Judges Association and a member of the International Law Association.