The The Bank of Jamaica (BOJ) is expected to begin consultations next year with financial holding companies (FHCs) with the aim of developing a new set of policies to guide their relationships with their subsidiaries.

These “relatively new” regulations have become necessary since the central bank began allowing FHCs in 2021, under new laws passed in 2019 that require any financial group with a depository institution, i.e. say a commercial bank, building society or trader. bank, to reorganize itself with a view to consolidated supervision in order to ensure that subsidiaries which are not normally regulated by the BOJ do not present risks that could destabilize the group, or worse, cause contagion risks.

So far, the BOJ has licensed six FHCs – NCB Financial Group, JN Financial Group, JMMB Financial Holdings, Sagicor Group Jamaica, VM Financial Group and Scotiabank Jamaica Group, with the expectation that a seventh will obtain such a license. here the end of the year. according to the responses provided by the central bank to Jamaica Observer. Barita Financial Group Limited is the latest entity seeking to become a licensed FHC, as was presented to the Supreme Court on October 15. It should be noted that an FHC is a company that owns or controls one or more financial institutions, such as banks, insurance companies, or securities firms.

Yet despite issuing the FHC licenses, the BOJ has yet to fully outline some of the regulations that will guide how these entities should operate.

“(The) BOJ is currently developing the capital and liquidity requirements for FHCs. Furthermore, a strengthening of the regulations which would apply to intra-group transactions is currently under study. This body of work is still in its embryonic stage as timelines for completion and implementation have not yet been set,” the Financial Institutions Supervision Division of the Bank of Jamaica said in an email addressed to the Bank of Jamaica. Sunday Finances.

This is part of radical changes the central bank is undertaking with the aim of “protecting depositors, retirees and investors”, it was highlighted as it operationalizes the framework within which it will supervise FHCs.

A key development is the update of the standard of sound practice in relation to fitness and probity. This revised guideline provides a framework for assessing the suitability and probity of individuals in senior management positions in financial institutions, ensuring that they possess the necessary skills, integrity and reputation.

Additionally, the BOJ issued a best practice standard for cyber risk management. This new guideline aims to strengthen cybersecurity measures in financial institutions, protecting sensitive data and mitigating potential risks.

The BOJ is also making progress in implementing Basel III requirements. This global regulatory framework focuses on improving capital adequacy, risk management and liquidity. As part of this effort, the BOJ is currently revising current capital regulations to align them with the best practice standard for minimum capital requirements.

The revised capital regulation will ensure that financial institutions maintain sufficient capital to cover potential risks. The Best Practice Standard on Minimum Capital Requirements document is available on the BOJ website, providing transparency and accessibility to stakeholders.

But the changes don’t stop there.

The BOJ shared guidelines titled Corporate Governance: Board Oversight in May 2023 with the FHCs, which are like a rulebook on how these institutions should manage their affairs, ensuring that they comply with the Corporate Governance Act. Banking Services Act, 2014 and other related laws. The main objective is to promote good governance practices, such as the independence of the boards of directors of financial institutions, in order to prevent undue influence. This means that each board must make decisions without being controlled by the others. Good corporate governance provides a structure for achieving the company’s objectives and monitoring its performance, ensuring that the board and management are working in the best interests of the company.

“(The) guidelines went into further detail specifying that boards of directors should have directors with sufficient knowledge of the risks inherent in the banking sector (such as credit risks, market risks, liquidity risks, operational risks and risks linked to the business model), as well as the mechanism to effectively manage these risks. This is to enable directors to have a good understanding of relevant issues and to challenge senior management where necessary,” the BOJ said. Sunday Finances.

Additional changes will also be made to the composition of the boards of directors of these financial institutions. Currently, the Banking Services Act requires banks and FHCs to have at least one-third independent directors. However, the Bank of Jamaica recommends a majority of independent directors with banking expertise to ensure effective governance. This is consistent with international regulatory standards, highlighting the importance of independent oversight.

To protect the interests of depositors, bank boards must prioritize the welfare of the bank before related parties and prevent conflicts of interest. Large cross-mandates that compromise the health of the bank are not permitted. In addition, the law prohibits individuals from holding dual or multiple positions within a financial group creating conflicts or from simultaneously serving as president and CEO of a bank or FHC, unless except branches of foreign banks.

The Bank of Jamaica aims to update legislation to require a majority of independent directors on boards, thereby ensuring operational independence and protecting the interests of depositors. These guidelines are based on law, particularly Section 33(d) of the Banking Services Act, which requires licensees to prevent conflicts of interest unless approved by the supervisor in extraordinary circumstances.

The BOJ is currently preparing to become the super regulator of the financial sector through the Twin Peaks model over the next two years and implement the Special Resolution Regime (SRR) which aims to create a mechanism for orderly resolution of regulated entities in difficulty. . The proposed size of the SRR fund is $40.1 billion, which is expected to be funded by contributions from regulated entities over a period of 10 to 15 years. The moves to strengthen oversight and protective measures for financial conglomerates come nearly three years after the International Monetary Fund (IMF) indicated that tighter oversight was needed in the sector.

“The financial sector is dominated by complex financial conglomerates that operate in multiple jurisdictions. The head offices of some large groups are based in jurisdictions that have different supervisory practices, and cross-border links and financial subsectors are concentrated in a few entities. Risks arise from concentration of ownership, exposures between related parties and large groups, and off-balance sheet positions,” the IMF said in its Article IV consultations with Jamaica in November 2021.