2 weeks Ago
For the financial system to function effectively, people must feel confident that their money is safe. This is a primary reason why there are regulatory bodies, laws, codes of conduct, and penalties for breaches. Rules and structures, notwithstanding, much rests ultimately on the unquestioned integrity of the people at all levels of the system, including those who use it to meet their financial needs.
There are two major regulators. The Bank of Jamaica regulates deposit-taking institutions, such as the commercial banks, merchant banks and building societies. Credit unions are due to eventually fall fully under its regulatory powers, and its powers also extend to micro-lending institutions, remittance companies and cambios.
The Financial Services Commission regulates non-deposit-taking institutions which provide insurance, securities and pension services. Upon them rests the responsibility of ensuring that the financial institutions and the people who make the major decisions adhere to strong moral and ethical principles and values. The regulators are able to carry out their functions based on the authority vested in them by the Financial Services Commission Act, the Securities Act, the Pensions (Superannuation Funds, and Retirement Schemes) Act, the Insurance Act, and the Banking Act, and their regulations.
A significant measure of strong moral and ethical principles and values is the ability to satisfy the “fit and proper” criteria laid down in the law, which directors, senior managers and other decision-makers, shareholders with holdings of 10 per cent or more, and pension fund trustees must satisfy. The fit and proper assessment focusses on probity, that is, honesty, integrity and reputation; financial soundness; and competence – knowledge, skill and experience. Companies wanting to be licensed to do business in the various areas of finance must have among their most significant people individuals who satisfy these criteria, which speak to character.
Some of the fit and proper criteria required for registration are: not having been convicted of an offence involving dishonesty, not being an undischarged bankrupt, not having an employment history that gives cause to believe that acts involving impropriety in the handling of money had been carried out, and not having breached the law designed for the protection of the public against loss. The objective of these criteria is to discourage people not meeting them from attempting to enter, to encourage compliance with statutory and regulatory requirements, and to promote a high standard of corporate governance. Additionally, these criteria help the regulator or supervisor to form an opinion about whether the appointment of an individual to the board, employment, or ownership of a licensee could give rise to a conflict of interest.
Requiring a person to pass the fit and proper test will help to shut the door to undesirable people entering the system in positions that are vested with the authority to make significant decisions, but that cannot by itself stop undesirables from entering. Moreover, this exercise is not targeted at people outside of relatively senior positions, and even with strong recommendations and a view of an individual’s employment history, as is done for prospective employees generally, there is still the risk of hiring unsuitable people. Beyond that, even people with a seemingly impeccable history are not immune to falling to temptation, particularly in situations where an opportunity presents itself, perhaps due to lax supervision or poor internal controls.
We have seen the happenings at Stocks and Securities Limited, in which many investors lost very significant sums of money, but have not heard of other such issues elsewhere in the securities industry regulated by the same regulator – the Financial Services Commission. Even SSL, no doubt, had internal systems and regulations. Additionally, we learn from time to time of employees of commercial banks being brought before the courts for acts of dishonesty against clients or their employers.
In fairness, there are measures in place to nullify or reduce actions which give evidence of poor integrity. Companies are not allowed to mingle their funds with that of their clients. There are rules against insider trading in the securities market, there are rules regarding the trading and settling of transactions on the stock exchange, to kill likely improprieties relating to stock trading.
Mechanisms for determining the risk profiles of investors make it easier to tailor portfolios to their needs, thus reducing the risk of unsuitable securities being improperly foisted on them. The availability of status letters for life insurance policies, statements for investment accounts and bank balances, for example, help clients to keep their fingers on their financial affairs and thus deter financial services professionals who are low on moral character and honesty. It is not possible to legislate integrity, and people with an integrity deficit will get into the system, and, even with a system of internal controls, seem able to make breaches.
It is up to the regulators and the managers of the system to make it more daunting for such people to succeed, and for the users of the markets themselves to be alert and take keen interest in their own affairs, as well as avoiding misrepresentation and honouring their own obligations. Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning , offers personal financial planning advice and counsel.
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