Are Regulators Killing the Financial Sector?

Let me open by remarking that in my discussions with many colleagues involved with various sectors of financial, investment and banking services I have found that there is 100 percent unanimity of wanting The Bahamas to be a well regulated jurisdiction.

It is believed that a well regulated industry will help considerably to sustain and attract business to The Bahamas.

Attracting new business in this current environment is extremely difficult and The Bahamas needs to be able to emphasize and demonstrate why it should still be considered a jurisdiction of choice.

Like the hotel industry (the number one industry of The Bahamas) the financial services industry is made up of large, medium and small players.

It is this diversity of operators that gives the public choices. This diversity should also be recognized as a positive strength.

By way of example, look at the potential employment and other mayhem that would have occurred had Atlantis closed its doors.

Similarly in the financial industry, there is and always has been the potential for the “big banks” to immediately withdraw from the jurisdiction.

This could be for a variety of reasons often beyond the direct control of The Bahamas – i.e., changes in business strategies and consolidation among the global players.

This is not just empty rhetoric it is evidenced by the reduction of bank licensees.

Another example of note is to acknowledge what has happened to the mutual fund administration segment of the financial services industry – from a thriving segment it too has essentially disappeared.

The Bahamas should not ignore these events and it needs to be fully alert to these potential dangers which would/could prove to be a death knell for the financial services industry as a whole.

In order to create a favorable environment it is important for the regulators to enhance the development of all sectors within the financial services industry and in particular recognize their size.

Such actions would considerably enhance the attraction of new players, clients, etc., which in turn will continue to broaden the base of the financial services industry.

Quite often one gets the impression that The Bahamas only wants to attract the big global players.

This might be an ideal goal but in reality, I do not consider it to be realistic especially as their numbers are shrinking.

Currently the regulators tend to be viewed as an impediment to business as opposed to being a benefit.

Recently the Securities Commission of The Bahamas circulated papers (some for discussion) others as guidelines to its licensees relative to compliance officers, capital requirements and increased annual fees.

The approach taken by the Securities Commission, and to some degree by the Central Bank, is to adopt policies and guidelines for the entire industry – i.e., a “one-size-fits-all” syndrome.

This situation is becoming more pronounced by the Securities Commission as it is tending to automatically include Financial and Corporate Service Providers (FCSP) licensees along with the investment sector participants – the FCSP licensees seem to be losing their individual identity (they have already lost their individual regulator).

In the cases of the “big” players the “one-size-fits-all” policies and guidelines are probably regarded as impediments, however they invariably have the adverse impact of increasing the cost of doing business.

Though, when it comes to the medium and small players such impediments become difficulties – serious difficulties which can and do divert potential business from this jurisdiction. I briefly expand on the recent bulletins received from the Securities Commission.

Compliance Officer – Guideline: This states that the person fulfilling this role has to be an independent person.

How can a business of maybe two or three persons be expected to have an employee with an independent role? Why cannot the CEO or COO be assigned to fulfill this role?

With smaller firms there does not tend to be sufficient business to occupy the full time of such executives and it would make viable and economic sense if one of them could also fulfill this role.

Does such a suggestion of amalgamating these functions increase the risk that an independent person would have?

Specifically, securities investment advisors have minimal risk, as they do not undertake banking or custodial roles thereby the risk is significantly reduced.

For the “big players” who have independent persons as compliance officers all of them have the right to raise non-compliance issues; however, it is invariably senior management who makes the ultimate decision on how to deal with all of the issues raised.

I do not think that allowing the dual role (similar to the smaller banks) undertaken by small firms will significantly increase the risk exposure.

Capital Requirements – Guideline: A recent change in the legislation has increased the required capital of a security investment advisor from $25,000 to $125,000.

What is the rationale behind a 400 percent increase? One can argue that $125,000 is still a relatively small capital requirement which if viewed in isolation is true but equally one can ask why?

What is this supposed to represent? This is considered an adverse move as pending applicants now have to find an additional $100,000, which may not be that easy.

In other words it creates a difficult environment, which faces the smaller operators (especially Bahamians) as well as the negative aspect of changing and/or evolving guidelines.

Furthermore, one has to query the relevance of this increase in capital.

For example, is it based on risk formula or is it just an arbitrary number? I would have hoped that the Securities Commission would have followed the Central Bank’s example of determining the overall risk of their licensees relative to their business segment.

If this modern risk-rating approach was undertaken then it may make more sense and be more appropriate to ensure the company had adequate professional indemnity insurance (PII).

In most cases the security investment advisor licensees have minimal risk as they do not undertake any banking functions and they are not the custodians of the assets.

Their real and only exposure would be erroneous trade executions. Once the risk is ascertained then the appropriate level of capital and/or professional indemnity insurance could be put in place.

The capital, however, should be allowed to accumulate via retained earnings and consideration could be given to a possible control over the dividend payments.

At this time, the guidelines indicate a new company can obtain professional indemnity insurance within the first 12 months of its operation.

However, in reality the Securities Commission will not issue the license until it has evidence that the PII is in place.

Law-Abiding Resident
The Bahamas
September, 2012