Financial holdings are facing new changes

THe The Bank of Jamaica (BOJ) is set to begin consultations next year with financial holding companies (FHCs) to develop a new set of policies to guide their treatment of their subsidiaries.

The rules, which are “fairly new”, have become necessary since the central bank began licensing FHCs in 2021 under new laws passed in 2019 that require any financial group with a depository institution, i.e. a commercial bank , a building society or commercial enterprise bank, reorganize for consolidated supervision to ensure that subsidiaries, which are not normally regulated by the Bank of Japan, do not pose risks that could destabilize the group or, worse, pose a risk of contamination.

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 a seventh bank expected to receive such a license by the end of the year. According to answers provided by the central bank Jamaican columnist. Barita Financial Group Limited is the latest company to apply for an FHC license as it was submitted 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.

However, despite issuing FHC licenses, the Bank of Japan has yet to fully define some of the rules that will govern how these entities should operate.

“The Bank of Japan is in the process of developing capital and liquidity requirements for FHC. In addition, tightening the rules that will apply to intra-group transactions is currently being considered. This scope of work is still in its infancy as timelines for completion and implementation have not yet been established,” the Financial Institutions Supervision Division of the Bank of Jamaica said in an emailed statement. Sunday Finance.

It is part of sweeping changes the central bank is making as it seeks to “protect savers, pensioners and investors”, it said as it put into place a framework under which it will oversee the FHC.

One of the key developments is the update of the Standard of Good Practice in Fitness and Integrity. This revised guidance provides a framework for assessing the suitability and integrity of individuals holding senior management positions in financial institutions, ensuring that they have the necessary skills, integrity and reputation.

In addition, the Bank of Japan has issued a Standard for Sound Cyber ​​Risk Management Practices. This new guidance aims to strengthen cybersecurity measures at financial institutions, protect sensitive data and mitigate potential risks.

The Bank of Japan is also moving ahead with the implementation of Basel III requirements. This global regulatory framework aims to improve capital adequacy, risk management and liquidity. As part of these efforts, the Bank of Japan is reviewing existing capital rules to align them with the Standard of Sound Practices on Minimum Capital Requirements.

The revised Capital Regulations will ensure that financial institutions maintain sufficient capital to cover potential risks. The Standard of Prudent Practice for Minimum Capital Requirements is available on the Bank of Japan website to ensure transparency and accessibility for stakeholders.

However, the changes don’t stop there.

In May 2023, the Bank of Japan shared guidelines with the FHC entitled “Corporate Governance: Board of Directors Oversight”, which are a set of rules on how these institutions should manage their affairs, ensuring that they follow the Banking Services Law of 2014 and other relevant laws. The main goal is to promote good governance practices, such as the independence of the boards of directors of financial institutions, to prevent undue influence. This means that each board must make decisions without being subject to the control of others. Good corporate governance provides a structure for achieving company goals and monitoring results, ensuring that the board of directors and management work in the best interests of the company.

“(The) guidance further states that boards of directors should include sufficient knowledge of the risks inherent in banking activities (such as credit risks, market risks, liquidity risks, operational risks and business model risks), as well as the mechanisms to effectively manage these risks. This is to ensure that directors have a good understanding of relevant issues and challenge senior management when necessary,” the Bank of Japan said. Sunday Finance.

Additional changes must also be made to the composition of the boards of directors of these financial institutions. Currently, the Banking Act requires banks and FHCs to have at least one-third independent directors. However, the Bank of Jamaica recommends that most independent directors have experience in the banking industry to ensure effective governance. This is consistent with international regulatory standards and highlights the importance of independent oversight.

To protect the interests of depositors, bank boards of directors must put the welfare of the bank above related parties and prevent conflicts of interest. Significant cross-direction that jeopardizes the health of the bank is not permitted. In addition, the law prohibits individuals from holding dual or multiple positions in a financial group that create conflicts, or from simultaneously holding the positions of chairman and CEO of a bank or FHC, except for branches of foreign banks.

The Bank of Jamaica is seeking to update legislation to require a majority of independent directors on boards of directors, ensuring operational independence and protecting the interests of depositors. This guidance is based on the law, specifically Section 33(d) of the Banking Act, which requires licensees to prevent conflicts of interest unless approved by a supervisor in emergency circumstances.

The Bank of Japan is now preparing to become a super-regulator of the financial sector through a “Twin Peaks” model over the next two years and introduce a special resolution regime (SRR), which is intended to create a mechanism for the orderly resolution of troubled regulated entities. . The proposed size of the SRR fund is $40.1 billion, which would be funded by contributions from regulated entities over 10 to 15 years. The moves to strengthen oversight and protections for financial conglomerates come nearly three years after the International Monetary Fund (IMF) said stricter supervision was needed in the sector.

“The financial sector is dominated by complex financial conglomerates operating in multiple jurisdictions. Some large groups are headquartered in jurisdictions with varying supervisory practices, and links between cross-border and financial subsectors are concentrated in a few organizations. Risks arise from concentrated ownership, related party and large group exposures, and off-balance sheet positions,” the IMF said during its Article IV consultation with Jamaica in November 2021.