Bank of Jamaica’s Supervisory Responsibility
for Deposit-Taking Institutions
Bank of Jamaica undertakes the supervision of deposit-taking institutions (DTIs) in Jamaica, as required by Section 34A of the Bank of Jamaica Act. The supervised population comprises deposit-taking institutions licensed under the Banking Services Act, that is:
- Commercial banks
- Merchant banks
- Building societies
The Banking Services Act and related regulations provide a standardised legal framework for the operations of the licensed deposit-taking intermediaries and provide the statutory principles on which supervision is conducted. The legal framework is further complemented by supervisory notes and Standards of Best Practice issued by Bank of Jamaica to ensure that licensees are not only aware of the risks inherent in banking activities, but that these risks are managed prudently and in accordance with their fiduciary responsibilities to depositors.
Additionally, credit unions have been designated by the Minister of Finance as ‘specified financial institutions’ under the Bank of Jamaica Act, as a preliminary step towards placing these institutions under the supervisory oversight of the Bank of Jamaica. This specification currently enables the Central Bank to obtain information on their operations. Legislations to establish a formal supervisory framework for these entities have been drafted and been the subject of extensive discussions with sector representatives. The draft regulations, once amended to reflect the current agreements arising from discussions with the sector, are expected to be presented by the Minister of Finance to Parliament.
Bank of Jamaica’s supervisory responsibilities for DTIs are discharged through the Financial Institutions Supervisory Division (FISD) of the Bank. The principal aims of supervision are to promote the safety and soundness of banks and banking groups, as well as the stability of the financial system. The supervisory methodology combines risk-focussed on-site examinations of each licensee with on-going off-site monitoring facilitated primarily by prudential reporting requirements. Feedback from on and off-site assessments is provided by the Bank of Jamaica to licensees’ management and Boards through a composite of formal meetings, official correspondence and written reports on examination findings, highlighting issues of concern and requiring remedial actions within specified time frames, as necessary. Where there is evidence of ‘unsafe and unsound’ practices, the Bank of Jamaica utilises sanction measures as provided for under the governing legislation.
Underpinning the entire supervisory process is a constant review of the legal and policy framework, as well as supervisory practice to ensure that these remain relevant as financial markets evolve domestically and internationally.
The Banking Services Act (BSA) passed in June 2014, became effective 30 September 2015. This Act repealed and replaced the former Banking Act, Financial Institutions Act and Bank of Jamaica (Building Societies) Regulations which governed the regulation and supervision of deposit-taking institutions (DTIs). Further, at the core of the BSA is a framework that will allow for increased compliance with international supervisory principles embodied in the Basel Committee on Banking Supervision’s Core Principles for Effective Banking Supervision (BCPs).
Significant enhanced provisions incorporated in the BSA include: –
Supervisory Autonomy – Under the BSA, certain critical supervisory functions have been transferred from the Minister of Finance to the Supervisor and the Supervisory Committee. The Supervisory Committee, as prescribed, consists of five (5) persons: three ex-officio members and two independent persons appointed by the Governor-General, on advice of the Minister of Finance. The Supervisor, (the Governor of the Bank of Jamaica who is the designated “Supervisor of Banks”) is the Chairman of the Supervisory Committee and is responsible for implementing the determinations of the Committee.
Among the specific supervisory powers of the Supervisory Committee, are determinations on:
- Issue and revocation of licenses;
- Fitness and probity of directors, officers, key employees and substantial shareholders of licensees (i.e. deposit-taking entities and Financial Holding Companies);
- Exemptions from statutory exposure limits;
- Matters relating to the establishment of branch operations (and representative offices), group structure, changes in ownership, amalgamations, mergers and acquisitions;
- Variation of prudential capital adequacy requirements;
- Authorisation of information sharing arrangements with other Regulators;
- Enforcement measures as prescribed under the BSA;
- Making of regulations for the operation of licensees;
- Investigatory action related to breaches of the Act and related regulations;
- Objection to the appointment and the removal of external auditors; and
- Issue of standards of sound practices for licensees.
Complementary to increased supervisory autonomy, are provisions which:
- Strengthen the governance and accountability structure of the Supervisory Authority;
- Prescribe the establishment of an independent Supervisory Appeals Board to hear appeals arising from supervisory determinations in relation to fit and proper assessments and external auditors’ appointments among other matters;
- Codify timelines for supervisory determinations in relation to new businesses or products, new delivery channels for existing businesses or products, strategic alliances, joint ventures and co-branding initiatives; and
- Empower the Supervisory Authority to set binding prudential rules to promote the stability of the financial system. These include rules related to licensee’s risk management framework, problem assets and provisioning requirements, liquidity requirements, valuation requirements and corporate governance functions.
Consolidated Supervision Framework – The existing consolidated supervision framework is enhanced under the BSA through requiring the establishment of a Financial Holding Company (FHC) for each financial group to which a DTI belongs. The FHC, which is required to be licensed and supervised by the Bank of Jamaica, will be responsible for, among other things, ensuring that the financial group is adequately capitalised on a consolidated basis and subject to effective governance and risk management. The FHC’s responsibilities will also involve ensuring that group members comply with regulatory requirements applicable under the BSA or any other legislation (or regulatory regime) governing their operations. Consequently, there will be a greater need for consultation between the Bank of Jamaica and other regulators, such as the Financial Services Commission (FSC) and provisions to facilitate such collaboration are codified in the BSA.
Strengthening the Corrective and Sanctioning Framework – The BSA outlines binding enforcement measures that will ensure that the Supervisory Authority has at its disposal, an adequate range of supervisory tools to bring about timely corrective actions by licensed DTIs and FHCs. The Supervisory tools, provided include:
- Issuance of warnings;
- Issuance of cease and desist orders;
- Requiring Board Undertakings;
- Directions to refrain from, or prevent, a particular course of action by a licensee;
- Imposition of limitations, including those on the granting of credit, making of investments or distribution of dividends;
- Limitations on acceptance or solicitation of deposits; and
- Requiring the removal of any director or manager.
Significantly, the Supervisory Authority is also specifically empowered to utilise early intervention measures, where a licensee falls below, or is approaching the minimum capital ratio. In this regard, where a licensee’s capital falls to one percentage point above any established minimum, the Supervisor will:
- Issue warning notices for capital restoration within a specified timeline; and/or
- Require a Board Undertaking for corrective action to restore capital levels through requisite capital injection or other corrective action deemed appropriate by the Supervisor.
Notwithstanding, the BSA does not prevent the Supervisor from taking any of the outlined actions where capital is falling but remains above the minimum levels stipulated. Further, where a licensee’s capital falls by fifty per centum (50%) below any prescribed minimum capital level, powers of temporary management will be invoked. Sanctioning power also extends to the FHC and may include the requirement to undertake resolution strategies involving the disposal of any entity within the financial group that is the cause of the capital deficiency or undue risk to the licensee.
Enforceable Code of Conduct – The BSA provides for the issuance of a Code of Conduct addressing deposit-taking licensees’ dealings with their customers. The Code covers a subset of customer related issues and is expected to complement consumer protection for users of banking services, available under substantive consumer protection mechanisms/agencies. Under the Code, specific obligations of DTIs to their customers include the following:
- Obligations to provide customers with reasonable notice of changes in fees and charges, interest rates and terms and conditions;
- Customer access to personal information at reasonable cost;
- Clear expression and standardisation for disclosure of effective annual interest rates across the banking services industry;
- Simplification and clear use of language in customer contracts;
- The establishment of effective mechanisms to address, report and record customer complaints and the communication of the existence of these mechanisms to clients; and
- Reporting of information to the Central Bank for administration of the established code of conduct.
The BSA also empowers the Supervisory Authority to obtain information necessary to establish whether the Code has been breached and, in those circumstances, to impose administrative sanctions for non-compliance with the Code. The Bank of Jamaica also has the express power to publish statistics on customer complaints, and licensees’ fees and charges.
Counterparty Exposure Limits – The framework for the containment of risks within the context of licensee’s capital resources has been strengthened through enhanced requirements, at the FHC and deposit-taking institution level, on incurring counterparty exposures. Specifically, the Act includes:
- Expansion of the definition of “counterparty group” to ensure that any connection and association that ties the fortunes of a group of counterparties will be accurately reflected within the computation of the single counterparty exposure. This includes, in part, cross guarantees, common collateral, common ownership, partnerships or joint ventures and the ability to exercise direct or indirect control over the same persons.
- Revision of large exposure limits, which are established in relation to credit facilities, to incorporate all ‘counterparty exposures’. In that regard, the term ‘counterparty exposure’ includes all direct and indirect credit exposures, commitments, contingent liabilities, investments (debt and equity) and other holdings of debt or equity securities, reverse repurchase transactions and derivatives;
- Standardisation of counterparty exposure limits for all DTIs and the application of these limits on a consolidated basis.
Agent Banking – The BSA provides for the extension of permissible banking services through agents who meet the requirements for authorisation and are approved by the Supervisory Committee. This provision allows customers of deposit-taking licensees to conduct certain banking services through a non-deposit-taking third party. Permissible activities in which agents may be used include deposits and withdrawals, loan repayments, bill payments, account balance inquiries and collection of know-your-customer (KYC) and customer due diligence (CDD) information. The Supervisory Authority (through the Supervisor or the Supervisory Committee) is empowered to:
- Prescribe operational thresholds, limits or other restrictions in relation to the services offered through an agent;
- Examine the books, documents, records, statements and other relevant information of an agent; and
- Revoke an approval given to a particular agent. These agency arrangements are expected to widen access to financial services and promote financial inclusion.
Developments in Progress
- AML/CFT Supervision Enhancement – Examination procedures are being revised in line with currently accepted standards and best practices promoted both under the BCP and the Financial Action Task Force (FATF)5 which point to risk-based approaches.
- Liquidity Risk Supervision – The Standard of Sound Business Practices (SSBP) for Liquidity Risk Management is being comprehensively revised along with examination procedures to support the effective supervision of liquidity risk of licensees.
- Implementation of the Basel III Framework – Phase 1 will focus on the consultation and implementation of Pillar 1 components of the Basel Framework and revised definition of regulatory capital. On 28 December 2020, the Bank issued a Consultation Paper on the implementation of the Basel III Capital Adequacy Framework and is now awaiting comments on the proposal. The other two phases will focus on the consultation and implementation of Pillar 2 and Pillar 3 components of the Basel Framework.
- Operationalization of the BSA – The implementation of the Bank’s Consolidated Supervision framework has commenced with the ongoing monitoring and supervision of a pilot financial group collaborating with the Financial Services Commission through a joint technical working group. This process will inform the finalized implementation plan of the risk-based supervisory methodology.
5FATF is an inter-governmental body established in 1989 with objectives of setting standards and promoting effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF currently comprises 34 member jurisdictions and 2 regional organisations, representing most major financial centres across the globe.