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Regulation not a panacea to financial failure

Published:Friday | March 25, 2011 | 12:00 AM
Rohan Barnett, executive director of the FSC. - File Photos
Patrick Hylton, group managing director, National Commercial Bank of Jamaica.

No matter how closely monitored, regulations by themselves do not prevent the collapse of financial institutions, according to Rohan Barnett, who says alert investors potentially have more sway.

"Regulation is not a silver bullet," said Barnett, the executive director of the Financial Services Commission (FSC).

It might mitigate against failure, but "it can never eliminate the possibility of corporate reporting or governance failures," he said.

"Investors must recognise their power and exercise this power in contributing to the efficiency and strength of the financial system," said the financial regulator at an investor forum organised by his agency, which was founded after the financial sector's collapse in the mid-1990s and is marking a decade of operation this year.

The FSC regulates 32 securities firm in addition to insurance companies and pension funds.

At the end of December 2010, FSC data shows that the top 10 brokers manage some J$558 billion in funds under management, or 70 per cent of the estimated J$792 billion of total industry funds.

Since the financial sector meltdown, no other institution has failed, but Barnett was less than confident that the system was free of weak players.

"The nature of financial services is risk, and once there is risk there is something present that can affect your institution," he told the Financial Gleaner.

"There is always risk, always concern, so we investigate; and based on our investigation we take action," he said.

There have been hiccups in the system since the 2008 global crisis.

At the start of the crisis, local securities companies had to be supported by the Bank of Jamaica as a result of margin calls. Still, expectations that a US$950-million rescue fund would have been needed to shore up institutions after the Jamaican debt exchange plan was executed, proved to be overly pessimistic. The unused funds now form part of Jamaica's foreign reserves.

Still, interest income continues to falter as interest rates decline, eroding industry revenue and profit.

Patrick Hylton, group managing director of National Commercial Bank, whose bank has grown profit to new records despite falling interest income, said a healthy financial system requires responsive overseers.

"Responsiveness of regulators is critical in the role of prevention," said Hylton, who was also a presenter at the FSC forum.

With that, Hylton noted the need for collaboration among stake-holders while highlighting five areas for improvement: corporate governance reform, fiscal discipline and enhanced legal framework, capital market development, international standards and best practices, as well as improvement in financial regulation, an area which is now being worked on by the Government.