Beware over-regulation
Published:Sunday | May 25, 2014 | 12:00 AM
ICAJ critical of banking reform bill
The Institute of Chartered Accountants of Jamaica (ICAJ) has pointed to anomalies in the bank reform bill, and raised concerns that appear critical of the drafters' accounting knowledge and apparent excess of regulatory zeal.
The group, in feedback to the joint committee reviewing the proposed Banking Services Act to fast-track its passage into law, contends that the accounting impact of the some of the proposals will contradict existing provisions in the Companies Act.
"A properly governed and stable financial sector is a requirement", but "excessive regulatory action can add to the cost and drive inefficiency of the institutions," said the scripted presentation of Rosemarie Heaven, executive director of the ICAJ.
"Some of the provisions seem to suggest a lack of understanding of current legislative provisions in place and the provision under accounting standards, which are effectively accepted through the provision in the Companies Act."
Heaven said a number of proposed actions of the supervisor of the banking system - a job and title to be assigned to the Bank of Jamaica - affect the commercial operations of the institutions, including where the central bank may issue directions to a licensee regarding control of risk within a financial group, and another where the Supervisor may require the sale, transfer or disposition of any other member of the financial group.
The ICAJ is also wary of the absence of time limits for supervisory response.
"In all but one of the interventions or prior submissions to be made to the Supervisor, no time limit is presented for a response. This affects commercial activities which could result in significant losses if response times are delayed," Heaven said.
A list of concerns with the banking bill laid out by ICAJ include:
● Section 49(1): Allows a financial institution to hold up to 100 per cent of its capital base in fixed assets, but is unwise as it would tie up 100 per cent of capital and leave nothing to respond to eventualities. If 100 per cent of the capital base is tied up, the operation would be funded by Tier 2 capital, which is not as stable as Tier 1, and depositors' liability. The limit in the old 1960s law was 40 per cent of capital base.
● Section 50: Fixed assets held at historical cost would breach IFRS, which allows property, plant and equipment to be carried at fair value. Because the financial institution is usually a public company, values become hidden when all assets are not carried at fair value and are not reflected in market prices.
● Section 64(2): The Supervisor is taking on the responsibility of valuators.
● Section 82(1)(b): The provision that interest on non-performing loans in arrears for 90 days or more should not be taken to the profit and loss account, does not consider whether the interest is recoverable through collateral and is inconsistent with IFRS which applies a recoverability test. Audit opinions of building societies have been qualified because of this inconsistency.
● Section 82(1)(c) and (d): The requirement that disclosures relating to non-performing loans are made on audited balance sheets would be cumbersome/impractical, and are better reflected in the notes to the accounts rather than the face of the balance sheet.
● Section 87 to Section 94: Will result in increased audit costs, which will add to business costs and may result in increased costs to consumers; and will increase the time taken to complete audits, which may result in longer time periods for information getting to the market, and in particular to the Jamaica Stock Exchange.
Discussions on the banking bill wrapped up last Thursday and revisions are to be finalised on Monday. Finance Minister Dr Peter Phillips says he aims to introduce the legislation in Parliament this week to meet the early June deadline for passage.