21.01.15

Part 1-The Banking Services Act & The Anticipated Impact on The Financial Services Sector

Simone Bowie Jones
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Part 1-The Banking Services Act & The Anticipated Impact on The Financial Services Sector

The aim of the recently passed, but not yet in force, Banking Services Act (the "Act") is to aid in the creation of a more efficient banking system by seeking to bring the legislative regime in accordance with international standards and by consolidating the different pieces of legislation that govern entities within the financial services sector. The Act repeals the Banking Act and the Financial Institutions Act and amends sections of the Building Societies Act and the Bank of Jamaica Act. Members of the financial sector have for some time been waiting with wary anticipation for the passing of the Act, first known simply as the banking "omnibus legislation". Highlighted in this article are some of the changes that will be introduced by the Act.

The Administration of the Act & Transparency. The Banking Services Act, like the previous pieces of legislation governing the financial services sector, is administered by the Bank of Jamaica (the "BOJ") and the "Supervisor", that is, the Supervisor of Banks and Specified Financial Institutions appointed under the Bank of Jamaica Act. The Act introduces the "Supervisory Committee", which is to advise and make recommendations to the Supervisor on matters such as the grant and revocation of licenses; the determination as to whether a person is fit and proper; applications regarding corporate and group restructuring, new products and services; development and enforcement of the Code of Conduct; and change in the ownership of licensees.

The constitution and procedures of the Supervisory Committee are set out in the Second Schedule to the Act. Notably, two of the five members of the Supervisory Committee must be persons not employed to the BOJ and have experience and knowledge in banking business, commercial law, administration, finance or the regulation of financial services. Public officers, members of the House of Representatives or the Senate and persons with a proprietary interest in a licensee are not eligible for appointment. Measures such as this clearly evidence an intention to improve governance and transparency.

Boards & Management Committees. The Act requires all licensees to establish appropriate board and management committees to oversee key aspects of the operations, and establish due diligence processes (including background checks) for directors, officers and key employees. It also maintains the requirement that the officers advise the Supervisor on a proactive basis of any facts evidencing potential or actual challenges to the ability of a licensee to meet its obligations.

Every licensee must have a board of directors consisting of not less than five members, and not less than one-third of the board membership must be made up of independent directors.

The Act also stipulates that the board of directors is to be comprised of suitably qualified and competent directors that possess the knowledge and expertise required to have oversight of the operations, effective leadership and can ensure that the licensee operates in a prudent manner.

The Act specifically prohibits the chairman of the board from being an employee of the licensee. Further, the same person cannot be both chairman of the board and chief executive officer of a licensee at the same time. However, these restrictions do not however apply where the chairman of the board or board of management is established in relation to the branch operations in Jamaica of a foreign bank.

Every licensee is to ensure that: the policies of the licensee are updated at regular intervals; policies and procedures (including rules and procedures governing due diligence and promoting ethical and professional standards) are established and meet the standards required by applicable laws; appropriate and adequate record keeping systems are in place; a person does not undertake activities or hold dual or multiple roles within a financial group that may create an actual or potential conflict of interest except where approved by the Supervisor; and any transaction between a licensee and a connected person is at commercial arms length pricing and terms.

These provisions should result in better accountability and governance and allow the public to have a greater level of confidence that the institutions in which they deposit their hard-earned money, are being operated by qualified persons with a greater level of transparency.

Additional Reporting Requirements. The Act now incorporates an express obligation for licensees to immediately report to the Supervisor matters that could materially affect the financial viability or reputation of the licensee, as well as, fraud or criminal activity committed by or against the licensee. The licensee is also to advise the Supervisor of any emerging factors that may render a director, officer, substantial shareholder or key employee unfit to hold office or no longer fit and proper, as well as, of the resignation or dismissal of any such person and the reason for same.

Licensees must also give prior notice to the Supervisor of transactions involving the sale or purchase of loans for a price exceeding (individually or in aggregate) 5% of its capital base. They must also give notice of intent to appoint an external auditor and any major changes to existing operations.