FSC lost the plot
IF ITS aim was to calm investors’ anxieties over reported thefts from clients’ accounts at Stocks and Securities Ltd (SSL), and patch up its reputation as a worthy guardian of the securities sector, the Financial Services Commission (FSC), at its press conference on Wednesday, is likely to have accomplished the opposite.
The exercise was wholly unhelpful to investors, and the commission’s executive staff exuded evasiveness bordering on disrespect for the public they are to serve, or ignorance of the reasons for their existence. Which is to ensure that brokerage houses and other institutions regulated by the FSC operate in accordance with established rules, thus creating an environment in which investing and financial risk-taking are not akin to games of Russian roulette.
The risk that the FSC now runs – having been incompetent in assuaging people’s jitters over SSL – is that they may have worsened fears, which, if not corrected, could morph into contagion. In this regard, it is not surprising that Everton Mcfarlane, FSC’S executive director, has decided to jump ship.
It was clear from relatively early in Wednesday’s event that it was headed nowhere, except, perhaps, downhill.
In a preemptive move, Mr Mcfarlane declared Wednesday: “We are aware that there are a number of questions that are of public concern. Questions, for instance, relating to the FSC’S past actions. What we knew, when we knew it, what we did, but… our ability to answer certain questions at this point in time is constrained.”
Yet, these are precisely the kinds of questions the FSC needed to answer if it intended to calm investors’ concerns, especially in the face of the current events, and revelations by this newspaper about the recent history of the company and its involvement therein.
SSL’S SOLVENCY
That SSL is privately held means its balance sheet is not readily available. But a cursory comparison against other players in the securities market does not, on the face of it, paint SSL among the biggest operators, which deepened the disquiet over this week’s revelation that J$3 billion may have been stolen from clients’ accounts. The potential size of the exposure, notwithstanding that some of them were off-balance sheet transactions, raised questions about SSL’S solvency, and whether the company would have the assets and/or liquidity to satisfy withdrawal demands if fear turned to something worse.
The FSC, with its ham-fisted press conference, only heightened these concerns – and of its capacity as a regulator.
At least during 2016 and 2017, as this newspaper has reported, the FSC was deeply exercised over SSL, worried about management/operations and financial health.
According to a 2017 FSC internal document, SSL had years old history of regulatory breaches, faltering capital adequacy and, apparently foreshadowing today’s problem, poor internal oversight.
Contract notes were poorly written up; there were connected party loans; and despite Fsc-mandated restructuring, the problems persisted – at least into 2017.
None of the issues, however, is likely to have been as worrisome as the state of the company’s finances. As at June 2016, the group’s accumulated deficit was approximately J$1.5 billion, causing its auditors to warn, said the FSC document, of the “existence of a material uncertainty that may cast doubt on the group’s and company’s ability to continue as going concerns”.
The FSC shied away on Wednesday from revealing if SSL actually fell into bankruptcy; whether the deficiency identified by the auditors was rectified by equity injections, including from Zachary Harding’s Hyperion Equity Inc, which took a stake in SSL in 2019. The value of that arrangement was not publicly announced, and the deal came three years after the auditors’ qualification of the SSL accounts.
What the FSC and SSL do in the interim to ensure that SSL emerge financially sound are important questions for the commission to answer, in light of the current situation.
FRANK DISCOURSE
Frank discourse does better at building confidence, rather than hiding behind tinsel ramparts of privacy.
What the FSC did was elevate concerns and questions of whether a regulatory fudge and lax oversight helped to feed a spectre that still haunts SSL. Or, perhaps the commission was so skilled in its management of the affair that everyone else is failing to see the silver lining. Too much, maybe, is being made of an exposure of J$3 billion – or more.
The executive staff of the FSC, and the commissioners themselves, should be reminded that Sections 6 and 8 of the Financial Services Commission Act give them significant authority over the institutions they supervise.
That they have this power is not merely for form. Its aim, as the preamble to Section 6 of the act makes clear, is “for the purpose of protecting customers of financial services”.
What ought to be the FSC’S lessons from this affair: the value of robust, unsentimental regulation – and ensuring that internal oversight mechanisms are not only in place, but that they work.
The FSC must embark on a course correction – quickly reset its discourse on SSL, as well as do more to assure the public that it is a competent regulator.