‘In a crisis, reason is often the first casualty’
IN ITS 2019 bulletin titled, Psychology of a Crisis, the US Department of Health and Human Services noted that “in a crisis, … people take in information, process information, and act on information differently than they would during noncrisis times”. The bulletin further advises authorities to apply the antidote of telling, “what you know, what you don’t know and what process you are using to get answers”. I identify with this approach.
Prior to my policy address on Monday I met with the FSC board of commissioners, the outgoing FSC executive rirector, and the FSC management. One of the many questions I sought an answer to was whether SSL was ever raised with me. In none of those meetings was there an indication that the answer was in the affirmative. This coincided, and coincides, with what I know.
Late in the evening after my policy address on Monday, a member of the FSC management called me to say that a member of her team told her that the FSC would have sent a copy of a report to my office, among a bundle of other reports, consequent upon an on-site examination of SSL in June 2019.
The next day, Tuesday, I asked my office to search and verify whether this was indeed the case. They did not find any such report. I personally returned to the cabinets myself, searched approximately five years worth of records and eventually found one report regarding SSL, dated June 25, 2019, which was packaged among other reports, sent by the FSC on April 3, 2020 and stamped “received” by my office on April 15, 2020. This was not a report prepared for me specifically. Rather, it was a copy of an existing FSC report that the FSC uses to do its job.
FOUND BREACHES
The report, which does not contain the regulatory history with respect to SSL that is now in the public domain, found breaches worthy of the recommendation that the FSC meet with the board of SSL to address liquidity issues at SSL and further recommended that SSL be “issued immediately with regulatory directions in order to have the issues resolved in a timely manner”.
What followed this June 2019 report is worthy of note: (i) the FSC board implemented the report’s recommendations and approved directions, which were issued to SSL on October 25, 2019, almost six months prior to my office receiving a copy of said report; (ii) the FSC board implemented directions that were more extensive than the directions recommended in the report in both scope and detail and; (iii) a later FSC status update confirmed that SSL was compliant or largely compliant with five of the six FSC board mandated directives by April 25, 2020, days after my office received the report.
I wish to make it clear, however, that the referenced report was never, ever, brought to my attention. Period. And I did not know of its existence prior to the referenced conversation on Monday night. The FSC has brought matters of concern, or that require my input, directly to my attention many times in the past. SSL was never among them. Neiterr the FSC executive director, nor the FSC board of commissioners, nor anyone at the FSC has ever raised SSL with me.
The FSC regulates approximately 368 active pension plans (and 815 pension plans in total), 26 pension administrators, 25 pension investment managers, 38 security dealers, 26 insurance brokers, 11 general insurance companies, six life insurance companies, among multiple other entities all of which are required to be examined annually and be sent to the minister within 90 days, given the definition of prescribed financial institutions under various orders dating back to 2005.
This language in the FSC Act about examinations and reporting is mandatory and unequivocal. Given the language, approximately 500 examinations need to be generated annually and be sent to the Minister! In this case, the law is as absurdly impractical as it is abundantly clear. For better for worse, to the best of my knowledge, and after making a few calls to verify, the FSC over its 22 years never quite operated in that way. This should be patently obvious. At least the logic would have been obvious pre-crisis, but in a crisis, reason and reasonableness are often suspended.
REASONABLE AND RATIONALE WAY
A reasonable and rationale way of allocating scarce regulatory resources is that the intensity of regulation is determined according to risk-based considerations. Such considerations include, among other things, the size of an institution, whether it is part of a financial group, the institution’s own risk profile, whether identified issues are being addressed, whether an institution has been subject to a recent on-site examination usually within the last five years, an assessment of risks common across the system and whether an institution is heavily exposed. A risk-based approach is a normal and internationally accepted supervisory approach.
Outside of a crisis, we see with eagle-eyed clarity that politicians’ or the minister’s meddling in prudential decision-making is a very dangerous and unwelcome over-reach inconsistent with international standards. In a crisis, however, reason and reasonableness can be postponed.
The FSC Act does not contemplate the minister’s involvement in supervisory decisions and activities. Rather the FSC Act contemplates the minister providing the FSC with policy guidance. Any specific action required by the minister would have to be in the context of either (a) a request for, or a determination of the need for, policy action or (b) a necessary coordinated supervisory response involving the central bank and the ministry in its policy role.
Operational independence of the regulator is the second of eight principles set by the International Organizations of Security Commissions (IOSCO), which the G20 and the Financial Stability Board have endorsed as the relevant standards in this area. IOSCO members, including the FSC, who are “A” signatories to its multilateral memorandum of understanding for cooperation, have to undergo a peer review process of assessment to assure that the jurisdiction is compliant in eight principles, the second of which is operational independence.
My office staff members also take a reasonable and rational approach to bringing matters to me that involve a consideration as to whether any matter has been specifically flagged for ministerial action or intervention. In the context of the FSC, this is consistent with Jamaica’s commitment to its operational independence.
Upcoming regulatory reforms must address some of the impracticalities and ambiguities highlighted above. Getting all of these done, within a “bounded timeframe”, will require reason and reasonableness.