How to avoid FSC’s regulatory blunders
THE FINANCIAL Gleaner reported on Friday, January 26 that central bank governor Richard Byles told attendees at the Jamaica Stock Exchange’s (JSE) Investments and Capital Markets Conference that, ‘The BOJ will begin consultations with financial institutions in February to discuss consumer issues and, eventually, formulate standards.”
He was also reported as saying the institution “would also engage with members of the public”, but no timeline was given for that.
Deposit-taking financial institutions like banks, building societies, credit unions and non-deposit-taking entities like insurers, intermediaries, securities dealers, and others are parts of the services industry.
Service management practices, write Benjamin Schneider and David E. Bowen in their book Winning The Service Game, should be based on “a deep knowledge of customer characteristics in three areas: expectations, needs, and competencies”.
The BOJ’s proposed approach to “begin consultations with financial institutions in February” and “engage with members of the public” in the indefinite future seems ill-advised. It should begin with consumer consultations to determine their needs and expectations.
Will the proposed discussions with banks, insurance companies and other entities that hold billions of dollars in deposits and premiums on behalf of consumers before engaging consumers increase the public’s confidence and trust in the former institutions?
The Office of Utilities Regulation (OUR) understands the service game. My December 10, 2023 article, ‘Financial Service regulators must do better’, offers evidence that OUR’s regulatory doctrine places consumers at the centre of its regulatory action, not the utility providers.
The two newspaper reports of Mr. Byles’ address at the JSE event suggest that he is placing emphasis on the service providers and the BOJ’s work plan. Consumers are on the sidelines.
The January 28 Jamaica Observer report expressed optimism on the outcome of the consultations: “Consumers can breathe a sigh of relief as new regulations aimed at enhancing consumer protection are on the horizon.”
This is despite the inconsistencies between the BOJ’s proposed work plan and Mr. Byles’ statement that “the public has been crying out for more market conduct and consumer protection regulation, and we can’t (continue to) ignore it”.
Byles and the newspapers have missed the big picture! This matter is not about consumer issues or twin-peak regulation. The proposed changes to the island’s deposit-taking and non-deposit institution regulatory architecture were spurred by the Stocks and Securities Limited imbroglio.
Finance and Public Service Minister Dr. Nigel Clarke initiated the discussion about the proposed regulatory changes in the context of that mess. His goal was to engender trust in the financial system.
Excerpts from an Inter-American Development Bank (IDB) study, Trust: The Key to Social Cohesion and Growth in Latin American and the Caribbean, the subject of one of my 2022 articles, are relevant. The IDB study observed that trust:
“Whether in others, in government, or firms, trust is lower in the Latin American and Caribbean region than anywhere else in the world.
Fell between 198 and1985 and 2016-2020 worldwide from 38 per cent to 26 per cent or 31.5 per cent. In the LAC region, trust fell during the same period from 22 per cent to 11 per cent or by 50 per cent.
Is the most pressing and yet least-discussed problem confronting Latin America and the Caribbean given that it is lower in the region than anywhere else in the world. The economic and political consequences of mistrust ripple through society. It suppresses growth and innovation. Investment, entrepreneurship and employment all flourish when firms and government, workers and employers, banks and borrowers, and consumers and producers trust one another.
Inside private and public sector organisations is essential for collaboration and innovation.”
The creation of trust in financial and other institutions is hard work. In August 2014, the IDB’s Access to Insurance Initiative and the Multilateral Investment Fund conducted a diagnostic study of the local insurance environment. It offered recommendations under three broad headings, namely 1) supervisory and regulatory, 2) industry, and 3) consumer protection.
The specific recommendations that were made under groups two and three related to the promotion of trust in the industry and its products. Nearly 10 years later, none of the eight ideas that the IDB experts suggested to improve trust in the industry or enhance consumer protection was put into practice.
The Financial Service Commission, the non-deposit taking institution regulator, introduced market conduct guidelines for the insurance industry in February 2019. They were followed by the gazetted Insurance (Amendment) Regulations of December 31, 2022.
None of these efforts led to improvements in customer experiences or served to reduce the trust deficit.
Given this history, I am sceptical that the ‘Twin Peaks’ regulatory methodology, which is over three decades old, ‘will deliver comprehensive consumer protection and market conduct regime legislation for (the local) financial services industry.’
This is because the proposed regulatory process begins by focusing on service providers instead of on consumers.
It is also worrying that, according to the Jamaica Observer, the Central Bank and the FSC, in addition to downplaying the input of local consumers, appear to be overlooking the value of inputs from local institutions like the OUR, Consumer Affairs Commission, The Jamaica Social Investment Fund, and the country’s major hotel brands, as they begin the regulatory process.
Persons in these organisations, unlike the BOJ technocrats, understand local culture and the service game. Exclusive reliance on experts from overseas entities like The World Bank and The International Monetary Fund and from ‘several major financial sector regulators in countries that have already developed the twin peaks model of financial sector regulation’ will lead to a repeat of the FSC’s regulatory failures.
If you require assistance managing risks or solving insurance problems, Cedric E. Stephens offers free counsel and advice. To obtain information and counsel, please write to The Business Editor at business@gleanerjm.com or contact Mr Stephens directly at. Letters and emails will be edited for clarity and length.