Thursday, April 25, 2024

NOTES FROM A NATIVE SON: Financial flaws

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TWO RATHER interesting events have taken place recently, which together expose the flaws in the Barbados financial regulatory system.
The first, and more important, was the so-called Oversight Committee’s reporting on the Clico fiasco and, in particular, the permanent secretary’s bold claim that he would not be influenced by fear or favour.
Clico embodies all that is wrong with financial regulation in Barbados, from the business models of the banks and insurance companies, to the investment polices and capital adequacy supervision.
Understandably, as the biggest locally owned financial services company, there was a certain sentimental attachment to Clico.
As a result, it was allowed to grow too big to fail, not only in the individual countries in which it operated, but as a group across the region.
One problem with being too big to fail is that, even if the details were not spelt out, all its policyholder and investor liabilities were in fact underwritten by taxpayers.
In other words, government either had to create an environment in which policyholders’ and investors’ money was at risk from the failed enterprise, with all its political ramifications, including being out of office for at least a decade, or protect the savings of ordinary voters.
But there was another way which would have been tough for the government, the regulators and certain powerful individuals.
As soon as Clico had encountered liquidity problems and was unable to resolve them within a set period, Government should have taken control of the day-to-day management of the firm, suspended all the directors and senior executives and banned them from being involved in any Barbados-domiciled financial services firms until the Clico business had been settled.
Long-term policyholders should have been reassured that their investments were guaranteed by the Government, while shareholders should have been reminded that investments could under or over-perform.
When there are profits they, as shareholders, are quite pleased to accept the dividends, so when there are losses they must take the hits.
The authorities should then have carried out a detailed forensic audit of the firm’s business, including internal pricing (the modus operandi used by most cross-border firms to shift funds), and all its assets and liabilities.
Non-core assets and businesses should have been auctioned off, with the core business continuing to functioning under the temporary management.
In the meantime, a judicial committee should have been appointed to carry out an investigation into the running of the firm, with a brief to pinpoint any suspected criminal activity, if any.
On the basis of the findings it would be decided if any criminal charges would be brought against the firm as a corporate body or any of its directors and senior executives.
If such an approach had been taken, there would have been no need for the Oversight Committee, led by a permanent secretary with no obvious expertise in financial regulation.
The simple answer is that the financial regulatory and supervisory system is chaotic and not fit for purpose.
But, if Barbadians want to believe they have one of the best systems in the world, then they are free to continue with such self-deception.
The other development was the decision by the Antigua government to appoint former prime minister Owen Arthur to carry out a review of that country’s financial services. permanent secretary with no obvious expertise in financial services
• hal.austin@ft.com

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