THE ISSUE: Regulation the way forward
The CLICO saga has moved into another phase in the region.
The government of Trinidad and Tobago’s payout plan is well advanced while the judicial manager for Barbados and the Eastern Caribbean has put forward several suggestions to the governments of those countries.
While these steps toward finding a solution will bring relief to many individuals and families throughout the region, there will be a lingering concern about what has been done to prevent a similar situation in the future.
In order to avoid a repeat of the debacle, regional authorities must first take stock of the reasons for the failure and then put the requisite regulations in place.
Governor of the Central Bank of Trinidad and Tobago Ewart Williams, identified three main reasons for CLICO’s financial difficulties.
• Excessive related-party transactions which carry significant contagion risks.
• An aggressive high interest rate resource mobilization strategy to finance an equally high risk investments, much of which are in illiquid assets including real estate both in Trinidad and Tobago and abroad and
• A very high leveraging of the group’s assets, which constrains the potential amount of cash that could be raised from the asset sales.
Williams noted that in the Central Bank’s regular monitoring of CLICO Investment Bank Ltd and CLICO since 2004, the bank had consistently focused on these deficiencies but had been stymied by the inevitable challenge of change and by inadequacies in the legislative framework which did not give the bank the authority to demand these changes.
“The Central Bank is very conscious of the contagion risks that financial difficulties in an institution as vast as the CL Financial Group could have on the entire financial system of Trinidad and Tobago and indeed in the entire Caribbean region,” he said.
In an article on his website, Jamaican economist Norman Girvan suggested that “one lesson of the CLICO debacle, therefore, is that governments need to equip themselves in a timely manner with the necessary legal tools and supervisory instruments to effect adequate regulation of financial entities in the public interest, and not seek to close the gate after the horse has bolted”.
“In the CLICO case, it is clear that the authorities cannot claim that ‘we did not know’. Hence no entity, no matter how large its weight in the economy, can be safely regarded as being above proper oversight and regulation.
“Indeed the larger it is, the more important adequate regulation becomes and the greater the consequences of its absence,” he said.
Girvan also highlighted the need to finalize and adopt the CARICOM Financial Services Agreement as a matter of urgency.
He noted that by this means, financial entities would not be able escape regulations in one regional jurisdiction by exploiting legal loopholes in another.
“A seamless regulatory environment for investment and financial services across the regional space will strengthen the effectiveness of regulations aimed at averting another CLICO debacle, and heighten the attractiveness of the region as an investment destination by reducing the transactions costs of doing business in several regional countries,” he stated.
Addressing the 31st annual Caribbean Insurance Conference earlier this year Trinidad and Tobago’s Minister of Finance Winston Dookeran noted that Trinidad had responded to the situation by “looking very carefully” at strengthening the regulatory infrastructure of the financial sector and revamping the Securities Bill.
Also on the agenda were amendments to the Insurance Act and the creation of an act to bring credit unions under the regulatory oversight of the Central Bank.
“In a sense and in a regional context, we are attempting to do three things.
“Firstly, to ensure we champion the initiatives of strengthening cross-border supervision and regulation. For some time now, in spite of collaboration with regulatory bodies, there has been the feeling that information sharing is not adequate and that in terms of the new market dynamics, there is a need for deepening that process. And we will champion that because we are indeed in a world in which borders are no longer defined by national boundaries,” he said.
Secondly, the minister said there was a need to develop “some sort of protection scheme that will only benefit policyholders in the future”.
“The main objective is to ensure that the framework provides the conditions and incentives for the soundness on one hand and on the other hand provides the opportunity for investment and commercial activity to take place,” Dookeran said.
He added that: “Thirdly . . . given the situation globally, and given our own lapse in the regulatory system in Trinidad and Tobago, an independent risk committee will be established to monitor key risks to the financial sector with the view of preventing similar failures and to ensure that systemic risks contained”.
Dookeran noted that Trinidad and Tobago had succeeded in putting its financial situation in order.
“While I do not underestimate the emergence of new risks in an exposed economy, I feel certain that we can find the appropriate response to protect the commercial and regulatory aspects of the insurance industry,” he said.
The extent to which other countries and the Caribbean as a whole can put these or other appropriate regulations in place will be key in preventing similar fall-outs in the future.