An attorney-at-law who was connected to the commission of inquiry into the failed CL Financial and its affiliated companies has said that the complexity and structure of financial services giant, the Sagicor Group, present “so much possibilities which can go wrong”.
Similar concerns were raised by the International Monetary Fund (IMF)in a recent explosive report on supervision of the Sagicor conglomerate by the Financial Services Commission (FSC).
The IMF warned in the report that because the group is large and complex, “it is quite possible that emerging risks or potential vulnerabilities exist or have not been detected”.
The report exposed a number of shortcomings at the FSC and raised questions about its ability to regulate the Sagicor Group, while suggesting that “failure or near failure” of the company could be worse than the CLICO collapse.
“The group structure, business philosophy and operations are in many ways similar to those of CLICO Group, another Caribbean financial conglomerate which failed ten years ago, and resulted in substantial losses. Notwithstanding the acknowledgement of systemic relevance of the group
resulting from its size and interconnectedness, no formal college of supervisor exists, nor is the group subject to basic group-wide supervision,” the report said in its executive summary.
It said engagement in non-insurance activities, in particular the real estate investments, posed challenges for risk management oversight, while pointing out that “the complexity of the group could potentially mask significant risks, critical correlations, and assessment of contagion risk arising from the interconnectedness”.
Focusing on that particular segment of the report, the Trinidad-based counsel, who requested anonymity, said there were openings for things to go wrong.
“Well, essentially non-insurance activities would have been carried out either by a special purpose subsidiary company or companies in which Sagicor Inc would have had a controlling interest by way of shareholding. This company would not fall under the jurisdiction of the Financial Services Commission. Acquisitions of the real estate investments and non-insurance activities would not obviously be backed by statutory fund to protect policyholders as required by the FSC and the Financial Services Commission Act, Co-Operative Societies Act, Insurance Act etc.
“These acquisitions would not have been backed by any actuarial and risk assessment that would have been overseen by the FSC,” he said.
The candid 16-page IMF report, which came out of an October 9-13 mission here at the invitation of the FSC, raised strong concern that the regulator, which was established in 2011, was “equipped with very limited resources” and “struggles to discharge its mandate with respect to the insurance sector supervision”.
In this context, the attorney-at-law wondered whether the FSC had the legal teeth and the necessary resources to “adequately” conduct supervision and regulation of companies such as Sagicor.
“Questions ought to be asked [about] whether the FSC had the statutory backing to adequately supervise and regulate; whether it had the resources; whether the auditors were doing its job. Also whether the group was the auditor’s main/major client, which makes it difficult to independently regulate and or assess,” he said.
“Of crucial importance is how auditors, financial institutions, co-operative societies and FSC interpret the regulations in deciding the limit of investments; how to treat with group accounts; whether intercompany debts are realizable and can be properly considered assets; proper supervision of the statutory fund and limits on what can be pledged; and whether the auditor has a duty to the FSC or to the financial institution,” he further explained.
Based on this, the legal expert said, it was “completely crucial to regulate financial institutions to prevent systemic risks and eventual collapse of the financial market and also to promote investor confidence and protect policyholders and depositors”.
FSC Chairman Sir Frank Alleyne on Tuesday sought to discredit Barbados TODAY, which broke the story on Monday, by dismissing the report as “lies and damn lies”.
Sir Frank, who in April had admitted that the FSC was operating “on a shoe-string budget . . . [but] our medium-term goal, in another seven years or so, is to have a regulator which has attained financial independence”, also insisted on Tuesday at a hastily arranged news conference called to respond to the story, that the regulatory body was strong and proactive.
Barbados Investors and Policyholders Alliance (BIPA) chairperson June Fowler has also given the FSC a vote of confidence, saying yesterday that “right now BIPA doesn’t have a concern about the level of efficiency at the FSC”.