At the beginning of November, Michael D. Foot, C.B.E., joined The Central Bank of The Bahamas as a consultant with responsibility as the Inspector of Banks and Trust Companies.
Mr. Foot played an instrumental role in the creation of the United Kingdom’s Financial Services Authority (FSA) which was established in 1998, and served as one of the FSA’s three Managing Directors until just before he accepted the position with the Central Bank. The FSA is the regulatory body for all major banking, insurance, securities, asset management and personal investment firms operating in the UK as well as recognised Exchanges operating in the UK, including the operation of listing rules for listed companies.
With his background and Central Bank responsibilities – which include monitoring the activities of all licensees to ensure they comply with applicable regulatory laws, regulations, standards, policies and guidelines – Mr. Foot was asked to comment on a number of issues:
##Regulatory Regime Consolidation##
Most regulatory regimes in the world have reviewed their structure over the last few years and most have made changes. The "drivers" of that change are typically the need to:
* **respond to changes in the financial sector itself.** More and more financial groups are providing a range of financial products that cover banking, securities and insurance and this requires more co-operation among the different regulators.
* **be cost-effective.** There can be big economies of scale if regulators co-operate within a jurisdiction (for example, in co-ordinating examinations by the banking and securities supervisors, and in dealing with the ever-growing number of international committees and initiatives on regulation.)
* **be consistent between the sectors.** For example, in the US, the insurance industry has brought a lot of new credit risk in recent years from the banking sector, because the banking regulators have been tougher in their capital treatment of this risk than the insurance regulators. But it’s the same risk and it would be safer if it were treated similarly.
In some countries, of course, change has been very substantial and involved the creation of a whole new agency. I must stress, however, that there is no one model that works for every country – history and circumstances are different in every case. And, it’s also vital to remember that any organisational change is a huge undertaking that requires very careful planning and new legislation. For example, in the UK, it took four and a half years, even after the Government had announced what it wanted.
##Cross Border Regulatory Co-operation##
With even quite small financial groups operating in several different countries across the world and the increased threats of terrorism and money laundering to add to the traditional concerns over prudential stability, regulatory co-operation across borders has never been more important. The extent of co-operation is regularly put under the microscope by agencies such as the Financial Action Task Force (FATF).
The legislative and regulatory regime in The Bahamas is perfectly consistent with our international obligations but we have perhaps not done ourselves justice to date. Specifically, we haven’t spent enough time ensuring that our system is well understood abroad. That has meant that requests for help have not always been framed in the way that makes it easiest for us to respond and, also, our level of co-operation has not been given due recognition.
##Goals for the Bank Supervision Department##
I’ve been in this post only 3 weeks and still have a lot to learn about banking supervision in The Bahamas and about how the other regulators here go about their jobs. So I’ve not set detailed goals. But I can say that I want to help the banking supervisors maximise the value – for the industry and for depositors – that they add in their job. A key part of that will be developing further the risk-based tools that already exist here. I also want to help them develop further a Bahamian-based core of expertise that will stand them in good stead when I’m long gone. Banking regulation is a profession that needs the right experience, the right skill sets and dedication if it is to be done well. The Central Bank has obviously done a lot in recent years to raise skill and experience levels but there is always more to do. And the industry itself never stands still – just compare Basel 1 from the mid-1980s with the complexities of the new Basel 2.
##Initial Impression of The Bahamas Financial Services Sector##
I’ve been struck already by the diversity of the firms that have licences here in The Bahamas, by their shared conviction that The Bahamas is a good place from which to do business and by the sense that there are real opportunities looking ahead. But, as I’ve said already, things don’t stand still. I also greatly welcome assurances by the Association of International Banks & Trust Companies in The Bahamas (AIBT) and the Bahamas Financial Services Board (BFSB) that they recognise the value of being part of a well-regulated jurisdiction and their commitment to an extensive and lively dialogue. The regulators for their part have to make sure we do a good job in a cost-effective, business-friendly way.
Basel 2 is an amazing advance on the Basel 1 of the mid-1980s and shows just how far the banking industry has come in that time. But to be effective, Basel 2 is going to require a great deal of regulatory cross-border co-operation between regulators and the application of a lot of common sense in smaller jurisdictions where the nature of some of the problems and the size of the available resources are very different from those in New York or London. This is another case where dialogue between the industry and the regulator is going to be essential, together with a recognition that we are going to have to help each other up a steep learning curve.