AN extensive series of recommendations on future regulatory practices in the wake of the collapse of Kaupthing, Singer and Friedlander will be placed before Tynwald tomorrow.
The final Select Committee report requests that Tynwald receives and approves the recommendations made in all three Select Committee reports which cover a wide variety of subjects including conditions of directorships, greater co-operation between regulators in different jurisdictions and the speed of repayment to retail depositors in the review of the Depositors’ Compensation Scheme.
The recommendations are extensive and we publish them all in full detail, as they appear on the Order Paper for tomorrow’s Tynwald debate.
1R-1. We wholly endorse [the Public Accounts Committee’s recent recommendation in relation to record keeping by public bodies], which was approved by Tynwald. We would extend this to cover more than where significant costs are likely to accrue, such that all exchanges with third parties by public sector organizations (including different departments and agencies, including the FSC) should be noted or recorded. This is for the protection of officials and to assist future referencing when issues arise.
1R-2. The FSC not only regulates banks but also Trusts, Funds and Corporate Service providers. Until recently, the FSC also managed the Companies Registry. However, it is the view of this committee that the complexities and reputational risks associated with managing banks are much greater than the other categories of financial businesses. On this basis, there should not be any ability for individuals to be directors.
1R-3. The Treasury should restructure the oversight model to create separate Commissioners’ Boards in one organisation: one covering banking; the other covering the other sectors. This would enable a pool of suitably talented and qualified individuals to oversee the banks to be drawn from other parts of the financial services sector and for Commissioners of the FSC overseeing banks to be able to hold directorships of trust, funds and corporate services businesses but they would be barred from being a director of a bank in the Isle of Man.
1R-4. Despite the steps taken to which we referred above, and taking account of the FSA remit in the UK, we recommend that the FSC (or other responsible agency on the Island) should take a much more active role in ensuring that bank customers can gain access to proper information about banks and their parents via links from the FSC website and that they are given every opportunity to learn how to research risk properly, with appropriate links to relevant ratings and other published economic data. We note that it is now a mandatory requirement that Isle of Man subsidiaries should publicise the production of their annual accounts and these should be highlighted as accessible via a clear website link.
1R-5. We conclude that the lack of a legally binding Memorandum of Understanding without a corresponding duty of care between regulators has been shown to be insufficient in times of crisis. Whilst the Isle of Man is a very small part of the global financial markets, we recommend that the Isle of Man Government declare its willingness to enter into legally binding exchange of information agreements, similar to Tax Information Exchange Agreements, with other regulators so that there is a duty of care to disclose material facts to other regulators.
1R-6. It is our view that the Isle of Man Government should lobby strongly (not least with UK) that a clear international standard should be established which will insist that one regulator (in the case of KSF Group this would have been either Iceland or United Kingdom) must undertake consolidated supervision of liquidity matters. The adoption of legally binding Memorandums of Understanding would underpin the consolidated oversight role since all necessary feedback on liquidity issues would have to be forwarded to/exchanged between impacted locations.
1R-7. We acknowledge that a balance has to be struck between business objectives and prudence. However, we feel that in future such compromises should be recorded in reported minutes and that suitable fall back conditions should be established at that time in the event that trading and/or economic conditions worsen. Accordingly we recommend that in circumstances where the FSC identify specific risks and agree an action plan to mitigate those risks with a regulated entity, it should also agree contingency plans in the event of a deterioration.
1R-8. It would be helpful if the Isle of Man Government, in conjunction with the FSC, produced some consumer friendly literature which summarised the liquidity and capital safeguards in place for regulated entities in the Isle of Man. This might help existing and prospective customers to understand the steps being taken to reduce the future risk of another failure.
1R-9. We note that banks have established policies covering staff and directors dealings in shares and that banks have differing policies about encouraging staff/directors to maintain accounts. It is our view that there should be specific policy requirements covering withdrawals of deposits held in the bank by its directors.
For example, it would seem appropriate that any significant withdrawal, or withdrawal at times of turbulence requested by a bank director should have to be reviewed and counter-signed by another Director or authorised official. This will ensure there is some independent oversight of such transactions which can protect the bank from the risk of defalcation as well as poor practice.
Recommendations of Third (Final) Report:-
3R-1. As part of the revision of the law relating to insolvency and bankruptcy, we recommend that the Government design a mechanism to enable depositors to access a single point of information electronically. This single point should be used for dissemination of important documents.
3R-2. We recommend that Government consider all options to enhance the position of and speed of repayment to retail depositors in the review of the Depositors’ Compensation Scheme.
3R-3. We recommend that the learning from the implementation of the Early Payment Scheme be included in the Depositors’ Compensation Scheme review and the adoption of such principles will be important to be able to achieve timely interim payments in any future case.
3R-4. Most banks on the Island upstream to parent banks in other jurisdictions - and some do this to a high degree. The parent banks need the deposits in order to fund their broader operations which this source provides. We note that depositors with the Irish banks have the additional cover of the Irish Credit Institutions Eligible Liability Guarantee Scheme as well as the Government of Ireland Financial Support Scheme in addition to the Depositors’ Compensation Scheme on the Isle of Man. We recommend that the Treasury consider negotiating with major partners off the Island in order to get a similar tie-in for banks based here but headquartered elsewhere with the objective to support the level of protection for retail depositors above the amount of the cap placed on the Isle of Man scheme, recognising that each group benefits materially by the deposits raised in the Isle of Man.
3R-5. In order to be able to guarantee swift payout, it is clearly useful to have some element of pre-funding of the Depositors’ Compensation Scheme. We recommend that the Government make efforts to devote some reserves to supporting a fund as this would greatly assist in creating confidence among depositors (and their advisers) that the Depositors’ Compensation Scheme is both reliable and can deliver early payments in any future default. 3R-6. Although the banks in evidence did not support the concept of pre-funding we recommend that the Treasury examine ways of encouraging banks to take part. For example, they might be permitted to make their contributions to the Depositors’ Compensation Scheme fund count towards their Tier 1 capital holdings.
3R-7. We recommend that the method of calculating payments and the lower and upper annual limits for participating banks be reviewed bearing in mind that the speed of return of funds will be the main criterion on which any Depositors’ Compensation Scheme will be judged.
3R-8. We recommend that the review of the Depositors’ Compensation Scheme arrangements look carefully at the existing level of cap on the annual levy to each bank, taking due account of different levels in the Channel Islands’ schemes.
3R-9. We recommend that the Financial Supervision Commission examine the banking industry model on the Island, in particular the question of spread of loans made by subsidiaries, and the question of branches versus subsidiaries as protection both for depositors on the Isle of Man and its compensation scheme; and further, if necessary after due consideration and discussion, modified regulations should be introduced to cover these matters.
