The FSA, inside the BLA

by G.E.M. Saunders Fri Mar 08, 2013

Several important regulatory, governance and management issues have come to the fore with the recent turn of events at the Building and Loan Association (BLA). The recently created Financial Services Authority (FSA), having now inserted itself inside the BLA, finds itself with ample opportunity to vindicate the government’s decision to establish such a regulatory body by stabilizing the BLA and reducing any further deterioration that may have been precipitated from the Luke Browne letter.{{more}}

Firstly, the motives behind Luke Browne’s whistle-blowing should not be the issue. In any event, whistle-blowing by its very nature carries with it an element of risk for the whistle-blower and we have to assume that Browne would have carefully calculated these risks. What is, however, much more important at this point is the veracity of Browne’s claims and how they affect the short and medium-term financial health of the BLA.

Luke Browne will also be acutely aware that if the serious allegations made by him are proven to be untrue, then equally serious consequences await him. If, however, his claims are substantiated by the FSA, then that would be another story. We, therefore, ought not to spend any more time castigating Luke, just in case his whistle-blowing averted rather than caused a crisis.

If the BLA management was in fact facilitating several large withdrawals of cash in the wake of this letter, then the FSA was clearly given enough pretext and justification for their intervention. This is so because one of the primary responsibilities of any financial institution is the maintenance of adequate liquidity and the management of its liquidity risk.

Although it is perhaps regrettable that the FSA’s overall objectives and terms of reference were not clearly articulated and understood by the public prior to its intervention at the BLA, some consideration should be given to the fact that the Authority had to be called into action a mere two months after its official formation and without the opportunity to launch any public education and outreach efforts.

The Government must, however, be given credit for the establishment of this necessary regulatory entity and also for ensuring that it has the authority and ability to leverage resources to intervene in situations where shareholder protection and market confidence are being threatened. In this regard, the age of the institution is not nearly as important as the qualification, experience and training of the FSA’s employees and consultants.

The call by some for the quick exit of FSA and the return of the BLA into the hands of its shareholders demonstrates a lack of appreciation of the gravity of the situation as outlined by the FSA in their regular releases. The FSA, however, has to tread very carefully in finding the right balance between maintaining its internal focus and confidentiality on the one hand and revealing what could be considered sensitive and confidential information to the public in what might be an attempt to justify their continuing presence.

The restoration of confidence in the BLA is not just an exercise in public relations. The Government’s and the ECCB’s assurance of support will go a long way towards engendering confidence. However, the truth and facts must be ascertained and an accurate assessment of the financial position of the BLA must be determined through the production of financial statements, prefaced by the investigation and audit currently being undertaken.

The audit itself is likely to be an extensive exercise involving the now customary review of board and management documents, decisions and minutes. This exercise may well be further compounded by the failure of the management to implement a new IT/accounting system over the past two years. In short, it must be appreciated that the FSA has a herculean, but surmountable task at hand. What is now required is the patience and understanding of shareholders and depositors.

Some of this understanding was exhibited by a few contributors at a recent meeting of a group of shareholders and “interested persons”. It is just a pity that this group had not previously found it necessary to rally around the likes of Clem Iton, Cools Vanloo, Jerome Burke, Ken Young, Cecil Ryan, Camille Crichton, Junior Bacchus and others who, year after year, had been championing the interests of the general membership at annual general meetings.

At these meetings, the poor numbers were highlighted and the inertia of successive boards was challenged, especially with respect to implementing change and improving management and accountability. The forbearance of members was very often stretched with lots of promises, but with little or no resulting action. This makes it especially important that the BLA rules be revised, with the assistance of the FSA, in order to ensure consistency with modern financial regulations.

While the tenure of the FSA inside the BLA cannot be open-ended, the preliminary assessment of the situation by the FSA would seem to make it very likely that the FSA and the ECCB will both need to continue to sit on the BLA with a very close oversight role for many years to come; all of this without intruding into the governance and management of the institution.

It is clear that with the recent history of BAICO/CLICO and the present global financial crisis, both the FSA and the ECCB will also need to widen their purview to not only scrutinize and regulate individual companies, but also to strengthen existing measures that would quickly mitigate any negative macroeconomic impacts. It is hoped that the FSA in the BLA would also provide an ideal test for the effectiveness of existing regulatory entities and measures.