4.3 Factual assessment
4.3.1 Legislation
The legislation relevant to banking and its regulation
in Bermuda is as follows:
- The Bank and Deposit Companies Act 1999 ("BDCA");
- The Bermuda Monetary Authority Act 1969 ("BMA
Act").
The BDCA has been recently introduced to modernise
the previous legislation. Like the BMA Act it governs banking
regulation and assigns supervisory responsibility to the BMA.
Under the BDCA it is an offence to undertake deposit
taking business in or from within Bermuda without a licence. The
only exemptions to this are the Government of Bermuda, public
authorities in Bermuda and the BMA itself.
Responsibility for prudential decisions and judgements
lies with the BMA. The Minister of Finance may give the BMA general
policy directions in relation to its functions under the BDCA,
but cannot otherwise interfere with the BMA's discretionary powers.
No general policy directions have been issued to date.
The BDCA covers areas such as:
- powers and duties of the BMA;
- powers of the Minister of Finance;
- powers of entry in case of suspected contraventions;
and
- immunity for the BMA in the exercise of its powers.
4.3.2 Regulations
The BDCA received assent on 23 September 1999. Subsidiary
regulation issued covers the following areas:
- the minimum loan percentage for deposit companies;
- exemption of credit unions; and
- the meaning of deposits and deposit taking business.
4.3.3 Guidance notes
A number of guidance notes on key subjects have been
issued over the last 18 months. These papers have been distributed
in conjunction with the introduction of the new BDCA.
- Measurement of Capital: Bank and Deposit Companies
(November 1999) which sets out the framework for capital adequacy
calculation;
- Bank and Deposit Companies Act 1999: Statement
of Principles (November 1999) which was statutorily required and
covers minimum licensing criteria, granting and revocation of
licences, powers to obtain information and reports;
- Implementation of Provisions for the Reporting
and Control of Large Exposures (November 1999) which outlines
the implementation approach for Section 38 of the BDCA;
- Banks and Deposit Companies: The Measurement
and Monitoring of Liquidity (March 2000) which sets out the approach
for measuring and assessing the adequacy of liquidity for banks
and deposit companies;
- The Approach to Consolidated Supervision (January
2000) which affirms BMA's commitment to consolidated as well as
solo supervision of Bermudian banks and deposit companies. The
BMA supervises on both a consolidated and solo basis as evidenced
by the receipt of both types of Prudential Supervision returns;
and
- Bermuda Monetary Authority's Relationship with
Auditors and Reporting Accountants of Banks and Deposit Companies
(August 1999): sets out the legal provisions governing the relationship
between auditors and banks and deposit companies and the BMA.
This paper currently remains consultative in nature, pending completion
of discussions with the accountancy profession and licensed institutions.
New reporting forms (Prudential Information Returns
or "PIRs") are now in place. The new forms seek to improve
the capture of information on large exposures and liquidity as
specified within the respective papers above.
4.3.4 Supervision - systems and procedures
4.3.4.1 Regulatory structure
The BMA has an operating division (comprising a manager,
two assistant managers and two support staff) which undertakes
the day-to-day supervision of banks and deposit companies in addition
to trust companies and Bermuda's one credit union. The operating
division is supported by a separate Authorisation and Compliance
division which is responsible for the initial vetting of corporates
and individuals and by a Policy and Research division which provides
legal guidance and advice on the BMA's regulatory responsibilities.
The BMA sends its senior bank regulatory personnel
to meetings of the Offshore Group of Bank Supervisors.
4.3.4.2 Application process
Under the BDCA the BMA is the licensing and regulatory
authority for banks. Whilst section 14(2)(b) of the BDCA provides
the Minister of Finance with a veto to ensure the granting of
the licence is in accordance with the economic and financial policy
of the Government, the decision on whether an applicant is suitable
to be granted a licence rests with the BMA.
The BDCA requires that the BMA shall not grant a
licence unless it is satisfied that the minimum criteria specified
in the Second Schedule to the Act are fulfilled. These criteria
include the "fit and proper" status of the directors,
controllers and senior executives. They also require at least
two people to direct the business of the licence holder and that
the business itself is conducted in a prudent manner.
The Schedule also requires the applicant's Board
to have non-executive directors.
There have been no new banking licences granted for
many years.
4.3.4.3 Off-site monitoring
The basis of the BMA's off-site monitoring is the
prudential information return (PIR), which is comprehensive and
submitted quarterly. The returns are reviewed by the BMA's analysts.
The BMA also routinely receives and reviews copies of banks' own
management accounting information packages.
The analysis of these returns provides the basis
for regular routine prudential meetings with the institution's
senior management which normally occur three times a year.
Ad-hoc meetings are also
arranged as required at the instigation of either the BMA or the
financial institutions to deal with specific issues.
4.3.4.4 On-site monitoring
On-site inspections commenced in 1997 when visits
took place to licensed banks, branch and subsidiary operations
in the UK Crown Dependencies. These on-site inspections were conducted
with the full acquiescence of the host regulators. Further visits
to the UK, Ireland and Luxembourg followed.
With effect from 2000 it is intended that inspections
will be expanded to cover head office functions. On-site visits
to head office operations have in the past been exceptional rather
than forming part of the routine supervisory process. Outline
proposals for this work and for the timing of its implementation
have already been given to the individual institutions and the
scope has been formally decided. The BMA also proposes to visit
the Cayman Islands and Hong Kong operations of its banks as the
third round of its overseas on-site inspections.
4.3.4.5 Ongoing Requirements
Books and records
All banks are required to maintain proper books and
records in accordance with accepted international accounting standards.
It is a requirement that all licensees report to BMA on a regular
basis, and auditors approved by BMA must audit the financial statements
of the banks on an annual basis. The BDCA provides an auditor
with exemption from the general duty of confidentiality for communications
by the auditor to the BMA in respect of matters relating to its
role as auditor. There is also a general duty for the auditor
to report matters of concern to the BMA.
The BDCA gives the BMA access to all books and records
of a licence holder.
Capital adequacy
The BMA applies standard target and trigger capital
ratios and does not currently differentiate between banks.
All licensed banks (on a consolidated basis) and
deposit companies maintain high capital ratios.
Liquidity
A new liquidity paper has been issued by the BMA.
Liquidity analysis tables have been developed and are included
in the new version of the prudential information returns reviewed
off-site.
Derivatives/ off balance sheet activity
We are informed by the BMA that derivatives activity
is restricted in practice to interest rate and foreign exchange
swaps, options, futures and forwards. The inherent risk from these
products is reported by BMA to be small and they consider that
the banks use derivatives primarily as risk management tools.
Whilst at the time of our visit the extent and purpose
of the use of derivatives was not verified by the BMA on-site,
the BMA felt that revisions to the PIR, shortly to be introduced
would provide fuller and more detailed information.
Anti-money laundering
Licence holders are subject to the anti-money laundering
legislation and regulatory code, which covers, inter alia,
"know your customer" requirements.
Breach of the anti-money laundering legislation codes
do not currently automatically represent a disciplinary offence
by the licence holder, therefore, at present the BMA has no automatic
power to take action against a licence holder for such a breach.
4.3.5 Enforcement - systems and procedures
The BMA has a wide range of enforcement powers. These
include:
- to impose restrictions on licence holders;
- to make directions after surrender or revocation
of a licence; and
- to petition the courts for the winding up of
a former licence holder.
There is no specific power to debar individuals,
but the BMA can restrict the licence via conditions, to require
removal of present directors or senior executives and could, under
directions, impose other steps necessary to safeguard the interest
of depositors.
The BMA has power to "police the perimeter"
including (with a magistrates warrant) the power of entry to carry
out an investigation.
4.3.6 Depositor protection schemes
There are no depositor protection schemes operating
in the jurisdiction.
4.4 Issues and recommendation
4.4.1 Introduction
Bermuda operates a regulatory regime that complies
with all significant elements of the Basel Core Principles. This
compliance was enhanced by the new BDCA which provides a modern
regulatory framework.
There are some areas where enhancements are still
necessary but the BMA has identified the majority of these and
is taking steps to make appropriate improvements.
Furthermore, it should be noted that the BMA's strong
understanding of its licence holders' businesses implies that
these current deficiencies are not as material as would be the
case in a jurisdiction with a larger number of licensed banks.
Specific issues for consideration are detailed below.
4.4.2 On-site inspections
The principal area where regulatory focus should
be concentrated is in respect of the extension of the on-site
inspection programme to Bermuda.
The full and effective introduction of such a local
programme will assist the BMA in fully meeting the Basel Principles
in the following areas:
- In carrying out an evaluation of a bank's policies,
practices and procedures for loans and investments (Principle
7). The BMA receives and reviews statistical information in these
areas but the suggested evaluation is not systematically undertaken
by the BMA at present. We would expect the proposed on-site programme
to address this issue.
- In ensuring that banks have policies, practices
and procedures for evaluating the quality of assets and adequacy
of loan loss provisions and loan loss reserves (Principle 8).
- In being satisfied that management information
systems are in place to identify concentrations. The BMA has ensured
compliance with the second part of this Principle through the
issuance of its paper on Large Exposures last year. However, only
full on-site verification can offer definitive comfort that adequate
management systems are in place (Principle 9).
- In being satisfied that banks have adequate policies
and procedures for identifying, monitoring and controlling country
risk, market risk and transfer risk (Principles 11 and 12).
- In ensuring that banks have comprehensive risk
management processes in place (including board and senior management
oversight) (Principle 13). The recent on-site visits conducted
overseas specifically targeted this aspect of Bermudian bank and
subsidiary operations.
- In ensuring that banks have comprehensive adequate
internal controls (Principle 14).
- In ensuring that banks have adequate policies,
procedures and practices including "know your customer"
(Principle 15).
Whilst elements of the above areas can be achieved
through off-site supervision, we consider on-site verification
is vital for full compliance to be achieved.
We therefore strongly support the commitment of the
BMA that the first routine on-site inspections are undertaken
of the banks local offices by 31 December 2000. We have received
representations from the BMA that since the date of our visit
an on-site inspection programme has commenced.
4.4.3 Capital adequacy
We support the BMA's stated intention to move towards
a risk differentiated approach to capital adequacy in due course.
4.4.4 Derivatives
We are encouraged by the BMA's proposed development
of a more detailed review process that will ensure that the banks'
policies of prudent use of derivative products are in place and
are adequate.
We consider that this enhancement should be monitored
and should form part of the on-site as well as off-site supervisory
programme.
4.4.5 Anti-money laundering
Whilst the BMA has made it clear to the banks in
the Statement of Principles issued under the BDCA that a breach
of legal provisions and codes such as in relation to money laundering
constitutes grounds for disciplinary action for a breach of the
prudential criteria, we consider that, to make the position absolutely
clear, a breach of any anti-money laundering laws, codes, guidance
or regulations should formally be grounds for disciplinary action
against a licence holder, including possible revocation of its
licence.
4.4.6 Enforcement powers
Section 17 (2) of the Banks and Deposit Companies
Act 1999 gives the BMA powers to take constructive actions to
assist with the management of a licensee. We do, however, consider
that the BMA should have the power to appoint a person (or apply
to the court for a person to be appointed) to take over the management
of a licence holder, in order to safeguard the interests of depositors.
