The Bermuda Monetary Authority (the BMA) has published a new statement of practice (SoP). It sets out factors to which it will have regard and procedures to be followed in deciding whether and in what manner to exercise powers granted under the following four statutes that regulate financial sectors in Bermuda:
• The Insurance Act 1978
• The Banks and Deposit Companies Act 1999
• The Investment Business Act 2003
• The Trusts (Regulation of Trust Business) Act 2001
The Corporate Services Providers Act 2012, which came into operation on 1 January 2013, also provides for the same range of powers. The SoP applies equally to powers in this instrument. In addition, the BMA proposes also to make corresponding changes to the Investment Funds Act 2006.
The occasion of a new SoP is the introduction of new and enhanced powers on the part of the BMA introduced in amendments during 2012. These were first proposed in the BMA’s business plans of 2008 and 2009, partly in response to the International Monetary Fund’s “Assessment of Financial Sector Supervision and Regulation in Bermuda” in 2008, which focused on supervisory regulation of insurance business.
A discussion paper on new powers followed in early 2009, reporting on a gap analysis conducted by the BMA comparing its powers with those of authorities in comparable jurisdictions – including captive domiciles and centres for international commercial carriers. It identified various powers possessed by other authorities not at the disposal of the BMA.
Following industry feedback, the amendments in 2012 introduced the following:
Enhanced powers of investigation, including a power to investigate whether an officer is “fit and proper”. The power to investigate extends to any activity which effectively requires registration under one of the above acts.
The power to issue directions in certain circumstances – e.g., as to the posting of funds or other collateral.
The power to impose civil penalties. Prior to the new powers, a breach of an act represented a summary or indictable offence where specifically provided. Now, any breach of a requirement or contravention of a prohibition of an act may be penalised by a fine of up to $500,000 (subject to specific fines for late filings, such as a $5,000 fine for late lodgement of statutory returns).
To petition the Supreme Court for an injunction compelling or prohibiting action or to secure assets.
To censure publicly.
To prohibit an entity or individual from holding a specified function or acting in a regulated sector.
To publish the results of a decision notice of the BMA, in which the conclusions of the BMA’s consideration of whether and how to exercise enforcement powers are summarised.
(By and large, the BMA retains its pre-existing powers, namely: to object to a person assuming a specific function or becoming a controller of a licensee, to investigate contraventions, to compel production of documents, to intervene or make directions, to revoke or vary registration, to wind up a licensed entity, or report conduct to the police.)
Summary of SoP
The SoP emphasises that the powers are not a first resort for every instance of regulatory non-compliance. Unless the contravention is particularly grave or wilful, in the ordinary course issues identified will be notified to the licensee’s senior management for rectification. However, if the department is not satisfied with the response, the issue may be escalated to the Enforcement Unit, part of the Legal Services and Enforcement Department of the BMA. If so, this will be notified to the entity. The Enforcement Unit will then – again except in unusual circumstances – notify the licensee of the referral.
If it determines that the exercise of powers should be considered, this also will be notified in the ordinary course. The decision whether to exercise powers is made by the CEO of the BMA with the benefit of advice of the Enforcement Committee of the BMA.
Nevertheless, there are powers that supervisory departments may exercise without referral to the Enforcement Unit, for example, imposing directions and restrictions on a licence.
Principles Underpinning the BMA’s Approach to Exercise of Powers
In considering whether to exercise enforcement powers and how, the BMA will act in a manner that is transparent, proportionate and responsive to the issue. It will seek to provide fair treatment and – recognising the need to proceed on a case-by-case basis – will seek to apply powers consistently.
In all cases, following a referral, the BMA will have regard to some or all of the following criteria: the nature of the breach (its seriousness, frequency, duration, etc.), the importance of the statutory requirement that has been breached, whether the conduct was wilful, the impact of the breach, the interests of stakeholders, any counterveiling benefits that flow from the breach, the reputation of Bermuda as a financial centre, “systemic issues”, the individual compliance history of the licensee, the BMA’s approach to prior instances of a similar nature, the need to deter future breaches, or the need to prevent or cure risk of harm.
Among specific factors to be considered by the BMA in deciding whether to use a new power are the following:
Imposing Fines on Licensees
The BMA will have regard to the resources of the licensee, the need to deter future misconduct or breaches and the prior approach adopted by the BMA. The fine should be “effective, proportionate and dissuasive”. It will consider how much is needed to deter, the resources of the licensee (the BMA will not seek to bankrupt the licensee), the impact of the breach on the licensee’s business, the individual licensee’s compliance history, its culpability – attempts to conceal will be punished, and attempts to rectify will be taken into account, as well as cooperation with the BMA.
The BMA will consider the risk of asset dissipation, the need to preserve evidence, the likelihood of repeated misconduct, whether applicable legal requirements for seeking an injunction are made out, and the urgency of relief.
This power represents an alternative to exercise of other powers which would, for example, threaten the licensee’s solvency or be disproportionate. It is the new power whose proposal drew most industry comment in the BMA’s discussion paper. In deciding whether to use it, the BMA will consider whether censure will effectively deter future breaches, and the licensee’s conduct subsequent to the breach (for example, whether it brought it to the attention of the BMA) and the individual licensee’s prior compliance history.
Prohibition Orders Against Individuals
This power is available where a director of a licensee, or individuals performing specified activities, do not meet the BMA’s “fitness and propriety” minimum requirement. The power is likely to replace the pre-existing power to “object” to individuals in similar circumstances, a power that in some respects lacked teeth.
Prohibition may be specific to a particular function (say, the holding office as a director) and to a particular financial sector.
In deciding whether to make an order, the BMA will consider: how the conduct compares to the standards in the minimum criteria, whether it was deliberate, its impact on the business of the licensee and its stakeholders, the length of time that has elapsed since the conduct, whether it was done knowingly, the particular position activity or role of the individual concerned, the nature and activities of the licensee, the individual’s conduct toward the BMA regarding the breach, and whether the conduct showed lack of competence to carry out the role concerned.
Warning Notice, Representations, Decision Notice, and Publication
Except where its decision is to seek an injunction, petition the winding up of a licensee or make a referral to the police, where the BMA seeks to use powers, it will, except in circumstances of urgency, issue a warning notice to give the licensee a reasonable opportunity (14 days subject to extension in unusual circumstances) to make representations before a final decision is taken. Absent a response, the BMA will consider its conclusion undisputed. If its concerns have not been satisfied, it may issue a decision notice. (If they have, it may take no further action.)
Publication of Decision Notices
The BMA may publish such information about the matter as it considers appropriate. The BMA expects to use this power to publish its decisions notices. Licensees will receive prior notice of publication.
Exercise of many powers is subject to appeal to tribunals. But in the ordinary course, the effect of the decision will not be suspended pending the outcome of that process.