THE Financial Services Commission (FSC) is seeking to assure the public that fraudulent events at Stocks and Securities Limited (SSL) are not an indication that the securities dealers industry in Jamaica is no longer safe for people to invest, but added that certain regulated changes may have to be made to reduce the chances of another occurrence in the sector.

The FSC is also set to face the media today to answer questions about the issues that have been uncovered so far, and its role in regulating the sector, in the wake of many people expressing concerns about the safety of their investments from fraud.

“From the work that we do, fraud in the industry is not commonplace, and certainly fraud at the scale of what has occured is even less commonplace,” Everton McFarlane, executive director of the FSC, told the Jamaica Observer in a short phone call on Tuesday.

“And so to that extent, I think it would be premature to say that across the sector, things are so lax, that people’s money is not safe because of fraud,” he added.

“Do there need to be regulated changes based on the incident? Perhaps,” McFarlane continued. “But neither you nor I are in a position to know what those are until we get all the facts, and all we are trying to do is to put ourselves in a position to manage all the disruptions to the entity, which is why we have put in a temporary manager in place.”

On Tuesday, the regulator of non-deposit-taking institutions in Jamaica appointed a temporary manager to assess the situation at SSL and since that person is working on behalf of the FSC, it will allow the regulator to see the true financial position of the company.

But facing questions about its role in preventing the fraud that has happened at SSL, McFarlane was strident in defending the regulator.

“Well, if the company was flagged [for certain breaches] it must mean we have been doing something,” he quipped.

But he added, “Flagging a company for a breach or a problem doesn’t mean you go in and shut down the company. [If we should do that], what would happen to people’s money?”

“If every single company that at some point in time had an issue, and I am not downplaying SSL’s issues, but if every single time a company has an issue and they are flagged, do we then go in and shut down the company? What would happen to the confidence in that company? What happens to the people’s money invested in it? If there is a run on the company, enuh, it doesn’t only affect that company, it affects all companies in the industry. And if it comes to assets being liquidated [to make repayments] and the price of those assets fall, what happens [to other things] like pensions funds?” he asked rhetorically.

“We have a responsibility to act responsibly and to act fairly and to act appropriately,” he added.

McFarlane added that instead of going into companies to shut them down, the regulator would use its powers to first try to get them to remedy the situation.

“When we do that, we [are] not going to come into the press and say ‘this company was flagged as a problem entity’. How is that going to help the outcome that we want? How is that going to help the persons we need to protect?”

He suggested that if the FSC was to go to the public every time it identifies issues in a company, rather than work with the entity to solve them, then “we wouldn’t have any securities industry left”.

He told the Business Observer that the law provides specific instances where the FSC is obligated to inform the public, but said those circumstances must come when a licence is suspended or cancelled or a company is put under temporary management, “because those are major events that could affect the registration status of an entity”.

He explained further: “If we are going to suspend a company we have to first issue a notice of an intention to suspend. So we say to the company, this is what you have done, and based on what you have done, this is the sanction that is warranted and we intend to suspend your licence. The law then says that entity has 30 days to request what is called an opportunity to be heard, where the decision could be reviewed by the FSC. If the suspension is not final, we can’t go to the public and say ‘we issued a notice to suspend’.”

In addition to that process, McFarlane said during the 30-day period in which the review is to be done, the problem entity could take steps to rectify the issue and come to the hearing showing they have sorted out the matter.

The entity can also appeal to the appeals tribunal if its review failed, and the FSC would have to stay its decision until the appeal is heard.

“Almost every breach in the statute is criminalised and in order to impose a penalty, there has to be a summary conviction…It’s not a fine.”

He said, in the past, while many matters have not gone to the tribunal, some nevertheless have.

Turning to the specific case of SSL, McFarlane said while he needs to see the details of the investigation to understand how the fraud happened at the entity, “perhaps, the role of third-party independent verification for some aspects of the company’s business may need to be enhanced and looked at, but it doesn’t mean that person’s monies are not safe, because the particular scheme that was used there may not be transferable in another context.”

“There may be some commonalities which come up, in terms of things like a circumvention of internal controls or in the worst case, probably an absence of certain internal controls,” he further explained.

He said it is hard to make generalisations, because the same level of controls or oversight won’t be absent in every company. “There are so much that is company-specific,” he noted. “Where it is that there are elements that are replicable, then we have to make sure that the other dealers move quickly to rectify it, and that is if there is such a deficit within their system. So it would have to be a collaborative effort between us and the dealers, in terms of doing a review of their internal controls in some way to increase the level of assurance, over and above what already exists, but I believe that there exists a high degree of assurance around people’s money.”

“The security dealers have been in operation for how many years. How many incidences of fraud do you recall being reported for the securities industry? People have lost money but because of behaviours in the market,” he said.

He also said the FSC has regulated the sector with good governance practice which requires companies to report monthly unaudited statements, but admits that even an external audit would not capture every risk in an entity or capture every aspect of an entity’s operations; it only provides assurances of the numbers.

“Obviously, we can’t regulate everything on a daily basis, nor can we regulate every single transaction an entity undertakes. That is why you need good management and board and you need good systems of governance, of risk management and internal controls, strong audit functions, and so on.”

“Now it doesn’t mean all aspects of governance of every company is perfect, but with most companies I would believe it is strong. But even with strong companies, if somebody is working on the inside and is working there long enough, if you have a system, it is not inconceivable for somebody to devise a way around it. And remember that our regulation depends on the information coming in and when we go on site it still depends on books and records kept by the entity, but if those books and records are falsified, then what do you do?”

“Now it doesnt mean that there is a case for persons to panic, because books and records in a good system can’t easily be falsified without being detected,” McFarlane pointed out.

He said the FSC’s regulations have helped securities dealers to weather the proverbial storm which emerged with the COVID-19 pandemic, “So much so that even with the onset of the pandemic, while dealers were faced with challenges, their buffers have been sufficient to withstand.”