The Bank of Jamaica is taking a significant step to enhance corporate governance in the financial sector by regulating how many directors of financial holding companies (FHCs) can also serve on the boards of their subsidiaries. This move aims to strengthen the safeguards protecting Jamaica’s financial system.

By doing so, the Bank of Jamaica seeks to minimize potential conflicts of interest and ensure that FHCs and their subsidiaries operate with greater transparency and accountability. This change is part of the central bank’s broader efforts to upgrade the regulatory framework governing FHCs and promote more robust risk management practices.

FHCs have become the standard structure for financial companies held by a conglomerate with a deposit-taking institution (DTI) in the midst. As a result, the majority of financial sector assets are held in a select set of FHCs.

Thus, the FHC’s board of directors usually sets the overarching policy for the other financial subsidiaries and the direction of financial group. As a result, what has tended to occur is for a number of directors on the FHCs to sit or be present on the boards of the financial subsidiaries, which can create mirror boards. However, this might not always be in the best interest of governance and the best interests of financial subsidiaries for certain developments.

“Notwithstanding, in keeping with international regulatory standards that boards should be comprised of a sufficient number of independent directors, the Bank of Jamaica’s Corporate Governance: Board Oversight guidance recommends that boards should have a majority of independent board members with sufficient knowledge of banking. This policy position signals the BOJ’s intention in updating the current legislation to require that majority of the board’s membership comprise independent directors. In keeping with the aforementioned Corporate Governance Guidance, the BOJ expects that FHCs and their subsidiaries compose their respective boards in a manner that will allow for operational independence,” said the Financial Institutions Supervisory Division of Bank of Jamaica in an emailed response to the Jamaica Observer.

The BOJ introduced a minimum one-third independent director requirement in the 2021 Microcredit Act when the sector came under the BOJ’s supervision. This requirement applies to all microcredit companies with the audit/compliance committees also having independent director requirements. Also, the BOJ noted in the email, “The number of independent directors required to be appointed on the boards of DTIs and FHCs is at least one-third of the membership of the board, or another fraction prescribed by the Supervisory Rules (as per section 34 of the BSA).”

While the BOJ already has fit and proper compliance requirements for board members of any regulated entity, this doesn’t mean that the members will have a full scope or depth of the financial entity they are supposed to oversee.

“BOJ has always required that boards of DTIs and FHCs contain directors with financial risk experience in order to fulfil its statutory obligations to manage the risks to the viability of the institution’s safety and soundness. However, the Bank of Jamaica’s Corporate Governance: Board Oversight Guidance went into further detail specifying that boards should have directors with sufficient knowledge of risks inherent in banking (such as credit risks, market risks, liquidity risks, operational risks, and business model risks), as well as the mechanism to manage these risks effectively. This is to enable directors to have a good understanding of relevant issues and challenge senior management where necessary,” the BOJ added as it published a Corporate Governance: Board Oversight Supervisory Guidance document which has been updated over the last two years.

There have already been changes by some FHCs and their associated subsidiaries this year to further improve governance. Sandra Glasgow, for example, resigned from the board of NCB Financial Group Limited (NCBFG) but remained as a director on the board of National Commercial Bank Jamaica Limited (NCBJ) while Sanya Goffe resigned from the NCBJ board but would remain on NCBFG’s board. NCBFG also added new directors to its board which has resulted in it being largely Canadian with four independent directors, one executive director and two non-executive directors. NCBJ also saw the addition of John Bailey to its board as an independent director with the board now having three independent directors, one executive director and two non-executive directors.

NCBFG’s subsidiary Guardian Holdings Limited (GHL) also made several changes earlier this year as it revamped some of its subsidiary boards which included adding new independent directors.

Sagicor Group Jamaica Limited has also reduced some of its boards and further improved governance over the last four years. In 2020, Sagicor Bank Jamaica Limited (SBJ) had 10 listed directors with some of the directors also sitting on the FHC board (Sagicor Group Jamaica). In 2024, Bruce James now chairs the board of five, which also includes SBJ CEO Chorvelle Johnson Cunningham, Sagicor Group Jamaica chairman Peter Melhado, Sagicor Group Jamaica CEO Christopher Zacca, and Colin Steele. Thus, there are now three independent directors on the five-member board.

Sagicor Investments Jamaica Limited (SIJL) had a board of nine directors in 2020 which was chaired by Paul Facey, a non-executive director at the time with a connection to Pan Jamaica Group Limited. That board has now shrunk to one with five directors with Bruce James also chairing the board along with Zacca, Melhado, Steele and Monish Dutt.

An FHC and its associated financial subsidiaries have already been set with a mandate to restructure their boards in the next year to create further independence among the entities. This will result in some directors no longer sitting on some subsidiary boards.

NCBFG and JN Financial Group Limited were the only two licensed FHCs at the start of 2023 before JMMB Financial Holdings Limited, Sagicor Group Jamaica and VM Financial Group were approved as licensed FHCs. The BOJ indicated that Scotia Group Jamaica Limited was approved as a licensed FHC earlier this year with GK Financial Group Limited and Barita Financial Group Limited also seeking to be licensed.

This move to strengthen financial sector governance comes at a time when the BOJ is set to become the super regulator of the entire sector within the next two to three years. This will take place under the twin peaks model, in which the BOJ will oversee prudential regulation of the sector while the Financial Services Commission (FSC) will oversee consumer protection and market conduct. The BOJ is also moving to implement the special resolution regime as a way to establish a framework to deal with troubled or failing financial institutions.

“The Banking Service Act (BSA) provides regulatory requirements for all entities licensed under that Act (DTIs and FHCs); however Part XV of the BSA stipulates the obligations that are specific to an FHC. As we operationalise this framework, the bank is currently in the process of developing a framework to govern capital, liquidity and intra-group transactions for financial groups. This is intended to ensure FHCs build their capacity to execute on the obligations as established in the BSA. This workstream is estimated to be issued for consultation in 2025,” the BOJ noted re: expected changes to take place with FHCs in short order.