JAMAICAN financial firms are urging regulators to coordinate the roll-out of new capital and liquidity rules, arguing that the rapid pace of reform is creating a heavy compliance burden that could impact profitability.

The call was made by Keith Duncan, chief executive of JMMB Group Ltd, one of the island’s largest financial institutions.

“Another area of concern is the pace of regulatory reform. Over the last 10 years we have had over 100 new policy reforms and things that the financial sector has to implement. Best practice, [it’s] good for financial sector stability, but the pace at which they come creates a real regulatory burden on us,” said Duncan at the company’s 12th annual general meeting (AGM) on Friday.

The central bank is implementing a suite of new measures, including the Basel III capital standards and a “twin peaks” regulatory model, alongside new liquidity rules for financial holding companies.

According to financial executives, the cumulative effect of these measures is to drive up operational costs and constrain how capital can be deployed.

Over the past five years the BOJ has driven changes designed to strengthen supervision and stability. A key initiative has been the licensing of financial holding companies (FHCs), with the seven now approved encompassing over 90 per cent of financial sector assets, thereby consolidating regulatory oversight.

These detailed reforms are advancing alongside the BOJ’s implementation of the wider twin peaks framework. Under this new model the BOJ will focus on prudential regulation for the entire sector, and the FSC on market conduct and consumer protection. The scale of this parallel effort is testing the capacity of both regulators and regulated entities.

“We have to use national discretion, and we have take into account where we are as an industry and to work collaboratively with the industry to sequence out and ensure that what we’re doing does not [cause] too much of a burden on the financial sector, especially smaller financial institutions that really can’t manage it,” Duncan stated in his concern regarding the regulatory changes.

The BOJ is building out the regulatory framework for FHCs, which includes reforms to the corporate governance framework of deposit-taking institutions (DTIs) and FHCs. This is meant to minimise conflict of interest and foster good governance for subsidiaries in making crucial decisions.

The BOJ is also building capital requirements for FHCs, which include capital and liquidity requirements that are meant to address prudent capital allocation and which address risks like regulatory arbitrage and double gearing/double leverage. Additional standards to be developed include prudential standards for solvency, liquidity, and large exposures and related parties.

These proposed capital changes might impact some FHCs due to companies operating under their own independent framework prior to the BOJ’s new regulations.

The proposed liquidity coverage ratio (LCR) for FHCs comes at the same time the BOJ is adjusting the LCR for deposit-taking institutions (DTI) like commercial banks, building societies and merchant banks. The BOJ wants to adjust the LCR ratio from 100 per cent to 120 per cent — a move which might require some DTIs to adjust their internal strategies.

The LCR, effectively, is a measure of a bank’s high-quality liquid assets relative to its net cash outflows over a 30-day stress period.

If a bank had $1 billion in net cash outflows in a 30-day period, the bank must have $1 billion in HQLAs to pay depositors.

The proposed change by the BOJ would require a bank to hold $1.2 billion in HQLAs to meet the demands of depositors under that 30-day stress period.

The BOJ is also working on implementing the different elements of the Basel III framework with legislators. The Basel III framework sets out a series of changes that strengthens the capital base of banks and regulatory oversight by a regulator. The capital adequacy requirements for a bank would be more risk-sensitive, increase the level of tier-one capital held by banks, and implement the capital conservation buffer (CCB) and the countercyclical capital/systemic risk buffer (SYRB). DTIs are currently reporting in parallel under Basel II and Basel III to the BOJ.

These capital changes for FHCs and DTIs are some of the current measures on the table and in progress by the BOJ. However, the BOJ also wants to introduce the special resolution regime (SRR), which is meant to provide a mechanism to orderly address any failing financial institution. Although the proposed measure is welcomed by different market players, the proposed funding of the SRR has been a contentious issue during the current consultation phase. The SRR which would be introduced under the Financial Institutions (Resolution and Winding up) Act is set to have a fund which was estimated to require $40.1 billion or 1.5 per cent of the country’s GDP.

Apart from these measures being spearheaded by the BOJ, the FSC made changes to the exposure limits for collective investment schemes (unit trusts and mutual funds) which limits the percentage of a scheme that one unitholder can own. This is in addition to reforms by the FSC on the framework for securities dealers to declare dividends to their shareholders. The Financial Services Commission (Amendment) Act, 2024 also came into force on February 14 which made provisions for the licensing and supervision of non-bank holding companies, the supervision and regulation of these non-bank financial groups on a consolidated basis, and empowering the FSC to request information from any company in the non-bank financial group.

“Structural investment restrictions also warrant reconsideration. Current regulations limit diversification and elevate concentration risks, particularly for pension funds and securities dealers. JMMB urges a holistic review of these constraints to foster a more efficient and inclusive capital market,” JMMB Group said in a press release.

While these measures are set to further strengthen the financial system, they might bring on additional compliance costs which might be passed onto the public. The financial sector is already pushing for the removal of the 0.25 per cent asset tax which is passed onto consumers who already lament the cost to access capital from banks. The JMMB Group CEO noted that the Jamaica Bankers Association (JBA), Jamaica Securities Dealers’ Association (JSDA), and Insurance Association of Jamaica (IAJ) have made recommendations to the Ministry of Finance & Public Service and BOJ on the pace of regulatory reform.

“We need to find that balance with our regulators — the Bank of Jamaica and FSC in Jamaica. And the Dominican Republic is also very challenging. People need to work collaboratively to sequence and ensure that the regulatory burden is not too high and the costs don’t have to impact our profitability and our return to shareholders,” Duncan closed in his remarks.

DUNCAN…another area of concern is the pace of regulatory reform.