AS the Financial Services Commission (FSC) continues to come under fire for its handling of Stocks and Securities Limited (SSL), which is embroiled in an alleged multi-billion-dollar fraud, questions are continuing to swirl on whether or not there were warning signs that indicated a need for earlier intervention in the securities dealer.

As a member-dealer/broker of the Jamaica Stock Exchange, SSL is required to submit monthly and quarterly returns along with a disclosure on its excess net free capital (ENFC) position. Last Thursday the JSE’s Regulatory Market and Oversight Division (RMOD) published its October 2022 report which revealed that a broker had fallen into capital deficit for September. It showed a broker had fallen into capital deficit between March and July before falling into the ENFC range of $0 to $299 million for August. There were four other brokers in that range. The JSE’s benchmark is five per cent for ENFC.

When the Jamaica Observer did checks on the 15 JSE brokers with publicly available financials and disclosures, 10 of them were in compliance with regulatory capital requirements. Of the other five, four told the Sunday Observer that they remained in compliance with JSE and FSC capital requirements during 2022. The only broker we could not contact for a response was Stocks and Securities Limited.

SSL was also cited by the RMOD for an incomplete May filing in that October report and numerous times in 2022 for other breaches.

When the Sunday Observer questioned FSC Executive Director Everton McFarlane at the press conference last Wednesday about potential indicators on SSL’s capital position in 2022, he responded, “The work of the temporary manager will determine the position prior to the incident. I can’t give specifics, but suffice to say it would have been monitored by the FSC according to all our protocols and we would have, at that point, no reason to suspend or cancel the licence. As things evolve the work of the temporary manager is going to give an updated picture and we’ll proceed on that basis.”

The FSC had intervened in SSL in 2013, 2017, and 2020 before the current events where the entity was flagged for practices that were not in accordance with regulations and described as unsafe and unsound. This eventually culminated in the FSC considering suspending its securities dealer licence after a February 2017 report. SSL was not suspended and put under specific directives which it was required to follow. The FSC regulates the JSE and has access to information generated by the RMOD.

McFarlane resigned on Thursday, with the resignation to take effect on January 31, but went on leave on Friday as chief prudential officer of the Bank of Jamaica, Major Keron Burrell was seconded to lead the entity.

Jamaican track icon Usain Bolt, who was also swindled, had his lawyers writing the FSC, alleging that the financial regulator was liable and failed to perform its duty in accordance with the Financial Services Commission Act, based on its handling of SSL over the years. Bolt’s lawyer, Linton P Gordon, has also sent a letter to SSL requesting that the company returns the missing funds within 10 days or legal action would be taken against the company and its directors which would include civil and criminal prosecutions.

SSL currently has two active court cases with OGH Jamaica Limited & Anor bearing case number SU2022CD00213, and against Jamaica Small Loans and Microfinancing Limited which trades as Boost Financial Services bearing case number SU2020CD00116. Its parent company, SSL Growth Equity Limited, also has a case against Franz & Anor bearing case number SU2022CD00176.

“The approach of the FSC in general is to get entities to remediate and so, the action of pulling the plug on an entity is a last resort. I’m sure you can imagine that there are several different stakeholders who could be adversely affected in the event we pull the plug on any entity that we license or regulate,” said FSC acting general counsel Donia Fuller-Barrett on sanctioning an entity via the suspension or cancellation of their dealer licence.

Industry resilient

Despite the events unfolding at SSL, Jamaica Securities Dealers Association (JSDA) President Steven Gooden was adamant about the industry’s resilience and capital strength to weather market headwinds. He referenced the consolidated FSC data that the industry had capital in excess of $130 billion, with more than $80 billion of that capital being above the regulatory minimum.

“If that wasn’t the case then you would’ve seen continued losses, et cetera, being incurred by securities dealers, and we would have been required to hold more capital as a result,” added interim chief executive officer at Barita Investments Limited Dane Broadber on the industry’s low level of fraud.

The FSC’s September report showed that industry capital was down 16.72 per cent year over year, from $148.9 billion to $124 billion, up to September 2022. The capital to risk weighted assets ratio has also fallen from 24.5 per cent to 20.1 per cent over the same time frame. Those are still way above the FSC’s benchmark or early warning signal which is 14 per cent, with the regulatory minimum at 10 per cent. However, funds under management marginally declined 3.40 per cent to $1.59 trillion.

This decline in capital has been driven by the unrealised losses largely arising from assets such as bonds which have seen their fair value marked down as interest rates continue to rise globally. The decline in capital has resulted in listed companies NCB Financial Group Limited, JMMB Group Limited, Proven Group Limited, and Victoria Mutual Investments Limited suspending dividends in the interim as they focus on maintaining relevant capital adequacy.

VM Wealth Management Limited and JN Fund Managers Limited received equity injections of $600 million and $1 billion, respectively, from their parent companies during 2022. VM Wealth was cited by the RMOD’s October report for an incomplete July 2022 monthly filing.

The first nine months have seen the ENFC of numerous member-dealers come under significant strain as many have fallen to the lower rungs. In December 2021 there were four brokers who were above $6 billion and two brokers who were above the zero to $299 million range. As of September 2022 there were only two brokers with ENFC above $6 billion and six brokers in the zero to $299 million range.

“As an industry — individually and collectively — we have invested billions of dollars in improving processes; internal controls; technology and analytical tools to detect, monitor and prevent fraud,” Gooden said on the industry’s desire to be good stewards of investors’ money.

SSL is currently unable to account for billions of dollars for dozens of victims, including Bolt whose account is missing more than US$12.75 million ($1.98 billion). There have also been a number of elderly clients who are victims in the situation, Finance Minister Dr Nigel Clarke acknowledged in a statement.

On Friday police searched two premises in the Millsborough area and Havendale connected to Jean-Ann Panton, the former SSL wealth advisor who is the main suspect in the alleged fraud. She is being represented by Tamika Harris.

Dr Clarke intends to deliver a policy address tomorrow on the broader issues surrounding the SSL matter. He said that the Financial Investigations Division and the Fraud Squad have operational independence to pursue this investigation and that no stone will be left unturned. This event has been discussed globally by news entities such as Al Jazeera, CNN, Bloomberg, AP News and many others. It’s unknown how this will affect Jamaica’s evaluation by the Financial Action Task Force next month.