Transitional Demands on Regulatory Resources and Focus The Trinidad and Tobago experience A Presentation at the World Bank Conference on Aligning Supervisory Structures with Country Needs by: Ms. Catherine Kumar – Inspector of Financial Institutions Central Bank of Trinidad and Tobago June 6, 2006

2 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Outline of Presentation Background of Trinidad & Tobago – Economic and Financial Landscape Background of Trinidad & Tobago – Economic and Financial Landscape Factors that led to new regulatory structure Factors that led to new regulatory structure Challenges of Reforming the regulatory and supervisory process Challenges of Reforming the regulatory and supervisory process Lessons Learnt and the Way Forward Lessons Learnt and the Way Forward

Location – Trinidad and Tobago

4 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Economic Background Trinidad and Tobago Developing country Developing country Population – 1.3 million Population – 1.3 million Positive growth over last decade Positive growth over last decade Energy-based economy Energy-based economy GDP growth projected to reach 10% in 2006 GDP growth projected to reach 10% in 2006

5 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 The Financial Landscape in Trinidad and Tobago “The local financial system has been responding to a constantly changing macro-environment and has made significant strides….” White Paper on the Reform of the Financial System of Trinidad and Tobago (2004)

6 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 The Financial Landscape in Trinidad and Tobago Factors which have contributed to the complexity of the financial landscape in Trinidad and Tobago: Buoyancy of the economy Buoyancy of the economy Liberalization Liberalization Globalization Globalization Technological changes Technological changes

7 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Operating Environment Intense competition Intense competition Convergence of financial products and services offered by: Convergence of financial products and services offered by: Banks Banks Trust Companies Trust Companies Securities firms Securities firms Insurance companies Insurance companies

8 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Globalization of financial markets Implications: Establishment of large and complex financial conglomerates Establishment of large and complex financial conglomerates Regulatory challenges due to increased potential for systemic risk and contagion risk Regulatory challenges due to increased potential for systemic risk and contagion risk

9 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Critical Components of the Supervisory Response Regulatory and supervisory reform Regulatory and supervisory reform Organizational restructuring Organizational restructuring Effective management of staff resources Effective management of staff resources

Regulatory and Supervisory Reform

11 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Structure of the Regulatory System prior to 2004 Central Bank of Trinidad and Tobago: Bank Supervision Bank Supervision Ministry of Finance (Supervisor of Insurance): Insurance and Pension Supervision Insurance and Pension Supervision

12 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Structure of the Regulatory System prior to 2004 Ministry of Labor & Cooperative: Credit Unions Credit Unions Securities & Exchange Commission (S.E.C.): Securities market Securities market

13 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Phase I Transfer of Insurance and Pension Supervision to Central Bank (May 2004) Transfer of Insurance and Pension Supervision to Central Bank (May 2004) Phase II Establishment of supervisory cooperation with the S.E.C. and other regulators Establishment of supervisory cooperation with the S.E.C. and other regulators Regulator for other financial institutions e.g. Credit Unions, Home Mortgage Bank Regulator for other financial institutions e.g. Credit Unions, Home Mortgage Bank Regulatory & Supervisory Reform – Integrated Supervision

14 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Regulatory & Supervisory Reform – Integrated Supervision Phase III – Consideration for a fully integrated supervisor under the Central Bank or some other autonomous body (Long Term) Phase III – Consideration for a fully integrated supervisor under the Central Bank or some other autonomous body (Long Term)

15 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Phase 1 Amendment of Insurance Act – transfer of supervisory and regulatory authority from Supervisor of Insurance to Central Bank Amendment of Insurance Act – transfer of supervisory and regulatory authority from Supervisor of Insurance to Central Bank  Oversight of:  6 commercial banks  17 ‘non-banks’  45 insurance companies  2500 insurance intermediaries  208 registered pension plans

16 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Legislative changes Amendments to: Insurance Act, 1980 Insurance Act, 1980 Financial Institutions Act, 1993 Financial Institutions Act, 1993 Cooperatives Society Act Cooperatives Society Act to address current fragmented regulatory and supervisory framework

17 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Essential substantive amendments Consolidated supervision Consolidated supervision Sharing of information Sharing of information Large exposures Large exposures Civil money penalties Civil money penalties

18 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Supervisory Architecture Issuance of Guidelines: Issuance of Guidelines: Anti-Money Laundering Anti-Money Laundering Fit and Proper Fit and Proper Prudent person approach to investment and lending Prudent person approach to investment and lending Corporate Governance Corporate Governance Security of customer information Security of customer information

19 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Supervisory Oversight Goal: Goal: Single team of supervisors to monitor the adherence of major groups to regulatory requirements Challenge: Challenge: Ideal organizational structure

20 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Restructuring the Supervision Department Prompted by: Integration of banking and insurance sectors Integration of banking and insurance sectors Ability to achieve economies of scale and scope Ability to achieve economies of scale and scope => More efficient allocation of scarce resources

21 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Organizational Restructure Technical assistance (IADB): Upgrading skills and capacities of Staff Upgrading skills and capacities of Staff Creating integrated supervisory authority for: Creating integrated supervisory authority for: Banking Banking Insurance Insurance Private pension funds Private pension funds

Challenges of Integrated Supervision

23 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Human Resources Challenges Recruitment of specialized staff Recruitment of specialized staff Actuary, life and property and casualty operations experts Actuary, life and property and casualty operations experts Rigorous training Rigorous training Organizational restructuring Organizational restructuring

24 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Cultural Challenges Personnel transferred from Supervisor of Insurance felt alienated Personnel transferred from Supervisor of Insurance felt alienated Bank Supervision staff traumatized when staff from Office of Supervisor of Insurance recruited into higher positions Bank Supervision staff traumatized when staff from Office of Supervisor of Insurance recruited into higher positions

25 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Move to Fuller Integration Restructure of department to allow for fully integrated supervision of banking and insurance Restructure of department to allow for fully integrated supervision of banking and insurance Establishment of Market Conduct Unit Establishment of Market Conduct Unit Retraining of staff Retraining of staff Physical movement Physical movement New institution portfolio allocation New institution portfolio allocation

26 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Areas of emphasis Communication with the insurance industry Communication with the insurance industry Consultative approach: Consultative approach: Formulation of guidelines Formulation of guidelines Formulation of new reporting schedules Formulation of new reporting schedules Establishment of Office of the Financial Services Ombudsman Establishment of Office of the Financial Services Ombudsman

Lessons Learnt & The Way Forward

28 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Major Challenges Harmonization of the information technology system for the banking, insurance and pension sectors Harmonization of the information technology system for the banking, insurance and pension sectors Consolidated supervision of large, complex conglomerates Consolidated supervision of large, complex conglomerates

29 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Lessons Learnt Technical assistance may be necessary Technical assistance may be necessary Dealing with the cultural aspect of integration is critical Dealing with the cultural aspect of integration is critical Training is necessary Training is necessary Ensure competent personnel retained Ensure competent personnel retained The harmonization process must be managed effectively The harmonization process must be managed effectively

Conclusion

31 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Benefits of Integrated Supervision Regulation by sector is not viable due to: the increase in the number of financial conglomerates and the increase in the number of financial conglomerates and the blurring of boundaries between products the blurring of boundaries between products =>The unification of the supervisory process will reduce regulatory gaps

32 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Role of the Central Bank as Integrated Supervisor Chosen due to track record & strong credibility in the financial environment Chosen due to track record & strong credibility in the financial environment Continue to ensure compliance with international standards: Continue to ensure compliance with international standards:  Basel Core Principles (BCPs)  Insurance Core Principles (ICPs)

33 Catherine Kumar, Inspector of Financial Institutions, June 6, 2006 Concluding remarks The integrated supervisory process continues to be a challenge The integrated supervisory process continues to be a challenge The need to address recruitment and training policies is critical The need to address recruitment and training policies is critical As the financial landscape changes, there may be need to restructure again to respond to challenges As the financial landscape changes, there may be need to restructure again to respond to challenges

The End Thank you! Questions? Comments?