Chapter 5. The Legal Matrix Governing Directors and Officers of Financial Supervisors: Understanding their Role in Governance

• Pages: 99-146

CHAPTER 5

THE LEGAL MATRIX GOVERNING DIRECTORS AND

OFFICERS OF FINANCIAL SUPERVISORS

Understanding their role in governance

C B

INTRODUCTION

The literature on governance in organisations is heavily concerned with commercial

enterprises. Hence the term ‘corporate governance’, which, in the early development

of the concept, and stricto sensu, has been taken to mean control and accountability

systems for corporations1– business associations run largely by private capital2 which

are registered under the relevant companies enactment. Principles of corporate gov-

ernance have nonetheless come to be recommended for and applied in government

institutions, as e orts at restructuring and transforming the public sector3 have been

infl uenced signifi cantly by private sector concepts and models.4 An aspect of public

sector transformation and modernisation has been the creation of statutory bodies5

assigned regulatory portfolios. Particularly with this delegation of governmental power

to an increasing number of statutory agencies in several jurisdictions, academic stud-

ies and commentaries on public sector governance have emerged.6 Since the turn of

the twenty-fi rst century, there has been an emerging focus within the public sector

1 J Farrar, Corporate Governance: Theories, Principles and Practice (3rd edn, OUP 2008) 3.

2 Structural conversion by governments of public sector trading operations or services of a

commercial nature traditionally delivered by public sector departments into state-owned registered

companies has, increasingly, become a feature of the public sector. These companies have been

referred to as ‘corporatised’ enterprises by J Farrar, Corporate Governance: Theories, Principles and

Practice (3rd edn, OUP 2008) 458.

3 In the UK, public sector transformation since the 1980s has proceeded under the label ‘The

New Public Management’. For an overview of public sector restructuring in the Commonwealth

Caribbean see, P Sutton, ‘The Public Sector Reform in the Commonwealth Caribbean: A Review

of Recent Experiences’, Caribbean Paper No 6, Centre for International Governance Innovation

2008, available at <http://www.cigionline.org/sites/default/fi les/6.%20Public%20Sector%20

Reform%20in%20the%20Commonwealth%20Caribbean.pdf>.

4 E Ferlie, L Ashburner, L Fitzgerald and A Pettigrew, T he New Public Management in Action (OUP

1996). A major corporate governance study relating to the Caribbean includes what the author

refers to as ‘state-owned enterprises’: VL Kerr, E ective Corporate Governance (GovStrat 2005) esp

Ch 9. The term ‘state-owned enterprises’ does not appear to be defi ned in the work but it seems

to be focussed on the type of fi rm referred to by Farrar as ‘corporatised enterprises’ (above n 2).

5 These are distinct from what Farrar calls ‘corporatised entities’ (above n 2).

6 For example, D Oliver, T Prosser and R Rawlings, The Regulator y State (OUP 2010); R Mulgan,

Holding Power to Account (Palgrave Macmillan 2003); C Scott, ‘Accountability and the Regulatory

State’ (2000) 27(1) Journal of Law and Society 38; E Ferlie, L Ashburner, L Fitzgerald and APettigrew,

The New Public Management in Action (OUP 1996). For a Commonwealth Caribbean perspective, see,

for example, S Ryan and A Bisessar (eds), Governance in the Caribbean (SALISES 2002); DMcKoy,

Corruption: Law, Governance and Ethics in the Commonwealth Caribbean (Hansib 2012).

100 Commonwealth Caribbean Corporate Governance

governance literature on the institutions responsible for fi nancial sector regulation and

supervision.7 This focus is perhaps understandable in view of the fact that these institu-

tions have become governance watchdogs for the entities falling within their regulatory

purview. In addition, it has been argued that regulatory governance has become a

point of interest because changing business models in the delivery of fi nancial services

as well as fi nancial sector distress have sparked debates about the most suitable struc-

ture for regulation.8 Importantly too, there is empirical research which indicates that

the quality of regulatory governance has an impact on fi nancial system stability9– a

critical goal of fi nancial regulation.

In Commonwealth Caribbean jurisdictions, as elsewhere, there has been a grow-

ing tendency to establish fi nancial regulators/supervisors as statutory organisations.10

The Commonwealth Caribbean has not, however, featured much in the emerging

literature on fi nancial regulatory governance.11 Additionally, despite the fact that statu-

tory regulatory authorities are typically led by a board of directors, there appears to

be few studies which examine in some detail governance issues relating specifi cally to

7 For example, A Page, ‘Regulating the Regulator– A Lawyer’s Perspective on Accountability and

Control’, C Goodhart, ‘Regulating the Regulator– An Economist’s Perspective on Accountability

and Control’ and R Lastra and H Sham, ‘Public Accountability in the Financial Sector’ all in

E Ferran and C Goodhart (eds), Regulating Financial Services and Markets in the Twenty First Century

(Hart 2001) 127, 151 and 165 respectively; D Masciandaro and M Quintyn (eds), Designing

Financial Supervision Institutions: Independence, Accountability and Governance (Edward Elgar 2007). See

especially M Quintyn, S Ramirez and M Taylor, ‘The Fear of Freedom: Politicians and the

Independence and Accountability of Financial Supervisors in Practice’ in D Masciandaro and

M Quintyn (eds), Designing Financial Supervision Institutions: Independence, Accountability and Governance

(Edward Elgar 2007) 62–63.

8 M Quintyn, S Ramirez and M Taylor, ‘The Fear of Freedom: Politicians and the Independence

and Accountability of Financial Supervisors in Practice’ in D Masciandaro and M Quintyn

(eds), Designing Financial Super vision Institutions: Independence, Accountability and Governance (Edward

Elgar 2007) 62–63.

9 U Das, M Quintyn and K Chenard, ‘Does Regulatory Governance Matter for Financial System

Stability? An Empirical Analysis’ (2004) IMF WP/04/89.

10 Commonwealth Caribbean Central Banks are statutory creatures. Though monetary policy

is the core function of central banks, these central banks have also been typically assigned

supervisory and regulatory functions for at least part of the fi nancial sector. In Jamaica,

for example, the Central Bank’s supervisory remit includes most deposit-taking fi nancial

institutions. Another statutory body, the Financial Services Commission, has oversight for the

securities, insurance and private pensions sectors. The Jamaica Deposit Insurance Corporation,

established under the Deposit Insurance Act 1998, as a secondary safety net regulator, completes

the main structure for fi nancial regulation in Jamaica. In Trinidad and Tobago the Central

Bank has supervisory responsibility for much of the fi nancial sector of that territory including

deposit-taking fi nancial institutions as well as the insurance and private pensions sectors. The

securities sector is regulated by the Trinidad and Tobago Securities and Exchange Commission

set up under the Securities Act 2012. (The Commission had previously existed by virtue of the

Securities Industry Act 1995.)

11 Notably, a study on fi nancial supervisory governance surveying 55 jurisdictions included two

countries in the Commonwealth Caribbean. See D Masciandaro, M Quintyn and M Taylor,

‘Financial Supervisory Independence and Accountability– Exploring the Determinants’ (2008)

IMF Working Paper WP/08/147, available at <https://www.imf.org/external/pubs/ft/

wp/2008/wp08147.pdf> accessed May 2012.

Chapter 5: The legal matrix governing directors & o cers 101

the directors and o cers of these authorities.12 This contrasts with the overwhelming

attention in the corporate governance literature devoted exclusively to directors of

incorporated associations. Financial regulators, as entities established by statutes, are

not automatically subject to enactments governing companies. It should not there-

fore be assumed that corporate governance rules emanating from companies legisla-

tion apply automatically to the directors, o cers and structure of statutory boards.

Though fi nancial regulatory authorities play an important role in ensuring that the

entities they regulate and supervise observe corporate governance laws and codes, the

precise legal framework governing the boards and o cers of these statutory bodies,

particularly those in Commonwealth Caribbean jurisdictions, appears to have so far

received relatively little commentary in the literature.

Against this background, this chapter examines directors and o cers in the con-

text of governance of fi nancial regulators in the Commonwealth Caribbean. This is

perhaps timely given the renewed thrust regarding governance in public sector institu-

tions in at least one Commonwealth Caribbean jurisdiction, Jamaica. The government

of this country in 2011 approved for implementation a new policy on governance in

the public sector.13 This policy, despite its currency, is necessarily general in that it is

designed for all public sector entities, irrespective of their juridical nature or functional

remit. Corporatised entities, for example, though subject to general public sector gov-

ernance principles, may, arguably, require a nuanced governance regime when com-

pared with other types of public sector entities. In relation to regulatory institutions in

the public sector, a case has been made that fi nancial regulators are distinctive because,

unlike several other regulators, they oversee issues surrounding market failure includ-

ing questions of governance. Besides, where necessary, these regulators become criti-

cal players in redressing that failure14 by exercising considerable powers legislatively

conferred on them, many of which are highly intrusive and may have a signifi cant

impact on the regulated entity and the wider fi nancial system. Arguably then, they

merit special attention in the governance literature. Besides treating with public sector

bodies in a generic, undi erentiated way, Jamaica’s recent public sector governance

12 The board and senior o cers of fi nancial regulators are usually discussed within the literature

in the context of institutional independence which tends to be partly signalled by the bases

for appointment of board members and o cers, how their appointments may be revoked

as well as their tenure. See, for example, the criteria for institutional independence set out in

AppendixII in D Masciandaro, M Quintyn and M Taylor, ‘Financial Supervisory Independence

and Accountability– Exploring the Deter minants’ (2008) IMF Working Paper WP/08/147,

available at <https://www.imf.org/external/pubs/ft/wp/2008/wp08147.pdf> accessed May

2012. See too Table 3A.2 in the Appendix in M Quintyn, S Ramirez and M Taylor, ‘The

Fear of Freedom: Politicians and the Independence and Accountability of Financial Supervisors

in Practice’ in D Masciandaro and M Quintyn (eds), Designing Financial Supervision Institutions:

Independence, Accountability and Governance (Edward Elgar 2007) 100–101.

13 Corporate Governance Framework for Public Bodies in Jamaica, 2011, available at <http://

www.mof.gov.jm/documents/documents-publications/document-centre/fi le/172-corporate-

governance-framework-september-2011.html> accessed July 2015.

14 J Carmichael, ‘Public Sector Governance and the Finance Sector’ in R Litan, M Pomerleano

and V Sundararajan (eds), Financial Sector Governance: The Roles of the Public and Private Sectors

(Brookings Institution 2002) 121, 130–132.