Are you someone who reads all the reviews on Amazon and thoroughly researches a product before adding it to your cart and checking out? Do you research the financial institution where you are depositing or investing your money with the same thoroughness? Recent incidents in the Jamaican financial sector will hopefully make you more discerning about where you put your money.
The first thing you should want to know when placing money with a financial institution is whether they are regulated or not. Until recently, the Financial Services Commission (FSC) was one side of the financial sector supervisory coin in Jamaica, the other being the Bank of Jamaica (BOJ).
The BOJ supervised Deposit Taking Financial Institutions, Credit Bureaus, and Money Services businesses such as cambios and remittance companies while the FSC supervised Non-Deposit Taking Financial Institutions. These included Securities Dealers, Insurance companies, Mutual Funds, Unit Trusts, and Private Pensions Funds.
However, the Finance Minister announced last month that the Bank of Jamaica will be taking over the regulation of investment companies and others from the Financial Services Commission, alongside plans to downsize the FSC to a consumer agency and police of the market conduct of licensed financial firms. What that means is the BOJ will now have oversight of insurance companies, the securities, and the private pension markets.
Irrespective of these and any future regulatory changes, the key thing is to ensure that the financial institution that you are dealing with has evidence of a licence or designation from the relevant regulator.
The other thing that is important to know about a financial institution is its capital base. The capital acts as a buffer to absorb losses experienced by the institution and if it is large enough, it will allow the company to continue meeting its obligations to its clients and other creditors. In essence it is the "cushion" for potential losses and protects a financial institution’s clients.
However, it is not just enough to look at the absolute value of the total capital that your financial institution maintains. What is more critical, is the size of its capital base in relation to its assets. This will give a good indication of the strength and safety of the institution relative to its peers.
It is for this reason that regulators usually stipulate that a financial institution keep a specified minimum percentage of its total assets as capital. The higher this percentage the better it is for the institution and its clients. An institution with a capital base that is 8% of its assets is considered to be less financially flexible than an institution with a capital base that is 15% of its assets.
This assessment of capital to assets is known as the Capital Adequacy Ratio (CAR). Regulators in most countries, Jamaica included, establish and monitor CAR to protect depositors and investors, thereby maintaining confidence in, and promoting the stability and efficiency of financial systems. The requirement for deposit taking institutions in Jamaica such as banks is a minimum of 6% and for non-deposit taking institutions, the capital adequacy ratio must be no less than 10%.
Two types of capital are usually measured. The first type is tier one capital, which can absorb losses without a financial institution being required to cease trading. The second type is tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Regulators also make stipulations about the quality of the assets that are held as capital. This is known as the risk-weighted capital adequacy ratio. The objective is to ensure that the institution not only has sufficient capital to withstand changes in the value of its assets, but that the capital itself is invested in high quality instruments that can be readily redeemed if the need arises.
These are just some but not all the things you should consider when assessing the safety of the financial institution you are doing business with. Knowing that the financial institution you are doing business with is under the watchful eye of a regulator and has adequate capital will help you to rest better at night.
Toni-Ann Neita-Elliott, CFP is the Vice President, Sales & Marketing at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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