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INTRODUCTION The end of FY2001/02 marks a major milestone in the restructuring of the financial sector. This was highlighted by:
With this accomplishment:
FINSAC FINSAC was established on January 29, 1997 and was given the mandate to resolve the problems of solvency and liquidity facing the financial sector. In carrying out this mandate it adopted a three-pronged approach:
FINSAC completed the first two phases before the end of FY2000/01 and embarked on the divestment phase culminating in the divestment of the shares in Union Bank and Island Life in that year. The major challenge for FINSAC at the start of FY2001/02 was to sell its shares in LOJ and NCB, two of the largest institutions to be intervened and rehabilitated. FINSAC managed to meet this challenge in spite of the uncertainty which prevailed.
1. Divestment of Non-Performing Loans (NPLs) Consequent on the aggressive marketing of the NPL portfolio, twenty-one (21) expressions of interest were received from local and overseas parties. A pre-qualifying process yielded three approved indicative bidders. However, following the disturbances in West Kingston in July 2001, investor interest in the portfolio waned, and discussions with bidders were postponed. Although prospects for further discussions were affected by the events of September 11, efforts to collect on the bad loans continued. On January 30, 2002, the sale of the portfolio to Jamaica Redevelopment Foundation, Inc., a subsidiary of Beal Bank Inc., was concluded. Beal Bank is based in Texas, United States, and is one of the largest privately-owned financial institutions. It is a wholesale bank, specialising in the secondary market in the United States, where loans and debt securities are bought and sold. The key points of the transaction were as follows:
Future payments will be secured by a debenture in favour of FINSAC to cover all the assets of the Jamaica Redevelopment Foundation.
It should be noted that the arrangements that have been made between debtors and FINSAC will continue in effect and are legally binding, unless replaced by a mutual agreement between the debtor and the purchaser in the future.
2. Divestment of LOJ The process of divestment of the Government of Jamaica’s stake in Life of Jamaica started during FY2000/01 and was successfully concluded during the period under review, after a competitive bidding process. Based on a clearly articulated set of criteria, the FINSAC team recommended the acceptance of the Barbados Mutual Life Assurance Society/Colina Financial Group joint bid. Negotiations with FINSAC and Barbados Mutual Life Assurance Society et al. were concluded on November 15, 2001, with the signing of a sale agreement. The agreement was completed on December 6, 2001. It should be noted that Barbados Mutual Life Assurance Society had already invested in the Jamaican life insurance sector through the December 1999 joint recapitalisation exercise with FINSAC in Island Life Insurance Company. Based on that transaction, Barbados Mutual became the majority shareholder, with 64% of the ordinary shares. In the wake of this recent acquisition, a decision was taken by the majority shareholders in both Island Life and LOJ to merge the two companies, during calendar year 2002.
3 Divestment of National Commercial Bank FINSAC’s activities in the banking sector centred around its investment in National Commercial Bank Jamaica Limited. For FY2001/02, FINSAC concentrated on marketing the bank to potential investors, with a view to securing the sale of its 75% stake. HSBC plc, its investment advisors, assisted in this process. During the period, contact was made with AIC Berkshire Limited, a Canadian mutual fund management company, whose principal shareholder is a Jamaican. AIC Limited had previously expressed interest in acquiring businesses in Jamaica, and had participated in the bidding for Eagle Unit Trust in 1999. After lengthy negotiations, an agreement was reached between FINSAC and AIC. Under the transaction, AIC acquired the entire Government shareholding in the bank, which amounts to 75% of the issued stock, for a price of J$6.034bn. J$2.65bn was paid on March 19, 2001 with the balance to be paid over a period of 9 years in 8 annual instalments, attracting interest at the prevailing Treasury Bill rates. The final payment is due on March 1, 2010. The Government’s interest in the balance purchase price will be protected by a lien over shares to the equivalent in value. During the fiscal year, NCB reached an agreement with the Government on the terms of the monetisation of its stock of FINSAC notes. LRS was issued to the Bank to replace the FINSAC notes.
4. Divestment of Remaining Real Estate Portfolio In light of the Government’s commitment to return all assets acquired by FINSAC to private hands, steps are being taken to divest the remaining assets. These are comprised essentially of real estate. FINSAC is in the process of aggressively marketing the remaining real estate portfolio. An attempt will be made to sell these properties in bulk. However, if FINSAC fails to dispose of them within a specified time frame, efforts will be made to sell them individually through its affiliate Financial Institutions Services Limited (FIS). FINSAC is also in the process of removing the non-trading companies from the Registrar of Companies. In addition, resolutions are being prepared for the liquidation of other companies.
FORENSIC/PROSECUTORIAL ACTIVITIES FINSAC has been involved in the investigations of fraudulent activities committed in FINSAC-intervened entities. An important part of FINSAC’s operations is its Prosecutorial and Forensic Unit. This unit co-ordinates and assists in the conduct of investigations into suspected fraudulent activities committed at FINSAC-intervened entities prior to the intervention. In relation to criminal matters, the Unit initiates investigations and based on its findings, may make a report to the Police Fraud Squad. Thereafter, members of the Unit work closely with the Office of the Director of Public Prosecutions and the Fraud Squad to identify further evidence and assist the prosecutors in trial preparation. In relation to civil matters, the Unit works closely with FINSAC’s external attorneys to prepare matters for suit against persons identified as being responsible for losses suffered by the institutions, where such losses are due to the acts or omissions of these persons. For the fiscal year, the Unit focused on assisting external counsel in the following:
During the period, there were significant developments in the matters being pursued by the Unit. These were as follows:
These activities will be transferred to the Financial Crimes Unit.
REGULATORY FRAMEWORK Since the mid-1990’s the regulation of the financial sector has been significantly enhanced. Following the initial amendments to pieces of legislation which contributed to improved supervision of deposit-taking institutions, efforts were made to strengthen the supervisory capacity of the securities and insurance industries. The result of these efforts were realised during FY2001/02 with amendments to the Securities and Unit Trusts Acts, the enactment of a new Insurance Act and the establishment of the Financial Services Commission. This new supervisory authority has the responsibility to supervise the insurance, securities and pensions industries. The supervision of the pensions industry is pending the enactment of the Pensions Act. The institutional arrangements for the Financial Services Commission reflect an improvement over that which existed for the Securities Commission and the Office of the Superintendent of Insurance. With the gazetting of the regulations, continued training to enhance the supervisory capability of the staff and the provision of additional resources, the supervision of these institutions is expected to ensure that problems in the sector are minimized. In addition, further amendments have been made to the Financial Institutions, Banking, Bank of Jamaica and Building Societies Acts. These amendments have been made to give the supervisor of deposit-taking institutions the authority to intervene in troubled institutions through temporary management and facilitate better supervision of complex groups of companies. It should also be noted that Cabinet has given approval for the drafting of legislation which will allow the establishment of a privately-owned Credit Bureau. This will facilitate sharing of information on the credit history of borrowers, which will hopefully assist institutions in determining risk associated with each creditor. These amendments together with the coordinated approach being taken through the establishment of the Regulatory Policy Council are some of the measures taken to ensure that the problems which emerged in the mid-90’s do not recur.
CONCLUSION FINSAC met significant targets in the past financial year, and has largely completed its mission to restructure and rehabilitate the Jamaican financial sector. With all majority interests in financial sector institutions divested, FINSAC will now focus on implementing its plan to deal with the resolution of all residual issues arising from its programme of intervention. It will also complete its exit from the financial sector. FINSAC will be reducing its operations during FY2002/03 while FIS will carry out its functions associated with Century and Blaise issues and execute the residual activities left by FINSAC. The supervision of all institutions throughout the sector has been enhanced through the strengthened and improved regulatory framework. Consequently, it is expected that the financial sector will once again make significant contributions to economic development.
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