The Bermuda Monetary Authority/(Revised Fee Structure)

On Friday, December 7, the Minister of Finance, the Hon. Curtis Dickinson, JP MP, passed an Order in the House of Assembly that provides for amendments to the fees charged by the Bermuda Monetary Authority (“the Authority”) to financial institutions within various industry sectors pursuant to Annex I of the Act.

“The Bermuda Monetary Authority has established a track record of success, and earned a positive reputation amongst industry stakeholders, said Minister Dickinson. “However, to maintain its capability to meet increasingly demanding international standards and expectations for financial supervisors, and continue to deliver on its strategic objectives while facing the heightened complexities characterizing the supervised sectors, the Authority must further enhance its operations and augment its supervisory resources to support key activities.

“In the above context, the Authority undertook a comprehensive target operating model (“TOM”) review with the assistance of an international management consulting firm. The result of this review was a multiyear plan to effect improvements in the organisation and operations of the Authority. Based on this plan, the Authority has already begun to implement changes to the way it works and is organised to align the Authority’s human capital and business procedures with its changing strategic priorities.

“One important aspect of the TOM review involved an analysis of the Authority’s structure and staffing levels, and an examination of the costs related to supervising different elements within all sectors of the financial services community. As part of this analysis, the external consulting firm conducted an independent third-party benchmarking exercise in which they studied peer jurisdictions to ascertain the fees charged for comparable supervisory activities to those performed by the Authority, in addition to reviewing the staffing levels needed to effectively perform these activities.”

The report produced as a result of the benchmarking exercise highlighted that human and financial resource levels within the Authority are below expected levels given the organization’s continually expanding mandate and what it will need to achieve in the future.

The TOM review concluded that the Authority will require up to 39 additional full-time employees by 2020 to continue to effectively discharge its duties. It is proposed that these new employees be added in a phased manner over the course of 2019 and 2020. This action is independent of recruitment by the Authority to support the implementation of the regulatory framework for the digital asset businesses expected to enter Bermuda following the implementation of the Digital Asset Business Act 2018. The licensing fees established for such firms are expected to cover the costs associated with supervising this sector.

There are significant financial implications associated with this necessary increase in staffing levels, and with implementing other improvements in the organisation and operations of the Authority recommended by the TOM review. Specifically, annual operating costs are projected to increase to $61 million by 2020, an increase of $11.7 million over the 2017 year-end figure. As the Authority incurred an operating loss of $1.6 million in 2017, and is projected to again incur an operating loss in 2018, it is essential that fee structures for regulated firms be revised.

Notwithstanding the need to implement fee increases, the Authority recognizes that market conditions remain challenging in a number of regulated sectors. Accordingly, the revised fees made considered prevailing conditions, were carefully researched and are presented with the sustainability and continued credibility of the regulatory regime in mind.

The TOM review and benchmarking exercise incorporated a review of the various supervisory activities performed by the Authority and noted that the current fees often did not reflect the supervisory effort needed to perform them. Furthermore, activities were identified for which the Authority charges no fees, yet the supervisory resources devoted to them are substantial.  In part, this is attributable to the fact that commencing during the global financial crisis, and continuing in recent years, fee increases were moderated to reduce the impact on the financial services industry. This has, however, contributed to the Authority operating at a deficit, with resultant budget shortfalls being covered from existing reserves.

Consequently, certain existing fees will be adjusted and/or new fees be introduced to reflect the Authority’s resource utilization for these ongoing supervisory activities. Also, the basis on which fees are charged will be simplified so that entities will find it easier to determine what fees they need to pay. This same philosophy will be applied in the future as the Authority’s mandate expands to encompass new activities.

The revised fees proposed have been informed by four guiding principles:

    1. Fund the Authority’s operating budget: counterbalance the projected cost increase of $11.7 million annually by 2020;
    2. Align fees to supervisory activity by sector: adjust fees to closely reflect resources utilized in regulating firms within that sector;
    3. Increase discretion of supervisory teams: allow fees to be levied for activities that require exceptional Authority resources; and
    4. Maintain competitiveness: account for pricing relative to peer regulatory bodies to ensure Bermuda remains competitive.

It was initially intended that the revised fees be introduced over two years (2019 and 2020). During the consultation process, and in subsequent meetings the Authority held with relevant industry stakeholder groups, the most prevalent comment was that the impact of the fee increases should be ameliorated by adopting a longer implementation period. As such, the Authority now proposes a three year phasing-in period (2019, 2020 and 2021). The insurance industry’s request that the Authority have greater flexibility regarding fees to be applied in specific circumstances, such as where affiliated insurers have similar risk profiles and in cases where combined application fees would otherwise be payable, has also been addressed via separate creation (in the Insurance Act) of a power to exempt or reduce fees.

 

-ENDS-