A Progress Report - Conduct Framework for the Financial Services Sector

Friday, September 10th, 2021

Mr Speaker, the purpose of this Statement is to provide an update on the progress made to enhance the conduct framework for the financial services sector in Bermuda. The enhanced framework is intended to further develop existing conduct requirements to create fairer outcomes for customers as they engage with the banking sector.

Mr Speaker, the Government takes the view that the regulatory framework for financial institutions should be enhanced to provide additional requirements regarding the conduct of financial institutions and the protection of customers. The Government also takes the view that the Authority, in particular, should adopt clear and consistent regulatory processes to achieve this objective.

Mr Speaker, against this backdrop, and in order to further enhance the financial sector framework, the House is advised that the Authority does not have a specific power to enforce protection of customers using financial services offered by financial institutions. Although, certain Acts make explicit note of the Authority’s role in protecting clients and potential clients of registrants, the relevant provisions of the Banks and Deposit Companies Act, as well as other relevant Acts, are primarily concerned with preventing breaches of law rather than focusing on fair outcomes for customers, specifically.

Mr Speaker, it is proposed to amend the Banks and Deposit Companies Act 1999, to provide a power for the Bermuda Monetary

Authority (the “Authority”) to issue codes of conduct in relation to the manner in which an institution conducts deposit-taking business. It is also proposed that appropriate changes will subsequently be made to the customer-facing component of the regime, which will fall under the auspices of the Department of Consumer Affairs. Thus, matters relating to customer complaints will be overseen by the Department of Consumers Affairs (“the Department”). Discussions between the Authority and the Department have commenced and will continue to be progressed to ensure that the overall regime achieves the objective of providing appropriate protections to the customer. As part of this work, there will also be amendments made to regulatory and other legislation, to allow for appropriate sharing of information.

Mr Speaker, as noted previously, the Authority does not seek to resolve individual complaints, but will ensure that the financial institutions have the appropriate policies, processes and internal structures to treat their customers fairly as well as a robust complaint handling mechanism. The Authority will coordinate its efforts with the Department of Consumer Affairs to monitor breaches of conduct across each sector, and to deal with non- compliant companies. They will also monitor how institutions are adhering to the market Codes of Conduct or Practice.

Mr Speaker, in view of this, the House is advised that the Authority has conducted a review of conduct standards set down by the following international standard setting bodies:

  • The Bank for International Settlements
  • The International Association of Insurance Supervisors

• The International Organisation of Securities Commissions

  • The G20 High Level Principles on Financial Consumer Protection 2011 and
  • The Organisation for Economic Cooperation and Development

Mr Speaker, the Standards establish the actions that could be taken by supervisors to develop an effective conduct framework. Regarding general measures to safeguard the interests of both the consumer and an institution, Principle 1 of the G20 High Level Principles on Financial Consumer Protection 2011, provides that financial consumer protection should be an integral part of the legal, regulatory and supervisory framework. Principle 1 also provides that such protection should also reflect the diversity of national circumstances and global market and regulatory developments within the financial sector.

Mr Speaker, in this regard, the House is advised that the Authority commenced a consultation process in August 2020, concluding in April 2021. The objective of this consultation was to gather views of the public on the Authority’s long-term conduct agenda. Reference is made to the following consultation package:

  • Bermuda Monetary Authority Discussion Paper entitled, A Conduct of Business Regulatory Framework for Bermuda, dated August 2020.

o Bermuda Monetary Authority Consultation Paper entitled, Proposal for a Conduct of Business Regulatory Regime, dated December 2020.

Mr Speaker, the Authority’s proposed approach to the supervision of conduct of business has been encapsulated by six (6) high-level principles as follows:

  • the firm must ensure fair and equitable treatment of its customers;
  • the firm must have continuing regard for the interests of its customers in the conduct of its business;
  • the firm must ensure that communications with customers are fair, clear and not misleading;
  • the firm must ensure that protection of customer’s assets against loss, fraud and misuse;
  • the firm must handle complaints and errors in a manner that is fair and expedient; and
  • where dealing with retail customers, the firm must ensure that individuals are aware of the responsibilities within the business relationship and have access to appropriate financial educational resources.

Mr Speaker, the package was targeting a wide range of stakeholders, both general public and relevant organisations and institutions. A stakeholder response letter was also published on the Authority’s website in April of this year to address the queries raised during the consultation process.

Mr Speaker, among the multi-layered results that can be extracted from stakeholders’ replies, the most prominent areas of actions include those related to scope, timing, and retail vs. non-retail customers. Below is a summary encompassing the main findings of the consultation:

  • Application of the proposal

The Authority advised that the details will be incorporated into sector-specific codes of conduct. The Authority also advised that the codes will reflect the diversity of Bermuda’s financial services market.

  • Timing/Implementation

The Authority advised that it is intended that codes of conduct for the banking sector will be put in place before year-end.

Codes of conduct for the insurance sector will be amended to include the relevant provisions before year-end.

A transition period, yet to be determined, will also be put in place to provide institutions with time to adjusts to new requirements.

Regulatory treatment of retail and non-retail customers

The Authority advised that the codes are intended to be proportionate to the nature of the customer and that initial implementation will be primarily focused on retail customers.

Cross-border scope

The Authority advised that the codes are intended to be applied in the same manner as all other provisions of the relevant framework. The Authority also accepts that an entity may comply with what they deem to be a higher standard required by a foreign jurisdiction.

Mr Speaker, in that context, the key amendments to the Banks and Deposit Companies Act 1999 are as follows:

  • The Authority’s statutory powers will be expanded to include protection for customers and the promotion of the fair treatment of financial services customers.
  • The Authority’s powers to obtain information will be expanded to include a power to obtain information and reports from a licensed institution regarding codes of conduct. It is also proposed to amend the relevant provision of the BDCA to include a power to obtain information and reports regarding the safeguarding of the interests of clients and potential clients of an institution.
  • Minimum criteria for licensing are set down in the Second Schedule of the Act. The Minimum criteria will be amended by including obligations to comply with codes of conduct.
  • The Authority and the Ministry of Home Affairs will also agree additional changes to the framework to provide for information sharing between the Authority and the Department of Consumer Affairs.

Mr Speaker, the House is also advised that the Authority carried out a review of relevant frameworks in other places, and noted that while some jurisdictions have separate supervisory authorities for prudential and conduct supervision, there are some where the same regulators also have responsibility for both prudential and conduct supervision. Given the scale of the Bermuda financial services market, it is feasible for the Authority to assume the conduct of business mandate alongside its prudential responsibilities.

Mr Speaker, the Authority will initially incorporate conduct supervision within its supervisory units, as these units already have a strong working relationship with the financial services institutions and understand the business model of each sector. As the conduct supervisory framework

matures, the Authority aims to establish a dedicated unit devoted to conduct supervision.

Mr Speaker, the Authority will soon issue the relevant draft Code of Conduct for consultation, as it is proposed to finalise the Codes by year-end 2021. In addition, the Authority has already met with financial institutions to discuss these matters. It is also proposed to put in place a suitable transition period to allow banks to come into full compliance. It is also agreed that the Authority will proceed with the code of conduct proposal in the first instance. Amendments to the Consumer Affairs regime will be assessed based on the outcomes of technical discussions already underway, together with the feedback received during the next phase of the consultation process.

Mr Speaker, in closing I would highlight the importance of these proposed changes to the regulatory framework, to ensure that there is even greater focus within this jurisdiction, on matters relating to consumer protection in the financial services sector. This is consistent with this Government’s commitment to a fairer and better Bermuda. In this regard, I wish to express my sincere thanks to the Authority, the Ministry of Finance, the Ministry of Home Affairs together with the Ministry of Legal Affairs for their assistance with the development of the framework.

Thank you, Mr Speaker.