Shirley Ann-Eaton, Contributor
Carlos Hill and David Smith
The establishment and operations of unregulated investment schemes have elicited strong emotional responses from members of the public who support the operations of these schemes.
Some are blaming the authorities for interfering with their 'right' in a free-market economy, to 'invest' their money with whom, where, and how they want. Others accuse the authorities of conspiring with 'big banks' to prevent them from making more money.
The existence of a free-market system does not mean that there should be no rules to protect the public. All sectors of a free-market economy are regulated to protect the public. There are regulations pertaining to health and sanitation standards to protect the public's health, regulations concerning the establishment and operations of schools to protect our children, as well as licensing and other standards for health professionals, such as doctors, to protect the public from 'quacks'.
In market-driven economies, the operations of financial services institutions and markets are subject to regulation and close supervision.
reasons for financial regulation
The reasons for financial regulation are: to protect the public who do not have sufficient information or knowledge of the products, services, and operations of financial services entities to whom they hand over their money; to ensure the stability of a country's financial system; and, to maintain the viability of financial services institutions.
Financial regulation seeks to ensure that the owners and managers of financial services institutions are honest persons with the appropriate skills to carry out their responsibilities in an ethical, prudent, and lawful manner.
Regulation also prescribes limits on what these entities may do, as well as set out reporting and disclosure requirements which allow for transparency and accountability in the handling of money entrusted to them by the public.
The imbroglio pertaining to the plethora of unregulated investment schemes operating in Jamaica, which is evidenced by the commentary on these schemes by sections of the public, suggests that many are unaware that the Jamaican authorities have, over the years, expanded and modernised financial regulation in keeping with international standards and changes in the local, regional, and international markets.
Financial services institutions are usually placed into two categories. There are deposit-taking (or banking) institutions and non deposit-taking (or non-bank) institutions. In Jamaica, deposit-taking institutions (commercial banks, merchant banks, trust companies, building societies) are regulated and supervised by the Bank of Jamaica. (Credit unions are also categorised as deposit-taking institutions and will soon be brought under the supervision of the Bank of Jamaica).
Non-deposit-taking institutions (securities dealers, dealers' representatives, investment advisers, insurance companies, insurance brokers and agents, collective investment schemes or mutual funds, unit trusts and private pension funds) are regulated and supervised by the Financial Services Commission (FSC).
Enforcement
The Bank of Jamaica and the FSC are established by acts of Parliament. These acts set out the purpose, function, powers, etc., of these two regulators. The establishment and operations of the various types of financial institutions must be carried out in accordance with their own acts. For example, The Banking Act requires a deposit-taking entity which is carrying out commercial banking business to be licensed.
The act and regulations also set out rules under which a commercial bank must operate, and gives the Bank of Jamaica powers to take certain actions to ensure that a bank is operating in keeping with the law. In the case of a non- deposit-taking entity such as a securities dealer or an investment adviser, the Securities Act requires an entity carrying out securities business or giving investment advice to be licensed and registered to carry out such business. The act and regulations set out who is a securities dealer and investment adviser, what constitutes securities and dealing in securities, what is the giving of investment advice, etc. Enforcement of the provisions of the Securities Act and regulations is reposed in the FSC.
Regulators, in carrying out their functions, take into consideration the interest of the public. Where an entity is operating in contravention of the law, regulators will oftentimes, in the first instance, seek dialogue with the entity with the objective of bringing the entity into compliance with the law within a stipulated time.
Jamaica's two financial services regulators are empowered to take action against entities which are carrying out any type of business which is required by law to be licensed, registered, and supervised. One course of action which the regulators can take is that of issuing a 'cease-and-desist order'.
A cease-and-desist order is an instruction to an entity requiring it to discontinue any business, transactions, or any actions which are in contravention of any of the various financial acts. For example, where a cease-and-desist order is issued by the FSC under the Securities Act, the entity must immediately cease taking money from existing and new investors and discontinue its operations until it has acquired the required license or registration. Until it has complied with the requirements of the law, it could transfer the business to a licensed entity - usually with the consent of the existing investors - or it must return all moneys which it has received to the investors.
The FSC, following investigations triggered by information and complaints received by it, served a cease-and-desist order on Olint Corp Limited/David Smith, et al; Overseas Locket International Corp./David Smith, et al; Lewfam Investments and Trading Limited/Neil Lewis et al; and LewFam Investments Club/Neil Lewis, et al.
Olint and LewFam sought to prevent execution of the order. On November 3, 2006, the court granted a stay of execution of the commission's cease-and-desist order until March 26, 2007, when the appeals of Olint and LewFam would be heard by the court. It was also ordered that there should be no increase in the membership of Olint until the appeal was heard.
On December 24, 2007, the FSC was vindicated when the court held that the operations of Olint were in breach of the provisions of the Securities Act by its dealing in securities and engaging in the participation of a profit-sharing agreement, issuing investment contracts, and providing advice to potential investors without the required licences and registration. The court held that LewFam was in breach of the Securities Act in performing the functions of a dealer's representative or investment adviser's representative without the required registration under the Securities Act. The court also found that the commission's issuance of the cease-and-desist order was correct and directed that the stay of execution of the order was ended. While the authorities awaited the decision of the court, Olint carried its operations off-shore and outside the immediate jurisdiction of the Jamaican authorities.
seeking a declaration
A claim was filed by Cash Plus Limited in May 2007, seeking a declaration: whether Cash Plus Limited is carrying on business which falls within the purview of the FSC or the Securities Act; whether the loan agreement which is non-tradable between a private company and a private citizen constitutes a security under the Securities Act; and if a private company borrows money from members of the public, pays a return on the borrowed money and makes the principal available on demand, those acts by themselves constitute the taking of deposits as a bank under the Banking Act. This matter is set for hearing before the Court on January 23, 2008.
After conducting investigations, the Financial Services Commission on December 28, 2007, issued a cease-and-desist order to Cash Plus Limited and its employees and agents Carlos O. Hill and Kahlil Harris. The order instructs these persons to immediately cease: carrying out securities business without a licence; functioning as a dealer's representative without being registered; and, issuing unregistered securities.
In both the Olint and Cash Plus situations, the issues revolve around the meaning of the word 'securities' under the Securities Act.
In the case of Olint, the court found that the operations of Olint showed participation in profit-sharing agreements; that agreements between Olint and members of the public were investment contracts; and, both were, therefore, 'securities' under the Securities Act. The act requires that all persons dealing in 'securities' must be licensed to do so. It does not matter whether profits are gained from the "trading of foreign exchange or by investment in real property or on the stock market, or through commercial papers or other instruments." Olint was also held to be providing investment advice to potential and existing investors and carrying on an investment-advice business. The Securities Act requires persons providing investment-advice services to be registered under the act to provide those services.
securities
In the case of Cash Plus et al, the issues also revolve around the meaning of 'securities' and whether the 'loan agreements' between Cash Plus and members of the public are 'securities' under the Securities Act. The regulator is obviously of the view that Cash Plus et al. are carrying on a securities business without the required licence; functioning as securities dealer's representatives without being registered to do so under the act; and, are issuing unregistered securities to the public in breach of the Securities Act.
In recent times, there has been reference to, and the use of the term 'investment club' and 'members' club' to describe some of these unregulated schemes. Investment and members' clubs exist in many countries and consist of groups of people who come together to invest their money for a profit. They are usually required to be registered and operate within certain regulatory parameters.
Despite the massive public-education programme carried out by the FSC and other agencies such as the Jamaica Deposit Insurance Corporation - which provides insurance for the deposits in licensed deposit-taking institutions - reports suggest that hundreds of millions of dollars have been placed in these unregulated schemes and that members of the public continue to hand their money over to these schemes. Is this need, greed or ignorance?
Shirley-Ann Eaton is an attorney-at-law and lecturer in the Department of Management Studies at the University of the West Indies, Mona.
