In a clearly written and argued judgment, Justice Ronnie Boodoosingh in Stone Street Capital v Attorney General declared that the amendment to the Central Bank Act No. 18 of 2011 was unconstitutional.
This amendment allowed the Central Bank, where it has assumed control of a financial institution, to maintain that no creditor, shareholder, depositor, policyholder or anyone else could commence or continue any action or proceedings or enforce any judgment or order until the publication of a notification by the Central Bank. In effect the amendment allowed the Central Bank, a part of the executive arm of the state, to institute an indefinite stay on proceedings, including matters which might be already before the court, until it had decided to lift the stay. The learned judge found that the amendment breaches the separation of powers in that the power to stay was a judicial and not an executive power.
I think that the judge is entirely correct. But the judgment also throws into stark relief certain fundamental policy issues which are the granting of draconian powers to a regulator and the appropriate circumstances and checks on the exercise of such powers. I argued in a paper presented to the Caribbean Association of Banks in 2011 that the power to assume control of financial institutions given to central banks in Trinidad and Tobago and in the Eastern Caribbean is a draconian power, whose exercise is not sufficiently guarded by the legislation, having been instituted by panicked governments and fearful regulators.
Section 44D(1) of the Central Bank Act which confers that power to take control of an institution and thereby abrogate property rights is supposed to be exercised only where the Bank is of the opinion that the financial system is in danger of disruption, substantial damage, injury or impairment as a result of the circumstances giving rise to assumption of control. In the Gulf Insurance case where the exercise of section 44D powers was considered, the Privy Council clarified that the threat to the financial system must be seen to arise directly from the bank that the regulator intervenes.
The test of the risk of disruption or substantial damage, or contagion, as it is now called in the jargon of the regulators, constitutes a very high hurdle. It is not the case that trouble at even a very large bank or insurance company will inevitably lead to contagion and systemic collapse, though of course the risk is higher if the financial institution is ‘systemically important’. It depends on the circumstances and how the situation unfolds or is allowed to unfold by the regulator, or if the regulator is simply caught unawares.
The public may flee a troubled institution, but yet maintain confidence in the rest of the system. If there is a ‘living will’, even a large institution may be liquidated or restructured in an orderly fashion without risk to the system as a whole. The risk to the financial system and hence to the economy is therefore a matter for the regulator’s keen assessment of the circumstances of the troubled institution, its products and its market position and that assessment must be done objectively and responsibly.
The regulator will almost always want to play it safe and opt for control because it will be concerned that if it did not assume control of the institution and there was indeed widespread loss of confidence, it would have failed in its duty to safeguard the financial system. The regulator is also fortified to act in this way by virtue of the virtual immunity against suit conferred by section 44H. On the other hand, it is not the duty of the regulator to rescue any and every failing institution no matter how large since risk taking and failure is part and parcel of a dynamic market economy. No institution should be ‘too big to fail’.
It is instructive that in the United Kingdom, the assessment of systemic risk is deemed to be so important that it is not left to the central bank alone. The UK Banking Act of 2009 sets up a Special Resolution regime which takes account of the property rights of shareholders of intervened banks via independent valuation and a compensation scheme, and also requires the Bank of England, the FSA and the Treasury to consult among themselves before a bank which is deemed to threaten the system can be intervened.
While Boodoosingh J in the Stone Street Capital matter made his declaration on the basis of the constitutional principle of the separation of powers, it should prompt us to the need for a rethink of sections 44D - 44H of the Central Bank Act from a policy perspective. We need to look at the proportionality of the exercise of draconian powers, when those powers should be invoked and by whom, and how they may be circumscribed in time and in scope.
It is also recommended that generally, Parliament should be much more circumspect in passing legislation when the government is in crisis mode since it is more likely to overreach and end up infringing the rights of citizens. The suggestion of putting sunset provisions on all crisis legislation is therefore a good one as the legislature will then have to revisit and correct any excesses it may have allowed.
Hopefully the judgment of Justice Boodoosingh will prompt mature reconsideration of the draconian powers given to the central banks here and in the OECS and to that extent it would have helped immeasurably to preserve and strengthen our democracy in the region and steer us away from the exercise of arbitrary power.
• Terrence Farrell is a former deputy governor of t he Central Bank