In its regulation of failed billion-dollar insurance company CLICO, the Central Bank faced a double-edged sword—archaic legislation limited its legal teeth and attempts at moral suasion on issues like corporate governance fell flat.
"They never gave in. CLICO never gave in. You had to fight for even the smallest victory," said former Central Bank governor Ewart Williams as he took the witness stand during the tenth evidential hearing of the enquiry into the collapse of CLICO and the Hindu Credit Union (HCU) at the Winsure Building, Richmond Street, Port of Spain, yesterday.
Williams was the governor of the Central Bank for ten years, and it was under his tenure that the regulation of insurance companies was brought under the Bank.
As he told of what amounted to a tug-of-war battle between the insurance company and its regulator, Williams observed that CLICO executives were at times "uncooperative" and "offensive" to the Central Bank under his tenure, and the Bank was cowed often enough as it had limited legal recourse.
To this end, the Bank relied heavily on moral suasion after it assumed regulation of insurance companies in 2004.
"The tools available to the Central Bank were blunt instruments: there was limited scope for targeting particular behaviour, as opposed (for example) to taking control over the entire institution or revoking an insti- tution's licence. Depending on the circumstances (including the institution concerned and the offending behaviour), intervention carried a serious risk of undermining public confidence and triggering a run on the institution concerned," stated Williams in his 43-page witness statement to the commission.
"I was conscious of the particular difficulty of regulating businesses with a high profile and a weighty impact on the national economy," he stated.
On this position, he was challenged by counsel for the Ministry of Finance Vincent Nelson QC, the first party to cross-examine, on whether he relied too much on moral suasion in reining in CLICO.
Williams conceded that while "governance is not an area which lends itself to rules and regulations", the Central Bank had received a commitment from CLICO to set up an audit and investment committee, which they expected to be implemented.
He pointed out that a forensic examination in 2009 revealed that the committees were not used at all or used on a limited basis.
"It was clear that on occasions, Mr (Lawrence) Duprey overrode the recommendations of the investment committee," he said.
Duprey was the chairman of CLICO and its parent, CL Financial.
He identified the US$750 million acquisition of Jamaican conglomerate Lascelles de Mercado as one such incident.
Williams admitted that while he "didn't press the issue", it was discussed and expressed constantly.
"In a private company like CLICO, it is difficult to force the company in a direction which they don't want to go," Williams responded.
When Nelson pointed out that something should have been done by the regulators on corporate governance, Williams said the law did not give the Central Bank room to deal with governance, only with directors.
Williams pointed out that the Central Bank had issued corporate governance guidelines for the insurance sector, and while most companies complied, "CLICO, for the most part, did not. And they carried no sanction".
In Williams' estimation, the Bank achieved some level of success in getting CLICO to comply with quarterly data as opposed to an annual submission. But even this, he recognised, came with its challenges as they were not quarterly balance sheets, and they showed a successful company.
The data that CLICO presented, he said, masked the liquidity challenges, as well as the Statutory Fund deficit.
Williams observed that in CLICO's case, the Statutory Fund gave a misleading confidence as it met the legal requirements. This, he agreed, was a mismatch.
Asked by Nelson why the regulator did not do its best to ensure that all regulated companies met their demands, Williams said the regulator's conclusion was that matters at CLICO were systemic.
"As a regulator, you can do little about it in the context of existing legislation. The regulator needs to explore options, see a range of vulnerabilities which lead to adverse cir- cumstances and adverse results. CLICO met its Statutory Fund requirement. There was no reason to believe CLICO was not meeting the obligations to its policyholders," he said.
Williams said he didn't have the legal basis to do much more.
He also pointed out that the Bank had misdiagnosed CLICO's bailout as a "liquidity" problem because of misrepresentations made on the part of CL Financial's executives (CLICO's parent company) about the depth of the problem in meetings which took place in 2009.
He said CLF had initially sought a loan from the Central Bank to meet the obligations of CLICO Investment Bank, but meetings with CLF executives pointed to a larger problem of systemic risk.
"It appeared to me that although there was not yet a run on CIB, there were very high levels of withdrawals that would be coming due—$1.3 billion in January, with a further $1 billion projected for February 2009, and $0.5 billion for March 2009. From the data presented, it appeared that CIB would be unable to meet the forecasted requirements for cash for January 2009. If CIB failed to meet these requests for withdrawals, it was obvious that there would be a run on CIB and it would collapse. If that happened, the deposits held by CLICO in CIB would be lost, and there was a real risk of financial meltdown within days. As the memorandum itself makes clear, this contagion risk was at the forefront of the Central Bank's thinking at this time," he said.
Williams, who was instrumental in the meetings leading up to the government's bailout of CLICO and CIB, said even when Duprey sought the government's help to bail out his company, he wasn't forthcoming with details.
"The Bank had limited information available to it about their precise, current financial condition, and what information was provided to it by management had proved to be incomplete and unreliable. As further information emerged, the picture became worse—that is why the Central Bank had to take steps to verify the information for itself," he said.
"Moreover, the investigations have revealed what appears to have been widespread self-dealing within the CLF Group (which is now the subject of a substantial civil action). Other incidents such as the sale of CLICO Energy shares at the time the MOU was being negotiated and implemented underline the difficulty in the suggestion that CLF's management were capable of producing and implementing proposals that would have saved the regulated financial entities or could have been trusted to do so. If the Central Bank had not intervened at that point, it is very likely that the Central Bank would be criticised for failing to act sufficiently swiftly," said Williams.
Williams' cross-examination was cut short after the microphones malfunctioned at about midday. The problem could not be resolved in time for the afternoon session.
He will continue to give evidence from 9.30 a.m. today.