Cedric Stephens | Legal risk over poor performance

Former Prime Minister P. J. Patterson was quoted recently as saying that the Financial Services Commission “had better pad up a top-class legal team over potential lawsuits from 200 clients whose funds were stolen from their investment accounts at the fraud-hit Stocks and Securities Limited (SSL)”.

FSC is the government-run regulatory body that supervises the securities, insurance, and private pensions industries. It calls itself an “integrated financial services regulator”.

The Office of Utilities Regulation (OUR) supervises telecommunications, electricity, water and sewerage service providers. These outfits provide dissimilar services. However, the OUR uses fewer words to describe its functions.

I have long felt that the would have been a more effective regulator if it had modelled its performance against the OUR. Mr Patterson’s comments suggest that the self-described integrated financial services may have difficulty in escaping legal blame for the SSL mess.

The FSC’s job is to ensure “the proper administration of the industries” it supervises. Information on its website says it oversees the registration, solvency, and conduct of approximately 614 firms and over 4,800 individuals who provide non-bank financial products and services.

Mr Patterson, an attorney-at-law, used the cricket term “pad up” to offer the FSC free legal advice. The former prime minister, the country’s longest-serving head of government, a Calabar High School alumnus, like his political colleague and historian Arnold Bertram does not appear to have distinguished himself at cricket but studies the game. His name is omitted from Bertram’s cricket encyclopaedia, Jamaica at the Wicket. However, Patterson, like many of the male, post-independence leaders in Bertram’s book, appear to have been influenced by “the game of life”.

The former PM’s metaphor suggests batsmen getting ready to go out to the wicket to bat. The process involves putting on the necessary protective gear like leg, thigh, arm, and abdominal or box pads (hence the term), batting gloves, and helmets. The term has also been used in other contexts. It means preparing oneself for a task, challenge, or event. The FSC should start its preparations for a legal contest over the SSL debacle, according to Mr Patterson.

The recently published notice by the Insurance Association of Jamaica (IAJ) on behalf of its non-life members, about the “nature and effect” of the average clause/pro-rata condition of average – as required under Clause 120 of the Insurance Act 2001 – should be scrutinised by the FSC’s de facto bosses at Nethersole Place.

The IAJ is a lobby group. The organisation seeks to influence public policy and decision-making on behalf of its members. Its mission is to persuade legislators, government officials, and other decision-makers to support the positions of its members. It also serves to improve the industry’s public image and, by extension, insurers”. Are the actions the IAJ is pursuing on behalf of some of its members with respect to their policyholders with respect to the average clause in conflict with its mission?

Clause 120 predated Audley Shaw’s announcement of the National Financial Inclusion Strategy by 16 years. At the same time, it introduced the concept of insurance literacy, which is a subset of financial inclusion.

Three years after that introduction, the FSC attempted to clarify insurers’ obligations under Clause 120 by way of regulations dated August 18, 2004. Explanations and a suggested template about the average clause, which were directed to policyholders, consisted of insurance jargon.

Additionally, a basic understanding of the principles of property insurance was assumed. It is unclear if the advisory and/or template was not assessed by insurance buyers.

The clause is designed to legally compel the insurer, “where a contract of insurance contains a pro rata condition of average, to inform the insured (about it) in a prescribed manner and about the nature and effect of the condition”. Where this duty was not discharged, before the contract was entered into, the average clause would be of no effect.

Put simply, insurers were being forced to educate consumers about the average clause when the Insurance Act was passed 24 years ago. This is a continuing duty. Non-compliance invalidates the clause. These measures were found wanting.

Twenty-one years elapsed after the enactment of the groundbreaking Insurance Act, including Clause 120, before the FSC codified the duties of insurers and intermediaries to provide “customers and prospective customers in writing of current, relevant, and accurate information, including sound explanations of the terms and conditions of insurance contracts … in relation to insurance coverage”.

Surprisingly, the regulator did not consider the acute and persistent problems the country’s educational system has faced post-independence when these new conditions were introduced.

Do newspaper advertisements about the average clause prepared on behalf of non-life insurer members of the IAJ constitute compliance with Sections 142D and 142E of the insurance (Amendment) Regulations dated December 31, 2022? Can insurers effectively surrender part of or all their legal obligations under Clause 120 to the IAJ and still invoke the protection they are afforded in cases where the property is underinsured? These are issues that former Prime Minister Patterson and other eminent legal minds representing the FSC will have to clarify.

In the meantime, insurance consumers, many of whom are barely literate, are being forced to transact insurance with service providers in ignorance under conditions of uncertainty despite Clause 120 and Sections 142D and 142E of the Insurance (Amendment) Regulations.

Entities like the Planning Institute of Jamaica, the Statistical Institute of Jamaica, the Jamaica Deposit Insurance Corporation, the British Caribbean Insurance Company Limited, the JMMB Group Limited, and the Ministry of Finance and the Public Service have recognised that the nature of the underlying problems in the educational system have started the process of padding up to engage their respective audiences. When will the FSC do the same?

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com.