Cedric Stephens | The irrelevance of fairness in the FX game

Local commercial banks are fanatics about making money. This is the answer to the question posed in the headline of Lisa Hanna’s article in last Sunday’s Observer – ‘Is This Fair? JA Banks Buy US$ Low and Sell High’.

The attention-grabbing statement preceding the question is misleading. The big spreads – the difference between the low buy and high sell prices – do not apply only to foreign currency, or FX, transactions in US dollars. They apply to all bank transactions. The spreads they charge on FX transactions are the most visible sign of fanaticism.

Fairness is irrelevant. The real game is about seizing opportunities to squeeze more money from banking transactions. Shrewd bank customers know this. The LIBOR scandal, which went undiscovered for nearly a decade and involved some of the world’s leading banks, and the case of Wells Fargo, which paid over US$3 billion in fines and in which, according to US News, staffers “were incentivised to open approximately two million fake accounts under customers’ names”, are examples of some of the misdeeds that have come to public attention.

The formation by the US government of the Consumer Financial Protection Bureau in 2011, with the aim of preventing financial harm to consumers, provides evidence that the public’s perceptions about the trustworthiness and ethical behaviours of members of this industry are unwarranted.

Unlike Ms Hanna, I am not distracted by the apparent courtesy, patience, and willingness of some bank employees who provide support. Beneath their public exterior is the steely drive to maximise earnings for employers. This is an important part of their corporate culture. They are incentivised to behave this way.

Last Monday, a relative and I visited two banks in the Kingston 8 zone. Evidence of the prevailing ‘make money at all costs’ culture was on full display. The relative sought a printed copy of a credit card statement. Earlier requests for monthly statements to be sent to postal and email addresses were ignored for over 12 months.

As a result, the relative is forced to visit the institution periodically to find out how much is owed. The bank recently imposed, without notice, a flat charge, plus GCT, for a printout. A few months earlier, it was supplied free. Meanwhile, the interest rate clock on the credit card balance never sleeps.

Both banks provide parking spaces for customers that are supervised by security guards. Seating is available inside air-conditioned buildings. Because of the long waiting times for service and the record-breaking temperatures outside, it is preferable to stay inside rather than going outside to face the heat. Given the ever-present threat of climate change and the heating of the planet, is it unreasonable to expect that banks will soon start to seek a fee for persons wishing to enter their premises to conduct business – much in the same way transaction fees are now the norm for using automated teller machines and making withdrawals?

Only three lines of Ms Hanna’s one-page article discussed regulation of banks. This was surprising because of her former position as a policy-making government official. Huge spreads on FX transactions are symptoms of a broader problem. Commercial banks are regulated by the central bank or the Bank of Jamaica (BOJ). Its mandate, under the BOJ (Amendment) Act, 2020, was revised four years ago. It is now “the maintenance of price stability and financial system stability with the primary objective being the maintenance of price stability”. Price and financial system stability imply that consumers have confidence in the financial system. Can these objectives be attained in the face of these huge FX spreads that commercial banks are imposing and consumer dissatisfaction with them?

Lawrie Savage, in a 190-page report, Re-Engineering Insurance Supervision, wrote that “the public’s experience as users of the insurance/financial system (including banks) is also an important determinant of the confidence they will have in that system. If consumers’ experience is that they will not be treated fairly … it will undermine their confidence in the system just as surely as insolvencies and other financial issues”. Surely, the BOJ must have an instrument in its regulatory toolbox to tame the wild impulses of commercial bank CEOs.

Some of Jamaica’s leading entities that own commercial banks also own and/or control life and non-life insurance companies. Senior bank employees, including CEOs, are directly involved in policymaking in insurance companies. It is, therefore, logical to guess that the bank “seizing all opportunities to make more money pricing policy” will migrate into insurance companies. One example: last year, a motor insurer offered a 25 per cent loyalty discount. This year, the discount disappeared without explanation.

The Stocks & Securities meltdown triggered changes in the local regulatory structure for banks and other deposit-taking and non-deposit taking entities. Savage calls this, in his 2016 report, “the upgrading of the supervisory function in emerging and developing countries from the perspective of the new supervisory paradigm”. Finance Minister Dr Nigel Clarke describes the proposed structure more succinctly as the twin-peaks model. Prudential or solvency regulation for banks and other deposit-taking institutions, one of the two peaks, is part of the Bank of Jamaica’s mission.

Market-conduct regulation for all financial institutions, the second peak, will be the role of the Financial Services Commission (FSC). Market conduct and consumer protection regulation refers to the oversight of financial institutions to ensure that they are engaging in fair and ethical business practices and are treating customers fairly.

The proposed division of labour between the central bank and FSC is a tacit admission by the authorities that the previous regulatory regime was ineffective. It was unevenly balanced between the needs of consumers and financial institutions.

Until such time that the new regulatory regime becomes operational, bank and insurance consumers should expect a wild ride. These institutions will seek to maximise their earnings as they transition from the old regime to the new. Check the price movements between 2023 and 2024 to find evidence of the trend.

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