Government taking a lesser involvement in the Bermuda Monetary Authority's affairs would reduce the potential for compromise, according to an international report on the effectiveness of the Island's financial services sector regulation.

The call for a more defined line of separation between the Authority - as the Island's financial services regulator - and Government was called for in a lengthy country report from the International Monetary Fund (IMF) made public yesterday.

The IMF compiled an assessment following a visit by at least 11 officials on a 13-day ‘mission' in March, 2003. Bermuda's review was one of 44 country studies conducted by the IMF.

The findings were released yesterday in two volumes: ‘Review of Financial Sector Regulation and Supervision' and ‘Detailed Assessment of Observance of Standards and Codes'.

While saying the Island's regulatory framework was “well developed” in the areas of banking, securities regulation and in regards to anti-money laundering as well as combating the financing of terrorism, the report said there were areas of weakness including a call for better supervision of the Island's insurance sector and saying the Authority's level of independence could be increased.

On the final point, the IMF report said in its executive summary “the potential for compromise to the independence of the supervision and the need for increased resources were issues” was found in its assessment of each area of Bermuda's regulatory framework. In the area of banking, the IMF has called for greater on-site and off-site supervision as well as more formal processes to be put in place.

It said additional resources could support greater supervision, as well as calling for “greater budgetary independence for the regulator and a reduction in the Ministerial power of direction to reduce the potential threat to operational independence”.

The BMA's oversight of investment intermediaries and collective investment schemes - the main activities of the Bermudian securities industry - was said to be “working effectively”.

The IMF did point out though that there was room for improvement, including “centralisation of issuer regulation and shareholder protection” as well as calling for “greater oversight” by the BMA of the Bermuda Stock Exchange (BSX).

In order to facilitate these improvements, the IMF said there should be planned improvements in legislation to give the BMA the required powers, as well as additional staff training to boost the Authority's capacity to supervise the industry.

One area where there were said to be clear deficiencies in supervision was in the Island's leading sector, the insurance and reinsurance industry. “While the BMA has broad powers to supervise the sector, these are not yet fully realised,” the report said.

“The oversight of the insurance sector is conducted in close cooperation with the insurance industry and its independent auditors, with the industry supporting a very thorough and effective screening function required for entry” it said in the IMF assessment.

The IMF's visit to the Island in March 2003 fell a year on from Government's decision to move insurance regulation under the control of the Bermuda Monetary Authority, with this function previously falling within the Registrar of Companies under the Finance Ministry.

Head of the insurance division Jeremy Cox said in 2002, while there was a close alliance with the insurance division and the industry it was not a case of ‘ok guys, do your thing'.

“There may be the misconception that the tail wags the dog but that is certainly not the case here in Bermuda,” Mr. Cox said shortly after the insurance division came under the BMA, in a move to comply with recommendations on transparency from a KPMG review. In the report released yesterday, the IMF said the Island's regulatory powers over the insurance sector relied on “self supervision to a large extent ... reflecting the sophisticated nature of the industry”.

“To enhance what has proved to be a flexible system, the authorities should provide additional guidance for the auditor, improve the information provided by the industry, and increase the BMA's capacity to analyse on-site and off-site information supported by enhanced IT systems.”

Meanwhile, the IMF assessment said the Island's legal framework to combat money laundering and the financing terrorism was generally adequate and backed by a well-developed infrastructure for implementation. However, the report said that to date there had been no assessments of insurance entities for the purpose of addressing anti-money laundering or combating the financing of terrorism risk.

Some areas of concern are understood to have been addressed by legislative amendments in the period between the 2003 IMF visit and now, with Finance Minister Paula Cox saying on Friday that “in some critical aspects the assessment is not an up-to-date report of our current position”. She said that areas where the IMF assessment does highlight areas of concern “not adequately addressed through the various legislative and other changes made over the past two years since the IMF assessment, we will carefully consider their suggestions”.

But Ms Cox stated that any course of action would not be taken “blindly or unthinkingly” while remaining “fully committed to meeting high standards and best practice”.

A team from the IMF is expected to return before the end of 2006.