Key recommendations from the International Monetary Fund's review of Bermuda's financial service regulation and supervision:

REGULATION OF THE BANKING SECTOR:

Operational independence of the supervisor: Government should consider amending legislation to remove the Finance Minister's power to give directions to the BMA and approve its budget. "While the powers to give direction are constrained, these measures would remove the potential for intrusion by the Minister on the operational independence of the BMA."

More formalised approach to banking supervision: The BMA should consider an increase in the number and breadth of expertise of their banking supervision staff, introduction of a comprehensive examination manual, and adoption of a more formalised system of working papers for on-site examinations.

Validation of supervisory information from banks: To complement its examination regime in, for example, capital market activities and information technology, the BMA should consider contracting external auditors or outside professional experts for additional work.

ANTI-MONEY LAUNDERING (AML)/COMBATING THE FINANCING OF TERRORISM (CFT) FRAMEWORK:

Strengthening CFT legal framework: More substantial CFT legislation would be necessary for giving effect more fully to the provisions that reflect requirements of international conventions and treaties.

Reinforcing the legislation and resources for the Financial Investigations Unit (FIU): The authorities should consider formally incorporating the FIU as the competent authority in the legal framework. (The resources of the FIU require strengthening if it is to perform the roles of an intelligence and investigative unit more effectively. Further training of the FIU staff is also desirable. Arrangements should also be made for awareness raising among prosecutors and the judiciary.)

Insurance sector supervision: The BMA should provide guidance to the auditors conducting onsite visits to insurance entities in respect of aspects of AML/CFT risk to be assessed during visits. The current legal framework for the insurance sector should be amended to include the concept of fit and proper as in the other prudentially regulated sectors. This would reinforce the vetting procedure currently employed by the BMA.

REGULATION OF THE INSURANCE SECTOR:

Corporate governance: The flow of information between the BMA and the auditor should be more detailed and more frequent. The supervisor should require the auditor to do specific checks (including the review of internal controls) and the auditor should systematically provide the supervisor with a detailed written report.

Need to strengthen verification procedures: The authorities should contract independent reviewers to verify the

information received from companies. The supervisor should have access to their working papers and the capability of checking these, either directly or indirectly.

Enhancing controls over balance sheet items: While capital adequacy and solvency is defined in a stringent way, the authorities should also set minimum rules on the calculation of liabilities and on the adequate cover of technical provisions by secure assets.

Increasing data supported information on the industry: Financial reporting should be more detailed, distinguishing direct and assumed insurance, lines of business, and type of contracts for reinsurance.

The supervisor should gather more relevant data from the industry, in particular, income statements disaggregated by line of business and information on reserves (liquidation of prior year reserves etc.) and strengthen supervisory capacity to process and analyse these data.

Consumer protection: It is recommended that procedures be put in place to permit the individual and small corporate policyholder to receive meaningful and understandable information in a timely manner and have easy access to an equitable treatment of complaints.

REGULATION OF THE SECURITIES INDUSTRY:

Regulation and information sharing on collective investment schemes: Suggested changes to the Collective Investment Scheme Act and Regulations should be carried through; these would address many of the gaps in collective investment regulation.

Regulation of issuers and secondary markets: Regulation of issuers should become the direct responsibility of the BMA, who would be responsible for unlisted issuers, for supervision of the BSX regulation of listed issuers, and for the introduction of further rules for shareholder protection.

Resources of the regulator: Additional staff training is required to enhance technical skills, especially in the areas of inspections and oversight of BSX functions.