MODERNIZING THE BAHAMAS

Our effort to modernize the Bahamian economy and society continues. When we speak of “modernizing” our economy and society, we are not simply looking for some theoretical buzz word to make sexy what it is we are doing in hopes that it will sell us in the political marketplace. We literally and practically mean that we are attempting to ensure that the tools, skill-sets, infrastructure, systems, laws, regulations, procedures and programmes of our country are so updated as to leverage themselves against the best available technology, techniques and practices in order to put us in the best position to seize the opportunities and meet the challenges of an evolved and evolving domestic and international environment. We do this not as a luxury of our existence but as a necessity to it. As developed countries have come to advance the wellbeing of their people through this march of modernization, so we must do and give every Bahamian man, woman and child the absolutely best prospects for a brighter and more glorious future.

• We build modern schools so that motivated teaches with cutting edge educational practices can teach our children in them and give them the best opportunity to receive an education commensurate with their ambitions, giving them the best chance to receive employment commensurate with their education;

• We dig up roads to get to rusty leaking cast iron pipes so that they might be replaced with modern pvc and/or polyethylene water tight pipes so our people can enjoy clean, rust free, adequately pressured water for the basic living needs;

• We dig up roads to lay telecommunications, cable and other utilities to ensure the greater safety and durability in the face of nature’s harshness, ensuring their enduring delivery of services to our people;

• We design and redesign dug up roads and pave them so that we create a modern road network that better meets that needs of a small island whose people have long endured the discomforts and disadvantages of a network too out dated for its population size and commercial sophistication;

• We build modern courts so that judicial efficiencies might lead to a more effective execution of justice and benefit our citizenry through a greater sense of justice and reduced levels of crime;

• We build modern airports and seaports so that residents and visitors alike might have a travel experience that invites that continuous patronage for the long term economic health of our nation;

• We build modern hospital facilities so that our people in their hour of vulnerability might have the comfort of knowing that there is available to them the best tools and skills to heal their hurt and restore their health;

• We upgrade our information and communication technology so that the advances of 4G and E-Government might be available to give our people speedy access to information; unencumbered opportunities to communicate with their family, friends or business interest; and easier ways of doing their business with the state and each other;

• We build modern parks so that the minds of our people heavy with the fatigue of work or worry might find occasion to rest and recreate in an environment of peace and aesthetic pleasure; and

• We modernize our legislation because in so doing we ensure that the bounds in which we wish our society and commerce to operate are defined so as to take account of the prevailing dynamism of their environment as well as the increasing complexity of our world.

Yes, we modernize not for modernization sake but because the needs of our people can be met thereby. So our march of modernization continues.

FINANCIAL SERVICES AND SYSTEMS LEGISLATION TO DATE

Mr. Speaker, you will recall that in this place we have passed a number of new and updated laws addressing issues in the broader financial services area and in respect of our financial system. These include:

• New Business License Act

• New Securities Act

• New Domestic Insurance Act

• New International Insurance Act

• New Executive Foundations Act

• New Telecommunications Legislation to govern an open, competition driven

telecommunications industry, including The Communications Act, 2009, the Utilities Regulation and Competition Authority (URCA) Act, 2009, the Utilities Appeal Tribunal (UAT) Act, 2009, the Utilities Regulation and Competition (Amendment ) Act 2011, the Communications (Amendment) Act 2011;

• Critical amendments to the Trustees, Perpetuities and Company Liquidation legislation

• New Arbitration Act

• Upgraded Central Bank legislation and reforms to exchange control procedures …in order to put The Bahamas in the best position to have a best in class central banking regime and regulated financial system;

THE COMPENDIUM OF PAYMENT SYSTEM LEGISLATION

Mr. Speaker, when we conduct domestic or international commercial or financial transactions, we typically use cash or cash alternatives. Over centuries, cash alternatives have become more prominent in this regard, especially where large, trade related activities are concerned. So that a business purchasing large volumes of supplies from abroad might use a bank draft or certified check or international money order. The use of such alternatives to cash as a way of transferring money is known as a “payment system”.

In our more modern world, where information and communications technology has rapidly evolved and continues to do so, making online commerce one of the fastest growing modes of business dealings, new alternatives to cash transactions have evolved, including credit cards, debit cards, internet banking, e-commerce payment systems, electronic funds transfer (ATMs), direct credits or debits, etc. There might also be very particular payment systems created to deal with specific kinds of business transactions such as might be used by securities traders, financial institutions settling claims between themselves and the like. These various and ever evolving methods of transferring money of course have their own implications for a country’s financial system and increasingly so where they become a larger share of the commerce taking place within it.

They also represent fiduciary responsibilities among the participants that have to be honoured and the breach of which can have serious implications not only for the users but for the financial system itself. Increasingly, countries have began, especially in the wake of the most recent global economic and financial crisis, to take steps to better protect and preserve their financial system by ensuring the wholesome regulations of their financial systems.

The Central Bank of The Bahamas being cognizant of these realities have put forward the propositions that have led to the legislative initiatives we now have before it. These are truly driven by the Bank and we believe sensibly so.

The purpose of the Payment Systems Bill is to introduce a new legislative and regulatory framework for the oversight by the Central Bank of payment systems and the regulation of multi-purpose stored value facilities such as prepaid cards and other payment instruments.

A new legal and regulatory framework is considered necessary for a number of reasons. First, the existing framework is provided for in several pieces of legislation which have been introduced over the years on a piecemeal basis, and also through informal agreements and cooperative arrangements with the Clearing Banks, the key payments stakeholders. A new legislative framework will provide the Central Bank with a comprehensive and consistent basis to oversee payment systems and payment instruments in The Bahamas and provide the Bank with the powers and tools to effectively regulate such systems and instruments. Furthermore, the Bill will strengthen the legal underpinnings of payment systems operating in The Bahamas by ensuring that all payments cleared through a designated payment system, are deemed to be final and irrevocable in the event of the insolvency of a system participant.

Developing a robust and modern financial infrastructure is especially important to a premier offshore financial centre such as The Bahamas whose economy is primarily sustained by tourism and international financial services. A failure in the country’s financial infrastructure can lead to delays in interbank payments and banking operations and have serious negative consequences for the economy. One way to avoid this, is to ensure that domestic payment systems operate in a safe and efficient manner, while meeting the demands of increased financial activity and technological innovations. The proposed legislative changes will enable the Bank to establish standards that promote the safety and efficiency of these systems, while promoting competition in the market for payment services.

The Payment Systems Bill once enacted, will also bring The Bahamas in line with international standards and best practice. Jurisdictions such as Australia and Canada and premier offshore centres such as Hong Kong and Singapore, have in recent years sought to formalise and strengthen their own payment systems framework and oversight of these systems by introducing comprehensive payments legislation.

  The Central Bank-led initiative to modernize the payment system includes the implementation of a comprehensive legal and regulatory framework which is considered necessary for a number of reasons. Payment systems lie at the heart of the financial services sector; they provide a highway over which individuals and companies receive and make payments for goods and services. A payment system is essentially a set of instruments, procedures and rules for the transfer of funds among system participants. Disruptions in a system or the total failure of a system, pose a threat to the stability of the financial system. A safe and efficient payment system is, therefore, critical to the effective and smooth functioning of the financial system and helps maintain and promote financial stability.

Amendments to the Central Bank of The Bahamas Act, 2000 (CBBA) in 2010 enhanced the Central Bank’s powers to, inter alia, regulate payments and securities systems and to regulate payment instruments. The CBBA was amended to provide that it is a duty of the Bank to ensure the stability of the financial system and to promote and ensure the establishment and oversight of a sound and efficient national payment system. The 2010 amendment to the CBBA was the precursor to the Payment Systems Bill which sets out in detail the Bank’s powers in respect of the oversight of payment systems and payment instruments.

The purpose of the Payment Systems Bill and the compendium of related legislation [which include the Companies (Amendment) Bill, the Bills of Exchange (Amendment) Bill and the Bankruptcy (Amendment) Bill and supporting regulations and Byelaws], is to introduce a comprehensive legislative and regulatory framework for the oversight by the Central Bank of payment systems and the regulation of multi-purpose stored value facilities, such as prepaid cards and other payment instruments. When enacted the legislation will codify key provisions necessary to undergird existing payment systems, and to provide a robust regulatory environment for the safe and efficient operation of these systems and, indeed, any system which may be established in the future. The Bill will also offer important protections for payments flowing through these systems, in the event of the failure of a participating institution.

Examples of payment systems operating in The Bahamas include the Bahamas Inter-Bank Settlement System (BISS), and the Automated Clearing House (ACH). BISS, which commenced operations in 2004, is owned and operated by the Central Bank of The Bahamas, and is an example of a payment system that facilitates the electronic transfer and settlement of large value payments, (totaling over $150,000), among the Clearing Banks, on a real time basis. The ACH is a clearing and settlement system for small value payments (under $150,000) between the Clearing Banks. The ACH, which was implemented in 2010, is operated by the Bahamas Automated Clearing House Limited (BACH) and is jointly owned by the Clearing Banks. These payment systems currently operate on a contractual basis among participants.

6. Members of the public have already benefitted from the payment systems modernization initiative. In particular it is to be noted that the implementation of the ACH has led to increased efficiency in processing payments –

• The time involved in the overall cheque clearing process, has been reduced from five to two business days following the deposit of a cheque. In January 2010, the manual system of cheque processing was replaced by an electronic cheque clearing process. Under the new system, payment details of cheques are captured electronically and submitted to the ACH for processing in a safe and secure environment. Further, a payor’s account is debited on the same day on which his or her cheque is presented by the payee and the payee’s account is credited within two business days.

Since September, 2010, direct credits have been facilitated through the ACH. Direct credits provide an electronic alternative to cheque payments, allowing customers of participating Clearing Banks to transfer funds directly to the accounts of other customers at any other participating bank. Employers may now deposit salary payments with direct immediate credit to employees’ accounts at any Clearing Bank instead of issuing physical cheques. Employees are now able to access their salaries immediately through the convenience of an ABM/ATM system at any bank of their choice, rather than standing in long lines in a bank to cash their paycheques. This should result in a cost savings to the banks and to the businesses that make bulk payments, as time, resources and costs associated with the manual processing of cheques and cash payments, are redeployed.

Soon, direct debits will be facilitated through the ACH, and will further revolutionise the way the public conducts their banking and business affairs. While some aspects of direct debit transactions already exist as a part of the services offered by the Clearing Banks, (for example, payment of insurance premiums by way of standing orders and direct debits), these services only permit the transfer of values among customers of the same bank. Direct debits through the ACH will eventually facilitate direct payments between all the Clearing Banks allowing a customer of one bank to deposit funds into another customer’s account at any Clearing Bank. This will allow consumers to make bill payments easily and more quickly.

The Payment Systems Bill and related Bills will address a number of important issues including the following:

• While we note that there have been significant gains with the implementation of both the BISS and the ACH, pursuant to their respective contractual arrangements, there still exist legal impediments to even greater efficiency. For example, the Bills of Exchange Act currently provides that cheques must be physically presented for payment at the proper place. Therefore the Clearing Banks continue to meet weekly at the Central Bank for physical exchange of cheques. With the enactment of the Payment Systems Bill and the amendment of the Bills of Exchange Act, the Clearing Banks will no longer be required to exchange physical cheques with each other.

The legislation will strengthen the legal underpinnings of payment systems operating in The Bahamas by ensuring that all payments cleared through a designated payment system, are deemed to be final and irrevocable in the event of the insolvency of a system participant.

The legislation will assist the jurisdiction in complying with the Basel Committee’s Core Principles for Systemically Important Payment Systems (CPSIPS) which are the international standards for systemically important payment systems. According to the CPSIPS Report, a payment system is regarded as being systemically important where, if the system were insufficiently protected against risk, disruption within it could trigger or transmit further disruptions amongst participants or systemic disruptions in the financial area more widely. A number of other jurisdictions regionally (such as Trinidad) and internationally (Canada, Singapore and Hong Kong) have adopted payment systems legislation consistent with CPSIPS.

The CPSIPS Report considers systemic importance to be determined largely by the size or nature of the individual payments or their aggregate value. Although systems handling specifically large-value payments would normally be considered systemically important, a systemically important system does not necessarily handle only high-value payments, but can relate to payments of various values which can also trigger or transmit systemic disruption by virtue of certain segments of its traffic.

Based on CPSIPS standards, the Bank has identified the Bahamas Interbank Settlement System (BISS) and the Automated Clearing House (ACH) as the only systemically important payment systems currently operating in The Bahamas.

Any person that operates or participates in a domestic payment, clearing or settlement system or who seeks to establish, operate or participate in such a system and issuers of electronic money (other than banks or trust companies), will all be subject to the Central Bank’s supervision. However, where the Central Bank designates a payment system as a “systemically important payment system” or a “SIP”, the Payment Systems Bill will require the participants, operators, clearing houses and settlement institutions of the designated system to adhere to enhanced regulatory requirements.

The Payment Systems Bill together with the Payment Systems (Oversight) Regulations and the Payment Systems (National Payments Committee) Byelaws, also addresses the role of the Central Bank in relation to payment systems and payment instruments. The Bill will:

• Provide that the Central Bank is responsible for formulating, adopting and monitoring the implementation of a national payment system policy for The Bahamas and for overseeing payment systems and payment instruments; determining general or individual standards and guidelines for all domestic payment systems and payment instruments approved by the Bank; establishing and performing control and audit procedures; imposing administrative sanctions; and suspending the operation of any system or terminating the participation of any member in an approved system on the grounds provided in the Bill.

• Formally establish the National Payments Committee (NPC), as an advisory body, chaired by the Bank, to provide a forum for discussion of payment-related issues. Membership of the NPC shall comprise certain governmental bodies which regulate or are in any other way involved in payments activities and the financial markets, major financial institutions or their national associations which are participants in payment systems; and other persons approved by the NPC that are involved in the clearing and settlement of payments or securities or in the financial markets. The objective is to provide a meaningful, formal vehicle through which payments matters of national importance may be considered, and recommendations madeon the way forward.

• Identify the Central Bank as the regulator for issuers of electronic money products that may be accessed by the general public and which provide a multipurpose means of payment, that is, which can be used to purchase goods and services from third party merchants other than the issuer. For electronic money issuers (other than banks and trust companies licensed by the Central Bank), there is a separate regulatory regime under the Bill. “Electronic Money” is defined in the Bill as essentially a stored value facility (SVF) in which a record of the funds or value available to the consumer for multipurpose use is stored on an electronic device in the consumer’s possession. The operative word here is “multipurpose”—those stored value cards that may be used that may be presented at various establishments and effectively used as “money”. Under the provisions of the Bill, non-bank issuers of multi-purpose SVFs must be licensed by the Central Bank and are subject to the information-gathering powers of the Bank. Existing issuers of these products will be given a grace period (four months) within which they must be licensed by the Central Bank.

The Payment Systems (National Payments Committee) Byelaws, 2012 and the Payment Systems (Oversight) Regulations, 2012 form part of the legislative package for the supervision and regulation of payments systems and payment instruments in the jurisdiction. Payment Systems (National Payments Committee) Byelaws, 2012

The Byelaws set out the objectives of the NPC, which include advising the Bank on the implementation of the National Payment System Policy; and supporting the implementation of the Policy through collaboration with stakeholders and facilitating co-operation between market participants. The Byelaws also set out the qualifying criteria for membership in the NPC.

Payment Systems (Oversight) Regulations, 2012

The operator of a designated payment system will be required under the Regulations, to obtain the Central Bank's approval for the appointment of its chief executive officer or directors in The Bahamas, who are entrusted with the management of the operator. As persons with a substantial shareholding in an operator can influence the management of the operator, a person who seeks to become a substantial shareholder of an operator of a designated payment system must obtain the approval of the Central Bank.

Where the Central Bank believes that a designated system is being operated inefficiently or in a manner considered to be unsafe, the proposed Regulations give the Bank the power to take certain actions in relation to a designated payment. These include the power to appoint a person to advise the clearing house of the designated payment system on the proper conduct of its operations, for the Bank to assume control of and carry on the operations of the clearing house, to require the clearing house to cease operation of the designated system, to petition for the winding up of the clearing house, and to require the clearing house to take any action as the Bank may consider necessary.

Consequential amendments to the Companies, Bills of Exchange and Bankruptcy Acts will have to be made in light of the provisions of the Payment Systems Bill.

Companies (Amendment) Bill, 2012

When enacted, the Companies (Amendment) Bill, will insert new sections 262A and 262B into the Companies Act. Together, these two provisions seek to (i) ensure the validity and finality of transactions of a company that is being wound up; and (ii) exclude such transactions from the provisions of the Companies Act relating to insolvency proceedings and from the effects of foreign court orders which are inconsistent with the provisions of the Payment Systems Bill. Such transactions will be protected where, inter alia, they are treated by relevant payment system rules as final and irrevocable and where these transactions are made prior to the issuance of a winding up order.

The Bills of Exchange (Amendment) Bill, 2012

When enacted, the Bills of Exchange (Amendment) Bill, will amend section 52 of the Bills of Exchange Act and also insert a new section 75A into that Act. The effect of these amendments will be to recognize and validate the electronic presentment of cheques when presentment is effected in accordance with the provisions of the Payment Systems Bill.

The Bankruptcy (Amendment) Bill, 2012

When enacted the Bankruptcy (Amendment) Bill, will insert a new section 75A and section 75B into the Act. These sections seek to exclude the finality of transactions in relation to the property of a bankrupt made through a designated system, from the requirements of the Bankruptcy Act, which relate to insolvency proceedings, and from the effects of foreign court orders which are inconsistent with the provisions of the Payment Systems Bill. DETAILS OF KEY PROVISIONS

Click HERE to read key provisions.