Palau’s Prudential Supervision Remains a Concern as Implementation Capacities Lag

A recent assessment has revealed that Palau’s financial sector remains plagued by weaknesses, with the Financial Institutions Commission (FIC) struggling to exercise effective prudential supervision. The mission found that while some principles are largely compliant, many others remain non-compliant or materially non-compliant.

Composition of the FIC’s Governing Board

One of the major concerns is the composition of the FIC’s governing board, which has been criticized for giving too much influence to the banking industry. The current setup provides a potential conflict of interest and may lead to operational paralysis.

• Recommendation: Designate a fifth voting member from outside the banking industry.
• Amendment needed: Section 16 of the Financial Institutions Act (FIA) should be amended to allow government employees to serve on the board.

Lack of Legal Protection for FIC’s Governing Board and Staff

Another significant concern is the lack of legal protection for the FIC’s governing board and staff. Without this protection, they are hesitant to take adjudicatory action, including deciding on banking license applications. This uncertainty is causing concern in the industry, particularly as current licenses are set to expire soon.

• Recommendation: Amend the FIA to include a provision granting legal protection to the FIC’s governing board and staff.

Regulatory and Supervisory Powers of the FIC

Furthermore, the regulatory and supervisory powers of the FIC are severely limited by provisions in the FIA. For instance, regulations issued by the FIC must be approved by the Office of the President (OEK) through joint resolution, making it difficult for the FIC to exercise its regulatory powers in a timely manner.

• Recommendation: The FIC should have the authority to issue and enforce prudential regulations without external interference.

Urgent Action Needed

These concerns highlight the need for urgent action to address the weaknesses in Palau’s financial sector regulation and supervision. Without meaningful implementation capabilities, the country risks jeopardizing or even impeding effective banking regulation and supervision.