FIA’s Regulatory Powers and Immunity Framework Found Lacking

A recent assessment has revealed that Palau’s Financial Institutions Act (FIA) falls short of international standards in several key areas, including regulatory powers and immunity for supervisors.

Regulatory Powers

According to the FIA, the Financial Inspection Commission (FIC) is empowered to:

• Issue regulations, orders, or guidance
• Visit financial institutions’ offices
• Examine their accounts, books, documents, and records

However, these regulations must be approved by the Parliament’s Oversight Committee (OEK) and the President of the Republic before taking effect. This approval process limits the FIC’s independent regulatory powers, making it difficult for the Commission to address compliance issues and safety concerns in a timely manner.

• The primary purpose of bank examinations is to identify fraudulent acts or irregularities
• However, the FIC’s powers are curtailed by requiring Supreme Court confirmation for cease and desist orders

Immunity Framework

The assessment revealed that the FIC’s legal framework lacks adequate protection for supervisors. While commission members, officers, employees, and agents enjoy immunity from arbitrary or capricious supervisory activities:

• They do not have complete legal protection against lawsuits
• The present law also lacks clear provisions on the handling of confidential information

Areas for Improvement

The assessment did find one area where Palau’s laws meet international standards: the provision of legal protection for supervisors. An amendment to the FIA is expected to be adopted by the OEK in the spring session, which will address some of these concerns.

Conclusion

While Palau has made progress in establishing a regulatory framework for banking supervision, there are still significant gaps that need to be addressed to ensure compliance with international standards. The government must prioritize the adoption of reforms to strengthen the FIC’s powers and provide adequate legal protection for supervisors.

Recommendations

1. Amend the FIA: Streamline the approval process for regulations issued by the FIC.
2. Enhance the FIC’s Powers: Provide the ability to issue cease and desist orders without Supreme Court confirmation, and address safety and soundness concerns.
3. Clear Provisions on Confidential Information: Ensure that supervisors have adequate legal protection against lawsuits and provide clear provisions on handling confidential information.
4. Prioritize Reforms: Strengthen the FIC’s regulatory framework and provide adequate legal protection for supervisors.

By addressing these gaps, Palau can demonstrate its commitment to improving its regulatory framework and ensuring a safe and sound banking system.