is that an independent supervisory body be established, at arms length, from the political field.

In a recent report the accountancy firm KPMG states, "The relationship with the Minister of Finance does not accord with the principle of regulatory independence.

"We believe the insurance industry element of the companies registry should be separated into a body with statutory independence which would take on full responsibility for licensing, supervision and enforcement. The powers currently vested in the Minister of Finance should be transferred to this new body.'' Government agrees with this and the Insurance Advisory Committee is already engaged in reviewing the options for to achieve that end. As a first step there are plans to amend the Insurance Act 1978, hopefully by September this year, to remove the duties and responsibilities from the minister and place them with the Registrar of Companies.

Then the committee will decide whether the next step will be towards creating a new body to handle insurance supervision, create a new part of the BMA to handle it or restructure the department of the registry.

KPMG suggested extending legal requirements to insurance managers and auditors to report events that may adversely affect the viability of an insurance company. Government rejects this.

Of the Island's 1,500 insurance entities, most are captive insurance companies where the principal representative is the captive's insurance manager, who is already reporting under current legislation as the principal representative.

Auditors already report to the registrar through the filing of statutory returns.

The recommendation that all changes to business plans should be notifiable has also been rejected. KPMG suggested that as the initial business plan has to be approved by the Registrar changes should be notifiable.

This is not required in all other jurisdictions and is not a requirement of the International Association of Insurance Supervisors, so Bermuda does not feel the need to do this. Also, Government feels that material changes to a business plan will be reviewed in on-site inspections.

The report said, " Where functions are outsourced to independent agents the work should be subject to specific guidance from the regulator and be adequately supervised.'' This refers to out-sourced work such as auditing and Government agrees with this and the whole matter of giving formal guidance in these circumstances is currently under review through the IAC. They are also examining how to extend on site inspections to these functionaries.

Government does not agree with the recommendation that classes 1 and 3 insurance companies should notify the regulator of changes to their reinsurance programmes.

Government urged to take hands-off touch with insurance industry They are mostly captives, so only deal with their own risks and do not involve any third party insured and such notification is not a requirement of the IAIS or most other jurisdictions. Anyway it would be extremely hard to resource coverage of the amount of notification of changes from around 1500 companies.

The final insurance related recommendation is that composite insurance companies be required to set up separate companies for life and other business, in line with international practice.

The industry and Government have agreed and are examining procedures for effecting this.

In the banking sector the report recommends there should be more on site inspections of work by the regulators. But KPMG were a bit late with this as it is already happening.

The BMA introduced an on-site inspection programme last year for deposit taking licence holders and this will continue.

Government's note of moving towards a different method of calculating capital adequacy, risk differentiated method, as a recommendation is a bit of a red herring. The report said it supports the BMA's stated intention to move towards this and it is in motion. However given the very high level of capital that Bermuda deposit takers keep it is not really a problem either way.

Enhanced monitoring of the Island's banks' use of derivative products has already begun through an updated reporting procedure from the BMA.

Government has rejected KPMG's call for making a breach of the `know your customer' code an express breach of regulations. The BMA already has the legislative tools to be able to assess if such a thing is occurring and the legislative powers to act on any such breach. Government does not feel under these circumstances that it is necessary to create more legislation to cover it.

The final banking recommendation is that, "the BMA should have the power to appoint a person to take over management of a licence holder, in order to safeguard the interests of depositors.'' While Government agrees in principle it does not feel this is relevant as all the direction of new legislation ensures intervention by the regulators at a much earlier time in the event of problems.

KPMG's recommendation is only applicable when things have already gone very badly wrong.

ANALYSIS In Monday's Royal Gazette we published the formal response of the Bermuda Government to KPMG's Review of Financial Regulation.

Today, we begin to examine more closely just what the responses are to the various recommendations made by KPMG on behalf of the UK Foreign Office. In a series of four articles The Royal Gazette's Sue Stuart will look at the various sectors, beginning today with insurance and banking.

Tomorrow, she will examine the sections relating to investment business and collective investment schemes.