Guernsey: Law of Offshore
Banks are registered in Guernsey under the Banking Supervision (Guernsey) Law 1994 as amended in 2003, which is administered by the Guernsey Financial Services Commission. Applications from new banks are carefully vetted both from a prudential point of view and commercially.
The Banking Law has three main objectives:
- To protect depositors;
- To protect the reputation of Guernsey as an International banking centre;
- To protect the best economic interests of Guernsey.
It contains capital adequacy rules which are stiffer than the Basle requirements.
In November 2001 the Financial Services Commission announced that it would be applying customer 'due diligence' standards according to the Basel Committee on Banking Supervision's "Customer Due Diligence for Banks" paper (4 October 2001, "the CDD paper").
Section 2.2.3 of the CDD paper sets out what the Commission now regards as best practice for banks on introduced business. The criteria listed under paragraph 36 include the recommendation that "all relevant identification data and other documentation pertaining to the customer's identity should be immediately submitted by the introducer to the bank, who must carefully review the documentation provided. Such information must be available for review by the supervisor and the Financial Intelligence Service or equivalent enforcement agency, where appropriate legal authority has been obtained."
Under Regulation 1(4)(a) of the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, 1999, in determining whether a person carrying on any financial service businesses in the Bailiwick of Guernsey is in compliance with the regulations, a court may take account of "the Guidance Notes on the Prevention of Money Laundering issued from time to time by the Guernsey Financial Services Commission and any other guidance issued, adopted or approved by the said Commission."
The Commission said its announcement represented guidance issued by the Commission for the purposes of Regulation 1(4)(a) mentioned above.
In early 2002 the Guernsey FSC, along with its peers in Jersey and the Isle of Man announced new measures to tighten anti-money laundering regimes.
The new measures included three main features:
- In addition to being required to know their own customers, banks and other institutions will be required to look beyond their customers (for example, when they are trusts or companies) to establish the principals behind them.
- The new measures tighten up the requirements on banks and other institutions to ensure that due diligence is done properly - even where the customer is referred to them by another institution which claims to have carried out the background checks already.
- All institutions will be required to embark upon a progressive risk prioritised programme to bring the records of existing accounts up to current standards (where there are deficiencies in information and documentation held) if the nature of the client or transaction meets certain criteria.
In December, 2003, the FSC responded to concerns raised by the jurisdiction’s financial services sector by clarifying kyc rules for 'introduced business' following the introduction of the FATF's revised 'Forty Recommendations' which included rules comparable to the Basle rules but administratively somewhat simpler.
The FSC said: "Accordingly, from the date of this statement, the Commission will adopt the standard embodied in FATF Recommendation 9 (see below) with regard to the provision of information to financial services businesses in respect of introduced business. As a minimum, financial services businesses should receive written confirmation from the introducer, by way of a certificate or summary sheet(s), detailing the necessary information and the documentation held by the introducer and also take adequate steps to satisfy themselves that copies of the necessary information specified in FATF Recommendation 9, will be made available upon request without delay."
"The Commission expects that financial services businesses should have a programme of testing to ensure that introducers are able to fulfil the requirement that relevant documentation can be made available upon request without delay. This will involve financial services businesses adopting ongoing procedures to ensure they have the means to obtain that information and documentation."
"In order to determine that the new standard is being applied, the Commission, during its on-site visits, will seek to verify that financial services businesses have obtained the necessary information by way of a certificate or summary sheet(s) and that the requirement for copies of such identification data and other relevant documentation to be made available upon request without delay has been tested."
"It should be noted that, ultimately, the responsibility for customer identification and verification will remain, as always, with the financial services business relying on the introducer."
In August 2008, the GFSC issued a consultation paper to members of the Association of Guernsey Banks to seek their views on proposals to amend several key areas of regulatory policy and to introduce a range of measures aimed at safeguarding retail depositors.
The proposals, contained in the paper 'Consultation on Parental Upstreaming and the Introduction of Depositor Protection and Ombudsman Schemes,' aim to reinforce Guernsey’s reputation as a mature and well regulated finance centre. The consultation closed on September 15, 2008.
Peter Neville, Director General of the Commission explained:
“The review has its origins in the 'credit crunch' and more specifically in the problems experienced by the Guernsey subsidiary of Northern Rock plc prior to its transfer into public ownership.
"That episode led us to consider the vulnerabilities inherent in a banking model that is widely used in Guernsey, which involves gathering retail deposits and then lending a large proportion of those funds to the parent bank – what we call 'upstreaming'. The Northern Rock case also highlighted the fact that we do not have a deposit protection scheme to protect people who put their money with banks based here."
In order to provide greater protection for retail depositors the GSFC proposes to reduce parental upstreaming to a maximum of 85% of total assets. The Commission may also impose further restrictions based on the level of perceived risk associated with the parent bank.
The regulator also wants to discourage the use of branch structures for new licensed banks, unless they are perceived to be systemically important at least in their home jurisdiction or are highly specialised in nature, and introduce a deposit protection scheme limited to a maximum of GBP35,000 per individual depositor and to retail depositors only.
The GFSC says its proposals would strengthen the banking sector by requiring greater transparency through disclosure by individual banks to their depositors of: the existence (or otherwise) in the jurisdiction of a deposit protection scheme; the existence or possibility of parental upstreaming; and the status and nature of support extended by the parent to the local bank.
Other proposals would:
- require banks to monitor the liquidity and solvency of the parent entity when they place funds with it;
- require banks to have in place a contingency plan to withdraw some or all upstreaming without destabilising the parent;
- impose stronger corporate governance arrangements through the requirement for at least one independent non-group non-executive director on the Boards of local banks; and
- introduce an ombudsman scheme. Such a scheme would not be limited to the customers of banks and therefore this proposal will require further consultation with other regulated financial services sectors in Guernsey. The Commission believes that the introduction of such a scheme will afford further safeguards to depositors and customers generally.
The consultation paper sets out the benefits that would flow to Guernsey from having a deposit protection scheme and addresses the costs associated with a scheme which would be funded by the banking sector.
The views of the banking sector are also being sought on the possible establishment of an ombudsman scheme to resolve complaints from members of the public who have suffered losses or have other grievances.
"The way forward which is being suggested would involve limiting the costs by having the Commission provide resources to support an ombudsman in a way which did not conflict with our supervisory and regulatory responsibilities," Neville added.
"Once we have received the responses to the paper on the proposed ombudsman scheme, we will consider extending the consultation process to the other parts of the finance sector," he concluded.
A Guidance Note providing additional Guidance on certain sections of the Banking Supervision (Bailiwick of Guernsey) (Amendment Law), 2003 with regards up streaming was published by the Guernsey FSC in January 2010 and is available on the Commission's website.
In April 2010, the Guernsey Financial Services Commission published the final draft of new Capital Adequacy Rules, mandatory for all entities licensed under the Protection of Investors (Bailiwick of Guernsey) Law 1987. The release of the Rules in the their final form is the culmination of a November 2009 consultation.
The Capital Adequacy Rules became effective on April 16, 2010, but contain transitional rules that allow licensees until June 30, 2010, to meet the requirements.
The Guernsey FSC has released details on the following rule changes:
- Capital Adequacy Requirements for Designated Managers administered by another firm: Several respondents asked whether, for designated managers administered by another licensee, the Capital Adequacy Rules should be relaxed. The respondents were concerned about barriers to entry. The Commission no longer has the power, or the duty, under section 4 of the Law to consider economic benefit for licence applicants. The Commission, in arriving at these Capital Adequacy Rules, has considered the general risks that it considers licensees are exposed to. The risk for such licensees is in being a designated manager; the Commission does not recognise a distinction between an administered designated manager and one with its own staff and premises.
- Use of Carry Value for adjustments at Rule 5: The Commission has been made aware that the concept of carry value is more appropriate than market value. This is because, under certain GAAP provisions, some assets are carried at cost in the balance sheet. The Commission does not wish to force companies to apply market value or fair value where they are not required to under GAAP. Therefore the Commission has accepted this point.
- Inter-Company Group Loans: The Commission received significant feedback about the disallowing of inter-company group loan debtors. Some respondents suggested to the FSC that this might be appropriate in cases where capital is then placed outside the Bailiwick of Guernsey but should not apply where the debtor is another company domiciled in Guernsey. The FSC considers that this is not an appropriate principle on which to negotiate. It has been regulators’ experience that such arrangements lead to a recycling of capital that disguises, maybe unintentionally, insufficient cover to the group as a whole, the FSC said.
- Counterparty Risk: The absence of a definition of counterparty risk provided a major problem for respondents. Whilst the Capital Adequacy Rules have been designed to protect licensees from an over-exposure to any single counterparty they were not designed to capture balances with counterparties for every outstanding bargain or trade. Consequently, the Capital Adequacy Rules now exclude outstanding trades unsettled for 15 days or less from the Counterparty Risk computation. In addition, respondents were concerned that cash held at bank would also be captured under counterparty risk. The Commission has accepted this concern: any cash held at bank with a term of less than 90 days should be excluded from the Counterparty Risk computation, the new rules state.
- Matching of Fees Payable and Receivable: Lastly, respondents expressed concern at the inclusion of fees payable (which were directly attributable to fees receivable) in expenditure for the purposes of calculating the Financial Resources Requirement. The Commission has accepted this inclusion did not reflect the behaviour of such businesses and therefore the risks of undercapitalisation. Such fees payable are now excluded from the Financial Resources Requirement (and Liquidity Requirement) calculation.