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In
April 2009, it was announced that Guernsey had
launched the Island’s first legal resources
website. The site is the result of a joint initiative
between Guernsey’s Royal Court and the
Law Officers of the Crown and provides access
to a comprehensive collection and database of
Guernsey’s legal material:
Guernsey
laws, including consolidated versions and
recent changes
Unreported judgements
Guernsey Law Reports
Guernsey Law Journal and the Jersey and Guernsey
Law Review
“The
launch of this site is an extremely positive
development for Guernsey as a leading international
finance centre,” said Peter Niven, Chief
Executive of Guernsey Finance – the promotional
agency for the Island’s finance industry
– said at the time.
“Guernsey
prides itself on having modern legislation,
especially for financial services like the new
Trusts Law and new Company Law that we introduced
last year and we now have all this available
in a user-friendly online resources centre."
“Having
such a comprehensive ‘one stop shop’
will make accessing materials a much more streamlined
process for anyone wanting information on Guernsey’s
legal framework. The resources will be of particular
benefit to lawyers and other intermediaries
who now at the touch of a button will be able
to see exactly what Guernsey can offer their
clients.”
Guernsey
features alongside the likes of the United Kingdom
and the United States on the OECD’s ‘white
list’ that was published at the conclusion
of the G20 summit in London at the start of
April and was ranked 12th in that year's Global
Financial Centres Index (GFCI) which was published
in March 2009.
In
its Annual Report for 2003, the Guernsey Financial
Services Commission (GFSC) drew attention to
the publication during the year of the International
Monetary Fund's (IMF) report on the Bailiwick's
financial regulation and criminal justice framework,
revealing that Guernsey was assessed by the
IMF to have a high level of compliance with
international standards of regulation in banking,
insurance, securities, trust and company service
provision, anti-money laundering and combating
the financing of terrorism.
Additionally,
the report announced that during 2003, the Commission
was involved in a number of initiatives with
industry, working to ensure that the Bailiwick
maintains its competitive edge whilst adhering
to recognised standards. Director general of
the GFSC, Peter Neville observed that: "2003
was a very good year for the Commission. We
received an excellent IMF report, which commended
our high regulatory standards. These same standards
were cited by Robert Finch, the Lord Mayor of
the City of London, as good reason to do business
with the Island and he acknowledged that we
stand alongside the City in terms of our integrity,
innovation and standards of service."
In
March, 2004, the Financial Services Commission
issued a statement on anti-money laundering
standards for existing customers following the
issue of revised Recommendations by the Financial
Action Task Force in 2003. The statement requires
financial services businesses to assess the
risk of each business relationship and to make
sure that they have customer due diligence information
appropriate to the level of risk.
It allows businesses in the financial services
sector to consider whether simplified or reduced
information is appropriate for low risk businesses
and lower risk customers. This could mean for
example, locally resident retail customers who
have a relationship which is understood by the
financial services business.
"The
Commission has worked with the Guernsey Joint
Money Laundering Steering Group, which contains
representatives from across the finance sector,
in developing this new statement,” explained
Peter Neville. “The
statement extends the existing flexibility provided
by the Commission's Guidance Notes on the Prevention
of Money Laundering and emphasises that unnecessary
demands on lower risk customers should be avoided,"
he added.
The Commission said that it was not issuing
more detailed recommendations at that stage
on how the FATF standard should be applied in
practice. It further announced that it intended
to consult with industry by way of observation
during on-site visits and by way of discussions,
to develop such recommendations for inclusion
in the revised Guidance Notes. A revised version
of the Guidance Notes was to be issued only
after full consultation with industry and the
other Crown Dependencies.
Following
discussions between the IMF and the Commission
at the end of 2008, it was agreed that the IMF
would undertake its assessment of the Bailiwick
of Guernsey late in 2009. This assessment was
originally scheduled to take place in January
2009, but the IMF took into account the severe
effects of the global crisis, including the
problems experienced at Northern Rock Guernsey
and Landsbanki Guernsey.
The areas to be covered by the assessment were
unchanged. A significant aspect was to do with
the stability of Guernsey’s financial
sector. It was also to cover banking, insurance
and investment sector supervisory legislation
and practice, together with anti-money laundering
and counter terrorist financing legislation
and its implementation.
Peter Neville, Director General of the Commission
said: “The Commission is eager to participate
in the IMF’s assessment process and looks
forward to the broader perspective a later assessment
will bring. For substantially more than a year
we have been presented with significant challenges
in crisis management. We have met these challenges.
The very positive findings of the inquiry by
Michael Foot of the Promontory group into the
role played by the Commission in the Landsbanki
Guernsey case should stand Guernsey in good
stead."
He
added: "We hope that one of the outcomes
of the IMF’s future assessments will be
the pulling together of the lessons learned
by supervisors around the world during the crisis.
Here in Guernsey the response has already included
the introduction of a depositor compensation
scheme. The hard look that Guernsey will be
taking at the nature of its banking sector and
the relationship between the financial industry
in Guernsey and its counterparts in the UK will
also be relevant to the IMF’s assessment.
The IMF will want to gauge the effects of the
financial crisis and the global economic downturn
on the shape of the finance industry and the
products and services it offers.”
In
December 2008, a new regulation was introduced
in Guernsey to prevent money laundering, which
restricts the sale or purchase in the course
of certain businesses of precious metals, precious
stones or jewellery, where the payment is made
in cash and exceeds GBP10,000. These regulations
were proposed by the Guernsey Financial Services
Commission, which sought to extend the Bailiwick’s
anti-money laundering regime in order for it
to meet international standards.
The
Regulations are made under Sections 49A and
54 of the Criminal Justice (Proceeds of Crime)
(Bailiwick of Guernsey) Law, 1999 and are titled
The Criminal Justice (Proceeds of Crime) (Restriction
on Cash Transactions)(Bailiwick of Guernsey)
Regulations, 2008 and were effective from December
1, 2008. Any person who contravenes the restriction
commits an offence and is liable, for a first
offence, to a fine of up to twice the value
of the cash involved. The Guernsey government
has asked that dealers in precious metals, precious
stones or jewellery should report any attempted
transactions in excess of GBP10,000 as suspicious
to Guernsey’s Financial Intelligence Service.
In
December 2009, the Guernsey Financial Services
Commission proposed changes to its AML/CFT that
will require postage stamp dealers, bullion
dealers, firms of accountants which are currently
not registered with the Commission, and firms
(including sole practitioners) of insolvency
practitioners, auditors and tax advisors to
register with the Commission and to comply with
the AML/CFT regulations, and with the rules
in the Commission’s handbooks.
As
the Commission is conscious that the requirements
of the regulations may appear complex and onerous,
especially to firms which have not previously
been subject to any form of AML/CFT regulation
or supervision, the guidance note provides information
to assist such firms.
The
guidance paper, available on the Commission’s
website, provides a simplified overview of the
requirements of the regulations and the rules
in the Handbooks.
In
April 2010, the Guernsey FSC announced the launch
of a consultation on proposals to overhaul legislation
that governs the prevention of money laundering
and the financing of terrorism in the island.
The
consultation paper proposes extensive amendments,
namely to the following legislation:
The
Financial Services Commission (Site Visits)
(Bailiwick of Guernsey) Ordinance, 2008;
The Insurance Business (Bailiwick of Guernsey)
Law, 2002;
The Insurance Managers and Insurance Intermediaries
(Bailiwick of Guernsey) Law, 2002;
The Protection of Investors (Bailiwick of
Guernsey) Law, 1987;
The Banking Supervision (Bailiwick of Guernsey)
Law, 1994;
The Registration of Non-Regulated Financial
Services Businesses (Bailiwick of Guernsey)
Law, 2008;
The Regulation of Fiduciaries, Administration
Businesses and Company Directors, etc. (Bailiwick
of Guernsey) Law, 2000;
The Criminal Justice (Proceeds of Crime) (Financial
Services Businesses) (Bailiwick of Guernsey)
Regulations, 2007; and
The Criminal Justice (Proceeds of Crime) (Legal
Professionals, Accountants and Estate Agents)
(Bailiwick of Guernsey) Regulations, 2008.
The
first part of the consultation discusses harmonizing
the Commission’s on-site inspection powers
throughout all governing legislation.
The
definition of “regulatory laws”
is also to be amended to provide a consistent
definition across governing legislation. In
particular this will improve the Commission’s
checks when considering a license, by broadening
the pool of relevant contraventions of regulatory
laws that the Commission may take into account
when considering an application.
It
is also proposed that a textual amendment be
made to legislation which governs penalties,
namely harmonizing the texts of Section 88 of
the Insurance Business Law, 2002 and Section
65 of the Insurance Managers and Insurance Intermediaries
Law, 2002.
In
addition, as part of a larger review of the
definition of “FSB Regulations,”
the Commission proposes inserting a new provision
into the FSB Regulations which enables financial
services businesses to disclose information
to other financial services businesses and prescribed
businesses, where it appears necessary for the
purposes of forestalling, preventing or detecting
money laundering and terrorist financing. This
amendment is supported by the recommendation
in recent IMF reports of other jurisdictions
that they should consider including explicit
provisions to provide for the sharing of information
between financial services businesses.
The
consultation paper is available on the Commission’s
website, and interest parties were asked to
submit comments by May 21, 2010.
The
Trusts Law 1989 provides a modern statutory
basis for trust management activity. The Edwards
Report acknowledged that Guernsey ranks highly
among IOFCs for the quality of its regulation.
Unlike the banking sector, however, the Guernsey
trusts industry has not been subject to any
formal system of supervision.
Partly
as a result of the Edwards Report, a law was
prepared by the States' Advisory and Finance
Committee under the name of The Regulation of
Fiduciaries and Administration Businesses (Bailiwick
of Guernsey) Bill 2000. The law - known as the
Fiduciary Law - came into effect on April 1,
2001.
Anyone
who, by way of business, carries on regulated
fiduciary activities in or from within the Bailiwick
of Guernsey requires a fiduciary licence granted
by the Commission under the Fiduciary Law. Section
2 of the Fiduciary Law sets out the activities
which are regulated, and section 3 provides
for exemption in some circumstances.
A licence is required by any company, wherever
registered, providing fiduciary services in
the Bailiwick and by Guernsey-registered companies
providing fiduciary services anywhere in the
world.
There are two categories of fiduciary licence:
A full fiduciary licence can only be granted
to a company or a partnership, and authorises
all regulated fiduciary activities. A full
fiduciary licence authorises the licensee
and its directors or partners, managers
and employees to carry on regulated fiduciary
activities (where the directors, etc. do
so in the course of their duties to the
licensee).
A personal fiduciary licence can only be
granted to an individual and authorises
the holder to carry on a restricted range
of fiduciary activities. Those include acting
as a company director, as trustee (but not
as a sole trustee), and as executor of a
will or administrator of an estate. The
holder of a personal fiduciary licence is
prohibited from advertising by The Regulation
of Fiduciaries (Fiduciary Advertisements
and Annual Returns) Regulations, 2001.
The
law contains a 'four eyes' rule, standards for
capital adequacy and compulsory indemnity insurance.
The offer or provision of fiduciary services
without a licence incurs criminal sanctions.
Prudential rules are also imposed; clients'
funds need to be segregated from other trust
assets; and new accounting safeguards have been
installed.
The
law provides extensive powers to the Guernsey
Financial Services Committee in the granting,
refusal, revocation, and application of conditions
to fiduciary licences. It also has authority
to control the names of, and advertising by,
fiduciary businesses, rights to obtain information
and documents, and powers to conduct investigations.
The Guernsey law of trusts was codified in 1989
along broadly Anglo-Saxon lines in the Trusts
(Guernsey) Law 1989. This law does not apply
directly in Alderney or Sark, but has a substantial
influence on trusts in those jurisdictions.
Trust
documents are in English. There are no registration
requirements for trusts, no fees are payable
on formation, and there are no annual reporting
requirements other than for resident trusts
(ie those with resident beneficiaries). Trust
accounts must be kept but there is no audit
requirement.
The
maximum perpetuity for Guernsey trusts is 100
years. The law provides for non-recognition
of foreign judgements, and forced heirship provisions
in foreign law can be over-ridden. The Hague
Convention has been incorporated into Manx Law.
In
September 2005, the Guernsey FSC launched a
consultation with trust professionals, lawyers,
accountants and regulators to: investigate the
requirement for changes to enable new trust
products and services to be available to the
Fiduciary Sector in Guernsey; to consider the
availability of competitor trust products and
services from other jurisdictions; to consider
marketing requirement for the Fiduciary Sector;
and to make recommendations for the desired
changes.
New
trust legislation (the Trusts (Guernsey) Law,
2007), which was approved in July 2007, came
into force on March 17th, 2008. The changes
overall are designed to create a more flexible
framework for the local trust industry, and
to ensure that Guernsey, as a jurisdiction for
the establishment and administration of fiduciary
structures, remains well placed and competitive.
Some
of the most significant changes to the Island’s
trust legislation include:
The introduction of (non-charitable) Purpose
Trusts;
Removal of limits on the length of a trust’s
duration – allowing perpetual trusts;
Clarification of the position of retiring
trustees, making the transfer process more
streamlined;
Clarification of the circumstances under which
information has to be given to beneficiaries;
Abolition of the liability of directors of
corporate trustees based in Guernsey or acting
as trustees of Guernsey law trusts, particularly
as a way to encourage greater use of Private
Trust Companies (PTCs); and
Revision of arrangements regarding limitation
periods and Alternative Dispute Resolution
(ADR).
The
new law has its roots in a series of proposals
made in the ‘Evans Report’, which
was published following a root and branch
review of the Island’s trust legislation
by a working party under the chairmanship
of Guernsey advocate Rupert Evans.
“This
is yet another example of how the Guernsey
government, the Island’s financial regulator
and its industry practitioners, continually
work together to maintain an environment that
maximises business flows,” stated Peter
Niven, Chief Executive of GuernseyFinance.
Guernsey
has more than 50 years experience in providing
trust and corporate services. As of February
2008, the Island hosted more than 140 licensed
fiduciaries, ranging from large organisations
to independent, boutique operations. Together,
they held between GBP200 and GBP300bn worth
of assets in trust.
Mr
Niven added that: “Guernsey’s
fiduciary industry has built a reputation
for professionalism and expertise in using
the modern structures that are available on
the Island for the preservation of both institutional
and individual/family wealth and assets. The
amendments to Guernsey’s trust legislation
include several significant changes like the
introduction of Purpose Trusts that will particularly
enhance the Island’s fiduciary environment."
He
concluded: “However, we are far from
resting on our laurels and work continues
to introduce legislation that will allow the
establishment of Foundations. The addition
of this innovative tool will ensure that the
Island’s practitioners are able to offer
their internationally mobile clients the widest
spectrum of products and services.”
In
July 2009, Guernsey's Financial Services Commission
announced proposals to overhaul regulation
to enhance protection and oversight of Retirement
Annuity Trust Schemes.
Retirement
Annuity Trust Schemes (RATS) have been available
as a form of personal pension provision in
Guernsey for many years. Recently, with other
options such as retirement annuity contracts
becoming less widely available, RATS have
been formed in larger numbers.
Their
flexibility in relation to how assets may
be invested, and benefits drawn on retirement,
makes them useful in many circumstances. However,
the same flexibility gives rise to the risk
of RATS being used in circumstances where
they are not the best solution or are not
fully understood by the member.
The
Commission fears that due to the cross-sectoral
involvement in the schemes, regulatory framework,
which applies to the firms which operate in
different sectors but provide services in
relation to the same structure or product,
needs revision to set broader, more effective,
guidelines.
In
late 2008 the Commission circulated a discussion
paper on RATS, highlighting some concerns
about the present position. This arose from
discussions with a group of practitioners
across the relevant sectors of finance business.
The problems identified by the group included:
The
quality of initial advice: there are concerns
that not all firms involved in RATS understand
the specific factors and requirements which
apply to them. There has sometimes been
insufficient analysis of existing pension
arrangements and the merits of transferring
out of those into a Retirement and Annuity
Trust Scheme.
There has sometimes been inadequate disclosure
of fees and charges. Those have a particular
significance with RATS because they are
comparatively expensive to administer and
clients need to be able to factor that into
their decisions. There have also been problems
with the disclosure of commission and investment
performance, it informed.
There have been issues with the expertise
of some firms to advise on suitable assets
to ensure that Income Tax requirements for
RATS are met, and that the investments are
suitable to allow benefits to be drawn down
on retirement.
A particular problem relating to investment
policies pursued within RATS has been the
use of heavy gearing (borrowing) by trustees
of RATS, with the serious risks involved
not always being clear to the RATS’
members.
The
Commission reportedly received some very helpful
responses to the discussion paper. It was
clear to the Commission, both from the number,
and the content of those, that there is widespread
concern about the above areas within firms
across all sectors of the finance industry.
As
a result, the Commission produced a consultation
paper summarizing its proposals for improving
the regulatory framework under which firms
provide services relating to RATS.
The
Commission’s proposed rules include:
Training
for those advising and acting as trustee
of or administering RATS;
At set up stage, a trustee accepting trusteeship
must be certain that the RATS and the proposed
investment and investment strategy is a
suitable form of retirement provision for
the member;
Before transferring funds from a defined
benefit pension scheme to a RATS, the trustee
must produce an impartially verified report
showing that the RATS would be more financially
beneficial over the existing set-up;
Trustees must make the member aware of the
risks of using gearing to enhance investment,
and the trustee must get the member to sign
a copy of the statement, stipulated within
the Commission’s guidance note, underlining
that they understand the risks;
Trustees must report full financial reports
of the RATS financial standing to the member
at least annually;
The trustee must ensure that, once income
starts to be drawn down and paid to the
member in the form of an annuity, the trustee
can demonstrate that the level of payment
is appropriate to secure a satisfactory
provision for the retirement of the member,
but also that reviews are carried out to
ensure that the amount annuitized remains
appropriate with respect the amount remaining
in the RATS, and the life expectancy of
the member;
A trustee must make fully transparent what
its fees and commissions are, with regards
assets at any level, including not limited
to trustee’s own fees and fees or
commissions payable from the assets to the
trustee, any independent financial advisor,
other intermediary, investment or fund manager
or adviser.
No financial services business licensed
by the Commission shall inaccurately or
misleadingly advertise or promote RATS,
or investments or investment strategies
(including gearing) for use as part of retirement
provision involving RATS. The Commission's
proposals are listed comprehensively on
its site, where responses will be welcome
until September 2, 2009.
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.
Insurance companies are regulated by the Financial
Services Commission under the Insurance Business
(Guernsey) Law 1986, updated by the Insurance
Business (Bailiwick of Guernsey) Law, 2002,
the Insurance Managers and Insurance Intermediaries
(Bailiwick of Guernsey) Law, 2002, the Insurance
Business (Bailiwick of Guernsey) (Amendment)
Ordinance, 2008, and the Protected Cell Companies
Ordinance 1997.
The
minimum capital requirement of a licensed insurance
manager or
a licensed insurance intermediary is GBP25,000
or 125% of the
licensee’s professional indemnity insurance
deductible or excess, if higher; a fee of GBP4,070
is payable on registration and GBP3,860 annually
thereafter (for a 'Pure' insurance manager.
Commercial insurance managers pay an annual
fee of GBP6,460. These fees are effective as
of January 1, 2010.
Annual
audits are needed, and there are substantial
annual information requirements, including business
plans, solvency calculations, reports on claims,
banking and investment schedules, and, for life
companies, actuarial certification.
In
March 2010, it was announced that Heritage Insurance
Management in Guernsey had achieved a worldwide
first by amalgamating two Protected Cell Companies
(PCCs).
The
companies, Harlequin Insurance PCC Limited and
Friary Court Insurance PCC Limited, are both
insurance PCCs with 17 independently owned cells
between them.
The
companies were used by Heritage and Heath Lambert
Insurance Management (Guernsey) Limited (now
merged) to provide cell captive insurance facilities
to their clients. It was decided that amalgamating
the two PCC companies into one would create
a more efficient structure which ultimately
will save money for the clients involved in
the cells.
Speaking
about the amalgamation, Martin Le Pelley, Compliance
Officer for Heritage, said at the time that:
“The amalgamation of two PCCs is not straightforward
as each cell represents a separate class of
share, which in turn means that all cell shareholders
must vote in favour of the amalgamation in order
for it to take place. Nevertheless, having achieved
this milestone, we consider that the combined
company will provide a more secure and efficient
platform for our cell captive clients going
forward.”
The
combined company has retained the name Harlequin
Insurance PCC Ltd.
Collective
Investment Funds are supervised by the Financial
Services Commission (FSC) under the Protection
of Investors (Bailiwick of Guernsey) Law,
1987 (as amended) and the Collective Investment
Scheme Rules 1988.
Open
ended funds may be established as Class
A, B or Q funds and are constituted as companies,
protected cell companies or unit trusts.
Closed ended investment funds are constituted
as companies, unit trusts, limited partnerships
or protected cell companies.
Open
ended schemes are authorised and entities
involved in controlled investment business
are licensed under the Protection of Investors
(Bailiwick of Guernsey) Law, 1987, as amended.
The Commission has made a number of rules
under the Law which set out the detailed
requirements to be followed by all authorised
schemes and licensees. These include:
The
Collective Investment Schemes Rules 2002
(which cover Class A schemes); The Collective
Investment Schemes (Class B) Rules 1990
(which cover Class B schemes);
The
Collective Investment Schemes Qualifying
Professional Investors (Class Q) Rules
1998 (which cover schemes designed for
qualifying professional investors);
The
Collective Investment Schemes (Designated
Persons) Rules 1988;
The
Licensees (Conduct of Business and Notification)(Non-Guernsey
Schemes) Rules 1994.
Class
A schemes are those which meet the Commission's
Collective Investment Schemes Rules 2002
and are therefore eligible for recognition
by the UK Financial Services Authority for
sale to the public in the United Kingdom
under section 270 of the Financial Services
and Markets Act 2000.
The
rules for Class B schemes incorporate a
measure of flexibility. This policy recognises
that Class B schemes range from the retail
fund aimed at the "general public"
via institutional funds to the strictly
private fund established solely as a vehicle
for investment by a single institution.
Their investment objectives and risk profiles
are similarly wide-ranging.
The
Class Q Rules seek to provide a clear and
concise set of requirements for the operation
of professional investor funds and have
been designed to encourage innovation.
A
Qualifying Investor Fund (QIF) regime was
Introduced following consultation with the
financial services industry in the latter
half of 2004, and was welcomed by the island's
fund industry. Under a streamlined application
process, the Commission undertakes to grant
fund approval within 3 working days provided
that an appropriately licensed Guernsey
applicant has certified that: the fund will
be restricted to professional, experienced
and knowledgeable investors; the applicant
has conducted due diligence on the promoter
and associated parties and has found them
to be fit and proper; and the applicant
is satisfied as to the fund's economic rationale
and the disclosure of any risks associated
with the investment vehicle.
New
criteria for Qualifying Investor Funds released
by the Guernsey Financial Services Commission
in 2006 met with support from the island’s
finance industry.
Chief
executive of GuernseyFinance, Peter Niven,
suggested that the move "will serve to bring
more business to the island", whilst Chairman
of the Guernsey Investment Fund Association,
Mike de Haaff, announced that:
"GIFA
welcomes the change in criteria as it brings
Guernsey in line with other offshore jurisdictions.
The change in definition of a professional
investor will encourage more take up of
QIFs and can only be seen a positive move
for the island’s fund industry."
Under the new rules, the definition of Professional
Investor has been widened to include an
individual investor who invests a minimum
of USD100,000 in such a fund.
The
revised guidance note issued by the FSC
also re-emphasised the due diligence obligations
which Guernsey Licensees undertake when
submitting applications for Guernsey Qualifying
Investor Funds.
The
growing use of Guernsey structures as vehicles
for hedge funds has highlighted a number of
areas where the existing investment fund framework
can create problems, leading the Guernsey
Financial Services Commission to issue a consultation
document: ‘The regulatory framework for
Hedge Funds in Guernsey’ in November
2003, setting out a range of practical issues,
and seeking views from interested parties
on those issues and the solutions which may
be available.
The
Guernsey Financial Services Commission also
issued guidance on the disclosure regime for
closed-end investment funds. That guidance
re-emphasised the flexible nature of the Commission’s
approach. Guernsey domiciled closed-end funds
are subject to Guernsey company law and the
Control of Borrowing regime, and it is clear,
from the closed-end hedge funds already established
under those arrangements, that few structural
problems arise.
In
the open-ended sector, the position is more
complex. Open-ended funds are subject to the
Protection of Investors (Bailiwick of Guernsey)
Law 1987, as amended, (“POI”) and
to rules and regulations made under that law.
POI provides, inter alia, that all Guernsey
open-ended funds must be authorised by the
Commission - there is no provision for “unauthorised”
funds – and that each fund must have
a designated manager and a designated trustee
or custodian.
In
mid-2004, the GFSC published a document setting
out its main conclusions regarding hedge funds.
The findings are directed at the funds industry
for vehicles which are popular with institutional
investors, said Fiona French, the commission’s
assistant director of investment business:
"We always had the power to waive our rules.
Now we’re saying publicly to hedge fund managers
that these are the ones we’re prepared to
waive to establish funds here. We’re technically
not changing the rules because some elements
we’ve always waived."
Areas
where the commission will show flexibility
include: not requiring a Guernsey-domiciled
and licensed custodian to fill the role of
a suitably qualified prime broker; no need
for complex segregation requirements for prime
brokers holding fund assets; waivers for funds
which can demonstrate a need to use estimates
of net asset value in advance of final NAV
determination; and where estimation is permitted,
there may be waivers of client money rules
requiring segregation of subscription and
redemption monies.
In
May, 2006, the report of a Committee appointed
in 2005 to consider investment sector legislation
and regulation and to report to the Guernsey
Financial Services Commission and to the Commerce
and Employment Department recommended the
creation of a "registered" fund sector, alongside
the existing "regulated" sector. Unlike regulated
funds, registered funds would not need prior
approval from GFSC.
The
report suggests that the same framework should
apply to both open and closed end funds, which
should be subject to a dedicated Funds Law,
leaving the existing Protection of Investors
Law to deal with other aspects of investment
business.
It
also recommended that public offers should
be made subject to specific Prospectus legislation,
rather than to the current Control of Borrowing
regime, and that provision of services to
certain funds domiciled outside Guernsey should
also be liberalised.
The
report additionally recommended that definitions
of investment business in the POI Law be reviewed,
that economic benefit should be abandoned
as a criterion for licensing investment firms,
and that some of the sets of rules made under
the POI Law should be merged.
The
report further reflects on the importance
of expanding Guernsey's intellectual capital
by attracting new service providers in areas
other than fund administration, and notes
the significance of personal tax rules and
housing policy in achieving those objectives.
Peter
Neville, Director General of the Guernsey
Financial Services Commission, announced following
publication of the report that:
"We
very much welcome the proposals put forward
in the Harwood Committee report. Streamlining
authorisation and licensing processes will
benefit: the investment sector by allowing
faster responses; the Commission by letting
its dedicated staff extend their monitoring
of licensees rather than on pre-vetting funds;
and Guernsey in general by ensuring that the
service delivered by Guernsey investment firms
continues to support and enhance our established
reputation."
"Recent
trends have seen new businesses - stockbrokers,
asset managers and private wealth managers
- outside the pure funds sector establish
themselves here in Guernsey. We also endorse
the report's recognition of the importance
of expanding the widest range of investment
activity in Guernsey."
"Once
we have seen how the investment sector responds
to the consultation, we look forward to working
with them, with the Finance Sector Group and
the Department of Commerce and Employment
to bring about agreed change as soon as possible."
In
May 2008 the Guernsey Financial Services Commission
commenced a public consultation on a proposal
to fast track the application process for
specified licensees associated with Qualifying
Investor Funds or Registered Closed-ended
Investment Funds.
The
main thrust of the proposal is that a Licence
Assessment Committee will be convened to consider
the issue of a licence under the Protection
of Investors (Bailiwick of Guernsey) Law,
1987 (the POI Law) within 10 business days
of receipt of a complete formal application,
together with confirmations from an appropriately
licensed Guernsey service provider to the
Commission that:
They have performed sufficient due diligence
to be satisfied that the beneficial owners
or controllers of, and relevant parties
to, the applicant for a licence are fit
and proper and meet the requirements as
set out in the POI Law and that in this
respect consideration has been given to
all of the issues set out in the Guidance
Document issued by the Commission;
They have undertaken sufficient due diligence
to confirm that the application for a licence
under the POI Law which includes the relevant
application form and supporting documentation
and information, is complete and accurate.
The
introduction of the Qualifying Investor Fund
regime in February 2005 and the Registered
Closed-ended Investment Fund regime in February
2007 provided fund promoters and their Guernsey
regulated service providers with two fast
track application processes for defined investment
funds, giving a guaranteed response time from
the Commission.
Since
the introduction of the two regimes, a significant
number of fund applications have been made
under them, and at the same time associated
licence applications under the the POI Law
have been made for parties seeking to provide
management services to the funds.
Due
to the statutory obligations imposed on the
Commission when considering applications for
licences under the POI Law, which do not apply
in the same way to fund applications, the
Commission said that it is not possible to
guarantee considering applications for licences
in the same time scale that apply to the two
fast track fund application processes.
The
Commission has acknowledged that this apparent
“mis-match” in timescales is not
ideal and proposes to introduce a regime which
will reduce the timescale for the consideration
of licence applications in specified cases.
Due
to the statutory obligations referred to above
it is not possible to reduce the relevant
timescale to that applying to the associated
fund applications, but it is considered that
the proposed regime will introduce certainty
of response in respect of licence applications
made to the Commission.
The
Commission proposes to introduce a framework
applicable to licence applications under the
POI Law for parties seeking to provide management
services to Qualifying Investor Funds or Registered
Closed-ended Investment Funds.
Parties
seeking to conduct activities such as administration
or custody for such funds or who intend to
conduct restricted activities in connection
with other types of investment fund business
and/or non-fund business will need to apply
and be assessed under the Commission’s
standard licence application process.
In April 2009, it was
announced that the Guernsey Financial Services
Commission, in conjunction with a Working
Party representative of practitioners across
the investment industry, has been preparing
new Conduct of Business Rules mandatory for
all entities licensed under the Protection
of Investors (Bailiwick of Guernsey) Law,
1987 as amended.
The Conduct of Business
Rules are the first, and major, part of a
process to replace the Licensees (Financial
Resources, Notification, Conduct of Business
and Compliance) Rules, 1998 and the Collective
Investment Schemes (Designated Persons) Rules,
1988. The second and final part of the process
is a revision to the Capital Adequacy Rules,
which went into effect in April 2010 (see
Banking above).
The Conduct of Business
Rules recognise the very different activities
undertaken by the population of licensees
under the Law. The main highlights of the
Conduct of Business Rules include:
a
comprehensive set of rules outlining the
Board of a licensee’s responsibility
for the compliance function;
a
recognition that the term 'designated manager'
applies to administrators of open-ended
and closed-ended collective investment schemes;
the
proposed rules do not impose MiFID-style
provisions on licensees; nevertheless, the
Rules recognise that group requirements
will apply to some firms and do not, therefore,
conflict with MiFID provisions;
the
client money rules have been made more rigorous.
In October 2009, Guernsey’s
Chief Minister, Lyndon Trott, expressed confidence
that discussions between the jurisdiction
and key players in Europe will secure the
future for the funds industry in Guernsey.
Trott said that he
was fully aware and had been for some time
of the serious threats posed by the EU Alternative
Investment Fund Managers Directive, which
seeks to regulate all alternative investment
funds including private equity and closed-ended
listed funds, where the island is a world
leader.
Guernsey’s political
and industry response, being led by the Commerce
and Employment Department with the Guernsey
Financial Services Commission and the Guernsey
Investment Funds Association, has involved
a series of meetings in Brussels.
Deputy Trott said:
“This development
demonstrates just how vital it is that Guernsey
continues to build relationships with Brussels.”
“Brussels is
increasingly influential in setting global
regulatory standards and our continued prosperity
will increasingly depend on our relationship
with them.”
The States team has
held discussions with the European Fund and
Asset Management Association, a number of
financial institutions in Europe, and other
key individuals involved in this debate.
Commerce and Employment
Minister Carla McNulty Bauer said that the
purpose of discussions in Brussels were four-fold:
To
ensure that there is a clear understanding
among decision-makers of Guernsey’s
current regulatory regime;
To
obtain information on how the directive
is likely to be amended and when it is likely
to be finalized;
To
offer suggestions on how the directive could
be amended to ensure that it meets the objective
of better regulation but also ensures that
European professional investors can continue
to access global capital markets; and
To
develop appropriate contacts within the
various European institutions to build relationships
and understanding about Guernsey.
Deputy McNulty Bauer
said: “There is no doubt that this directive
has the potential to have a significant impact
on the global alternative funds industry.
Guernsey is not immune from those effects.”
“But the directive
also presents a significant opportunity for
us. Our standards of regulation of alternative
funds are high and stronger than that of many
EU Member States. My Department is confident
that Guernsey is well placed to achieve equivalence
under the directive at some time in the future,
though that will depend on how the directive
changes during the coming months.”
The directive is unlikely
to be finalized until the summer of 2010 and
will then not come into force until 2014 or
2015. Until that time the status quo remains
and Guernsey’s fund industry can continue
to enjoy its current market access for the
next five years.
Guernsey Finance, the
promotional agency for the Island’s
finance industry, has assured that, despite
the European Union’s continued steps
towards introducing the controversial Alternative
Investment Fund Managers Directive, the future
of Guernsey as a leading funds domicile is
not in jeopardy.
Peter Niven, Chief
Executive of Guernsey Finance, said:
“I am confident
that no matter which approach is finally adopted
by the European Union, Guernsey is well positioned
to remain an attractive and competitive jurisdiction
for European professional investors.”
“Under the latest
proposals any third country hedge fund or
private equity group will be able to gain
an EU passport if it complies with the new
rules and its home country applies global
standards. We certainly believe that Guernsey
meets all the relevant criteria, not least
through our long-standing commitment to adopt
international standards on regulation, transparency
and information exchange. This has been recognized
by the Island’s inclusion on the OECD
‘white list’ and the findings
of the Foot Review.”
Niven added: “Guernsey’s
government, industry and regulator will be
continuing the joint work to understand the
implications of the Directive, lobby for changes
to the proposals, and promote a better understanding
of our regulatory regime and alternative funds
industry to ensure we have the best possible
outcome for the island.”
In May 2010, European
Union finance ministers reached an agreement
on a mandate for the Spanish Presidency of
the EU to negotiate with the European Parliament
on a directive establishing an EU framework
for managers of alternative investment funds.
A final vote on the draft directive by the
European Parliament has been scheduled for
July, 2010.
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