Isle of Man: Law of Offshore
Banks are regulated by the Financial Services Commission under the Financial Services Act 2008. This new legislation, which came into force on August 1, 2008, consolidated several pieces of financial services legislation, including the Financial Supervision Act 1988 and the Banking Act 1998, into one Act and simplified the licensing regime. The underlying regulations remain largely unchanged however, although the term 'banking' has been reclassified as 'deposit taking.'
A licence to carry on the Class 1 regulated activity of Deposit Taking permits a business operating in or from the Isle of Man (with certain specified exclusions) to accept deposits of money, where:
- The money received by way of deposit is lent to others; or
- Any other activity of the person accepting the deposit is financed wholly, or to a material extent, out of the capital of or interest on the money received by way of deposit.
Prior to the new legislation, banks operated under either a full or restricted banking licence. The Financial Supervision Commission regulated the banking and investment industry under the powers created by the Financial Supervision Act 1988 and the Investment Business Act 1991.
An unrestricted banking licence permitted a bank to conduct investment business without holding a separate investment business licence. However, unless otherwise agreed with the Commission, all businesses which held banking licences and were conducting investment business are now expected to hold licences to conduct Class 2 Investment Business.
A Managed Bank employs the services of another licensed bank in the Isle of Man, the "Approved Manager", to provide the day to day management and administrative functions to it. The Managed Bank may not employ any staff in the Island without the consent of the Commission and it must operate from the premises of the "Approved Manager". Unless otherwise agreed with the Commission, all banks that were approved under the old legislation to manage another bank or building society are expected to hold licences to conduct Class 7 Management or Administration Services.
The Commission’s General Licensing Policy provides guidance for banking licenceholders. A licenceholder and its key staff are required to be 'fit and proper' persons. The Commission’s licensing policy is to apply a test of fitness and propriety in the key areas of integrity, competence and solvency.
The fit and proper test is both an initial test at the time of granting a licence and a continuing test in relation to the conduct of regulated activities. The test takes into account integrity, solvency and competence. The licensing policy provides guidance on the key requirements, such as:
- Real Presence - the Commission will not licence a mere shell; the company’s management and control must be in the Isle of Man.
- Track record - a licence applicant must demonstrate a proven track record in the successful conduct of the regulated activity for which it seeks a licence, either by being part of a group that already undertakes the activity in another jurisdiction or by key persons having operated at a senior level in a relevant licensed business.
- Staffing – for most classes of business, the applicant should be managed by two “resident officers” who are supported by staff with suitable experience to fulfil the key roles.
Unlicensed banking operations remain a problem and have become known as 'brass plate' companies. These 'rogue' operations are, when reported, investigated by the Enforcement Division of the FSC.
The Banking Act (as amended) recognised the contractual duty of a banker to keep the affairs of his customer confidential and the customers' entitlement to confidentiality. There were very few limited exceptions to these principles, set out in the Financial Supervision Act 1988, and these included circumstances where disclosure was required to assist criminal proceedings or to enable the FSC to discharge its statutory functions.
All banking licence holders are required to participate in the Depositors Compensation Scheme. The FSC is the Scheme Manager. The Banking Business (Compensation of Depositors) Regulations 1991 extends to all licensed banking institutions, except those listed by name in the Schedule. Under the Compensation of Depositors Regulations 2008 as amended by Tynwald on October 23, 2008, the DCS compensates people who have money in current and deposit accounts in the Isle of Man with up to GBP50,000 of net deposits per individual depositor or GBP20,000 for most other categories of depositor. Cover is calculated per depositor, per deposit taker, if this bank fails.
Prior to the 2008 regulation, deposits were protected up to 75% of the first GBP20,000 per depositor and the Scheme extends to the sterling equivalent of foreign currency deposits.
The Scheme was successfully operated in respect of the default of BCCI which had a branch in the Isle of Man.
The government announced in July 2001 that it would become the first Crown Dependency with a financial ombudsman which means that customers worldwide will have access to an independent dispute-resolution scheme covering Isle of Man-based financial institutions. The 'Financial Services Ombudsman Scheme' covers complaints about financial advice and products across the range of personal finance such as banking, credit, insurance and investments. The scheme is open to individuals with a financial complaint against an Isle of Man firm that the firm has been unable to resolve.
In June, 2005, the Isle of Man's Financial Supervision Commission announced that a project was underway to update the Banking (General Practice) Regulatory Code 1999. The key drivers for this project were to update the Banking Code in line with current requirements whilst taking into account the recommendations made by the International Monetary Fund (IMF) inspection team following its visit in 2002.
As a result, the Banking (General Practice) Regulatory Code 1999 was replaced by the Banking (General Practice) Regulatory Code 2005 on July 1, 2006.
The Commission published its approach to Basel II adoption in February 2006.
Says the Commission: 'The EU has issued the Capital Requirements Directive (“CRD”) which all regulators of member states must implement. Although this encouraged adoption from January 1, 2007, the CRD contains a qualification that, where a bank has committed to the standardised approach by 1st January 2008 it can continue to report under Basel I during 2007.
'The Isle of Man is not part of the EU and is not under any legal obligation to require locally incorporated banks to report under Basel II from 1st January 2007 or 1st January 2008.'
However, the Commission says it understands that locally incorporated banks which are subsidiaries of banks in countries requiring Basel II reporting in 2007 may wish to begin similar reporting to the Commission, whether under standardised or more advanced approaches (re parallel runs). With this in mind the Commission intends to have available the necessary reporting forms and guidance during 2007 but may require these banks to also continue reporting under Basel I.
The Commission says it will require locally incorporated banks to report under Basel II with effect from 1st January 2008 for the standardised approaches, with some degree of flexibility on a case by case basis for later adoption.
Basel II will require the Commission to make some changes to the Banking (General Practice) Regulatory Code 2005, as amended (“the Code”). It is expected that these changes will be minor and will focus on capital, risk management, and reporting forms (which are specified in the schedule to the Code). In addition, the Commission anticipates that guidance notes will be utilised to supplement the Code to ensure compliance with Basel II principles contained within Pillar 1 and Pillar 2.