1.) The Offshore Regulatory Environment Flashcards
Define a crown dependency’s relationship with the U.K
The crown dependencies recognise the queen as their head of state, but their governments and judicial systems are independent.
Whilst the dependencies aren’t subject to UK laws, they’ve usually introduced similar legislation to that on the mainland, regarding civil and criminal laws
The British government is responsible for managing the international interests of the dependencies in relation to their dealings with large international organisations, e.g. The UN or EU
The British government is also responsible for the defence of the crown dependencies
Other than militarily and internationally, the crown dependencies can be considered independent, self-governing countries
Define the three possible avenues open to a foreign services provider under the U.K. Financial Services Act 1986 to provide investment services into the UK (Under Sections 86, 87 and 88 of the Act, respectively)
UCITS - Undertakings for Collective Investments in Transferrable Securities
Designated Territory status
Apply for authorisation
Describe UCITS (Undertakings for Collective Investments in Transferrable Securities), one of the three possible avenues open to a foreign services provider under the U.K. Financial Services Act 1986 to provide investment services into the UK (Under section 86 of the Act)
The UK’s membership of the EU required the UK comply with the EU Second Investment Directive.
This requires member states to enable licensed investments businesses in OTHER member states to conduct investment business within their borders, subject to local legislative requirements
This meant that the UK Act also had to include this mechanism - Section 86 of the Financial Services Act provides for the authorisation of foreign collective investment schemes that are regulated to an equal standard as an authorised UK scheme
The EU benchmark for a regulated scheme is that it meets all of the requirements set out in the UCITS directive, and that it’s an authorised scheme in its country of incorporation. Section 86 of the Act provides for all UCITS schemes to be sold in the UK, subject to formal notification to the UK regulator, and a one month waiting period during which time the regulator can object to the scheme
What is the EU benchmark for a regulated scheme?
The EU benchmark for a regulated scheme is that it meets all of the requirements set out in the UCITS directive, and that it’s an authorised scheme in its country of incorporation.
Section 86 of the Act provides for all UCITS schemes to be sold in the UK, subject to formal notification to the UK regulator, and a one month waiting period during which time the regulator can object to the scheme
Define the acronym UCITS
Undertaking for Collective Investments in Transferrable Securities
Describe designated territory status, one of the three possible avenues open to a foreign services provider under the U.K. Financial Services Act 1986 to provide investment services into the UK (Under section 87 of the Act)
Crown dependencies can’t use section 86 of the act as they aren’t members of the EU and are unable to issue UCITS certificates to their domestic funds.
The U.K. act made special provisions for non-EU territories in Section 87, which allows the Secretary of State for the UK to designate territories which have demonstrated that their financial services legislation is equal to that of the UK
As UK legislation changes, the crown dependencies must change theirs too, if they wish to retain their designated territory status
Describe ‘apply for authorisation’, one of the three possible avenues open to a foreign services provider under the U.K. Financial Services Act 1986 to provide investment services into the UK (Under section 88 of the Act)
The third option open to non-EU investment service providers is to apply directly to the Secretary of State under section 88 of the act for authorisation on a scheme by scheme basis i.e. each investment scheme would be subject to authorisation based on its country of residence and the merits of the scheme.
This is a lengthy and expensive process and it’s been rarely utilised in practice
Who is the JFSC governed and managed by?
The JFSC is managed and governed at operational level by an executive board, headed by the director general.
Like many other financial services regulators, the JFSC is ultimately managed by a non-executive board of commissioners, made up of a mixture of Jersey- and internationally-based regulators and senior industry practitioners.
Although the board of (10) commissioners delegates several functions to the board, the most important regulatory decisions, e.g. revocation of a license or banning an individual is retained by the board of commissioners
Describe the JFSC’s key purpose, and how it achieves this
REDUCING RISK/SAFEGUARDING/PROTECTING/COUNTERING
The JFSC’s key purpose is to maintain Jersey’s position as an international finance centre with high regulatory standards by:
X Reducing risk to the public of financial loss due to dishonesty, impotence, malpractice or the financial unsoundness of financial services providers
X Protecting and enhancing the Island’s reputation and integrity in commercial and financial matters
X Safeguarding the Island’s best economic interests
X Countering financial crime both in Jersey and elsewhere
Describe what the JFSC aims to do in support of its key purpose
Ensure that all entities are authorised meet fit and proper criteria
Ensure that all regulated entities are operating within accepted standards of good regulatory practice
Match International standards in respect of banking security, trust company business, insurance regulation, anti-money laundering (AML) and terrorist financing defences (CFT)
Identify and deter abuse and breaches of regulator standards
Ensure that the JFSC operates effectively and efficiently, and is accountable to the States of Jersey
What are regulated businesses, in relation to the JFSC?
Businesses that the JFSC has prudential oversight of, such as:
Banks (e.g. Via work in the areas of AML, CFT and sanctions)
Insurance companies
General insurance mediation businesses
Investment businesses (managers, dealers and advisers)
Trust company business (trust and company service providers)
Money service businesses (bureau de change and money transmitters)
Fund products
Define the ‘4 regulatory laws’ that form the legal basis for the JFSC’s oversight of regulated businesses
REMEMBER BIFC
Banking (Jersey) Law 1991
Insurance Business (Jersey) Law 1996
Financial Services (Jersey) Law 1998 (FS(J)L)
Collective Investment Funds (Jersey) Law 1988
What do the ‘4 regulatory laws’ that form the legal basis for the JFSC’s oversight of regulated businesses in Jersey allow the JFSC to do?
The four regulatory laws give the JFSC the power to:
(When combined with the Commission Law) Conduct off- and on-site supervision of regulated businesses
Various tools and powers to ensure it can carry out effective supervision.
Require the provision of information and documents
Conduct investigations
Enter and search premises (with a warrant)
Revoke a regulated business’ license
Refuse to license an applicant
Set conditions on a license
Issue directions requiring a regulated business to take (or not take) specific action
Appoint a manager to manage a regulated business
Issue public statements that warn the public and/or censure the regulated business
The four regulatory laws also provide for criminal offences to be committed where (inter alia) a person conducts a financial services business without the relevant license from the JFSC, or provides false/misleading info to the JFSC
The JFSC has used powers under the four regulatory laws to issue codes of practice that set standards regulated businesses must meet. E.g. the codes set conduct of business rules and financial resource requirements
What is the purpose of the Jersey’s AML/CFT handbook, as issued and maintained by the JFSC?
Setting regulatory requirements on regulated businesses to support those set out in legislation (the Money Laundering (Jersey) Order 2008)
Define the acronym JFCU
The joint financial crimes unit, Jersey’s joint police/customs Financial Intelligence Unit
What is the JFCU, the joint financial crimes unit
Jersey’s joint police/customs Financial Intelligence Unit
Describe how the JFSC works with the JFCU, the joint financial crimes unit
There’s a regular exchange of information regrading regulated businesses, particularly where a suspicious activity report (SAR) submitted to the JFSC indicates that there may be issues at the regulated business that the JFSC should look into
Conversely, there have been several instances where an onsite examination of a regulated business has resulted in the JFSC becoming aware of potential breaches in AML/CFT legislation, amongst other things, and a referral to the JFCU has been made. Investigations and criminal prosecutions have resulted from such referrals
Describe how regulated businesses play a role in the Island’s fight against criminals
KYC (know your customer) requirements that regulated businesses must follow enables them to be in a position to report suspicious or unusual activity by their clients
Their vigilance is reflected by the large number of SARs submitted by them to the JFSC.
For example, between January 2005 and December 2007 over 3500 SARs were submitted to the JFSC by regulated businesses
Describe the non-profit organisations (Jersey) Law 2008, and how it affected the JFSC
The NPO law requires non profit organisations to register with the JFSC.
The JFSC is given, inter alia, an obligation to help determine if an NPO is assisting or being used to assist in terrorism
Where it suspects that an NPO is being used to assist terrorism, the JFSC must immediately inform the attorney general
Describe how the proceeds of crime (supervisory bodies) (Jersey) Law 2008 has affected the JFSC
The proceeds of crime law extended the remit of the JFSC to overseeing that companies in numerous different business sectors comply with their statutory AML/CFT obligations, such as:
Lawyers
Accountants
Estate agents
High value goods dealers
What’s the purpose of a MOU?
To establish an agreed mechanism under which the signatories commit to using their statutory powers of cooperation to assist each other
The JFSC has entered into MoU’s on regulatory matters with numerous fellow regulatory authorities. What do these memoranda cover?
Regulatory assistance to be given in the context of:
New applications for licensing by financial institutions
Investigations into regulatory offences, e.g. insider dealing
General inquiries that are relevant to the fitness and properness of registered institutions
List the various international organisations that the JFSC is either a member of or associated with
IOSCO - the international organisation of securities commissions (member)
OGIS - the offshore group of insurance supervisors, (member)
IAIS - the international association of insurance supervisors, (member)
GIFCS - the group of international finance centre supervisors. Via its membership of the GIFCS, the JFSC works with:
x BIS - the Basel committee on banking supervision
x FATF - the financial action task force (on money laundering)
OECD - the organisation for economic cooperation and development, via the UK’s membership and official declaration of the Island’s association, dated 19 July 1990
The United Nations global programme against money laundering (participant)
Define the acronym IOSCO
The international organisation of securities commissions
Define the acronym OGIS
The offshore group of insurance supervisors
Define the acronym IAIS
The international association of insurance supervisors
How did the JFSC become an associate of the OECD?
Via the UK’s membership and official declaration of the Island’s association, dated 19 July 1990
What’s the OECD’s purpose in relation to financial regulation?
The OECD examines the issues associated with tax havens and harmful tax practices
What are the main objectives of the OECD?
Set global tax standards
Require all white listed financial centres to sign their commitment to cooperation with internal and external agencies to deter money laundering, tax evasion and fraud
How does the OECD define a tax haven?
A financial centre that accepts and actively encourages international investors and provides a variety of services that will provide income and/or capital gains, which disadvantages other financial centres
International investors can take advantage of the tax regime that in most cases will result in income being received gross of tax (no tax taken off at source)
How does the OECD define harmful tax practices?
In the differentiation between the tax applicable to local people and resident companies, and that levied on foreign investors but unavailable to lcoals
How was Jersey removed from the OECD’s tax haven blacklist?
In 1998, the OECD listed 35 countries as tax havens, reporting that they had harmful tax competition
In order to not be blacklisted, or to be removed from the blacklist, the offshore finance centre (OFC ) had to agree to implement global tax standards
The Channel Islands signed international cooperation agreements in July 2001. This and other measures meant that Jersey was removed from the blacklist in early 2002
Any country that is considered uncooperative will be blacklisted and may be subject to defensive measures
Describe the FATF and its purpose
Set up in 1989 by the G7 countries
An organisation specialising in the fight against money laundering (AML)
The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
33 member states, including:
France
Germany
Italy
Australia
Ireland
Iceland
UK
Switzerland
What’s the main objective of the FATF?
Identify money laundering methods with a view to developing counter measures
The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
Summarise the FATF’s recommendations
Countries:
X Countries should implement AML programmes, including the introduction of legislation to criminalise money laundering and enable confiscation of property associated with this financial crime
X Mutual assistance and cooperation amongst governments for exchange of info on suspicious transactions, and also when investigations are taking place, and also action for a government to seize or freeze assets upon request from foreign countries
Financial Institutions:
X All financial institutions should properly identify their clients by reference to official documents, such as passports, and should not authorise the operation of anonymous accounts, known as the accounts of strangers. Where possible, the financial institution should make personal face-to-face contact with all customers
X Financial institutions should also put in place appropriate systems so as to be able to detect suspicious transactions, such as unusually large transactions which are unusual for the customer, and not in line with expected business transactions
X Financial institutions should also have procedures for reporting suspicions to the authorities
X Employees and financial institutions should be immune from prosecution for disclosure of confidential facts, even if the parties didn’t have knowledge of the underlying financial crime, or even if none had been committed
Name several of the experts involved in the fight against money laundering
FATF member representatives
The world bank
The IMF
Interpol
Name several regional groups and countries or governments with specialist financial crime units
The EU
The Caribbean financial action task force
The Asia Pacific group
The organisation of American states
GIFCS
List some of the countries included in the GIFCS
Note that the GIFCS is affiliated to FATF
Bermuda
Hong Kong
Jersey
Guernsey
Isle of Man
Malta
Gibraltar
Cyprus
Barbados
Bahrain
Define the leading offshore finance centres according to FATF, and why they were chosen
The leading offshore centres of Jersey, Guernsey and the Isle of Man have been assessed as category 1, the best category, on par with Hong Kong, Singapore and Switzerland
FATF concluded in June 2000 that the above leading offshore finance centres (OFCs) were considered to be cooperative and have comprehensive AML systems in place to combat financial crime
Describe the scope (what is covered by) The Financial Services (Jersey) Law 1998 (FS(J)L)
The Jersey regulatory framework comprises the following:
Primary legislation
Secondary legislation
Notices
Policy statements
Codes of practice
Guidance notes
Describe primary legislation, one of the areas which make up the framework of the The Financial Services (Jersey) Law 1998 (FS(J)L), and how such legislation can be brought into force
Sets legal obligations, and is adopted by the states of Jersey, sanctioned by the privy council (in the UK), registered in the royal court, then brought into force in one of two ways:
On a date specified in the law
OR
On a date or dates determined by an appointed date act passed by the states of Jersey
Describe secondary legislation, one of the areas which make up the framework of the The Financial Services (Jersey) Law 1998 (FS(J)L), and how such legislation can be brought into force
Sets detailed legal obligations in specific areas, but can only be utilised when primary legislation provides for its use:
In the form of a regulation which is made by the states of Jersey
OR
In the form of an order which is made by the relevant minister
Describe notices, one of the areas which make up the framework of the The Financial Services (Jersey) Law 1998 (FS(J)L), and how they are issued
Provide details on specific matters, as required by legislation, and are issued by the commission or other government agencies, e.g. notices issued in respect of fees
Describe policy statements, one of the areas which make up the framework of the The Financial Services (Jersey) Law 1998 (FS(J)L)
These are a STATEMENT of POLICY, setting the commission’s policy regarding some areas of legislation
Describe codes of practice, one of the areas which make up the framework of the The Financial Services (Jersey) Law 1998 (FS(J)L)
Establish sound principles for the conduct of financial services business and in some cases repeat a number of legislative requirements
Describe guidance notes, one of the areas which make up the framework of the The Financial Services (Jersey) Law 1998 (FS(J)L)
These set out a methodology for complying with either a legislative or regulatory requirement
Define orders
REMEMBER AS CAAFE
Orders provide more detail or prescription to the high level provisions within the regulatory law itself. The type of matters covered by orders are:
Client asset rules
Accounts (requirement to submit audited financial statements)
Advertising rules
Fees
Exemptions to regulation
Describe what the Codes (I.e. the JFSC codes of practice) require regulated firms to do (note that principles=codes in Jersey)
Act with integrity
Act in the customer’s best interests
Maintain adequate risk management systems
Demonstrate transparency in their business arrangements
Demonstrate the existence of adequate financial resources
Deal with the JFSC and other statutory authorities in Jersey in an open and cooperative manner (including specific notification requirements such as if the regulated entity was subject to any disciplinary actions)
Not make false or misleading statements (i.e. in relation to marketing materials and advertising)
Describe how regulated firms must act in the customer’s best interests, one of the requirements of the Codes in relation to regulated firms
Regulated entities must:
Act with due skill, care and diligence
Only exercise its powers or discretions for a proper purpose
Avoid conflicts of interest
Transact business in an expeditious manner
Ensure that any delegations of power or duties are entered into for a proper purpose
Ensure that regular reviews at appropriate intervals are conducts in relation to client business
Describe how regulated firms must maintain adequate risk management systems, one of the requirements of the Codes in relation to regulated firms
Corporate governance
Internal systems and controls
Competence
Continuing professional development
Key persons
Complaints
Record keeping
Describe corporate governance, one of the ways in which regulated firms must maintain adequate risk management systems, one of the requirements of the Codes in relation to regulated firms
Ensuring that the regulated entity:
Has an adequate span of control
Is adequately monitored and controlled at senior management and board level
Describe internal systems and controls, one of the ways in which regulated firms must maintain adequate risk management systems, one of the requirements of the Codes in relation to regulated firms
AML systems to ensure compliance with all relevant AML and CFT legislation and guidance
Disaster recovery arrangements
Systems in place to ensure that due regard to the principles of the sensitive activity policy
Systems in place to ensure compliance with the JFSC’s policy on outsourcing
Describe competence, one of the ways in which regulated firms must maintain adequate risk management systems, one of the requirements of the Codes in relation to regulated firms
A regulated entity must ensure that its staff are fit and proper for their roles (In some Codes, a regulated entity must demonstrate that a percentage of its staff are professionally qualified)
Describe continuing professional development (CPD), one of the ways in which regulated firms must maintain adequate risk management systems, one of the requirements of the Codes in relation to regulated firms
Regulated entities must ensure that staff undertake a minimum number of hours a year of training or professional development (usually between 25 and 35)
Describe key persons, one of the ways in which regulated firms must maintain adequate risk management systems, one of the requirements of the Codes in relation to regulated firms
Apart from principal persons, there are three specific roles within a financial services business that require separate authorisation by the JFSC. These are:
Compliance officer
Money-laundering reporting officer (MLRO)
Money-laundering compliance officer
As these roles are important to a regulated entity, the individuals performing these roles have specific responsibilities to comply with
Describe complaints, one of the ways in which regulated firms must maintain adequate risk management systems, one of the requirements of the Codes in relation to regulated firms
A regulated entity must:
Establish effective complaints-handling systems and procedures.
Notify the commission If a complaint isn’t resolved within 3 months
Consider whether a complaint gives rise to any notification requirement under its professional indemnity insurance
Describe record keeping, one of the ways in which regulated firms must maintain adequate risk management systems, one of the requirements of the Codes in relation to regulated firms
A regulated entity must:
Keep adequate accounting, business and transaction records
Have a clearly documented policy for the retention of records for at least 10 years
Describe how regulated firms must demonstrate transparency in their business arrangements, one of the requirements of the Codes in relation to regulated firms
A regulated entity must:
Disclose on its stationery and advertising material it is regulated by the JFSC
Be open and transparent about its charges and fees
Accurately record the basis of any charges regarding time spent and disbursements
Describe how regulated firms must demonstrate the existence of adequate financial resources, one of the requirements of the Codes in relation to regulated firms
Financial resources cover three areas:
A minimum share capital or minimum asset position
Liquidity - generally to ensure that, on an ongoing basis, the regulated energy has sufficient liquid assets to cover operating expenses for a three month period
Professional indemnity insurance
Describe the consequences of breaching the Codes (I.e. The JFSC codes of practice)
A breach of the codes may lead to the JFSC taking regulatory action, e.g. enhanced supervision, the issue of a condition of registration or the revocation of a registration
In appropriate circumstances, the Commission may issue a public statement concerning the registered person
Continued non-compliance or other failures to remedy the circumstances giving rise to the beach may be addressed by the issue of a written direction under Article 23 of the Law
Such a direction may impose requirements on the registered person to do (or not do) things, remove principal persons, or to cease operations.
In appropriate circumstances, that direction can be made public due to Article 25(a) of the Law
Describe the consequences of failing to follow the Codes
Failure to follow the codes doesn’t render a person liable to legal proceedings or invalidate any transaction, but the Codes shall be admissible in evidence if it appears to the court conducting the proceedings to be relevant to any question arising (in the proceedings) and shall be taken into account in determining any such question
What the law that regulates banking business (I.e. Deposit-taking) in Jersey?
The banking business Jersey law 1991
Describe the Jersey bank depositors compensation scheme (DCS)
Approved by the States of Jersey on 6 November 2009
Similar to schemes in UK, Guernsey and the Isle of Man
Operated by the Jersey bank depositors compensation board, an incorporated body independent of Ministers and the States of Jersey
Provides protection of up to £50,000 per person, per banking group, for local and international depositors, in line with international standards
The depositor compensation scheme is operated by the Jersey bank depositors compensation board, an incorporated body independent of Ministers and the States of Jersey
Its main features are:
Should a Jersey bank fail, an interim payment of up to £5,000 will be made within 7 working days and the balance of compensation within three months
The £50,000 limit will apply per person, so a £100,000 deposit held in a joint account by a couple will be completely covered
The maximum liability of the DCS is capped at £100 million in any 5 year period
What is the JFSC’s position on new banks?
Applicants should be:
Financial institutions of international stature and reputation - registrations under the banking law are therefore limited to entities which are, of which are owned by, members of the global top 500 banks by reference to capital base, or financial conglomerates of equivalent size
Subject to satisfactory consolidated supervision by the supervisory body of its country of origin, in accordance with Basel committee principles. The home country supervisor will be asked to confirm its agreement to the applicant bank setting up in Jersey
Define the additional requirements in place for regulated banks in Jersey, in addition to those set out in the JFSC’s codes of practice
Risk management controls
Credit risk
Country and transfer risk
Market risk
Operational risk
Liquidity risk
Describe risk management controls, one of the additional requirements in place for regulated banks in Jersey, in addition to those set out in the JFSC’s codes of practice
Adequate risk management involves having processes, structures, resources, information systems and reporting arrangements in place to ensure that the adequate identification, evaluation, control, recording and reporting of all significant risks that a registered person incurs
Describe credit risk, one of the additional requirements in place for regulated banks in Jersey, in addition to those set out in the JFSC’s codes of practice
Risk of loss due to a debtor’s non-payment of a loan or other line of credit, either in terms of capital or interest
Describe country and transfer risk, one of the additional requirements in place for regulated banks in Jersey, in addition to those set out in the JFSC’s codes of practice
The risk of a country (political, economic, social, etc) that a bank will be exposed to if engaged in international lending
Describe market risk, one of the additional requirements in place for regulated banks in Jersey, in addition to those set out in the JFSC’s codes of practice
The risk that the value of an investment will decrease due to moves in the market
The four standard market risk factors are:
(REMEMBER as ICCE)
Interest rate risk
Currency risk
Commodity risk
Equity risk
What are the four standard market risk factors?
Equity risk
Interest rate risk
Currency risk
Commodity risk
Describe liquidity risk, one of the additional requirements in place for regulated banks in Jersey, in addition to those set out in the JFSC’s codes of practice
The risk that a given risk or security asset cannot be traded quickly enough in the market to prevent a loss, or make the required profit
What is the law that regulates investment business in Jersey?
The financial services (Jersey) Law 1998
Became law on 1 July 1999
According to the financial services (Jersey) Law 1998, a person carries on investment business if the person does what activities?
Deals in investments, that is, the person buys, sells, subscribes for or underwrites investments on behalf of a principal
Undertakes discretionary investment management, that is, the person decides as agent to buy, sell, subscribe for or underwrites investments on behalf of a principal
Gives investors advice, that is, the person gives to persons in their capacity as investors or potential investors advice on the merits of:
X The purchase, sale, subscription for or underwriting of a particular investment
OR
X The exercise of a right conferred by an investment to acquire, dispose of, underwrite or convert the investment
Define the additional requirements in place for regulated investment businesses in Jersey
Knowledge of client
Suitability
Switching and churning
Front running
Customer order priority
Aggregation
Fair and timely allocation
Timely execution
Best execution
Describe knowledge of client, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
Where a registered person is responsible for providing advice or exercising discretion for its clients, it must obtain, document and maintain any information about the circumstances (financial and otherwise) and investment objectives of the client that are relevant to the services to be provided
Where a client declines to pricked information regarding their circumstances and investment objectives, a registered person mustn’t provide advice to or exercise discretion on behalf of the client unless it’s first been disclosed to the client that the lack of such information may adversely affect the service it can provide
Describe suitability, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
FACTS/TERMS/OTHER FACTS
Where a registered person is responsible for providing advice or exercising discretion for clients, it must demonstrate in writing that the services provided are suitable for the client, in relation to:
X FACTS disclosed by the client
X TERMS of any agreement with that client
X Any OTHER relevant FACTS about the client of which the registered person is, or reasonably should be, aware
Note that where a registered person is responsible for providing advice, it must make available to its client, in a comprehensible and timely manner, appropriate information so as to allow the client to make an informed investment decision
A registered person must ensure that adequate procedures are implemented, to ensure that the investment services that it provides are regularly reviewed at appropriate intervals
Describe switching and churning, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
A registered person mustn’t advise a client to, nor in the exercise of its discretion, effect a switch of long-term insurance products or a switch within or between collective investment schemes unless it’s in the client’s interest to do so. Written evidence should retained in this regard
A registered person mustn’t advise a client, nor in the exercise of discretion, enter into transactions with unnecessary frequency having regard to the client’s agreed investment objectives
Describe front running, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
Where a person or its associate, as defined in Article 1 of the law, intends to publish to clients a recommendation, or a piece of research or analysis, in relation to a particular investment, it must not deal:
In the investment, or any related investment, on its own account
In the investment, or any related investment, on behalf of an associate
Ahead of the clients for whom the recommendation, research or analysis was intended if those clients ought to have priority
Describe how a registered person shall not be deemed to have breached the JFSC’s additional requirements/codes on front running, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
A registered person shall not be deemed to have breached the JFSC’s additional requirements/codes on front running if they can demonstrate that:
The publication couldn’t reasonably be considered price sensitive
The registered person is a market maker in the investment concerned, and the deal was executed or arranged in good faith
The registered person was dealing in order to fulfil an unsolicited client’s order
The registered person has reasonable grounds for believing that it needs to deal if the investment concerned in order to fulfil client orders which are likely to result from the publication and that to do so won’t cause the price of the investment to move against client’s interests by a material amount
Describe customer order priority, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
A registered person must deal with client and own account orders fairly and in due turn
Describe aggregation, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
A registered person may only aggregate an order of another client or of the registered person, where it’s in the overall best interests of all the clients concerned, or any possible disadvantage has been disclosed to each client
Describe fair and timely allocation, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
When allocating orders, a registered person mustn’t give unfair preference to itself or to any client for whom they have dealt
Where a registered person has aggregated a client order with its own or other client’s orders, it must allocate back to the client within 24 hours
Where an aggregated order isn’t completed in full (I.e. A partial fill), a registered person must give priority to the client’s orders unless it can demonstrate that the transaction wouldn’t have happened on such favourable terms without the registered person’s involvement
Describe timely execution, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
Once a registered person has agreed with a client or decided in its discretion to effect or arrange a client order, it must effect or arrange the execution of the order as soon as possible in the circumstances, unless postponement is in the best interest of the client
Describe best execution, one of the additional requirements in place for regulated INVESTMENT businesses in Jersey
For investments other than units in a collective investment fund, and long term insurance products, in dealing with or for a client, a registered person must take reasonable care to ascertain the price which is best available at the time for transactions of the kind and size concerned, and then, unless circumstances require it to do otherwise in the interests of a client, deal at a price no less advantageous to the client (excluding any of its disclosed charges)
A registered person may rely on another person who executes the transaction to provide best execution, but only if they believe on reasonable grounds that the person will do so
Where a registered person executes an order through the London stock exchange’s stock exchange trading system (SETS), the best execution requirement will be deemed to have been satisfied
Where a registered person has access to a variety of price sources, it should compare these sources, and give the client the best price
Define SETS
Stock exchange trading system
What’s the law that regulates insurance business in Jersey?
The insurance business (Jersey) law 1996
Became law 1 February 2001
What’s the difference between holders of category A and category B permits to undertake INSURANCE business in Jersey?
If the permit holder is authorised by or under the law of a recognised jurisdiction outside the island, it will hold a category A permit
Category A permits are granted to applicants to carry on business of the same description as that which they’re authorised to carry out in their home country jurisdiction (subject to confirmation from the home country supervising authority)
Any other permit holder will hold a category B permit (insurance companies incorporated in Jersey usually hold category B permits)
Applicants for category B permits will be allowed to carry on long-term or general business, subject to meeting the JFSC’s requirements
What’s the criteria for gaining a category A permit to undertake INSURANCE business in Jersey?
If the permit holder is authorised by or under the law of a recognised jurisdiction outside the island, it will hold a category A permit
Category A permits are granted to applicants to carry on business of the same description as that which they’re authorised to carry out in their home country jurisdiction (subject to confirmation from the home country supervising authority)
What’s the criteria for gaining a category B permit to undertake INSURANCE business in Jersey?
If a permit holder IS NOT authorised by or under the law of a recognised jurisdiction outside the island, it will hold a category B permit (insurance companies incorporated in Jersey usually hold category B permits)
Applicants for category B permits will be allowed to carry on long-term or general business, subject to meeting the JFSC’s requirements
What items does the JFSC take into account when considering applications for category B permits?
REMEMBER AS CRIPES
CAPITAL - the paid up share capital of the applicant and the level of free capital and reserves, as compared with premium income
REINSURANCE arrangements made or to be made by the applicant
INSURANCE - The nature of risks to be insured
PERSONNEL - Whether fit and proper persons are employed by or associated with the applicant in the management, control and audit of its operations
EXPERTISE and knowledge in insurance matters available to the applicant
STANDING, reputation and nature of business of the owners and their combined level of free capital and reserves
What are the main benefits of a company establishing an insurance company in an offshore location? (Think back to offshore finance industry module)
Reduced insurance costs
Increased cash flow
Access to reinsurance markets
Insurance of hard to place risks
Improved control
Centralised insurance management
Possible tax benefits
Describe reduced insurance costs, one of the main benefits of a company establishing an insurance company in an offshore location (Think back to offshore finance industry module)
Captive insurance of reinsurance programs should be cheaper to operate than paying premiums in the market.
This will result in lower premiums for the same coverage, or greater profit being derived by maintaining the same premium levels, leading to a reduction in future reinsurance costs or the redeployment of profits for the benefit of the company’s shareholders
A captive avoids acquisition or sales costs and the marketing, advertising and administration costs of commercial insurance companies
Describe increased cash flow, one of the main benefits of a company establishing an insurance company in an offshore location (Think back to offshore finance industry module)
Insurance premiums paid by a company to a commercial insurer are usually paid when the year of risk commences, and attract for the commercial insurer a significant amount of investment income
A captive, however, has the use and enjoyment of the premiums paid by the parent. The captive holds these premiums and invests them
The cash flow generated by these premiums benefits the owners rather than the commercial insurer
Premiums paid to reinsurers are usually paid in arrears and therefore there may well be an immediate cash flow benefit switching fro the primary commercial market to the reinsurance market
The creation of a captive therefore converts a cost into a profit centre
Describe access to reinsurance markets, one of the main benefits of a company establishing an insurance company in an offshore location (Think back to offshore finance industry module)
A captive has direct access to the reinsurance market, where companies tend to work on lower expense ratios than direct insurers. Therefore, reinsurance can be on gained at a lower cost conventional direct insurance.
Access to the reinsurance markets opens up possibilities for financing risks which aren’t otherwise available
Reinsurance, ceding and profit commissions may also be earned, which may further reduce the net cost of insurance
Describe insurance of hard to place risks, one of the main benefits of a company establishing an insurance company in an offshore location (Think back to offshore finance industry module)
Certain types of risk, e.g. Hazardous materials and selected professional indemnity are either impossible to place or only available at unacceptably high premiums.
The captive insurance company may be the only way to absorb such risks, as it will have more favourable access to the reinsurance market
Describe improved control, one of the main benefits of a company establishing an insurance company in an offshore location (Think back to offshore finance industry module)
Greater control can be exercised on those activities which impinge on risk management, such as loss control, safety instructions, loss reporting procedures and claims settlement, to the overall benefit of the captive and its parent company
Describe centralised insurance management, one of the main benefits of a company establishing an insurance company in an offshore location (Think back to offshore finance industry module)
The captive, in addition to providing full insurance at reduced costs, serves as a central point to simplify, coordinate and control worldwide risk management.
Insurance and reinsurance coverage can be tailored to solve the specific needs of the parent company.
Insurance programs of captives may be designed precisely to meet the global insurance requirements of the group, and achieve continuity of insurance cover
Describe possible tax benefits, one of the main benefits of a company establishing an insurance company in an offshore location (Think back to offshore finance industry module)
The correct structure of a captive, and conduct of its business, may produce tax benefits to the parent company or group
What’s a benefit of investing in a fund, as opposed to another kind of investment option?
A fund is a way of investing money with other people to participate in a wider range of investments than those feasible for most investors
By what criteria is a person who carries on fund services business defined?
A person carries on fund services business if by way of business the person is:
X A manager, manager of a managed entity, administrator, registrar, investment manager or investment adviser
X A distributor, subscription agent, redemption agent, premium receiving agent, policy proceeds paying agent, purchase or repurchase agent
X A trustee, custodian or depositary
X A member (except a limited partner) of a partnership, including a partnership constituted up under the law of a country outside Jersey
How does the CIF(J)L define a collective investment scheme?
Any collective investment vehicle whose units are offered to more than 50 potential investors, or which is listed on the stock market
In accordance with which laws does the JFSC regulate unclassified fund products and their functionaries?
Regulation of the unclassified fund product is undertaken in accordance with the provisions of the collective investment funds (Jersey) law 1988 (CIF(J)L)
However, the regulation of their Jersey-based functionaries (fund service providers) is undertaken in accordance with the provisions of the financial services (Jersey) law 1998 (FS(J)L)
Describe how recognised funds are regulated by the JFSC
Recognised funds are regulated through the granting, or refusal to grant, a certificate to the fund and permits to the functionaries of the fund
Article 5 of the CIF Jersey law requires that a person must hold a permit granted by the JFSC if it wishes to be, or holds itself out as being a functionary of a recognised fund, unless it performs that function wholly outside Jersey
If the person performing the role of functionary is a company incorporated in Jersey, it must apply for a permit to perform the functionary role, no matter where in the world it performs its activities
Describe the list of functions (and their respective groups), as set out in part 2 of the schedule to the CIF Jersey law, in respect of a collective investment fund (recognised and unclassified funds), which if undertaken defines a person as a functionary
Group 1 - any company issuing units (so, where the collective investment fund is a company, the fund itself will also require a permit)
Group 2 - manager/administrator/registrar/investment manager/investment advisor
Group 3 - distributor, or a type of agent (subscription, redemption, premium receiving, policy proceeds paying, purchase, repurchase)
Group 4 - trustee/custodian/depository
Group 5 - membership of a partnership (except s limited partner)
Article 8 of the CIF Jersey law states that specific persons shall not carry on any business of an unclassified fund, unless a certificate has been granted under article 8B of the CIF Jersey law.
Which persons does this refer to?
A Jersey company issuing units or a company, issuing units that has an established place of business in Jersey that is an unclassified fund
A trustee of a unit trust that is an unclassified fund, and that is a trust whose proper law is the law of Jersey, or managed from within Jersey
A general manager of a Jersey limited partnership that is an unclassified fund managed from within Jersey
As a result of article 8B of the CIF Jersey law, what is the JFSC required to take into consideration when deciding whether to grant a certificate to persons wishing to carry on the business of an unclassified fund in Jersey?
The JFSC is required to have regard for the protection of the public, as well as the economic interests and reputation of the island
The JFSC is also required to consider:
The function to be performed
Whether the applicant and its principal persons are fit and proper
The nature of the collective investment fund to which the function relates
Any other fund service providers of the fund
What does the JFSC do instead of regulating unclassified funds which aren’t Jersey certified funds?
For unclassified funds which aren’t Jersey certified funds, e.g. where the fund is based in a another jurisdiction, the JFSC doesn’t directly regulate the fund, however, it does regulate any Jersey-based fund service providers of the unclassified fund, as they’re required to be registered to conduct fund service business under the FS Jersey law
The prospectus of all certified funds (both open- and closed-ended) must comply with the provisions of which law?
The prospectus of all certified funds must comply with the provisions of the Collective Investment Funds (Unclassified Funds) (Prospectuses) (Jersey) Order 1995, aka the UFPO.
Define the acronym UFPO
Collective Investment Funds (Unclassified Funds) (Prospectuses) (Jersey) Order 1995
Define the acronym EFG
The Jersey Expert Fund Guide
Define an expert fund
A certified fund established in Jersey and in which only expert investors may invest
Define an expert investor
Someone with a net worth greater than USD 1 million, OR who makes a minimum subscription of USD100,000 to the fund
As defined in section 1.5 of the EFG (Jersey Expert Fund Guide)
What is the purpose of the EFG/Jersey Expert Fund Guide?
To define an expert fund and to set out the characteristics that such a fund would usually be expected to have
An expert fund meeting the criteria set out in the EFG may be established using a streamlined authorisation process, as described in section 4 of the EFG
Define the acronym LFG
The Jersey Listed Fund Guide
Define a listed fund
A certified fund that’s incorporated as a company in Jersey.
It must have a listing on a recognised stock exchange or market (as listed in appendix 1 of the LFG), and be a closed-ended fund
What’s the requirements of creating a listed fund in Jersey?
It must have a listing on a recognised stock exchange or market (as listed in appendix 1 of the LFG), and be a closed-ended fund
What is the purpose of the LFG?
To define a listed fund, and to set out the characteristics that such a fund would be expected to have
An expert fund meeting the criteria set out in the EFG may be established using a streamlined authorisation process, as described in section 3 of the LFG
Define the acronym COBO
Control of Borrowing (Jersey) Order 1958
Enacted under the Control of Borrowing (Jersey) law 1947, aka the CBJL
Define and describe COBO only funds
Certain funds, known locally as COBO only funds, which don’t come within the definition of a collective investment fund under the CIF Jersey law (usually as they’re offered to less than 50 people) will require a consent under COBO (Control of Borrowing (Jersey) Order 1958)
This will usually be the limit of a COBO only fund’s regulatory requirements in Jersey
Which activities does COBO require the JFSC to give their consent to before they can be carried out?
A non Jersey company raising money in Jersey by issuing shares
The issue of shares by a non Jersey company, if those shares are to be registered in the island (including the keeping of a duplicate register)
The issue of units by a trust that’s governed by the law of a jurisdiction other than Jersey, if those units are to be registered in the island (including the keeping of a duplicate register)
A Jersey company issuing shares anywhere
A Jersey unit trust issuing units anywhere
The circulation in Jersey of an offer for subscription, sale or exchange of any securities of a non Jersey company
Any unit trust raising money in Jersey by issuing shares
The circulation in Jersey of an offer to the public for subscription, sale or exchange of any units issued by any trust that’s governed by the law of a jurisdiction other than Jersey
A limited partnership raising money in Jersey by creating partnership interests
A Jersey limited partnership creating partnership interests anywhere
The circulation in Jersey of p an offer to the public for subscription, sale or exchange of any partnership interests of a non-Jersey limited partnership
What types of funds are exempt from the requirements of COBO?
Certified funds, as well as any recognised funds that are exempt from the requirements of COBO
What is the collective investment funds (unregulated funds) (Jersey) order 2008 also known as, and on what date was it brought into forde?
The unregulated funds order
19 February 2008
What is the purpose of the collective investment funds (unregulated funds) (Jersey) order 2008, aka the unregulated funds order?
It establishes the requirements for two types of unregulated collective investment funds, aka unregulated funds:
X An unregulated eligible investor fund
X An unregulated exchange traded fund
Note that any unregulated fund must be a Jersey entity. This means that if the fund is company, it must be incorporated in Jersey, and if it’s a limited partnership or unit trust, the general partner/trustee must also be a Jersey company
Describe the investors that unregulated eligible investor funds, one of the two types of unregulated collective investment fund that the collective investment funds (unregulated funds) (Jersey) order 2008 establishes the requirements for, are available to
(Note that the clue for both types of fund below is in their respective names)
Unregulated eligible investor funds are only available to eligible investors, individuals who:
x Make a minimum initial investment of USD 1 million
x Are professional or financially sophisticated investors
Note that unregulated exchange traded funds (the other kind of fund relating to the unregulated funds order), may be listed on a stock exchange recognised by the JFSC, provided they are closed ended
Describe the investors that unregulated exchange-traded funds, one of the two types of unregulated collective investment fund that the collective investment funds (unregulated funds) (Jersey) order 2008 establishes the requirements for, are available to
(Note that the clue is in the name)
Unregulated exchange traded funds may be listed on a stock exchange recognised by the JFSC, provided they are closed ended
What is the law that regulates trust company business in Jersey, and when did it come into force?
The financial services (Jersey) law 1998
1 February 2001
Which activities are included in the definition of trust company business, as per the financial services (Jersey) law 1998?
A person carries in trust company business if the person carries on a business that involves the provision of company administration services or trustee or fiduciary services, and in the course of providing these services provides any of the following specified services:
Acting as a company or partnership formation agent
Acting as or fulfilling the function of arranging for another person to act as or fulfil the function of director or alternate director of a company
Acting as or fulfilling the function of arranging for another person to act as or fulfil the function of a partner of a partnership
Acting as or arranging for another person to act a secretary, alternate, assistant or deputy secretary of a company
Providing a registered office or business address for a company or partnership
Providing an accommodation, correspondence or administrative address for a company, partnership or for any other person
Acting as or fulfilling or arranging for another person to act as or fulfil the function of a trustee of an express trust
Acting as or fulfilling or arranging for another to act as shareholder or unit holder as a nominee for another person
A person carries on money service business if they carry on the business of which kinds of work?
A bureau de change
Providing cheque cashing services
Transmitting or receiving funds by wire, or other electronic means
Engaging in money transmission services
What is the exemption from having to obtain the JFSC’s approval to carry on money service business?
An exemption may be granted in cases where turnover during the last completed financial period of the money service business (usually 12 months) is less than £300,000.
However, the person who intends to use the exemption must give the JFSC prior notification of the intention to carry on money service business
Define and describe turnover, in relation to money service business
Turnover, in relation to money service business, is the cumulative total during a financial period of all or any of the following:
Foreign currency that is, in the course of the person carrying on the business of a bureau de change, bought from or sold to customers of the bureau de change (counting one side of the transaction only)
Funds transmitted or received by the person in the course of carrying on the business of transmitting or receiving funds by wire or other electronic means, or money transmission services
Cheques cashed by the person in the course of carrying on the business of providing cheque cashing services
Define and describe the three types of money service business activity that are exempt and not subject to the financial services (Jersey) law 1998
1) A transaction where a payment for goods or services is made in one currency, and the change is given in another currency. The main purpose of this exemption is to avoid shops that accept payment in one currency and give change in another from being treated as carrying on a a bureau de change service
2) A funds or money transfer made for the sole purpose of enabling a person to pay for goods or services, or enabling a person to access their own money. The main purpose of the exemption is to take outside of the money service business regime issuers of debit cards, credit cards or electronic money that are used solely as a means of payment for goods or services. This exemption will also take out of the regime for money service business those who provide cash-back facilities (e.g. supermarkets) and providers of cash machines (ATMs)
3) One where a person cashes a cheque drawn by another person in the latter’s own bank account. The purpose of this exemption is to ensure that only persons in the business of cashing third party cheques come from within the regulatory regime for money service business
What factors will the JFSC take into account when assessing a prospective financial services business?
x Integrity, competence, financial standing, structure and organisation of the financial services business
x Persons employed by or associated with the applicant for purposes of the applicant’s business or principal persons in relation to the applicant
x Description of the business which the applicant proposes to carry on
In this regard, and in relation to principal persons, the JFSC will be able to ensure that those persons that have control, influence or management of the regulated entity are themselves fit and proper
Define and describe principal persons
Principal persons are defined in the various regulatory laws, and generally would include:
X Shareholders that directly or indirectly own 10% or more of the entity
X Directors of the regulated entity
X Other controllers of the regulated entity
In this regard, and in relation to factors the JFSC takes into account when assessing a prospective financial services business, the JFSC will be able to ensure that those persons that have control, influence or management of the regulated entity are themselves fit and proper
Describe integrity, one of the factors that the JFSC will take into account when assessing a prospective financial services business
X To a large extent, the integrity of an applicant, especially where an applicant is a small or medium sized business, is a reflection of the people employed by or associated with the applicant
X An applicant must be able to demonstrate that it intends to, and on an ongoing basis through compliance with the relevant codes of practice, will:
Conduct its business with integrity
Have due regard for the interests of its customers
Provide appropriate supervision and training to those employed by or associated with it
X In assessing the integrity of an applicant and those persons employed by or associated with it, it is the JFSC’s policy to consider whether any of their past actions or conduct impact on their ability to meet the expected standard of integrity. Further information may be found in the application form relevant to the proposed regulated activity of the applicant
Describe competence, one of the factors that the JFSC will take into account when assessing a prospective financial services business
Competency, with regard to those employed by or associated with an applicant, may be evidenced by the attainment of relevant qualifications or by having sufficient relevant experience for the function they’re performing
An applicant must be able to demonstrate that it is, and will have procedures will assist it to remain, competent to undertake ifs regulated activities, including the ability to comply with the aspects of the regulatory framework relevant to the proposed regulated activities of the applicant
An applicant must be able to demonstrate appropriate supervision and training of both entities and individuals charged with performing particular functions
The JFSC has specific interest in the collective competence of those governing the entity, e.g. the board of the applicant. A board, or its equivalent, should be made up of people with a wide range of skills and competence
In assessing the competence of an applicant, the JFSC will consider the particular regulated activities it proposes to undertake, particularly the volume and type of business and the jurisdictions in which it will be offering its services
Describe financial standing, one of the factors that the JFSC will take into account when assessing a prospective financial services business
An applicant will be expected to maintain, and be able to demonstrate the existence of, adequate financial resources in terms of capital adequacy, solvency and professional indemnity insurance
It is the JFSC’s policy that after taking account of contingent liabilities, a registered person must be, and be likely to remain, a going concern
The JFSC considers that adequate financial standing isn’t merely a matter of meeting liabilities as they fall due, but of maintaining adequate financial resources to enable a registered person to survive periods of business slowdown or market disruption
Systems and controls associated with managing the financial risks of the applicant, including liquidity management and proper care of customer’s money and assets, are also important considerations
Describe structure and organisation, one of the factors that the JFSC will take into account when assessing a prospective financial services business
The JFSC considers that the structuring and organisation of an applicant are essential elements of an applicant’s ability to satisfy the JFSC that it is a fit and proper person to hold the license
Structure and organisation is divided into 3 different areas:
X Structure, including access to resources
X Systems and controls
X Transparency of ownership
Describe structure, one of the areas of structure and organisation, a factor that the JFSC takes into account when assessing a prospective financial services business
An applicant is expected to restrict its activities to the regulated activities for which it holds licences and other activities which are wholly associated with/allied to the licensed business. When determining an application, it is the JFSC’s policy to consider the activities of associated persons to assess whether they may negatively impact the applicant
In terms of physical structure, it is the JFSC’s policy that an applicant should have the resources, or access to the resources necessary to perform its regulated activities
Additionally, the applicant must be structured and organised in such a way to enable the JFSC to fulfil its oversight function regarding the regulatory framework
The JFSC considers that an applicant can demonstrate availability of resources in one of the following ways, via operating in Jersey:
X Maintaining staff and business premises
X As a managed entity utilising the services of a manager that’s physically located in Jersey and, where relevant, has been licensed by the JFSC to act in the capacity of manager of another business
X Through an organisation that is regulated and supervised in an equivalent jurisdiction to provide those services
Whichever of the above options is used, an applicant must be able to demonstrate that it will have, and be able to maintain:
X Sufficient management oversight and control of its regulated activities
X Comprehensive financial information setting out its financial position, which must be readily accessible in Jersey. Further info on the form of the accounts/financial statements may be found in their respective accounts, audits and reports orders that, inter alia, determine the accounting records to be kept by a registered person
Appropriate systems and controls relating to its regulated activities
Relevantly qualified and experienced staff to competently deliver the financial services it offers, which may include using third party providers or resources from other entities within the same group
Local management and control (heart and mind of management): This requirement should be read in conjunction with the specific requirements contained within section 310 of the relevant codes of practice. In most cases, an applicant will demonstrate local management and control if the balance of the board are resident in Jersey and the Jersey element of the board are actively engaged in the governance of the business
What are the ways that an applicant to the JFSC can demonstrate availability of resources?
The JFSC considers that an applicant can demonstrate availability of resources in one of the following ways, via operating in Jersey:
X Maintaining staff and business premises
X As a managed entity utilising the services of a manager that is physically located in Jersey and, where relevant, has been licensed by the JFSC to act in the capacity of manager of another business
X Through an organisation that is regulated and supervised in an equivalent jurisdiction for the provision of those services
Describe systems and controls, one of the areas of structure and organisation, a factor that the JFSC takes into account when assessing a prospective financial services business
It is the JFSC’s policy that an applicant must be able to demonstrate the existence of:
X Adequate risk management systems
X Systems and controls designed to manage its affairs effectively for the proper performance of its regulated activities, including those that evidence transparency in its business arrangements
The JFSC will look for evidence that the applicant will have adequate systems and controls in place and is adequately resourced, in terms of both staff and/or service providers and financial resources, to conduct the regulated activities. An applicant will also be expected to satisfy the JFSC that it will have in place, and will systematically apply, robust systems and controls to enable it to comply with the relevant codes of practice relating to the regulated activities it is proposing to undertake
Describe transparency of ownership, one of the areas of structure and organisation, a factor that the JFSC takes into account when assessing a prospective financial services business
In considering the ownership structure of an applicant, the JFSC must be able to identify the individuals who ultimately own the business and who exercise control over the appointment of the management team, as well as the management team and any individuals who will have significant powers and responsibilities in relation to he regulated activities
The JFSC should be able to look through the ownership structure, and if an ownership structure is unduly complex and/or lacks transparency, it would expect the applicant to explain and justify the rationale for having such a structure, particularly when the proposed structure falls purist that described below
The JFSC can require the removal of any principal person or key person in the event that it concludes that their continued presence in the structure is no longer compatible with the registered person being considered fit and proper
Once a firm has been authorised, it becomes a regulated entity, and as such will be required to comply with the regulatory laws, orders, etc in order that it continues to be fit and proper, and ensure that its authorisation is retained
Note that the fit and proper criteria, in terms of fundamental ongoing conduct, is contained within the codes of practice (codes). Codes have been published for each of the regulated financial activities listed earlier in the course, e.g. Trust and investment business
What methods do regulators use to supervise the compliance of regulated firms with specific requirements of the legislation?
Statutory reporting requirements
Onsite examinations
Offsite supervision
Formal investigations
Define and describe statutory reporting requirements, one of the methods that regulators use to supervise the compliance of regulated firms with specific requirements of the legislation
Often in the form of annual returns, which monitor capital adequacy, the identity of controllers, business volumes, and any changes to principal activities which may affect the nature of the business undertaken
Define and describe onsite examinations, one of the methods that regulators use to supervise the compliance of regulated firms with specific requirements of the legislation
Usually carried out by specialist audit teams from the regulators, who will work through a checklist of compliance points with the purpose of ensuring that the procedures adopted by the firm are adequate, and conform to the requirements of the regulations and governing law
Define the three types of examination undertaken by each supervisory division, whether they are proactive or reactive
Discovery
Focused
Themed
Describe discovery examinations, one of the three types of examination undertaken by each supervisory division, whether they are proactive or reactive
When the JFSC lacks sufficient info about a regulated entity in one or more material ways, such that, for example, it is not able to properly complete the risk assessment for that firm (proactive) or because info is needed before authorisation can issue a license (reactive), then a discovery examination will be one of the means by which the gaps in knowledge can be filled.
Thus, a discovery examination is to a large extent a fact-finding exercise from which conclusions can be drawn on the adequacy of systems, controls and procedures of a regulated entity
Describe focused examinations, one of the three types of examination undertaken by each supervisory division, whether they are proactive or reactive
These are examinations undertaken to individual firms as a result of a specific issue or material risks that have been identified at the firm.
For example, such issues/risks will arise from the risk model evaluation (proactive) or as a result of adverse info passed to us by enforcement, or another regulator (reactive).
Thus, a focused examination designed to test systems, controls and procedures so that conclusions can be drawn and, if appropriate, recommendations made to improve systems, controls and procedures within a regulated entity
Describe themed examinations, one of the three types of examination undertaken by each supervisory division, whether they are proactive or reactive
These are examinations targeted at an area of activity, rather than an individual firm. Such examinations are used when a common problem across the industry or specific sectors of the industry is identified.
They are designed to assist the JFSC in determining the scale and/or nature of a problem, and thus be able to better determine the means by which to eliminate/mitigate a problem.
For example, common themes arising from the risk model or international developments (proactive), or as a result of a major international event, such has the split capital event or 9/11 (reactive).
Examples of recent themed examinations:
AML procedures
Conduct of business
Corporate governance
Financial resources
Give several examples of themed examinations, one of the three types of examination undertaken by each supervisory division, whether they are proactive or reactive
AML procedures
Conduct of business
Corporate governance
Financial resources
What would be included in offsite supervision or desk based supervision by a regulator?
Initial applications and ongoing changes, including changes in principal persons
Review of audited financial statements, auditors management letter, declaration, etc
Liquidity requirements
Pre-vetting and approval of principal persons and key persons
Review of suspicious activity reports (SARs)
General correspondence
Complaints
Law reports
Marketing material
Particular attention to any proposals to change business plan (competency check)
Info from other regulators or other sources
When might formal investigations be carried out by regulators
Usually when the regulators have the power to carry out formal investigations of a single firm, or all regulated firms within a specific sector of the industry
These powers are usually invoked when the regulator is concerned that procedures being adopted by firms are exposing the island to risk, and may be the precursor to changes in the regulations
Who will carry out formal investigations of a firm, or all regulated firms within a specific sector of the industry?
Investigations like these are usually not carried out by the regulators themselves, but by an appointed firm of reporting accountants, who will carry out the investigation and report their findings to the regulator
Formal investigations are usually carried out under the provisions provided in the respective law governing the activity, rather than the codes of practice.
As such, the investigators have legal powers of discovery and entry to premises for the examination of records and gathering of evidence
The regulators also have powers of interview, with penalties applied for non-cooperation on the interviewee’s part.
The convention on human rights require that legislation which forces cooperation in this way be modified to prevent self-incrimination
As such, any statements obtained under powers of compulsion may not now be used in a subsequent criminal prosecution, other than in the defence of the accused
What powers do the investigators conducting investigations into the activities of a firm, or all firms in a specific industry, have?
The investigators (I.e. the firm of reporting accountants appointed by the regulator to conduct the investigation) have legal powers of discovery and entry to premises for the examination of records and gathering of evidence
The investigators also have powers of interview, with penalties applied for non-cooperation on the interviewee’s part.
Note that the convention on human rights require that legislation which forces cooperation in this way be modified to prevent self-incrimination
As such, any statements obtained under powers of compulsion may not now be used in a subsequent criminal prosecution, other than in the defence of the accused
Under what legislation are formal investigations into the activities of a firm, or all firms in a specific industry, conducted?
Formal investigations are usually carried out under the provisions provided in the respective law governing the activity, rather than the codes of practice.
What are the three regulatory processes?
Authorisation
Supervision
Enforcement
In relation to firms, under what circumstances would a regulator use enforcement powers?
When firms experience difficulties in complying with the regulatory requirements
OR
Where firms either consistently breach requirements or breach in relation to a substantial, one off matter
Locally, the JFSC has to be satisfied that issues posing a risk to the public and the island’s reputation are given due attention and resolved ASAP to reduce such risks
Where such action is considered to be insufficient, or where cooperation is lacking, there may be a need for more formal enforcement action by the JFSC, involving the use of statutory powers
Note that individuals within a firm may also give cause for the JFSC to use its enforcement powers. For example, where a person has contravened the regulatory laws or regulations, orders, codes of practice, directions or conditions made under these laws, or has committed other instances of misconduct, such as breaches of the AML legislation
In relation to individuals, under what circumstances would a regulator use enforcement powers?
The need for enforcement may arise where a person has contravened the regulatory laws or regulations, orders, codes of practice, directions or conditions made under these laws, or has committed other instances of misconduct, such as breaches of the AML legislation
Under what circumstances may the JFSC consider using its statutory powers?
Where such action is considered to be insufficient, or where cooperation is lacking, there may be a need for more formal enforcement action by the JFSC, involving the use of statutory powers
Statutory powers = The powers assigned to the statutory authority (e.g. the JFSC) or body to implement the law
What are the principal powers the JFSC has at its disposal, as part of its enforcement process?
Warnings and statements
Policy on the JFSC’s use of public statements
Public statement as a regulatory sanction
Reduction of the period of notice
Public statement with respect to a direction
Directions and conditions
Applications to the court
Objections and revocation
Criminal prosecution
Rights of appeal
Describe warnings and statements, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
The issuing of a private warning to board directors and/or senior management of a firm or to individual principal persons setting out the JFSC’s concerns as to the firm’s conduct and/or individuals and the consequences of repeating this mistake
The issuing of a public statement of misconduct is described in the document ‘guidance on the Commission’s use of public statements’
Describe the circumstances in which the JFSC may issue a public statement, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
Under each of the regulatory laws, the JFSC has powers in certain circumstances to issue a public statement.
There’s a wide range of circumstances in which its appropriate to issue a public statement, the main ones being:
X As a regulatory sanction, or part of a sanction, by promulgating the findings of the JFSC, and any action it has taken in relation to a failure of a business or person to comply with a requirement of any relevant law or codes of practice
X To give warning of unauthorised business, or similar circumstances, where the best interests of the public could be adversely affected
X To publicise a direction, or particular aspects of a direction, given by the JFSC. The specific aspects addressed by this policy statement are a decision to:
Issue a public statement as a sanction, or part of a sanction
Issue a public statement with respect to a direction
Reduce the period between serving notice to anyone named in a public statement and the issue of the public statement
Describe the factors the JFSC will take into consideration before deciding whether or not to issue a public statement on a firm or individual as a form of regulatory sanction, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
In deciding whether to issue a public statement as a form of regulatory sanction (I.e. To spread word on the findings of the JFSC and any action it has taken regarding the failure of a person or business to comply with a relevant law or code), the JFSC will have regard to the following considerations, among others, whether:
The circumstances are sufficiently serious to warrant placing them in the public domain
The non-compliance was committed intentionally or recklessly, rather than accidentally
The JFSC has previously issued a specific warning relating to the type of non-compliance that has occurred
There is a pattern of poor regulatory compliance
There has been any attempt to conceal the non-compliance from the JFSC, or to mislead the JFSC about it
The person concerned has been cooperative in admitting the noncompliance, and in taking remedial action
In all the circumstances it is appropriate to draw attention to the non-compliance to demonstrate that regulatory standards are being upheld
It is appropriate to advise the industry of poor practice and provide education on the standards of conduct expected of registered persons
Define the JFSC’s use of public statements as a regulatory sanction, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
To spread word on the findings of the JFSC and any action it has taken regarding the failure of a person or business to comply with a relevant law or code
Describe reduction of the period of notice, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
The regulatory laws require that, if reasonably practicable, the JFSC must send a formal notice to any person to be named on a public statement, and may not issue the statement until one month before the notice, or later if an appeal is made to the royal court
However, the regulatory laws also provide for the JFSC to be able to decide when the statutory criteria are met that allow the notice period to be reduced, even so much so that the public statement is issued on the same day as the notice
Describe the factors the JFSC will take into account before reducing the period of notice before a public statement is issued, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
The JFSC is mindful of the additional consequences for anyone named in the public statement if the notice period is reduced. It therefore doesn’t expect to use this power unless it’s satisfied that its use is both necessary and proportionate. Each case is considered on its own merits, and the factors the JFSC takes into account include, but aren’t limited to:
The need for urgency in warning the public of unauthorised financial services business
Whether or not a delay could result in members of the public incurring financial losses
Whether or not a delay may result in significant risk of damage to the reputation of a registered financial services business or a person associated with that business. If the notice period is reduced, although an appeal to the court may still be made, the issue of the public statement is neither deferred nor suspended, pending that appeal being heard, unless the court so orders after considering a separate application: as a result, it may not be possible for the appeal to be heard before the public statement has been issued
Whether or not a delay could cause unnecessary damage to the reputation, integrity or economic interests of the island in commercial and financial matters
Whether or not reducing the notice period would counter, or assist in countering, financial crime in Jersey or elsewhere
What are kind of public statements are most likely to have their notice period reduced by the JFSC?
Those that give warning of unauthorised business, or similar circumstances, where the best interests of the public could be adversely affected
Whilst the JFSC doesn’t expect it will be necessary to apply the provision to other kinds of public statement (I.e. those that spread word on the findings of the JFSC and any action it has taken regarding the failure of a person or business to comply with a relevant law or code), it will do so if it considers that circumstances dictate
Describe the issuing of public statements with respect to a direction, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
A decision of whether or not to publish a public statement is likely to be based on the need to:
X Protect the interests of:
Any existing or potential clients or customers of the person to whom the direction was given
The general public
Other regulated businesses in the island’s financial services industry
X Protect the reputation of Jersey in commercial and financial matters
X Counter financial crime in Jersey and elsewhere
Describe directions and conditions, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
The issuing of a direction or license condition to require a person to take (or not take) certain action. Failure to comply with the direction and condition could result in prosecution
Directions may be used, for example, to require a regulated entity to provide certain info to the JFSC
The power of direction is available in order to ban an individual from operating at a regulated entity or in the finance industry in general.
Describe applications to the court, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
Application to the court for an injunction to restrain a person from committing or repeating a contravention, or in order to remedy a contravention
Application to the court for a registered person’s business to be subject to supervision, restraint or conditions, and for the registered person to make good losses suffered by third parties as a result of specified contraventions of the regulatory laws
Application to the court for the appointment of a manager to take charge of a person’s financial services business affairs
Describe objections and revocation, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
Objection to a principal person or changes in shareholding
Revocation of a registered person’s license
Describe criminal prosecution, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
Referral of a contravention of the law to the attorney general for his decision on criminal prosecution. (The factors the JFSC would take into account would in making such a referral are set out in its statement on ‘policy on referrals to the attorney general)
The particular enforcement measures, or a combination of measures adopted, depend on factors such as:
X The seriousness of the contravention or instance of misconduct
X The degree of cooperation and openness displayed by the person concerned
X Whether it is considered necessary or desirable for the matter to be brought into the public domain through the use of a public statement
Taking account of these factors, the JFSC will consider each case carefully on its merits
Describe rights of appeal, one of the principal powers the JFSC has at its disposal, as part of its enforcement process
All individuals and/or firms have the right to appeal to the JFSC and the court where they believe that they’ve been unfairly treated, e.g. if their license has been revoked, or they have been penalised and/or have been required to award compensation to investors
Describe ‘offshore’ jurisdictions
Technically, offshore means anywhere a person places property, other than their place of residence or domicile
Offshore vs onshore
Not necessarily an island
Can be landlocked, and therefore onshore geographically, e.g. Switzerland
Tax system advantages
Tax haven - low or no tax jurisdictions
Confidentiality
Political stability
Most OFCs are dependencies or colonies
What’s the IMF definition of an offshore finance centre/OFC
Large number of financial institutions engaged primarily with non-residents
Financial system with external assets or liabilities out of proportion to the domestic economy
Centres which provide some or all of the following:
X Low or no tax
X Moderate or light regulation
X Banking secrecy or anonymity
What are the benefits of setting up an offshore insurance company
Reduced cost of insurance
Increased cash flow
Access to reinsurance market
Insurance of hard to place risks
Improved control
Centralised insurance management
Possible tax benefits
Describe risk management controls, one of the requirements for regulated banks in Jersey
Processes
Structures
Resources
Information systems
Reporting arrangements
Define the acronym CBJL
Control of borrowing (Jersey) law 1947
Describe operational risk, an additional requirement in place for regulated banks in Jersey
Remember the FALLOUT story
The risk arising from execution of a company’s business functions. As such, companies require appropriate policies/processes/procedures for managing operational risk in all material products/activities/processes/systems. These include:
The courier laid out the EVALUATION AND DELIVERY of a plan to rob a shop with Dogmeat, as well as the DOCUMENTARY AND LEGAL RISK of doing so. This would be good PROCESS MANAGEMENT, especially in the event of SYSTEMS FAILURE. It was just him, reducing the risk of INTERNAL/EXTERNAL FRAUD. On their way in, the greeter-bot warned about IMPROPER ACTIVITIES in the toilets, and a sign was displayed at the entrance, about EMPLOYMENT PRACTICES AND WORKPLACE SAFETY. At each of the tills, there was a note on HANDLING OF CUSTOMER INFO. The manager’s office had a lot of PHYSICAL DAMAGE, but they found the key to the safe behind a list of CLEARLY DEFINED EMPLOYEE DUTIES. Inside the safe, they found cash, as well as a nuka cola RISK ASSESSMENT OF NEW PRODUCTS PRE-LAUNCH. Upon leaving, the courier reflected that the plan had had a REGULAR REVIEW OF OPERATIONAL RISK PROFILES, as well as BUSINESS CONTINUITY PLANS.
