THE COMMISSION

KEEPING UP WITH INTERNATIONAL REGULATORY STANDARDS

Public Speech - 19 September, 2002

Richard Pratt
Director General,
Jersey Financial Services Commission

Document Overview

Introduction Top

I am grateful to have been asked to participate in today's open day. The Securities Institute is a premier organisation. With 15,000 members and 52,000 candidates for its exams, the Securities Institute is making a huge difference - improving the standards of competence in the securities industry throughout the UK. And this branch in Jersey is one of the most successful and active. I believe we in the Commission may have assisted in this by insisting on minimum qualifications in our Codes of Practice. I congratulate the Institute on its tenth anniversary this year. We in the Commission are proud to have Scott Dobbie, the Institute Chairman, as one of our Commissioners.

I want to talk today about how international standards are developing and the importance I attach to Jersey keeping up.

The Importance of International Standards Top

I attended the Cambridge symposium on Economic Crime this year. Sitting listening to the closing speech by the Chairman, Saul Froomkin, I was struck by his final remarks.

"We discuss crime, and strategies for defeating it." He said. "But we are talking to ourselves. Where are the pariah states? Where are the states that are prostituting their sovereignty for money?"

There might have been a time, when a Chairman making such remarks would have been referring to Jersey. It would have been unfair and mistaken of course. Nevertheless, the assumption in such a gathering might well have been that Jersey was one such state. But the Chairman knew perfectly well that I was there. He knew that Guernsey and the Isle of Man had also been there. Indeed, we had been active participants - addressing the symposium.

We are not now counted amongst those pariah states.

That is one obvious consequence of our determination to adhere to international standards. But it goes further.

My arrival at Cambridge had been delayed by two key events.

First, I had stayed in Jersey to attend the opening meeting with the team from the International Monetary Fund that is here in Jersey, as we speak, evaluating our adherence to international standards.

The IMF deputy mission chief - Neville Grant - told the Jersey Evening Post what he expected to find. "I expect to find that Jersey is a pretty good jurisdiction", he said. Although he also said (and I am sure he is right about this) that the team will have some recommendations for improvement.

It is by adhering to international standards that we get that reputation. It is by demonstrating that adherence that we enhance our reputation.

My second reason for delaying my attendance at the Cambridge symposium was that I was asked to go to a meeting of the "Wolfsberg group". This is a group of the world's 11 major banks. They have formed a club to draw up international standards - for example on know your customer principles for private banking; principles for preventing the financing of terrorism; and for dealing with correspondent banks.

Sometimes they ask regulators from around the world to comment on their principles. On Tuesday, they invited regulators from the FSA, the Federal Reserve, Jersey, Switzerland.

I was there because they recognise that we have a key contribution to make in setting standards.

And we do. We think carefully about standards and have experience from our perspective that we can share.

On that same day, Colin Powell, Chairman of the FSC, was at a meeting of the Basel Committee cross border working group. They were setting standards for international co-operation.

Also on that day, the Commission's Director of Compliance, John Pallot, was at the Implementation Committee of IOSCO. They were setting out the criteria for assessing whether or not a jurisdiction meets IOSCO standards. We were asked because we are respected as meeting international standards. We have a key contribution to make.

And we have our chance to make sure that standards take account of our circumstances.

Last Tuesday's series of meetings were not unique. We were also involved in the FATF review of its recommendations and in other discussions. The same is true of other Crown Dependencies.

These are important opportunities to protect Jersey's interests. We only get them because we have a reputation as a well-regulated jurisdiction. We need to protect that reputation.

But we do not maintain international standards simply to protect our reputation. We do so because those standards are intended to ensure clean, fair and free markets. We depend on such conditions to be successful. So it is in our interests directly to meet those standards and to help ensure that others do to.

But there is no denying that reputation is important. That is one of the reasons the IMF visit is so important. And since I have mentioned the IMF visit, let me say a little more about it.

The IMF Evaluation Top

Its genesis was a study by a body known as the Financial Stability Forum Offshore Working Group. The FSF was set up to look into reasons for instability in the world's financial markets. It established an offshore group. The concluded that offshore centres were not a source of instability but that they might be. It was vital that they met international standards.

To their credit, the Forum recognised that some offshore centres, like us, were well regulated. But they decided to ask the IMF to undertake a programme of evaluations.

Senator Walker has formally invited the IMF. Its report will be to Senator Walker and it will be for the Jersey Government to determine whether or not to publish the report.

The scope of the evaluation is our regulation of financial services businesses and our anti money-laundering regime.

This is the most comprehensive study the Commission has ever seen. The IMF team have already received many lever arch files of information on laws and regulations. They have an 8-person team of experts from around the world and they are here for a fortnight.

We, of course, are hoping for an "A"! But we are also seeing this as a learning process. There are things we have decided we want to do better, simply by undertaking the preparation for the visit. There will be recommendations for improvement. We can always do better.

Keeping up with international standards is not easy. First, we need to understand what those standards are. They are set by:

• The Basel Committee on banking supervision (25 principles)
  

• IOSCO - another 25 principles
  

• IAIS - another 18
  

• Trust Company business standards
  

• Financial Action Task Force. 40 recommendations on money laundering and another 8 on terrorist financing.
  

These are set at a high level of generality. So each of these bodies make statements and resolutions from time to time which are necessary to interpret the standards. The Basel Committee issued its paper on Customer Due Diligence last October. IOSCO has passed numerous resolutions. The FATF has published interpretative notes.

Moreover, each of the standard setting bodies has produced methodologies to help determine if a country meets the criteria. These develop and amplify the principles. We have to keep up.

The Forward Movement in Standards Top

At the same time, different countries take action that go beyond the minimum standards. Germany, for example, has recently decided that each bank should have a database, which includes all the key data about its customers (including beneficial ownership information) and which can be directly accessed by the authorities without the permission or even knowledge of the bank. The French have a similar arrangement. Will this become an international standard? Perhaps. We have to keep abreast of these developments and make our own judgement about what is right for us.
For we, too, occasionally go ahead of international standards. The obvious example has been the regulation of trust company business.

But we should not get too smug. We published our Position Paper on overriding principles for a know your customer framework. This set out the Commission's position on a number of issues but let me emphasise just three points:

• In the light of experience, we must limit the circumstances in which businesses can rely on the customer due diligence work done by others. And when they do rely on the work of others, they must keep copy documentation.

• We must also insist that financial institutions look right through companies and trusts that open accounts, so as to establish the beneficial owners, the beneficiaries, controllers and others with a controlling interest.
  

• Financial institutions must work through their existing accounts - even those taken on before the current requirements were in force - and bring their due diligence up to date.
  

At the time we published it, some thought it contained proposals not yet in place in a number of jurisdictions. But other bodies and jurisdictions are moving fast.

The Basel CDD paper, for example, was published in October last year and includes, for banks, many of the same principles. For example, it also insists on banks establishing and verifying the identity of beneficiaries of trusts.

The FSA in the UK has reached agreement with the major banks to fill in the gaps in their own KYC that arose from accounts opened before 1994.

And other countries are moving forward in other ways. In a few days time, the UK Proceeds of Crime Act comes into force. This will change the anti-money laundering regime. It will introduce an offence of failing to report a suspicious transaction for all crimes. (For as you no doubt recall, in the UK and in Jersey hitherto, it is an offence to fail to report a suspicion of a drugs or terrorist related transaction but, for all other crimes, failure to report is not an offence - it simply removes the defence against a money laundering prosecution) And that failure to report offence will apply, not only when an individual has a suspicion that he or she is dealing with the proceeds of crime. It will also apply when an individual (if in the regulated financial services sector) had reasonable grounds for being suspicious - the objective test.

In this, the UK is ahead of us. Guernsey and the Isle of Man are ahead of us in bringing in these reforms.

It does not stop there. The UK Proceeds of Crime Act also introduces a new Assets Recovery Agency. This will be able to assist police forces in securing criminal confiscation of assets. It will also be able to secure civil recovery of assets from people, if, on the balance of probabilities, the assets appear to be the proceeds of criminal conduct. And if the ARA cannot achieve that, they have the power to tax the proceeds.

The UK was not the first with these provisions. They followed examples in Ireland and in Australia.

There are many in Jersey who will argue that we are ahead of international standards. In a few areas we are. And in many others we do well. But in many others we are still moving forward towards those standards.

In the money-laundering field, the definitive standard setting body - the Financial Action Task Force is currently reviewing its own forty recommendations. As part of that review, it is considering many issues that we have discussed in our Position Paper. The FATF has issued a consultation paper on its own review. The Jersey Financial Services Commission has responded to its consultation paper. Our response is based on the Position paper principles. I am glad to say that the response was broadly agreed with the industry.

This agreement is a good omen for the next stage in the development of our anti money-laundering regime. We are about to start the process of discussing the detailed drafting of the Guidance Notes with the industry.

The Commission will approach those discussions in a constructive spirit, within the framework of the Position Paper. Industry representatives are showing a similar spirit and their participation in the process will be very helpful in turning those principles into workable and practical rules.

We will complete the process around next February - about the time that the FATF completes its review of its forty recommendations. We will then be in a position to turn those revised international standards quickly into practice here in Jersey.

This is an excellent example of how we are working together with the industry to meet international standards.

I have emphasised that international standards never stay still for long. The same is true of us.

Jersey's Developing Standards Top

We are embarked on a long-term overhaul of our regulatory system.

Our vision is to have a single regulatory law. This law - modelled on the Financial Services (Jersey) Law 1998, will set out the overarching powers available to the Commission. These will include the powers to give, refuse, withdraw or condition licences to financial services business; the power to obtain information and to insist on a reporting accountants report, to appoint inspectors or otherwise mount investigations; the power to co-operate with other regulators and to appoint a manager.

There will be secondary legislation covering such matters as audits, segregation of customer money and regulatory fees.

And there will be Codes of Practice - different ones for different sectors of the business.

We are making good progress. All of this is in place for Investment Business and Trust Company Business. We have recently issued Codes of Practice for Insurance business. And we are about to issue a consultation paper for the consolidation of the banking business into the Financial Services Jersey Law and of draft Codes of Practice.

Codes of Practice for funds are now being drafted and will be ready next year.

It will take some time to realise our vision but we are well on the way.

There are other matters we need to attend to, in order to avoid any gaps in our regulatory regime.
We are in the middle of consultation processes for

• an Ombudsman

• a depositor protection scheme for banks
  

• advertising regulations
  

• information on company beneficial ownership and sensitive activities.
  

Each of these, except the last, will bring us into line with international standards. The latter issue - the declaration of beneficial ownership and the restrictions on sensitive activities is an area where we have been ahead of international standards for some years. We are reinforcing that regime. It is a regime we need because of the nature of our business here in Jersey - because of the temptation to set up a company with legal but no real presence, in order to hide ownership or engage in activities that we would all deplore. Our rules help us to control it.

Partnership Top

I have said many times that we aim to work in partnership with the industry. Our agreement with the industry on the response to the FATF forty recommendations is a good example. Our extensive series of consultation exercises - continuing over many years is a further testament.

This partnership is vitally important in Jersey's drive to maintain international standards. It is important that we all understand where Jersey needs to make improvements to move towards international standards. Then we must work together to achieve those standards. We have done a good job together thus far. We must continue to do so.

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