THE COMMISSION

Jersey Financial Services Commission Seminar

“Key issues for the Trust Company Business Sector”

By Debbie Sebire – Director, Trust Company Business, Jersey Financial Services Commission.

Public speech - 10 November 2004

Good Morning Chairman, Ladies and Gentlemen

Most speeches tend to start with a comment from the speaker about how pleased and honoured they are to be addressing their particular audience – in this case the sentiment is particularly true as this is the first time I have had to speak to you as the Director of the Financial Services Commission responsible for Trust Company Business. I am delighted to be here and am very much looking forward to getting to know you and your businesses in more detail in the months ahead.

Moving from industry into the regulatory environment is a big move and certainly one that was not taken lightly. I am hugely enthusiastic about the opportunity to take a skill set acquired during my career as a Trust Practitioner and apply those skills from the perspective of a regulator. I do recognise, so early in my tenure that I will have to learn the “regulatory ropes” and have no doubt that it is going to be a fascinating process. It’s already obvious to me that it’s not simply about learning the compliance standards – the role is very much about creating a framework within which high quality and well run businesses thrive, a framework that gives international clients increased confidence, a framework that is robust enough to withstand any amount of ‘tire kicking’ when the G7 countries and their international evaluating bodies come visiting!

One tends to initially think about regulation as a set of rules, but actually I think it is also about a cultural environment. That concept of culture is quite interesting, as I think it is the culture of a Trust Company that is the determining factor in whether the business is well run or not, and not necessary the policies and procedures they have on the shelf. You will hear the theme of culture cropping up throughout the day and indeed during meetings the Commission may have with you as we try and fully understand the culture that operates within your firms. It is one of the most important indicators that help us determine levels of comfort with your businesses and I will be coming back to the subject of culture again in the context of corporate governance.

Another element of my role will include managing difficult disciplinary matters and to do that I will have to learn the legal, procedural and natural justice issues that a statutory body must, itself, operate within. And of course, all the usual aspects of a new directorship to do with staffing issues, budgets and business plans, before we mention getting to know my new regulatory peers around the world.

I think you will agree that this adds up to both an exciting and challenging role.

Going back to the point about regulatory peers, it’s interesting, as I met up with two members of the Monetary of Authority of Singapore when I was visiting there recently. Singapore is in the process of introducing Regulation for their, as yet, pretty embryonic Trust Business and are currently going through the consultation phase. The Regulators were pretty keen on exploring the possibility of seconding their Regulatory Supervisors to Jersey to gain experience and training in regulation of the Trust Industry!

I would like to share with you some thoughts which at this very early stage in my new role, seem to me to represent key themes, or key values that at this time are important in helping me focus my thoughts.

The first key theme I want to bear in mind whilst evolving into my new role is to create an environment that balances the need to embrace commercial opportunity whilst keeping well clear of businesses that engage in bad practice. We will be touching on some examples of such bad practices later in the day in the case studies.

There is absolutely no doubt in my mind that the trust sector is an important one.

As you know, Helen Hatton has often referred to the Trust Sector as the “seed bed” of the financial services industry in Jersey and actually, I agree with this. The marketing arms of your organisations not only bring you business back to your offices in Jersey, but also your efforts bring back business to the islands banks, fund and investment managers, law firms and accountants. The point I am trying to make is that your business is truly critical – pivotal - to the economy and reputation of our Island.

I very much want my job to contribute to the success of the sector in terms of maximising your ability to deliver quality services to clients we can be proud to represent. When deciding to join the Commission one of the driving motivators for me was to be able to still contribute positively to an industry that has been very close to my heart for many years now. Working with the industry to achieve this will remain one of my key objectives.

Having said that, it would be naïve of me not to recognise that there is also the more obvious “regulatory piece of the jigsaw” which is sometimes difficult and indeed unpopular. Just in these first two weeks in the post I have seen the importance of the Commission protecting the trust sector’s reputation by dealing with the few who engage in practices which do not do proper credit to the majority of the well run and reputable businesses that thrive here. When those occasions arise – and I do hope they will be few and far between – I will not hold back from doing what needs to be done.

The second key theme I want to share with you, is to do with the maturity of the sector and of the Commission itself.

I am very pleased to be joining the Commission at this particular time, I think we are at an interesting time in the Jersey industry. A few years ago we were operating in a very different environment. In saying this I am not just thinking about a different regulatory environment – no regulation as opposed to a fairly tight regime! – but rather the culture within the island relating to co operation on legal and criminal matters, the fiscal morality issues, etc – all were very different even so recently as 6 or 7 years ago.

Certainly during that period, working in a major international organisation, we went through a programme of intensive client reviews, repositioning of clients that were, for one reason or another likely to be more comfortable in a different jurisdiction. This can be done in a big group where you have the opportunity to consider effective legal and regulatory risk management strategies by region or country and have the infrastructure to enable you to do this.

I know many medium sized firms have tackled this issue by forming strategic alliances or partnerships with corresponding firms in other jurisdictions, or by opening sister companies or subsidiaries overseas. These are all examples of effectively managing risk and better positioning clients according to their particular circumstances. Additionally of course, such arrangements provide important new sources of business for Jersey in circumstances where it is determined that a structure is best established or run from here and fortunately the in flow is still greater than the outflow.

So I think Jersey is increasingly a mature jurisdiction and having had the opportunity to see the Commission both from the outside view and now briefly from the inside, I think it is fair to say that so has the organisation of the Commission itself matured. One example of this maturing that I particularly endorse, is their recent move to industry sector divisions. As you know, the coverage of the industry within the Commission has now been separated into industry specific pillars, being Trust Company Business, Banking, Securities and so on, with each being lead by its own dedicated Director. I like this not just because it has given me the opportunity I am now enjoying, but because I also welcome their commitment to getting closer to the industry sectors in terms of understanding their needs better and getting a closer grip on the differing challenges faced by each sector.

So a key driver for me is to honour that commitment from the Commission and really make the effort to get out of my office and into yours, get to know you, your businesses and the standards within them. I hope I can help by sharing best practice, help by smoothing the way with other regulatory bodies when you are seeking to expand your operations, help by advising on solutions to common areas of difficulty and help by doing my best to process timely decisions. One thing I have learnt is that time is of the essence!

I also hope that I will be able to help the firms that got their licences most recently. They will have now had time to strengthen their systems and controls above the minimum threshold level and I will be pleased to help firms that want to be helped and to press forward for improvements with those that require a little extra motivation!

I guess that brings me to the end of my initial remarks. I would like now to offer some warm up to the topics of the day, some of which my colleagues will be talking about in more detail later

Firstly - Corporate Governance and Span of Control and this is where I come back to my previous remarks on culture.

I strongly believe that the culture of a firm – its “personality” - is set by its board. This culture is set by the bosses of a company, by their personal values, by their work habits and the degree to which they value and demonstrate ethical behaviour and indeed the degree to which they frown on bad practice and reward good practice. If you have a boss that wins business on nothing but improper promises, someone that retains business by agreeing to unreasonable client requests and turning a blind eye at critical moments, well, what chance do you have of even a competent middle member of staff standing firm about controls or quality of work? Even if they knew it was the right thing to do, it would take a pretty strong character to stand up and be counted as a ‘No’ vote if it went against the cultural grain of the corporate governance culture within the firm.

Conversely, compliant business is normally good business, business that stays on the books and pays its fees. Compliant business is about representing clients that do not compromise the trustee or professional director, clients on whom you can rely to grow your own business and with whom you can prosper.

In my experience when you have a nagging doubt about whether you should take on a client, those are the clients that generally cause problems later on. A risk you identified as a possibility becomes materialised; those initial nagging doubts soon crystallise into huge problems that cost hours and pounds in terms of legal fees, management costs regulatory interface or litigation misery; and it can be miserable. Having a sound corporate culture, offering staff clear direction and leadership, demonstrating clear decision making with published internal lines of authority are all means of demonstrating the type of corporate governance that modern business demands. Although reports like Turnbull and matters such as the Combined Code don’t directly apply to Jersey trust company businesses, they do set out sound principles that benefit us all.

Boards are jointly and severally liable, at law and in regulatory terms. Several of the case studies later today set out how some smaller firms have joined forces to present to the regulator a picture of three independently minded people running the show. However if you delve below the surface, the fact of the matter is these firms are in fact, what we call “flat sharing”. This is where separate people carry on their own businesses and have simply come together for no purpose other than sharing the heating and lighting bills, paying lip service to the principle of six eyes. In effect they are operating as old fashioned chambers might have run, with each principal having their own client base, their own marketing plan and in fact their own agenda. This is not an example of corporate governance – it’s a recipe for disaster. Directors become responsible for the risks – be they regulatory or legal – arising from the separate set of clients belonging to their fellow directors, a group of clients in respect of whom the first individual has no control or oversight.

Another case study looking at corporate governance explores the question – when is an affiliation member actually a managed trust company?

Sometimes it’s not easy to see where one starts and the other finishes. The presentation explores why it matters and how unwittingly firms are substantially increasing their own risks by incorrectly declaring a separate business they manage for another, as a member of their own affiliation.

Risk management is another topic dear to a regulators heart. We are perfectly comfortable with a firm taking on high risk business, we simply want to know that you have systems in place to determine what high risk means, and have worked out how you are going to mitigate and monitor that risk.

The first step is to determine the full scope of situations that would lead you to classify business as high risk, whether this be the fact that the client is a politically exposed person; the nature of the asset being held by the structure; the type of transactional activity; multi layering of entities, the list can go on considerably.

The second logical step is then to go through your client list and risk rate each structure accordingly. I know that the businesses here will have gone through that exercise.

But really, that’s the easiest part of the equation. The difficult part comes with the heightened monitoring that goes with the higher risk categories and the difficult decisions and action plans that have to be put into place when you determine through your boards that the risk can no longer be managed at an acceptable level.

The key thing the Commission will be looking for during the course of getting comfortable with your risk management, will be exactly that point – how are you handling that heightened monitoring and how are you working through the action plans to keep those high risk cases boxed?

David will be going through a number of examples exploring situations where risk management systems have broken down and where Trust Company Directors are potentially leaving themselves exposed.

Turning briefly to the subject of KYC on the basis that Risk Management and KYC are always closely related. I am amazed to see in my very short time with the Commission how many firms think of KYC as nothing more than ID. Failing to realise that the provenance of funds and commercial rationale for the structure are the very heart of KYC. Similarly I have been surprised that many firms seem to think of KYC as merely an anti money laundering requirement and don’t understand or value it as a means of reducing their own risk of exposure to being held party to a fraud, or a constructive trustee, or tax enquiry.

Another major topic later today relates to the Financial Resource Requirements. I know it is one you are going to find interesting and informative most particularly as it is a subject that arises for discussion with industry members and the Commission quite frequently. I think it goes without saying that it must make sense for the regulatory regime to require a firm is adequately financed to fulfil its functions and cover its risks. It seems to me that this is one area where responsible directors are unlikely to differ with the regulator – once the company’s ability to meet its risks is exhausted the directors personally move into a vulnerable position! Despite this rather obvious observation, I have been surprised to see many firms shaving their financial position to the bone and seeking to rely on rather weak loans or cross arrangements of one sort or another. The desired position is clearly for firms to be well capitalised and robust in their ability to sustain financial stress.

Well, I can feel the collective need for caffeine beckoning now, so I would like to draw to a close. I’d like to finish by thanking you for your attention and your warm welcome. I look forward to speaking with many of your through the course of today but obviously getting to know you properly in the months and years ahead.

Thank you.

Top

<< Back to contents