Jersey Financial Services Commission Seminar
Keynote speech: Investment business and general insurance mediation
By David Carse OBE
Director General, Jersey Financial Services Commission
Public speech - 12 November 2004
Good Morning and Welcome to the fourth and last in a series of workshop seminars focussing on the various sectors of the industry. The seminars have been arranged as a direct result of requests from the industry at our February event. The delegates asked for presentations focussed on the specific issues relevant to each industry sector and we hope that the four days of seminars will do just that.
I am delighted that you are all here and that we have had such a good response.
The emphasis will be very much on practical issues and on providing feedback to you on the sort of problems that arise in our day-to-day interaction with regulated entities. We will also try to provide you with solutions to go along with the problems. I hope very much that you will feel that the Commission is part of the solution rather than the problem. But if you have a contrary view, please let us know. This is very much intended to be an interactive event.
From my point of view, this is an opportune time for this seminar. I’ve now been over a year in office, and a lot has happened during that period. I hope that you will feel that we have made progress, certainly in terms of building up a constructive relationship with the industry.
In this short opening speech I will make some observations about the key issues and challenges that are facing the finance industry in Jersey, and about some of the topics that the later speakers will be addressing in relation to investment business and general insurance mediation.
Key issues for the finance industry
It seems to me the Key Issues centre on how the Island will move forward in terms of maintaining and enhancing competitiveness, quality, its skills pool, and reputation.
On Competitiveness, what matters is price, position and product.
We know our price is dearer than some other jurisdictions, but not dearer than London, Geneva, Luxembourg or Dublin. We cannot in any case hope to compete on price – there will always be someone cheaper.
We know our position in its various manifestations (geographical, political, regulatory, legal) is better than Cayman, BVI, Bahamas, Bermuda, etc. Jersey came out well in the IMF review, and we are negotiating a good position in the European tax initiatives. Jersey was able to offer a safe haven to a number of institutions after the recent hurricanes in the Caribbean – a reminder that despite our moans about the weather here, Jersey is a relative haven of stability in all its various forms.
Our product is good - very good - but we need to make sure it is excellent. We must maintain a competitive legislative framework, and a legal and regulatory framework that give business a solid platform from which to market their services. Initiatives such as protected cell companies and foundations are an example of this. But if new products such as foundations are introduced, they will need to be firmly rooted in the Jersey legal and regulatory ethos. The way forward is not through regulatory arbitrage, or a “race to the bottom”, but through the pursuit of excellence by all the players in the industry, including the Commission.
That is where quality, skills pool and reputation come in and indeed are vital.
Quality is always a difficult thing to define; yet we all know it when we see it. It’s not about slick advertising or snappily dressed executives. Its something more solid, more sustained, more lasting.
From a regulatory point of view – and perhaps in this context from a client point of view – quality could be described as an industry made up of firms that are financially sound, operate with integrity and competence, that take their duty of care and responsibilities to their clients seriously, that have sound organisation and structure, that are open and transparent in their business arrangements, and are well managed.
Certainly, those are the criteria that we look for in exercising our supervisory oversight and when we find them – which we often do – we are extremely pleased, not least because it gives us less work to do. But equally, it would be wrong not to acknowledge that the culture of excellence is not evenly spread throughout the industry, and some of our regulated entities give us more headaches than others. Our role as we move forward is to assist in the process of raising standards throughout the industry, and I hope that this series of seminars will have a part to play in this.
As regards the skills pool, the old differences between on shore and off shore are being eroded. Over the last 10 years the basic proposition has changed dramatically. The old ways were that offshore equated to secrecy and tax haven. In the modern world neither of those concepts can form the core of a respectable jurisdiction’s offering. So what is the differentiation?
Tax neutrality does help and our position in the various forms that I have described is another big plus. But these by themselves are not enough to create the “unique selling point” that makes a financial centre truly successful.
What really matters is the skill of our bankers, our trustees, our asset managers, our fund managers and administrators, our custodians and all the other finance industry professionals. And their skills sit within an overall framework of the skills of other professionals that make up the industry – the lawyers, accountants, tax specialists and so on, as well as the regulators, law enforcers, and judiciary. Jersey is a place where clients get timely access to impartial justice – not a concept honoured in all parts of the world.
To retain this advantage it is important that each business invests in its staff, and searches for the best people, if necessary bringing them into the Island to help train and develop local talent.
It is the conduct of all of the industry that makes up its reputation. The industry’s – indeed the Island’s reputation – is only protected to the extent of its weakest link.
I hope in this context, that regulatory standards assist the industry by identifying weak players and encouraging them to “shape up or ship out”. Our duty to the quality institutions is to protect their hard earned reputation from the conduct of the weakest.
In this we need your support. The Commission needs to listen to the needs and concerns of the industry, but we also need to be listened to.
Inside the Commission itself, we are committed to travelling our own road to excellence and we are currently reviewing our internal efficiency. We have recently changed our structure to make it more industry focussed and we are looking for opportunities to streamline our regulatory regime in a way that maintains standards but reduces administrative burden – for example, by merging laws and orders so that a firm operating under more than one licence, has only one regime to follow. This will reduce your costs but keep the joint regulator and industry commitment to quality.
I want now to turn from the Big Picture issues to the specific issues that concern the investment business sector, and to foreshadow, without stealing their thunder, some of the topics that the other speakers will be addressing today. I will also say a few introductory words on where we are on general insurance mediation.
The personal financial services industry has gone through some troubled times in recent years. Confidence of investors was shaken by the collapse in the tech boom and by the slump in market indices after 9/11. Stock markets have since staged a recovery, but they have yet to make up all the lost ground; and they remain potentially vulnerable, in my view, to further external shocks such as a collapse in the U.S. dollar or another terrorist atrocity.
Things have not been helped by a spate of bad publicity – corporate frauds in the U.S. and elsewhere, the splits episode, the malpractices in US mutual funds, misselling of various kinds, precipice bonds, with-profits insurance policies, and now the latest investigation by Mr Spitzer into the practices of U.S. insurance brokers.
All this has produced a nasty dent in the confidence of investors, particular retail investors. This has led in some quarters to talk about a so-called “savings crisis”. People are now apparently less inclined to save because confidence in financial products and services has been eroded; and, together with the well-publicised problems with pension schemes, this is raising concern about whether people are making adequate provision for old age. The recent historic lows in interest rates have not helped.
Perhaps these issues have not loomed quite so large in Jersey, but Jersey has certainly not been immune. You only have to read the pages of the Jersey Evening Post to see that issues such as alleged misselling of mortgage endowment policies are a lively topic of controversy. Moreover, the role of IFAs has come under scrutiny here, as it has done elsewhere.
If you accept the argument that investor confidence has been dented, the question is what can be done to improve matters. Of course, fluctuations in world financial markets are outside the control of individual firms. But what is within the remit of such firms is how they handle their client relationships and how they manage their own affairs in a way that inspires confidence in those who transact business with them.
Taking the first of these, one of the major failings we see in a number of the firms that we visit is that they do not properly establish and document the customer’s investment needs and risk appetite, and explain coherently in writing why a particular investment is suitable. If the “fact-find” and the “reason-why” ARE done properly, the chances of the customer being sold an unsuitable product are greatly reduced, and the firm is better protected against allegations of misselling if the customer subsequently complains.
If the customer does complain, proper investigation of the complaint should be made and consideration should be given to providing adequate redress, even if the matter relates to something that happened before the Financial Services (Jersey) Law came into effect. This should not be a matter of narrow legal interpretation, but one of good business practice. What you should absolutely NOT do is to charge the customer for investigating the complaint. Believe it or not, we do come across this from time to time in our visits.
Of course, it would help if there were an independent mechanism, in the shape of a Financial Ombudsman Service, to investigate and arbitrate on complaints. But, as yet, it appears that there is not sufficient political or industry support for this. An alternative would be for the industry to set up its own arbitration panel to adjudicate on complaints. But, in the absence of this, we are thrown back on the need for individual firms to do the right thing themselves.
Firms can also boost investor confidence by demonstrating that they have proper governance arrangements and risk management, and by employing staff who are demonstrably competent. They also need to have sufficient financial resources to support the business and meet their obligations.
There is also the question of how firms are remunerated. Commission arrangements are bound to leave a lingering suspicion that advice is not purely disinterested, and a move to a fee-based approach would in my view be a step forward in building transparency and trust. I accept however that it may be difficult for individual firms to do this in isolation, and that it might be necessary to overcome customer resistance to explicit fees. But I think that the trend is going to be in this direction.
I do not want to appear too downbeat. The Jersey finance industry in general, and the investment business sector in its various facets, has much to be proud of. Equally, it would be wrong to ignore that there are issues in relation to advising on, and selling, financial products - here and perhaps even more elsewhere - that do need to be addressed by the industry; and this is going to be one of the Commission’s main areas of focus in the coming year.
Another key issue for us next year will be to put in place the new regime for regulation of general insurance mediation. This is an area where the need to regulate has been driven by external events, in particular by the changes in the U.K’s financial services regime to give effect to the E.U. Insurance Mediation Directive. There are often complaints about the time that it takes to legislate in Jersey. But the fact that we have been able to enact the enabling law and draft the necessary orders, all during the course of this year, is a tribute to the hard work of all those involved, in particular Nigel Woodroffe and his team. The new regime is coming in at an interesting time, just as controversy engulfs the insurance brokers in the U.S. We are obviously following developments there with interest.
I know we have a full day ahead and so I will stop at this point. There will be an opportunity in the interactive sessions to conduct a free and frank exchange of views. I mentioned earlier that I hope that the Commission will be listened to. Equally, we are committed to listening to you – your concerns, your questions, your aspirations for your industry. Please make the most of the opportunity today to make it a real exchange: we have much to learn and are keen to increase our understanding of this vital part of the Jersey economy.
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