Jersey Financial Services Commission Seminar
Keynote speech: Trust Company Business
By David Carse OBE
Director General, Jersey Financial Services Commission
Public speech - 10 November 2004
Good Morning and Welcome to the second 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 have 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 the trust company sector.
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 programme, 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 sets 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.
In this context, I hope 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.
Our new structure has involved the appointment of new directors, and I am delighted that the most recent recruit, Debbie Sebire, is here to make her official debut today. Debbie comes to us with long experience as a trust practitioner, and her appointment is a practical illustration of our desire to get close to the industry and understand its needs.
Trust company issues
I want now to turn from the Big Picture issues to the more micro issues that concern the trust company sector, and to foreshadow, without stealing their thunder, some of the topics that the other speakers will be addressing today.
Underlying everything we say will be recognition of the importance of the trust company sector to the Jersey finance industry. The trust companies are the jewels in Jersey’s crown. That doesn’t mean that they all shine with the same brilliance. But collectively they are very much part of Jersey’s unique selling point. It is vital therefore that we strike a balance in our regulation that allows the trust company sector to prosper, while preventing bad practices that would bring the sector into disrepute. Again, this is one of the themes of the day.
The trust company sector has had a great journey to make over the last four years. It is four years this month since the introduction of the extension law, which was the mechanism to extend the definition of financial service business to include the trust sector.
It is gratifying that the latest STEP survey of offshore trust business suggests that 80% of the respondents in Jersey believe that the degree and style of regulation in their jurisdiction has been good for the industry. This is despite the fact that around the same percentage thought that the regulation had significantly increased operating costs, and a sizeable minority (39%) thought that the regulation was too robust.
All surveys need to be taken with a pinch of salt. But the overall picture seems to be that most trust practitioners think that the price of regulation has been worth paying and that a majority (albeit a somewhat smaller one), consider that we have got the style of regulation about right.
This should not come as too much of a surprise. After all, if you look at the principles and practices on which our regulation is based, these are what a well-run firm should be doing for itself, without being told.
The problem is that not all firms are managed to the same high standards as the quality firms. So the task of the regulator is to make sure that clear minimum standards are laid down, supplemented by guidance on best practice, and that everybody follows these standards.
Following on from this, there is no doubt that some firms must increase their focus on corporate governance and span of control, on properly understanding the commercial rationale for the structures under their administration and on tightening their risk management. I am also concerned that we see more honest admission of fault and client complaints put right voluntarily by firms that consider themselves fit and proper.
Firms also need to ensure that they are operating with sufficient financial resources to meet their obligations and cover their risks. These resources must be real and not illusory; they must be properly accounted for along with the related assets and liabilities; and the regulatory requirements on ANLA and PII must be met on an ongoing basis. These are all issues on which we shall be offering practical guidance during the course of the day.
Finally, there is the vexed question of AML and KYC requirements. We know that this is a key issue for the trust companies both in taking on new business in their own right and as the introducers of business to others. We shall be taking the opportunity to explain to you later this afternoon our approach to incorporating the latest international standards into what is now known as the Handbook for the Prevention of Money Laundering and the Financing of Terrorism – a snappy title, I am sure you will agree.
The Handbook has been developed in close consultation with our industry steering group, and the needs and concerns of the trust companies have figured very heavily in our discussions. We hope to undertake a full consultation of the Handbook in the near future. Rest assured that our objective is to end up with something that is pragmatic and risk-based while complying with the relevant international standards.
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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