THE COMMISSION

Jersey Finance Limited – Annual London Conference

Speech by Colin Powell CBE
Chairman, Jersey Financial Services Commission

28 April 2005

“Regulation in harmony with business development”

No doubt if I was to introduce myself by saying “I am from the regulatory authority and I am here to help you” many of you would be rather sceptical. But hopefully in the fifteen minutes at my disposal I will be able to convince you that while the Jersey Financial Services Commission is a regulator, and will regulate to high standards this does not mean the Commission cannot or does not regulate in harmony with business development in the Island.

The Jersey Financial Services Commission is a statutory body corporate, independent of Government in the regulation of all aspects of the finance industry, but at the same time accountable to Government for the efficiency and effectiveness with which it undertakes its roles. Those key roles, reflected in the guiding principles of the Commission, are to –

·1 protect the investor;

·2 protect the Island’s reputation;

·3 serve the Island’s best economic interests;

·4 help combat financial crime.

In carrying out these roles the Commission seeks to comply with all the relevant international standards set by IOSCO; OGBS; Basel; IAIS; FATF.

International recognition of our standards is also most important. Jersey received a most successful report from the IMF in 2003 following its assessment of the Island’s financial regulation and anti-money laundering activities.

The IMF report however is not the end of the story. The IMF has indicated that it will be regularly reviewing Jersey and other offshore financial centres and sometime in 2006 Jersey can expect to be reassessed for compliance with international standards and in particular the FATF revised Forty Recommendations on Money Laundering and Nine Special Recommendations on Terrorist Financing.

The Commission has always attached particular importance to the way it contributes to the international fight against financial crime. The pursuit of those who are engaged, in money laundering, terrorist financing, corruption and other financial crimes, and the prevention of the use of the Island by those so engaged is reflected in much of what the Commission does. For example, supported by an industry steering group, the Commission is currently preparing legislation and revising its anti-money laundering guidance in response to the FATF’s revised Forty Plus Nine Special Recommendations. In doing so we are also having regard for the European Union Third Money Laundering Directive and the UK Guidance.

The Commission fully appreciates however that it is important to strike a balance between maintaining high regulatory standards, and obtaining international recognition, and maintaining a favourable commercial environment for the Island’s finance industry. In the Commission’s view there need be no conflict between compliance with international standards and long term business success. The two have been and can continue to be complementary.

What is required is effective and balanced regulation.

One way the Commission is responding to the needs of the market place is through the pursuit of what is known as the risk based approach. Thus while there is a need to take fully on board the “know your customer” principles embodied in the FATF Recommendations, and also in the Basel Committee’s customer due diligence paper, there are and should be opportunities to vary the application of those principles according to the riskiness of the business. Where there is lower risk it ought to be possible for the burden of regulation to be lightened without in any way putting at risk the reputation of the Island when being independently assessed for compliance with international standards.

There are other ways that the Commission can and does help support a favourable business climate and respond to business development needs, while seeking to remain in the mainstream in the application of international standards.

The Commission is engaged in helping to open up markets by conveying to overseas regulatory authorities the standards being applied, both directly through the negotiation of memoranda of understanding and indirectly through active participation in a number of international fora. The Commission has focussed in particular on those jurisdictions that have had an unfavourable view of the Island, a view that has often been reflected in black lists or other discriminatory action.

The Commission also has joined in responding actively when European Directives or Regulations could disadvantage the Island; for example much effort has been devoted to ensuring that Jersey’s use of the United Kingdom’s payment system is not prejudiced by the introduction of an EU Regulation to implement the FATF’s Special Recommendation VII on Wire Transfers. We have also put in place the regulation of general insurance brokers to ensure the Jersey based brokers continue to have access to the insurance markets in the European Union.

The Commission believes the balance between the standards to be applied and the need to respond to business development needs is more likely to be secured if there is good communication and consultation with the finance industry. One way the Commission seeks to do this is by setting up working groups comprised of representatives of the industry – a good example of this is the Anti-Money Laundering Steering Group to which I have already referred. The Commission believes that while maintaining its independence of action as a regulator it can and should work closely with those in the finance industry, Jersey Finance Limited and also with the Government, all of whom are actively engaged in supporting the Island’s continued success as an international finance centre on which the Island’s economic well being will continue to depend.

The Commission works closely with industry and government in the drafting of legislation. In some cases the Commission takes the initiative because of the need to extend or amend the existing regulatory and legislative framework in order to comply with international standards or to ensure access to specific markets. On other occasions the finance industry and/or government will identify the need for legislation to help promote new business opportunities. In these cases the Commission will be consulted on whether there are regulatory issues arising and, if so, how they can be best accommodated.

Working closely with the industry the Commission has produced an expert funds guide which is proving extremely attractive to the funds industry. We are continuing in our efforts to provide a regulatory environment that is supportive of the development of the funds industry. This will include a shift for non-retail funds to a more functionary based regulatory approach, with less scrutiny on individual funds. We are also working closely with the industry and government on matters such as protected cell companies and revisions of the Trust Law.

The Commission is seeking to reduce the administrative burden on industry. We recognise that regulation has a cost. Among other things, the Commission is considering placing greater reliance on company service providers to make information on the beneficial ownership of companies available to the Commission only when it is needed, rather than requiring this information to be held by the Commission as at present.

In seeking to establish an effective and balanced regulatory regime which embraces international standards we are also conscious of the need to maintain our competitiveness as an international finance centre. We therefore keep a keen eye
on the activities of other competing centres. It is important that there should be
a level playing field.

As Chairman of the Offshore Banking Supervisors I have the opportunity to attend the Plenary meetings of the FATF, and contribute to discussions on how to ensure that there is consistency of interpretation of the FATF recommendations. Through the Offshore Group I also have close working relationships with the Basel Committee, the IMF, the Financial Stability Forum and Interpol. The result of all these international contacts is not only that Jersey has become better known and recognised for the quality of its financial regulation and its AML/CFT standards. It also gives us an opportunity to press for a consistent approach to compliance.

Traditionally the attitude of the G7 countries has been that offshore financial centres need to be threatened and cajoled into complying with international standards. The position now is that we are often pointing out to the G7 countries where we consider their standards to be wanting. This is particularly so in respect of the regulation of trust and company service providers where the offshore financial centres have taken a lead which the G7 countries are now being required to follow as a result of the extension of the FATF Forty Recommendations to such providers.

In seeking to ensure that there is a level playing field particular problems can arise from the adoption of the risk based approach. The FATF Working Group on Evaluations and Implementation of the Forty Recommendations on which I sit will be focussing on this and other aspects of consistency. We recognise that the way customer due diligence measures are applied to both low and high risk customers can be an important aspect of the competitive business environment.

The level playing field issue applies particularly in the area of international cooperation. International cooperation calls for transparency, and transparency and confidentiality are sometimes seen at odds with each other. International cooperation and transparency is a key requirement in the fight against financial crime, and we in the Commission are playing our part in this fight. Those who are not engaged in financial crime however should have no reason to fear that the confidentiality offered to those who use Jersey, that is founded in common with the position in the United Kingdom on a strong historic tradition of common law protection of privacy, will not be preserved.

When the subjects of transparency and confidentiality are raised it is frequently in the context of taxation rather than financial regulation. Taxation is not a matter that falls within the purview of the Financial Services Commission but in my role as Adviser to the Policy and Resources Committee of the States of Jersey on International Affairs I am engaged, together with my colleague John Harris, in advising on Jersey’s response to the EU and OECD tax initiatives.

Because of the need to maintain a level playing field Jersey decided to follow Luxembourg and Switzerland in adopting the EU withholding tax option – or as we know it in Jersey the retention tax option - for the taxation of savings income. This EU tax initiative has not been without its benefits. We had to satisfy the European Member States that our collective investment undertakings legislation and our anti-money laundering legislation were equivalent to the legislation in the European Union. Having done so, the Member States cannot now put up market access barriers on the grounds that our financial regulation and anti-money laundering standards are below theirs.

The lack of a level playing field has also meant that, while Jersey is committed to exchange of information within the framework of the OECD’s harmful tax practices initiative, we have made it clear in common with many other jurisdictions that the implementation of this commitment is much affected by the fact that two competitor OECD member jurisdictions have yet to adopt the same principles. Also that competing jurisdictions outside the membership of the OECD have yet to be embraced by the OECD’s programme.

Therefore what we would say is that we are for international cooperation, and we are committed to the principle of information exchange particularly in pursuit of those engaged in financial crime. But we are also determined that this should not be at the expense of a significant economic cost to the Island because we are being expected to do what our main competitors are not doing or not being expected to do.

Let me conclude by saying that the Commission is committed to the continued success of Jersey as an international finance centre. We believe that we can play a part in helping to ensure that people use Jersey because it is well regulated; because it is internationally recognised as such; but also that as far as possible regulation is business friendly and that the quality of service is high. We believe good regulation is good for business and good for the Island. An international reputation for compliance with international standards, and a known commitment to join in the global fight against financial crime, combined with investor confidence in the quality of the many financial services on offer and the probity of the financial institutions providing those services, remain essential features for the future success of the Island as an international finance centre. We believe there is also absolutely no reason why good regulation should frustrate the business acumen and response to market requirements upon which the Island’s success as an international finance centre will also continue to depend. We are an independent regulator but we also have a direct interest in a continuing success story.

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