THE COMMISSION

STEP JERSEY - 10TH ANNUAL CONFERENCE

By Colin Powell, OBE
Chairman, Jersey Financial Services Commission

Public Speech - 21st November, 2003

As Chairman of the Financial Services Commission I am delighted to have been given this opportunity to say a few words at the outset of your Tenth Annual Conference. You have an impressive array of speakers covering UK, US and Swiss situations at a technical level with whom I cannot hope to compete. In these short opening remarks therefore I propose to refer to certain matters bearing on the current business environment which hopefully will be both of some interest and of some relevance for the programme for the day.

I am particularly pleased to be able to participate in your conference, if only in a relatively small way, because the relationship between the Financial Services Commission and the finance industry, in which STEP members play a key role, is a most important one. It is also something that needs constant nurturing through a continuing process of full and effective consultation. Trust and company service providers who have most recently been brought within the regulatory framework have had a particularly close relationship with the Commission over the last two years - perhaps somewhat closer than some might have liked - but it is important that this relationship is maintained. The successful development of Jersey as an international finance centre since its 'birth' in 1961 has owed much to the ability of the regulator and the regulated to work together and future success will depend on that relationship being fostered.

There is inevitably an element of tension between the regulator and the regulated. It is impossible for a regulator to be loved all the time. What is important is that there should be every opportunity for the regulated and the regulator to communicate with each other so that there is mutual understanding. In this context I should like to take this opportunity of saying how grateful we at the Commission are for all the support we get from STEP members through their participation in working groups and generally in the advice offered. As Chairman of the Commission I am determined that this spirit of partnership should be further fostered and enhanced.

It is sometimes forgotten that the legislation setting up the Financial Services Commission is responsible not only for regulation and supervision but also for the development of the financial services industry. The challenge before us all is how to comply with relevant international standards and at the same time foster a business environment that is conducive to business growth.

There have been a number of developments in the past year, and there are also developments in prospect, that have borne or will bear upon the business sectors in which STEP members are employed. Perhaps I could take this opportunity to refer briefly to some these developments.

1. The IMF Report

As you may be aware the IMF began a series of assessments of jurisdictions in 2000 following a report by the Financial Stability Forum (the body set up by the G7 countries). Each assessment followed a similar approach in examining a jurisdiction's adherence to the anti-money laundering and counter terrorist financing recommendations issued by the Financial Action Task Force, and to the regulatory standards issued by the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions, and the International Association of Insurance Supervisors. Some assessments have also examined compliance with the Offshore Group of Banking Supervisors Statement of Best Practice for Trust and Company Service Providers. Jersey is one of the jurisdictions that has been assessed.

The report on Jersey produced by the International Monetary Fund is due for publication on Tuesday of next week. It is a good news story to add to the good news stories of previous assessments. Jersey's financial regulation and supervision aand its anti-money laundering defences, and compliance with all the relevant international standards, are all commended by the IMF

The IMF assessment was carried out by a team of nine experts working with a methodology that had been agreed between the IMF/World Bank and the FATF. That methodology was based on the old FATF Recommendations. The new Recommendations which were endorsed by FATF members at their Plenary meeting in Berlin in June are in the process of being turned into a new methodology which will be used for future assessments. It seems likely that jurisdictions such as Jersey, Guernsey and the Isle of Man will be faced with a FATF style mutual evaluation using the new methodology in 2005 or 2006, and the IMF are talking about repeating their assessments every five years.

One issue that arose with the IMF assessment was a difference of opinion on whether Guidance Notes backed by regulatory sanction could in appropriate circumstances be considered equivalent to law or regulation. Our view that they could won the day in the rating of compliance with AML standards, and the status of Guidance Notes that are enforceable has been referred to specifically in the interpretative notes attached to the Revised FATF 40 Recommendations.

2. The Financial Action Task Force Revised Forty Recommendations

As I have mentioned the Revised FATF Forty Recommendations will be translated into a new methodology for use in assessing jurisdictions' compliance with the Recommendations. The Revised Forty recommendations and the methodology, together with the Basel Committee on Banking supervision's paper on customer Due diligence, will form the basis of revised AML Guidance Notes on which the Commission together with the Steering Group of industry representatives are currently working.

One of the problems faced with the Recommendations is that they are worded in such a way as to encompass some very different positions on the part of the individual members. There is a danger that in trying to produce a methodology that assessors can use in a consistent way this will re-open some of those differences.

With the Revised Forty Recommendations, for assessors

• there are potential problems of interpretation. For example, the wording of the Recommendations presents evidence if it is needed of the extent to which the majority of FATF members do not have a proper understanding of trusts. Difficulties arise when the FATF attempts to extend to trusts the concept of 'beneficial ownership'. They do so by defining a 'beneficial owner' to also 'incorporate those persons who exercise ultimate effective control over a legal person or arrangement'.
  
  
• it is also going to be difficult to be sure of a level playing field because of the incorporation into the Recommendations of a risk based approach. The risk based approach does have advantages, but allowing a different degree of customer identification and verification according to whether the customer is in a lower or higher risk category opens up the issue of how lower and higher risk are to be defined. In the context of the revision of the AML Guidance Notes the Commission is giving thought to what advice might be given on the criteria to use in determining levels of risk. Consideration is also being given to what guidance to give to Trustees on when verification of beneficiaries needs to be undertaken.

In drawing up the Recommendations Members of the Financial Action Task Force were not prepared to treat trust and company service providers as financial institutions, and so they get included in designated non-financial businesses or professions. However, the important point to bear in mind is that the Revised Recommendations apply to trust and company service providers whereas the old Recommendations did not. This should help to produce a more level playing field

There has been some confusion caused for the banking community arising from the fact that the Basel Committee's paper on Customer Due Diligence is capable of being interpreted as saying something different than the FATF Recommendations on such matters as introduced business. However this confusion should shortly be resolved by a communication from the Basel Committee which will seek to reconcile the two documents.

3. Trust and Company Service Providers - Statement of Best Practice

The Offshore Group of Banking Supervisors which I chair produced last year a Statement of Best Practice in respect of trust and company service providers. This was accepted as a guide by the IMF/World Bank for the purpose of their reviews but they were not prepared to give it the same status as the Financial Action Task Force Recommendations on Anti-Money Laundering and the Combating the Financing of Terrorism or the Basel Committee on Banking Supervision's Core Principles. This has meant that some IMF country assessments do not cover this area of business. The Working Group that produced the Statement of Best Practice is now looking at cross-border co-operation between trust and company service providers and those regulating their activities.

4. The EU and OECD Tax Initiatives

The EU tax initiatives and in particular the Directive on the Taxation of Savings Income will no doubt bear upon STEP members, even though trusts are to all intents and purposes not covered. Guidance notes are out for consultation at the present time, and I would emphasise that in drafting those Notes the objective has been to extend to the finance industry as much flexibility as possible in implementing the requirements while at the same time not departing from the basic requirements.

The OECD through its tax initiative is promoting the principles of transparency and information exchange. The OECD has an ad hoc group on accounts which is looking at transparency issues and that body in turn has a sub-group on trusts. The Technical Sub-Group on Trusts met earlier this year and tried its hand at a definition of trusts and also sought to explore the concept of the Nexus of a trust.

We argued successfully that as far as trusts are concerned the focus should not be on the trust per se but on the position of the trustees or any other person who had possession or control over the information that might be sought as part of any tax information exchange agreement.

The OECD Ad Hoc Group on Accounts started down a road charted by the OECD Secretariat of suggesting that for trusts the only way in which there could be proper transparency and effective information exchange was for there to be a register of trusts, and for financial statements of accounts to be prepared, and filed or audited. However I believe we have been successful in persuading the OECD that through the regulation of trust and company service providers, and the conditions that those providers have to comply with in order to be licensed - which conditions are very much in line with the Statement of Best Practice produced by the Offshore Group to which I have already referred - their objectives can be more than met; and in a way far better than what the Secretariat was proposing.

The experience with the OECD and the other international organisations with an interest in matters of concern to STEP members leads on to the importance both of having a level playing field, and of it being recognised that what is important is what is achieved not the process by which it is achieved. Accordingly it is not for the G7 countries to lay down the rule that the only proper way of proceeding is for other jurisdictions to match the approach adopted by the G7 countries themselves. There has to be recognition of the fact that each jurisdiction can have different ways of implementing the principles of transparency and information exchange.

The OECD is currently wrestling with the issues surrounding the concept of a level playing field. At a meeting in Ottawa last month it was agreed that a Working Group should be set up to address these issues.

5. Review of the Trust Law

The Commission recognises the importance of keeping abreast of market needs if the Island is to remain competitive. It is in this context that the Commission is keen to engage with other interested parties in a review of the existing Trust Law. There will be a need to look to STEP members among others for ideas on how the present Trust Law might be improved to facilitate future business development.

6. Compliance Visits

Having virtually completed the exercise of introducing the regulation of trust and company service providers we are now moving into the period when those who have been licensed will be experiencing compliance visits. The Commission will be holding a seminar in February which will focus on compliance and seek the views of the finance industry generally on the way in which the compliance function is being exercised by the Commission. That seminar will also focus on business development opportunities and the extent to which those opportunities could be better taken advantage of with the support of the Commission while at the same time not diluting the standards upon which the Island's long term future as an international finance centre will depend.

One of the benefits of all the evaluations of the Island that have taken place from the Edwards Review, to the FATF, and now the IMF is that there is now a much better understanding of the Island's position and of the standards that it is maintaining. As the Island extends its cooperation through memorandum of understanding with individual jurisdictions, and tax information exchange agreements, it is hoped that some if not all of the discriminatory measures that are presently applied to jurisdictions such as Jersey through black listing or other equivalent actions will be removed.

The Commission and the finance industry will continue to face the challenge of combining compliance with international standards, the creation of an environment conducive to business growth and development, and maintaining the Island's competitiveness on a level playing field. There is no reason to suppose that this challenge cannot be met and if it is there is every reason to be optimistic about the Island's future. I hope your speakers today will be talking about windows of business opportunity. Certainly the current easing of the pressures on the Island's labour and housing markets should make it easier than in the past to accommodate business growth. Indeed this would seem to be a very good time to have a business development initiative involving all the parties who have a part to play in the successful delivery of such an initiative. I hope you will end your Tenth Annual Conference in a mood of confidence about the future not only for your individual businesses but also for the Island. What I can say is that the Commission is determined to play its part in helping to generate such a positive vision of the future.

Colin Powell OBE
Chairman - Jersey Financial Services Commission

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