Feedback and further consultation on Investment Business regime

CAO

Financial Services (Investment Business (Client Assets)) (Jersey) Order 2001

CP

Consultation Paper

FCA

Financial Conduct Authority (UK)

FSJL

Financial Services (Jersey) Law 1998

IB

Investment Business

IB Code

Code of Practice for Investment Business

IOSCO

International Organisation of Securities Commissions

JFSC

Jersey Financial Services Commission

MiFID II

Markets in Financial Instruments Directive (MIFID - 2014/65/EU) and the Markets in Financial Instruments Regulation (MiFIR - 600/2014/EU)

registered person

a person who is registered by the JFSC under Article 9 of the FSJL to carry on Investment Business as defined in Article 2 (2) of the FSJL

Include Hold

Extend the provision of advice to include ‘hold’ as well as ‘buy’ and ‘sell’.

Proposal will not be applied; legislation to remain unchanged. The current law captures the activity already.

Derivative Definitions

Further Consultation Question 1

Update the definition of investments to include all financial derivatives.

The JFSC has worked with the Law Drafter’s Office to address the concerns raised.  The new legislation proposal is included in this paper for consultation.

We have created a clearer and tighter definition by:

• aligning the definitions more closely to FCA/MiFID
•  modifying the definition of contracts for differences for consistency

Update the definition of ‘Futures’, when for commercial purposes.

Update the definition of ‘Contracts for differences, etc’ to align with the ‘Financial derivatives’ and ‘Contracts for differences, etc’ changes.

Arranging

Further Consultation Question 2

Include the activity of arranging as an IB activity.

The JFSC has worked with the Law Drafter’s Office to address the concerns raised.  The new legislation proposal is included in this paper for consultation.

We have addressed the concerns on scope by aligning the existing exemptions for dealing with arranging.

Ban Products

Powers to ban the sale of certain products to retail clients.

The JFSC will work with the Law Drafter’s Office for an appropriate legislative proposal to achieve this.

Exchange Business

Prepare to include the oversight of exchange business in the FSJL.

Legislation has now been drafted and consulted upon; the JFSC is now ready to apply the changes when required.

Advice on Pension Transfers

Include the oversight of advice on transfers from defined contribution schemes in the FSJL.

The proposed legislation will not be implemented by the JFSC.  It will be incorporated within the Government phase 1 pension project.

CAO Changes

3rd Party Due Diligence & Disclosure

Further Consultation Question 3

Enhance client asset protection related to 3rd party due diligence and transparency on disclosure of protection in overseas regimes, in line with IOSCO recommendations.

The JFSC has worked with the Law Drafter’s Office to address the concerns raised.  The new legislation proposal is included in this paper for consultation.

We have addressed the concerns on scope by proposing an amendment to “Approved Custodians”.

Requirement

The class of IB which relates to the provision of advice be extended so that a registered person must also give advice on the merits of “holding” an investment in addition to providing advice on the purchase or sale of such an investment.

Support Distribution

Response Summarised

• Agreement that advising on holding an investment is equivalent to advising on buying and selling an investment
• Confusion and concern over proposed wording
• This is already regulated and therefore an unnecessary change

JFSC Response

The JFSC has considered the feedback and agrees that the change is not necessary as advising on the merits of “holding” an investment is already a regulated activity – holding a security derives from decisions as to whether or not to buy/subscribe, and, having bought/subscribed, whether or not to sell”.

Outcome

Proposal will not be applied; legislation to remain unchanged.

Requirement

Amendment to the definition of Investments in Schedule 1 so that it includes all financial derivatives.

Futures may be considered not to be investments if they are for commercial purposes even when they have a settlement period greater than 7 days.

Support Distribution

‘Financial Derivatives’

‘Futures’

Response Summarised

• The rationale for an enhanced definition was generally welcomed; clarity requested on scope
• Similarly the Futures enhancement was generally welcomed for its improved clarity and consistency
  • Observation that the FCA has since adjusted their position
  • Concern raised over ‘commercial purposes’ definition

JFSC Response

The questions on scope demonstrated that the new proposal would inadvertently bring too much into scope.

We have worked with the Law Drafter’s Office and are proposing clearer and tighter definitions by:

• aligning the definitions more closely to FCA/MiFID
• modifying the definition of ‘Contracts for differences, etc’ for consistency
• further clarifying the definition of ‘commercial purposes’

For the avoidance of doubt the JFSC considers structured products to already be caught within the framework by virtue of the current definitions of ‘Debentures’ and ‘Contracts for differences, etc.’, and will continue to be caught in the proposed framework.

Proposed Legislation Summary

Unchanged text: black

New text: green

Deleted text: red strikethrough

7        Futures

Rights under a contract for the sale of a commodity, or property of any other description which is entered into for investment, not commercial purposes, and under which delivery is to be made at a future date and at a price agreed upon when the contract is made.

Notes:

(1) A contract shall be regarded as made for investment purposes if it is made or traded on an investment exchange, or made otherwise but expressed to be as traded on such an exchange or on the same terms as those on which an equivalent contract would be made on such an exchange.

(2) A contract not falling within Note (1) shall be regarded as made for commercial purposes if –

(a) under the terms of the contract delivery is to be made within 7 days unless it can be shown that there existed an understanding that (notwithstanding the terms of the contract) delivery would not be made within 7 days;

(b) it is a commodities future and the parties intend that the profit is to be obtained or the loss avoided by taking delivery of any property to which the contract relates; or

(c) it is a foreign exchange future, and –

(i) the parties intend that the profit is to be obtained or the loss avoided by taking delivery of the currencies, and

(ii) the purpose of the trade is to facilitate a means of payment for identifiable goods and services.”.

8        Contracts for differences, etc.

Rights under a contract for differences, or under any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price of property of any description or in an index or other factor designated for that purpose in the contract..

Notes:

(1) This paragraph shall not apply to a contract where the parties intend that the profit is to be obtained or the loss avoided by taking delivery of any property to which the contract relates.

(2 1) This paragraph shall not apply to rights under any contract under which money is received by the Director of Savings as deposits or otherwise in connection with the business of the National Savings Bank or in respect of money raised under the National Loans Act 1968 of the United Kingdom under the auspices of the Director of Savings or under which money raised is treated as having been so raised by virtue of section 11(3) of the National Debt Act 1972 of the United Kingdom.

8A Financial derivatives

Rights under any contract, except an option, future or contract for differences, the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price of property of any description or in an index or other factor designated for that purpose in the contract.

Notes:

(1) This paragraph includes any contract made or traded on an investment exchange, or made otherwise but expressed to be as traded on such an exchange or on the same terms as those on which an equivalent contract would be made on such an exchange.

(2) This paragraph does not apply to a contract not falling within Note 1 where the parties intend that the profit is to be obtained or the loss avoided by taking delivery of any property to which the contract relates.

(3) This paragraph does not apply to rights under any contract under which money is received by the Director of Savings as deposits or otherwise in connection with the business of the National Savings Bank or in respect of money raised under the National Loans Act 1968 of the United Kingdom under the auspices of the Director of Savings or under which money raised is treated as having been so raised by virtue of section 11(3) of the National Debt Act 1972 of the United Kingdom.”.

JFSC Comments

Schedule 6 is accordingly updated to reflect changes to Schedule 1.

Full details are available in the appendix.

Next Steps

Question 1

Do you have any observations on, or concerns about, the amended proposed legislation to enhance the derivative definitions?

If you do, please state in detail what your observation or concern is and the reason for it.

Requirement

The activity of “arranging” to be added as a new class of IB.

Support Distribution

Response Summarised

• The rationale for the inclusion of arranging was generally welcomed
• Guidance was requested regarding scope, conduct expectations, and licensing
• Where concern was raised it was predominately related to the scope.  In addition concern was raised about equivalent jurisdictions, and it was commented that Jersey’s retail market is comparatively small compared to the UK.

JFSC Response

The JFSC acknowledges the comments, and as indicated in the consultation, further guidance and clarification is required and will be provided in advance of bringing arranging into force.

Some of the high-level scope concerns can be addressed here in advance of further more detailed guidance:

• the intention is to capture investment activity that otherwise would not have taken place without the arranger
• we do not intend to capture introducing

We do not intend to create a new class of licence.

We acknowledge that the Jersey retail investment business sector is comparatively smaller than the UK but do not consider the market size to be material when considering if arranging should be adopted within investment business.

A review of comparable jurisdictions has been undertaken and arranging is incorporated within these regimes.

The questions on scope demonstrated that the exemptions for dealing needed to include the activity of arranging; we have worked with the Law Drafter’s Office and are proposing an amendment to achieve this.

Proposed Legislation Summary

Unchanged text: black

New text: green

2        “Financial service business” defined

(2) A person carries on investment business if the person –

(a) deals in investments, that is, the person –

(i) buys, sells, subscribes for or underwrites investments, either as principal or as agent, or

(ii) makes arrangements with a view to another person acquiring, disposing of, subscribing for or underwriting investments;

JFSC Comments

Full details including consequential amendments and transitional arrangements are available in the appendix.

The effective date of the change is the date the regulation comes into force; a 6 month relief (plus additional provision for application purposes) is available only if a person was engaged in the activity at any time in the 6 months prior to the effective date.

Next Steps

Question 2

Do you have any observations on, or concerns about, the amended proposed legislation to introduce the activity of arranging within the activity of dealing?

If you do, please state in detail what your observation or concern is and the reason for it.

Requirement

Legislation for powers to ban the sale of certain products to retail clients.

Support Distribution

(Ban Provision)

Response Summarised

• The rationale for the power to ban certain products for retail investors was generally welcomed
• There were concerns raised about the application of banning certain products for example:
  • Prior consultation excepting for instances of most blatant risk to retail clients
  • Products available on certain exchanges should be exempt

JFSC Response

The JFSC welcomes the feedback on the powers to ban certain products for retail investors, and agrees that the scope of products to which this can be applied needs to be carefully considered, and that where possible prior consultation should occur.

JFSC Comments & Next Steps

The JFSC will work with the Law Drafter’s Office for an appropriate legislative proposal to achieve this.

Requirement

Legislation for a supervisory regime and powers to write codes of practice regarding exchange business.

Support Distribution

Response Summarised

• The rationale for a supervisory regime and powers to write codes of practice regarding exchange business was generally welcomed
• Where responses raised concerns or questions they were all related to areas of scope and application

JFSC Response

• The JFSC acknowledges the comments and confirms that areas of scope and application would be consulted upon when code of practice requirements are written
• Upon activating the law to regulate exchange business activity the investments caught would be those in Schedule 1
• The JFSC would amend the legislation, if required, to ensure that virtual assets were captured

Outcome

The legislation is made; a further Ministerial Order is required to bring this into force after the JFSC has recommended it is necessary to do so. In this eventuality we would undertake prior consultation on code of practice amendments.

JFSC Comments

Full details including transitional arrangements are available in the appendix.

The effective date of the change is the date the regulation comes into force; a 6 month relief (plus additional provision for application purposes) is available only if a person was engaged in the activity at any time in the 6 months prior to the effective date.

Next Steps

(when required)

Requirement

The activity of advice on transfers from pension schemes to be expanded to include defined contribution schemes (in the same manner as for defined benefit schemes).

Support Distribution

Response Summarised

• The inclusion of advice on transfers from defined contribution schemes was broadly welcomed
• One response suggested that scope should be more far reaching than just the provision of advice

JFSC Response

In light of the consultation process, the JFSC has liaised with Government to clarify its plans with regards to changes to the regulation of pensions in Jersey. The Government intends to legislate with regard to all Investment Business activity under the FSJ Law involving pension products, not just investment advice. Given the substantial plans Government are developing for change in this area, the JFSC has drawn the conclusion that any initiative by the JFSC at this time would only apply for a short period and would require industry to adapt twice to two regulatory initiatives in quick succession. This would be disproportionate and disorderly. For that reason, notwithstanding the desirability of regulating the provision of investment advice with regard to DC pensions, the JFSC has decided not to take an initiative in that regard at this time. In the event that Government were to notify us that they were unable to progress their wider plans or it was to be unduly delayed, for whatever reason, we would then revisit the question of regulating pension advice using the feedback from this consultation now complete to proceed to put a regime as set out in our original consultation in place.

Outcome

This proposal will not be implemented by the JFSC.  It will be incorporated within the Government phase 1 pension project.

Requirements

›   apply appropriate due diligence on a selection of third parties on behalf of registered person; and

›   ensure that there is clarity and transparency in the disclosure of the relevant client asset protection regime(s) and arrangements and the consequent risks involved.

Support Distribution

Response Summarised

• There was support with some concern related to enhancing the CAO
• The questions and concerns raised in the feedback were all in some way concerning the scope of the changes
• Generally the proposal to better align with the IOSCO principles was supported
• Concern was raised that the proposal had not fully mitigated the concerns raised by IOSCO

JFSC Response

• The JFSC acknowledges the general support
• Regarding the scope questions, the changes proposed are  related to conduct requirements and do not change the scope of the CAO
• The JFSC agrees that the amendments should be expanded and have worked with the Law Drafter’s Office and are proposing an amendment to “Approved Custodians” to achieve this

Proposed Legislation Summary

Unchanged text: black

New text: green

Deleted text: red strikethrough

Article 1 (interpretation) amended

“documents of title” includes certificates evidencing title;

“foreign jurisdiction” means any jurisdiction outside Jersey;

“intermediary” means ….

Article 18 (safekeeping of documents held by an approved custodian who is not the registered person's own nominee) amended

After Article 18(1)(b) there is inserted –

(c) if the custodian is in a foreign jurisdiction, the registered person or custodian has disclosed to the client –

(i) that the client’s protected property will be subject to the client protected property asset protection regime or the insolvency regime, as the case may be, of the foreign jurisdiction;

(ii) the risks to the client arising from the client’s protected property being held in the foreign jurisdiction;

(iii) the differences (if any) between the client protected property asset protection regime or the insolvency regime in Jersey and that of the foreign jurisdiction, and

(iv) the potential consequences of those differences.

22      Third parties

(1) A registered person must not lend client’s title documents protected property to a third party unless the client has given his or her written consent.

(1A) A registered person must exercise all due skill, care and diligence when selecting, appointing or reviewing a third party to whom clients’ protected property is lent.

(1B) A registered person must not lend a client’s protected property to a third party in a foreign jurisdiction, unless the registered person or third party has disclosed to the client –

(a) that the client’s protected property will be subject to the client protected property asset protection regime or the insolvency regime, as the case may be, of the foreign jurisdiction;

(b) the risks to the client arising from the client’s protected property being lent to a third party in the foreign jurisdiction;

(c) the differences (if any) between the client protected property asset protection regime or the insolvency regime in Jersey and that of the foreign jurisdiction, and

(d) the potential consequences of those differences.

JFSC Comments

Full details are available in the appendix.

Next Steps

Question 3

Do you have any observations on, or concerns about, the amended proposed legislation to update the CAO?

If you do, please state in detail what your observation or concern is and the reason for it.

Question 1

Do you have any observations on, or concerns about, the amended proposed legislation to enhance the derivative definitions?

If you do, please state in detail what your observation or concern is and the reason for it.

Question 2

Do you have any observations on, or concerns about, the amended proposed legislation to introduce the activity of arranging within the activity of dealing?

If you do, please state in detail what your observation or concern is and the reason for it.

Question 3

Do you have any observations on, or concerns about, the amended proposed legislation to update the CAO?

If you do, please state in detail what your observation or concern is and the reason for it.

Appendix A

Financial Services (Amendment of Law) (No. 6) (Jersey) Regulations 202-

Appendix B

Financial Services (Amendment of Schedules to Law) (No. 2) (Jersey) Order 202-

Appendix C

Financial Services (Investment Business (Client Assets)) (Amendment No. 2) (Jersey) Order 202-

Appendix D

List of respondents

The Royal Bank of Scotland International

TISE

The Association of Investment Companies (AIC)

Afex Offshore Limited

Barclays Bank PLC, Jersey branch

SG Kleinwort Hambros Bank (CI) Limited

Simon Howard Consulting

Standard Chartered Bank, Jersey Branch

Digital Assets Working Group

APW Investors Limited

LGT Vestra (Jersey) Limited

Jersey Funds Association

Rossborough Financial Services Ltd

JFL: Bank

JFL: Investment Business

3 Anonymous responses