Changes to the international regulatory landscape - a Jersey perspective
Robin Smith
Carey Olsen
St Helier
Robin Smith (Bio)
Although offshore finance centres as a class were subject to criticism during the recent financial crisis, there is a clear sentiment that the Jersey Financial Services Commission (JFSC), the regulator of financial services and banking business in Jersey) has been operated in a manner that has protected the island from specific criticism in relation to financial regulation. In fact, Jersey has been recognised by the Financial Action Task Force (FATF) and the IMF as having some of the most robust compliance and regulatory processes in the world. However, financial regulation is rapidly evolving and all finance centres will face challenges in the near future in meeting new standards.
Tax Information Exchange Agreements
As with other international financial centres, a cooperative stance in the international marketplace is essential in order to maintain Jersey's position in the global financial markets. The G20 communiqué issued at the Summit of April 2 2009 set out the organisation's intention to take action against non-cooperative jurisdictions as part of a package of measures designed to strengthen global supervision and regulation. Around the same time the Organisation for Economic Corporation and Development (OECD) published a progress report in relation to the jurisdictions surveyed implementing the Internationally Agreed Tax Standard and categorised financial centres as black, grey or white. While that report immediately categorised Jersey as a 'white list' jurisdiction, Jersey has built on this recognition still further by continuing to broaden its TIEA (Tax Information Exchange Agreement) network over the past 18 months, as evidenced by the signing of its 21st agreement in April 2011. In practice, and despite the importance attached to information exchange agreements by the OECD and national governments, information requests under TIEAs are relatively rare. However, their political value to a jurisdiction such as Jersey cannot be overstated.
IOSCO - Mitigating Systemic Risk
Earlier this year the International Organisation of Securities Commission (IOSCO) (of which Jersey is a member), published its paper Mitigating Systemic Risk - A Role for Securities Regulators. IOSCO identifies reducing systemic risk as one of the three objectives of securities regulation. IOSCO has some 38 principles of securities regulation, which are based upon these three objectives ((i) protecting investors, (ii) ensuring that markets are fair, efficient and transparent and (iii) reducing systemic risk). Their discussion paper builds on these principles and begins developing a methodology for the identification, analysis, monitoring and mitigation of systemic risk as well as the promotion of financial system stability. Regulators and governments will need to spend time adapting and improving existing processes and legislation in order to be aligned with these principles at the same time as undertaking the more routine day to day functions associated with securities regulation. Regulators undoubtedly have a busy time ahead! Jersey, being both politically and fiscally stable, should enjoy the advantages of having the necessary resources to devote to this changing landscape. A process is currently underway to update the Codes of Practice that are issued under the four regulatory laws administered by the JFSC.
The importance of International Relationships
The subject of international relations is very important to the Island and Jersey has taken steps in recent years to develop its own distinct international identity standing alongside the UK as a jurisdiction on the international regulatory scene. The Channel Islands are not part of the EU but are part of the Customs Territory of the European Community by virtue of Protocol 3 to the UK's Act of Accession. In September 2010, a Channel Islands Brussels Office (known as CIBO) was set up jointly with Guernsey to develop the influence of the two Bailiwicks with the EU, to advise the islands' governments on European matters and to promote economic links with the EU. This marked an historic commitment by the islands to co-operate on matters of dual interest in order to meet the challenges presented by a changing environment and increasing regulation affecting international finance centres.
Dodd Frank and AIFMD
Of particular interest to Jersey and other offshore jurisdictions recently were the US Dodd Frank Act and, (in Europe), the Alternative Investment Fund Managers Directive (AIFMD), both of which have the potential to affect how funds business is conducted from Jersey. Although the Dodd Frank Act is a complex piece of legislation with wide ranging implications, it did not cause as much controversy in Jersey as the AIFMD which was politically a highly sensitive piece of legislation. Seeking to regulate the alternative investment fund market, AIFMD is an example of direct reaction to the global financial crisis. It went through several iterations before it was passed and, contrary to what was suggested in one draft, the final Directive will allow non-EU managers to market into Europe either under the private placement regime up to 2018 or thereafter provided their home jurisdiction has attained equivalence. Prior to the Directive being approved, there was discernable uncertainty as to the best jurisdiction in which to set up a fund or fund manager where the fund was intended for the European market. Now that the uncertainty has been removed (and, in fact, it has been shown that there are likely to be certain advantages in setting up a fund manager in Jersey) we have seen a marked increase in the number of new funds. This is a clear example of the potential of regulation to stifle business activity, although temporarily in this case as the latest statistics show that the funds industry in Jersey is regaining momentum.
Regulation and innovation
Jersey continues to develop its funds framework and this year has introduced two new forms of limited partnership: separate limited partnerships and incorporated limited partnerships both of which have a separate legal personality and which we anticipate will be put to good use by new fund structures being established in Jersey.
Jersey will not be immune to other global developments and we will see further effects from Basel III and the Foreign Account Tax Compliance provisions of the US Hiring to Restore Employment Act. Financial institutions will be required to meet the costs associated with complying with new standards of regulation and in some cases these are likely to be substantial.
Within its multi-faceted international relations strategy Jersey has promoted a number of initiatives to encourage business with the world's fastest growing economies (including the BRIC countries) in the expectation that significant business will come into the island in the future from these countries. It will be particularly interesting to see the interplay of these rapidly expanding economies with the level of regulatory oversight that exists in more developed international financial centres.
During the coming months and years, Jersey must continue to evolve and innovate to meet the demands of regulation and compliance in the increasingly complex international marketplace while maintaining its entrepreneurial spirit. This will be vital to ensure that any increased regulation is appropriately managed to allow the promotion of prudent business growth without being a stifling bureaucratic overlay. Above all, it is important that the jurisdiction continues to demonstrate on the world stage that it can, and does, comply with the highest international regulatory standards.