Offshore

WealthBriefing Talks to the Director General of Guernsey Financial Services Commission

Contributing Editor, 20 May 2005

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Peter Neville, the Director General of Guernsey Financial Services Commission is one of the major policy makers in the Channel Islands and h...

Peter Neville, the Director General of Guernsey Financial Services Commission is one of the major policy makers in the Channel Islands and has a unique insight on some of the financial issues offshore centres face. WealthBriefing managed to catch up with him and asked him a number of questions around the regulatory/offshore debate.

1.The Channel Islands have done a lot to comply with international financial regulatory pressures. Do you think this is not properly appreciated by the major financial centres (eg, the UK Treasury, City of London, etc)?

In a report issued at the end of 2003 the IMF commended Guernsey’s financial regulation and law enforcement standards.

Guernsey was assessed by the IMF to have a high level of compliance for each of the international standards against which the Bailiwick was judged – the Basel Core Principles for Effective Banking Supervision; the Insurance Core Principles of the International Association of Insurance Supervisors (IAIS); the Objectives and Principles of Securities Regulation of the International Organization of Securities Commissions (IOSCO); and the Financial Action Task Force (FATF) 40+8 Recommendations. Guernsey’s legal framework for company and trust service providers was also found by the IMF to be fully consistent with the Offshore Group of Banking Supervisors (OGBS) Statement of Best Practice for Company and Trust Service Providers.

The IMF report also commended:

•the level of international cooperation displayed by the Bailiwick;

•Guernsey’s well established and well respected Financial Services Commission and its experienced staff;

•the fact that Guernsey was one of the first jurisdictions to apply a comprehensive regulatory regime for trust and company service providers; and

•the developed framework for anti-money laundering and combating the financing of terrorism and the strong rapport between the Commission and licensed institutions on these issues.

The views expressed by the IMF are well understood by the majority of major jurisdictions. For example, in 2004 the Lord Mayor of London (Robert Finch) said “Guernsey has come out of recent reports very well and [is] one of the best regulated [finance centres] in the world…. It has succeeded because it has a well-regulated system.”

The UK Treasury, the US Department of Justice, the US Federal Reserve, the US Securities and Exchange Commission, OSFI - the Canadian regulator of banks and insurers - and regulators in other important jurisdictions where we have Memoranda of Understanding, for example Italy’s CONSOB and the French AMF, certainly understand that Guernsey meets international standards and co-operates well to fight financial crime. Similarly, all the international regulatory standard setters (the Basel Committee, IOSCO, the IAIS, the FATF and the OGBS) are well aware of Guernsey’s good standards because we play an active part in setting international standards as members of various committees within those organisations. For example, I am on the Executive Committee of the IAIS and we were closely involved with the drafting of the IAIS guidance notes on anti-money laundering for insurance supervisors around the world.

In addition, we have close relations with EU regulatory institutions such as the Committee of European Securities Regulators. I am also attending a high level meeting with representatives from various parts of the European Commission in June.

As far as other, less well informed, jurisdictions and commentators are concerned, we will continue to demonstrate that Guernsey is well regulated and co-operates well to counter the abuse of the international financial system.

2.Are you completely up to speed with the EU Savings Directive? What is your view of the Directive?

We keep ourselves informed on all regulatory developments elsewhere, both in the EU and in other major international financial centres. However, the EU Savings Directive is concerned with taxation, not the regulation or supervision of financial services. We therefore have no comment on it other than to direct you to Peter Niven, the States Commerce and Employment Department Director of Finance Sector Development, who co-ordinates the government responses on this issue.

3.What are the challenges to an offshore centre like Guernsey on the regulatory front? Some commentators might feel that offshore centres in Europe have had their day, what are your views on this?

These are two very separate questions.

On the regulatory front, we will continue to ensure that Guernsey meets but does not get ahead of international standards on financial supervision and fighting money laundering and the funding of terrorism. The main challenges are no different in Guernsey than any other jurisdiction. We need to ensure that we continue to commit sufficient resources to engage seriously with the international regulatory community and meet international standards in a pragmatic way that allows industry to continue to carry out good business.

On the commercial front, this is a really a question for GuernseyFinance, but the empirical evidence available to us is that business is doing very well. For example in the funds area during 2004 the total number of funds administered in Guernsey increased from 662 to 703 and their value increased by over 30 per cent to £73.6 billion. In the first three months of 2005 the number of funds administered increased to 721, with a value of £75.6 billion. Guernsey’s ability to meet international standards without having to adopt the more rigid and bureaucratic aspects of regulation and supervision which are found in some other centres will continue to stand financial services business in Guernsey in good stead. As long as Guernsey firms can continue to deliver value for money to their clients they will do well.

4.What regulatory framework are you putting in place to ensure that the local financial services sector flourishes?

The foundation stones for the regulatory framework are established by the international regulatory standard setters. The framework we have established in Guernsey will continue to be updated to ensure that it meets international standards in a way that is pragmatic and that allows good business to develop and flourish. We achieve this by working very closely with local industry so that only necessary regulation is introduced and so that our regulation is effective and understood.

The Commission’s pragmatic approach to regulation can be seen from several initiatives we have carried out in consultation with the Guernsey fund sector and the sector’s professional advisers.

We recognised the particular nature of hedge funds and the changing investment market place and in 2004 the regulatory environment for open-ended hedge funds was revised. We provide additional flexibility in relation to custody arrangements, valuations and the segregation of assets. It is clear that the initiative has attracted new funds and new sponsors to use the Bailiwick’s services.

Consultation was also held with the Guernsey Investment Fund Association and other interested parties on a more streamlined authorisation regime for funds limited to Qualifying Investors – i.e. professional investors, expert investors and knowledgeable employees of investment businesses. The Commission provides a guaranteed timetable for delivery of the regulatory authorisation or consent, to provide additional certainty for promoters and sponsors. In return Guernsey licensees have to warrant to the Commission that they have satisfied themselves as to the fitness and properness of applicants, that the scheme is economically viable, and that they have appropriate procedures in place to ensure that it is only available to Qualifying Investors. The formal arrangements came into force early in 2005 and the relevant guidance to sponsors is available from the Commission’s website.

In addition, a committee has been established under the chairmanship of a leading commercial lawyer – Advocate Peter Harwood – to report jointly to the Commission and to the States Commerce and Employment Department on the investment business sector in Guernsey. Part of that committee’s remit is to review Guernsey’s Protection of Investors legislation and to recommend changes. It is expected that the committee will examine the scope for further development of the Qualifying Investor Funds regime and the exemption of interprofessional business from the scope of the Protection of Investors Law.

5.What is the GFSC’s view on hedge funds and is Guernsey trying to attract specialist funds like hedge funds in a similar fashion to Jersey?

A recent AFSR/CorrectNet Hedge Fund Administrator survey clearly shows that Guernsey is a leading hedge fund domicile. At the end of March 2005 there were 71 open-ended hedge funds and funds of hedge funds (consisting of 402 separate investment pools/classes) in Guernsey, with a net asset value of £19.76 billion. In all, there are 223 open-ended funds (986 pools) with a net asset value of £36.26 billion. The Commission welcomes good and well-run hedge funds.

We view hedge funds as a significant asset class within the investment fund sector and the Commission recognizes that there is a large amount of interest from investors in such funds. There are already a large number of hedge funds and funds of hedge funds either established in Guernsey or administered or managed from this jurisdiction and the Commission is aware of the specific issues relating to these funds. The regulatory initiatives referred to above are evidence of the Commission’s proactive and pragmatic approach to regulation.

The Commission does not ignore other types of investment funds. For example, over the past two years there have been a large number of property funds and private equity funds established on the island. The Commission ensures that the regulatory environment for all types of investment funds, not just hedge funds, is conducive to attracting business.

6.Guernsey and Jersey appear to be marketing themselves much more these days as a place to do financial business. Some might feel there is greater competition between the two, and even with the Isle of Man. Do you have any thoughts on this?

This is a question for GuernseyFinance to answer in detail, not for the Commission, but it is apparent that competition globally is increasing. From a regulatory perspective we work hard with other Commissions to ensure that there is no possibility for regulatory arbitrage.

7.What are the particularly regulatory features which you as a regulator believe Guernsey has to consider?

Guernsey is a well regarded international financial services centre. Much of the business carried out in Guernsey is only one part of a transaction or arrangement involving other financial centres. As a regulator we therefore have to ensure – and demonstrate – that firms here meet the standards the international community expect. We do this in a way that is sensible and pragmatic. At the same time, we cooperate fully with other regulators and criminal authorities around the world to prevent Guernsey being used to abuse the international financial system.

For investment business we are focusing more on the level of regulation that is appropriate for the services/products being provided (taking into account the type of investor involved), rather than continuing to apply a “one size fits all” regime. As referred to above, recent initiatives have focused on the Commission’s flexible approach to regulation and it is anticipated that the committee, under Advocate Harwood’s chairmanship, will consider further enhancements. It is important that the Commission works with the sector, and listens to their concerns when considering any regulatory changes.

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