KPMG has told the Channel Islands’ business community that the wave of new and tougher regulations about to hit Guernsey and Jersey will be the biggest challenge to businesses in the coming months.
Chairing KPMG’s seminars, Ashley Paxton (pictured), Head of Advisory for KPMG in the Channel Islands, said businesses needed to take a holistic approach in order to deal with the raft of new global regulations that have extra territorial reach.
Rob Kirkby, Director of Advisory for KPMG in Jersey, reiterated that the UK banking reform will ring-fence retail banking operations from their investment and wholesale operations, require banks to have bigger capital cushions to absorb losses and make it easier for customers to switch bank accounts.
He explained that, even though it is UK banking sector legislation, all Channel Island banks, companies and individuals could be touched in some way by the changes.
“This is all about the UK Government’s reaction to bailing out the banks and avoiding a recurrence,” he said.
“By May 2015 the reform will come into effect and High Street banks will have to amend their business model in order to adhere to the new rules. Customers could notice a different banking experience to what they had before.”
Mr Kirkby said that the recent White Paper specifically referred to the UK Government working with the authorities in the Crown Dependencies to enter into bilateral arrangements that would allow ring-fenced banks to maintain subsidiaries or branches in those jurisdictions. This clears up a concern, from earlier iterations of the reform agenda, which only covered banking operations within the European Economic Area (EEA) and not the Crown Dependencies.
“Even though this appears to be good news for the Channel Islands, and the other Crown Dependencies, it is important to find out what the EEA will want in return,” he said.
“We may end up with different banking models. Ring-fenced banks are likely to have higher costs and non ring-fenced banks are likely to be able to offer higher rates of return. It is all about whether or not the customer wants to pay for perceived extra security.
“From a Channel Islands’ perspective an end to up-streaming would be a positive step for the island; it could attract more banking activity and could result in a greater breadth of skills and employment which would be good for both Guernsey and Jersey.”
Mr Kirkby said that the White Paper fell short of providing the required compass heading for banks to engage in transformation work. However, given that the reform timelines have not changed, and further details are not imminent, banks might want to review their business model based on the information available.
KPMG’s Head of Tax in Guernsey, Tony Mancini, focused on the new and evolving issues arising from the Foreign Account Tax Compliance Act (FATCA).
He said over 40 countries had indicated an interest in Inter-Governmental Agreements (IGAs) with the US as a means of making compliance with FATCA less burdensome for their local finance businesses. The Crown Dependencies are working together on determining whether this is an option they want to pursue.
“The US has indicated it would welcome the islands becoming FATCA partners and we now have to decide whether or not this is a good idea,” said Mr Mancini.
“Currently, the US is negotiating an agreement with the UK, France, Germany, Italy and Spain. This is likely to be the model that the Crown Dependencies will be asked to adopt; until it is published later in the summer no decision can be made on whether or not Guernsey and Jersey will become FATCA partners.
“It also looks increasing unlikely that many finance businesses will be able to escape the reach of FATCA. Many global financial institutions are saying that they will only deal with other participating foreign financial institutions (FFIs). This means that it is all the more important for businesses in the Channel Islands to understand the full ramifications of FATCA and what they need to do to comply,” he said.
Director Neale Jehan of KPMG in the Channel Islands spoke about the Alternative Investment Fund Managers Directive (AIFMD).
Mr Jehan identified the AIFMD as the regulatory initiative with the most impact across businesses. Implementation would begin in July 2012 and would come into full effect by July 2013.
An important part of the directive is imposing limitations on the delegation of AIFM functions to avoid becoming a ‘letter-box entity’.
“It is about retaining management responsibility for key decision-making and only delegating the minority of tasks. Substance will be key to demonstrating the existence of robust operations which the islands need to be well placed to deliver,” said Mr Jehan.
Michael Schulz, Senior Manager of Advisory at KPMG in the Channel Islands, closed the seminar exploring risk management considerations to maximise stakeholder value under the pressure of the regulatory changes.
Mr Schulz used examples from the ‘Weavering judgement’ and recent amendments to the Jersey and Guernsey Financial Services Commission Anti Money Laundering (AML) Handbooks to explore the measures that could, and should, be taken.
“To succeed in the current environment businesses need to think about profitability, their financial statements, efficient execution and maintaining competitive advantage. It is about balance; risk must be a part of the strategy but, within this current climate, it must be managed.
“A holistic approach to overcoming the fast-evolving regulatory demands is crucial,” he said.
Mr Paxton urged the business community to pay heed to the impact of all of the outlined regulatory measures and the steps that should be taken to achieve compliance.
“The introduction of such a vast array of new regulatory initiatives will widely shake up, and add complexity to, the way in which businesses operate and ad hoc measures are simply no longer the solution when it comes to managing governance, risk and compliance,” he said.
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