Written by: Nick Kirby
Posted: 07/02/2013
Cees Schrauwers and Clive
Jones, Chairmen of the
Financial Services Commissions
in Guernsey and Jersey
respectively, talk to Nick Kirby
about the challenges their
organisations face from inside
the islands and around the globe.
Solvency II, Basel II and III, Dodd Frank,
the Alternative Investment Fund Managers
Directive (AIFMD), the Foreign Account Tax
Compliance Act (FAT CA)… The list of existing
and upcoming legislation out of Europe and
the US presents something of a minefield for
the financial organisations in the Channel Islands that may
be expected to be compliant. For organisations such as the
Guernsey Financial Services Commission (GFSC) and the
Jersey Financial Services Commission (JFSC), making sure
the islands meet all necessary international standards is
vital to their continued success.
Cees Schrauwers (left), Chairman of the GFSC, and
Clive Jones (right), his counterpart at the JFSC, are also
aware of the balancing act required to meet those standards
while protecting the interests of the islands' financial
industries. They recently got together with businesslife.co
to discuss some of the more pressing matters.
What do you see as the key regulation challenges for the
next 18 months?
Clive Jones: I think the main challenges are those
regulations that have been brewing for some time. AIFMD
will be critical for our funds industry, and for the banking
sector there is Basel III and whatever comes as a result
of the Vickers Report. With AIFMD we have been able to
make representations to ESMA with the other two Crown
Dependencies as part of the consultation process. The
trick with all of these things is trying to ensure that the
way we get to implement it locally is proportionate and
keeps our players in the game.
Cees Schrauwers: The legislation we've seen coming for
some time means we have more time to prepare and make
our representations, as Clive points out. What is perhaps
more challenging is when politicians have a Pavlovian
reaction to something going wrong and instantly think
that new laws need to be brought in. So we need to be
prepared for the long-term things and nimble enough to
react in the short term.
For Guernsey, on top of AIFMD and other legislation,
there is also Solvency II to consider. While politicians
have decided we won't follow Solvency II at present, it will
still have an impact and we need to understand it. Because
much of this legislation is still to be finalised, we are
aiming at moving targets and that makes it rather difficult.
As Guernsey Finance and Jersey Finance seek to enter
new territories, is there an increased risk for the islands?
And if so, what are the Commissions doing to mitigate it?
CJ: I think the simple answer is that yes there is more
risk, but we have to modify that by saying you can have
high-risk clients in a low-risk jurisdiction, and you can
have low-risk clients in newer, more ‘exotic' jurisdictions.
The issue is whether our businesses are properly equipped
to do good risk-based due diligence at the point they take
the clients on.
CS: Part of the reorganisation of the GFSC is to move
towards more risk-based supervision. To use a sailing
analogy, if you go into uncharted waters you take a
pilot, you don't just sail on in there. So whether we are
dealing with new organisations, new territories or, indeed,
both, we are making absolutely sure that we understand
everything. It's about doing a full and frank risk
assessment. If we don't understand it then we shouldn't
touch it – it really is as simple as that.
CJ: We're going to be issuing new guidance
on the whole area of risk through what
we call a sensitive-activities policy, which
we have been working on for quite some
time. It's a complex piece of work, but we're
hoping to have it out at the end of the year.
We're doing our best to try to put down
some guidelines for the industry to follow.
In the end, though, it's up to the industry
participants themselves.
As you strive to meet more and more global
financial standards, do you envisage a need
for extra resources?
CS: The reality is that we have no choice
but to meet standards. Eighteen months ago,
we asked Ernst & Young to come and look at
us and see if we were as nimble and efficient
as we should be. Perhaps unsurprisingly
there was room for improvement, so
from February of this year we have been
implementing their recommendations,
which are there to improve the effectiveness
and efficiency of GFSC and, in particular, to
increase productivity. We are reshaping the
organisation and making sure there is enough
time to do all the things that are required, but
we don't anticipate taking more
people on to achieve this.
CJ: Likewise, we don't expect
to be needing more resources. The pace
of international standard setting has
undoubtedly increased in the last few years,
and we have had to put extra resources in
the policy area just to keep up. But the aim
is not to grow just by throwing more people
at the work. Our funding model means we
are paid for by the license payers, and it's
not an acceptable outcome to simply increase
fees because our only solution is to increase
headcount. So, for example, we are looking
at technological solutions to certain issues
and to build some scalability in what we do.
Are memorandums of understanding
(MoUs) sufficient in the quest for financial
regulation, or is more going to be required to
maintain the islands' international standing?
CJ: There's no doubt MoUs help. Generally
what they do is codify an already effective
bilateral relationship. We recently signed one
with the Reserve Bank of India for example
– we've always had a good relationship with
them, but they felt it best to codify that as an
MoU and we're more than happy to do that.
But frankly, it is the quality of the working
relationship that is most important. Do we
need a higher level of agreement, a new
standard? I sincerely hope not, as we have
enough to do trundling along as we are!
CS: I agree that MoUs are quite useful – we've
been working for a while on one with the
People's Republic of China, and that is a very
useful thing to have. It's a formal country and
things happen in formal ways so having an
understanding between Guernsey and China
is very important. We issue MoUs to make
sure that both parties understand what is
required. They also protect our reputation,
which is crucial if we are to remain
competitive. But, like Clive, I don't anticipate
the need for a different type of agreement.
Will the JFSC be adapting to the changing
financial world and relax the ‘top 500' bank
rule? Has Jersey lost out because of it?
CJ: No, I don't think we have lost out
because of it. If anything, the existing
bank-licensing policy proved its worth in
the period from 2007 to 2009 when other
locations had banks that failed completely.
Yes, we had banks that failed, but they
were supported by their home governments
because they were systemically important.
Now with Vickers on the horizon, it's
possible that the operating models of our
major banks may need to change, and we,
therefore, may need to revisit our banklicensing
policy. It's too early to say yet, but
Vickers is a potential major catalyst.
How do you respond to industry perception
that you wish to close down some of the
smaller operators?
CS: By saying that it's not true. To use another
sailing analogy, little boats in violent seas can
survive while others go under, and big boats
can run aground – all this is to do with the
skipper and the crew and how well the boat
is prepared. Our world is running up the
down escalator and someone is fiddling with
the speed – if you stop to catch your breath,
you are at the bottom again. The world is
speeding up all the time, so companies need
to have the organisational ‘fitness' to deal
with it – and that has absolutely nothing to
do with their size.
CJ: One of my fellow commissioners
reported to me that someone told him I had
said that we wanted to close down small trust
companies, which I have never said. What
I have said is that small trust companies are
perfectly capable of conducting themselves
well in the market place, however by
definition they have fewer resources to
deal with something that might become
a problem. So a small trust company needs
to be careful about the business it deals
with. I have no animus against small trust
companies per se, my only concern is that
they stick to doing what they are good at and
don't try and fish in ponds that contain some
rather more complicated fish.
Are we going to see more ‘fast tracking'
of funds or other new product initiatives?
CJ: We need to remain competitive, not least
because of the legislation coming in. But we
have to balance that with making the right
decisions. Times, however, are tough and
industry is finding it hard to generate new
levels of business and, therefore, to some
extent they are putting us under pressure to
make things easier for them. If the industry
comes to us and says ‘this new product is one
that we think will give us a real edge' – such
as with private placement funds – we have the
capacity to work with them on it and get
it done as quickly as possible. If something
like that was to come up again at the behest
of industry and we felt we could manage
it, we'd do our damnedest to help them do it
– it's our job to help the industry within the
bounds of our regulatory responsibility. That
said, wholesale easing up is a sure recipe for
problems down the road.
CS: I've gone public in saying we'll publish
service-level standards with the industry.
Under these we'll stipulate what will be
done and within what time frame – say two
working weeks. We need to make sure we
facilitate industry by responding quickly.
This also means that if there's a boardroom
proposal in London to do business with
Guernsey, they know how long the process
will take. From my own experience as
someone who has dealt with regulators,
I know what I wanted and how long I was
willing to wait for it – I assume other people
want that certainty as well.