Report Of The Advisory And Finance Committee On The Status Of The Review Of Regulation In The Crown Dependencies
1. Executive Summary
The Edwards Report, which was published in November 1998, was welcomed by the Guernsey Authorities as independent confirmation of the Island's high standard of financial services regulation and its commitment to combat crime of all types. It endorsed the strength of Guernsey in the areas reviewed and described the Bailiwick as being in the "top division of offshore finance centres" (s11) "with reputations for stability, integrity, professionalism, competence and good regulation" (s7).
The Report praised regulatory systems, judicial and prosecution systems and co-operation with other jurisdictions stating that "The Islands have impressive arsenals of financial, company and criminal legislation"(s20) and that "For the most part the Island's existing and prospective legislation seems satisfactory. In some respects, and especially in relation to fiscal offences, it seems to me better than most EU and FATF countries" (s157).
The author was able to make these points because the Crown Dependencies in line with the development of their financial services sectors have progressively enacted legislation and regulations and introduced practices which matched and sometimes have been in advance of international standards. It has been, is and will be, an ongoing process.
The Report recognised and applauded the steps which had already been taken. The Report has improved the international perception of the Guernsey regulatory framework, its law enforcement agencies and equally importantly the attitude and commitment of the Guernsey Authorities to respond to changing international standards.
Many of the suggestions contained in the Edwards Report were, as the author acknowledges, already actively under consideration by the Guernsey Authorities before the review was commissioned. The Report adopted some of these but in addition indicated other areas for special consideration, sharpened the regulatory and law enforcement focus and highlighted the wisdom of accelerating the introduction of regulatory best practice and law reform in some areas. The objective appraisal has proved to be of great benefit to the Islands.
The Advisory and Finance Committee of the States of Guernsey (the Committee), on publication of the Report, established an advisory group ("the Advisory Group") to evaluate the Report's suggestions in a constructive and positive way and to make recommendations to the Committee with a view to improving the quality and depth of regulation and improving still further international co-operation on criminal matters.
The Advisory Group, with the assistance of specialist advisors, sub groups and working parties, has reviewed in detail every suggestion contained in the Report. These suggestions met, in the majority of cases, with the agreement of the Advisory Group. Many of the suggestions were already in the course of implementation, others have been implemented as a consequence of the Report's suggestions. In some cases the Advisory Group believes the thrust of a suggestion can best be implemented in a different and more appropriate way. In other cases the developments in the UK and elsewhere are awaited before the issue is considered further. In a small number of cases suggestions have been rejected. This range of response is consistent with what the author of the Report had anticipated and acknowledged when presenting his Report.
The Guernsey Authorities will continue to keep the Islands' regulatory framework, its practices and its arsenal of legislation under review at all times through the work of the Advisory Group and many governmental and regulatory standing committees. They will also continue to participate in and influence international debate and actions.
The Guernsey Authorities are determined to maintain and enhance the Island's position as a reputable co-operative international finance centre regulated to the highest standards and to ensure that the Island continues to play its part in the fight against crime of all types, including tax evasion.
2. Background to the Edwards Review
In January, 1998 the Home Secretary commissioned Mr. Andrew Edwards to review, with the Island Authorities in Guernsey, Jersey and the Isle of Man, the regulation of their international finance centres, the combating of financial crime and co-operation with other jurisdictions.
On the 19 November, 1998, following extensive discussions with the Island authorities, Mr. Edwards published his assessment in the form of a Report (the Edwards Report).
The Advisory and Finance Committee of the States of Guernsey (the Committee) on publication of the Report reacted positively and established an advisory group ("the Advisory Group") with the task of evaluating the Report's suggestions and making recommendations to the Committee with a view to improving the quality and depth of regulation and improving further international co-operation on criminal matters. The Committee directed that suggested measures should be considered in detail and stated publicly that action would be taken to remedy any weaknesses in regulatory or legal structures and practices.
The United Kingdom Government and the Island Authorities agreed that it would be helpful and appropriate for a series of meetings to be held. At these meetings the authorities of Guernsey, Jersey, the Isle of Man and the United Kingdom would make known their considered evaluation of the Report's suggestions and indicate to each other the measures which each proposed to take and also to identify those suggestions which were not considered worthy of early or any action. Several meetings were held in London and one in Jersey.
The Advisory Group was chaired by the Chairman of the Committee and had as its other members H.M. Procureur (the Bailiwick's Attorney General), The Director General of the Guernsey Financial Services Commission (the Commission - the regulatory authority of the financial sector), the States Supervisor (the head of the Guernsey Civil Service) and the Administrator of Income Tax. Group members had briefed and assisted Mr. Edwards when he was compiling information prior to the publication of his Report. Several working groups comprising officials of the Commission and finance sector representatives with specialist knowledge reported to the Director General of the Commission. Advice was also sought from outside experts on technical issues.
In the Introduction section to his Report (paragraph 1.2.3) Mr. Edwards observed that his assessment included many expressions of opinion and suggestions intended to be helpful pointers not dogmatic prescriptions. Only in a few areas did he consider that action was needed in a specific and precise form. In others there would be various options for delivery. He encouraged the Island authorities to continue or reinforce what they were already doing.
Many of the measures suggested in the Report were already under active consideration and have been implemented.
The Advisory Group has concurred with most of the measures suggested in the Report and this is consistent with the statement of Mr. Edwards "The Islands have a firm and continuing objective to be the best governed, best regulated and most responsible of offshore centres as well as the most successful". (s.15). Furthermore such concurrence was also to be expected because the Committee and its Advisory Group agree with Mr Edwards that "it is clearly in the best interests of the Islands, the UK and the international community that the islands should set and deliver high standards in this way"(s.16).
The Advisory Group has recommended that the objectives of some of the suggestions can best be delivered in ways different than those put forward. In those cases where legislation will be necessary the Committee will recommend to the States of Guernsey that legislation should be enacted.
In some cases the Advisory Group has concluded after lengthy evaluation by experts that suggestions, which at first sight appeared to have merit, cannot be commended and the Committee has concurred. In other areas where the Report suggested that changes should be made first in the UK or internationally, the Advisory Group has been directed by the Committee to keep abreast of such developments on a continuing basis and report to the Committee when appropriate.
The Committee will, as in the past, continue to keep under review with the assistance of the Guernsey Commission, the Law Officers and the Advisory Group both the coverage and depth of regulation in the Bailiwick and co-operation with foreign law enforcement agencies in the fight against crime of all types including tax evasion. The Guernsey Authorities and representatives of the finance sector acknowledge that international standards of regulation and policing are an absolute obligation and in the Islands' own best interests.
3. Guernsey's response to the principal measures discussed in the Report
The Edwards Summary and Main conclusions contained some 211 paragraphs including over 160 individual proposals, suggestions, comments or observations relating to Guernsey, Jersey or the Isle of Man. As noted above the majority of the issues relating to Guernsey were already under active consideration prior to the Edwards review as was also the case in the other two jurisdictions.
The Advisory Group in compliance with its mandate has given most careful consideration to each suggestion.
The Edwards Report listed these proposals in a table of "Principal Measures" (appendix 1) indicating which related to each of the three jurisdictions.
It is appropriate just one year after the Advisory Group embarked on its task to indicate the Group's response to these Principal Measures. As the table indicated some had already been the subject of decision and these are noted in the Report as already decided.
3.1 All Crimes Money Laundering
(noted in the Report as already decided)
The Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 will come into effect on 1 January 2000. The provisions of the Law are equivalent to the provisions of legislation in force in the UK, Jersey and the Isle of Man. Tax evasion is treated no differently from any other serious crime. It is worthy of mention that the inclusion of fiscal offences in the legislation enacted in British Isles jurisdictions is a step not yet taken by some EU and OECD countries.
It is also worthy of note that Guernsey, as long ago as 1995, introduced legislation which gave statutory protection to any informant who disclosed his suspicion of money laundering activities in a case where he was subject to an obligation of confidence, secrecy or other restriction on the disclosure of information.
On-site visits to banks by members of the Guernsey Commission have commenced. These visits cover a range of prudential issues but are also designed to ensure compliance with the anti money laundering recommendations of the Financial Action Task Force. They are also conducted in such a manner as to be in accordance with the Core Principles of Banking Supervision issued by the Basle Committee on Banking Supervision.
3.2 PACE Law or Equivalent
(noted in the Report as already decided).
A working draft of a Police and Criminal Evidence Law, 2000 has been prepared by the Law Officers and will be sent to the Home Office in February 2000. This Law will inter alia provide additional powers to obtain information needed for investigations and judicial evidence where not already covered under other legislation. It is anticipated that the legislation will be enacted in 2000.
3.3 International Co-operation Law
(noted in the Report as already decided).
A working draft of legislation entitled the Criminal Justice (International Co-operation) (Bailiwick of Guernsey) Law, 2000 has been sent to the Home Office for comment. This law will enable law enforcement agencies to provide yet further assistance to overseas authorities in obtaining evidence for investigation purposes. It is anticipated that legislation will be enacted in 2000.
In the field of co-operation in Drug Trafficking cases Guernsey is consolidating its existing Drug Trafficking legislation which, with a few minor exceptions, mirrors existing UK legislation. The consolidation will include minor additions to correct drafting omissions in existing legislation and enable the Bailiwick to comply with the provisions of the Vienna Convention against Illicit Traffic in Narcotic Goods and Psychotropic Substances. Some final drafting points are being considered with the Home Office. It is anticipated that legislation will be enacted in 2000.
3.4 Regulation of Director Services
(noted in the Report as already decided).
The Committee and the Commission have long been committed to the regulation of those providing Director Services and firms engaging in trust and company formation and administration business. Collectively these businesses are termed Fiduciary Services. (see also paragraph 3.9)
In the Autumn of 1998 the Commission appointed a Director of Fiduciary Services and Enforcement. In May 1999 the Commission issued a consultative paper entitled "The Regulation of Fiduciaries and Administration Businesses". The Commission is of the view that appropriate regulation in this hitherto lightly regulated area of activity is essential to protect the reputation of the Bailiwick and to demonstrate internationally that the Bailiwick is determined to extend the coverage and depth of its regulation whenever and wherever appropriate. Mr. Edwards was assured by the Island Authorities in Alderney and Sark that their respective committees of government would recommend to their parliaments that they should agree to the enactment of legislation to be adopted by the States of Guernsey so that fiduciary services will be regulated on a Bailiwick wide basis by the Commission.
Consultation on the proposed Fiduciary and Administration Businesses Law was, therefore, extended to Alderney and Sark and is now virtually complete in all three Bailiwick jurisdictions. It is proposed by the Commission that the legislation will introduce a conventional licensing system analogous to that applied to the Banking, Insurance and Investment sectors. The holding of a licence would be subject to satisfying specified "fit and proper" criteria and submission of annual returns. Licences would be renewable annually. The Commission would have the power to refuse an application for a licence or set conditions on that licence.
The range of persons and institutions to be supervised will include those carrying on, by way of business, the formation and/or administration of trusts, companies or partnerships; acting as corporate and/or individual trustees for trusts or foundations; the provision of corporate and/or individual directors or nominees services; and the provision of executorship services.
Two categories of licence are envisaged namely:
(1) A Personal Licence permitting an individual to act as director, co-trustee or protector; and
(2) A Fiduciary Licence for companies and partnerships providing fiduciary services.
This innovative legislation will be similar to that to be enacted in Jersey. The UK has no comparable legislation.
A policy letter proposing the enactment of legislation along the above lines is likely to be laid before the States of Guernsey in 2000.
3.5 Recruitment of extra staff for Law Officers, Police and GFSC
Law Officers - The Edwards suggestions reflected the Law Officers proposals at the time and have been accepted by the Islands Authorities. Recruitment is under way.
The Police - The States of Guernsey has approved the recruitment of 28 extra Police officers in response to a request from the Chief Officer of Police initiated in January 1998, prior to the Edwards Review.
The Commission - Additional staff have been appointed raising staffing levels from 35 to more than 50 by the end of 1999. Further resource requirements are being quantified. This reflects the Commission's proposals, commended in the Report, to extend the coverage and depth of regulation.
Staffing levels will remain under review.
3.6 Possible structural changes in Fraud and Financial Investigation
Financial Crime Units - The Home Office does not appear to favour the Report's suggestion. It will not be recommended by the Advisory Group to the Committee as the problems which it would create would outweigh the benefits.
For many years there has been the closest co-operation between the Commission, Law Officers, Police and Customs. Senior representatives of each are constantly reviewing how co-operation can be improved. Guernsey Police and Customs are at present undertaking a comprehensive review of their Joint Financial Investigation Unit. This Unit works alongside the Fraud Department and carries out local financial investigations and also deals with enquiries received from law enforcement agencies in other countries.
3.7 GFSC and Regulatory changes, including Board and structural changes
The Advisory Group has recommended that changes should be made to the Guernsey Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (GFSC Law).
The Committee has accepted that the Commission should be seen to be independent of Government. It has, therefore, agreed that the President of the Committee should not ex-officio be the Chairman of the Commission and as a consequence the legislation would no longer require political representation on the Commission Board. The appointment of the Commissioners will remain with the States of Guernsey.
The GFSC Law sets out the grounds upon which an ordinary member of the Commission may be removed from office by the Chairman. The mechanism and grounds for removal of all members of the Commission, including the Chairman, is being reviewed.
The Advisory Group also is of the view that the Commission should not undertake direct promotion of the financial services sector in the way that term is defined in the Report. However, it is acknowledged that there are many areas linked to promotion where the Commission is best suited to explain the standards and practices of financial institutions. Consideration is to be given by the Committee to the need for a separate promotional body.
3.8 Depth of regulation proposals
The Commission will continue to regulate financial services in accordance with the principles of, and to the high standards established by, the Basle Committee on Banking Supervision, the International Association of Insurance Supervisors, the International Organisation of Securities Commissions and other international organisations. Codes of conduct will continue to be developed to support existing regulatory frameworks and will be included under the proposed Fiduciary and Administration Businesses Law.
The Commission will continue to keep under review the way in which it discharges its statutory duties.
3.9 Licensing and regulation of Trust and Company Service providers etc
It is proposed that the Commission will have formal responsibilities and powers in relation to trust companies and company formation and administration firms. These powers will be contained within the proposed legislation concerning Fiduciary Services and Administration Businesses. (see also paragraph 3.4)
It is confidently anticipated that the legislation will raise, still further, the standards of those who conduct such business. It will, therefore, accelerate the flight to quality business which has been a feature of the development of the financial services sector in Guernsey in recent years. That is a key objective of the legislation and will assist the Commission in the discharge of its new regulatory duties.
The legislation is innovative. It is further evidence of the intention of the Island Authorities to set international standards above those currently in force in the United Kingdom, the EU and OECD where providers of such services are greater in number but are largely unregulated. A policy letter will be laid before the States of Guernsey in 2000.
3.10 Company regulation changes
3.10.1 Audit and disclosure
The Advisory group does not accept that all limited companies should prepare and file audited accounts. Guernsey companies are already obliged to have audited accounts unless they are dormant or asset holding companies who do not trade and whose shareholders have formally elected for non-audited status. To require the filing of audited accounts in respect of all limited companies, irrespective of their purpose, turnover or profits, would be contrary to common practice in the UK, the USA and elsewhere.
The UK Government has recently published proposals to raise the small company audit exemption threshold. If similar proposals were applied in Guernsey, most Guernsey companies would be below the threshold and, therefore, exempt.
Guernsey companies which are exempt from the requirement to have audited accounts must nevertheless keep at all times full accounting records, prepare annual accounts and submit them to shareholders and maintain such records in Guernsey, irrespective of where such companies carry on business.
3.10.2 Registration of companies incorporated elsewhere
Much information, including the name of the company and its registered office, is available on the public register in the country of incorporation. The public disclosure of such information in no way damages legitimate client confidentiality. It is a long-established and widely-accepted principle. This and additional information is readily available in respect of Guernsey companies.
The Advisory Group is of the view that such basic information about foreign incorporated companies which establish a business presence in Guernsey should be available to those with a legitimate interest. The Advisory Group's proposals were endorsed by the Commission in its Regulation of Fiduciaries and Administration Businesses Consultation Paper. A recommendation will soon be made to the Commission and the Committee.
3.11 Insolvency legislation and rescue provisions
A full review of the extensive range of insolvency and bankruptcy procedures is planned. Initially proposals are to be submitted on corporate insolvency issues as part of a general review of the Companies legislation. A policy letter recommending legislation to consolidate and amend the existing legislation is likely to be considered by the States in 2000. Introduction of legislation will follow soon afterwards.
3.12 Possible changes in Trusts legislation
The heading to this issue in the Report is - "Possible improvements to existing legislation" (paragraph 12.8). Mr. Edwards drew on the advice of Professor Hayton and stated in the Report that Professor Hayton "has identified a number of possible changes or additions that might be considered in one or more of the Islands' Trust legislation."
Jersey resolved that an acknowledged expert in the field should conduct an independent review of the Trusts (Jersey) Law, 1994 and, following talks between the financial service commissions of the two jurisdictions, it was agreed that the expert would, in so, doing have regard to the Trusts (Guernsey) Law, 1989 which closely followed the Jersey Law.
The Advisory Group agreed with the Commission that the Commission should review the possible changes outlined in the Report and these changes are being considered by a group comprising Commission staff and leading trust practitioners. In common with the Jersey Task Force the Advisory Group has concluded that some of Mr Edwards' suggestions were based on a misunderstanding of the current position in the Guernsey Law, some reflected existing policy and practice, whilst other suggested policy changes clearly diverge from current international standards.
The Commission and the Advisory Group have concluded that many of the possible changes, suggested in the Report, for reform of the Guernsey's Trusts legislation are inappropriate. However, the group reporting to the Commission, as part of the ongoing review process of legislation and practices in the financial services sector, are considering the detailed findings of the Jersey review and will also be considering other suggestions for law reform made by leading practitioners. Recommendations for law reform of Guernsey's Trusts legislation will be incorporated into the ongoing programme of regulatory reform.
3.13 Customer Protection schemes
The Banking Supervision (Bailiwick of Guernsey) Law, 1994 contains provisions enabling subordinate legislation to be introduced to establish a depositor protection scheme.
The Commission has conducted a survey of the number and size of deposits in all banks and a review of the structure and content of schemes in other jurisdictions and has concluded that a scheme should be introduced. It is intended that the scheme should be introduced at the same time that more modern insolvency provisions and procedures are introduced. This will allow a scheme to operate in concert with modern international administration/rescue procedures which would provide the mechanism to deal with a failed bank. A policy letter will be laid before the States in 2000.
Guernsey has in place a customer protection scheme on UK lines for collective investment schemes which are approved for marketing to the general public in the UK. The Commission is giving consideration to extending the scope of the existing investors compensation scheme beyond collective investment schemes and developments within the UK on compensation schemes are being carefully monitored.
With regard to insurance, Guernsey's policy holder protection arrangements are achieved by separation of policy holder assets from share holder assets under a form of trust. Consulting actuaries have confirmed that in view of the size of the market this arrangement is wholly appropriate ands is at least equivalent to that of the UK.
The Advisory Group concurs with the Commission's intentions.
3.14 Financial Services Ombudsman
As noted in the Report the Commission was already investigating and developing proposals for an Ombudsman scheme. The structure and operation of schemes in Australia, Ireland, New Zealand, Scandinavia, Switzerland and the UK have been examined. A detailed scheme which will provide an efficient and cost effective mechanism for the resolution of disputes between all financial services businesses and their customers is under active consideration. A consultation document has been drafted and will be released shortly.
The Advisory Group concurs with the Commission's intentions.
3.15 Insurance regulation changes
Many of the Edwards' suggestions have been accepted and implemented. Insurers are already obliged to draw up annual accounts in accordance with Generally Accepted Accounting Practice (GAAP) and life insurers are required to submit annually 3-5 year business plans. Standard criteria are set for consulting actuaries and Guernsey is one of the authorities charged with formulating international standards of market conduct. This ensures that Guernsey is at the leading edge of regulatory developments. The Commission does not accept that there should be separate legislation for domestic and offshore insurance business as suggested. The authorities believe all business should be supervised and regulated to the same high standards.
The Commission has established a pensions steering group to consider the dedicated regulation of pension schemes. In light of the groups findings the Commission considers it appropriate to increase its regulatory role in certain areas of pension business. A consultation paper will be issued in 2000.
An Insurance Law Review Committee is currently dealing with the other proposed suggestions and also looking at other regulatory changes not mentioned in the Review.
The Advisory Group concurs with the Commission's conclusions.
3.16 Investment Business regulation changes
The Commission intends to issue, by the end of 1999, a guidance note on the standards it expects of institutions which outsource investment business activity. In addition a Review of The Company Securities (Insider Dealing) Law, 1996 has been carried out. A policy letter is likely to be laid before the States in 2000.
3.17 Possible new Double Taxation or Exchange of Information Agreements
The Guernsey Authorities, in responding to the suggestion in the Edwards Report that the present 1952 Double Taxation Agreement (DTA) with the UK should be replaced with a new DTA or modern Exchange of Information Agreements, have indicated that they are ready to enter into discussions with HM Government but without at this stage any pre-conceptions as to the likely outcome of any such discussions.
4. Way Forward
Of those proposals accepted but not yet implemented, the majority will require enactment of legislation following consideration and acceptance of the States of Guernsey.
The Advisory Group will, together with standing committees of Government and the Commission, continue with the consultation evaluation and advisory process. It will contribute to the preparation of policy letters for consideration by the States of Guernsey. Developments in the UK and elsewhere will continue to be monitored.
The development of the financial services sector in Guernsey will be determined by the changing nature of financial services, the ability to meet the constantly changing needs of customers and the ability to respond to the intensifying competitive pressures. This is what has enabled Guernsey's financial services to succeed in the past and it is this which will ensure our continuing success.
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