At the end of September 2013, the Jersey Financial Services Commission (Commission) published its consultation paper (Consultation Paper) on proposed changes to the Codes of Practice for Investment Business (IB Codes) on what is the penultimate stage of the Commission's Review of Financial Advice (RFA).

The Commission is expected to implement the proposed reforms in respect of charging commission on financial products and qualifications that financial advisers are required to hold on 1 January 2014. What, if anything, does the RFA mean for the investment business sector in Jersey?

Background to the RFA

The RFA began in August 2011 in response to the UK Financial Services Authority's Retail Distribution Review (RDR). The aim of the RFA is to raise the professional standards of investment advisers, and reduce the conflicts of interest which are found in commission-based remuneration for adviser services.

At its core, the RFA is driven by consumer protection and the understanding that improvements in this regard will increase the international reputation of the Jersey financial services industry. The Commission has argued that the changes proposed to the IB Codes should reduce the risk of bias from commission-based remuneration and therefore reduce the risk of the misselling of financial products, thereby increasing standards and confidence in the investment business sector generally.

The RFA will be implemented through the proposed amendments to the IB Codes set out in the Consultation Paper, and through amendments to the Commission's guidance note (Guidance Note) on professional qualifications in respect of investment business.

Proposed Changes to the IB Codes

The Commission proposes four changes to the IB Codes in pursuit of the aims of the RFA:

1. The defined term "client" be sub-divided into "Retail Clients" and "Professional Clients" with respect to registered firms giving investment advice.

The significance of whether a client is a Retail Client or Professional Client becomes significant in respect of the other changes set out in the Consultation Paper. Advisers to Retail Clients will be caught by the rules relating to charging commission and qualifications, whereas advisers to Professional Clients will not.

A Retail Client is simply defined as a client that is not a Professional Client. A Professional Client is defined as being either a Large Undertaking or a Professional Investor.

A Large Undertaking is defined as an undertaking that fulfils two of the following three criteria:

1. Balance sheet total assets of no less than £13m;

2. Net turnover of more than £26m; and

3. Net assets of more than £1.3m.

A Professional Investor on the other hand is defined as either of the following:

  • A government or supra-national body; or
  • A person whose ordinary business or professional activity includes or it is reasonable to expect that it includes acquiring, underwriting, managing, holding or disposing of investments whether as principal or agent or the giving of advice on investments.

2. All registered firms offering investment advice will be required to implement policies, procedures and controls to classify their clients as either Retail Clients or Professional Clients and subsequently identify the jurisdiction of residence of all Retail Clients.

This requirement is set out to ensure that Retail Clients are being correctly identified and thereby the correct, more onerous rules that apply to advisers of Retail Clients be correctly applied. The requirement that their jurisdiction of residence be also identified is relevant because some exceptions apply in respect of Retail Clients not resident in Jersey, as set out below.

The proposed changes to the IB Codes also allow for Retail Clients to elect to be classified as Professional Clients (Elective Professional Clients). As such, they will come under the umbrella of Professional Clients, and correspondingly they will fall outside the scope of the rules relating to Retail Clients. To do this, having been prompted by the client the investment adviser must assess the knowledge and experience of the client and form the view that they are capable of making their own investment decisions and understanding the risks involved. The investment adviser must also document the frequency with which the client deals in the investments which form the subject matter of the advice, the size of the client's portfolio and the extent of their experience. The investment adviser must then provide the client with a written warning about the rules which will be disapplied in respect of the advice they receive, in response to which the client must provide a written statement that they wish to become an Elective Professional Client and that they understand the consequences of this election.

3. Employees providing investment advice to Retail Clients will be required to hold minimum professional qualifications.

Broadly these requirements mirror, or are intended to mirror, the qualification requirements in the UK. The exact requirements are set out in more detail in the Consultation Paper and will be implemented through amendments to the Guidance Note.

This will not apply in respect of advisers providing advice on long-term insurance contracts where the commission is not linked to investment performance.

4. Advisers of Jersey resident Retail Clients will be banned from accepting commission payments from financial product providers, except where those exceptions set out below apply.

The ban on charging commission goes to the core of eliminating bias or potential conflicts of interest.

This will not apply to advisers providing advice in respect of the following circumstances:

  • Long-term insurance contracts where the commission is not linked to investment performance;
  • Retail Clients not resident in Jersey; and
  • Retail Clients resident in Jersey but in respect of trail commission charged on investment contracts commencing on or before 31 December 2013.

Big Changes?

The changes anticipated by the Consultation Paper seem unlikely to place any great additional burden or cost on the investment advice industry in Jersey since those changes represent a trend in industry standards that has taken or is already taking place. It is therefore hard to see that big changes will be needed to implement or ensure compliance with the new framework. That said, investment advisers will need to have reviewed their current position and policies, in respect of training and qualifications, and in respect of the classification of clients into Professional and Retail, to ensure that compliance is achieved post 1 January 2014, even if little practical change is observed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.