Fintech 2023 - Fin Tech

Law and Practice

1. Fintech Market

1.1 Evolution of the Fintech Market

Emergent fintech firms continue to grow in Guernsey, taking advantage of the Island?s internationally recognised, flexible and forward-thinking regulatory environment in blockchain administration, lending, robo-advisory, data analytics, payment services, client due diligence and prime-brokerage platforms.

In particular, blockchain platforms operating in Guernsey benefit from the Electronic Transactions (Guernsey) Law, 2000 (the "Electronic Transactions Law") which confirms that, subject to limited exceptions, a contract cannot be denied legal effect, validity or enforceability solely because the contract was made in an electronic form or by electronic means. The Electronic Transactions Law is technology agnostic and can be applied to all forms of digital technology.

On 1 March 2019, the Electronic Transactions (Electronic Agents) (Guernsey) Ordinance, 2019 (the "Electronic Agents Ordinance") came into force, enabling the use of electronic agents. The Electronic Agents Ordinance is the culmination of the work of legal and other experts in the industry, in collaboration with policymakers in the States of Guernsey, the Guernsey Financial Services Commission (GFSC) and Guernsey Finance, to create an environment in which electronic agents can easily be used. Guernsey is possibly the first jurisdiction in the world to introduce legislation that fully enables the use of electronic agents.

Uses and Relevance of Electronic Agents

In general terms, electronic agents consist of computer software and devices that can independently perform certain tasks without review by a person, which makes the software or device autonomous. Existing examples include driverless cars and virtual assistants in smartphones. Autonomous software and devices are not a new concept, and perhaps the most common example is vending machines for snacks and drinks. However, those types of devices can only work in accordance with how they were designed and programmed by a person. Advances in technology and, in particular, in artificial intelligence (AI), can change this by giving the software or device the ability to make its own decisions. For example, a vending machine could be enabled to decide to accept a lower offer for a snack if it thought that it needed to be sold sooner to avoid a use-by date.

Modern technologies enable increasingly complicated tasks to be automated by software and devices (also known as bots). However, existing laws around the globe envisage people, not computers, having discretion as to whether to perform certain actions that can give rise to legal rights and liabilities, such as deciding whether or not to enter into a contract.

In Guernsey, electronic agents can now be used to form (eg, by negotiating), enter into, perform and also to end contracts on behalf of a person, which could be an individual, a company or any other corporate or unincorporated entity. An electronic agent can represent just one of the parties to a contract or multiple parties, or different electronic agents could represent different parties, which makes the legislation very flexible. It is also not a requirement for anyone wishing to use such electronic agents to be in Guernsey, although in order to benefit fully from the new legislation it is likely that a person who uses such an electronic agent would need to operate it in Guernsey. The new legislation also contains a rebuttable presumption that a person who uses an electronic agent intends to create a legally binding contract using the electronic agent.

Electronic agents could be particularly relevant to businesses that are seeking to use blockchain, machine learning and AI technologies to automate contracts, which is really useful for businesses that use smart contracts.

The Handbook

The GFSC?s Handbook on Countering Financial Crime and Terrorist Financing (the "Handbook") applies to businesses in Guernsey that are required to satisfy the island?s anti-money laundering and countering the financing of terrorism (AML/CFT) requirements. The Handbook includes a novel regime to satisfy clients? due diligence requirements using digital certifiers, which can include the use of blockchain and other recent advances in technology. This will enable businesses to use advanced technologies to satisfy their anti-money laundering obligations, which is expected to be popular with emergent fintech businesses.

Lending, Credit and Finance Law (the "LCF Law")

Guernsey is in the process of implementing the LCF Law. The LCF Law introduces four new regulatory licensing regimes which will regulate various activities, including certain fintech activities, carried on by way of business either by a Guernsey person (anywhere in the world) or by any person in or from within Guernsey.

The four regimes cover consumer credit (which need a Part II licence), "financial firm business", which includes payment services providers (which need a Part III FFB licence), certain services relating to digital assets such as virtual currency issuers and virtual asset exchanges (which need a Part III VASP licence) and peer-to-peer and crowdfunding platforms non-bank credit or finance intermediation (which need a Part IV licence).

All four licensing regimes come into force from 1 July 2023, by which time licenses must be in place. The licensing application window opened on 1 February 2023.

2. Fintech Business Models and Regulation in General

2.1 Predominant Business Models

Guernsey is home to an increasing number of financial research and analytics, money services and client due diligence platforms.

Financial Research and Analytics Platforms

Financial research and analytics platforms typically provide services to the island?s investment management and private wealth sectors, as well as to businesses around the world. The types of services offered generally include financial research, data analytics, risk and reporting systems.

Existing financial research platforms are more likely to provide services, such as investment advice or management, which require a licence to be granted by the GFSC. However, newer financial research platforms usually limit the services that they offer, so that they do not require a licence.

Money Services and Client Due Diligence Platforms

Money services platforms provide lending, payment and FX solutions for clients as alternative financial services providers in Guernsey, and they are usually registered with the GFSC and must comply with Guernsey?s AML/CFT regime. These platforms will typically need a Part III FFB licence under the LCF Law.

Client due diligence platforms have been launched and continue to be developed in Guernsey, taking advantage of Guernsey?s updated know-your-customer regime, which enables the use of digital certifiers. Client due diligence platforms typically provide services to regulated financial services firms in Guernsey and internationally.

Guernsey is also home to an increasing number of prime brokerage platforms, which provide services to professional and institutional investors for high-frequency and algorithmic trading.

2.2 Regulatory Regime

Financial research platforms that provide investment advice and management services must be licensed by the GFSC under the Protection of Investors (Bailiwick of Guernsey) Law, 2020 (the "PoI Law"). Other platforms that provide payment services and lending solutions are typically registered with the GFSC under the Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law, 2008 (the "NRFSB Law"), which is a lighter touch regime that requires compliance with Guernsey?s AML/CFT regime. Businesses that (at the time of writing) are registered with the GFSC under the NRFSB Law will, broadly, be required to be licensed by the GFSC under the LCF Law with a Part III FFB licence.

Other types of fintech platforms, including those that provide financial research solutions and do not provide investment advice, management services or money solutions, generally do not (at the time of writing) need to be licensed by the GFSC.

However, the NRFSB Law will be repealed and replaced by the LCF Law from 1 July 2023. The LCF Law specifically regulates certain fintech services carried on by way of business either by a Guernsey person (anywhere in the world) or by any person in or from within Guernsey. These services include payment services providers, peer-to-peer platforms, crowdfunding platforms, non-bank credit or finance intermediation, and certain virtual asset service providers (VASPs), such as virtual currency issuers and virtual asset exchanges.

2.3 Compensation Models

There are no prescribed models for charging customers in Guernsey. However, industry participants are typically required to disclose to their customers in writing all fees and charges, together with the basis of their calculation, before entering into an agreement with customers to provide services. Industry participants may also be required to disclose any remuneration to be received in connection with a transaction prior to the execution of the transaction. If the amount of the remuneration is not known, the basis of its calculation should be disclosed.

2.4 Variations Between the Regulation of Fintech and Legacy Players

The same regulation applies to fintech industry participants that applies to legacy financial services businesses in Guernsey.

2.5 Regulatory Sandbox

Innovation Soundbox

The GFSC has introduced the Innovation Soundbox, to serve as a central hub for enquiries relating to innovative financial services.

The Innovation Soundbox is targeted at start-up financial services businesses which are considering applying for a regulatory licence or registration from the GFSC.

The Innovation Soundbox can be contacted via the GFSC?s website (www.gfsc.gg) to provide initial guidance regarding Guernsey?s regulatory framework and how it may apply to a new business.

Global Financial Innovation Network (GFIN)

The GFSC is also a founding member of the Global Financial Innovation Network (GFIN), together with the UK Financial Conduct Authority (FCA). A key purpose of GFIN is to create a "global sandbox" to provide firms with an environment in which to trial cross-border solutions. GFIN also acts as a network where regulators can collaborate and share experiences of innovation in emerging technologies and business models, and provides a forum for joint policy work and discussions. Further information about GFIN can be found on the GFSC?s website (see above).

2.6 Jurisdiction of Regulators

The GFSC?s jurisdiction generally applies to financial services businesses that conduct, or claim to conduct, business in the Bailiwick of Guernsey (hereafter referred to as "Guernsey", which includes the islands of Guernsey, Sark and Alderney). This can include occupying premises or advertising a contact address in Guernsey, as well as issuing adverts or making offers in Guernsey, or making offers that specifically target clients in Guernsey.

Non-financial Regulators in Guernsey

The Office of the Data Protection Authority (ODPA) – this is responsible for developing, implementing and overseeing Guernsey's data protection regime, which generally applies to any "controller" or "processor" of personal data where such controller or processer is either established in Guernsey or processes Guernsey residents' personal data in the context of offering goods or services to them or monitoring their behaviour in Guernsey. Any such controller or processer is required to register with the ODPA.
The Channel Islands Financial Ombudsman (CIFO) – this body has powers to receive and determine complaints about certain types of financial services businesses in Guernsey and Jersey.
The Guernsey Competition and Regulatory Authority (GCRA) – this is responsible for enforcing Guernsey?s competition laws and thus (among other things) for reviewing mergers and acquisitions involving undertakings with local revenue that exceeds certain thresholds.

2.7 Outsourcing of Regulated Functions

Depending on the type of licence that has been granted by the GFSC, as well as whether any derogations have been granted, particular requirements may apply to the outsourcing arrangement, including in respect of the terms of outsourcing contracts. Certain activities, such as corporate administration, can only be outsourced to a firm in Guernsey that is licensed by the GFSC. Licensed VASPs will need to obtain GFSC consent before outsourcing any activity to a service provider outside of Guernsey.

2.8 Gatekeeper Liability

The extent to which fintech providers are regarded as "gatekeepers" with responsibility for the activities on their platforms, depends on whether they are subject to any of the regimes described in 2.2 Regulatory Regime. In short, fintech providers that are licensed under the PoI Law are subject to the range of regulatory requirements that are applicable to other regulated investment businesses (including requirements relating to how those businesses are managed and controlled, financial resources and liquidity requirements, and the nature of the business carried out and clients serviced), while those (at the time of writing) registered under the NRFSB Law are subject to a lighter touch regime that is principally concerned with AML/CFT.

Fintech providers? regulatory responsibilities will become more tailored to the nature of their businesses under the LCF Law, and, depending on their activities will be subject to a range of regulatory requirements, including requirements relating to AML/CFT, how those businesses are managed and controlled, financial resources and liquidity requirements, and the nature of the business carried out and clients serviced.

All local businesses (including those that are not otherwise regulated) are subject to Guernsey?s suspicious activity reporting regime, and are accordingly under obligation to report suspicious activity to the relevant authorities.

2.9 Significant Enforcement Actions

So far, no known public enforcement action has been taken against fintech firms in Guernsey.

2.10 Implications of Additional, Non-financial Services Regulations

The principal non-financial regulatory regimes potentially applicable to fintech businesses are those relating to data protection, economic substance, complaints by members of the public, and competition law.

Data Protection

The Data Protection (Bailiwick of Guernsey) Law, 2017 (the "DP Law") has introduced new rules into Guernsey, which are based on the EU?s General Data Protection Regulation (EU) 2016/679 (GDPR). Essentially, these rules apply to all businesses that are established in Guernsey and process personal data (and also to non-Guernsey businesses that process the personal data of Guernsey residents), and such businesses are required to register with the data protection regulator, the ODPA (see 2.6 Jurisdiction of Regulators).

Guernsey benefits from being one of only 14 jurisdictions (at the time of writing) that have been granted a data protection adequacy decision by the European Commission, which enables the free flow of personal data between EEA member states and jurisdictions, such as Guernsey, that have secured adequacy decisions, including the other Crown Dependencies and the UK. Guernsey?s adoption of legislation equivalent to the GDPR makes it much easier for Guernsey businesses to access EU markets, and also reassures customers and clients of those businesses that there are safeguards in place to protect their personal data.

Economic Substance

In line with the rest of the offshore world, Guernsey introduced "economic substance" requirements, with effect from the beginning of 2019, for Guernsey resident companies that are engaged in certain "geographically mobile" activities, including, for example, banking, insurance, financing and leasing, equity holding, and intellectual property holding. From 1 July 2021, the economic substance regime was extended to partnerships that are treated as being as "resident" in Guernsey for economic substance purposes (such partnerships are not otherwise treated as tax resident in Guernsey). Guernsey resident companies and partnerships engaged in the activities referred to above must be able to demonstrate economic substance in Guernsey, which generally entails (subject to enhanced requirements for IP holding bodies, and reduced requirements for pure equity holding bodies) being directed and managed, conducting their core income-generating activities, and having adequate people, premises and expenditure on the island.

Public Complaints

Some financial services businesses in Guernsey (and in the neighbouring island of Jersey) are subject to the jurisdiction of the CIFO (see 2.6 Jurisdiction of Regulators), which has certain powers to enable it to resolve complaints about such businesses from members of the public.

Competition Law

Guernsey has laws in place prohibiting anti-competitive behaviour, and mergers and acquisitions that exceed certain "notifiable" thresholds (in terms of revenue in Guernsey or in some circumstances, across the Channel Islands) are subject to the approval of Guernsey?s competition authority, the GCRA.

2.11 Review of Industry Participants by Parties Other than Regulators

Financial services firms that are licensed by, or registered with, the GFSC must appoint an auditor, which must audit the business in accordance with recognised accounting standards. However, no other additional requirements apply to financial services firms, except those that are applied by the GFSC.

2.12 Conjunction of Unregulated and Regulated Products and Services

Industry participants that are licensed or registered with the GFSC can also offer unregulated products and services. However, if those products and services are offered via the same licensed or registered entity, the products and services will generally have to comply with the regulatory requirements imposed on the industry participant in respect of its regulated activities. On this basis, it is not unusual for a financial services business to establish a separate firm to offer unregulated products and services, when it may not be necessary or desirable for any regulatory requirements to be applied to them.

2.13 Impact of AML Rules

Fintech providers that are licensed under the PoI Law are subject to the range of regulatory requirements that are applicable to other regulated investment businesses, including AML/CFT requirements, requirements relating to how those businesses are managed and controlled, and the nature of the business carried out and clients serviced. Fintech providers registered (at the time of writing) under the NRFSB Law are subject to a lighter touch regime that is principally concerned with AML/CFT.

Fintech providers that are licensed under the LCF Law from 1 July 2023 will be subject to AML/CFT requirements, which will be updated to reflect the Financial Action Task Force?s (FATF) recent guidance for virtual assets and VASPs.

3. Robo-advisers

3.1 Requirement for Different Business Models

Robo-advisers are not required to have a different business model to other types of investment advisers in Guernsey.

3.2 Legacy Players' Implementation of Solutions Introduced by Robo-advisers

Legacy players in Guernsey have developed their own technologies to provide robo-advisory services, which are being offered in conjunction with their existing products and services. Industry participants that seek to provide robo-advisory services need to be licensed by the GFSC, and their business plans, business risk assessments and operations manuals expressly need to cover the application of the robo-advisory services, which also need to be reviewed and approved by the GFSC.

3.3 Issues Relating to Best Execution of Customer Trades

Conduct of Business Rules

Investment businesses that are licensed under the PoI Law in Guernsey must comply with the Licensees (Conduct of Business) Rules and Guidance, 2021 (the "CoB Rules"). The CoB Rules require licensees that deal with, or for, a client to provide best execution, unless there is a specific instruction from the client. Licensees must also have a best execution policy in place, which must be disclosed to clients. The policy should state the execution venues used by the licensee.

In order to provide best execution, the licensee must take reasonable care to ascertain the best available price for the client, in the relevant market at the time, for transactions of the kind and type concerned.

Robo-advisory Platforms

If a licensee is using a robo-advisory platform to deal with, or for, a client, the licensee is still ultimately responsible for achieving best execution for the client. Therefore, it is important that the robo-advisory platform can satisfy the best execution requirement. A suitable sample of orders should be reviewed regularly by the licensee as part of the licensee?s ongoing compliance monitoring programme, to ensure the orders are executed in accordance with the licensee?s best execution policy.

4. Online Lenders

4.1 Differences in the Business or Regulation of Loans Provided to Different Entities

There are no differences in the regulation of loans to individuals, small businesses or others that are provided by fintech firms, in comparison to legacy loan providers. Once the LCF Law and the associated Lending, Credit and Finance Rules and Guidance, 2023 (the "LCF Rules") fully come into force from 1 July 2023, lending to consumers will be regulated and will require compliance with various requirements including relating to total cost of credit, customer disclosures, APR calculations and unfair contract terms. Lending to non-consumer third parties and operating peer-to-peer lending platforms will also be regulated and require compliance with certain requirements.

4.2 Underwriting Processes

Conduct of business rules and codes of conduct in Guernsey require suitability assessments in certain circumstances. Suitability assessments will be required for consumer lending from 1 July 2023.

4.3 Sources of Funds for Loans

At the time of writing, alternative lenders whose source of funds is peer-to-peer or lender-raised capital typically fall within the scope of the NRFSB Law (and will fall within the scope of the LCF Law from 1 July 2023). The NRFSB Law requires financial services businesses to comply with Guernsey?s anti-money laundering regime. It is also possible for the GFSC to impose additional requirements on financial services businesses that are registered under the NRFSB Law, such as professional indemnity insurance. The NRFSB Law will be repealed and replaced by the LCF Law from 1 July 2023. Licensees under the LCF Law will be subject to various requirements, including compliance with Guernsey?s AML/CFT regime, financial resources and liquidity requirements.

Alternative lenders whose source of funds is taking deposits are generally classified as banks in Guernsey, and must be licensed under the Banking Supervision (Bailiwick of Guernsey) Law, 2020 (the "Banking Law").

4.4 Syndication of Loans

Syndicated loans are regularly made to Guernsey borrowers. However, these loans are typically arranged and funded by non-Guernsey commercial and investment banks, and they are usually subject to English law-governed finance documents. There are also alternative finance providers in Guernsey that offer finance on a syndicated basis.

5. Payment Processors

5.1 Payment Processors' Use of Payment Rails

While it is possible in Guernsey for payment processors to create and use new payment rails, payment service providers carrying out single euro payments area (SEPA) credit transfer transactions and SEPA direct debit transactions must satisfy the technical requirements set out in Titles III and IV of the Payment Services Directive (Directive (EU) 2015/2366, also known as PSD2) and the Single Euro Payments Area (SEPA) Migration Regulation (Regulation (EU) 260/2012), which have been adopted into Guernsey law.

5.2 Regulation of Cross-Border Payments and Remittances

Guernsey participates in the SEPA and has implemented the requirements of the Payment Services Directive and the Single Euro Payments Area (SEPA) Migration Regulation into local law. Guernsey has also adopted the Wire Transfer Regulation (Regulation (EU) 2015/847).

6. Fund Administrators

6.1 Regulation of Fund Administrators

Fund administrators that conduct, or claim to conduct, any controlled investment business in Guernsey, which includes the administration of collective investment schemes or funds, must be licensed by the GFSC under the PoI Law.

6.2 Contractual Terms

Contractual terms between fund advisers and fund administrators are usually based on the fund administrators? standard terms of appointment for fund advisers. While there is an element of industry custom in respect of fund administrators? agreements, they do vary between fund administrators to reflect the particular requirements of each fund administrator and their relationship with their client fund advisers.

7. Marketplaces, Exchanges and Trading Platforms

7.1 Permissible Trading Platforms

Guernsey?s financial services regulatory regimes do not prescribe or limit the different types of trading platforms that are permissible in Guernsey. Instead, the GFSC will review each type of trading platform as part of an application for licensing or registration of the operator of the platform in Guernsey, in order to be satisfied that the platform meets Guernsey?s regulatory requirements.

Certain types of platforms (such as peer-to-peer platforms) fall within the scope of the LCF Law and will be regulated from 1 July 2023.

7.2 Regulation of Different Asset Classes

Collective investment schemes and general securities and derivatives typically fall within the scope of the PoI Law. In particular, a token or coin issued using blockchain technology that has the characteristics of a security or derivative, or a fund that issues interests to investors using tokens or coins, will likely fall within the scope of the PoI Law. Financial services businesses that conduct, or claim to conduct, restricted activities in or from within Guernsey in respect of collective investment schemes or general securities and derivatives must be licensed by the GFSC. Restricted activities include promotion, subscription, registration, dealing, management, administration, advising and custody. Collective investment schemes that invest in digital assets will continue to be within scope of the PoI Law and benefit from exemptions from the LCF Law.

At the time of writing, other forms of digital asset classes, such as cryptocurrencies that are not asset backed, may fall within the scope of the NRFSB Law, since financial services businesses that provide services in respect of cryptocurrencies could be classed as:

operating a money service business;
facilitating or transmitting value through an informal value transfer system or network;
issuing, redeeming, managing or administering means of payments;
money broking;
money changing;
providing safe custody services; or
accepting funds other than deposits.

Financial services businesses that are registered under the NRFSB Law generally benefit from a lighter-touch regulatory regime in comparison to businesses that are licensed under the PoI Law.

Various services relating to digital asset classes will fall within the scope of the LCF Law and, subject to certain specific exemptions, will be subject to licensing (likely a Part III VASP licence or Part III FFB licence) under the LCF Law and LCF Rules.

7.3 Impact of the Emergence of Cryptocurrency Exchanges

At the time of writing, cryptocurrency exchanges are not specifically regulated in Guernsey. However, the LCF Law and the LCF Rules include provisions that add additional regulatory protections for customers of cryptocurrency exchanges that are not licensed under the PoI Law. In particular, the GFSC will not licence a cryptocurrency exchange that allows retail investors (including sophisticated or professional individual investors) to trade.

7.4 Listing Standards

No formal listing standards exist for unregulated platforms, but general contractual principles should apply. Exchanges that are regulated by the GFSC will have detailed listing/admission to trading rules to ensure transparency and compliance with applicable laws and regulations (eg, the International Stock Exchange Listing Rules), while rules relating to the requirement to publish a prospectus may also be relevant.

7.5 Order-Handling Rules

Financial services businesses that are licensed under the PoI Law must comply with the requirements of the CoB Rules, which include rules governing the execution of orders. In particular, the CoB Rules require licensees to complete client and own account orders fairly and in due turn. The execution of client orders must also be effected or arranged as soon as reasonably practicable in the circumstances, unless the licensee has reasonable grounds to believe that postponing the execution of the order would be in the best interests of the client.

Furthermore, a licensee must not unfairly prejudice itself or any of those for whom it has dealt where the licensee has aggregated an order for a client transaction with an order for an own account transaction, or with another order for a client transaction. If all of the orders cannot be achieved, the orders for the client transactions must be satisfied first, unless the licensee has reasonable grounds to believe that, without its own participation, it would not have been able to effect those orders either on favourable terms, or at all.

7.6 Rise of Peer-to-Peer Trading Platforms

Guernsey?s flexible legal and regulatory environment is attractive to peer-to-peer platform providers. For example, protected and incorporated cell companies give such platforms the ability to establish any number of separate "cells" for different portfolios, while segregating those portfolios so as to prevent cross-contamination of liability.

At the time of writing, peer-to-peer trading platforms typically fall within the scope of the NRFSB Law and must satisfy Guernsey?s AML/CFT requirements.

Peer-to-peer electronic platforms must be licensed under the LCF Law from 1 July 2023.

7.7 Issues Relating to Best Execution of Customer Trades

Investment businesses that are licensed under the PoI Law in Guernsey must comply with the CoB Rules. The CoB Rules require licensees that deal with, or for, a client to provide best execution, unless there is a specific instruction from the client. Licensees must also have in place a best execution policy, which is disclosed to clients. The policy should state the execution venues used by the licensee.

7.8 Rules of Payment for Order Flow

While payments for order flow are generally permitted in Guernsey, firms must disclose to their customers all remuneration that they will receive in connection with a transaction prior to the execution of the transaction. If the amounts are not known, the basis of the calculation of the remuneration must be disclosed.

7.9 Market Integrity Principles

The Market Abuse Regulation (Regulation (EU) 596/2014) does not apply in Guernsey. However, the PoI Law includes a prohibition against market abuse.

PoI Law

Market abuse under the PoI Law generally consists of behaviour by a person or persons, in relation to collective investment schemes or general securities and derivatives traded on a regulated exchange (qualified investments), that is likely to be regarded by a regular user of that market as a failure on the part of that person or those persons to observe the standard of behaviour reasonably expected of a person in their position in relation to the market. Regulated exchanges are expressly prescribed and include the LSE, AIM, NYSE, NASDAQ, The International Stock Exchange, any regulated market that falls within the meaning of the European Directive of Markets in Financial Instruments 2004/39/EU (MiFID), as well as others.

The Code of Market Conduct

The Code of Market Conduct issued by the GFSC under the PoI Law includes descriptions of behaviour that amount to market abuse. These include, for example, the dissemination of information by any means which gives, or is likely to give, a false or misleading impression as to a qualified investment by a person who knew, or could reasonably be expected to have known, that the information was false or misleading. The Code of Market Conduct also identifies manipulating transactions, manipulating devices, and action which distorts a qualified investment, as behaviours that amount to market abuse. Furthermore, it should be noted that inaction can be considered a behaviour which amounts to abuse, eg, where a person fails to make a disclosure that they are under a legal or regulatory duty to make.

The Code of Market Conduct also includes descriptions of behaviour that do not amount to market abuse. These are known as "safe harbours", and include where a person passes relevant information which is not generally available to the following persons:

employees (for the purpose of enabling them to perform their role where the information in question is necessary to their performance);
professional advisers involved in a transaction (for the purposes of obtaining advice);
those with whom one is negotiating a commercial, financial or investment transaction (for the purpose of facilitating the proposed transaction);
trade unions or employee representatives (to fulfil a legal obligation); and
certain statutory and regulatory bodies (to fulfil a legal or regulatory obligation, or otherwise, when passing information to certain statutory or regulatory bodies (in connection with the performance of those bodies' functions).

8. High-Frequency and Algorithmic Trading

8.1 Creation and Usage Regulations

High-frequency and algorithmic trading platforms that provide services for, or on behalf of, clients in return for fees generally fall within the scope of the PoI Law and must be licensed by the GFSC. However, Guernsey does not have a specific regulatory regime for high-frequency and algorithmic trading platforms.

8.2 Requirement to Register as Market Makers When Functioning in a Principal Capacity

There are no specific rules in Guernsey that apply to market makers when they are functioning in a principal capacity.

8.3 Regulatory Distinction Between Funds and Dealers

Collective investment schemes (funds) are subject to specific rules, depending on the type of fund (ie, open-end or closed-end, authorised or registered, qualifying investor fund or private investment fund), which address the particular requirements for a fund. Dealers themselves are not subject to the specific rules for funds but their activities generally may fall within the scope of the PoI Law if carried out in or from within Guernsey.

8.4 Regulation of Programmers and Programming

Programmers who develop and create trading algorithms and other electronic trading tools are not regulated in Guernsey (unless they also carry out some other regulated activity).

9. Financial Research Platforms

9.1 Registration

Financial research platforms that provide, or claim to provide, investment advice or management services in or from within Guernsey on behalf of clients must be licensed by the GFSC under the PoI Law.

Other financial research platforms that do not provide investment advice or management services typically do not need to be licensed by the GFSC.

9.2 Regulation of Unverified Information

The dissemination of unverified information will, in appropriate circumstances, be subject to the PoI Law?s prohibition against market abuse, as described in 7.9 Market Integrity Principles.

9.3 Conversation Curation

It is the responsibility of the operator of the platform to have in place measures that prevent and avoid pump-and-dump schemes, spreading of inside information, or other types of unacceptable behaviour.

10. Insurtech

10.1 Underwriting Processes

Guernsey is a world leader in captive insurance and insurance-linked securities, and the island?s insurance sector is regulated by the GFSC.

Insurance Business Law

Insurtech businesses that conduct, or claim to conduct, insurance business in or from within Guernsey, by accepting risks in effecting or carrying out contracts of insurance, fall within the scope of the Insurance Business (Bailiwick of Guernsey) Law 2002 (the "Insurance Business Law") and must be licensed by the GFSC.

Insurance Managers Law

Insurtech businesses that occupy premises in Guernsey, or are contactable from an address in Guernsey, or offer to perform their services in Guernsey, and which enter into, or offer to enter into, a contract to exercise the managerial functions of an insurer, to advise clients on their insurance requirements, or to arrange contracts of insurance between insurers and clients, fall within the scope of the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law 2002 (the "Insurance Managers Law"). Insurtech businesses that fall within the scope of the Insurance Managers Law must also be licensed by the GFSC.

GFSC Requirements

The GFSC has issued regulations and rules under the Insurance Business Law and the Insurance Managers Law that impose requirements on the operations of insurtech businesses that fall within the scope of these laws. In particular, the GFSC has introduced rules that impose requirements on the way that insurers, insurance managers and intermediaries conduct business and on the solvency requirements of insurers, insurance managers and intermediaries.

10.2 Treatment of Different Types of Insurance

The Insurance Business Law and the Insurance Managers Law treat long-term and general insurance business as different categories of insurance. Long-term insurance includes life, marriage and birth, permanent health, capital redemption, credit life assurance, as well as pension fund management.

The GFSC applies different rules and requirements in respect of insurance businesses that provide general or long-term insurance products or services.

11. Regtech

11.1 Regulation of Regtech Providers

Regtech businesses in Guernsey are not currently regulated, unless those businesses provide other financial services, such as company administration.

The GFSC recently conducted an industry consultation, which asked whether businesses that provide compliance services, such as client due diligence services, should be regulated by the GFSC. The benefits of regulating client due diligence services providers would be to ensure high industry standards and also to enable client due diligence services providers to act as introducers for regulated financial services businesses. Depending on how they operate, such service providers will be within the scope of the LCF Law.

The Handbook enables financial services businesses in Guernsey to adopt apps that can automatically certify identity and address verification documentation without requiring approved certifiers. This development should create a huge opportunity for regtech providers that offer services in Guernsey.

Other forms of regtech providers, such as businesses that provide reporting tools (eg, for KID reports under PRIIPs, or for FATCA and CRS reporting) or compliance management platforms, are typically unregulated in Guernsey.

11.2 Contractual Terms to Assure Performance and Accuracy

The contractual terms between financial services firms and technology providers vary considerably depending on the type of relationship between the financial services firm and the technology provider, as well as the type of service being offered. However, the contractual terms would typically include provisions that cover service levels, intellectual property, confidentiality, data protection, termination, insurance and suitable warranties and indemnities.

12. Blockchain

12.1 Use of Blockchain in the Financial Services Industry

Fund administration and management firms have already started to implement blockchain technology for the purposes of performing fund administration functions in Guernsey. In addition, participants in the financial services industry in Guernsey have been considering using blockchain technology to hold and share client due diligence information securely.

Some banks and custodians are also considering establishing services either to issue, or to act as custodian of, cryptocurrencies.

12.2 Local Regulators' Approach to Blockchain

In Guernsey, blockchain is generally recognised as a software tool that can be used to record and distribute information securely. Therefore, while some of the activities that blockchain can be used for, such as token offerings, would typically be regulated, blockchain technology itself is not regulated.

However, financial services firms that are regulated in Guernsey and that wish to use blockchain technology should liaise with the GFSC to update it on how the technology will fit within the firm?s business models and operating procedures; whether the technology will present any risks; and to demonstrate to the GFSC that they have sufficient knowledge and experience to use the technology.

12.3 Classification of Blockchain Assets

Whether an asset that is recorded on a blockchain is regulated in Guernsey will depend on the nature of the underlying asset.

In respect of security tokens (including equity tokens) that are linked to an asset, where the value of the tokens is derived from that asset (such as shares, futures or options contracts), or where the issuer of the tokens has the characteristics of a collective investment scheme, namely:

investors share in the profits and income arising from the investments of the issuer;
investors do not have day-to-day control over the investments of the issuer; and
the contributions of investors and the profits and income from which payments are to be made are pooled, or the investments of the issuer are managed by a third-party investment manager,

the tokens will likely fall within the scope of the PoI Law.

Utility tokens (app coins or user tokens) that are linked to the purchase of goods or services will be within the scope of the LCF Law. Certain services relating to digital assets, such as those described above, will also be within the scope of the LCF Law.

12.4 Regulation of "Issuers" of Blockchain Assets

The PoI Law

Financial services providers in Guernsey that provide services to issuers of security tokens that fall within the scope of the PoI Law will likely have to be licensed by the GFSC, and comply with the requirements of the PoI Law and the applicable rules made under the PoI Law.

The NRFSB Law

Financial services providers in Guernsey that provide services to issuers of utility tokens that fall within the scope of the NRFSB Law will likely have to comply with the requirements of the NRFSB Law and Guernsey?s AML/CFT regime. The NRFSB Law requires financial services businesses to be registered with the GFSC. The NRFSB Law will be repealed and replaced by the wider LCF Law with effect from 1 July 2023.

Regulation of Fiduciaries, Administration Businesses and Company Directors Law

Depending on the nature of the assets to be issued, the issuer may also need to be regulated in Guernsey and/or comply with additional rules, including in respect of disclosures to investors. If the services provided include company administration, it is likely that the services provider will also need to be licensed under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law 2020.

The LCF Law

The provision of services to issuers of virtual assets is within the scope of the LCF Law and, depending on the nature of the services involved, will require a Part III VASP licence.

12.5 Regulation of Blockchain Asset Trading Platforms

Currently, blockchain asset trading platforms in Guernsey generally fall within the scope of the PoI Law or the NRFSB Law, depending on the nature of the underlying assets that are traded, which require the operator of the platform either to be licensed or registered by the GFSC. Such platforms may, depending on how they operate, be subject to the LCF Law. Where they are subject to the LCF Law, they will likely require a Part III VASP licence.

The GFSC has issued guidance that it would be cautious about approving applications for token or coin offerings which could be traded on a secondary market, due to the increased risk of fraud and money laundering. This caution extends to the LCF Law, and the GFSC will not issue a licence to a trading platform on which retail investors (including sophisticated or professional individual investors) could trade.

12.6 Regulation of Funds

Any funds that invest in blockchain assets are regulated in the same way as any other funds that invest in other types of alternative asset classes. These types of fund will be exempt from the LCF Law as they are subject to the PoI Law. However, it is likely that the GFSC will take a cautious approach to approving funds that invest in blockchain assets due to the potential volatility and the risk of fraud and money laundering.

12.7 Virtual Currencies

The legal treatment of any cryptocurrency or other blockchain asset will be determined by whether that particular asset?s features fall within the scope of certain legislative and regulatory regimes.

12.8 Impact of Regulation on "DeFi" Platforms

The extent to which decentralised finance platforms will be caught be Guernsey's regulatory laws will depend on the nature of the services offered (and the assets to which those services relate): as noted in 12.5 Regulation of Blockchain Asset Trading Platforms, such platforms will generally be subject to either the PoI Law or the NRFSB Law at the time of writing. From 1 July 2023, such platforms will be subject to the LCF Law. However, it is unlikely that the GFSC will license a decentralised finance or DeFi platform.

Furthermore, businesses that use blockchain to access or store personal data are likely to be subject to Guernsey?s data protection regime, as outlined in 2.10 Implications of Additional, Non-financial Services Regulations.

12.9 Non-fungible Tokens (NFTs)

NFTs that have the characteristics of a security or derivative will likely fall within the scope of the PoI Law, as would the platform on which such NFTs are traded or exchanged. However (at the time of writing), NFTs (and their related platforms) that are not backed by financial assets, or are not asset backed, may fall within the scope of the NRFSB Law or, depending on relevant specific facts, may not fall within the scope of any regulatory law.

NFTs and NFT platforms will be within the scope of the LCF Law, such that persons issuing NFTs and platforms on which NFTs are traded or exchanged will require licensing by the GFSC if they are a Guernsey person or carry on their business in Guernsey. The GFSC will not issue a licence to a NFT issuer or trading platform where the NFT is aimed at retail investors (including sophisticated or professional individual investors) or where such investors could trade in the NFT.

13. Open Banking

13.1 Regulation of Open Banking

Guernsey has adopted Titles III and IV of PSD2 into Guernsey law. A possible disruptive aspect of PSD2 is the ability for payment initiation service providers to initiate payments from account-servicing payments service providers and for account information service providers to access customer data.?

Retail banking in Guernsey is dominated by the same UK clearing banks that are implementing open banking in the UK. On this basis, financial institutions in Guernsey may seek to introduce open banking as a consequence of its adoption in the UK.

13.2 Concerns Raised by Open Banking

PSD2 imposes certain conditions on the access to, and use of, data by firms providing a payment initiation service or account information service. This includes a requirement for customer consent, and other requirements in relation to security and the use of data. In addition, the DP Law requires customers to be made fully aware, in a clear, concise and transparent fashion, of how their personal data will be used and by whom. It also provides for the right to withdraw consent and access to data, and the right for information to be erased. In sharing data with third parties such as account information service providers, financial institutions need to be aware of the potential for fraud or other risks.

Originally Published by Chambers and Partners Fintech Practice Guide 2023.

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.

Guernsey: Fintech 2023