Regulation - an Opportunity or Restriction?
Lisa Aune, Lead Director, Corporate Services
Rewind to 2016 and the dinner tables of finance workers across the Channel Islands, and its likely regulation was the dirty word used in many conversations. The work that many had to go through to implement FATCA — the Foreign Account Tax Compliance Act - thanks to the Americans, caused many headaches and cost finance firms a lot of money. Yet it is just one of the regulatory changes brought in which has altered financial services. If you would like to view this article in PDF, click here.
Both Guernsey and Jersey’s finance industries have gone through a metamorphosis, fighting back against the ‘tax haven’ image and bringing in our own regulation to ensure the sectors are transparent and clean.
Was it the right move? Has regulation created opportunities, or been a pain in the proverbial? Business Brief asked some of the islands’ experts for their views.
Helen Hatton, Managing Director, BDO Consulting
The first thing is that it’s the ticket to play the game. If you don't have a properly recognised equivalent regime that effectively meets international standards you're not allowed to play the game.
In my view the regulatory regime must be just a part of the offering and the next big chunk is the skills pool and in that regard that can help as a regulatory authority is always charged with assessing the competency and integrity of any financial institutions, so the regulator can mandate qualification levels.
By mandating that it forces businesses to invest in staff and invest in their own competencies and career. That massively professionalises the industry so it’s interesting if you phone up people like the Securities Institute or ICSA, the Institute of Chartered Secretaries and Administrators, and ask them the size of their membership in Jersey compared with similar sized jurisdictions without a competency requirement, you would find the members are minimal in places like the Cayman compared to ours.
Someone who is a fully qualified professional with globally recognised exams becomes an asset of the business, part of the human capital and so regulation well done can get quite involved in social engineering.
Another example of regulation being a positive is many jurisdictions permit representative offices and in effect they allow their centres to be used as booking centres, whereas Jersey is very committed to being a real presence centre. We need competent properly qualified directors resident in the island running the business. When international trends change, so the big threat now is substance and BEPS (base erosion and profit shifting) we can sustain those pressures because we have competent staff who are actually located here. So regulation is more than just the conduct of business rules that people tend to focus on. It’s also about building the infrastructure of the actual businesses that are present in the jurisdiction.
JFSC chairman, Lord Eatwell speaking at the JFSC’s 20th anniversary
The Jersey Financial Services Commission is a sophisticated regulator working in a small jurisdiction. This means that necessarily it works far more closely with industry and with government than would be the case in a larger jurisdiction such as the UK. This provides an environment in which successful innovation, especially fintech innovation, could just possibly be a process in which all three — regulator, industry and government are usefully involved. At the EU level a nervous approach, indeed negative approach is being taken to fintech. At present UK regulators have adopted a more wait and see approach, wary of stifling innovation. In Jersey because of our experience of working together we could go further, creating a unified technology, regulatory and government space in which fintech innovations can be tested before they're launched in the market place.
What I’m not saying is we should relax our regulatory muscles as far as fintech is concerned that would not only increase the risk to which Jersey is exposed, but it would also be a betrayal of fintech developers. They need the guidance so they can accurately assess regulatory response. Nor will we provide so called safe harbours, that’s not what regulators do. What we can do is provide an environment in which creativity can thrive in a realistic legal environment.
Malin Nilsson, Managing Director, Duff & Phelps
The regulatory regimes in the Channel Islands have long been described as strong, or, in some cases, onerous when compared to other jurisdictions such as the Overseas Territories. High standards of regulation invariably lead to higher costs of doing business, implying a negative impact on firms; however, two factors point to the opposite.
First, as noted in the Duff & Phelps Global Enforcement Review, standards of supervision and enforcement differ between countries and regulatory arbitrage opportunities exist — but they are shrinking. Regulatory standards are being enhanced globally, and the Channel Islands may benefit from being ahead of the curve.
Second, a decision to use specific jurisdictions is not always driven by cost. Investors in funds domiciled in the Channel Islands, as well as providers of finance in an increasingly private equity- owned industry, value security and stability, and regulatory standards form a part of this.
The remaining challenge is how to maintain high regulatory standards that are also commercial and a framework that makes “doing business” easy. This is a balance which is not easy to strike.
Tracy Garrad, Chief Executive Officer, Channel Islands & Isle of Man HSBC Bank plc
It is true that the volume and pace of regulatory change, in all sectors, has been dramatically increasing in recent years but| start from the belief that all new regulation comes from a place of good intent; it’s a response to an emergent, or crystallising risk that has been identified, which is a good thing. Of course, implemented in a clumsy way, additional or new regulation can undoubtedly have detrimental impacts in many ways, certainly in customer convenience and experience but also in terms of increasing costs of enhanced processes to be compliant. So at its most basic, new regulation can and should be a driver for considering innovative and thoughtful ways in which to be compliant whilst IMPROVING cost efficiencies and the customer experience simultaneously. Beyond this, there are some regulations where the only feasible response is innovation, and more specifically technology innovation — highly data intensive analytical requirements for example, simply cannot realistically be met by any other means. In summary, |believe regulation is a fantastic driver of innovation, if that is the lens through which you choose to look at it and respond.
Dominic Wheatley, Chief Executive, Guernsey Finance
Regulation is fundamental to the competitive offering of a global finance centre.
Guernsey takes pride in its efforts to meet all applicable international regulatory standards while continuing to offer a pragmatic, flexible and responsive environment for business.
Guernsey is well regarded internationally for proportional regulation with a fair, pragmatic and approachable regulator. The accessibility of the regulator in developing new products and opportunities and for potential licensees is one of Guernsey's key strengths.
Guernsey regulations are being updated and modernised all the time. In the past 12 months Guernsey has seen a number of developments which demonstrate our flexible, principles-based and pragmatic regime, which we will continue to use to position ourselves for success in global finance going forward.
Last year Guernsey revised and modernised its regulatory and supervisory framework for international pension schemes and their providers. The aim was to better protect investors, improve the island's competitive position, and future-proof the supervisory framework.
This year we have seen amendments to the Private Investment Fund rules which have been significant, both in greater demand for the product as a result, and in demonstrating the flexibility and responsiveness of our regulatory environment, which also boosts our reputation.
We expect the launch of the Guernsey Green Fund this summer to become one of the most significant developments in Guernsey regulation for some time. We see it as the island taking a stake in progress towards raising finance to meet the United Nations’ Sustainable Development Goals, and also the first move in positioning ourselves to become the “go to” global finance centre for green finance.
Lisa Aune, Lead Director, Corporate Services at SANNE
There is still a lack of expertise in the market when it comes to FATCA and CRS (Common Reporting Standard) and many financial institutions found that they had underestimated the burden of ensuring compliance. The rules under FATCA and CRS are ever changing and it's becoming increasingly difficult, even for the most sophisticated of institutions, to keep on top of the nuances between the jurisdictions.
As if this wasn’t enough, the introduction of the OECD's Base Erosion and Profit Shifting (BEPs) framework means that many financial institutions, forming part of a multi- national group, are now required to exchange information under the Country-by Country Reporting Regime on an annual basis. This reporting, again, requires specialist software to create files in the correct format and a level of expertise to ensure that the information contained in the reports is complete and accurate.
Add to this the compliance requirements imposed under the EU’s General Data Protection Regulation, introduced earlier in the year, and the reporting which will be required under the EU’s mandatory disclosure rules (also referred to as DAC 6 reporting) and you can see that many institutions now have a huge amount of compliance and regulatory reporting to contend with.
There is no doubt that SANNE has seen increased demand for an outsourced tax, compliance and regulatory reporting solution throughout the last two years, with many in the industry now viewing this as a product in its own right, as opposed to a bolt-on to the standard administration service.