1 Jersey Financial Services Commission (JFSC) updates
1.1 Jersey's Private Fund consultation paper
In August 2016, the JFSC issued a consultation paper in relation to the proposed rationalisation and consolidation of Jersey's private fund and unregulated fund regimes. The paper is the result of work undertaken by a funds working group comprised of members from the Government, the JFSC, Jersey Finance, the Jersey Funds Association and industry experts, including Ogier partner Niamh Lalor. Its aim is to simplify Jersey’s funds legislation and regulation process whilst retaining flexibility and innovation.
In summary, the consultation paper proposes to:
- introduce a new Very Private Placement Fund Guide intended to provide greater certainty of the eligibility conditions and regulatory approach to the authorisation process for a Very Private Fund (to be re-branded subject to consultation);
- introduce a new and universal "Professional Investor" definition, intended to avoid the uncertainty that is created by having multiple non-retail investor definitions spread across the Private Placement Fund Guide, the "professional investor regulated scheme" Orders, the Expert Fund Guide, the Restriction of Scope Order and the Unregulated Funds Order;
- introduce modern regulatory powers in the COBO Law, including supervision, enforcement and co-operation powers in line with powers available to the JFSC under the Collective Investment Funds (Jersey) Law 1988;
- phase out COBO-Only Funds, which have seen a decline in applications since the introduction of the Private Placement Fund in 2012; and
- phase out Unregulated Exchange-Traded Funds, which the JFSC has seen being misused, given that they can be established simply by giving notice to the Companies Registry (as long as they are listed on a prescribed exchange) with no restrictions in relation to the number or types of investors or a minimum investment amount.
Industry and the JFSC continue to work together closely to streamline this critical aspect of Jersey's funds offering and revised proposals are expected to be published early in 2017.
1.2 Outsourcing consultation
As we mentioned in a briefing last summer, in July 2016 the JFSC issued a consultation paper in relation to proposed amendments to the outsourcing policy. Its aim is to eliminate the confusion historically caused by the distinction between outsourcing and delegation, and amend the scope to include all outsourced activity that may have a material impact on 'regulated activity'.
One of the issues with the proposed revised outsourcing policy is that it now requires a registered person to provide notice to the Commission of its intention to outsource any "material activities" or to make material changes to any existing arrangements. Registered persons must procure a 'no-objection' from the Commission in respect of the outsourcing, with a restriction on proceeding with the outsourcing until the 'no-objection' is received. In addition, as part of any arrangements sought to be put in place, the registered person is required to conduct due diligence on any service provider that may be appointed. This will undoubtedly increase the corporate governance required (and evidence to be maintained thereof) in terms of internal arrangements to be put in place to ensure adherence with the revised policy, and may potentially require the re-negotiation of existing contracts, with costs of additional warranties that may be requested, etc. It appears that the proposed policy will result in an increase in the costs associated with outsourcing and make an already highly regulated entity subject to additional procedural burdens. The consultation closed at the end of September and it is hoped that feedback on the policy (including by Ogier's funds and regulatory team) with respect to areas which require further clarity will be considered prior to the issue of the revised policy.
The intention is that the revised outsourcing policy will come into force in Q1 2017, although no response to industry feedback has been issued by the JFSC since the end of the consultation period, so timing remains uncertain.
1.3 AML consultation
This Consultation, published on 23 September 2016, sought input on the proposed new Funds section to the AML/CFT Handbook for regulated financial services business. The new section is aimed at providing additional clarification and guidance on certain aspects of the AML/CFT regime and as such it would not amend any existing statutory or regulatory AML/CFT obligations for funds or fund operators nor would it contain any new codes of practice. The proposed guidance contains examples and welcome clarity in a number of specific areas of complexity. Following a briefing session on the proposals hosted by the JFSC for individuals working in the funds sector on the consultation on 15 November, the consultation closed on 25 November. Ogier submitted a response to the JFSC and looks forward to the publication of feedback on the consultation paper.
1.4 Amendments to Registry Fees
In October 2016, the Registry announced that it will impose new fees, as set out in a public consultation issued in May 2016, which apply as of 1 January 2017. In summary, the Registry will:
- increase the annual return fee from £150 to £210;
- apply new penalties in relation to late filing fees, commensurate with the length of time the filing is overdue; and
- introduce a new five tier system for the incorporation of companies, with the charge for a five day incorporation being £150 (£50 less than the current two day incorporation cost).
1.5 Information on Beneficial Ownership
In April 2016, the States of Jersey signed an agreement with the UK Government in relation to the sharing of beneficial ownership information between the law enforcement authorities of both jurisdictions, which will come into effect by 30 June 2017.
As a result of the commitments made under the agreement, the Registry is requiring all Jersey corporate and legal entities (apart from foundations) to confirm their current beneficial ownership and control by 30 June 2017. For such corporate and legal entities administered by a licenced trust company service provider, there is then an ongoing obligation to notify the Registry in respect of any changes to the beneficial ownership and control within 21 days of the change. Those corporate and legal entities that are not administered by a trust company service provider will, going forwards, need to seek the prior consent of the Registry before any change in beneficial ownership of 25% or more takes place.
The information provided will not be available on any public register – it will be stored on a secure and private register held by the Registry and will only be exchanged on request with law enforcement and tax authorities.
The Registry will replace the COBO consent for each corporate and legal entity with a new form of COBO consent issued on the JFSC website on 1 January 2017 containing the additional notification requirements. A replacement COBO consent in that form applicable to each corporate and legal entity will be sent out with the annual return receipts (except for certain more complex COBO consents which will be issued on review and on a case by case basis), but will be effective from 1 January 2017. The new COBO consent will automatically replace any existing COBO consent, notwithstanding that a replacement copy has not yet been received. Although the introduction of these notification requirements for corporate and legal entities can be viewed primarily as a change in policy, we understand that legislative amendments will follow in the second quarter of 2017.
The States has also committed to creating a centrally held register of directors, meaning that all companies will need to notify the Companies Registry of the identity of all directors and ensure that this information is kept up to date and accurate. The JFSC will commence work on this project in 2018.
1.6 Brexit funding approved
In September 2016, the Treasury Minister approved growth funds for three initiatives, including for the establishment of a governmental Brexit planning unit. It is hoped that this will enable the government to understand and deal with issues arising out of the UK's decision to exit the EU. A high-level working group across all government departments has been established to identify all potential implications and opportunities of Brexit for Jersey. In addition, a range of other work to assess the scale and nature of economic opportunities resulting from the UK’s changed circumstances will also be undertaken.
Allocations have also been provided to enable Jersey to respond to the introduction of the EU's General Data Protection Regulation which increases regulatory requirements and to help develop on-island digital business skills.
1.7 Feedback on JFSC MiFID II Consultation
In December 2016, the JFSC reported on responses received to its consultation paper published in April 2016 which, as discussed in our previous update, sought input as to whether Jersey should introduce a MiFID II equivalent regime and set out certain potential benefits and costs of doing so. The JFSC received 27 responses in total and, on the question of equivalence, nine were in favour of the proposal for Jersey to seek MiFID II equivalence while twelve disagreed or expressed considerable concerns about doing so (and six had no strong opinion either way).
The reasons provided for those in favour included the benefits gained by addressing perceived regulatory gaps in Jersey, improving the ability to control non-compliant behaviour and generally improving consumer protection. However, the main concern raised by the proposal was the potentially negative impact on Jersey’s funds sector, including additional costs and disruption to the existing business models of fund functionaries that currently rely on exemptions from regulation.
In its analysis of responses, the JFSC has recognised that the core question comes down to a consideration of costs and benefits and as such it would be beneficial for the JFSC to provide more clarity on, and where possible quantify, such costs and benefits. The JFSC has said that it will explore a broad range of options in terms of pursuing an approach that generates more benefits than costs. However, it has recognised that "a full ‘cut and paste’ of MiFID, MiFIR and EMIR" would not be the best approach for Jersey.
2 CISE listing rule changes
With effect from 1 September 2016, chapter 7 of the Channel Islands Securities Exchange Authority Limited (the CISE) listing rules applicable to investment vehicles and its model code for securities transactions underwent changes, with the CISE adopting a principles and guidance based approach.
The intention is that the amended chapter will provide more flexibility to introduce new product types. The accompanying guidance notes are intended to explain the implications of the listing rules and indicate possible means of compliance and/or recommend a particular course of action or arrangement. The introduction of the guidance element to the listing rules allows the CISE to change the guidance more rapidly to reflect industry changes and norms.
Please click here to access a copy of our briefing summarising the revisions to chapter 7.
3 AIC Code applying to Jersey companies
A new AIC Code of Corporate Governance (the AIC Code) relating to Jersey companies was adopted in July 2016. The AIC Code is 'principles' rather than 'rules' based and aims to provide boards with a framework of best practice in respect of the governance of investment companies by setting out 21 principles, each with detailed recommendations. The JFSC has made a statement of support in respect of the AIC Code, emphasising that there are particular issues that directors need to address in the context of investment companies that go beyond the usual governance topics for trading business.
The "fundamentals" behind the AIC Codes are as follows:
- Directors must put the interests of shareholders above all others.
- Directors must treat shareholders fairly.
- Directors should be prepared to resign or take steps that could lead to a loss of office at any time in the interest of long-term shareholder value.
- Directors should ensure that they address all issues of relevance and that they disclose the outcomes of those deliberations in a way that shareholders with limited financial knowledge can understand.
The AIC Code recognises that investment companies have particular characteristics and require additional corporate governance considerations. Most notably, an investment company's customers and shareholders are often the same and it typically has no employees; such that roles in respect of CEO, portfolio management, administration, accounting and company secretarial are often provided by a third party fund manager (or outsourced by it), meaning that the fund manager is more important than a typical company supplier. Accordingly, the AIC Code deals with matters such as board independence and the review of management and other third party contracts. It considers that most of the time spent by a board of a well-functioning investment company should be spent on matters of general corporate governance, for example, investment strategy and performance monitoring.
We expect that the NED community in particular will be most interested in the introduction of the AIC Code, given the JFSC's commendation of it to Jersey-domiciled investment companies.
4 Global Developments
4.1 Brexit Crown Dependencies Inquiry
In October 2016, the UK Justice Select Committee (JSC) launched an inquiry with respect to the impact of Brexit on the Crown Dependencies. The inquiry began with a call for evidence inviting submissions on the potential opportunities and risks, its constitutional impact, what the UK Government should prioritise in its negotiations with the EU and how the UK Government is engaging with the Crown Dependencies.
The Jersey Government has responded to the questions raised and, while it has welcomed the inquiry, it has emphasized the importance of ongoing consultation, including following the triggering of Article 50, so that the Crown Dependencies' interests can be taken into account when tough decisions arise. It is expected that the JSC report will be published around the time that Article 50 is expected to be triggered.
4.2 FCA issues consultation papers on MiFID II Implementation
In September 2016, the Financial Conduct Authority (FCA) published a third consultation paper on the implementation of MiFID II in the UK. MiFID II, which comes into effect on 3 January 2018, will aim to make financial markets more efficient, transparent and responsible by updating rules governing the way capital markets function, contributing to the reform of derivatives markets and strengthening transparency of trading.
Key proposals of the consultation paper, which focuses on conduct of business issues to increase protections for retail investors, include:
- Strengthening inducement and research rules to drive better competition and ensure research is only produced and consumed where it adds value to investment decisions.
- Implementing requirements of full disclosure of costs and charges.
- Guidance on the responsibilities of providers for the fair treatment of customers.
- Extending the requirement of telephone taping to financial advisers, with the aim of providing benefits to both firms and their clients in resolving disputes in a quick and cost effective manner.
The FCA has previously confirmed it would apply the same conduct rules to third country firms as it does to MiFID investment firms, to ensure they are treated no more favourably than branches of EEA firms. The conduct proposals in this consultation paper for MiFID investment firms should therefore also apply to branches of third-country firms.
A further consultation paper issued in December deals with a series of broadly technical Handbook changes not covered in the previous MiFID II consultations, including specialist conduct of business regimes, tied agents and SME growth markets.
4.3 Proposals regarding new corporate offence of failure to prevent the criminal facilitation of tax evasion
In October 2016, HMRC published a summary of responses to the April 2016 consultation on a new corporate offence of failure to prevent the criminal facilitation of tax evasion. The legislation aims to introduce a new offence, which will be committed where a relevant body fails to prevent an associated person criminally facilitating the evasion of a tax, and this will be the case whether the tax evaded is owed in the UK or in a foreign country.
The new offence does not radically change what is "criminal"; rather it focuses on who is held to account for acts contrary to the current criminal law. It does this by focussing on the failure to prevent the crimes of those who act for, or on behalf of, a corporation, rather than trying to attribute criminal acts to that corporation. There shall be a defence where the relevant body has put in place ‘reasonable prevention procedures’ to prevent its associated persons from committing tax evasion facilitation offences, or where it is unreasonable to expect such procedures.
4.4 HMRC consults on tackling offshore tax evasion
In December 2016, HMRC issued a consultation paper entitled "Tackling offshore tax evasion: A requirement to notify HMRC of offshore structures" containing a proposal to require businesses that create certain complex offshore arrangements to notify HMRC of the details of such arrangements, and to provide HMRC with a list of clients using them. Although it is recognised that many such structures are legitimate, the aim is to target those that could easily be used for tax evasion purposes. Businesses would be provided with a notification number that they will in turn provide to their clients to include on their self-assessment tax return/personal tax account. Those that fail to comply with these requirements would incur civil sanctions. The deadline for comments is 27 February 2017.
Similarly, in August 2016, HMRC issued a consultation paper entitled “Tackling offshore tax evasion: A Requirement to Correct”, relating to proposals to introduce new legislation requiring any person who has undeclared UK tax liabilities in respect of an offshore interest to correct that situation by disclosing the relevant information to HMRC, with new sanctions for those who ‘fail to correct’. The deadline for comments has passed.
4.5 IOSCO paper on good practices for investment funds
In August 2016, the International Organisation of Securities Commissions (IOSCO) issued a consultation paper seeking feedback on a proposed set of good practices on the voluntary termination process for collective investment funds. The report recognises the importance for investment funds to have termination procedures in place from an investor protection perspective because the decision to terminate can have a significant impact on investors in terms of cost and their ability to redeem their holdings in a timely manner. The deadline for responses has passed.
IOSCO also issued a report setting out common examples of good practice that can be applied to collective investment scheme fees and expenses, with the aim of promoting greater fairness and transparency.