On the December 28, 2017 the Jersey Financial Services Commission (JFSC) published feedback to Consultation Paper No.6 2017 on amendments to the JFSC Codes of Practice applicable to all regulated financial services business (the “Codes”). The amendments (taking into consideration industry feedback) include routine updates to the Codes which clarify existing requirements, introduce new regulations to align the Codes with international standards, and address issues that the JFSC has identified during supervision visits.
The revised Codes have now been issued and will be effective from March 21, 2018. Firms should therefore review the changes to the Codes and consider whether any internal control updates are necessary. The JFSC does have an expectation that recent updates to Codes are implemented, and they are sure to be a focus of onsite visits over the coming year.
The updates to the Codes include the introduction of new and revised regulations to bring local requirements in line with the Group of International Finance Centre Supervisors (GIFCS) Standard (the international regulatory standard for the regulation of Trust Company Service Providers (“TCSPs”) against which Jersey will be independently assessed.
Whilst these updates directly impact the TCB Code, the JFSC has also amended the Codes as they apply to other sectors to reflect the same requirements where they represent best regulatory practice.
Material updates applicable to all Codes are summarized below (including industry feedback) and Duff & Phelps has prepared a table which details all updates to the Codes.
Assessment of corporate governance arrangements
The Codes will now include a new requirement for regulated firms to regularly review their corporate governance requirements which will include carrying out a periodic self-assessment or external assessment of the board’s effectiveness. The JFSC has confirmed that it does not propose to issue specific guidance on what a self-assessment should consider as there is much guidance already in the public domain from governance organizations and professional advisors.
The JFSC has commented that the frequency of such an assessment will depend on the complexity of the registered person’s business and that a registered person should be prepared to provide the JFSC with a rationale for the frequency of reviews it has decided upon.
Notification of qualified audit
The Codes will now include a new requirement for regulated firms to notify the JFSC on a timely basis of any decision by its auditor to qualify its audit report or to include an emphasis of matter in its opinion.
This is a GIFCS Standard and the JFSC has highlighted that due to the large number of financial statements it receives, a separate notification, to enable the JFSC to prioritize financial statement review in line with its risk based approach to supervision, is required.
Definition of a complaint
The Codes will be updated to include a formal definition for a complaint. Due to industry feedback, this definition was amended to bring it substantively in line with the definition issued by the Channel Islands Financial Ombudsman (“CIFO”).
A complaint will now be defined as “any oral or written expression of dissatisfaction, whether justified or not, from, or on behalf of a person about the provision of, or failure to provide a service that relates to [the type of regulated business] carried on by the registered person, which alleges that the complainant has suffered (or may suffer) financial loss, material distress or material inconvenience.”
The adoption of this wording is intended to avoid firms having to notify what might otherwise be considered trivial matters and to provide a measure of objectivity to the definition.
Risk identification and management
Principle 3 of the Codes requires a registered person to demonstrate adequate risk management systems. The JFSC commented in the consultation paper that some registered persons have interpreted this to mean risk only relating to money laundering and terrorist financing. The notes to Section 3 of the Codes will therefore be updated to note that “risk” refers to all risks that a registered person may face.
In its feedback paper, the JFSC clarified that the JFSC expects registered persons to periodically undertake a risk assessment covering not only its money laundering and terrorist financing risks but also its other risks. This risk assessment does not need to follow the same format as the AML Business Risk Assessment (as required by the JFSC AML/CFT Handbook) but should be documented to include the risks and what mitigating measures have been put in place.
As with the corporate governance arrangements, the JFSC does not propose issuing specific guidance on risk management. Proposed material updates to specific Codes are summarized below and we have also prepared a table which details all proposed updates to the Codes.
Amendments to the FSB Code
The Fund Services Business (FSB) Code will include a requirement for custodians and/or depositories to closed-ended funds to have paid up share capital and non-distributable reserves, and a minimum net assets position of not less than £250,000. This requirement previously only applied to the trustee of a closed-ended fund.
Amendments to the IB Code
The Investment Business (IB) Code will be amended to require a registered person, where it holds client monies, to disclose the terms on which it is held.
In terms of interest rates, disclosure should include advising clients whether client money will earn interest, whether interest will be paid to clients and, if so, the frequency of payment. It is not necessary to notify the client each time the rate changes. Notification of interest rates on request is acceptable.
Amendments to the TCB Code
The Trust Company Business (TCB) Code will also be amended to require a TCB to maintain documents systems, controls and procedures for “reconciling movement in trust company business assets.” Although it has long been a requirement to reconcile customer money under legislation, this requirement does not cover assets in a broader sense and is not in accordance with the GIFCS Standard.
The JFSC has confirmed that it will be conducting a thematic examination of whether registered persons have appropriate systems and controls to segregate, manage and safeguard client assets in Q2 2018. This should therefore be a key area of focus for firms.
The TCB Code will also be updated to require firms to understand and document the rationale for the formation of a company or the establishment of a trust, both of which were absent from the previous Code. However, while the requirement to understand the rationale for the provision of registered office facilities, or accommodation or correspondence addresses was always present, there will now be a formal requirement that this understanding is documented. These updates are again to bring the Code in line with the GFICS Standard.
In addition, the TCB Code will be amended (in line with the GIFCS Standard) to require TCSPs to disclose their terms and conditions to customers which are defined as persons to whom TCB services are provided to limit the disclosure to contracting parties. The revised Code sets out the requirements for these terms and conditions, for example this documentation must be distinguishable from marketing or promotional material and must be clearly expressed in plain language that only uses technical or legal terms where necessary.
How Duff & Phelps Can Help
Regulated firms may need to update their policies and procedures and introduce further controls to ensure compliance with the revised Codes. For example, firms will need to determine the frequency and scope of the periodic board assessment and whether the assessment will be conducted internally or externally.
Our experienced Compliance and Regulatory Consulting team, based in the Channel Islands and globally, can assist your firm with meeting the JFSC’s regulatory standards through:
- Policies and procedures development
- Review of governance arrangements and senior management arrangements
- Annual and ongoing reviews of compliance arrangements, systems and controls (including red-flag reports)
- Regulatory remediation project management and technical guidance
- Compliance and regulatory secondments to assist with temporary resource gaps
- Compliance monitoring
- Compliance infrastructure advisory
- Staff training on regulatory matters
- Mock regulatory audits, pre-enforcement and supervisory reviews
- Support with on-site regulator visits, examinations and enforcement investigations
- Advice on preparing for regulatory changes
- Regulatory update notifications
For details of the Consultation Paper please click the following link.
For details of the Consultation Paper feedback click the following link.