JFSC Shares Findings from its 2011 Inspection Programme

The Jersey Financial Services Commission has this week released its business plan, which contains an interesting insight into inspections made during 2011.

In relation to Trust Company Business, 47 registered persons were assessed.  Whilst many businesses were found to be in good order, examiners identified a small but not insignificant number of businesses where a poor corporate governance and an inadequate control environment had led to potentially serious issues. In these cases safeguarding directions were put in place, in some cases requiring reporting professionals to be appointed to fully assess the extent of the issues. This use of external assessors mirrors the situation in the UK, where the Financial Services Authority has issued an increasing number of Section 166 notices, requiring an independent review of controls within business where there may be a concern. 

Where serious issues are identified, the JFSC applies heightened supervision, or, in a small number of cases, has required the closure or sale of a business.

Clearly, everyone involved in the industry would prefer to avoid situations where drastic action is necessary and it is the practice of the JFSC to give guidance where it sees common issues within regulated business which require attention.  Two “Dear CEO” letters were issued by JFSC in relation to trust company business during 2011. The first commented on the fact that an increasing number of applications to incorporate Jersey companies evidenced insufficient due diligence and documentation of associated risks having been taken by the trust companies prior to submission of the incorporation request, particularly where the business was involved in a high risk territory or an inherently high risk activity.  The JFSC was concerned that the applicants were, in effect, trying to use the incorporation process as confirmation that the Registrar felt the risks to be acceptable, whereas this decision is the responsibility of the regulated entity.

The second letter shared with Industry some examples of issues identified concerning “COBO only” and private fund structures, namely conflict of interest issues, investor suitability and an absence of adequate disclosures.

Having been forewarned about these issues, trust companies will need to ensure during 2012 that they have paid full attention to the guidance being given by JFSC if they are to avoid action being taken.

The Funds Supervision Unit undertook 34 on-site examinations during 2011. Common themes coming out of 2011’s examination programme included a lack of appropriate due diligence on promoters and other parties in relation to new funds; a failure to demonstrate proper oversight by the board; and a failure to comply with all the requirements of the Island’s anti-money-laundering regime.

In my experience the JFSC is one of the more proactive and tough regulators in the industry.  Where it finds issues that require attention, it is not afraid to highlight them in order to see standards raised.  Whilst in a perfect world one could argue that it would be better if the JFSC was able to report having found no major failings during its inspection cycle, this is unrealistic in practice.  There will always be room for improvement and a regulator which is uncovering where those areas are is far more effective than one whose main concern is to be able to show a “clean” report to the world.  Jersey is not always an easy jurisdiction in which to work from a regulatory perspective, particularly for relatively small fiduciary businesses, as the compliance requirements are stringent, but as the world becomes increasingly suspicious of “secretive” offshore centres, the ability to show a transparent and prudent approach is all the more important.