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.

deVere's Green acquires 24% of STM Group, in gamble on Maltese QROPs growth

Last month Nigel Green, the founder and CEO of IFA group deVere, acquired a 24% stake in STM Group, the Manx incorporated AIM-listed fiduciary services business, in an audacious gamble on what action HMRC would take in relation to QROPs. 

STM Fidecs is perhaps best known as a provider of QROPS, having been one of the first companies to develop the schemes in Malta, which was approved by HM Revenue & Customs as a jurisdiction to which UK pensions could be transferred in 2009.  STM has also developed other pension-related solutions, including one which is designed to enable the transfer of UK pensions of individuals retiring to or returning to the US, and another which enables expatriate UK pensioners to move their pensions between a number of different countries, without incurring additional fees.

In acquiring a stake in STM (via an issue of new Ordinary Shares in the company issued at 17.5p per share), Green appears to have been gambling on the fact that QROPs changes to be announced by HMRC would lead to an increase in the QROPs market in general, and in particular an upturn in clients moving their pensions to Malta, where STM is a leading player, at the expense of other competing jurisdictions such as Guernsey and the Isle of Man.  His belief that Malta was likely to win where other might suffer was based largely on the fact that Malta is within the EU and has an extensive double-tax treaty network. 

Green was presumably confident that the QROPs market in Malta was indeed set to boom, as by most other measures STM was going through a very difficult period.  The company reported pre-tax profits having fallen by more than half and revenue falling to below £10 million.  Only £600,000 of the total revenue related to QROPs business, and there would therefore need to be a very significant spike in this area of the business for it to be material enough to turn around the fortunes of the company, which has felt a significant negative impact from the Eurozone crisis.

Whether or not the investment, (which cost Green £1.59m) was good value for money remains to be seen, but it seems that at least some of his investment assumptions were correct.   As previously reported, earlier this month HMRC removed the vast majority of Guernsey’s QROPs from its approved list and Malta may well be a beneficiary in the future of some of the business which might otherwise have gone to Guernsey.  However, HMRC seems to have left other territories such as the Isle of Man unscathed, at least for now, so Malta still faces some stiff competition from other jurisdictions which are well established in the market.

However, it is believed that Green was also looking to exploit some synergies between STM and deVere.  STM is looking to develop and build upon its distribution network and deVere is well placed to be a very important sales channel for STM, particularly given deVere’s current push into the US market.  According to a deVere press release last month, it has used QROPS for “almost half” of all the £1.3bn worth of pensions which it has transferred to offshore jurisdictions.

STM’s shares are currently trading at 25p which is almost double the recent low of 13p, but still a very long way off the hey-day back in 2007, when they were worth 73.5p.

Ireland proposing a Model Agreement for implementation of FATCA

The Irish Funds Industry Association has announced that the country’s tax authorities are in discussions with their US counterparts over the possibility of entering into a "model agreement" for implementing America’s Foreign Account Tax Compliance Act (“FATCA”).

In February, the US announced that they had agreed on an intergovernmental agreement with 5 countries, whereby financial institutions in these countries would forward the data on American account-holders to the governments of the respective countries in which their accounts are held, rather than having to make the disclosures directly to the IRS. The five countries concerned are the UK, France, Germany, Ireland and Italy. 

The concern for jurisdictions which have a significant amount of multi-jurisdictional work (most of the world's key international finance centres, whether onshore or offshore) was that it would be complex to have different reporting formats and bases for each country in which the accounts are held, and therefore the prospect of a model agreement for Ireland whereby the data would be passed across on a consistent basis and in the same format will be welcome news, particularly for the country’s fund management industry, which is of great importance to the economy of the jurisdiction. According to the IFIA, Ireland experienced the highest net inflows of UCITS of all fund domiciles in 2011, attracting some €62bn, nearly €50bn more than the next most successful territory.

The model agreement would not in any way alter or deviate from the obligation to make the FATCA reporting, but would in practice make it logistically somewhat easier to comply.

It is hoped that the model agreement will be in place by the end of June 2012.

FATCA compliance is an issue which is currently exercising the brains of many in the international finance community.  There is concern starting to emerge that trust companies in particular are ill-prepared for the potential impact of the new regulations, and that the regulations are not yet well understood in detail.  I know from my own experience with trust companies that many do not have IT systems in place which would permit easy identification or reporting of individuals who may be caught by the reporting requirement. Most would be able to identify if their clients were born in the USA or currently had a principal residence there, but not many of the standard systems would be able to pick up green card holders, or those with secondary residences in the US.  The task of identifying and then tracking this information throughout the lifetime of a client relationship is likely to be onerous, and detractors complain that FATCA is likely to lead to some institutions concluding  that it is simply easier not to deal with US individuals.  That might be a possibility in the realms of private wealth, but is not really a feasible option for fund managers and administrators.

Since the announcement of the intergovernmental agreement with the first 5 territories in February, some other jurisdictions, such as Guernsey, have expressed a desire to come to similar arrangements, but as yet there has been no official word on how well talks are progressing.

Seminar on Current Trends in Offshore Mergers and Acquisitions

As can be seen from prior postings on this Blog, the trust sector is currently facing a period of unprecedented activity.  Increasing global regulatory requirements and more complex international client structures requiring multi-jurisdictional servicing capability, are driving a period of consolidation in the sector which will have an impact not only on the parties directly involved in the consolidation, but on anyone who is competing to win business in the sector.  

On Wednesday 2nd May a seminar to be held in Jersey will give insight into current merger and acquisition activity in the sector, and will explore some of the practical, legal, financial and regulatory issues surrounding buying, selling and merging fiduciary businesses.  Hosted by leading offshore firm Mourant Ozannes and regulatory and compliance specialist Kinetic Partners, and with additional contributions from Deloitte and myself, the seminar should be of interest to anyone who is interested in tracking market trends and issues in the sector, those considering non-organic expansion of their business or those who may look to take external investment or sell their business at some point in the foreseeable future.

A few spaces remain for the seminar, which will commence at the Hotel de France in Jersey at 3.45 on 2nd May.  For further information, or to register for the event please contact Emma Pallot on +44 1534 676 473 or  at Emma.Pallot@mourantozannes.com.  

Triple Whammy for Guernsey

Guernsey has suffered the third blow to its international finance business in a matter of weeks.  First came the removal of the Low Value Consignment Relief for imports to the UK from the Channel Islands, then came the de-listing of the vast majority of the Islands’ QROPs, and now the EU Code of Conduct Group on Business Tax has ruled that Guernsey's zero-10 tax regime is harmful.

The EU made similar rulings on the systems in Jersey and the Isle of Man last year, but after changes were made to the deemed distribution provisions in both Islands’ systems, they were approved in December 2011.  Guernsey will now have to make similar amendments, but there will be some frustration from within the Island’s finance industry that the Island is now subject to a further period of uncertainty and delay, whereas if it had taken the same course as Jersey and the Isle of Man last year, the matter could have been resolved far sooner.  The Island had felt that the operation of its own deemed distribution provisions were sufficiently different to those of Jersey and the Isle of Man that it might succeed where they failed, but it turns out that this was a forlorn hope – something which had been predicted by a number of commentators.

There is no reason to believe that Guernsey cannot or will not make the necessary changes and eventually get the approval of the EU authorities, but uncertainty regarding taxation is something which clients strongly dislike, and it may discourage the establishment of business in the Island in the meantime.

Guernsey Treasury and Resources Minister Deputy Parkinson, said that the changes that the Island will need to make to comply with the Code of Conduct Group’s criteria "...would result in an increase in our deficit and we would probably have to take other corporate tax measures to compensate.”  Estimates have put the cost of complying with the criteria at around £10 million, which will be a significant blow to an Island still calculating the cost of the LVCR and QROPs losses.

Controversy builds over Lord Blencathra's Cayman Islands role

Controversy is brewing over the position of Tory peer Lord Blencathra, who is both the Cayman Islands representative in London and a member of the House of Lords.   Speculation is growing that he may face an investigation into whether he has breached parliamentary rules by accepting a paid position to lobby for Cayman’s financial services industry, as the issue has been referred to the Committee for Standards in Public Life by Labour MP Paul Flynn, a politician who is openly hostile to tax havens.  

As might be expected, the Cayman Islands Government and Lord Blencathra have strenuously denied that there is any problem with the arrangement, as they maintain that no rules were breached and that the Foreign and Commonwealth Office knew about the appointment.

However, the issue is fairly complex.  Guidance on the Code of Conduct for Members of the House of Lords says they may not accept any payment in return for parliamentary services, including "making use of their position to arrange meetings with a view to any person lobbying Members of either House, ministers or officials."  It has been reported by The Independent that Lord Blencathra had tried to introduce MPs who are hostile to tax havens to members of a Cayman delegation visiting London, and that he has lobbied Chancellor George Osborne to reduce the air passenger duty to the Cayman Islands.

Lord Blencathra does not believe that his actions breach the Code because he sees a distinction between lobbying Parliament (which he claims not to do), and lobbying the Government which he does admit to doing.  The Code of Conduct Committee will have to rule on whether Blencathra’s view is correct, but even if he is found not to have technically breached the Code his Cayman Islands role is an embarrassment to the Tory party, which is keen to be seen to be cracking down on tax avoidance.  

The Lib Dems, who are partners with the Conservatives in the UK's Coalition Government, are certainly angered by the row.  Tim Farron, the Lib Dem party president has said, "With all the controversy surrounding lobbying and tax at the moment, it's astonishing that a Tory peer is now the lead advocate in Britain for one of the world's biggest tax havens. While the Coalition is trying to make the rich pay their fair share, this exposes an element of the Conservative Party which wants to keep helping their wealthy friends hide their money from the taxman.”

Osborne sets £17billion target for tax evasion recovery

UK Chancellor George Osborne has reportedly increased the pressure on HM Revenue & Customs to catch companies and wealthy individuals evading tax. According to the UK press, he has written to HMRC chief executive Lin Homer, setting a target of raising £17bn this year from “catching out” tax cheats - £3.1 billion more than was achieved last year.

The Chancellor has suffered a number of public relations disasters recently – from the popular outrage over the reduction in the top rate of income tax, to the introduction of the so-called “pasty tax” and the “granny tax”, to revelations by the Treasury that almost one in ten people in the UK earning more than £10m per year is paying less than the 20% basic rate of income tax.  As a consequence, it would appear he feels under pressure to be seen to be clamping down on tax evaders and businesses who take advantage of loopholes to reduce their tax bills.

Stamping out tax evasion is not a controversial thing to do but setting financial targets for HMRC to achieve which encompass tax avoidance will be more controversial.  There is a fine line between arrangements which are legitimate and bona fide ways to minimise a tax bills, and those which over-step the line to become illegal avoidance or evasion.  Having financial performance targets for HMRC will be bound to increase their motivation to challenge schemes which may be within the letter, if not the spirit, of the law.