Front Matter

Front Matter Page

© 2003 International Monetary Fund

November 2003

IMF Country Report No. 03/366

Isle of Man—Crown Dependency of the United Kingdom: Assessment of the Supervision and Regulation of the Financial Sector Volume I—Review of Financial Sector Regulation and Supervision

This review of financial sector regulation and supervision in the Isle of Man in the context of the offshore financial center assessment program contains technical advice and recommendations given by the staff team of the International Monetary Fund in response to the authorities of the Isle of Man’s request for technical assistance. It is based on the information available at the time it was completed in October 2003. The staff’s detailed assessment of the observance of standards and codes can be found in Volume II. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the Isle of Man or the Executive Board of the IMF.

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Assessment of the Supervision and Regulation of the Financial Sector

Volume I: Review of Financial Sector Regulation and Supervision

Isle of Man

October 2003

Front Matter Page

“The contents of this report constitute technical advice and recommendations given by the staff of the International Monetary Fund (IMF) to the Isle of Man authorities in response to their request for technical assistance. With the written authorization of the recipient country’s authorities, this report (in whole or in part) or summaries thereof may be disclosed to IMF Executive Directors and their staff, and to technical assistance providers and donors outside the IMF. Disclosure of this report (in whole or in part) or summaries thereof to parties outside the IMF other than technical assistance providers and donors shall require the written authorization of the recipient country’s authorities and the IMF’s Monetary and Financial Systems Department.”

Contents

  • Acronyms

  • Preface

  • Executive Summary

  • Introduction

  • I. Financial System Overview

    • A. Background

    • B. Financial Institutions and Markets

      • Financial sector structure

      • Supervisory bodies

    • C. Regulatory Framework Oversight—Market Integrity Arrangements

      • Legal framework

  • II. Strengths and Vulnerabilities in the Financial, Regulatory, and Supervisory Arrangements

    • A. Overview

    • B. Actions to Strengthen Observance of Standards and Codes

  • III. Observance of Financial System Standards and Codes: Summary Assessments Basel

    • A. Core Principles for Effective Banking Supervision

      • Institutional setting and market structure

      • General preconditions for effective banking supervision

      • Principle-by-principle assessment

      • Authorities’ response to the assessment

    • B. FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

      • Information and methodology used for the assessment

      • Criminal Justice Measures and International Cooperation

      • Preventive measures for financial institutions

      • Summary assessment against the FATF recommendations

      • Authorities’ response to the assessment

    • C. IAIS Core Principles

      • General

      • Information and methodology used for assessment

      • Institutional and macroprudential setting-overview

      • General preconditions for effective insurance regulation

      • Principle-by-principle assessment

      • Authorities’ response to the assessment

    • D. IOSCO Objectives and Principles of Securities Regulation

      • General

      • Information and methodology used for assessment

      • Institutional and macroprudential setting, market structure

      • General preconditions for effective securities regulation

      • Principle-by-principle assessment

      • Authorities’ response to the assessment

  • IV. Authorities’ Action Plans

    • A. Basel Principles

    • B. FATF/Anti-Money Laundering

    • C. IAIS Principles

    • D. IOSCO Principles

    • E. OGBS

  • Text Tables

  • 1. Bank Deposits

  • 2. Recommended Actions to Improve Compliance with the Basel Core Principles

  • 3. Recommended Action Plan to Improve Compliance with the FATF Recommendations

  • 4. Recommended Action Plan for Observance of IAIS Insurance Core Principles

  • 5. Recommended Plan of Actions to Improve Observance of the IOSCO Objectives Objectives and Principles of Securities Regulation

Acronyms

AML

anti-money laundering

AML/CFT

anti-money laundering and combating the financing of terrorism

CIS

collective investment scheme

CP

Core Principle

CSP

corporate service provider

CTP

common trading practices

EU

European Union

FATF

Financial Action Task Force

FCU

Financial Crimes Unit

FSA

UK Financial Services Authority

FSC

Financial Supervision Commission

GAAP

generally accepted accounting principles

IAIS

International Association of Insurance Supervisors

IOSCO

International Organization of Securities Commissions

IPA

Insurance and Pensions Authority

KYC

know your customer

LEG

Legal Department

MFD

Monetary and Financial Systems Department1

MLRO

money laundering reporting officer

MSB

money services business, such as bureau de change activities, check cashing and money transmission services

MOU

memorandum of understanding

OGBS

Offshore Group of Banking Supervisors

ROSC

Report on the Observance of Standards and Codes

SRO

self-regulatory organization

STR

suspicious transaction report

TSP

trust service provider

Preface

In July 2000, the Executive Board approved a program of assessments on the basis of the paper, “Offshore Financial Centers—The Role of the IMF,” published in July 2000. In this context, the Government of the Isle of Man invited the IMF to carry out an assessment of the extent to which the regulatory and supervisory arrangements for the financial sector complied with certain internationally accepted standards and measures of good practice (a Module 2 assessment as described in the above-mentioned paper).

The assessments were carried out during a mission that was conducted October 21–30, 2002. The mission was led by Mr. R. Barry Johnston (Monetary and Financial Systems Department (MFD)) and comprised of Messrs. Neville Grant (Deputy Mission Chief, Consultant, MFD); Ian Carrington (MFD); John Darwood (Consultant, MFD); Ross Delston (Consulting Counsel LEG); John Farrell (Consultant, MFD); Jack Heyes (Consultant, MFD); and Marcel Maes (Consultant, MFD). Detective Chief Superintendent, Felix McKenna, served as the independent anti-money laundering expert (IAE) for the AML/CFT assessment.

The mission undertook a review of all relevant current legislation and practices, and held discussions with the regulatory authorities, certain government officials, and a broad cross-section of the private sector practitioners. The mission is most grateful for the excellent cooperation, openness, and hospitality of all the agencies consulted during its visit, and especially to the Isle of Man Financial Supervision Commission (FSC) for the excellent organization of the visit.

Executive Summary

The financial regulatory and supervisory system of the Isle of Man complies well with the assessed international standards. The authorities are to be commended for the attention they have given to upgrading the financial regulatory and supervisory system to meet international supervisory and regulation standards in banking, insurance, securities and anti-money laundering and combating the financing of terrorism (AML/CFT), and the introduction of a comprehensive regime for the licensing of corporate service providers (CSPs). The mission noted in particular:

  • the comprehensive, if somewhat complex, regulatory framework;

  • the proactive approach of the regulators to achieve high standards in the financial services sector; and

  • an off-site and on-site supervisory process that addresses key reputational risks.

The jurisdiction has been assessed to have a high level of compliance with the four key standards. Moreover, the legal framework for company and trust service providers (TSPs) is fully consistent with the Offshore Group of Banking Supervisors (OGBS) Statement on Best Practices.

The assessments identify shortcomings in the following areas:

  • the independence and accountability of the FSC and Insurance and Pensions Authority (IPA);

  • the need to apply more robust supervisory tools in selective areas of the banking sector, and the adequacy of supervisory resources;

  • weaknesses in the legal framework for AML/CFT and in the coverage of guidance notes in some areas; and

  • the need to complete the implementation of the licensing regime for TSPs.

These shortcomings have not been a major concern to date. However, they are likely to become a more significant issue going forward as the jurisdiction’s financial sector continues to develop.

The authorities are, therefore, encouraged to take actions to address these shortcomings.

Specifically:

  • adopt legislation to provide for appropriate independence and accountability of the financial regulators;

  • upgrade the on-site supervisory process;

  • amend the legal framework on AML/CFT and broaden the coverage of the guidance notes in certain areas; and

  • enact the Fiduciary Services Bill quickly.

The mission notes that the authorities have already taken action as follows:

  • to upgrade the on-site inspection process, a major project has been completed to implement a new approach to supervisory techniques. This includes the issuance to banks of a consultative paper on corporate governance and the start of a pilot program of supervisory visits to banks focusing on corporate governance, and safety and soundness issues, to be followed by a full program covering all banks. Detailed guidance is also being developed on specific areas of risk for banks, such as credit risk, market risk, etc.

  • the Anti-Money Laundering Code 1998 has been comprehensively revised to include a number of the mission’s recommendations for amending the legal framework on AML/CFT. The revised draft Code was issued for consultation in the jurisdiction at the start of July 2003.

Isle of Man: Crown Dependency of the United Kingdom: Assessment of the Supervision and Regulation of the Financial Sector Volume I—Review of Financial Sector Regulation and Supervision
Author: International Monetary Fund