Isle of Man
Crown Dependency of the United Kingdom: Assessment of the Supervision and Regulation of the Financial Sector Volume II—Detailed Assessment of Observance of Standards and Codes
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This assessment of the Basel Core Principles for Effective Banking Supervision has been completed as part of the IMF Offshore Financial Center (OFC) assessment program. First, the assessment benchmarks the current state of banking supervision, recognizing that there have been extensive changes in the last few years. Second, it suggests a number of further improvements or changes. Thus, this report provides a key input for the development of an action plan to move toward full compliance with the Core Principles.

Abstract

This assessment of the Basel Core Principles for Effective Banking Supervision has been completed as part of the IMF Offshore Financial Center (OFC) assessment program. First, the assessment benchmarks the current state of banking supervision, recognizing that there have been extensive changes in the last few years. Second, it suggests a number of further improvements or changes. Thus, this report provides a key input for the development of an action plan to move toward full compliance with the Core Principles.

I. Basel Core Principles for Effective Banking Supervision

A. General

1. This assessment of the current state of compliance by the Isle of Man (“the Island”) with the Basel Core Principles for Effective Banking Supervision has been completed as part of the IMF Offshore Financial Center (OFC) assessment program. Completion of a formal assessment serves several purposes. First, it benchmarks the current state of banking supervision, recognizing that there have been extensive changes in the last few years. Second, it suggests a number of further improvements or changes. Thus, this report provides a key input for the development of an action plan to move toward full compliance with the Core Principles. The assessment was conducted by Jack Heyes and Marcel Maes (both consultants of MFD). The team expresses its thanks to the staff of the Financial Supervision Commission (FSC), who cooperated in the completion of the assessment.

Information and methodology used for assessment

2. This assessment of the effectiveness of banking supervision was based on an examination of the legal framework, both generally and as specifically related to the financial sector, the self-assessment of the Core Principles, and extensive discussions with the staff of the FSC, external auditors, and the management of commercial banks.

Institutional and macroprudential setting, market structure overview

3. The Isle of Man has 59 licensed banks and 2 licensed building societies. The banks come from a variety of geographical areas, including Europe, Ireland, South Africa, United Kingdom, and the United States. Total bank deposits were £27.1billion. The majority of banks are engaged in providing private banking services to nonresidents. The services offered by banks are directed toward deposit taking with the funds on loan primarily in the international interbank markets. Some banks act as custodians and trustees to collective investment schemes, while others conduct trade, finance, and treasury operations.

4. The Financial Supervision Commission (FSC) was established in July 1983, under the Financial Supervision Commission Order, 1983, as a statutory board. It is governed by the Statutory Boards Act of 1987. The FSC originally regulated both deposit-taking institutions and insurance business and, later, investment business. In 1986, a separate insurance authority to supervise and regulate the insurance industry was established. This has since evolved into the Insurance and Pensions Authority (IPA), which is also constituted as a statutory board governed by the Statutory Boards Act of 1987.

5. As a statutory board, eight commissioners appointed by the treasury, subject to the approval of the parliament, Tynwald, oversee the FSC’s work.

6. The Banking Act, 1998, regulates banking business, which may not be carried on in or from within the island without a license. The Act confers licensing power to the FSC. The Act provides substantial powers for supervisory, disciplinary, and enforcement purposes.

General condition for effective banking supervision

7. Taken collectively, the banking laws, orders, and guidance notes provided by the supervisor constitute a generally appropriate legal framework for banking supervision. The BA gives the FSC the power to grant and refuse licenses.

8. A range of sanctions is available to the FSC where a bank is noncompliant. The FSC can make recommendations and issue directions to a bank. The ultimate enforcement sanction is revocation of a license.

9. The FSC uses both off-site surveillance and on-site visits in its supervision of banking entities.

10. All banks must maintain a minimum risk-based capital ratio of not less than 10 percent. The components of capital and the methodology used are in accordance generally with the Basel Capital Accord.

11. All banks incorporated in the Isle of Man are required to draw up annual financial statements. These must be prepared in accordance with U.K. accounting standards adopted by the United Kingdom Accounting Standards Board or other accounting standards approved by the FSC.

12. The Financial Supervision Act, 1988, permits the disclosure by the FSC of confidential information to other governmental agencies within the Isle of Man and to external agencies with statutory functions corresponding to the FSC.

B. Detailed Assessment

Table 1.

Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision

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Table 2.

Summary Compliance with the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially noncompliant.

NC: Noncompliant.

NA: Not applicable.

Table 3.

Recommended Actions to Improve Compliance with the Basel Core Principles

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C. Authorities’ Response to the Assessment

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

A. General

Information and methodology used for the assessment

13. A detailed assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime of the Isle of Man was prepared by a team of assessors that included staff of the International Monetary Fund (IMF) and an expert not under the supervision of IMF, who was selected from a roster of experts in the assessment of criminal law enforcement and nonprudentially regulated activities. The IMF staff reviewed the relevant AML/CFT laws and regulations, and supervisory and regulatory systems in place to deter money laundering (ML) and financing of terrorism (FT) among prudentially regulated financial institutions. In addition, the IMF staff, reviewed the arrangements for trust and corporate service providers which were in a transitional phase towards full prudential regulation. The experts not under the supervision of IMF reviewed the capacity and implementation of criminal law enforcement systems.

14. The team consisted of Ian Carrington, (MFD) and Ross Delston, (Consulting Counsel, LEG), with Washington-based assistance from Stuart Yikona, (Technical Assistance Officer, LEG). Messrs. Carrington and Delston were part of a Fund-led mission to Isle of Man during the period October 21-30, 2002. The independent law enforcement expert was Detective Chief Superintendent Felix McKenna of Ireland’s Criminal Assets Bureau who visited Isle of Man during February 11-13, 2003.

15. This assessment is based in part on discussions on AML/CFT issues that were held with officers and other representatives of the following offices among others, all of whom were most helpful in the preparation of this assessment: the FSC; the IPA: the attorney general’s chambers: the Isle of Man Police; Customs and Excise and the FCU. In addition, the assessors met with a number of financial sector parties, including banks, investment management companies, CSPs, insurance companies, lawyers, and associations representing these sectors.

16. Information used for the assessment was obtained from the Anti-Money Laundering Code 1998 as amended (the “Code”); Corporate Service Providers “(General Requirements) Regulatory Code 2000” “CSP Code”); the Banking (General Practice) Regulatory Code 1999 (the “Banking Code”); the Financial Supervision Commission Conduct of Business Regulatory Code (the “Conduct of Business Code”); the Criminal Justice Act 1990 as amended (the “CJA”); the Criminal Justice Act 1991 (the “CJA2”); the Drug Trafficking Act 1996 as amended (the “Drug Act”); the Banking Act 1998 (the “Banking Act”); the Insurance Act 1986 (the “IA”); the Insurance (Amendment) Bill (Draft 2) (the “IA Bill”);7 the Companies Acts 1931-1993 (the “Companies Acts”) ; the Charities Registration Act 1989 (the “Charities Act”); the European Communities (Money Laundering Directive)(Application) Order 2002 (the “Directive”); the Corporate Service Providers Act 2000 (the “CSP Act”); the Extradition Act (the “Extradition Act”); the Anti-Money Laundering (Money Service Businesses) Regulations 2002 (the “Regulations”); the Anti-Money Laundering Guidance Notes (the “Notes”)8; the Prevention of Terrorism Act 1990 (the “POTA”); Terrorism (United Nations Measures) (Isle of Man) Order 2001 (the “UN Order”); Iraq (United Nations Sanctions) (Isle of Man) Order 2000 (the “UN Sanctions Order”); Al-Qa’ida and Taliban (United Nations Measures) (Isle of Man) Order 2002; Anti-Terrorism and Crime Bill (June 2002); Insurance (Amendment) Regulations 1998 (the “1998 Insurance Amendment”); Insurance and Pensions Authority Common Trading Practices for Isle of Man Insurers (Guidance Notes on the Prevention of Money Laundering, effective March 31, 2003)(the “CTP”)9; Investment Business Acts 1991-1993 (“IBA”); the Financial Supervision Act 1988 (the “FSA”); the Finance Act 1958; the Interpretation Act 1976 (“the Interpretation Act”); Police Powers and Procedures Act 1998 (the “PPP Act”); the Customs and Excise Etc. (Amendment) Act 2001 (the “Customs Amendment Act”); the Off-shore Group of Banking Supervisors Mutual Evaluation Report on the Anti-Money Laundering System in the Isle of Man (1999); Position Paper: Overriding Principles for a Revised Know Your Customer Framework (February 2002), issued by the Guernsey Financial Services Commission, the Isle of Man Financial Supervision Commission and the Jersey Financial Services Commission,

17. For the purposes of this assessment, the term ‘Financial Institutions’ (FIs) means the following: banking business within the meaning of the BA; investment business within the meaning of the IBA; insurance business within the meaning of the IA; business carried on by a building society within the meaning of Section 7 of the Industrial and Building Societies Act; business carried by a society registered as a credit union within the meaning of the Credit Unions Act; business carried on by a society (other than a building society or credit union) registered under the Industrial and Building Societies Act; any activity carried on for the purpose of raising money authorized to be borrowed under the Isle of Man Loans Act; any activity carried on for the purpose of raising money by a local authority; the business of a bureau de change; the business of an estate agent within the meaning of the Estate Agents Act; the business of a bookmaker within the meaning of the Gaming, Betting and Lotteries Act; any activity permitted to be carried on by a license holder under a casino license granted under the Casino Act; the business of the Post Office in respect of any activity undertaken on behalf of the National Savings Bank; any activity involving money transmission services or check encashment; any activity in which money belonging to a client is held or managed by an advocate, a registered legal practitioner within the meaning of the Legal Practitioners Registration Act, and an accountant or a person who, in the course of business, provides accountancy services; the business of promoting or forming bodies corporate, acting as company secretary of bodies corporate, or providing registered offices for bodies corporate, or engaging in any regulated activity within the meaning of the CSP Act (i.e., the sale, transfer or disposal of companies; the provision of accommodations address facilities for a company; acting as director or alternate director of companies, or arranging for others to act as officers of corporate bodies; acting as or arranging for others to act as nominee shareholders of companies and the provision of company administration services); and the business of acting as trustee in return for payment, or providing or taking steps to provide persons to act as trustees in return for payment.

overview of measures to prevent money laundering and terrorism financing

18. The attorney general for the Isle of Man is the central authority for the purposes of mutual assistance in criminal matters. The main institutions in the Isle of Man in the AML/CFT area are the Financial Crimes Unit (FCU), which is part of the Isle of Man Police and is the FIU for Isle of Man; the police and the customs and excise, which provide staff to the FCU and investigate criminal activities; the attorney general’s chambers which prosecutes ML and FT, defends the Isle of Man authorities against suit, and advises the Tynwald (parliament) and the government on legal issues; and the FSC and IPA, which are the financial regulators for the Isle of Man and are responsible for monitoring compliance for FIs that are regulated by them.

Legal and institutional framework

19. The Isle of Man has a developed legal and institutional framework generally, particularly with respect to measures relating to confiscation of the proceeds of criminal conduct, information exchange and international cooperation. The broad regulation of the financial sector, including banking, investment companies and CSPs regulated by the FSC, and insurance business regulated by the IPA, is a strength. However, the Isle of Man’s legal and institutional framework falls short in a number of areas outlined below.

Implementation of the legal and institutional framework and financial sector-specific issues

20. Discussions with the FSC, IPA and industry representatives suggest a high level of awareness of AML/CFT issues and that considerable effort has been undertaken to put appropriate practices into place. The oversight function employed by the two regulatory bodies is generally satisfactory. Both regulators employ a regime of on-site and off-site surveillance and have visited the majority of licensed institutions in the last two years. Most of the institutions visited had comprehensive documentation on AML policies and procedures.

B. Detailed Assessment

21. The following detailed assessment was conducted using the October 11, 2002 version of Methodology for assessing compliance with the AML/CFT international standard, i.e., criteria issued by the Financial Action Task Force (FATF) 40+8 Recommendations (the Methodology).

Assessing Criminal justice measures and international cooperation

Table 4.

Detailed Assessment of Criminal Justice Measures and International Cooperation

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Assessing preventive measures for financial institutions

22. In order to assess compliance with the following criteria assessors must verify that: (a) the legal and institutional framework is in place and (b) there are effective supervisory/regulatory measures in force that ensure that those criteria are being properly and effectively implemented by all financial institutions. Both aspects are of equal importance.

Table 5.

Detailed Assessment of the Legal and Institutional Framework for Financial Institutions and its Effective Implementation

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Description of the controls and monitoring of cash and cross-border transactions

Table 6.

Description of the Controls and Monitoring of Cash and Cross-Border Transactions

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Ratings of Compliance with FATF Recommendations, Summary of Effectiveness of AML/CFT Efforts, Recommended Action Plan and Authorities’ Response to the Assessment

Table 7.

Ratings of Compliance with FATF Recommendations Requiring Specific Action

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Table 8.

Summary of Effectiveness of AML/CFT Efforts for Each Heading

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Table 9.

Recommended Action Plan to Improve the Legal and Institutional Framework and to Strengthen the Implementation of AML/CFT Measures in Banking, Insurance and Securities Sectors

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C. Authorities’ Response to the Assessment

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III. IAIS Core Principles

A. General

23. This assessment of the current state of the Isle of Man’s compliance with the IAIS Core Principles has been completed as part of the IMF Offshore Financial Center (OFC) assessment program. The assessment was undertaken by John Darwood (Consultant MFD). Completion of a formal assessment serves several purposes. First, it benchmarks the current state of insurance supervision, recognizing that there have been extensive changes in the last years. Second, it suggests a number of further improvements or changes. Thus, this report provides a key input for the development of an action plan to move toward full compliance with the Core Principles.

Information on the methodology used for assessment

24. This assessment has been conducted by comparison of the standards and practices of insurance supervision with the Insurance Core Principles and Insurance Core Principles Methodology promulgated by the International Association of Insurance Supervisors (IAIS), of which the Isle of Man is a member. In addition meetings have been held with the various insurance market associations and some individual companies.

Institutional and macroprudential setting, overview

25. The Isle of Man government Insurance and Pensions Authority (IPA) is the responsible body for the supervision of all insurance activity on the Island with the exception of life insurance intermediaries who are registered with the FSC for life business only. The IPA Mission Statement is as follows:

The IPA exists to maintain and develop an effective regulatory framework for insurance and pension business which will:

  • provide security for investors;

  • prevent and deter the Isle of Man being used for the purposes of financial crime;

  • preserve the international reputation of the Isle of Man;

  • ensure a flourishing environment for Isle of Man businesses.

26. There are three major strands of insurance business carried on in the Island, international life business, captive insurance business and domestic general and life business. These are described more fully below.

27. International life business; locally incorporated subsidiaries of mainly United Kingdom and other European companies write international business through a variety of international intermediaries who are usually outside Isle of Man regulatory purview. Since these companies are incorporated on the Isle of Man, the IPA is the home prudential regulator of them. The U.K. Financial Services Authority (FSAUK) is only directly involved if the company does business in the United Kingdom, or the U.K. parent does Isle of Man domestic business). Because of the strong links with the U.K. market, training, development and compliance tend to follow U.K. standards and cultures. In April 2002, the education subcommittee of the Manx Insurance Association issued “Best Practice Guidelines,” which has been signed off by all members.

28. The original thrust of this life business activity was the U.K. expatriate market, but that has now broadened to embrace all persons interested in insurance/investment linked products. The major markets are the United Kingdom, Middle East, Far East (HK) and Latin America, not the EU or the United States. About 85 percent of products sold are single premium type unit linked investments where the investment risk rests with the policyholder rather than the insurer.

29. The same 16 companies (the seventeenth has only just been licensed) have been writing this business for many years. Total funds are substantial, and steadily growing. Currently they are estimated to be around £14 billion with the largest company holding £3.2 billion of policyholders’ funds.

30. Captive insurers: 165 captives are listed by the IPA; the number also includes a few companies not “captive” in the narrow sense but writing special reinsurance business or extended warranty business, and one locally incorporated general insurer writing business in the domestic market (see General Insurers below). The first captive was established on the Island in 1981; in common with other captive jurisdictions growth has fluctuated in sympathy with world insurance market conditions, the present state of which may be conducive to a stage of further growth. This business is of very good quality, being comprised mainly of subsidiary operations of major blue chip U.K. parents, and of considerable size. Total premium income of these captives in 2001 was approximately £1.05 billion.

31. Captive insurers rely for their operation on captive insurance managers, of whom there are 22 registered, although the bulk of the business rests with the top four or five of them. These again are mostly local subsidiaries of major international insurance broking and captive management businesses, one of which controls its entire worldwide captive operations from the Island.

32. Domestic general and life business: There is only one domestic general insurer, which estimates it has about a 25 percent market share. All other domestic business is served by U.K. authorized insurers that need to register with the IPA if they have a fixed place of business on the Island, i.e., branch operation - if U.K. authorized without a branch there is no need to register but in these circumstances business will usually be through a local registered intermediary.

33. For life business, the local community is served by registered intermediaries who place the business with a variety of U.K. life insurers or with representatives of U.K. life insurers. On-site visits are now the norm for these companies.

34. Intermediaries: Life intermediaries dealing in domestic business are registered only with the FSC for this business. The only general business intermediaries who need to be registered are independent persons or companies (i.e., not answerable under a written agreement to one or more insurers) dealing in domestic business. There are some 22/25 of these some of which may also be registered with the FSC for investment activity. On-site visits are now the norm for these companies also.

35. Life supervisory issues: Supervisory work has increased significantly due to prudential and compliance issues, including on site inspections, which spin off from anti-money laundering considerations. On site visits for AML will be on a two-year basis—13 of the 16 companies have already been visited—but no regular system yet set up for other inspections, which have been on a focused “as needed” basis. Solvency problems, if any, have revolved around reserving policies and control of management expenses. In this respect business plans have to be carefully checked. Corporate governance is touched on during on site visits, and also when changes in control or directors occur. This issue was also discussed in some depth with the Manx Insurance Association and it is very apparent that all its members are aware of the need to attend to its considerations (also see reference in opening paragraph of Life Business above). Essentially it flows down from parent companies, which have high expectations in that regard, and fits in with compliance and internal risk management procedures, and the impact of external auditors.

36. Insurance managers: There were about 27 at peak, but consolidations and mergers have reduced the current number to 22. (There was also a cleaning out of some dormant companies following a recent increase in fees. Previously only one fee was paid on registration, now an annual fee applies.) These 22 managers are now subject to on-site visits and corporate governance is included.

37. The principal legislation is the Insurance Act 1986, as amended, and the associated Insurance Regulations 1986 (as amended) together with the Insurance Intermediaries (General Business Act) 1996 and Insurance Intermediaries (General Business) Regulations 1996. Also relevant are the Life Assurance (Compensation of Policyholders) Regulations 1991, Guidance Notes for Insurance Business and Guidance on the use of Derivative Instruments, April 2002.

38. The Insurance (Amendment) Bill is expected to come into effect by October 2003. This bill will reflect the outcome of an extensive review of the present legislation and powers in relation to the IAIS Core Principles, and should, when effected, enable almost all the principles to be fully observed.

39. As its name implies, the authority is also responsible for pensions, but since these are not covered by the IAIS Principles that aspect of its activity will not be addressed in this assessment.

General preconditions for effective insurance supervision

40. The preconditions for an effective insurance supervision in Isle of Man are given. The infrastructure is well developed because

  • the legal system in place is functioning well;

  • the applied accounting standards (internationally recognized standards)are comprehensive;

  • the actuarial and auditing profession apply recognized standards;

  • an efficient financial market (banks, investment funds) exists; and

  • sound and effective macroeconomic policies are in place so that insurance companies can operate within a stable environment.

B. Detailed Assessment

Table 10.

Detailed Assessment of Observance of the IAIS Insurance Core Principles

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Table 11.

Summary Observance of IAIS Insurance Core Principles

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Table 12.

Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

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C. Authorities’ Response to the Assessment

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IV. IOSCO Objectives and Principles of Securities Regulation

A. General

41. This report has been prepared in the course of a formal assessment by the IMF of the regulatory and supervisory arrangements of the Isle of Man for its financial sector, and the extent to which these arrangements conform with known international standards and statements of best practice. The assessment was undertaken by John Farrell (Consultant to MFD). In the report the mission reviews the rules of law and practice about the regulation of securities and investments, and assesses whether the Isle of Man has implemented the IOSCO Objectives and Principles of Securities Regulation. The FSC as a member of IOSCO adopted these objectives and principles in September 1998.

Information and methodology used for assessment

42. In essence the assessment was undertaken by analyzing the rules of law, the statements of best practice, and the evidence of current practice and evaluating them against the 30 IOSCO Principles. The mission was required to decide in the case of each principle whether it was (a) implemented;(b) broadly implemented; (c) partially implemented; (d) not implemented; or (e) not applicable. In the course of this assessment, the mission made a number of judgments. We report on these in Table1 to the report.

43. The mission reviewed many background documents before or in the course of the assessment. These included the IMF’s own guidance notes on assessment process and procedures, various IOSCO reports and resolutions, relevant publications of OECD, selected Isle of Man legislation, regulations, orders, codes and guidance notes, various documents on the FSC website, the IOSCO self-assessments prepared by the FSC and various operational documents of the FSC. In reviewing this material the mission paid close attention to the explanatory notes accompanying the IOSCO statement of Objectives and Principles. It also considered the MFP Transparency Code. The mission had extensive discussions with representatives of the government, the FSC, professional bodies and industry associations, and a number of supervised firms that were representative of the various categories of firms licensed to undertake securities and investment business. In the time available the mission did not have the opportunity to confer with independent commentators.

44. There were no factors that impaired the assessment process other than the limited time available to complete the work. The mission received extensive briefings from FSC staff on relevant matters and helpful answers to its many questions. The FSC has a great deal of useful written material available, both on its website and in hard copy. The law, regulations, codes and guidance notes were readily accessible. FSC staff organized an extensive program of visits for team members.

Institutional and macroprudential setting, market structure

45. The core Isle of Man rules of law about the regulation of securities and investments relate to:

  • the functions and powers of the FSC;

  • the licensing and supervision of those who undertake investment business, in particular, those who deal in investments, arrange deals in investments, manage investments belonging to others, give investment advice, or operate or administer a collective investment scheme (CIS);

  • the authorization and supervision of CIS’s;

  • the offer of securities and investments to members of the public and others.

46. These rules of law are administered and enforced by the FSC. However, the prosecution of criminal offences under the Companies Acts is a matter for the attorney general.

47. The term “investment” is defined to include the full range of securities and investment products. The principal investment products, which are the subject of regulation, are interests in CIS’s. There are also life insurance policies, which have the character of investments but are regulated as insurance products. These are dealt with elsewhere in the mission’s report. Isle of Man people may also invest in overseas listed securities.

48. A CIS may be an authorized scheme, a recognized scheme, an international scheme or an exempt scheme. Interests in an authorized scheme are available for offer to the general public in the Isle of Man. Authorized schemes, which meet certain requirements of U.K. law, may be offered to the general public in the United Kingdom. Comparable arrangements apply on a reciprocal basis with a limited number of other jurisdictions. A “recognized scheme” is one, which is established outside Isle of Man but is “recognized” by the FSC for marketing within the Island. The international schemes are intended for offer to more experienced or professional investors and, in practice, are not offered to the general public in the Island. Funds under management in CIS’s as at June30, 2002 were £5.12 billion. In addition, there were £3.5 billion in funds under discretionary management. There were 87 investment business licenses current.

49. There is no stock exchange in the Island and any listing of securities in Isle of Man based schemes or companies will be in another jurisdiction.

General preconditions for effective securities regulation

50. Andrew Edwards, in his 1998 review of the U.K. crown dependencies, writes of the substantial constitutional independence of the U.K. offshore finance centers in domestic affairs, their political stability and their willingness to adapt to changing world conditions. He adds that the substantial independence has enabled them to offer considerable tax advantages. It has also enabled them to establish their own legislative frameworks and their own financial market development policies.

51. The FSC has adopted as its mission statement, “To promote and secure high standards of integrity, solvency and competence within the Isle of Man financial services industry, to protect investors’ and depositors’ interests and to engender an environment in which financial institutions provide quality products and services for the economic benefit of the Island.”

52. Market access is determined by reference to the securities regulatory system and the decisions of the FSC. The mission is not aware of any particular barriers to the entry or exit of market participants other than those which are incidental to the operation of the regulatory system. The Isle of Man has explicit rules of statute law about competition. It is the team’s impression that there is a diversity of market participants engaged in investment business.

53. The Isle of Man has a conventional framework of general business law including a common law system. Securities law is backstopped by rules of law about contract, tort and property, and about serious fraud and other crimes involving fraud and deceit. Securities law is also dependent on mature rules of law about the constitution of entities which issue securities for subscription, company law, partnership law, and building society law and so on.

54. A key determinant of success for the Isle of Man as an international finance centre is its reputation. We routinely encountered a general understanding in this context of the importance of the regulatory system and broad support for the regulatory policies of the authorities.

55. The Isle of Man depends for its ability to develop as an international finance centre on the quality of its regulation, the expertise of its people, the cost of doing business there and its tax regime. It has encountered criticism in the past, particularly from neighboring countries, about its tax regime. The authorities consider it all the more important in the circumstances to have and to be seen to have soundly based law and procedures for the supervision and regulation of market participants and to cooperate and to be seen to cooperate with equivalent authorities in other jurisdictions.

56. The Isle of Man also depends for its ability to develop as a finance centre on its willingness to cooperate more generally with others on regulatory matters. In this context it is noteworthy that, despite its status as a U.K. crown dependency, it works directly in its own right with such organizations as the OECD and the UN. It is a party to tax information agreements with other countries. In addition the FSC has direct bilateral relations with the FSAUK, the SEC in the United States and several other regulators in overseas jurisdictions under MOUs on cooperation in the regulation of financial markets and institutions.

57. It is against the background of these general comments that we proceeded to examine the extent to, which the Isle of Man had implemented the IOSCO Principles.

Principle-by-principle assessment

58. The Isle of Man has implemented or broadly implemented 20 of the IOSCO Principles. It has partially implemented three Principles;

  • Principle 1: the responsibilities of the regulator should be clear and objectively stated

  • Principle 2: the regulator should be operationally independent and accountable in the exercise of its functions and powers.

  • Principle 24: There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

59. The mission has made three recommendations on these Principles:

  • that the government and the FSC secure by statute a clear, complete and authoritative statement of the FSC’s responsibilities;

  • the government and the FSC review the relevant rules of law, policy and practice with a view to providing for the FSC to become a more independent and more accountable financial services regulator and supervisor;

  • the government secure the enactment of rules of law for dealing with the failure of a market intermediary.

60. The mission has also made recommendations on operational matters. These are recorded in the appropriate place in the detailed assessment in Table 1 and summarized in Table 3 Recommended Actions.

61. The remaining seven Principles do not apply either because there is no secondary market or because there are no Self-regulatory Organizations (SROs).

B. Detailed Assessment

Table 13.

Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation

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Table 14.

Summary Observance of the IOSCO Objectives and Principles of Securities Regulation

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Recommended actions

Table 15.

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

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C. Authorities’ Response to the Assessment

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V. Review of Compliance with OGBS Statement of Best Practice for Trust and Company Service Providers

A. General

62. In August 2002, a Working Group established by the Offshore Group of Banking Supervisors (“OGBS”) produced a draft ‘Statement of Best Practice” (Statement) for trust and company service providers (CSP). The Fund agreed with the Commission that the Statement will be used for the assessment of trust and corporate service providers in the Isle of Man.

63. The mission is extremely grateful to the chief executive and staff of the FSC and, in particular, the staff of the Companies Supervision Division for the assistance and cooperation they provided with this assessment.

Methodology

64. The OGBS Working Group did not develop a methodology to accompany the Statement. The methodology used here was developed by reviewers working for the Fund who use the Statement in their work.

65. The Statement has been drafted to be applicable to trust and company service providers whether or not they are based in a jurisdiction that has a formal licensing and supervisory regime. In the circumstances, unlike the principles applicable to banking, insurance and securities, the Statement does not require that trust and company service providers are licensed or that they are subject to ongoing supervisory or enforcement procedures.

66. Even though the Isle of Man has chosen to license and supervise trust and corporate service providers, the mission concluded that, to ensure consistency between this and future reviews of other jurisdictions, some of which may not have a formal system of licensing and regulation in place, it was not appropriate to review issues such as the independence, accountability and resources of the regulator, the licensing process, ongoing supervision or enforcement except to the extent necessary to review compliance with the Best Practice Statement. Furthermore, the mission has had to make certain assumptions in the way that it has interpreted the Best Practice Statement.

67. The Best Practice Statement is expressed as a set of general principles rather than as a set of detailed criteria. In the circumstances, the mission has provided an indication of how the Isle of Man compares with the Best Practice Statement but has not attempted to provide a specific measure of compliance as it has in respect of the Basle, IAIS and IOSCO Principles.

68. The OGBS Best Practice Statement includes the following:

  • fit-and-proper criteria;

  • conduct of business;

  • the holding and sharing of information;

  • cessation of business;

  • misleading statements.

Additional issues

69. The assessment team has examined the regulation of trust and company service providers as undertaken in the Isle of Man. Although the report contains recommendations to the Commission, it should be appreciated that it is not, and should not be considered to be, an assessment.

70. With respect to Trust Service Providers (TSPs) the regulatory regime is not yet in place, but the framework for the regulation and supervision of CSPs provides a good framework on which to build. The FSC intends to proceed with the licensing of these under a new Fiduciary Services Bill (FSB) that will be introduced in the next session of the legislature. The mission recommends that every effort should be made to have this legislation in place as quickly as possible. Since the regulation of TSPs is not currently within the formal remit of the FSC and the proposed regime is not yet in place, the detailed assessment against the Statement of Best Practice was carried out only with respect to the CSP regime, except in relation to Principles which relate only to trusts or trust service providers.

B. Detailed Assessment

Table 16.

Detailed Assessment against the OGBS Statement of Best Practice for Trust and Company Service Providers

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Table 17.

Action Plan

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1

Made under Section 10 of the BA.

2

To protect the public interest by providing effective regulation and supervision within the Island’s financial services sector; to support a competitive environment in which quality products and services are promoted for the economic benefit of the Island; and to foster good working relationships within the business community.

3

The treasury, subject to the approval of Tynwald, appoints these. There must be a minimum of three commissioners. There is no requirement that they be politicians or members of the treasury.

4

Three out of the seven staff members were part of the banking supervision team (on a total of 7.75).

5

Licensing criteria and conditions, granting and refusal of licenses, and revocation and alteration of banking licenses.

6

On inspection and investigation.

7

Passage expected in the first half of 2003

8

The Notes do not meet the definition of ‘law’ contained in the Methodology since they are not ‘mandatory,’ evidenced by the fact that the cover page of the Notes states “[whilst this publication has been prepared by the Financial Supervision Commission for general guidance, it is not a legal document and should not be relied upon in respect of points of law. Reference for that purpose should be made to the appropriate statutory provisions.”] The attorney general agrees with this conclusion. Hence, the Notes are not included in the detailed assessment in any discussion of laws or legal requirements. In addition, there is no explicit legal basis for the issuance of the Notes by the FSC.

9

The CTP constitute guidance notes and therefore do not meet the definition of ‘law’ since they are not ‘mandatory,’ evidenced by the fact that they are only enforceable by reference to a Directors’ Certificate required to be filed by the 1998 Insurance Amendment. The attorney general agrees with this conclusion. Hence, the CTP are not included in the detailed assessment in any discussion of laws or legal requirements. In addition, with respect to the legal authority of the IPA to issue the CTP, section 24A of the IA provides that the IPA may publish information or give advice to insurance licensees.

10

This provision is interpreted by the authorities as including disclosures to the FCU.

11

This provision is interpreted by the authorities as including disclosures to the FCU.

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