Jersey
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 Cod

This report reviews the assessment of Jersey’s compliance with the Basel core principles for effective banking supervision based on the Core Principles. It provides a detailed assessment of the antimoney laundering and combating the financing of terrorism regime of Jersey and reviews its laws and regulations, supervisory and regulatory systems, Jersey’s compliance with the International Association of Insurance Supervisors (IAIS) insurance core principles, and benchmarks the state of insurance supervision. It also analyzes the objectives and principles of securities regulation and provides a detailed assessment of trust and company service providers in Jersey.

Abstract

This report reviews the assessment of Jersey’s compliance with the Basel core principles for effective banking supervision based on the Core Principles. It provides a detailed assessment of the antimoney laundering and combating the financing of terrorism regime of Jersey and reviews its laws and regulations, supervisory and regulatory systems, Jersey’s compliance with the International Association of Insurance Supervisors (IAIS) insurance core principles, and benchmarks the state of insurance supervision. It also analyzes the objectives and principles of securities regulation and provides a detailed assessment of trust and company service providers in Jersey.

I. Basel Core Principles for Effective Banking Supervision

A. General

1. This assessment of Jersey’s compliance with the Basel Core Principles for Effective Banking Supervision has been completed as part of the IMF offshore financial sector (OFC) assessment program.2 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 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 (CP). The assessment team expresses its thanks to the staff Commission 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 CPs, and extensive discussions with the staff of the Jersey Financial Services Commission (Commission), the external auditors, and the management of commercial banks.

Institutional and macro prudential setting, market structure

3. Jersey’s financial system is dominated by private banks that provide asset management for high-net-worth individuals who are attracted to the jurisdiction by low taxes; a secure legal environment; a convenient location close to the main European financial markets; and experienced private sector professionals and firms accustomed to providing wealth-management services. At the end of June 2002, 62 banks were registered compared with 70 a year earlier. The decrease reflects the continuing consolidation in the international industry, and the ongoing pressure within groups to streamline operations and reduce duplication. There are 38 subsidiaries and 24 branches of banks from 16 different countries.

4. The Commission is a statutory body corporate, set up under the Financial Services Commission (Jersey) Law 1998 (FSCL). The Law established the Commission as an independent body with a Board of Commissioners as the governing body. The Commission is accountable for its overall performance to the Parliament also known as States of Jersey through the Finance and Economics Committee (F&E).

5. The legislation relating to banking is the Banking Business (Jersey) Law, 1991 (BBL). It sets out a regime for the licensing of banks to carry out deposit-taking business and the supervision of those banks. Inter alia, it gives the Commission the ability to impose conditions on licensees and provides for penalties for breaches of the legislation and for the revocation of licenses.

General preconditions for effective banking supervision

6. Jersey has a sound and generally effective framework for the regulation and supervision of banking activity. Jersey’s effective licensing authority is supplemented by comprehensive criteria to ensure a consistent understanding of permissible activities and requirements.

7. The Commission prescribes that banks maintain minimum risk based capital requirement of 10 percent and where appropriate a higher minimum requirement can be imposed on individual institutions.

8. The Commission has developed guidance in the form of route planners to ensure a consistent approach for conducting its inspections. Route planners have recently been developed for corporate governance and credit risk.

9. The Commission’s approach to supervision requires that it pay close attention to the internal controls applied by the banks. When dealing with internal audit the FSC takes into consideration its independence, access to senior management and the Board, its risk assessment and quality control processes and technical experience and training programs.

10. The legislation and secondary regulations, which govern bank accounting, represent a valid basis for the supervisory authority. Jersey incorporated banks must produce “true and fair” audited accounts to the Commission.

11. While informal oral and written communication with management is a common form of remedial action utilized by the Commission, it has a range of powers, including powers to impose conditions, appoint inspectors and to revoke registration.

12. The Commission has wide gateways for the sharing of information with home and host country supervisors.

B. Detailed Assessment

Table 1.

Detailed Assessment of Compliance with the Basel Core Principles

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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.

C. Recommended Actions

Recommended actions

Table 3.

Recommended Actions to Improve Compliance with the Basel Core Principles

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D. Authorities’ Response to the Assessment

Basel Core Principles for Effective Banking Supervision

Overview

13. The authorities welcome the Fund’s confirmation that Jersey is compliant or largely compliant with 29 of the 30 Basel Core Principles (and sub-principles) , and its constructive recommendations to further enhance implementation of international standards, many of which support action planned or already underway at the time of the Fund’s assessment.

14. Notwithstanding this, the authorities do not consider that the Commission’s overall risk-based approach to supervision is sufficiently highlighted in the assessment. This approach has identified that the licensing criteria for banks and the nature of the banking business in Jersey has meant that supervisory guidance on credit policies, loan evaluations, and loan-loss provisioning, and setting specific capital requirements for market risk in banks should be afforded lower priority than addressing the risks posed by investment and trust company business. It has been for this reason that banking supervision undertaken by the Commission has focused on such matters as corporate governance, detailed conduct of business, and on ML risk. Nevertheless, as noted below, the Commission will be addressing the particular prudential risks referred to in the Fund’s assessment.

15. The authorities note that there is only one CP that the Fund assesses as materially noncompliant—and that refers to the provisions to deal with market risk. The authorities note that their approach to the management of market risk has been determined by the Commission’s risk assessment, as noted above. However, the Commission will consider the introduction of market risk capital requirements as part of its assessment of the second Basel Capital Accord.

16. A consolidated action plan, prepared by the authorities, is appended to Volume I of the assessment.

Objectives, autonomy, powers, and resources

Resourcing (CP 1(2))

17. The authorities note that the Commission has moved quickly to address the resource deficit noted at the time of the Fund’s visit, which took place shortly after the loss of some key banking staff. The staff complement in its Compliance Division has been increased from 27 to 40 staff, of whom 35 are now in post, including an additional senior manager with considerable experience of the banking industry, who will provide technical support to the Division’s banking team. Staffing requirements will continue to be reviewed on an ongoing basis to ensure that they continue to support the Commission’s objectives and a comprehensive on-site supervision program.

Market and other risks

Credit, market, and other risks (CPs 7,8,12 and 13)

18. Credit and market risk are assessed by the Commission as being low based on information collected from banks on a quarterly basis, and are mitigated by Jersey’s high capital requirements (a 10 percent risk capital requirement against the international norm of 8 percent), strict licensing policies (the Commission restricts licenses to banks in the top 500, measured by capital), and requirement for a letter of comfort from the parent company. Instead, the Commission has focused on corporate governance, detailed conduct of business, and on ML risk.

19. Notwithstanding this, in 2004 the Commission proposes to finalize Codes of Practice for banks, preparation of which was already underway at the time of the Fund’s assessment, which will address best practices for the management of credit, market, and other risks (including loan evaluation and loan-loss provisioning), and internal controls and internal audit and will review capital requirements (which already exceed the international norm) as part of the Commission’s assessment and implementation of the second BCA.

Internal control and audit

Management declaration on internal controls (CP 14)

20. The authorities accept that, currently, only trust company businesses are required to submit a declaration to the Commission that they have complied with relevant regulatory and AML legislation and Codes of Practice (Article 6 of the Financial Services (Trust Company Business (Accounts, Audits and Reports)) (Jersey) Order 2000).

21. The Commission intends to review whether or not directors (and senior management of branches) of all regulated businesses should be required to make such a declaration. Any proposed changes would then be subject to a period of consultation and legislative approval.

On-site and off-site supervision

Scope of supervision and quality control (CP 16)

22. The authorities note that the Commission, with support from outside consultants, has enhanced its on-site visit program to facilitate a more effective and focused use of its resources. This process was already underway at the time of the Fund’s assessment. The Commission has developed a new risk model which will allow it to more accurately identify higher risk operations, a comprehensive set of on-site visit programs, and a revised report format which, inter alia, will more accurately reflect the materiality of on-site visit findings and enhance internal review procedures.

Body of assessment

Operational independence (CP 1(2))

23. The authorities’ response to the fund’s comments on operational independence are set out in Volume 1 (page 21).

Legal framework for banking supervision (CP 1(3))

24. The authorities note that, while the Commission has still to issue Codes of Practice for deposit-taking business, failure to follow existing banking guidance notes may indicate that a business is not “fit and proper” and can attract regulatory sanctions. In addition, where necessary, conditions can be set on a license, which do have force of law, and which will attract a penalty where there is failure to comply.

25. Notwithstanding this, Codes of Practice for deposit-taking business will be issued by the Commission for consultation in 2003. Codes will, inter alia, lay out capital adequacy requirements and it is intended that they will come into force during 2004.

26. In addition, the Commission is seeking to consolidate all of Jersey’s existing regulatory legislation into the FSL, which provides an explicit legal basis for issuing Codes and attaches penalties for failing to comply with them. The authorities point out that the Commission will recommend legislation, subject to consultation and legislative approval to transfer regulation of deposit-taking to the FSL. Such a consolidation was under consideration at the time of the Fund’s assessment.

Powers to address compliance with laws (CPI(4))

27. The authorities response to the recommendation that the Commission be provided with civil monetary penalties and fining powers is in Volume 1 (page 43).

28. The authorities accept that there is no power under the Banking Business (Jersey) Law 1991 (BBL) for the Commission to issue directions or to appoint a manager. However, the law does provide the Commission with wide powers to impose conditions on the license of regulated institutions, equivalent to the power of direction, and the absence of such a power has not caused difficulty to date. The Commission also considers it unlikely that it would use a power to appoint a manager to a Jersey licensed bank, given the top 500 status of banks operating in Jersey.

29. Notwithstanding this, the Commission will undertake a general review of existing powers and sanctions to identify inconsistencies in the Commission’s regulatory arsenal. In any event, the Commission is seeking to consolidate all of Jersey’s existing regulatory legislation into one law (the FSL), which provides for the ability to direct, to appoint a manager, and for restitution on behalf of customers. Subject to consultation and legislative approval, the Commission will recommend that the regulation of deposit-taking be transferred to the FSL in 2004. Such a consolidation was under consideration at the time of the Fund’s assessment.

Credit policies (CP 7)

30. The authorities do not accept that the Commission places undue reliance on home supervisors to mitigate credit risk. Credit risk is assessed by the Commission as being low risk from information collected in prudential returns, and is mitigated, instead, by its higher capital requirement (10 percent risk capital requirement), licensing policies, and requirement for a letter of comfort from the parent company.

31. Notwithstanding this, Codes of Practice for deposit-taking business, will, subject to consultation, introduce best practices for credit risk and will ensure that responsibilities of the Board and senior management for credit risk are adequately addressed. Best practice will be determined by the Basel paper: Principles for the Management of Credit Risk. It is intended that these Codes will come into force during 2004.

32. The authorities point out that revised on-site visit programs have also been prepared and adopted which require review of management policies on credit quality and provisioning levels and the application of policies and procedures to manage all other core banking risks.

Loan evaluation and loan loss provisioning (CP 8)

33. The authorities do not accept that the Commission places undue reliance on audited financial statements to evaluate loans and loan loss provisioning. As explained above, it is the Commission’s view that credit risk is not a significant risk for the majority of Island banks and, instead, the Commission has focused on corporate governance, detailed conduct of business, and on ML risk.

34. Notwithstanding the above, a revised on-site credit risk program (route planner), which is risk-based, is in use which now:

  • Specifies testing to be carried out during visits to verify management representations.

  • Requires evaluation of the appropriateness of credit risk and provisioning policies and procedures.

The Commission will also review the merits in developing a credit risk rating system.

Connected lending (CP 10)

35. The authorities note that Codes of Practice for deposit-taking business, which will incorporate requirements governing connected lending, will be issued for consultation in 2003 and it is intended that they will come into force during 2004.

36. The Commission, with support from outside consultants, has enhanced its on-site visit program to facilitate more effective and focused use of its Compliance Division’s resources. The risk model has been enhanced, a comprehensive set of on-site visit work programs (route planners) has been developed, and improved quality control checks are being incorporated into the on-site visit process.

37. As required by the Banking Business (Jersey) Law 1991, banks proposing to introduce global liquidity pools have notified the Commission and met with it to determine the impact of such operations.

Validation of supervisory information (CP 19)

38. The authorities note that the Commission intends to review whether it should be permitted to approve the appointment (and continued appointment) of auditors of all licensed persons (subject to consultation and legislative approval). The appointment and retention of auditors of trust company businesses and Category B insurance permit holders is already subject to approval by the Commission, and guidance is in place that establishes a requirement for relevant industry experience for auditors of trust company businesses.

39. The Commission is to review the use of external experts in the validation of supervisory information, including its access rights to the working papers of such experts, and any consequential amendments to regulatory legislation that may be required. Any proposed changes would then be subject to a period of consultation and legislative approval.

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

A. General

Information and methodology used for the assessment

40. A detailed assessment of the AML and combating the financing of terrorism (CFT) regime of Jersey was prepared by a team of assessors that included staff of the International Monetary Fund (IMF) and an independent expert (IAE) 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.3 IMF staff reviewed the relevant AML/CFT laws and regulations, and supervisory and regulatory systems in place to deter ML and FT among prudentially regulated financial institutions. In addition, the Fund reviewed the transitional regulatory arrangements in place for trust and company service providers. The IAE reviewed the capacity and implementation of criminal law enforcement systems.

Overview of measures to prevent money laundering and terrorism financing

41. Information used for the assessment was obtained from the Money Laundering (Jersey) Order 1999 (the “MLO”4; the Proceeds of Crime (Jersey) Law 1999 (the “POCL”); the Terrorism (Jersey) Law 20024 (the “TL”); the Terrorism (United Nations Measures) (Channel Islands) Order 2001 (the “Terrorism Order”); the Al-Qa’ida and Taliban (United Nations Measures) (Channel Islands) Order 2002 (the “Al-Qa’ida Order”); the Drug Trafficking Offenses (Jersey) Law 1988 (the “DTOL”); the Collective Investment Funds (Jersey) Law 1988 (the “CIFL”); the Banking Business (Jersey) Law 1991 (the “BBL”); the Insurance Business (Jersey) Law (the “IBL”); the Financial Services (Jersey) Law (the “FSL”) (formerly Investment Business (Jersey) Law); the Financial Services Commission (Jersey) Law 1998 (the “Commission Law”); the Criminal Justice (International Cooperation)(Jersey) Law 2001 (the “CJL”); the Criminal Justice (Forfeiture Orders)(Jersey) Law 2001 (the “CJFOL”); the U.K. Extradition Act 1989 (the “Extradition Act”); the Police Force (Jersey) Law 1974 (the “PFL”); the Customs and Excise (Jersey) Law 1999 (the “CEL”); the Investigation of Fraud (Jersey) Law 1991 (the “Fraud Law”); the Interception of Communications (Jersey) Law 1993; the Interpretation (Jersey) Law 1954; the Companies (Jersey) Law 1991 (the “Companies Law”); the Borrowing (Control)(Jersey) Law 1947, (the “Borrowing Control Law”); the AML guidance notes for the finance sector (the “Notes”);5 the Investment Business Codes of Practice (the “Investment Codes”); Codes of Practice for Trust Company Business (the “Trust Company Codes”); the Mutual Evaluation Report of the OGBS of 1999 (the “MER”); Joint Action dated June 19, 1998, of the Council of the European Union on the creation of a European Judicial Network (the “EU Decision”); and the Self-Assessment Questionnaire: FATF Special Recommendations on Terrorist Financing (April 2002); Position Paper: Overriding Principles for a Revised Know Your Customer Framework (February 2002), issued by the Commission, the Guernsey Financial Services Commission and the Isle of Man Financial Supervision Commission. See generally, http://www.jerseylegalinfo.je, which contains all of Jersey’s primary and secondary legislation, along with some proposed legislation as well.

42. This assessment is also based in part on discussions on AML/CFT issues that were held with officers and other representatives of the following offices, all of whom were most helpful in the preparation of this assessment: the Commission; the Bailiff’s Chambers; the Attorney General’s Chambers; the Law Officers Department; the Police; the JFCU and Customs and Excise.

43. For the purposes of this assessment, financial institutions (FIs) are any deposit-taking business as defined in Article of the BBL; any insurance business to which Article 4 of the Insurance Business (Jersey) Law 1996 applies; the business of being a functionary of a CIF, as defined in Article 1(1) of the CIFL; any investment business, as defined in Article 1(1) of the FSL; the business of providing trusteeship services (not being services as a trustee of an occupational pension scheme); the business of company formation; the business of company administration; the business of a bureau de change; the business of providing check-cashing services; the business of transmitting or receiving funds by wire or other electronic means; the business of engaging in any of the following activities within the meaning of the Annex to the Second Banking Coordination Directive (No. 89/646/EEC) (not being a business specified above (inclusive): the acceptance of deposits and other repayable funds from the public; lending; financial leasing; money service business (MSB); the issuing and administering means of payment (such as credit cards, travelers’ checks and bankers’ drafts); guarantees and commitments; trading for one’s own account or for the account of customers in money market instruments (such as checks, bills, and CDs); foreign exchange; financial futures and options; exchange and interest rate instruments; or transferable securities; participation in securities issues and the provision of services related to such issues; advice to undertakings on capital structure, industrial strategy and related questions, and advice and services relating to mergers and the purchase of undertakings; money broking; portfolio management and advice; the safekeeping and administration of securities; credit reference services; and safe custody services, see generally Article 36(1) and Schedule 2 of the POCL. Jersey has a strong legal and institutional framework generally, particularly with respect to implementation of the major treaties, including measures to combat terrorism and terrorist financing; confiscation of the proceeds of criminal conduct; law enforcement and prosecution powers; customer identification; and international cooperation.

44. The main institutions in Jersey in the AML/CFT area are the JFCU, which is a unit of the Jersey Police and is the FIU for Jersey; the Police and the Customs and Excise Department, which investigate criminal activities; the Attorney General’s Office which prosecutes ML and FT; and the Commission, which is the financial regulator and responsible for monitoring compliance for FIs that are regulated.

45. The broad regulation of the financial sector, including banking, insurance, investment companies and trust companies in a single independent and effective regulator, the Commission, is another strength. However, a number of improvements to Jersey’s legal and institutional framework are recommended: First, with respect to the JFCU, consideration should be given to augmenting its permanent compliment of human resources, and its powers, particularly with respect to its ability to obtain information from reporting entities, and its access to public and nonpublic databases, strengthened. Second, the legal framework with respect to originator information remaining with the transfer through the payment chain, and enhanced scrutiny to wire transfers that do not contain complete information, needs to be strengthened, taking into account the two-year period referred to by FATF. Finally, the framework with respect to Jersey’s role as a home regulator, although applicable only to a limited a limited number of financial institutions, and the screening of applicants for employment by banks, insurance companies and CIFs, should be improved.

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

46. 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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