Review of Financial Regulation in the Crown Dependencies Presented to Parliament by the Secretary of State for the Home Department by Command of Her Majesty November 1998 Cm 4109-i Part 1 - Main Report £17.85 Cm 4109-ii Part 2 - The Jersey Finance Centre £10.30 Cm 4109-iii Part 3 - The Guernsey Finance Centre £12.60 Cm 4109-iv Part 4 - The Isle of Man Finance Centre £11.40 published by The Stationery Office as Part 1 ISBN 0 10 141092 1 Part 2 ISBN 0 10 141093 X Part 3 ISBN 0 10 141094 8 Part 4 ISBN 0 10 141095 6 Review of Financial Regulation in the Crown Dependencies OFFICE OF THE REVIEW OF FINANCIAL REGULATION IN THE CROWN DEPENDENCIES c/o Home Office 50 Queen Anne's Gate London SW1H 9AT Rt Hon Jack Straw MP Home Secretary Home Office 50 Queen Anne's Gate London SW1H 9AT 24 October 1998 Dear Home Secretary REPORT OF THE REVIEW OF FINANCIAL REGULATION IN THE CROWN DEPENDENCIES You commissioned me on 20 January 1998 to review with the Island authorities in Jersey, Guernsey and the Isle of Man their laws, systems and practices for regulation of their international finance centres, the combating of financial crime and co- operation with other jurisdictions. I have pleasure in submitting my Report with this letter. As explained in Chapter 1, the Report consists of four Parts. Part I presents my own assessment. I take responsibility for what it says. It includes a two-page summary of Principal Issues followed by a full Summary and Main Conclusions and then the Main Report. A detailed list of contents is at the end. Parts II, III and IV, prepared by the Island authorities in consultation with me, are professional guides to the finance centres of the three Islands. In submitting the Report, I would like to say how much I appreciate the constructive way in which the Island authorities have co-operated in the Review and the immense amount of work they have put into it. As explained in Chapter 1, many others, too, have made invaluable contributions. I thank them all. Yours sincerely, Andrew Edwards Review of Financial Regulation in the Crown Dependencies Part I Principle Issues Summary and Main Conclusions Main Report Presented to Parliament by the Secretary of State for the Home Department by Command of Her Majesty, November 1998 Cm 4109-I £17.85 published by The Stationery Office as ISBN 0 10 141092 1 Review of Financial Regulation in the Crown Dependencies Principle Issues PRINCIPAL ISSUES FROM THE REPORT General (Chapters 1-5) The Crown Dependencies have been very successful. They are clearly in the top division of offshore finance centres. The legal frameworks, judicial and prosecution systems, regulation, policing and co-operation with other jurisdictions mostly work well. Conflicts of interest are generally well-handled. Financial services regulation (Chapters 6-9) The regulatory bodies, all now independent of Government, are good. Their Boards should prefer-ably not include politicians. Prudential regulation of banks, investment business and insurance is generally of a high standard. There are points for consideration on the individual regimes. Regulation needs to be deepened, in the Islands as elsewhere, so as more fully to cover management and control systems, staff quality, risk management, conduct of business, and countering of client abuses. In Jersey and Guernsey, there is scope for strengthening enforcement and the policing of unlicensed business through dedicated enforcement units. Co-operation with overseas regulators is good, though recent Jersey legislation could restrict it in ways not intended. There is a case for introducing financial services ombudsmen (or a common ombudsman) and, as already in the Isle of Man, customer protection schemes. Companies, Trusts and service providers (Chapters 10-13) Jersey and Guernsey have good systems for vetting company incorporations. But in all the Islands the regulation of companies needs to be strengthened. The Isle of Man should consider vetting companies at registration and requiring confidential disclosure of beneficial ownership. The locally incorporated non-resident company category should preferably be abolished. All the Islands should extend registration and regulation to the many companies administered in the Islands but incorporated elsewhere. Some disclosure of financial information, even on a confidential basis, should be considered pending wider agreement, offshore and onshore, about disclosure regimes. The Isle of Man and Guernsey plan to update their insolvency procedures and introduce an office of Official Receiver. Jersey has done so already. All the Islands plan to introduce modern rescue procedures or are considering them. The Islands have good legal frameworks for Trusts. As elsewhere, there is a case for further legislation to counter potential abuses by settlors and trustees and to ensure proper accountability of trustees through enhanced disclosure and accounting requirements. A lead-Department in the UK, with responsibility for overseeing the UK's Trust sector, could promote an inter- Governmental forum of Trust jurisdictions in which the Islands could participate. The Report strongly commends the Islands' proposals to license and regulate providers of Trust and Company services. Such regulation needs, as the Island authorities envisage, to combat "nominee" Director abuses and abuses by clients as well as to protect clients. Enforceable codes of conduct are needed for Directors, company administrators and agents, and trustees. Providers of questionable competence or integrity should be weeded out. The professional regulation of lawyers and accountants in the Islands, already well developed, should extend to all practitioners and should cover provenance as well as handling of client accounts. Policing the finance centres (Chapters 14-16) The Islands are firmly committed to combat crime of all kinds, including tax evasion and money laundering, and to the fullest co-operation with other jurisdictions. They have given exemplary assistance in many cases of drug trafficking, fraud, tax offences and money laundering. The Jersey and Guernsey authorities are committed to completing their legislative arsenals for combating crime by autumn 1999. The Isle of Man's is substantially complete. The Jersey authorities, in a welcome policy change, are now willing to assist overseas authorities investigating fiscal offences and smaller fraud cases. Where problems of co-operation have arisen in the past, they have mostly been at the investigation stage. The completion of the legislative arsenals and recent policy changes should dispose of these problems. The suspicious transaction reporting system seems to be working well in banks and insurance companies. Improvements should be sought elsewhere. Procedures for co-operation over the provision of evidence and restraint and confiscation of assets have generally worked well. The Report sketches four possible reforms of the present legislative arsenals and three possible reforms to take the profits out of crime. In all cases the UK would need to take the lead. There is a case for setting up self-standing, separately financed Financial Crime Units responsible for policing the finance centres. International (Chapter 17) A new Offshore Steering Group, a new joint forum with onshore jurisdictions, and an extension of favourable treatment by the large countries of co-operative small jurisdictions, could all help to promote higher standards generally offshore. Resources and timetable (Chapter 18) The Islands are firmly committed to deploy the resources needed to regulate and police their finance sectors effectively. The Law officers, police and regulatory authorities in each Island appear between them to need about 20 extra professional staff. The Report expresses the hope that by spring 2000 the Islands will have implemented, or be well on the way to implementing, all the proposals discussed or will have decided what alternative courses to pursue. Review of Financial Regulation in the Crown Dependencies Summary and Main Conclusions REVIEW OF FINANCIAL REGULATION IN THE CROWN DEPENDENCIES PART I by Andrew Edwards SUMMARY AND MAIN CONCLUSIONS 1 Introduction S1 The Home Secretary commissioned me in January 1998 to review with the Island authorities in Jersey, Guernsey and the Isle of Man the regulation of their international finance centres, the combating of financial crime and co-operation with other Jurisdictions. The accompanying Report presents the outcome of the review. (1.1) S2 Part I presents my assessment. This reflects extensive discussion with the authorities and others in the Islands, in London and in other financial centres. It also draws on professional advice from Professor David Hayton, Mr Guy Sears, Mr Munro Sutherland and a former insurance supervisor. To all of these I am most grateful. (1.3-1.4) S3 The sections of this Summary correspond to the Part I Chapters. The cross-references at the end of each paragraph are to the relevant sections or paragraphs of the Part 1 Chapters. S4 Parts II, III and IV of the Report, prepared by the Island authorities in consultation with me, are professional guides to the international finance centres of each Island. I hope that the Island authorities will keep these up to date and make them available on the Internet. I hope, too, that other offshore centres may be willing to prepare, and make available, similar guides. (1.2) 2 The Islands' finance centres S5 The Islands have been very successful in recent decades in developing their international financial centres. Their businesses include banking, investment, insurance, company and Trust business. The assets and liabilities of Island institutions and Trusts probably now amount to some £300 to £350 billion. Customers are now truly international. Large sums are channelled from the rest of the world through the Islands to the UK. (2.1-2.6) S6 The Islands' success has depended importantly on internal self-government. This has enabled them, like other offshore centres, to offer customers tax and other advantages that the large centres are mostly either unable or unwilling to emulate.