The Jersey Financial Services Commission (JFSC) has published a consultation to its Codes of Practice (Codes) that will affect all registered persons under the Financial Services (Jersey) Law 1998.

These summaries and observations do not constitute legal advice. However, we hope they make life a bit easier for you when considering whether you’d like to respond to the Consultation yourself to help shape the future of Jersey’s regulatory environment.

The JFSC’s amendments fall into three broader categories:

amendments that are of a “maintenance” character, e.g. clarifying certain rules and concepts or enhancing stylistic consistency across various Codes;

amendments that modify regulatory requirements as a result of issues the JFSC has identified during its supervision of registered persons; and

amendments designed to ensure that the JFSC’s regulatory requirements comply and keep up to date with international standards.

Some of the proposed amendments are generic and affect all Codes alike, others target specific Codes only. The JFSC considers that none of the proposals should be overly onerous, costly or time-consuming for registered persons to implement.

The JFSC acknowledges that some registered persons may require a lead-in period to update internal procedures following the new changes to the Codes. It is the regulator’s intention to bring the amended Codes into force two (2) months after they are issued.

In the below we summarise the proposals and have added our preliminary thoughts where appropriate.

1. Generic Amendments

1.1 First: Payment of fines

With the exception of the Certified Funds Code, all Codes should be amended to make clear that where a financial penalty is imposed on a person by the JFSC (be it a registered or principal person), it will be that very person who has to pay the penalty, not any insurer. Likewise, insurance should not be sought by registered persons to cover payment of financial penalties.

This does expressly not prevent registered persons from taking out indemnity cover that indemnifies against costs associated with defending a JFSC enforcement action or any court costs and legal fees a person may be ordered to pay to the JFSC as a result of any such action.

Whilst acknowledging the intent and purpose of this provision is to ensure that the registered or principal persons do not avoid the financial consequences of their behaviour, this provision may create a disincentive to some business participants (e.g. non-executive directors) to provide services unless further clarity is provided about the JFSC’s approach to issuing fines.

1.2 Second: Cyber risk management
With the exception of the AIF Code, all other Codes will include a requirement that a registered person must specifically consider the risk of a cyber security incident and have in place a documented policy that identifies assets, risks, measures for protection against and detection of cyber incidents as well as response and recovery plans to and following an incident.

Attention is drawn to the NIST cybersecurity framework and five crucial stages an appropriate policy should follow: identify, protect, detect, respond and recover.

We consider this proposal to be in line with international standards and any operation that has not given sufficient thought to cyber security measures is strongly encouraged to do so.

1.3 Third: Client, customer and fund money
The TCB, GIMB, FSB and IB Codes will be amended to include a requirement for a registered person to conduct at least annually an independent review of the client, customer or funds money under its control. Such review should in particular focus on controls that prevent the loss, misuse or misappropriation of such monies.

The reviewer must be “appropriately qualified” and independent and is allowed to be an internal or external party. Where an internal party performs the review, this person must be operationally independent from the individuals or functions within the registered person that are responsible for control over the monies in question and functions under review.

We consider that clarification around the criteria for a person being “appropriately qualified” would be beneficial, in particular as this may also depend on the nature, size and complexity of the business in question.

1.4 Fourth: PII Arrangements
The JFSC refers to its previous reviews of Professional Indemnity Insurance (PII) which it published on 7 December 2017, with further guidance on 26 June 2018. The most recent proposals aim to harmonise and make consistent the PII requirements between the Codes for GIMB, FSB, IB and TCB.

The main features to be harmonised touch on required policy inclusions and JFSC notifications regarding PII; clarifications around “adequate PII cover” when a registered person is complained against with the Financial Services Ombudsman; and clarifying the period that “run-off” PII should cover where a registered person ceases to conduct a class of financial services business.

2. Code-Specific Changes

2.1 Amendments to the Alternative Investment Funds Code
Changes to the Alternative Investment Funds Code (AIF) are mainly stylistic “housekeeping” amendments of no particular significance. The key point is that the introduction of passporting and withdrawal of private placement rules has not taken effect during 2018. As a result, non-EU AIFMs remain able to market Directive AIFs under the existing Private Placement Rules for the time being.

2.2 Amendments to the Banking Code
Apart from the generic amendments discussed above, the only key change is that any Jersey bank has to notify the JFSC in writing no less than 10 business days before a change to its capital structure is to take place. “No Objection” confirmation in writing by the JFSC must be received before such change becomes effective.

We consider that further information would be helpful: for instance, will this consent requirement cover only banks which are fully Jersey incorporated entities or also unincorporated Jersey branches of banks incorporated abroad?

Likewise, would there be a de minimis threshold for a bank seeking to repay or vary its terms of capital, below which JFSC consent would not be required?

2.3 Amendments to the Certified Funds Code
It is proposed to amend paragraph 6.7.2 of that Code to further clarify notification requirements in the event of the winding-up or dissolution of a fund (except where the event has already been agreed by the JFSC). The purpose is to make clear that the JFSC expects notification for all such events and not just in limited circumstances or for specific vehicles only.

2.4 Amendments to the Fund Services Business (FSB) Code
Apart from the generic amendments discussed above, no further substantial changes are made to the FSB Code at this stage.

2.5 Amendments to the General Insurance Meditation Business Code
The generic amendments aside, the following important amendments are proposed:

Paragraph 3.2.1 will be changed to clarify requirements for the holding of policy and procedure manuals in Jersey or, in cases where the registered person is not incorporated or has its place of business in Jersey, these manuals must be made available without delay to the JFSC;

Sub-paragraph is amended to make clear that where a registered person has a physical presence in Jersey, its compliance officer must be based on the island also; and
The Code will be amended to ref

lect the requirement that for each and every policy of insurance, clients will receive a breakdown of costs, must not be misled and be informed about all relevant and material facts. The nature and amount of all standard fees and charges associated with a policy and levied over and above the premium have to be disclosed.

The first two amendments are in line with considerations around corporate and business substance which is an increasingly important topic, in particular for small jurisdictions like Jersey.

The third reflects the important acknowledgement (in line with international standards) that consumer and client protection as well as transparency on costs in the insurance sector (just as in other industries) is vital to maintain public trust and confidence and treat clients fairly.

2.6 Amendments to the Insurance Code
The main proposal for this Code is to clarify that the JFSC’s policy on outsourcing applies to Category B permit holders only.

2.7 Amendments to the Investment Business Code
The only changes proposed are in line with the generic amendments discussed above.

2.8 Amendments to the Money Services Business Code
The only changes proposed are in line with the generic amendments discussed above.

2.9 Amendments to the Trust Company Business Code
Limited liability partnerships are to be included where reference is made to Class I TCB. The other proposed changes are in line with the generic amendments discussed above.

3. The Codes’ Future: Alignment of the Codes

The JFSC invites views for future development of the Codes. The idea is to align lay-out, principles and terminology of the Codes where possible and appropriate to enhance clarity and ease of use. This should theoretically help registered persons (especially multi-licensed firms) to navigate the Codes and enhance clarity as to their regulatory obligations.

Such alignment may affect issues of terminology, numbering, punctuation, typesetting and emphasis. For example, the requirement that a registered person must conduct its business with integrity is equal to all Codes and could therefore be expressed in exactly the same wording.

Likewise, for illustration only, the Second Principle in all Codes is that a registered person must have regard for the interests of its clients/customers/policyholders/funds. The level of regard, however, is variously expressed as “due regard”, “highest regard” or “best interests”. The JFSC proposes that a future alignment could make “highest regard” the common principle across all Codes, enhancing clarity of the level of concern, care and diligence required.

It is noted by the regulator that a similar attempt had previously been made in Consultation Paper No 4 in 2011, with strong responses both in favour and against harmonisation and alignment of the Codes. The JFSC hopes that by now the market may have reached greater consensus and therefore presents this harmonisation project again to the public.

We consider that enhancing the ease of use and consistency across the Codes is generally a commendable thought and would further strengthen the reputation of Jersey as a jurisdiction where regulatory clarity and consistency across all financial services business regulations is market-standard.

As lawyers, however, we are also all too aware that the devil often lies in the detail: it is both right and necessary that certain industries are regulated in a different manner and the relevant rules cannot always be aligned with the rules and terminology used in other sectors.

The JFSC is naturally also aware of this and emphasises that industry-specific tailoring would still be needed. We look forward to hearing more about this proposal and engaging with the regulator and our clients on any improvements that can be made to the Codes.

You can access the consultation here. If you have any questions or queries, please do not hesitate to contact us.

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