What are some of the things captive directors are keeping an eye on looking into the future?

Directors we advise have been proactive in considering expanding the uses for existing captives. New and existing captive directors are now carefully contemplating, and in many cases underwriting, emerging risks as part of their risk selection. For example, risks relating to cannabis (where federally legalised) and cyber-related risks. The Bermuda Monetary Authority (BMA) has generally encouraged, and in some cases required, governance oversight of captive boards to consider the operational risks of their information technology infrastructure, operations outsourcing, cybersecurity, privacy law developments, and the advancements in the use of Artificial Intelligence in a captive’s operations. The BMA’s Insurance Sector Operational Cyber Risk Management Code of Conduct (Cyber Code) was published to promote such governance requirements, which extends to the secure management of information technology system, outsourcing best practices and related disaster recovery and contingency planning.

Captive directors are also carefully monitoring legal and regulatory developments along with global trends, for example ESG-related themes in leadership and risk management. In that regard, captive directors are looking at ESG-related risks that may impact their cedant organisations, for example risks relating to global warming and de-carbonisation while also considering internal changes, for example appointments to captive boards that promote greater social equity, diversity and inclusion.

One particular field of emerging regulatory compliance that will demand director oversight relates to the collection, use and sharing of personal information. In the near future, each captive in Bermuda will be required to appoint a representative ( their “privacy officer” ) who will be responsible to ensure the captive’s compliance with the Personal Information Protection Act 2016, as amended, which will come into force on January 1st, 2025. One of the responsibilities of the privacy officer will be to conduct all communications of the captive with the Privacy Commissioner. The role of the privacy officer cannot be outsourced to an unrelated corporate services provider, although that role can be filled by a person from within the captive’s group of affiliated companies. That person does not need to be based in Bermuda but they must be “accessible” by the captive and the Privacy Commissioner.

Of course, there are many other important topics and considerations, but the above aspects of Board oversight have been coming up fairly regularly in our experience.

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What are the current exemptions for the requirement to hold a LCF licence relating to VASP activity?

The Guernsey Financial Services Commission (GFSC) considers a virtual asset service provider (VASP) activity high risk. Its rationale for regulating VASPs is to ensure that anyone carrying out such activities by way of business in or from within the Bailiwick or by a Bailiwick body is properly regulated for the purposes of anti-money laundering and countering the financing of terrorism.

A VASP must have a licence under Part III of the LCF Law (a Part III licence), unless an exemption applies.

The following persons do not require a Part III licence:

  • those who make investments, hold, or trade, in virtual assets for their own benefit;
  • licensees under the local regulatory laws providing administration or management services to VASPs which either hold a Part III licence or who are otherwise exempt; or
  • authorised or registered collective investment schemes investing, holding, or trading in virtual assets.

For a full list of the exemptions please see the GFSC’s LCF Disapplication Note.

Are there any restrictions about advertising? Do I need a Part III LCF Licence for advertising my virtual assets within the Bailiwick?

There are specific rules for promotional activity relating to VASPs by whatever means including information published online and on social media.

A person intending to advertise virtual assets or virtual asset services in the Bailiwick, who does not hold a Part III VASP licence, must obtain prior written approval from the GFSC, and must abide by any conditions set out in that approval. See the Lending, Credit and Finance Rules, 2023.

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Has an application for the appointment of restructuring officers been rejected by the Cayman Court?

Yes, in In the Matter of Aubit International the company’s restructuring officers (RO) petition was dismissed because there was no credible evidence of a rational restructuring proposal with reasonable prospects of success and the purpose of appointing ROs was not a proper use of the restructuring regime. The Cayman Court therefore lacked jurisdiction to grant the order. This case is a reminder that companies should only apply for the appointment of ROs if confident they can adduce the required evidence. Failure to do so would make the company ripe to be wound up given that it would have had to admit inability to pay is debts as part of its RO application (see our Q3 article for further details on the RO regime, or revisit our previous articles on this case for further information: In the Matter of Aubit International and Intention Matters in the Matter of Aubit International).

Can a creditor apply for the appointment of “light touch” provisional liquidators?

A creditor can apply for the appointment of “light touch” provisional liquidators in Bermuda, although it is uncommon for a creditor to do so. There is no statutory basis for this in the Cayman Islands and in the BVI the company’s consent would be required.

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Isn’t lending already regulated in Jersey?

No. Although there are some protections in place, lending money to people is not currently regulated in Jersey, except:

  • against money laundering and the financing of terrorism;
  • against unfair commercial practices towards consumers and aggressive selling techniques and misinforming or misleading people about products or services;
  • for banks whose deposit-taking is already supervised by the Jersey Financial Services Commission (JFSC).

There is a voluntary Consumer Lending Code of Practice and a voluntary Debt collectors’ code of conduct, but neither are compulsory, and compliance is not currently overseen by a regulator. The introduction of regulation in this area would therefore be a significant change to Jersey’ regulatory landscape.

Can you give a high level overview of the proposed changes in lending in Jersey?

It is proposed that those that engage in lending or business ancillary to lending that involves consumers will be required to seek authorisation to do so from the JFSC. Such businesses will be regulated for their conduct by the JFSC.

The proposed regime is wide ranging. It will cover any cash loan and any other form of financial accommodation. This includes:
• consumer credit agreements;
• consumer hire agreements;
• secured lending arrangements (mortgages).

In addition to lending, the types of activities that will be caught by the proposed regime are:
• advising on, administering, and arranging regulated agreements and arrangements;
• credit broking in respect of regulated agreements and arrangements; and
• debt related activities such as debt adjusting, debt counselling, debt collecting and debt administration.

It is anticipated that anyone undertaking these activities will be required to obtain a licence from the JFSC towards the end of 2024 and will be subject to a set of standards set out the proposals.

What are the risks if lenders do not register with the JFSC?

For those lenders within scope of the new regime, once brought into force, if lending is being done by way of business without a licence, this could attract penalties of seven years imprisonment and/or fine.

There are proposed exemptions from the regime and additional exemptions will be consulted upon by the JFSC at a later date.

What does this mean for overseas lenders?

Overseas lenders that do not operate in Jersey in any way, such as UK or Guernsey lenders that do not have a presence or agent in Jersey, will not be required to be registered in Jersey. This means that any recourse a Jersey resident consumer may have against an entity registered overseas will lie with rights the consumer may have under foreign law and regulation. This is different to the Guernsey position, which is understood to require UK lenders to notify the Guernsey Financial Services Commission that they conduct business in Guernsey, as the UK is deemed an equivalent jurisdiction under The Lending, Credit and Finance (Bailiwick of Guernsey) Law, 2022, and registration of other foreign lenders. However, Jersey’s proposed approach is consistent with how the JFSC approaches the regulation of other overseas persons in the jurisdiction.

In the case of overseas lenders that have agents in Jersey, the intention is to provide a conditional exemption for the agent from the requirement to register with the JFSC and a limited regulatory regime for the lender.

Are there any other notable changes?

As part of the introduction of the regulation of consumer credit, amendments to Jersey’s degrévèment regime are also proposed.

The process leading to and of degrévèment is a long-established Jersey statutory process for removing encumbrances (usually hypothecs – often referred to a mortgages) that exist over a piece of immoveable property (such as a person’s house). At the end of the degrévèment process the property that is subject to the mortgage is transferred to a creditor (usually a mortgage lender) who may then retain or sell the property to recover sums due to that creditor. Under the degrévèment procedure, the creditor who receives the property (Tenant) will be required to pay off any superior secured creditors (e.g., any with mortgages created earlier) and other priority claims (such as expenses incurred during the process). However, if after those are paid, the value of the property is greater than the debt owed to the Tenant, then the surplus is retained by the Tenant. The surplus does not go back to the debtor, who may still be liable to other creditors for debts owed to them and there is no duty to account for the surplus to other unsecured creditors either. The Tenant therefore retains any windfall they may receive from the sale of the property.

The Jersey Government considers that the arrangements with respect to retention of any surplus by the Tenant, as they currently stand, are not compatible with the proposed consumer credit regime and should be addressed. Not only is the retention of a windfall by the Tenant prejudicial to consumers, but it is also prejudicial to other inferior secured and unsecured creditors who retain their claim against a debtor whose property has been taken through a degrévèment, but who might have no other resources from which to meet their claims. The Government proposes that the degrévèment regime be amended to add a discretion for the Royal Court, when it invests a property in the Tenant, to require that the property is sold and the surplus to be paid to the debtor, or into court – the Tenant will no longer be entitled to retain any surplus. The Royal Court will also be able to make further orders to require the Tenant to achieve the best price on the sale of the property to avoid any transactions at an undervalue taking place. It is expected that such provision may be used by the Royal Court to ensure that both the debtor’s and other creditors’ interests will be protected where there is expected to be a windfall gain for the Tenant from a degrévèment.

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