As many readers will be aware, the final version of the GFSC Finance Sector Code of Corporate Governance (the “Code”) was released by the Guernsey Financial Services Commission (the “Commission”) on 30 September 2011 and came into force on 1 January 2012. The Code replaces the Commission’s previous document entitled “Guidance on Corporate Governance in the Finance Sector” published in December 2004.

This briefing sets out:

  1. the purpose of the Code, and the approach adopted by the Commission in relation to compliance with the Code;
  2. the extent to which the Code applies to Guernsey-regulated financial services businesses; and
  3. the legal and practical effect of the Code.

The Code

Purpose and Approach

The Commission has stated that the purpose of the Code is to “… provide both Boards of locally regulated financial services businesses and individual directors with a framework for sound systems of company governance and, to help them discharge their duties efficiently and effectively”.

The Code sets out eight main principles of good corporate governance (the “Principles”), and provides guidance as to how the Commission would expect companies subject to the Code to adhere to those Principles (“Guidance”).

The Code adopts a modified form of the “comply or explain” approach to compliance that is set out in UK Corporate Governance Code (“UK Code”). By way of background, each company that is subject to the UK Code is required to comply with 16 principles of “good corporate governance” in the UK Code, and to provide statements in their annual financial reports as to how they have complied with the 16 principles. If they have not, it must be explained why not, and how the noncompliance will be remedied (or how the particular requirement may be achieved in a different way). Although there is no reference to the “comply or explain” phraseology in the Code, there are a number of statements in the introductory section to the Code which suggests that it will continue to apply in a modified form. By way of example, it is stated that:

  • the Code provides a “set of Principles and Guidance but is not intended to be prescriptive; rather it is a formal expression of the components of good corporate practice, against which shareholders and Boards, as well as the Commission, can better assess the degree of governance exercised over companies in Guernsey’s finance sector…”;
  • the Commission is not suggesting a “one size fits all” approach to compliance with the Code and states that “Each business’s approach to corporate governance should reflect its legal and operating structure, as well as the nature, scale and complexity of the business” and that “the differing nature, scale and complexity of businesses will lead to different approaches to meeting the Code”.

In addition, non-compliance with the Principles does not automatically make a company subject to the Code liable to any sanction or proceedings.

It should be borne in mind that the Code is quite clear that it does not change any enactment or other document and that it is not intended to codify or amend existing laws or to confer rights which conflict with or add to rights at existing law. Accordingly, if there is any incompatibility with existing law, the existing law will trump the Code to the extent of the inconsistency. Therefore, the corporate governance requirements at common law and in the Companies Law must be complied with by directors in conjunction with the Code and, if there is any doubt on a particular requirement or any inconsistency, the law rather than the Code will apply.

The Code is also described as a “living document” which will continue to evolve and be amended and reviewed as corporate governance evolves internationally.


The Code applies to all companies licensed by the Commission under Guernsey’s main regulatory laws, namely: (the “Regulatory Laws”):

  • The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended) (“POI Law”);
  • The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 (as amended);
  • The Banking Supervision (Bailiwick of Guernsey) Law, 1994;
  • The Insurance Business (Bailiwick of Guernsey) Law, 2002; and
  • The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002

(collectively, the “Regulatory Laws”).

The Code also applies to companies registered or authorised as collective investment schemes (“Funds”) under the POI Law, however, the Commission has exempted the application of the Code to underlying special purpose vehicles of Funds or investment holding companies of Funds.

Guernsey-licensed branches of foreign entities and partnerships are also exempt from complying with or reporting against the Code.

Licensees who are licensed under the Insurance Business (Bailiwick of Guernsey) Law, 2002 (where the Commission is their primary regulator) and comply with the Licensed Insurers’ Corporate Governance Code (last revised in March 2008) are deemed to meet the Code.

In addition, investment companies who report against the Association of Investment Companies Code or the UK Code are deemed to meet the Code.

While the Commission has excluded SPVs of Funds from the application of the Code, it should be borne in mind that it is often the case that the underlying special purpose vehicles are the entities through which the Fund will transact and conduct its business. In such cases, often the Fund itself will not be party to a number of the transaction documents to which the SPV is party. In addition, the directors on the boards of the SPV are not necessarily the same people who are Fund board members. In our view, this exclusion should be approached with caution and considered in the particular context of the Fund in question. Directors of any such company need to remember their legal and fiduciary duties at law at all times in any event.

In the case of companies administered by licensees (but which are not licensed themselves) (“Administered Companies”) do not fall within the Code, directors and administrators of Administered Companies will need to consider carefully whether the Principles and Guidance in the Code should be complied with anyway from both a best practice and regulatory perspective, particularly where licensee directors (whether individuals or corporate directors) are appointed to the board of the Administered Company. In our view, and whilst it is not stated in the Code, it is likely that this is the approach that the Commission would expect licensees to adopt.

Structure and Content

As mentioned in the Introduction section, the Code contains eight main Principles of good corporate governance which set out expected standards for boards. Each Principle is accompanied by guidance on how to meet the Principles.

The application of the eight Principles by a particular company will depend on the particular business of that company. The Commission also accepts that it may be the case that a company may meet a particular Principle in a different way to that set out in the particular Guidance relating to that Principle. In this regard, the Commission has included Guidance in Appendix 1 to the Code for instances where certain Principles may not be fully appropriate for certain licensees.

We set out the eight Principles briefly below:

Principle 1. The Board - Companies should be headed by an effective Board of Directors (the “Board”) which is responsible for governance.

Principle 2. Directors - Directors should take collective responsibility for directing and supervising the affairs of the business.

Principle 3. Business Conduct and Ethics – All directors should maintain good standards of business conduct, integrity and ethical behaviour and should operate with due care and diligence and at all times act honestly and openly.

Principle 4. Accountability - The board should have formal and transparent arrangements in place for presenting a balanced and understandable assessment of the company’s position and prospects and for considering how they apply financial reporting and internal control principles.

Principle 5. Risk Management - The Board should provide suitable oversight of risk management and maintain a sound system of risk measurement and control.

Principle 6. Disclosure and Reporting - The Board should ensure the timely and balanced disclosure to shareholders and/or to regulators of all material matters concerning the company.

Principle 7. Remuneration - The Board should ensure remuneration arrangements are structured fairly and responsibly and that remuneration policies are consistent with effective risk management.

Principle 8. Shareholder Relations - The Board should ensure that satisfactory communication takes place with shareholders and is based on a mutual understanding of needs, objectives and concerns.

While the eight Principles are not new to Boards of Guernsey licensed companies (i.e. some of them were covered (albeit broadly) in the Guidance Note and others would fall within what directors need to do in order to comply with their duties under the Companies Law and common law) the Guidance attached to each Principle is helpful in that it fleshes out some of the more detailed considerations which Boards will need to think about when considering their corporate governance obligations under existing law.

As noted above, the Commission has acknowledged that certain Principles may not be fully appropriate for certain investment entities such as principal managers, closed ended fund managers and Funds in the investment sector (“Relevant Entities”) and has provided some further guidance on these instances in Appendix 1 to the Code. The Commission has also in Appendix 2 to the Code included additional Guidance for Banks in respect of section 3.4 of the Code (which deals with Directors’ fiduciary duties).

It is submitted that the Guidance in Appendix 1 is common sense and would most likely be addressed by licensees when developing their corporate governance procedures and policies in any event. That said, however, the Guidance in Appendix 1 does provide some certainty on those aspects for licensees to which it applies.


The most important effect of the Code is that from 1 January 2012 directors of companies who are subject to the Code will need to complete an assurance statement on an annual basis, confirming that each of the directors of the company have considered the effectiveness of the corporate governance practices of the company and confirm that they are satisfied with the degree of compliance by the company with the Principles set out in the Code. In addition to submitting the assurance statement, Boards need to be in a position to discuss their corporate governance practices with the Commission.

As noted in more detail below, the ultimate effect of this is that Boards of regulated companies need to be in a position to “prove” compliance with each Principle in the company’s business and how that Principle has been met in light of the applicable Guidance. Where a Principle has not been complied with or an alternative method of complying with a Principle has been adopted (i.e. other than as set out in the applicable Guidance) an explanation will need to be given if requested by the Commission to do so.

Only one assurance statement needs to be provided by a licensee. Where a licensee holds more than one licence the assurance statement should be provided to the Division with which it has most contact. Insurers subject to the Licensed Insurers’ Corporate Governance Code do not need to submit an assurance statement, but instead they must continue to submit the summary of the extent of adherence to the corporate governance principles set out in the Insurers’ Code as required by Regulation 1(e) of the Insurance Business (Annual Return) Regulations, 2008.

The Commission has stated that going forward it is intended that the assurance statement will be incorporated into the respective Annual Returns required by each of the Fiduciary Services, Investment Business and Insurance Divisions and into the S36C Annual Review required by the Banking Division, however, for the time being it is a standalone document. The Commission will provide further guidance on the submission for the next period early in the fourth quarter of 2012.


Whilst no explanatory note needs to be included with the Assurance Statement or proof provided with it that a Board has met the requirements in the Code, each Board will need to be able to demonstrate and prove compliance in the event that their corporate governance compliance is investigated by the Commission.

Although the corporate governance requirements in the Code should not be new to Boards, Boards should have conducted or should be in the process of conducting a “health check” on their existing corporate governance policies and procedures in light of the size, nature and complexity of the company’s business and evaluating whether the procedures and policies which they have in place meet the eight Principles and Guidance set out in the Code. Where a Principle has not been met the Board needs to be in a position to provide an explanation.

In that regard, it is submitted that Boards should be documenting as much as possible to evidence compliance with the Code going forward and, for example, preparing detailed minutes of all board meetings which record the review and evaluation of the existing corporate governance policy in light of the issues and risks facing the business and the eight Principles.