The regulatory environment has become steadily ever more pervasive and complex since the whole concept of “regulation and compliance” was born in the late eighties and early nineties. Since then financial services businesses (“FSBs”) have faced a growing tide of laws and regulations with which they have to comply in order to do business.
Trust services providers (“TSPs”) are no exception. They have to grapple with, understand and implement the relevant substantive laws, regulatory rules, guidance and codes of practice.
The Guernsey Financial Services Commission (“GFSC”) has issued a “Code of Practice for Trust Service Providers” (the “Code”). This represents one of the last of a breed of official documents, in that it sets out “good practice” and “guidance” rather than specifying outright legal requirements. Although not particularly extensive, the Code represents an important overarching framework which will (or should) dictate a TSP’s approach to all the strict legal requirements which they have to observe.
If a TSP’s conduct is impugned, adherence to the Code will be an important element in assessing whether a TSP’s conduct is or has been “fit and proper”. Accordingly an understanding of the Code and its relevance is an important part of managing risk for TSPs..
Guernsey was one of the first jurisdictions in the world to introduce a comprehensive regime for the regulation and supervision of trust and company service providers.
Early on (in regulatory terms) Guernsey enacted “The Regulation of Fiduciaries, Administration Businesses, and Company Directors, etc. (Bailiwick of Guernsey) Law of 2000 (“the Fiduciary Law”)” to set out the framework for licensing, regulating and supervising company and trust service providers.
Under Section 35 of the Fiduciary Law the GFSC may issue such Codes of Practice as it thinks necessary - “(i) for the purpose of providing guidance as to the duties, requirements and standards to be complied with and….best practices to be observed by persons carrying on by way of business any regulated activity” (emphasis supplied)
The Code is therefore “guidance” and is to be regarded as “best practice”.
Schedule 1 of the Fiduciary Law deals with the “Minimum Criteria for Licensing” and states -
“(2) In conducting his business, the applicant or licensed fiduciary shall at all times act in accordance with the following documents issued by the Commission –
(a) the Principles of Conduct of Finance Business, and
(b) any rules, codes, guidance, principles and instructions issued from time to time under this Law…. ” (emphasis supplied)
Accordingly any licensed fiduciary should “at all times” act in accordance with the issued Code as a minimum criteria for licensing.
In order to set the Code in context, it is helpful to remind ourselves of the legislative framework within which it operates.
The Code of Practice sits above a substantive legal framework encompassing laws1, regulations2 and a Handbook3 (now containing legally enforceable rules rather than simply guidance) all dealing with aspects of anti-money laundering legislation. It provides guidance as to how TSPs should conduct themselves in both implementing that legal framework and operating within it.
The Code in detail
The Code (unlike the majority of the new Handbook) remains “best practice” and not a legal requirement. In its opening paragraph the Code explains that it “attempts to set out sound principles of practice for TSPs” but is expressly “not a statement of law”.
Accordingly, a contravention of the Code (whilst not in itself an offence) may be taken into account by the GFSC when deciding whether and in what manner to exercise its powers under the Laws and Ordinances, regulations and rules.
Below, we deal in detail with two of the key principles, “integrity” and “beneficiaries’ best interests”. The other principles, which include know your client (‘KYC’), competence and effective management and co-operation with regulatory authorities, can be viewed here http://www.gfsc.gg/UserFiles/File/Fiduciary/Code%20of%20practice- TSPs-2009(1).pdf.
Paragraph 2: “Integrity”
The Code states that trust service providers should conduct their business with “integrity” and this is one of the minimum criteria for licensing. The guidance note to this principle states that breach of:
“this principle will be regarded as being amongst the most serious of breaches. Without limiting the scope, TSPs must deal with clients fairly and communicate with them in a way which is suitable and not misleading”. (emphasis supplied)
A trustee acting with “integrity” must therefore act honestly and in a principled manner. It must have not relevant adverse business and professional history and there must be a demonstrated proper handling of conflict.
Further, in relation to personnel, the GFSC will be interested to see if there are any:
- professional or administrative reprimands;
- regulatory directions/public statements;
- disciplinary findings;
- civil fines;
- criminal convictions;
- declarations of insolvency;
- adverse personal credit rating
All of the above might impinge upon the “integrity” of the TSP.
Paragraph 4: Beneficiaries’ best interests
In accordance with the Trusts (Guernsey) Law, 2007, TSPs have to treat the best interests of beneficiaries as paramount (subject to their legal obligations to other persons or bodies).
The Code makes the trite statement that TSPs must invest, distribute or otherwise manage trust assets in accordance with the law and the trust deed.
With regard to management of trust assets the investment and custody of trust assets must be managed “professionally and responsibly.”
Of particular concern to trustees will be the guidance that TSPs should “provide promptly to clients information to which they are entitled about a Trust”.
In the present environment trustees are facing a far higher degree of requests for information from beneficiaries who are concerned about the changes in values of trust assets post the credit crunch and whether or not there is any means by which they may make the trustee liable for any drop in the value of trust assets. The information which is actually susceptible to disclosure to the beneficiary is a relatively complex area of law. Ultimately, the trustee will always have a duty to account to the beneficiaries as this is one of the fundamental obligations of the trustee in relation to the trust and trust assets.
A further principle is that TSPs should avoid setting up discretionary trusts “where the Trustee is merely carrying out the settlor’s instructions”. Again this is a fairly trite statement of principle and indeed if the trustee does nothing more than carry out the settlor’s instructions, the trust will be highly susceptible to the allegation of “sham”. There could also be tax implications for the settlor.
Of interest also is the principle that TSPs should “deal in a timely manner and in the best interests of beneficiaries with any transfer to other Trustees”. There has been recent case law in relation to transfer to new trustees (see for instance the case of Virani v Guernsey International Trustees Ltd4 where trustees have been open to criticism for wrongfully failing to transfer trust assets timeously when they have been removed or have retired).
With regard to identifying beneficiaries and their respective interests when the TSP is exercising its discretion, the Guidance Note states that the TSP should “be aware of their (i.e. the beneficiaries) personal circumstances including their current needs, residence and domicile, so far as those are relevant to the administration of the Trust.” This is potentially a fairly onerous requirement and also one that should be exercised clearly with a high degree of diplomacy and discretion.
In managing the investment and custody of trust assets, the Commission expressly states that it requires the TSP to have regard to the differing interests of the beneficiaries and different classes of beneficiaries. This clearly requires a fair degree of diligence on the part of the trustees to ensure that it has all the necessary information it needs when exercising its discretion.
With regard to overseeing companies held in trust, the Guidance states that the trustee should ensure “professional oversight”, although no definition of this has been provided. Of importance is the comment that, if investment managers are appointed, the agreement, instruction and investment plans should be carefully noted and regular reports will be required.
What is the future for the Code?
The whole shift from “Guidance” to “Handbook” with rules that are legally enforceable appears to have been mirrored by a change of attitude by the regulator. In the past, in the era when the Guidance Notes were just that, the regulator was on occasions prepared to provide guidance and assistance with regard to assisting TSPs to meet their requirements under the Guidance Notes and generally. It is now for a TSP to satisfy themselves that they have complied with the Handbook and to seek their own legal advice to ascertain if that is the case or not.
Looking ahead, Guernsey trust service providers are not yet mandatorily subject to the “Treating Customers Fairly” (“TCF”) principles to which all firms regulated by the Financial Services Authority in the UK must adhere. The TCF principles aim to raise standards in the way FSBs carry on their business. Specifically, it aims to help customers fully understand the features, benefits, risks and costs of financial products which they buy and minimise the sale of unsuitable products by encouraging best practice during and after a sale.
We understand that making the TCF principles mandatory is not currently on the GFSC’s agenda. However, knowledge of the principles may help a TSP understand what is required of it when dealing with clients in a “suitable” way and may give an indication of the way the Code may be finessed in future.
Current indications are that the regulator is not intending to update the Code. However, readers should note that the Code is presently being amended in Jersey, where the conflict of interest provisions are being enhanced, corporate governance provisions are being modified and a requirement being introduced that fee income must be paid into a regulated entity in the first instance.
It seems that further amendments to the Code are almost bound to follow after…watch this space!