Private fund consultation paper In August 2016 the Jersey Financial Services Commission (JFSC) issued a consultation paper in relation to the proposed rationalisation and consolidation of Jersey's private funds and unregulated funds regimes. The paper is the result of work undertaken by a funds working group comprised of members of the government, the JFSC, Jersey Finance, the Jersey Funds Association and industry experts. It aims to simplify Jersey's funds legislation and regulation process while retaining flexibility and innovation.
In summary, the consultation paper proposes to:
- introduce the new Very Private Placement Fund Guide to provide greater certainty on the eligibility conditions and regulatory approach to the authorisation process for very private funds (to be re-branded subject to consultation);
- introduce a new and universal definition of 'professional investor' to avoid the uncertainty that is created by having multiple non-retail investor definitions spread across the Private Placement Fund Guide, the Professional Investor-regulated Scheme orders, the Expert Fund Guide, the Restriction of Scope Order and the Unregulated Funds Order;
- introduce modern regulatory powers in the Control of Borrowing (Jersey) Order (COBO) 1958 Law, including supervision, enforcement and cooperation powers in line with the powers available to the JFSC under the Collective Investment Funds (Jersey) Law 1988;
- phase out COBO-only funds, which have seen a decline in applications since the introduction of private placement funds in 2012; and
- phase out unregulated exchange traded funds, which the JFSC has seen being misused, given that they can be established simply by giving notice to the Companies Registry (as long as they are listed on a prescribed exchange) with no restrictions in relation to the number or types of investor or a minimum investment amount.
Industry and the JFSC continue to work together closely to streamline this critical aspect of Jersey's funds offering and revised proposals are expected to be published early in 2017.
Outsourcing consultation In July 2016 the JFSC issued a consultation paper in relation to proposed amendments to its outsourcing policy. It aims to eliminate the confusion historically caused by the distinction between outsourcing and delegation, and amend the scope to include all outsourced activity that may have a material impact on regulated activity.
One of the issues with the proposed revised outsourcing policy is that it now requires a registered person to provide notice to the JFSC of its intention to outsource any material activities or to make material changes to any existing arrangements. Registered persons must procure a 'no-objection' from the JFSC in respect of the outsourcing and cannot proceed until the no-objection has been received. In addition, as part of any arrangements sought to be put in place, the registered person must conduct due diligence on any service provider that may be appointed. This will undoubtedly increase the corporate governance required (and evidence to be maintained thereof) in terms of internal arrangements to be put in place to ensure adherence with the revised policy, and may potentially require the re-negotiation of existing contracts, with costs of additional warranties that may be requested. It appears that the proposed policy will result in an increase in the costs associated with outsourcing and make an already highly regulated entity subject to additional procedural burdens. The consultation closed at the end of September and it is hoped that feedback on the policy with respect to areas which require further clarity will be considered before the issue of the revised policy.
The intention is that the revised outsourcing policy will come into force in the first quarter of 2017; however, no response to industry feedback has been issued by the JFSC since the end of the consultation period, so the timing remains uncertain.
AML consultation This consultation, published on September 23 2016, sought input on the proposed new funds section to the Anti-money Laundering/Combating the Financing of Terrorism (AML/CFT) Handbook for regulated financial services business. The new section is aimed at providing additional clarification and guidance on certain aspects of the AML/CFT regime and, as such, it would not amend any existing statutory or regulatory AML/CFT obligations for funds or fund operators, nor would it contain any new codes of practice. The proposed guidance contains examples and welcomed clarity in a number of specific areas of complexity. Following a November 15 2016 briefing session on the proposals hosted by the JFSC for individuals in the funds sector on the consultation, the consultation closed on November 25 2016.
Amendments to registry fees In October 2016 the registry announced that it will impose new fees, as set out in a public consultation issued in May 2016, which apply as of January 1 2017. In summary, the registry will:
- increase the annual return fee from £150 to £210;
- apply new penalties in relation to late filing fees, commensurate with the length of time that the filing is overdue; and
- introduce a new five-tier system for the incorporation of companies, with a £150 charge for a five-day incorporation (£50 less than the existing two-day incorporation cost).
Information on beneficial ownership In April 2016 the States of Jersey signed an agreement with the UK government in relation to the sharing of beneficial ownership information between the law enforcement authorities of both jurisdictions which will come into effect by June 30 2017.
As a result of the commitments made under the agreement, the registry requires all Jersey corporate and legal entities (apart from foundations) to confirm their existing beneficial ownership and control by June 30 2017. For corporate and legal entities administered by a licensed trust company service provider, there is an ongoing obligation to notify the registry in respect of any changes to the beneficial ownership and control within 21 days of the change. Corporate and legal entities that are not administered by a trust company service provider will, going forward, need to seek the registry's prior consent before any change in beneficial ownership of 25% or more takes place.
The information provided will not be available on any public register – it will be stored on a secure and private register held by the registry and will be exchanged only on request with law enforcement and tax authorities.
The registry will replace the COBO consent for each corporate and legal entity with a new form of COBO consent, which was issued on the JFSC's website on January 1 2017 and contains the additional notification requirements. A replacement COBO consent in the form applicable to each corporate and legal entity will be sent out with the annual return receipts (except for certain more complex COBO consents which will be issued on review and on a case-by-case basis), but will be effective from January 1 2017. The new COBO consent will automatically replace any existing COBO consent, notwithstanding that a replacement copy has not yet been received. Although the introduction of these notification requirements for corporate and legal entities can be viewed primarily as a change in policy, legislative amendments are expected to follow in the second quarter of 2017.
The States of Jersey has also committed to creating a centrally held register of directors, meaning that all companies will need to notify the Companies Registry of the identity of all directors and ensure that this information is kept up to date and accurate. The JFSC will commence work on this project in 2018.(1)
Brexit funding approved In September 2016 the treasury minister approved growth funds for three initiatives, including for the establishment of a governmental Brexit planning unit. It is hoped that this will enable the government to understand and deal with issues arising out of the United Kingdom's decision to exit the European Union. A high-level working group across all government departments has been established to identify all potential implications and opportunities of Brexit for Jersey. In addition, a range of other work to assess the scale and nature of economic opportunities resulting from the United Kingdom's changed circumstances will also be undertaken.
Allocations have also been provided to enable Jersey to respond to the introduction of the EU General Data Protection Regulation, which increases regulatory requirements, and to help develop on-island digital business skills.
Feedback on JFSC MiFID II consultation In December 2016 the JFSC reported on responses received to its consultation paper published in April 2016 which sought input as to whether Jersey should introduce a regime equivalent to the EU Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) and set out certain potential benefits and costs of doing so (for further details please see "Funds legal and regulatory quarterly update"). The JFSC received 27 responses in total and, on the question of equivalence, nine were in favour of the proposal for Jersey to seek MiFID II equivalence, while 12 disagreed or expressed considerable concerns about doing so (six had no strong opinion either way).
The reasons provided for those in favour included:
- the benefits gained by addressing perceived regulatory gaps in Jersey;
- improving the ability to control non-compliant behaviour; and
- generally improving consumer protection.
However, the main concern raised by the proposal was the potentially negative impact on Jersey's funds sector, including additional costs and disruption to the existing business models of fund functionaries that rely on exemptions from regulation.
In its analysis of the responses, the JFSC recognised that the core question comes down to a consideration of costs and benefits; thus, it would be beneficial for the JFSC to provide more clarity on, and where possible quantify, such costs and benefits. The JFSC has said that it will explore a broad range of options in terms of pursuing an approach that generates more benefits than costs. However, it has recognised that "a full 'cut and paste' of MiFID, MiFIR and EMIR" would not be the best approach for Jersey.
With effect from September 1 2016, Chapter 7 of the Channel Islands Securities Exchange Authority Limited (CISE) Listing Rules applicable to investment vehicles and its model code for securities transactions underwent changes, with the CISE adopting a principles and guidance-based approach.
The intention is that the amended chapter will provide more flexibility to introduce new product types. The accompanying guidance notes are intended to explain the implications of the Listing Rules and indicate possible means of compliance or recommend a particular course of action or arrangement. The introduction of the guidance element to the Listing Rules allows the CISE to change the guidance more rapidly in order to reflect industry changes and norms.(2)
A new Association of Investment Companies (AIC) Code of Corporate Governance relating to Jersey companies was adopted in July 2016. The code is principle rather than rules-based and aims to provide boards with a framework of best practice in respect of the governance of investment companies by setting out 21 principles, each with detailed recommendations. The JFSC has made a statement of support in respect of the code, emphasising that there are particular issues that directors must address in the context of investment companies that go beyond the usual governance topics for trading business.
The fundamentals behind the code are as follows:
- Directors must put the interests of shareholders above all others.
- Directors must treat shareholders fairly.
- Directors should be prepared to resign or take steps that could lead to a loss of office at any time in the interest of long-term shareholder value.
- Directors should ensure that they address all issues of relevance and that they disclose the outcomes of those deliberations in a way that shareholders with limited financial knowledge can understand.
The code recognises that investment companies have particular characteristics and require additional corporate governance considerations. Most notably, an investment company's customers and shareholders are often the same and it typically has no employees; as such, roles in respect of the chief executive officer, portfolio management, administration, accounting and company secretarial are often provided by a third-party fund manager (or outsourced by it), meaning that the fund manager is more important than a typical company supplier. Accordingly, the code deals with matters such as board independence and the review of management and other third-party contracts. It considers that most of the time spent by a board of a well-functioning investment company should be spent on matters of general corporate governance – for example, investment strategy and performance monitoring.
In particular, the non-executive director community will likely be most interested in the introduction of the code, given the JFSC's commendation of it to Jersey-domiciled investment companies.
In October 2016 the UK Justice Select Committee launched an inquiry with respect to the impact of Brexit on the crown dependencies. The inquiry began with a call for evidence inviting submissions on:
- the potential opportunities and risks;
- its constitutional impact;
- what the UK government should prioritise in its negotiations with the European Union; and
- how the UK government is engaging with the crown dependencies.
The Jersey government has responded to the questions raised and, while it welcomed the inquiry, it has emphasised the importance of ongoing consultation, including following the triggering of Article 50, so that the crown dependencies' interests can be taken into account when tough decisions arise. It is expected that the select committee report will be published around the time that Article 50 is expected to be triggered.
(1) A link to the JFSC's frequently asked questions for trust company business administered entities can be found here and those for non-trust company business administered entities can be found here.
(2) Please click here to access a copy of the briefing summarising the revisions to Chapter 7.
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