CARL ROSUMEK OF THE GUERNSEY FINANCE SERVICES COMMISSION LOOKS AT THE INTERPLAY BETWEEN INTERNATIONAL DEVELOPMENTS AND GUERNSEY'S REGULATORY REGIME
Against the continuing background of financial uncertainty and volatility, international organisations and standard setters continued to develop and coordinate their efforts to make the international financial system more resilient. The International Organisation of Securities Commissions (IOSCO) aligned itself with the G20 in promoting enhanced standards for issuers, service providers and for market intermediaries and investment advisors. At its 2010 annual meeting, IOSCO published its revised Principles of Securities Regulation to incorporate eight new principles, based on the lessons learned from the financial crisis and subsequent changes in the regulatory environment.
The added Principles include requirements: to monitor, mitigate and manage systemic risks; to review the perimeter of regulation regularly; to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed; that auditors should be subject to adequate levels of oversight; that auditors should be independent of the issuing entity they audit; that credit rating agencies should be subject to adequate levels of oversight; that other entities that offer investors analytical or evaluative services should be subject to oversight; and that regulation should ensure that hedge funds and/or hedge fund managers and advisors are subject to appropriate oversight.
Some of the existing Principles have also been amended. Much of the drift of these developments is already encompassed in the language of Guernsey’s Protection of Investors Law (‘the Law’) and Rules made under it which apply to Guernsey regulated investment businesses. As IOSCO develops its detailed methodology for assessing adherence to the Objectives and Principles of Securities Regulation some further development of the Law, and underlying rules, may be required.
European Union developments have been a particular focus for the Guernsey Financial Services Commission (GFSC), the draft Alternative Investment Fund Managers Directive (AIFMD) being a significant issue. The GFSC, along with representatives of the States of Guernsey Commerce and Employment Department, were involved in discussions with European Commission officials, UK representatives and the Committee of European Securities Regulators (now the European Securities and Markets Authority (ESMA)). The Directive preserves existing arrangements for third-country access to European markets, along with the possibility of a community-wide ‘passport’ at a later stage. While this outcome provides some reassurance, it is clear that continuing efforts will be required to maintain contact with decision-making bodies in Europe to ensure that the quality and effectiveness of Guernsey’s regulatory system is properly understood.
Significant work will continue to be undertaken within the EU, especially in terms of the possible Level 2 measures required. As proposals are released for public consultation by ESMA, the Commission will consider them and respond as necessary. The size of Guernsey’s investment fund sector and the Bailiwick’s proximity to the EU means that we have a considerable interest in the Directive and the regulatory framework and regimes that will be put into place, especially the impact on this jurisdiction as a third country.
As noted earlier, one of the main thrusts of the directive is the possibility of a community-wide ‘passport’ that might also apply to third countries such as Guernsey. When the definitive proposals are published, we will need to consider what changes, if any, may be required to Guernsey’s existing regulatory regime in order to ensure that it is equivalent to the requirements of AIFMD. This may require amendments to the Law, but is more likely to impact the rules made thereunder. The Commission will work closely with the local investment fund sector in the consideration and implementation of any required changes.
An important consideration to bear in mind in respect of these international initiatives is that Guernsey does not have the concept of unregulated investment funds. All Guernsey collective investment funds must be either authorised or registered by the GFSC and, accordingly, must comply with the relevant rules applicable to the appropriate class of investment fund. Unlike many jurisdictions, Guernsey not only already regulates the service providers but also the funds themselves.
The GFSC is not complacent about the challenges that it faces in respect of the possible changes that might be required in order to achieve equivalence should the passport proposals proceed; however, it considers that it has a firm foundation from which to proceed and to meet revised international expectations.