Regulatory Update May 2017

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1 Regulatory Update May 2017

Review Caroline McGrath, Senior Adviser MiFID II Update Phil Robson,

2 Agenda Welcome Mike Jones, Director of Policy Outsourcing Policy and Funds Section of the AML/CFT Handbook Kate Berry, Senior Adviser Funds Regime Review Caroline McGrath, Senior Adviser MiFID II Update Phil Robson, Senior Adviser Other Updates, Closing and Questions Mike Jones, Director of Policy

3 Welcome Mike Jones, Director of Policy Brexit EU Equivalence Update

4 Outsourcing Policy Kate Berry, Senior Adviser

5 Outsourcing Policy: Dates Published on 1 March 2017 Transitional Arrangements: Deadlines for Compliance: 1 March June June 2018 New arrangements Existing arrangements = those caught under the May 2011 Policy and those existing arrangements not previously caught under the May 2011 but now captured under 1 March 2017 Policy

6 Outsourcing Policy: Transitional Arrangements New Outsourcing arrangements 1 June 2017 Deadline for all Outsourcing arrangements 1 June 2018 This Policy applies to all new Outsourcing arrangements between a Registered Person and a Service Provider three months from the date of publication of this Policy, being 1 June Registered Persons with existing Outsourcing arrangements may adopt this Policy three months from the date of publication of this Policy, being 1 June Please note the JFSC s expectations in paragraph below. Registered Persons with existing Outsourcing arrangements must adhere to this Policy fifteen months from the date of publication of this Policy (the OSP Deadline ), being 1 June For the avoidance of doubt Registered Persons with existing Outsourcing arrangements means all existing Outsourcing arrangements entered into before 1 June 2017 and includes any arrangements which under the 2011 Policy may not have been considered as an Outsourcing arrangement but are under this Policy. Registered Persons may opt to adhere to this Policy and file the Outsourcing Notification form after publication of this Policy and prior to three month transition period expiring on 1 June 2017, providing that the Registered Person: (i) confirms in writing that it will adhere to this Policy; and (ii) agrees to be supervised by the JFSC as if this Policy applies to the proposed Outsourcing arrangement.

7 Outsourcing Policy: What s New? Applies to regulated and non-regulated outsourced activity where it could materially impair regulated activity. Gets rid of the distinction between delegation and outsourcing Exemption for Funds provided the conditions are met, the main one being disclosure Outsourcing Notification Form is provided JFSC best endeavours to respond and give a no objection within 10 business days or in line with relevant application.

8 Outsourcing Policy: Materially Impair? Registered Persons that are subject to one of the Regulatory Laws and no exemptions apply Risk Assessment: If the service provider fails to perform or inadequately performs the outsourced activity could it materially impair the registered person being able to continue to: carry out its regulated activity in compliance with regulatory requirements (for the avoidance of doubt includes compliance with all secondary legislation, Notice and Codes)?and/or provide services for which it is regulated to its customer(s)? If Policy does not apply: Codes-Principle 3: A Registered Person must organise and control its affairs effectively for the proper performance of its activities and be able to demonstrate the existence of adequate risk management systems.

9 Outsourcing Policy: What should you be doing? Reviewing all your outsourcing arrangements Assessing whether caught by the Policy Seeing if your outsourcing arrangements comply with the Policy Ensuring timeframes are met Doing a gap analysis of your policies and procedures

10 Funds Section of the AML/CFT Handbook - Kate Berry, Senior Adviser

11 Funds Section: Overview Published on 10 March 2017 New Section 14 No new requirements or AML/CFT Codes Applies to public and private funds and their operators Emphasises the difference in the application of AML/CFT by Funds and Fund Operators Every relevant person in a fund structure has AML/CFT obligations and these may not be the same. Provides additional guidance in certain areas from a Funds perspective.

12 Fund Operators Legal adviser Auditor Administrator Manager Custodian Distributor Fund Asset manager Investment adviser Lender/banker Class G director

13 Funds Section: Queries Q. Aren t Private Funds and Unregulated Funds exempt from AML/CFT requirements? A. No, they are relevant persons see the diagram at Section 14.1 paragraph 3 of the Funds Section. Q. Do Private Funds and Unregulated Funds need an MLRO and MLCO? A. Yes, a relevant person is required by MLO to have: Article 7 Article 8 a [money laundering] compliance officer a [money laundering] reporting officer Q. Surely a Fund doesn t need to apply identification measures to every investor? A. A Fund as a relevant person has to identify every customer (Article 3 (2) (a) MLO)

14 Funds Section: Queries Q. Don t we skip the nominee, GP or Trustee and look behind them? A. No, every relevant person has statutory obligations in relation to its customer. A relevant person must: Identify its customer Identify the beneficial owners and controllers of its customer Identify the third parties on behalf of whom its customer acts ( and the beneficial owners and controllers of the third parties) Identify those who can act on/contract on behalf of its customer

15 Three Tier Test Are your processes and procedures adequate? Key: Know your customer s ownership and control structure (Article 3 MLO) Do you know enough to apply the three tier test? Tier 1: Control by ownership; and Tier 2: Control by other means; or Tier 3 Control by positions held.

16 Funds Section: Queries Q. I think there might be an ultimate beneficial owner at tier 1 but there are so many entities in between, it is too complicated to find out who they are so surely I can move to tier 2? A. No, If there is an ultimate beneficial owner who controls at tier 1 or anyone at tier 2 they all need to be identified. The more complex the structure the greater the potential risk of ML/TF.

17 Three Tier Test For lower risk relationships, a general threshold of 25% is considered to indicate a material controlling ownership interest, but this is a rebuttable presumption. Who is calling the shots? Who is in control? The secret to success is to own nothing, but control everything. Nelson Rockefeller Document the ownership and control structure. Document how you have worked out who to identify by applying the three tier test. Not enough just to apply the three tier test. Need to be able to explain the process to ascertain who needs to be identified.

18 Beneficial Ownership: Al Tamimi v Al Chamaa 23 February 2017 W. J. Bailhache, Esq., Bailiff There is a public interest a very strong public interest in the Island being able to demonstrate that it has the ability to identify the beneficial owners of companies, or the beneficiaries under trusts. In our judgment, this Court should not recognise any arrangement which detracts from the ability of regulators or law enforcement authorities to do so...

19 Funds Regime Review Caroline McGrath, Senior Adviser

20 Introduction JFSC 2017 Business plan Strategic objectives Focusing regulation on the greatest risks; Interacting efficiently and effectively with Industry; Facilitating market access; and Safeguarding the sustainability, efficiency and independence of the JFSC. Major priority/project: Funds regime review Phase 1 - review of private and unregulated fund regimes Phase 2 - review of public fund regime Phase 3 - review of FSJL exemptions

21 Phase I 1 August March April Joint Consultation Paper issued Joint Feedback Paper issued Jersey Private Fund (JPF) Guide introduced providing certainty on the eligibility conditions for the establishment of private investment funds Very Private Funds (VPFs), Private Placement Funds (PPFs) and COBO Only Funds phased out All non-fund related COBO applications (including the new application forms for Jersey unit trusts and non-domiciled structures) dealt with by Registry going forwards Intention to introduce modern regulatory powers in COBO Intention to phase out Unregulated Exchange-Traded Funds

22 Jersey Private Fund (JPF) Guide Key Features JPF is a private investment fund involving the pooling of capital raised for the fund and which operates on the principle of risk spreading Non-fund entities such as holding companies and joint ventures and some qualifying family office and employee incentive arrangements intended to be out of scope of the Guide JPF may be Jersey or non-jersey domiciled in which the number of offers/investors must not exceed 50 with each investor being professional or eligible within the meaning of the new definitions introduced under the Guide Streamlined 48 hour fast-track authorisation process No promoter policy No requirement for Jersey directors/trustee/general partner No requirement for offer document/audited accounts (unless AIFMD applies) No investment/borrowing restrictions set by JFSC May be open-ended provided 50 or Fewer Test is met

23 JPF Guide Key Features (cont.) PROVIDED: JPF must not be a collective investment fund (CIF) within the meaning of the CIF Law JPF offer must be made to a restricted circle of persons within the meaning of the JPF Guide and on this basis, JPF must not be listed JPF must appoint a Jersey-based designated service provider (DSP) (ordinarily the administrator) JPF (either by itself or by reference to its DSP) must ensure compliance with all necessary Jersey AML/CFT requirements applicable to it JPF activity is subject to the JFSC s Sound Business Practice Policy 1070 application fee with an annual fee of 500 payable (pro-rated for the year in which the JPF is established) to cover the cost of supervising the JPF regime

24 Designated Service Provider (DSP) to the JPF JFSC reliance on full substance DSP cornerstone of the JPF Regime 15 or fewer investors - The DSP must be full substance FSB, TCB or IB registered (any class) 50 or fewer investors - The DSP must be full substance FSB (Class V, U, X or ZG only) No managed entities No change in DSP without prior JFSC approval Responsible for: ensuring compliance with the requirements of the JPF Guide at the outset and on an ongoing basis undertaking due diligence on the promoter and JPF and assessing fit and properness of the service providers to the JPF ensuring JPF s compliance with all AML/CFT requirements completing and submitting JPF application form, notice of change or event form and annual compliance return

25 What have we seen so far? JPF v Jersey unit trust (UT) and non-domiciled structures (NDS) (Non-Funds) (since 18 April 2017) 11 JPF applications Jersey UT (Non- Fund) 33% Jersey Private Funds 61% 3 VPF conversions NDS (Non-Fund) 6%

JPF in Practice AIF Overlay A JPF which is an AIF within the meaning of Article 3 of the AIF Regulations is subject to Jersey s AIFMD regime which is separate to the JPF regime.

26 JPF in Practice AIF Overlay A JPF which is an AIF within the meaning of Article 3 of the AIF Regulations is subject to Jersey s AIFMD regime which is separate to the JPF regime. Electronic payments SAMPLE Final forms Appropriate signatory sign-off Consideration by JFSC of applications for conversions from CIF (e.g. Expert Fund or materially equivalent NDF)

27 Phase II 2017/ Improve/ consolidate Jersey s public fund regime by reducing the number of CIF products to three; namely: i. a Jersey Registered Alternative Investment Fund (Jersey RAIF); ii. iii. a new and improved Expert Fund; and a refined retail fund product. 2. Reduce number of FSB classes 3. Streamline the authorisation process for CIFs and fund service businesses (FSBs)

28 Phase III 2018 onwards Review effectiveness of all funds related FSJL exemptions including the professional investor regulated scheme (PIRs) exemption Orders

29 Conclusion Whilst the Funds Regime Review remains a work in progress, in line with the JFSC s strategic objectives, the successful introduction of Jersey s new and consolidated JPF regime has led to: Greater transparency leading to an increased ability to supervise Jersey s private fund regime Improved JFSC interface Likely increase in Jersey s total AUM Regulatory streamlining

30 MiFID II Update Phil Robson, Senior Adviser, Policy David Porter, Head of Unit, Policy

31 Background MiFID II What and when Application to Jersey Jersey approach MiFID II equivalence an opportunity? Market access Reputation Equivalence provisions are limited

32 What have we done? Industry Liaison mid-2015 Consultation Paper April 2016 Industry Working Group late-2016 Feedback Paper December 2016 Consulted with Government of Jersey and other Stakeholders

33 Things have changed Market Access BREXIT Equivalence AIFMD Passport Uncertainty Feedback to consultation paper benefits and costs

34 But some things haven t changed Investor Protection International Standards

35 The future MiFID II equivalence wait and see Monitor, adapt and communicate Changes to IB regulatory framework Won t be full MiFID II transposition Prioritised and tailored Next steps Consult on enhancements to IB regulatory framework Watching brief on MiFID II

36 Other Updates and Closing - Mike Jones, Director of Policy Any Questions?

37 Follow us Like us at Jersey Financial Services Commission Follow us at Jersey Financial Services Commission Regulatory Update May 2017 Mike Jones, Director of Policy

Consultation Paper Issued by: Government of Jersey and Jersey Financial Services Commission

Consultation Paper Issued by: Government of Jersey and Jersey Financial Services Commission Rationalisation and Consolidation of Jersey s Private Fund and Unregulated Fund Regimes A joint consultation