ANNUAL REPORT

Transcription

1 ANNUAL REPORT

2 CONTENTS THE ISLAND OF JERSEY THE JERSEY FINANCIAL SERVICES COMMISSION THE COMMISSIONERS CHAIRMAN S STATEMENT DIRECTOR GENERAL S STATEMENT STRUCTURE CHART SUPERVISORY APPROACH POLICY DEVELOPMENTS ENFORCEMENT OPERATIONS REGISTRY FINANCIAL STATEMENTS CORPORATE GOVERNANCE WEBSITE INFORMATION STATISTICAL ANNEX ANNUAL REPORT

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4 THE ISLAND OF JERSEY Jersey is situated off the north-west coast of France, 14 miles from Normandy and 85 miles from the south coast of England. Within its 45 square miles the Island has a population of over 87,000 and enjoys a reputation as a well regulated international finance centre. Jersey s allegiance is to the British Crown but it is not part of the United Kingdom. The Island is not part of the European Union, being neither a separate Member State nor an Associate Member. The year 2004 marked the 800th anniversary of allegiance to the British Crown following the loss of Normandy by King John. Royal Charters were the basis of the independence of the Island s judicial system from the English Courts. From this foundation Jersey s independence and autonomy in domestic matters has developed. Jersey has its own legislative assembly, called the States of Jersey, which comprises 53 elected members plus the President. Jersey has its own system of local administration, fiscal and legal systems, and courts of law. ANNUAL REPORT

5 THE JERSEY FINANCIAL SERVICES COMMISSION The Jersey Financial Services Commission is responsible for the regulation, supervision and development of the financial services industry in the Island. The Commission is a statutory body corporate, set up under the Financial Services Commission (Jersey) Law The Law provides for a Board of Commissioners to be the governing body of the Commission. The Law established the Commission as an independent body, fully responsible for its own regulatory decisions. The Commission is accountable for its overall performance to the States of Jersey through the Economic Development Committee. The Commission is also responsible for appointing a person to exercise certain statutory responsibilities as the Registrar of Companies, Limited Partnerships, Limited Liability Partnerships and Business Names. The Commission has appointed the Director General of the Commission as the Registrar. The Commission s key purpose is: To maintain Jersey s position as an international finance centre with high regulatory standards by: reducing risk to the public of financial loss due to dishonesty, incompetence, malpractice or the financial unsoundness of financial service providers; protecting and enhancing the Island s reputation and integrity in commercial and financial matters; safeguarding the Island s best economic interests; and, in pursuit of the above, contributing to the fight against financial crime. In support of our key purpose, the Commission aims to: ensure that all entities we authorise meet fit and proper criteria; ensure that all entities we regulate are operating within accepted standards of good regulatory practice; match international standards in respect of banking, securities, trust company business, insurance regulation, and anti-money laundering and terrorist financing defences; identify and deter abuses and breaches of regulatory standards; and ensure the Commission operates effectively and efficiently and is properly accountable to the Economic Development Committee. 4 ANNUAL REPORT 2004

6 THE COMMISSIONERS Non-Executive Commissioners Colin Powell, CBE - Chairman Colin Powell became Chairman of the Jersey Financial Services Commission in October He has been Chairman of the Offshore Group of Banking Supervisors ( OGBS ) since 1981 and represents the OGBS at meetings of the Financial Action Task Force. He is currently co-chair of the Basel Committee Cross-Border Banking Working Group and an adviser on international affairs to the States of Jersey s Policy and Resources Committee. Before taking up his present position, he had posts as Economic Adviser and Chief Adviser to the States of Jersey between 1969 and 1999 and was responsible for advising on Jersey s economic development strategy, including its development as an international finance centre. Richard Pirouet - Deputy Chairman Richard Pirouet was born in Jersey and was educated at Victoria College. He has been a Commissioner since the inception of the Jersey Financial Services Commission in July 1998 and is now Deputy Chairman. He qualified as a chartered accountant in 1969 and was appointed a partner of one of the predecessor firms of Ernst & Young in He became Managing Partner of Ernst & Young in 1991 and Senior Partner from 1994 until his retirement from the firm on 31 March Richard now holds various non-executive directorships. Michael Clapham Michael Clapham was educated at Victoria College, Jersey and Wadham College Oxford. He has an M.A. in English. He qualified as an Advocate of the Royal Court of Jersey in He was Senior Partner of a long-established Jersey law firm for many years which merged with another firm in 1995 to become the legal, fiduciary and corporate services group of Ogier & Le Masurier. He retired from the partnership in 2001 but remains with the firm as a consultant. He was President of the Law Society of Jersey from 1997 to Scott Dobbie, CBE Scott Dobbie has over thirty years experience in stockbroking and investment banking and remains a senior adviser to Deutsche Bank. He was a Director of the United Kingdom s ( UK ) Securities and Futures Authority from 1993 to 2001, and is currently a member of the Regulatory Decisions Committee of the UK Financial Services Authority. He is also Chairman of the Securities & Investment Institute, the Edinburgh Investment Trust plc and Standard Life European Private Equity Trust plc and a Director of Premier Oil plc and other companies. Frederik Musch Frederik Musch, from 1986 to 1992, held the position in the Dutch Central Bank of Deputy Executive Director in charge of banking supervision, and represented the Central Bank on the European Union s Banking Advisory Committee and the G10 Basel Committee on Banking Supervision. He was a founding member of the Securities Board of the Netherlands. From 1992 to 1998 he was Secretary General to the Basel Committee. In 1998 he became a founding Director with the Financial Stability Institute at the Bank for International Settlements in Basel, from which position he retired in He is currently Chairman of the Global Financial Services Regulatory Practice at PricewaterhouseCoopers. Jacqueline Richomme Jacqueline Richomme studied law at the University of Durham and then at the College of Law, Chester and qualified as an English Solicitor in She joined the Jersey law firm, Mourant du Feu & Jeune, in 1985 and subsequently qualified as a solicitor of the Royal Court of Jersey in 1988, becoming a partner of Mourant du Feu & Jeune shortly thereafter. Her legal practice has covered all aspects of Jersey company, trust and limited partnership law, and she specialises in the provision of Jersey legal advice to investment funds and international finance transactions. She is a Director of Mourant Limited, and also is a Director of a number of client companies. ANNUAL REPORT

7 THE COMMISSIONERS Non-Executive Commissioners Executive Commissioner John Tibbo John Tibbo was born in Jersey, educated at Victoria College and has been on the Board of Commissioners since the inception of the Jersey Financial Services Commission in July He first joined Midland Bank in Jersey in January 1959 after two years with the Jersey Savings Bank. He held various management positions within Midland Bank plc including Divisional Director, Offshore Islands as well as positions at London Head Office. John retired on 31 January 1996 and since that date he has taken up a number of directorships on the Island. He has held the position of Jurat of the Royal Court since December Andrew Winckler Andrew Winckler is Chairman of Ernst & Young s Risk and Regulatory Practices in the UK, a member of the Board of the Housing Corporation, a Board member of Euroclear plc, and a member of the Economic & Social Research Council. A former Chief Executive of the Securities and Investment Board/Financial Services Authority in the UK, he was also previously Deputy Chairman of the Securities and Futures Authority and chaired its Enforcement Committee. David Carse, OBE - Director General David Carse has been the Director General of the Commission since 3 November Before joining the Commission, David was Deputy Chief Executive of the Hong Kong Monetary Authority where he was responsible for the full range of regulatory, supervisory and policy issues relating to the banking industry in Hong Kong. He went to Hong Kong as Commissioner of Banking in 1991, on secondment from the Bank of England, and became Deputy Chief Executive of the Hong Kong Monetary Authority in He spent 20 years at the Bank of England during which time he held a variety of positions within the Economic Intelligence Department, the Overseas Department and the Chief Cashier s Office before moving into Banking Supervision. 6 ANNUAL REPORT 2004

8 CHAIRMAN S STATEMENT In carrying out its statutory duties the Commission is conscious that it cannot act in isolation from either international or domestic influences. That no man is an island is nowhere more true than in the case of the work of the Commission. Complying with international standards set by bodies such as the Financial Action Task Force ( FATF ), the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions ( IOSCO ), and the International Association of Insurance Supervisors ( IAIS ) is a key feature of the Commission s regulatory regime. This is an essential requirement to ensure that the Island s reputation as a quality international finance centre is both maintained and enhanced. There remain those who seek to question the standards being applied by financial centres such as Jersey. In the absence of the evidence to refute these views, G7 and other industrial countries which are a source of business for Jersey may believe they are justified in taking discriminatory action. This position is also reflected in a comment recently expressed by an official from a G7 country that the absolute necessity for offshore centres to develop their comparative advantage leads to the same necessity for the international financial system to enhance the level of its surveillance of offshore centres. One of the problems arising from this attitude on the part of the G7 and other countries is that all that is achieved by a favourable report from an international body such as the International Monetary Fund ( IMF ) can be quickly undone by one case that receives national media attention. Jersey received a most successful report from the IMF in 2003 following its assessment of the Island s financial regulation and anti-money laundering activities. This has been used to persuade countries which traditionally have held the view that Jersey is not equivalent in the standards of regulation/anti-money laundering legislation and practice that this is not the case. The IMF report however is not the end of the story. The IMF has indicated that it will be regularly monitoring the Island s response to the recommendations in its report. Also, it has to be recognised that the IMF s assessment was based on a study of the Island s compliance with the FATF Forty Recommendations as they were in September Since then the FATF has revised the Forty Recommendations and, together with the IMF and World Bank, plus the FATF regional bodies, the FATF is now in the process of applying a comprehensive new Methodology in assessing compliance with the Revised Forty Recommendations and the Nine Special Recommendations on Terrorist Financing. Sometime in 2006/2007 Jersey can expect to be assessed for compliance with these Recommendations either in the form of a FATF style mutual evaluation carried out under the auspices of the Offshore Group of Banking Supervisors ( OGBS ) or in an IMF review undertaken as part of its Offshore Financial Centres assessment programme. The Commission has always attached great importance to the way it contributes to the international fight against financial crime. The pursuit of those who are engaged in money laundering, terrorist financing, corruption and other financial crimes, and the prevention of the use of the Island by those so engaged, is reflected in much of what the Commission does. In conjunction with an Industry Steering Group the Commission is preparing legislation and revising its anti-money laundering guidance in response to the FATF s Forty Plus Nine Special Recommendations. The Commission is also asking the States of Jersey to approve an amendment to the Financial Services Commission (Jersey) Law 1998 to include among the Commission s statutory obligations the fight against financial crime. The Commission has always attached great importance to the way it contributes to the international fight against financial crime. ANNUAL REPORT

9 CHAIRMAN S STATEMENT The Commission fully appreciates that it is important to strike a balance between maintaining high regulatory standards and at the same time recognising the commercial environment in which the finance industry operates. What is true for the Island in terms of the standards of regulation and anti-money laundering defences and mechanisms to counter the financing of terrorism ( AML/CFT ) is equally if not more so for the individual institutions making up the finance industry. Compliance is not just about satisfying the regulator or the assessors. The purpose of complying with regulatory standards should be to assist a financial institution in managing its compliance risk. This can be defined as the risk of legal or regulatory sanctions, financial loss, or loss to reputation the institution may suffer as a result of its failure to comply with all applicable laws, regulations, codes of conduct and standards of good practice. Compliance helps also to meet the expectations of customers, the markets and society as a whole. It is therefore most important that compliance with the regulatory standards of the Commission, which in turn are based on international standards, should be effective. At the same time the Commission recognises that these requirements should be both appropriate and proportionate to the business being undertaken and the risk incurred. The Commission fully appreciates that it is important to strike a balance between maintaining high regulatory standards and at the same time recognising the commercial environment in which the finance industry operates. In the Commission s view there need be no conflict between compliance with international standards and long term business success. The two have been and can continue to be complementary. The Commission is aware of the need to take account of domestic policy objectives and recognises the need to respond to those objectives. The States of Jersey have adopted a Strategic Plan for which includes a 2% real growth objective. The Economic Development Committee ( EDC ), to whom the Commission is accountable, was requested to bring forward an economic growth plan and this focuses naturally on the significance of the performance of the finance industry, which is the dominant sector of the Island s economy, in achieving the 2% real growth objective. This performance will call for both the retention and enhancement of existing services and the introduction and encouragement of new areas of activity. In responding to these domestic requirements the Commission is conscious of the fact that the standing of a regulatory authority is measured internationally partly by its independence from political influence. At the same time the Commission cannot be unaccountable to Government. This balance is being struck through a Memorandum of Understanding ( MOU ) agreed with the EDC. In adopting this MOU the Commission and the EDC have agreed that in interpreting the Guiding Principle to have regard to the best economic interests of the Island : the Commission should have regard to any Strategic Plan or Economic Growth Plan for the Island approved by the States of Jersey from time to time; the Commission shall take full account of the costs and other burdens of regulation; subject to the need to maintain regulatory standards, the Commission should assist in the development of business; but the Commission should not compromise regulatory standards in order to allow a line of business which a section of the industry might find attractive. The Commission has responded to the need for a favourable business climate in a number of ways while seeking to remain in the mainstream in the application of international standards. 8 ANNUAL REPORT 2004

10 CHAIRMAN S STATEMENT The Commission is engaged in conveying to overseas regulatory authorities the standards being applied both directly through the negotiation of Memoranda of Understanding and indirectly through active participation in a number of international fora. The Commission is focusing particularly on those jurisdictions that have an unfavourable view of the Island, a view that is often reflected in blacklists. Convincing the world at large that we are compliant with international standards is also helped by the fact that the Commissioners include three individuals from outside of the Island who have a high standing internationally. The Commission also has joined in responding actively to European Union ( EU ) Directives or Regulations which could disadvantage the Island; for example much effort has been devoted to ensuring that Jersey s use of the United Kingdom s ( UK ) payments system is not prejudiced by the introduction of an EU Regulation to implement the FATF Special Recommendation VII on Wire Transfers. As Chairman of the OGBS I have an opportunity to attend the Plenary meetings of the FATF, and contribute to discussions on how to ensure that there is consistency of interpretation of the FATF standards and the AML/CFT Methodology 2004, in the context of AML/CFT evaluations and assessments. I also continue to co-chair the Basel Committee s Cross-Border Banking Working Group which in 2004 produced a paper on consolidated Know Your Customer risk management. Through the OGBS, close working relationships have been established with the IMF, the Financial Stability Forum and Interpol. The Commission, through its Executive Directors, is also actively involved in the work of IOSCO and IAIS. The result of all these international contacts is that Jersey has become better known and recognised for the quality of its financial regulation and its AML/CFT standards. This is of great benefit to all concerned. Another way that the Commission is responding to the needs of the market place is to reflect in its regulation what is known as the risk-based approach. Thus while there is a need to take fully on board the Know Your Customer principles embodied in the FATF Recommendations, and also in the Basel Committee on Banking Supervision s Customer Due Diligence paper, there are and should be opportunities to vary the application of these principles according to the riskiness of the business. Where lower risks arise it ought to be possible for the burden of regulation to be lightened without in any way putting at risk the reputation of the Island when being independently assessed for compliance with international standards. One problem faced in this respect is to know how elements of the risk-based approach are to be judged and here the Commission is watching closely what other jurisdictions are doing, particularly the EU through their Third Money Laundering Directive and the UK through their Anti- Money Laundering Guidance Notes. The Commission believes a balance between the standards to be applied and the need to reflect the business environment is more likely to be secured if there is good communication and consultation with the finance industry. One way the Commission seeks to do this is by setting up working groups comprised of representatives of the industry - a good example of this is the Anti-Money Laundering Steering Group that has been closely involved in the drafting of the Revised AML Guidance. The Commission believes that while maintaining its independence of action as a regulator it can and should work closely with those in the industry, Jersey Finance Limited and also with the Government, all of whom are actively engaged in supporting the development of the finance industry on which the Island s economic wellbeing will continue to depend. The Commission believes a balance between the standards to be applied and the need to reflect the business environment is more likely to be secured if there is good communication and consultation with the finance industry. ANNUAL REPORT

11 CHAIRMAN S STATEMENT I would wish to take this opportunity of expressing the great confidence that I and my fellow non-executive Commissioners have for the work of the Executive of the Commission. The Commission also works closely with industry and Government in the drafting and enactment of legislation. In some cases the Commission takes the initiative because of the need to extend or amend the existing regulatory and legislative framework in order to comply with international standards or to ensure access to specific markets. On other occasions the finance industry and/or Government will identify the need for legislation to help promote new business opportunities. In these cases the Commission needs to be consulted on whether there are regulatory issues arising and, if so, how they can be accommodated. There is also the issue of the financial cost of the Commission borne by the industry. The Commission needs to be adequately resourced to carry out its responsibilities but at the same time the Commission is keenly aware of the need to limit the burden on industry by ensuring that its resources are used as effectively and efficiently as possible. To ensure this, the Commission is in active discussion with the EDC on how best an independent value for money audit could be conducted. In addressing the subject of the cost of the Commission it is to be emphasised that the Commission does not believe its statutory role in protecting the interests of investors should ever be restricted by an inability to take the necessary action, through the Courts if necessary, through a lack of financial resources. It is for this reason that the Commission considers it is right to maintain a healthy level of reserves. However it is also the Commission s view that consideration should be given to finding ways of lessening the cost of enforcement and of allocating the costs of investigation and litigation more fairly through the taking of the power to fine or recover costs from the guilty parties. The Commission also intends to discuss with the EDC the question of whether and how an independent mechanism might be established to investigate complaints against the Commission or its staff. I would wish to take this opportunity of expressing the great confidence that I and my fellow non-executive Commissioners have for the work of the Executive of the Commission. We have a tremendously well qualified, loyal and hard working staff led by a Director General of international standing supported by a Deputy Director General and a team of Directors who are also well recognised for the quality of their work, their proper attention to high standards of regulation and good corporate governance, and their personal integrity. The success of the Commission s activities in 2004 can be viewed in terms of both the opinion of the Island amongst the international community and the performance of the Island as an international finance centre with the level and range of business activities being undertaken. On both counts 2004 can be considered a success. The Business Plan for 2005, covering the activities of the Commission, will continue to focus on serving these two aims - international recognition as a quality, well regulated, international finance centre, particularly amongst the G7 countries; and recognition amongst those who are engaged in business locally and internationally that Jersey is not only well regulated and therefore an appropriate location for a quality institution with quality business to be located, but also a location that is alive to the needs of the market place and is capable of responding both through legislation and regulatory practices to the needs of that market place. 10 ANNUAL REPORT 2004

12 CHAIRMAN S STATEMENT The Commission s Business Plan reflects a very busy programme for the Board of Commissioners and the Executive. Much of what is in prospect is covered in the Director General s statement and what follows in this Annual Report. It is the hope that 2005 will see a number of matters come to a conclusion, the result of which will be to the benefit of the Island and the industry as well as the Commission. I am extremely fortunate to be supported by a team of Commissioners that bring skills and experience both from within the Island and from without, and their support is greatly appreciated. The Island and the finance industry are also fortunate to have such people prepared to give their time and energy in the pursuance and achievement of the aims and objectives of the Commission. The Commission s Business Plan reflects a very busy programme for the Board of Commissioners and the Executive. Finally, I should like to return to the theme that good regulation is good for business, and good for the Island. An international reputation for compliance with international standards, and a known commitment to join in the global fight against financial crime, combined with investor confidence in the quality of the many financial services on offer and the probity of the financial institutions providing those services, will remain essential features for the future success of the Island as an international finance centre. There is also no reason why in achieving this result good regulation should frustrate the business acumen and response to market requirements upon which that success will also depend. Colin Powell, CBE Chairman ANNUAL REPORT

13 DIRECTOR GENERAL S STATEMENT The Commission made substantial progress in achieving its objectives in As usual, much of our work was outward facing. A particular emphasis was placed on trying to convey to industry the message that the Commission aims to provide balanced and pragmatic regulation, while adhering closely to international standards. In addition, a key preoccupation during the year was to focus on the internal structure and processes of the Commission with a view to improving our efficiency and effectiveness. MAIN ACHIEVEMENTS IN the Commission aims to provide balanced and pragmatic regulation. Industry background The Commission s efforts during 2004 took place against a background of improved market sentiment, with many firms experiencing increased business volumes. This was particularly evident among firms engaged in corporate work, including in the funds sector, which was given a boost by the new regime for expert funds announced at the beginning of the year. This provides a speedier authorisation process, which helps to facilitate the growing trend toward more specialist funds, including hedge funds. In statistical terms, the main features of the year were as follows: Bank deposits increased by 6% to 158 billion; The number of collective investment schemes rose by 38% to 833; The net asset value of such schemes (which takes some time to catch up with the increase in the number of schemes) rose by around 2% to 104 billion; The total value of funds under management (other than in collective investment schemes) rose by over 10% to 34 billion; The number of new companies incorporated in Jersey rose by 13% to More detailed statistical information is given in the statistical annex to this report and on the Commission s website ( 12 ANNUAL REPORT 2004 New structure The Commission needs to ensure that it has an organisational structure that meets industry needs as they evolve and enables the Commission to fulfil its regulatory objectives. Accordingly, the Commission reviewed its structure in the first half of the year and implemented the new structure in July. There are now four supervisory divisions, replacing the former Compliance Division and incorporating the former Authorisation Division. Extensive work by the Operations Division on recruitment and premises changes and by the Finance Division on the structure of the Commission s accounting system was necessary to give effect to the new structure, which has been working well since it was introduced. In particular, the Commission is now better placed to serve industry needs and to build up expertise in each of the sectors covered by the four Divisions and their respective Directors. Financial control My Statement in the Annual Report for 2003 drew attention to the financial constraints facing the Commission. The 2004 budget anticipated a deficit for the year, partly reflecting the continued heavy spend on investigations and litigation. However, the financial position of the Commission improved during the year, with a surplus of income over expenditure (before an exceptional item) being achieved. This was due in part to tight control on operating expenses as well as higher than budgeted fee income. The income from banking fees benefited from the new licences taken out by banks which activated Jersey-based business continuity operations following the hurricane in the Cayman Islands.

14 DIRECTOR GENERAL S STATEMENT The Banking Division s speed of response in handling these applications was much appreciated by the firms concerned. The major imponderable in the Commission s budget remains investigation and litigation costs. These costs are volatile, and although they turned out to be somewhat less than expected in 2004, the question of how they should be financed remains an outstanding issue. They are currently financed out of the Commission s budget, with recourse to its reserve if necessary. One option would be for the Commission to be given fining powers, which might allow more of the costs of investigations and litigation to be recovered from those who have given rise to them. It is intended to address this issue in Among other steps taken to put the Commission s finances on a more stable basis was the proposed introduction of an amendment to the Financial Services Commission (Jersey) Law 1998 to enable the Commission to set its own fees and to split the Registry-related fees into two parts. One part would be set by the Commission to finance the administration of the Registry, while the other would be set by the Economic Development Committee ( EDC ) to raise revenue. The proposal attracted support from the industry during consultation conducted by the EDC, subject to the need for an arbitration mechanism in the event that the Commission and industry fail to reach consensus on a proposed fee increase. Such a mechanism has been devised and will be presented to the EDC with the results of the consultation in the near future. The banking fees were renegotiated with the agreement of the industry to recognise the consolidation that was reducing the number of bank licences, and the fee structure was amended to reflect the industry s preference for a sliding scale of fees. Finally, as a long-term efficiency measure, the Commission undertook a project to review the various processes in the Supervisory Divisions to see to what extent these could be streamlined and improved. This project concluded at the end of the year and achieved significant productivity gains. Policy and legal framework As noted above, a key event early in the year was the introduction of the regime for expert funds and non-domiciled funds. The response to this has been encouraging with a total of 44 funds established by the end of 2004, the vast majority Jerseybased. This was part of a more general revival in funds business. The funds team within the Securities Division has coped speedily and efficiently with this flow of applications. With the main focus on handling these applications quickly, and on developing Codes of Practice for funds functionaries (industry-wide consultation on which will be carried out during the first half of 2005), the long-term review of the funds authorisation process was extended into The outcome of this review is likely to be a greater focus on regulation of the functionaries rather than the funds (except in the case of retail funds). A further major piece of work, carried out under severe time pressure, was to put in place the framework for regulation of general insurance brokers. Not to have done this would have denied Jersey-based brokers access to the insurance markets in the European Union ( EU ). The Insurance Codes of Practice were finalised during the year and issued in early 2005, while the Deposit-taking Codes were sent out for consultation with the industry shortly after, continuing the action plan to implement the recommendations of the International Monetary Fund ( IMF ) in its report published in October a key event early in the year was the introduction of the regime for expert funds and non-domiciled funds. ANNUAL REPORT

15 DIRECTOR GENERAL S STATEMENT The Commission reviewed and reaffirmed its policy of only licensing the Top 500 banks in the world, as measured by Tier One capital. An approach towards the implementation of the new Basel II Capital Accord was developed during the year, in consultation with the Island s deposit-takers and the other Crown Dependencies. It will be further elaborated during The Commission considered the industry response to its proposals to amend the Companies (Jersey) Law 1991 to provide for the introduction of a register of directors, the creation of a record of foreign incorporated companies and the notification of changes in beneficial owners to the Commission. The Commission is now reviewing these proposals with a view to reducing the administrative burden on industry. The Commission reviewed and reaffirmed its policy of only licensing the Top 500 banks in the world, as measured by Tier One capital. This policy precludes the authorisation as deposit-takers of many building societies, which do not meet the size criteria. However, the Commission believes that a decision as to whether or not to allow building societies to operate as deposit-takers in or from within Jersey is a political one. As such, it should be taken by the States of Jersey or a relevant committee thereof. If the decision were taken that the Island should allow building societies to operate as deposit-takers, the Commission would provide advice on the appropriate regulatory structure and the resources that would be needed to supervise building societies. Countering money laundering and the financing of terrorism Considerable progress was made during the year in drafting the successor to the Anti-Money Laundering Guidance Notes for the Finance Sector. This will take the form of a Handbook for the Prevention of Money Laundering and Terrorist Financing. The Money Laundering (Jersey) Order 1999 will be revised to accommodate the Handbook, a draft of which is due to go out for industry-wide consultation by mid Major effort was also devoted to ensuring that Jersey s use of the United Kingdom s ( UK ) payment system (in particular BACS) was not prejudiced by the introduction of an EU Regulation to implement Financial Action Task Force Special Recommendation VII on Wire Transfers. It appears that a satisfactory solution has been reached, whereby transactions with territories (such as Jersey) that are in a monetary union with a EU Member State will be treated as domestic transactions by that State. Supervision The restructuring of the Commission and the review of processes were major events for the supervisory function during the year. Despite the short-term disruption caused by these initiatives, the Compliance Division and its successor Divisions were able to undertake about the same number of on-site examinations as in This was complemented by enhanced desk-based review, including increased use of the Commission s risk model for each of the regulated entities, which helps to focus attention on those entities that carry the highest risk. As part of the new structure and the supervisory process review, detailed performance targets have been set for the various supervisory tasks and incorporated into the Business Plan for The process of licensing the trust companies still under transitional arrangements continued during the year, and is now almost complete. To date this has resulted in the granting of 190 licences, representing a large majority of those firms that applied. The Commission has been concerned to ensure that all firms have sufficient time to meet the required standard, and much effort has been made by Commission staff to explain to the firms concerned how this can be achieved. 14 ANNUAL REPORT 2004

16 DIRECTOR GENERAL S STATEMENT Enforcement The Enforcement Division continued to oversee a number of complex enforcement cases, chief amongst these being the investigation into split capital investment trusts. A settlement was reached in respect of these at the end of the year, details of which are contained in a press statement that can be accessed on the Commission s website. Distribution of the monies arising from the settlement with two of the respondents in the A.P. Black case was made in the first half of the year. Action was continued against the other respondents in the second half of the year. The Commission maintained its approach of cooperating to the fullest extent possible with overseas regulatory authorities in investigating cases of suspected market abuse and unauthorised financial business that may have a Jersey connection. Registry The Registry continued to operate smoothly, meeting all its performance targets. During the year, it embarked on major new IT projects (managed by the Operations Division) to replace the current document imaging system and to allow on-line filing and searches of documents. It is intended that on-line filing of selected Registry documents will be available to users in the third quarter of This is part of a broader e-commerce initiative that will eventually be extended to the Commission as a whole. To help achieve this, the Commission is also engaged in a project to integrate its information databases (including that of the Registry) into a single database over time. Full simulation testing of the Commission s Business Continuity Plan was also carried out. The Division also implemented fully the latest module of the Central Index System database covering banking and insurance entities as part of the ongoing programme of database integration and improvement. The Commission was awarded a National Training Award by UK Skills for the first time in This followed the four local Training in Business Awards in previous years, and provided further confirmation of the progress that the Commission has made in developing its Human Resources function. PRIORITIES FOR 2005 The Commission s key priorities for the year ahead are set out in the succeeding chapters of this Report. Further details are given in the Commission s Business Plan for 2005, which, in keeping with the Commission s commitment to transparency and accountability, has been published in abridged form, and is available on the Commission s website. I shall therefore confine myself in this Statement to drawing out some of the main themes that will govern the Commission s work in In keeping with the theme of accountability, the Commission has agreed with the EDC that a value for money audit of the Commission should be conducted. In addition, although only a few complaints are made against the Commission or its staff each year, the Commission has undertaken to consider with the EDC an independent mechanism for investigating such complaints. The Commission was awarded a National Training Award by UK Skills for the first time in Operations The Operations Division continued to provide essential support to the Commission s staff in a number of the projects mentioned above. In addition, it was necessary to manage the complex migration of the Staff Pension Scheme to a new administrator and suite of funds. So far as the legal and regulatory framework is concerned, we will strive to avoid overload on the industry, by not pursuing new initiatives unless sure that they are justified and by streamlining the framework to eliminate duplication and unnecessary requirements. ANNUAL REPORT

17 DIRECTOR GENERAL S STATEMENT...we will be looking to increase our supervisory contact with the industry. This will mean, for example, looking for opportunities to integrate the various regulatory laws at both the primary and subordinate levels. As in 2004, much of our detailed work will continue to be governed by the IMF action plan mentioned earlier. Since the IMF is expected to pay a return visit to the Island in 2006/2007, it is important that we make substantial inroads into the remaining areas of the plan. Our anti-money laundering defences are also likely to be subject to some form of external assessment around the same time. The IMF action plan includes putting in place a formalised contingency plan for the failure of a market intermediary. Related to this (though not part of the IMF action plan), is the proposal for a depositor compensation scheme on which work was suspended in 2004 due to pressure on our resources. We intend to resume our consideration of this in 2005, placing emphasis on the need to maintain a close dialogue with the banking industry on what are the most appropriate arrangements for the local environment. We will continue our efforts to provide a regulatory environment that is supportive of the development of the funds industry in the Island. In the longer-term, this will involve the shift (for non-retail funds) to a more functionary-based regulatory approach, with less emphasis on scrutiny of individual funds. In the short-term, we will be taking stock of the workings of the Expert Fund and Non-domiciled Fund Guides in the light of experience so far to see to what extent the current arrangements can be further enhanced. We will promulgate the new Handbook on anti-money laundering, taking account of consultation with the industry and developing standards elsewhere, including in the UK and EU. This is part of a more general need to monitor regulatory and other initiatives emanating from Brussels to ensure that their impact on the finance industry in Jersey is taken into account. Now that the new structure of the Commission has bedded down, we will be looking to increase our supervisory contact with the industry, in particular through an expanded programme of on-site examinations. Where the rules are not being followed, we will make every effort to bring the entities concerned back into compliance through assistance and support. But we will be prepared to use our powers to take enforcement action where this is necessary. A decision will be taken on whether these powers need to be extended through the introduction of the ability to levy regulatory fines. We will strengthen our relations with key overseas regulatory authorities with the aim of enhancing cooperation and promoting Jersey s reputation abroad. We will continue to develop the IT systems that will improve the service that the Registry offers to users and that will enable us to cope with expanding volumes. The Registry, and other relevant parts of the Commission, will also help to facilitate Government-led initiatives such as the introduction of protected cell companies and foundations. Conclusions My first year in the Commission has been extremely busy, and has been a period of significant change. My staff have coped extremely well with the challenges, and I have also benefited from the support of my Chairman and my fellow Commissioners. As shown in our Business Plan for 2005, we continue to have a full programme that will keep us fully occupied during the coming year and beyond. I will continue to rely on my colleagues to deliver our objectives in a manner that reduces risk to the public and the Island s reputation, while providing a regulatory platform on which business can develop and prosper. David Carse, OBE Director General 16 ANNUAL REPORT 2004

18 STRUCTURE CHART Director General & Registrar Deputy Director General Risk Unit Research & Development Unit David Carse Helen Hatton Enforcement International & Policy Finance Operations Registry Gary Godel Director Andrew Le Brun Director Nigel Woodroffe Director Mark Whiteley Director Julian Lamb Deputy Registrar Banking Insurance Securities Trust Company Business Mark Sumner Director Nigel Woodroffe Director John Pallot Director Debbie Sebire Director ANNUAL REPORT

19

20 SUPERVISORY APPROACH The supervisory divisions of the Commission are responsible for two of our five aims. These are to ensure that all entities we authorise meet fit and proper criteria and to ensure that all entities we regulate are operating within accepted standards of good regulatory practice. The restructuring of the Commission, as referred to in the Director General s Statement, was a major event for the supervisory teams during the year. The previous functional divisions, of Authorisation and Compliance, were replaced with divisions structured along industry sector lines. There are now four supervisory divisions: Banking, Securities (encompassing Funds and Investment Business), Trust Company Business and Insurance. It is a detailed examination generally lasting three or four days and could include an end-to-end review of the business or possibly a review of part of the business that has been identified as having a particular issue. The examination is designed to draw out all issues relating to the area of concern. Each focus visit may be different, but the Commission s methodology for dealing with the examination remains consistent through the use of formal internal planning models. The main purpose of on-site examinations is to assist regulated entities to identify weaknesses in their regulatory controls and procedures and to implement improved controls. Whilst this more industry-focused structure provides a sounder platform on which to move forward in the future, there was some inevitable short-term disruption that impeded progress with on-site examinations and other supervisory tasks. Notwithstanding this, the Commission was able to undertake a total of 55 on-site examinations during the year, about the same as in 2003 (59). This included the resumption of visits to Guernsey and the Isle of Man, both to conduct home regulator discovery examinations and discuss issues of common interest with the Guernsey Financial Services Commission and the Isle of Man Financial Supervision Commission. The main purpose of on-site examinations is to assist regulated entities to identify weaknesses in their regulatory controls and procedures and to implement improved controls. The aim is to ensure that regulated entities operate within accepted standards of good regulatory practice. The Commission undertakes a number of different types of on-site examinations, namely focus, discovery and theme. A focus examination is very much a bespoke review, the scope of which is tailored specifically to each regulated entity. A discovery examination usually occurs when the Commission has inadequate information about a firm, such that it is difficult to properly assess the regulated entity to determine the risk rating against its peers. This examination is relatively short in duration and is conducted more as a fact finding mission. Total regulatory licences at 31 December 2004: 687 The theme examination is a relatively new style of visit and will generally last two days. Each supervision division takes a single, usually narrow, topic and examines a number of regulated entities against that same topic throughout the year. Themed examinations are a good way of assessing best practice and monitoring trends across the industry. ANNUAL REPORT

21 SUPERVISORY APPROACH The use of risk modelling was introduced during the year to identify perceived higher risk areas in both individual entities and across sectors that warranted further review. Type of Fund Assets at 31 December 2004 (Total number of pools of assets: 2214) If areas of concern are identified during either a discovery or theme examination, the Commission may extend the scope of the examination to that of a focus review. The majority of regulated entities assessed were found to be operating to satisfactory standards. However, there were some common problem areas identified during the examinations. In particular, the corporate governance in some institutions was found to be weak. Board meetings would either be held infrequently or the decision-making process, as evidenced by the minutes, was poorly documented. Standards of customer due diligence, although generally improving, were also found to be deficient in some sectors, such as trust company business. In addition, the quality of some investment businesses documentation on the financial standing, investment experience and objectives of their clients (ie, the fact finds ), and the subsequent written advice based on the fact find, was found to fall short of the standards expected by the Codes of Practice for such businesses. In a few cases, they were significantly below standard. Action is being taken to deal with these issues. The use of risk modelling was introduced during the year to identify perceived higher risk areas in both individual entities and across sectors that warranted further review. Specific risk areas assessed fall within the categories of financial standing, integrity, competence, organisation, and structure. Significant effort was devoted in 2004 to completing the risk model for each regulated entity and much of the Commission s ongoing on-site examination work will be determined through analysis of the results of this. All four supervisory divisions exceeded the target of 75% completion of risk models for regulated entities by the year end with all but one division achieving 100%. As part of the new structure and the supervisory process review mentioned below, detailed performance targets have been set for the various supervisory tasks and incorporated into the business plan for The performance targets require strict timescales to be met in relation to such areas as: processing licence applications, reviewing applications from proposed principal persons, reviewing financial information submitted by regulated entities, and responding to complaints made against regulated entities. The Commission continued to look at ways of making itself more efficient and during the year it initiated a Process Management Project ( PMP ). The aim of the PMP was to review key processes undertaken in the supervisory divisions and implement changes that would increase productivity. The full benefits of the PMP will not be seen until 2005 when the changes coming out of it have been completely implemented. However, significant productivity gains have already been achieved - primarily through changes to our processes which will result in staff spending less time on internal administrative activities and thus being able to devote more time to the ongoing supervision of regulated entities. 20 ANNUAL REPORT 2004

22 SUPERVISORY APPROACH Fund and special purpose vehicle authorisation continued to be a major activity. Changes to the authorisation process were made during 2004 to accommodate the introduction of the Expert Fund Guide (see Policy Developments chapter). By the year-end, 44 expert funds had been established (including 8 nondomiciled funds). This was part of a more general increase in funds business, including two new Recognized umbrella funds with twelve sub-funds and a property fund which is probably the largest yet seen in the Island. During the year, 213 Jersey domiciled funds were authorised. In addition, service providers in the Island were licensed to service 71 non-domiciled funds. During the year, the Commission met its targeted response timescales for dealing with fund and special purpose vehicle applications. The targets are shown in the table below: KEY TASKS FOR 2005 Launch an intensified on-site examination programme aimed at broadening and increasing our supervisory contact with regulated entities. Particular objects of attention will be trust company and investment businesses where standards of corporate governance, internal control, and administration are still uneven. Conduct a themed assessment of risks relating to banking treasury operations. Implement automated risk management and information integration and exchange software and associated business processes to improve the efficiency of the on-site examination process in particular, and the overall efficiency of supervisory activities in general. Review the requirements relating to financial resource and professional indemnity insurance cover for regulated entities. Implement the new regulatory regime for general insurance brokers. Changes to the authorisation process were made to accommodate the introduction of the Expert Fund Guide. Activity Target Response Achieved Special Purpose Vehicle - Provisional approval Special Purpose Vehicle - Document review Private Fund - Provisional approval Private Fund - Document review Collective Investment Fund - Provisional approval Collective Investment Fund - Document review Expert Fund - Authorisation review 85% within 5 working days 85% within 5 working days 85% within 10 working days 85% within 10 working days 85% within 10 working days 85% within 20 working days 100% within 72 hours 98.8% 100.0% 90.7% 99.2% 98.6% 98.3% 100.0% ANNUAL REPORT

23 POLICY DEVELOPMENTS One of the Commission s aims is to match international standards in respect of banking, securities, trust company business, insurance regulation, and anti-money laundering and terrorist financing defences. Within the Commission, the International & Policy Division, and the supervisory divisions (with resources provided by the Research & Development Unit) lead policy development to ensure that this aim can be met. The Commission put in place a framework for the regulation of general insurance brokers. A key event during 2004 was the introduction of the regimes for expert funds and non-domiciled funds. The response to these new regimes was encouraging. The expert funds regime provides a streamlined authorisation process for funds aimed at expert investors by allowing Jersey regulated functionaries to self-certify that individual funds and investment managers comply with the requirements of the Commission s Expert Fund Guide. Work was started on developing Codes of Practice for fund functionaries. The Codes, once in place, will complement those already issued in relation to investment and trust company businesses. Consultation with the industry on a detailed draft will be carried out during the first half of During the year, the Commission commenced a review of its fund authorisation and compliance processes. The funds team is reviewing all of its processes and procedures taking a risk-based approach. This is being done in order to determine whether all of the processes and procedures in place are necessary and, if so, whether the work can be carried out in a more effective way. This review will continue into The Commission put in place a framework for the regulation of general insurance brokers. This new regulatory regime was required as a result of a new European Union ( EU ) Directive. To enable Jersey s general insurance brokers to continue to have access to EU insurance markets they needed to be subject to domestic regulation equivalent to the requirements of the Directive. The necessary enabling law was passed by the States of Jersey in the autumn of The associated Orders that set out the details of the regime have been discussed with the industry and should be finalised in early The licensing process will take place in the early part of Work continued, in consultation with the industry, on drafting Insurance Codes of Practice. By the end of the year, the Codes were in near final form and were issued in early In addition, in line with the Commission s policy of developing Codes of Practice for all regulated business, work continued on Codes for Deposit-takers. Consultation with the industry commenced in early A review of the impact of the new Basel II Capital Accord was undertaken. Full implementation of the Accord in Jersey is considered to be impracticable, due to the high cost involved and the varying requirements of Jersey-based banks in this respect. Accordingly, an approach designed to address the subject in the most cost-effective manner appropriate to the Island was developed and consulted upon during the year, gaining widespread support from the banking industry. This preferred approach will be further considered during 2005 in the light of banks evolving needs and international developments. The Commission considered the industry response to its proposals to amend the Companies (Jersey) Law 1991 to provide for the introduction of a public register of directors of private companies (in addition to the current register of directors of public companies), the creation of a record of foreign incorporated companies and the notification of changes in beneficial owners to the Commission. 22 ANNUAL REPORT 2004

24 POLICY DEVELOPMENTS The Commission is now reviewing these proposals with a view to reducing the administrative burden on industry. Among other things, the Commission is considering to what extent greater reliance can be placed on company service providers to retain and provide to the Commission, on demand, information about foreign incorporated companies and beneficial ownership. It is also examining the arguments for and against allowing corporate directors of Jersey companies, which would facilitate the administration of such companies and the introduction of a register of directors. A first draft of legislation to provide for the oversight of money services businesses (bureaux de change, money transmitters, and cheque cashers) was prepared, to bring the Island s regulatory framework for such businesses into line with revised international standards (Financial Action Task Force ( FATF ) Special Recommendation VI on Alternative Remittances). Further drafts of legislation will be considered in 2005, culminating in a further period of public consultation on draft legislation and draft Codes of Practice. Consultation on the proposed consolidation, and updating to latest international standards, of the current legislation on insider dealing and market manipulation was concluded. Law drafting instructions for revised legislation were issued in the latter part of 2004 and the amended law is expected to be put in place during The Commission continued its review of Jersey s Anti-Money Laundering Guidance Notes for the Finance Sector, the Proceeds of Crime (Jersey) Law 1999 ( Proceeds of Crime Law ) and Money Laundering (Jersey) Order 1999 ( Money Laundering Order ), all of which came into force in The review, which is being undertaken in consultation with a steering group consisting of industry practitioners, has as its aim the introduction of revised guidance in the form of a Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism ( the Handbook ) and an updated Money Laundering Order. The Handbook will take into account the revised FATF Forty Recommendations issued in 2003, and, in particular, the more risk-based customer due diligence requirements, and will be designed to ensure that the identification and verification of identity of customers (and customers of customers) is applied proportionately, reasonably, and sensibly. Significant resources were expended during the year to ensure that the introduction in the EU of legislation to implement FATF Special Recommendation VII on Wire Transfers did not adversely effect Jersey s use of the United Kingdom s ( UK ) domestic payment systems, and in particular BACS. It is expected that EU legislation will provide a derogation for payments between the UK and Jersey (and the other Crown Dependencies), allowing such payments to be treated as domestic. In order to benefit from this derogation, Jersey has committed itself to implementing legislation which is equivalent to that introduced in the EU. Certain proposals which had been expected to be progressed during 2004 were deferred due to a lack of resources or other priorities. It is intended that the proposals for a depositor compensation scheme, an Advertising Order (under the Financial Services (Jersey) Law 1998) and integration of the Banking Business (Jersey) Law 1991 and the Collective Investment Funds (Jersey) Law 1988 into the Financial Services (Jersey) Law 1998, will be taken forward during No further work was undertaken on the introduction of a Financial Ombudsman Scheme in Jersey, due to insufficient States funding for this initiative because of other higher priorities for States expenditure. The Commission continued its review of Jersey s Anti-Money Laundering Guidance Notes... ANNUAL REPORT

25 POLICY DEVELOPMENTS KEY TASKS FOR 2005 Finalise changes to the Handbook, the Proceeds of Crime Law and the Money Laundering Order. Complete consultation on proposals to provide for the oversight of money services business. Implement legislation to provide for certain information to be included on wire transfers in line with FATF Special Recommendation VII. Finalise Codes of Practice for deposittakers and fund functionaries. Review Codes of Practice for trust company business and put out to consultation. Introduce an Advertising Order for financial services businesses regulated under the Financial Services (Jersey) Law The Order will prescribe minimum standards for the content of advertisements for financial products. Review the Expert Fund and Non-domiciled Fund Guides in the light of experience gained since their introduction and the proposal to move to a more functionary-based regulation of funds, to see to what extent the current arrangements can be further enhanced. In consultation with the industry, develop proposals for a depositor compensation scheme. Finalise the preferred approach towards implementation of the Basel II Capital Accord in Jersey. Complete the introduction of the regulatory regime for general insurance brokers, (including all subordinate legislation and Codes of Practice). Commence development work on the integration of the Banking Business (Jersey) Law 1991 and the Collective Investment Funds (Jersey) Law 1988 into the Financial Services (Jersey) Law ANNUAL REPORT 2004

26 ENFORCEMENT The Enforcement division is responsible for work relating to the aim of the Commission to identify and deter abuses and breaches of regulatory standards. During 2004, the Enforcement Division continued to oversee a number of complex cases, chief amongst these being the investigation into the sale of split capital investment trusts ( Splits ). At the end of the year, the Commission reached a settlement with the Jersey-based firms involved. In reaching the settlement agreement, the Commission was closely involved in discussions with the United Kingdom s ( UK ) Financial Services Authority ( FSA ) and the Guernsey Financial Services Commission ( GFSC ), both of whom had also been conducting investigations, and also participated in the settlement. As recorded in the Commission s public statement issued on 24 December 2004, the firms, the Commission, the FSA and the GFSC agreed a package of approximately 194 million for investors. The firms agreed to contribute without admissions to a fund which will be available for distribution to individuals who invested in zero dividend preference shares ( Zeros ) and in a number of specified unit trusts and other financial products that invested in Zeros. The fund is in addition to specific amounts paid or to be paid by specific firms to their investors. In addition, certain firms active in Jersey have agreed to the establishment of an independent adjudication scheme to provide a forum for resolving disputes over their Jersey-based activities in the Splits sector, which will mirror, as fully as practicable, the scope of the UK s Financial Ombudsman Service arrangements. The Commission has identified several areas, which the industry has agreed to review, if investors are to renew their confidence in the investment sector and investment trusts in particular. The Commission will take full account of these issues in its future regulation of fund business in Jersey. It will work with firms and the Boards of Directors of Jersey funds to ensure that measures are taken where necessary to enhance corporate governance and internal procedures and controls. The Commission maintains a policy of cooperation to the fullest extent possible with overseas regulatory authorities. Breakdown of all investigations carried out by Enforcement during 2004 Distribution of payments is expected to be made by the end of Investors who are offered the opportunity to obtain a distribution will have a choice whether to accept it or not. If they accept it, it will be in full and final settlement of any claims or any remedies they may consider they would otherwise have. If they do not accept the offer, they will remain able to pursue their own claims or remedies, including those arising under the adjudication scheme referred to below. In last year s Annual Report, the Commission reported that a settlement had been finalised with two of the respondents in the A. P. Black litigation. Distribution of the monies arising from that settlement was made in the first half of During the year, action was continued against the other respondents. The action had been brought by the Commission under Article 20 of the Collective Investment Funds (Jersey) Law 1988 in relation to investment products managed by Delta Options in the Bahamas. ANNUAL REPORT

27 ENFORCEMENT The Division issued 20 public statements to warn investors about illegal businesses operating on the internet. The Commission maintains a policy of cooperating to the fullest extent possible with overseas regulatory authorities in investigating cases of suspected market abuse and unauthorised financial business that may have a Jersey connection. The Enforcement Division received a total of six requests for assistance from overseas regulators during 2004, all of which were acted upon using appropriate statutory gateways. The Division issued 20 public statements to warn investors about illegal businesses operating on the Internet. Some cases involved cloned company identities, whereby a fraud is attempted by replicating the website of a legitimate financial services business. Other cases involved attempts to fraudulently convince investors that the entity named on the illegal website was regulated by the Commission, when it in fact was not. In a number of cases, the Division took action to have the illegal website closed down. KEY TASKS FOR 2005 Progress the A.P. Black legal action. Finalise all issues relating to the split capital investment trusts settlement. Focus on alleged mis-selling of financial products by certain investment businesses and take appropriate enforcement action. Consult on possible fining and investigation cost-recovery powers for the Commission and consider how to progress the related question of how decisions or appeals on fines should be taken. Implementation of revised legislation concerning market abuse. During the year, there was the investigation of six instances where non-jersey businesses had offered investment related services in the Island without the appropriate licence. These were dealt with in conjunction with the relevant overseas regulator and public statements were issued naming the firms. The Division has continued to be involved in ensuring that the industry maintains high levels of anti-money laundering controls through information sharing with Jersey s Joint Financial Crimes Unit, discussion with firms and, if necessary, investigations in conjunction with the relevant supervisory division. The Division also carried out various investigations in 2004 that concerned the quality of service provided by certain independent financial intermediaries to investors and these investigations will continue in ANNUAL REPORT 2004

28 OPERATIONS One of the aims of the Commission is to ensure the Commission operates effectively and efficiently.... The Operations Division is responsible for ensuring that the Commission has in place the necessary information technology, human and physical resources to ensure that this aim is met. The Division undertook a number of projects during the year to enhance the effectiveness of the Commission s processes and use of information technology. This included full implementation of the latest module of the Central Index System database covering banking and insurance entities, as part of the ongoing programme of database integration and improvement. Various enhancements were made to the Registry s database system to ensure that the Commission would be able to provide a wide-ranging e-commerce offering to its customers in the near future. The Division also co-ordinated development work on the Commission s intranet to ensure that it continued to provide an efficient central information resource for staff. The Division conceived, designed and implemented a sophisticated process management review for the supervisory Divisions (the Process Management Project referred to earlier in this Report). This project has enhanced productivity and service levels and put in place standardised and centralised processes and procedures. The Commission has in place a comprehensive business continuity and disaster recovery plan and this was subject to full simulation testing during the year. The simulation involved all of the Commission s back-up information technology systems being invoked at short notice and a large number of staff operating from the Commission s back-up premises. On the human resources side, further work on improving the recruitment process was implemented to ensure that new employees meet the requirements of each job profile. Training needs for staff members were assessed from individual performance development reviews and appropriate courses identified for staff members. The restructuring of the Commission referred to elsewhere in this Report necessitated a number of internal premises and infrastructure changes, all of which were achieved seamlessly with minimal disruption to staff. The restructuring also necessitated the recruitment of personnel for a number of posts; this was achieved on time and within budget. The Division managed a substantial migration project for the Commission s Staff Pension Scheme, changing administrators and investment choices for members. The Commission was awarded a National Training Award for the first time in The Award was for a programme of care and learning developed around a seriously ill member of staff: this provided support to the staff member and work colleagues to secure the right working environment and maintain the dignity and performance of all concerned. KEY TASKS FOR 2005 Review the Commission s premises needs for the period beyond the expiry of the current lease in Manage the introduction of automated on-site examination, risk management and information integration and exchange software in the supervisory divisions. Manage the upgrading of the Registry s information technology platform in preparation for on-line filing and other e-commerce services. Coordinate the planned value for money audit. Develop a structured system for career and succession planning. Introduce a flexible benefits package for staff. The Commission has in place a comprehensive business continuity and disaster recovery plan and this was subject to full simulation testing during the year. ANNUAL REPORT

29 REGISTRY The Commission operates Jersey s Registry for companies, limited partnerships, limited liability partnerships and business names. The main ongoing work of the Registry is the incorporation of new entities and responding to enquiries concerning entities on its Registers. The Registry s work complements the Commission s aim to ensure that all entities we authorise meet fit and proper criteria. The Jersey Companies Registry is a member of the European Commerce Registries Forum. The Registry incorporated 2,439 companies in 2004, which was a 13.1% increase on the previous year reflecting increased business activity in the Island. 773 new business names were registered in 2004 which was a 26% increase over Limited partnership formations during the year were 40% up on 2003 at ,440 company searches were undertaken during the year which was a 25% increase on the previous year. The Registry adheres to published response timescales, all of which were met during 2004, as shown on the opposite page: The Jersey Companies Registry is a member of the European Commerce Registries Forum ( ECRF ). The ECRF has representatives from most companies registries in Europe. Jersey has used this forum to persuade other registries to move towards agreement on a common process for company migration (continuance). A workshop of Registries including companies registries from Great Britain, Ireland, Northern Ireland, the Isle of Man, Gibraltar and Guernsey was held in Jersey in December The meeting concentrated on discussing issues of common interest, such as the migration of companies between jurisdictions. To allow on-line filing and searches of documents, the Registry embarked on major new information technology projects (managed by the Operations Division) to replace its current document imaging system. This is part of a broader e-commerce initiative that will eventually be extended to the Commission as a whole. A consultation paper was issued on proposals to amend the Registration of Business Names (Jersey) Law 1956, to address concerns that the law was becoming increasingly burdensome to administer and that it was not meeting the expectations of the public. The responses to the consultation were analysed during the latter half of the year. The proposed amendment to the law will be progressed in 2005, taking into account the views of respondents to the consultation. KEY TASKS FOR 2005 Continue to offer an efficient service to users of the Registry. Progress the amendment to the Registration of Business Names (Jersey) Law Continue the programme of updating and enhancing the Registry s IT systems with a view to introducing on-line filing during Continue work on the possible introduction of corporate directors. Consider the practical implications of the current Government initiatives to introduce foundations and protected cell companies, which will require public registers to be established for such entities. 28 ANNUAL REPORT 2004

30 REGISTRY Activity Target Response Achieved Company incorporations 2 day incorporations: 95% 2 day incorporations: 98.8% 2 hour incorporations: 95% 2 hour incorporations: 97.3% Partnership formations 95% within 2 days 99.2% Searches completed 95% within 2 days 99.8% Certificates processed 95% within 2 days 100.0% Business names registered 90% within 2 days 99.2% Company incorporations per year Registry processing - volume increases since 2000 Registry processing - items processed since 2000 ANNUAL REPORT

31 INTRODUCTION TO THE FINANCIAL STATEMENTS Fee income, at approximately 12 million, was some 500,000 higher than in The increase arose primarily from funds business, and from the revised trust company fee scales that took effect from the beginning of the year. However, the number of banking and insurance licences continued to fall, as the trend towards mergers and acquisitions in the industry continued. Bank deposit interest received increased by nearly 100,000 as a result of rising interest rates. Under the provisions of Article 18 of the Financial Services Commission (Jersey) Law 1998, the Commission pays an amount each year into the annual income of the States of Jersey Treasury. The annual contribution to the States rose from 3.9 million to 4.1 million in The effect of this, when combined with the overall revenue figure, was an increase in net income available to the Commission for its own expenditure of around 400,000 - from 7.8 million to 8.2 million. Staff costs continued to increase, albeit at a much slower pace than in In recent years, as a consequence of the increasing scope of regulation, the Commission has been increasing staff numbers to a level that is sufficient for it to be able to properly carry out its functions. Expenses in 2004 include the first full year costs relating to employees who were recruited during Investment in computer equipment, and the associated depreciation charges, increased because the Commission has continued to develop systems that are more efficient and that increasingly enable the industry to have electronic access, particularly to the Companies Registry. The Commission is conscious of the need to manage its finances carefully, and during 2004 it was able to reduce the amounts spent on items such as public relations and travel, as well as on other operating costs such as printing, stationery, telephone and postage. The net amount spent on investigations during the year increased to 900,000 from 632,000 the year before, although the 2003 figure was reduced by a court settlement that enabled the Commission to recover a significant amount of cost. The primary cause of the 2004 spend was the protracted and complicated investigation into the selling of split capital investment trusts. The investigation was concluded as part of a settlement that was reached at the end of the year. Total operating expenses rose from 7.4 million to 7.8 million, but the Commission felt it prudent to make a provision, in accordance with United Kingdom accounting standards, for its potential share ( 1.5 million) of the pre-1987 debt, amounting to 178 million, that is owed by participating employers to the Public Employees Contributory Retirement Scheme. The Commission has made this provision although it continues to reserve its position in respect of the liability. Details can be found in note 10 (a) to the Financial Statements. The provision has been included in the Income and Expenditure Account as an exceptional item. As a result, reserves fell by million to million. The Commission s policy is that its fees should match its expenditure, subject to the need to build up a reserve equal to six months net income in order to meet contingencies, particularly the costs associated with investigations and litigation cases. Following the conversion of our auditors, PricewaterhouseCoopers, to a Limited Liability Partnership ( LLP ) from 1 October 2004, PricewaterhouseCoopers resigned on 14 March The Economic Development Committee has appointed their successor, PricewaterhouseCoopers CI LLP, as auditors. PricewaterhouseCoopers CI LLP have indicated their willingness to continue in office. 30 ANNUAL REPORT 2004

32 STATEMENT OF COMMISSIONERS RESPONSIBILITIES The Commissioners are responsible for preparing financial statements for each financial year which give a true and fair view of the state of affairs of the Commission and of the income and expenditure for that period. In preparing those financial statements, the Commissioners are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the ongoing concern basis unless it is inappropriate to presume that the Commission will continue its operations. The Commissioners confirm that the financial statements comply with the above requirements. The Commissioners are responsible for ensuring that proper accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Commission and enable them to ensure that the financial statements have been properly prepared. They are also responsible for safeguarding the assets of the Commission and for taking reasonable steps for the prevention and detection of fraud and other irregularities. For and on behalf of the Board of Commissioners Stephen de Gruchy Secretary 26 May 2005 PO Box 267 Nelson House David Place St Helier Jersey Channel Islands JE4 8TP ANNUAL REPORT

33 INDEPENDENT AUDITORS REPORT To the Economic Development Committee of the States of Jersey We have audited the financial statements of the Jersey Financial Services Commission which comprise the Income and Expenditure Account, Balance Sheet, Cash Flow Statement and the related notes. Respective responsibilities of Commissioners and Auditors The Commissioners responsibilities for preparing the annual report and the financial statements in accordance with applicable Jersey law and United Kingdom accounting standards are set out in the statement of Commissioners responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board. This report, including the opinion, has been prepared for and only for the Economic Development Committee of the States of Jersey and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or in to whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view. We also report to you if, in our opinion, the Director General s Statement is not consistent with the financial statements, if the Commission has not kept proper accounting records, or if we have not received all the information and explanations we require for our audit. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. The other information comprises the Chairman s Statement, the Director General s Statement, the reports on the Commission s supervisory approach, policy developments, enforcement, operations and the Registry, and the statement on Corporate Governance. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Commission in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Commission s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of the Commission s affairs as at 31 December 2004 and of its deficit and cash flows for the year then ended in accordance with United Kingdom accounting standards. PricewaterhouseCoopers CI LLP Channel Islands Chartered Accountants 26 May ANNUAL REPORT 2004

34 NOTE TO THE AUDITORS REPORT PAGE The maintenance and integrity of the Jersey Financial Services Commission web site is the responsibility of the Commissioners; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Please note that this page does not form part of the printed version of the Jersey Financial Services Commission 2004 Annual Report.

35 INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 DECEMBER Note ooo ooo ooo ooo Income: Regulatory fees 4 (a) 6,172 5,715 Registry fees 4 (b) 5,801 5,788 Profit on sale of tangible fixed assets 2 - Bank deposit interest received Total income 12,297 11,727 Contribution to States of Jersey 4,100 3,900 Net income 8,197 7,827 Operating expenses: Staff salaries, social security and pension contributions 5,063 4,772 Operating lease expenditure Other premises costs Computer systems costs Legal and professional services Investigations and litigation Public relations costs Travel costs Staff training Other operating expenses Auditors remuneration Depreciation of tangible fixed assets ,829 7,359 Exceptional item Provision for share of pension scheme pre-1987 debt 10 (a) 1,500 - Total operating expenses 9,329 7,359 (Deficit)/Excess of income over expenditure (1,132) 468 Accumulated reserve brought forward 4,168 3,700 Accumulated reserve carried forward 3,036 4,168 Statement of total recognised gains and losses There were no recognised gains or losses other than those detailed above. Historical cost equivalent There is no difference between the net deficit for the year stated above and its historical cost equivalent. Continuing operations All the items dealt with in arriving at the net deficit in the income and expenditure account for the current year and the surplus in the previous year relate to continuing operations. The notes on pages 36 to 40 form an integral part of these financial statements. ANNUAL REPORT

36 BALANCE SHEET AS AT 31 DECEMBER Note ooo ooo ooo ooo Fixed Assets: Tangible assets Current Assets: Fee income receivable 6 11 Sundry debtors 5 2 Prepayments Cash at bank and in hand 7,114 6,601 7,290 6,675 Creditors - amounts falling due within one year: Fee income received in advance 4 (c) 2,926 2,319 Creditors and provisions Provision for share of pension scheme pre-1987 debt 10 (a) 1,500-4,856 3,060 Net Current Assets 2,434 3,615 Total Assets less Current Liabilities 3,036 4,168 Represented by: Accumulated reserve 3,036 4,168 The notes on pages 36 to 40 form an integral part of these financial statements. The financial statements on pages 33 to 40 were approved by the Commissioners, and signed on their behalf on 26 May 2005 by: G C Powell, CBE Chairman D Carse, OBE Director General & Commissioner 34 ANNUAL REPORT 2004

37 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 Reconciliation of net (deficit)/income to net cash inflow from operating activities ooo ooo ooo ooo Net (deficit)/income for the year (1,132) 468 Profit on sale of tangible fixed assets (2) - Interest received (322) (224) Depreciation charges (Increase)/decrease in debtors and prepayments (102) 76 Increase in creditors 1, Net cash inflow from operating activities Cash Flow Statement Net cash inflow from operating activities Returns on investments and servicing of finance Interest received Capital expenditure Payments to acquire tangible fixed assets (373) (499) Receipts from sale of tangible fixed assets 2 -- (371) (499) Increase in cash Reconciliation of net cash flow to movement in net funds Increase in cash in the year Net funds at 1 January 6,601 6,048 Net funds at 31 December 7,114 6,601 ANNUAL REPORT

38 NOTES TO THE FINANCIAL STATEMENTS 1. Accounting policies a) The financial statements have been prepared under the historical cost convention, and in accordance with generally accepted accounting practice in the United Kingdom. A summary of the more important accounting policies is set out below. b) Income is accounted for during the period to which it relates, and expenditure is accounted for on an accruals basis. c) Fixed assets are stated at cost less depreciation. Depreciation on tangible fixed assets is calculated to write down their cost on a straight line basis to their estimated residual values over their expected useful lives. Computer equipment is depreciated over three years. Computer software costs are written off as incurred to the Income and Expenditure Account, except for purchases in respect of major systems. In such cases, the costs are depreciated over three years. Office furniture, fittings and equipment are depreciated over five years. d) Foreign currency transactions during the year have been translated at the rates of exchange ruling at the dates of the transactions. Any profits or losses arising from such translations into Sterling are accounted for in the Income and Expenditure Account. e) Costs incurred as the result of investigations and litigation, and any cost recoveries, are accounted for in the year when the obligation exists at the balance sheet date. f) All leases are operating leases, and the annual rentals are charged to operating expenses on a straight line basis over the term of the lease. g) The contribution to the States of Jersey is shown as a deduction from total income in order to reflect clearly the amount available to fund the activities of the Commission. 2. Related party transactions Whilst there are transactions on an arm s length basis between the Commission and the States of Jersey, it is not considered that these are related party transactions. However, Jacqueline Richomme is a Commissioner and also a partner of Mourant du Feu & Jeune, and Andrew Winckler is a Commissioner and also a partner of Ernst & Young. Similarly, Frederik Musch is a Commissioner and also the Chairman of the Global Financial Services Regulatory Practice at PricewaterhouseCoopers. During the year the Commission used Mourant du Feu & Jeune, Ernst & Young and PricewaterhouseCoopers to provide certain legal and professional services. These were contracted on an arm s length basis, and are not considered to be significant in the context of the business of the parties. 3. Taxation The Commission is exempt from the provisions of the Income Tax (Jersey) Law 1961, as amended. 36 ANNUAL REPORT 2004

39 NOTES TO THE FINANCIAL STATEMENTS 4. Income ooo ooo a) Regulatory fees Banking Insurance Funds 1,845 1,668 Investment business 1,010 1,008 Trust companies 2,016 1,675 b) Registry fees 6,172 5,715 Registry fees comprise income derived from the operation of the Companies Registry, the Business Names Registry, the Registry of Limited Partnerships and the Registry of Limited Liability Partnerships. c) Regulatory fees received in advance 31 December 31 December ooo ooo Banking 1, Insurance Funds Investment business Trust companies ,926 2, Investigation and litigation costs As part of its regulatory responsibilities the Commission carries out investigations and enters into legal actions from time to time, the costs of which may be significant. The costs of each investigation or legal action may arise over a number of years, and are accounted for in the year when the obligation exists at the balance sheet date. In a few cases, some or all of the Commission s costs may be recoverable although not necessarily in the same financial year as the expenditure. In such cases the recovery is recognised when received. Net costs incurred during 2004 amounted to 900,000, ( ,000). ANNUAL REPORT

40 NOTES TO THE FINANCIAL STATEMENTS 6. Creditors and provisions ooo ooo General expense creditors Accruals Provisions Tangible assets Office Computer Total Furniture Equipment Fittings & Equipment ooo ooo ooo Cost of assets at 1 January ,741 2,249 Additions during year Disposals during year (83) (68) (151) Cost at 31 December ,011 2,471 Depreciation at 1 January ,252 1,696 Charged during year Eliminated on disposals (83) (68) (151) Depreciation at 31 December ,477 1,869 Net book value at 31 December Net book value at 31 December Financial commitments The Commission leases a property for its own occupation. The annual rentals payable under this operating lease are: ooo Leasehold with an expiry date between two and five years ANNUAL REPORT 2004

41 NOTES TO THE FINANCIAL STATEMENTS 9. Commissioners remuneration Fees paid to Commissioners were as follows: Colin Powell Chairman 41,250 41,250 Richard Pirouet Deputy Chairman 22,000 22,000 David Carse (appointed 6 February 2004) nil n/a Michael Clapham 16,500 16,500 Scott Dobbie 25,000 25,000 Frederik Musch 25,000 25,000 Richard Pratt (resigned 13 October 2003) n/a nil Jacqueline Richomme 16,500 16,500 John Tibbo 16,500 16,500 Andrew Winckler 25,000 25,000 David Carse is the Director General of the Commission, but he was not appointed as a Commissioner until 6 February During the year he was paid no fees as a Commissioner, but received total remuneration of 205,000, including pension contributions, during the year ( 33,000 during the period from 3 November 2003 to 31 December 2003) in his capacity as Director General. Richard Pratt was the Director General of the Commission until 13 October He was paid no fees during the period as a Commissioner, but received total remuneration of 209,000 in 2003, including pension contributions, in his capacity as Director General. 10. Pension costs a) Staff initially employed by the Commission before 1 January 1999 are members of the Public Employees Contributory Retirement Scheme ( PECRS ), which is a defined benefit pension scheme whose assets are held separately from those of the States of Jersey. Contribution rates are determined by an independent actuary so as to spread the costs of providing benefits over the members expected service lives. Salaries and emoluments include pension contributions for staff to this scheme amounting to 129,000 ( ,000). The decrease is due to staff retiring during the year. The Commission has adopted Financial Reporting Standard 17 Retirement Benefits ( FRS 17 ) in the year. Since the Commission is unable to readily identify its share of the underlying assets and liabilities of the PECRS, being a multi-employer scheme under FRS 17, contributions to the scheme will continue to be accounted for as if they were contributions to a defined contribution scheme. Consequently the adoption of FRS 17 does not affect the results for the current or preceding year. Actuarial valuations are performed on a triennial basis, the most recent being at 31 December The main purposes of the valuation are to review the operation of the scheme, to report on its financial condition, and to confirm the adequacy of the contributions to support the scheme benefits. The following assumptions have had the most significant effect on the result of the valuation: Investment returns will be 3.75% pa above UK inflation; Increases to pensions in payment and deferred pensions will be at UK inflation plus a 0.5% pa margin; General salary increases and the total scheme pensionable payroll will be 2% pa above UK inflation plus a further 0.5% pa margin; Long term investment returns on index-linked gilts will be 3% pa above UK inflation; Long term dividend yields on equities will be 2.75% pa for UK equities and 2.25% pa for overseas equities. ANNUAL REPORT

42 NOTES TO THE FINANCIAL STATEMENTS 10. Pension costs (continued) The conclusion of the latest valuation is that there is a deficiency in the scheme assets at the valuation date of million, although subsequent actions have reduced this deficiency to 78.1 million. In addition to this, there is a debt of 178 million due to the scheme from participating employers that relates to the period pre The Committee of Management has indicated that it believes the Commission s share of this debt to be approximately 1.5 million as at 31 December In order to comply with Financial Reporting Standard 12, Contingent Liabilities and Contingent Assets, full provision of the 1.5 million has been made because a possible obligation was deemed more likely than not to have existed at the Balance Sheet date. The Commission has made the provision although it continues to reserve its position with respect to this possible obligation. Agreement has been reached between the States of Jersey and the Committee of Management concerning the future action needed to deal with the debt, and the consequent amended scheme regulations are awaited. For the period up to 31 December 2004, the Commission has made contributions of 15.16% of salary to the scheme. For 2005 and beyond, the Commission is awaiting the amended scheme regulations with regard to the future contribution rate and any retrospective contributions that may be payable. Copies of the latest Annual Accounts of the scheme, and of the States of Jersey, may be obtained from the States Treasury, Cyril Le Marquand House, The Parade, St Helier JE4 8UL. b) Staff initially employed by the Commission after 1 January 1999 are members of the Jersey Financial Services Commission Staff Pension Scheme, which is a defined contribution scheme whose assets are held separately from those of the Commission. The Commission has appointed independent managers for the management of the investments, and for the administration of the scheme. Salaries and emoluments include pension contributions for staff to this scheme amounting to 176,000 ( ,000). The decrease is due to a member of staff leaving during the year. Particulars of the scheme may be obtained from The Secretary, Jersey Financial Services Commission, PO Box 267, Nelson House, David Place, St Helier JE4 8TP. 11. Interest in wholly-owned companies The Jersey Financial Services Commission has two wholly owned companies, JFSC Property Holding No.1 Limited and JFSC Property Holding No.2 Limited. JFSC Property Holding No.1 Limited is dormant. JFSC Property Holding No.2 Limited holds title to a residential property occupied by an employee of the Commission. An agreement exists between the occupier and the Commission transferring all the risks and rewards associated with this property to the occupier. The purchase cost has been provided to the company by the occupier, and the occupier will bear all future expenses associated with the property. As a result of the above, the two subsidiaries have not been consolidated, and no investment has been recorded in the balance sheet. 40 ANNUAL REPORT 2004

43 CORPORATE GOVERNANCE Introduction The Commission is committed to achieving high standards of corporate governance and, to this end, regards the Combined Code (the Code ) issued by the United Kingdom s Financial Reporting Council in July 2003 as the model of best practice which the Commission should follow. The Code is primarily designed for listed companies and some of the provisions in it (principally the provisions on shareholder relations) are therefore not applicable to a public body carrying out regulatory functions such as the Commission. The Commission complies with the provisions of the Code to the extent that compliance is proportionate and consistent with the Commission s responsibilities as a regulator. Constitution of the Commission The Commission is a statutory body corporate established under Article 2 of the Financial Services Commission (Jersey) Law 1998 (the FSC Law ). The governing body comprises a Board of Commissioners. The Board of Commissioners is responsible for setting the strategic aims of the Commission and ensuring that the necessary financial and human resources are in place for the Commission to meet its objectives. Functions of the Commission The functions of the Commission are set out in Article 5 of the FSC Law which states that the Commission shall be responsible for: (a) the supervision and development of financial services provided in or from within the Island; (b) providing the States of Jersey, any Committee of the States or any other public body with reports, advice, assistance and information in relation to any matter connected with financial services; (c) preparing and submitting to the Economic Development Committee ( EDC ) recommendations for the introduction, amendment or replacement of legislation appertaining to financial services, companies and other forms of business structure; and (d) such functions in relation to financial services or such incidental or ancillary matters: (i) as are required or authorized by or under any enactment; or (ii) as the States may, by Regulations, transfer. Constitution of the Board Article 13 of the FSC Law requires the Board to consist of a Chairman and not less than six other Commissioners. Currently, the Board consists of a Chairman, Deputy Chairman and seven other Commissioners. One Commissioner is the Director General of the Commission; all other Commissioners are non-executive. Six of the Commissioners live in Jersey, two in the United Kingdom, and one in Belgium. Article 3 of the FSC Law requires the Commissioners to include: (a) persons with experience of the type of financial services supervised by the Commission; (b) regular users on their own account or on behalf of others, or representatives of those users, of financial services of any kind supervised by the Commission; and (c) individuals representing the public interest. ANNUAL REPORT

44 CORPORATE GOVERNANCE The Board is satisfied that the Commissioners meet these requirements. The current membership of the Board is shown in the chapter entitled The Commissioners. The roles of the chairman and chief executive (Director General) are split and their respective responsibilities are distinct. The Chairman is responsible for the running of the Board s business and the Director General has executive responsibility for the running of the Commission s day-to-day business. The Deputy Chairman of the Board is considered by the Board to be its de facto Senior Independent Director as described in the Code. Vacancies which arise on the Board are filled through the use of an open and transparent process. The Board follows the procedures recommended by the Jersey Appointments Commission a body set up by the States of Jersey to overview all public sector appointments. A vacancy is always advertised and once a suitable candidate is identified a recommendation is made to the EDC. Under the provisions of the FSC Law, the appointment of Commissioners is a matter reserved for decision by the States of Jersey. If the EDC is satisfied with the Commission s recommendation, the EDC will take an appropriate proposition to the States for debate. On appointment, a Commissioner will receive induction to the work of the Board and each division of the Commission. This includes an opportunity to meet senior staff in each division. Under the provisions of the FSC Law, Commissioners are appointed for terms not exceeding three years and, upon expiry of their term of office, are eligible for reappointment. During the latter part of 2004, the Board took the decision to establish a nominations committee to lead the process for making recommendations on the appointment of Commissioners. Such a committee, with formal terms of reference, will be constituted during Operation of the Board The Board usually meets at least eleven times a year and will hold additional meetings when circumstances require it. In advance of each meeting, Commissioners are provided with comprehensive briefing papers on the items under consideration. The Board is supported by the Commission Secretary who attends and minutes all meetings of the Board. During 2004 the Board of Commissioners met 11 times. Attendance was as follows: Colin Powell 10/11 Richard Pirouet 11/11 David Carse 11/11 Michael Clapham 10/11 Scott Dobbie 11/11 Frederik Musch 6/11 Jacqueline Richomme 9/11 John Tibbo 9/11 Andrew Winckler 11/11 Article 10 of the FSC Law empowers the Board of Commissioners to delegate any of its powers to the Chairman, one or more Commissioners, or an officer of the Commission. However, the Board has decided to retain to itself those powers that could have a highly significant effect on the achievement of its key purposes or on the finances or reputation of the Commission. 42 ANNUAL REPORT 2004

45 CORPORATE GOVERNANCE In particular, in relation to licensing decisions, the Board has retained those powers which relate to: the authorisation of all new business applicants under the Banking Business (Jersey) Law 1991; the refusal of an application or the revocation of a permit, registration, etc., under the four regulatory laws (except in certain limited circumstances, for example where the revocation of a permit, registration or similar is at the request of the registered person). The Board has adopted a policy statement which sets out in detail which powers the Board has retained to itself and those powers which it has delegated to the Executive of the Commission. The full text of the policy statement can be viewed on the Commission s website ( On an annual basis, the Board holds an Away Day. This event, which is also attended by the Director General, Deputy Director General and divisional Directors, is an opportunity for the Board to conduct a frank evaluation of its performance during the year and discuss possible changes to its modus operandi. The Away Day also provides an opportunity to discuss strategic issues for the year ahead. The Board maintains a rolling three-year business plan and an annual budget. In the last quarter of each year, the Executive of the Commission prepares a draft business plan and budget incorporating, amongst other things, any strategic issues raised by the Board at its annual Away Day. The draft business plan and budget is considered by the Board in December of each year. The Commission publishes an abridged version of the detailed internal Business Plan used by the Commission s staff for comprehensive planning and monitoring purposes. The Board monitors performance against the objectives set in the business plan by reviewing regular reports from the Executive. These reports are considered at the Board s regular meetings at which the various Directors are present and available to answer any questions that Commissioners may have. Performance against budget is monitored by the presentation of quarterly management accounts to the Board and ad-hoc financial presentations as and when appropriate. The Board monitored key risks during 2004 in compliance with the guidance, Internal Control: Guidance for Directors on the Combined Code (the Turnbull Guidance ). The Board maintains a Risk Management Schedule which identifies the risks faced by the Commission and the controls that are in place to keep each risk within an acceptable level. Risks are identified by division and regular reports submitted to the Board to enable it to ensure that appropriate controls have remained in place. Committees of the Board The Board has established two committees: an Audit Committee and a Remuneration Committee. The members of those committees are appointed by the Board. The key duties of the Audit Committee are: to review annually the Commission s application of corporate governance best practice; to review the Commission s Risk Management Schedule, prepared in line with the Turnbull Guidance, and the mechanisms for ensuring the effectiveness of the Commission s internal controls; and to consider certain matters relating to the external audit of the Commission s annual financial statements (including reviewing those financial statements prior to their consideration by the Board). Whilst the Audit Committee s terms of reference include the consideration of the annual appointment of the external auditor, the actual appointment of the auditor is a matter reserved to the EDC under Article 20 of the FSC Law. ANNUAL REPORT

46 CORPORATE GOVERNANCE The members of the Audit Committee during 2004 were Andrew Winckler (Chairman), Scott Dobbie and John Tibbo. The Audit Committee met three times during The Audit Committee s full Terms of Reference can be obtained from the Commission s website. The key duties of the Remuneration Committee are: to set the remuneration level of the Director General; to agree the budgetary level of the annual pay review based on market remuneration analysis provided by the Director, Operations; to agree the recommendations of the Director General in respect of Directors remuneration; and to consider and agree any variations to the structure of the remuneration package that may be proposed from time to time. The members of the Remuneration Committee during 2004 were Richard Pirouet (Chairman), Andrew Winckler, David Carse and Michael Clapham (from 2 June 2004). The Director General, David Carse, stepped down from the Remuneration Committee on 2 June At no point during his time on the committee was he involved in any discussions concerning the level of his own remuneration. The Remuneration Committee met three times during The Remuneration Committee s full Terms of Reference can be obtained from the Commission s website. The procedures followed by the Commission ensure that the setting of remuneration packages for Commissioners is formal and transparent. Accountability arrangements Whilst the Commission is an independent body, it is accountable for its overall performance to the States of Jersey through the EDC. As part of its accountability arrangements, the Commission s business plan, budget and Annual Report are presented to, and discussed with, the EDC. Under Article 20 of the FSC Law, the EDC is required to lay a copy of the Annual Report before the States not later than seven months after the close of each financial year. Under powers granted by Article 11 of the FSC Law, the EDC may, after consulting the Commission and where it considers that it is necessary in the public interest to do so, give to the Commission guidance or give in writing general directions in respect of the policies to be followed by the Commission. The Commission has a duty in carrying out its functions to have regard to any guidance and to act in accordance with any directions given to it by the EDC. The Committee and the Commission have entered into a Memorandum of Understanding to clarify the circumstances and the manner in which the powers granted under Article 11 of the FSC Law would be exercised. The text of the Memorandum can be obtained from the Commission s website. 44 ANNUAL REPORT 2004

47 WEBSITE INFORMATION The Jersey Financial Services Commission website is the primary source for all key information regarding regulatory law, codes of practice, licensed business and latest information. The site includes the following information: BANKING BUSINESS Frequently Asked Questions Legislation Codes of Practice Guidance Notes Policy Guide for Applications and Fees Statistics Regulated Entities Steering Group Contact Details FUNDS & SECURITIES ISSUES Frequently Asked Questions Legislation Codes of Practice Guidance Notes Policy Guide for Applications and Fees Statistics Regulated Entities Steering Group Contact Details INSURANCE BUSINESS Frequently Asked Questions Legislation Codes of Practice Guidance Notes Policy Guide for Applications and Fees Statistics Regulated Entities Steering Groups Contact us ABOUT US Structure Board of Commissioners Contact us Complaints INVESTMENT BUSINESS Frequently Asked Questions Legislation Codes of Practice Guidance Notes Policy Guide for Applications and Fees Statistics Regulated Entities Steering Groups Contact Details TRUST COMPANY BUSINESS Frequently Asked Questions Legislation Codes of Practice Guidance Notes Policy Guide for Applications and Fees Statistics Regulated Entities Steering Group Contact Details GENERAL INFORMATION Consultation Papers Speeches Policy Statements Publications Public Statements Statistics Press Releases A CAREER WITH THE COMMISSION Why choose the Commission? Training & Development Who are we? Career Opportunities The way we do things at the Commission Current Vacancies THE REGISTRY Application Forms Companies Strike Off Process Names Search Fees Policy Guidance Notes Steering/User Groups Legislation Contact Us REGULATED ENTITIES A to Z Regulated Entities Insurance Business Banking Business Investment Business Funds & Securities Issues Trust Company Business INTERNATIONAL Introduction Membership of International Organisations Evaluations International Co-operation Sanctions Terrorism ANTI-MONEY LAUNDERING Legislation Guidance Notes Information & Publications Steering Groups LEGISLATION INVESTORS CORNER Commission Public Statements Complaints against Regulated Financial Services Providers Warnings from other Regulators Guidance Notes LINKS ANNUAL REPORT