Assessment Methodology on the implementation of the objectives and principles of securities regulation. Principles relating to market intermediaries

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1 Assessment Methodology on the implementation of the objectives and principles of securities regulation Principles relating to market intermediaries Completed by Jersey Financial Services Commission In case of any questions on this questionnaire please contact: Andrew Le Brun Director, International and Policy Tel: Fax: Web-site: December 2003

2 Principle 21: Regulation should provide for minimum entry standards for market intermediaries. Initial authorisation qualifications 21-1 Is authorisation, licensing or registration 1 required to carry on business as a market intermediary 2 in your jurisdiction? Answer 21-1: Yes. If so, 1.1 Who grants licences to market intermediaries? (If different types of market intermediaries are licensed by different authorities, please indicate the responsible authority for each type of intermediary. For example, licensing may be the responsibility of a statutory regulator or an SRO subject to oversight by a regulator.) 3 Answer : The Jersey Financial Services Commission (the Commission), which is the statutory regulator. 1.2 Describe what triggers the requirement to be licensed (e.g., is the requirement based on the type of activities carried on - "trading in securities")? Answer : Under Article 6 of the Financial Services (Jersey) Law 1998 (the FSJL) there is a requirement to be licensed where a person carries on investment business by way of business. A person carries on investment business where he is:- dealing in investments, that is, buying, selling, subscribing for or underwriting investments either as principal or agent [Class A]; undertaking discretionary investment management, that is by deciding to buy, sell or subscribe for or underwrite investments on behalf of a principal [Class B]; giving investment advice on the merits of the purchase, sale or subscription for or underwriting of investments or the exercise of a right conferred by an investment [Class C]; 1 In some jurisdictions, firms are "authorised" or "registered" instead of licensed. For the purposes of this survey, licensing generally refers to all forms of authorisation whereby the regulator gives permission to the market intermediary to carry on business. 2 The expression "market intermediary" generally includes those who are in the business of managing individual portfolios, executing orders, dealing in or distributing securities, and providing information relevant to the trading of securities. 3 In later questions, the expression "licensing authority" is generally used to refer to all those authorities identified in answer to this question. Later answers should distinguish between these different authorities where necessary. 1

3 giving investment advice on the merits of the purchase, sale or subscription for or underwriting of investments or the exercise of a right conferred by an investment [Class D] when prevented from holding client assets by a condition of registration; or investment business carried on only with respect to funds, where the funds fall outside the definition of a fund in funds legislation due to the fact that they do not raise capital through an offer to the public [Class E]. The term investments is defined in the First Schedule to the FSJL and includes shares, stock, debentures, instruments providing entitlement to shares and securities, certificates representing securities, units in a collective investment fund, options, futures, contracts for differences, long term insurance contracts and any other form of rights and interest in investments. The FSJL also provides provision for the regulation of trust and company service providers, in addition to intermediaries. 1.3 Describe in general terms the relevant statutes, regulations, policies or rules that apply to licensing. Answer : The FSJL prohibits a person from carrying out investment business in, or from within, Jersey unless the person has been registered under the FSJL (Article 6). The FSJL lays out the duties and powers of the Commission, and the rights and obligations of those intending to carry out investment business. Key provisions of the FSJL are described below. Articles 7-10 proscribe the application requirements, refusal and revocation procedures and give the Commission the power to put conditions on an intermediary s licence. An application made under Article 7 shall be in such form as the Commission determines and contain such information and documents as the Commission may require. Under Article 8, the Commission may refuse to license a person on a number of grounds, including where it is not satisfied that the applicant, is a fit and proper person to be registered, where it is in the best interests of person who may transact investment business with the applicant, and in order to protect the reputation and integrity of Jersey in financial and commercial matters. Article 10 provides for any person aggrieved by a refusal or revocation of a licence, or by conditions attached to his licence to appeal to the Royal Court. Articles require individuals intending to become principal persons (in summary directors, significant shareholders and those with significant influence) to give prior 2

4 notification to the Commission, which then has the power to object to an individual taking up such a position. The FSJL also provides the Commission with the authority to issue Codes of Practice to establish sound principles for the conduct of intermediaries (Article 17) The Commission has issued Codes of Practice under Article 17 which identify overriding principles for the conduct of intermediaries and specific requirements for intermediaries to meet these principles; specific requirements include the level of financial resources, insurance cover, qualifications of staff, continuing staff training requirements, compliance function, record-keeping and complaints management. The Commission has also issued a licensing policy for intermediaries. The policy requires new applicants for licences to have adequate stature and a regulatory and audit track record in an acceptable jurisdiction. The licensing policy also requires real presence; management and control of the intermediary must be based in Jersey, be actively engaged in the business and be properly accountable to the Commission for regulatory matters. Commission policy with regards to real presence requirements for staff, premises, records and accounts are also detailed in the of the licensing policy. The Commission has released an outsourcing policy which establishes the requirements for, and means by which regulated activities may be outsourced. Intermediaries will not be licensed where they propose to outsource activities in a manner which does not comply with the policy. The outsourcing policy contains five core principles: Before a Registered Person outsources any material part of its regulated functions it must first ensure that the delegatee is fit and proper and can fulfill the task in a responsible, professional and suitable manner. A Registered Person must have a written agreement with the delegatee that clearly specifies the terms of engagement and the levels of service to be provided by the delegatee. A Registered Person must retain sufficient capacity (i.e. skills and knowledge) to be able to assess whether the outsourced activity is being performed adequately. It must also have or retain adequate resources and establish procedures, including compliance plans, to be able to monitor the performance of the delegatee. A Registered Person must be able to terminate the delegation and have contingency plans for making alternative arrangements for the performance of the outsourced function. 3

5 A Registered Person must inform the Commission in writing of its intention to outsource any material part of its regulated functions within a reasonable time to allow the Commission to consider the proposal and to raise any concerns. 1.4 Describe the extent, if any, to which the licensing authority relies on judgments made by others, such as SROs or regulators or supervisors in other jurisdictions or financial sectors. Answer : The Commission does not rely on the judgments of other regulatory bodies. The FSJL requires all persons carrying out investment business, as defined by Article 2(2) of the FSJL, to apply for a licence to carry out such business if they are operating in or from within Jersey. Regulatory track record is however considered as one component of a person s integrity and competence which will influence the Commission s licensing decision, along with factors such as experience of key employees, structure, organisation, financial standing and business plan Are there clear minimum standards or criteria that all applicants for licensing must meet before a licence is granted or are there general guidelines with no minimum standards or criteria? Answer 21-2: Yes. The minimum standards are defined in the FSJL, the Investment Business Codes of Practice (the Codes) and the Commission s licensing policy statement. The Commission has also issued guidance on the requirements for the span of control for management within an investment business. If there are minimum standards or criteria: 2.1 Are these requirements publicly available? Answer : Yes. The FSJL is available from the States of Jersey (the Island s government) bookshop and is published on the Jersey Legal Information Board website [ The Codes and additional policy statements and guidance are published on the Commission s website [ which also contains a link to the FSJL published on the Jersey Legal Information Board website. 2.2 Please indicate how these minimum standards are set (e.g., by legislation or regulation, guidelines or rules established by the regulator or SRO). Answer : The FSJL is primary legislation. The Codes have been issued by the Commission under the authority given to the Commission in Article 17 of the FSJL. The FSJL 4

6 states that in any proceedings under the FSJL, the Codes shall be admissible in evidence if they appear to the court conducting the proceedings to be relevant to any question and shall be taken into account in determining any such question [Article 17(4)]. Article 17 includes a legal requirement to consult with such persons or bodies as appear to be representative of interests concerned. Commission policy and guidance is issued under the authority given to the Commission by Article 12 [Publication of information and advice] of the Financial Services Commission (Jersey) Law Policy and procedures are developed in line with a published consultation policy. 2.3 Describe in general terms, the minimum entry standards for each category of intermediary, if applicable. Answer : Article 8 of the FSJL lays out the grounds by which the Commission assesses licence applications, and by which applications can be refused or existing licences revoked. The key factors which the Commission may have regard to when assessing the fit and proper status of an intermediary as set out in Article 8 of the FSJL are the integrity, competence, financial standing, structure and organization of the applicant or registered person, principal persons and employees of the applicant or registered person and anyone associated with the applicant or registered person for the purposes of his business. The Commission may also have regard to the description of business proposed when considering an application or assessing satisfaction of ongoing licensing criteria. Principal persons in relation to an applicant for a licence or a registered person are defined in Article 1 of the FSJL and include the proprietor of a sole trader, a shareholder who directly or indirectly (either alone or with associates) holds 10% or more of the share capital issued or 10% or more of the voting power, a person who is able to exercise significant influence over the management of the company, a director or shadow director and a partner of a partnership, where the structure of the intermediary is a partnership. The general factors described in Article 8 of the FSJL are interpreted in Orders (secondary legislation) issued under the FSJL, the investment business Codes of Practice and Commission policy statements. The Codes build on these factors by laying out general principles and specific requirements for intermediaries. Where the Commission has reason to believe that at any time there has been a failure on the part of a registered person or an applicant to follow the Codes, it may revoke the registration or refuse to register the applicant. The first six sections of the Codes 5

7 apply to all licence-holders, with the exception of Class E licence-holders, and section seven to Class E holders only. In particular, do the standards include an assessment of whether the applicant has: a. the appropriate financial resources to carry on the proposed business, such as (i) (ii) the minimum capital requirements are met; there are additional capital resources available to meet the continuing demands of the business; Answer a: The minimum capital requirements, defined in section 5 of the Codes, are 25,000 paid up share capital, or evidenced net assets for non-incorporated entities; where the intermediary is an advisory only business and is restricted by a licence condition from holding client assets, section 5 of the Codes relaxes the capital requirement to a minimum of 10,000 paid up share capital. Additional capital resources are required by section 5 of the Codes. The calculation requires an intermediary to take into account liquid assets only and to calculate total resource requirements, which are composed of annual expenditure requirements and risk requirements for position risk, counterparty risk and foreign currency risk. The means of calculation of additional capital resources is described in the First Schedule to the Codes. The calculation must be performed daily by the intermediary. Advisory only businesses that are prevented by a licence condition from holding client assets are required to maintain sufficient assets to meet liabilities as they fall due. In addition, there are specific notification requirements for all intermediaries, with the exception of those advisory only businesses prohibited from holding client assets, where the intermediary must notify the Commission:- if the ratio of adjusted net liquid assets to total resource requirements falls below a specified threshold; of any single significant contingency, financial commitment or large exposure exceeding 25% of adjusted net liquid assets; and of any instrument, transaction or situation that is not catered for in the First Schedule to the Codes, which determines how the calculation of additional capital resources is to be carried out. The Codes also require a certain level of professional indemnity insurance, depending on the level of assets under management and the level of fee income, but subject to a minimum aggregate cover of 1 million. 6

8 Applicants are required to satisfy these requirements at the application stage and on an ongoing basis. b. adequate operational systems and controls for the businesses it proposes to carry on, such as proper books and records, internal controls, risk management, and supervisory systems; Answer b: The principles established by the Codes requires that an intermediary:- conducts its business with integrity; must organize and controls its affairs effectively for the proper performance of its business activities; and must be able to demonstrate the existence of adequate risk management systems. The Codes require that to comply with these principles, an intermediary must:- vet directors, senior managers and all other staff, self-employed representatives and agents to ensure that they are fit and proper for their roles; have procedures in place to monitor working practices, competence and probity of its directors, senior managers and other staff; apportion responsibilities among senior managers and directors clearly and so that the business is adequately monitored and controlled at senior management and board level; operate robust arrangements for meeting the requirements of the regulatory system, including adequate supervision of employees, dual or multiple authorizations for handling clients assets and for guarding against involvement in financial crime; and keep adequate and orderly records of its business and internal organization. Section 3.6 of the Codes requires all intermediaries to appoint an appropriately qualified individual to the position of compliance officer; the compliance officer s responsibilities are to ensure robust arrangements are in place for compliance with regulatory requirements, securing appropriate monitoring of operational performance and instigating prompt action to remedy any deficiencies. The Codes require that intermediaries be directed by at least three appropriately qualified and experienced individuals (the six eyes principal) or by at least two appropriately qualified and experienced individuals where the intermediary conducts advisory only business and is prevented from holding client assets through a licence condition. 7

9 The Codes also specify required minimum qualifications and experience for employees acting in the role of investment advisors, discretionary investment managers or dealers, and their immediate supervisors. Section 3.8 of the Codes lays out the record-keeping requirements for intermediaries, which includes records of the apportionment of responsibilities between senior management, records of controls and of compliance procedures. There is an obligation for records to be kept in Jersey and to be retained for at least 10 years. c. senior management, with the appropriate knowledge, resources, skills and ethical attitude (including a consideration of past conduct) necessary to perform their proposed roles; 4 Answer c: Where senior management occupy the position of director, shadow director, or are persons in accordance with whose directions any director of the intermediary is accustomed to act, they will be treated as being principal persons by the provisions of the FSJL. Under these circumstances the response given in answer d&e applies. In practice, due to the comparatively small size of Jersey intermediaries, the majority of senior management will also be principal persons. In addition to principal persons, the compliance officer (required by the Codes) and money laundering reporting officer (required by anti-money laundering legislation) are also vetted by the Commission and are required to submit a long form personal questionnaire. The Commission requires that both positions be held by members of senior management. The long form personal questionnaire asks for details of previous employment, qualifications and regulatory and criminal background. Article 8(3) enables the Commission to have regard to persons employed by or associated with the intermediary for the purposes of its business, when assessing whether the intermediary is fit and proper both to be licensed and to meet ongoing licensing criteria. The Commission will typically meet with senior management of an intermediary during the application process. Onsite supervisory visits are also undertaken by the Commission, on a risk basis, to assess the fitness and properness of the business; such visits include an assessment of the competence of management and staff. 4 Many jurisdictions set out detailed criteria relating to education, training, experience and the so called fitness and properness of an applicant to be met before a person may be licensed. These criteria are intended to protect the investor. 8

10 d. directors with the appropriate knowledge, resources, skills and ethical attitude (including a consideration of past conduct) necessary to perform their proposed roles; Answer d: Refer to Answer e. e. substantial owners/shareholders with the appropriate resources and ethical attitude (including a consideration of past conduct) necessary to perform their proposed roles. Answer d&e: The FSJL permits the Commission to have regard to principal persons in relation to an applicant or to a registered intermediary. Principal persons, which include directors and substantial shareholders, are defined by Article 1 of the FSJL as being the proprietor of a sole trader, a shareholder who directly or indirectly (either alone or with associates) holds 10% or more of the share capital issued or 10% or more of the voting power, a person who is able to exercise significant influence over the management of the company, a director or shadow director and a partner of a partnership, where the structure of the intermediary is a partnership. There is a direct requirement for principal persons in relation to an applicant to be approved by the Commission. Article 12 of the FSJL requires all persons intending to become a principal person in relation to a registered intermediary to notify the Commission of this intention in advance. The notification requirement includes advance notification of an intention to increase or dispose of a shareholding through the thresholds of 20%, 33% and 50%. On receipt of a notice of an intention to become a principal person, the Commission is given the authority, in Article 12(8) of the FSJL, to require the person concerned or the intermediary to provide such additional information or documents as the Commission requires in order to decide whether to serve a notice of objection. The Commission has the right under Article 11 of the FSJL to object to a principal person and to changes in shareholdings and to issue a notice of objection directing that the person ceases to be or to become a principal person or shareholder of the intermediary. It is Commission practice to require individuals intending to become principal persons to complete and submit a personal questionnaire, which includes details of qualifications, experience, regulatory and criminal background. The form is comprehensive and includes a requirement to submit a copy passport and consent to undertake police and other checks. Where the person is a legal person, each of its principal persons is also required to submit a personal questionnaire. The Commission carries out due diligence checks on all such individuals, which include 9

11 police record checks and a United Kingdom based regulatory and law enforcement database check. Under Article 13 of the FSJL, it is an offence for the intermediary to fail to notify the Commission within one month of becoming aware that there has been any change in principal persons, and it is an offence for the person intending to become a principal person (or to increase or decrease a shareholding) to do so without having notified the Commission in advance. The penalty for failing to notify the Commission can be a fine, imprisonment for up to two years for the principal person, for up to six months for the intermediary or both. These legislative provisions and Commission procedures provide a means to ensure that intermediaries, and those involved in managing and controlling intermediaries meet the fit and proper requirement of Article 8(3) of the FSJL. 2.4 If there are no minimum standards or criteria, but there are general guidelines, please describe, in general terms, what is addressed in these guidelines and how they are applied. Answer : Minimum standards and criteria are described in Answer Describe, in general terms, any other factors and information that are assessed by the licensing authority during its review of an applicant. For example, if the applicant is licensed or supervised by another regulator or supervisor, would the licensing authority consult that other authority during the assessment process? Answer 21-3: Details of the applicant s auditors and business record are considered, and a three year business plan requested. Consideration of an applicant s business record includes: whether or not it carries out investment business from jurisdictions outside Jersey; whether it is regulated in another jurisdiction; whether it has been criticised, censured, disciplined, suspended, expelled, fined or subject to any disciplinary action by any regulatory or professional body; and whether it has been the subject of any bankruptcy or compulsory winding-up process Other than as described in question 21-3, does the licensing authority require individuals associated with (in direct employment, acting for or having an arrangement with) a licensed market intermediary to be licensed or otherwise approved? If yes, please describe in general terms who is required to be licensed and what requirements are applied (e.g., principals, managers, individuals whose activities are seen to raise particular concerns, such as salespersons, or those handling client assets, may be required to be licensed). 10

12 Answer 21-4: Refer to Answer d&e. Ongoing requirements There is no requirement for other individuals associated with the applicant to be approved, however the Commission has the right to refuse to register an applicant or to revoke a licence based on the suitability of persons employed by or associated with the intermediary [Article 8 of the FSJL]. The basis for such a refusal is where the intermediary is, as a result of the connection, not fit and proper or where the employee or associate has been convicted of an offence under the FSJL or any offence involving dishonesty. The Commission has the authority, under Article 7(3) of the FSJL, to ask for information concerning an intermediary s associates, as the Article allows the Commission to require such information and documents relating to the applicant and its business as the Commission deems necessary What actions may be taken where a market intermediary fails to meet ongoing requirements? (If the power to take action varies with the nature of the requirement that the intermediary has failed to meet, please indicate under what circumstance each action would be permitted.) Answer 21-5: The powers to take action are contained within the FSJL. Action may be taken as a result of breaches of primary or secondary legislation or as a result of breaches of the Codes. All the regulatory sanctions are available on breach of the Codes, where the breach indicates a failure of the intermediary to meet the requirement of being fit and proper on an ongoing basis. In particular, does the licensing authority have the power to: 5.1 suspend the intermediary's licence; Answer : See answer below. 5.2 revoke the intermediary's licence; Answer & 5.2: Yes. The Commission has authority, under Article 8 of the FSJL, to issue a licence with conditions, to refuse to register an applicant or to revoke a licence. The Commission does not require the ability to suspend a licence, since this might be achieved through a licence condition. Grounds for revoking a licence are set out in Article 8(4) of the FSJL. 11

13 5.3 impose terms and conditions on the intermediary (such as limiting the type or amount of business that may be carried on); Answer :Yes. Article 9 of the FSJL enables the Commission to attach conditions to a licence and to vary any licence conditions. There are no restrictions as to the content or purpose of conditions which may be imposed. The penalty for not complying with licence conditions is a term of imprisonment of up to two years or a fine, or both. The Commission may also apply to the Court for an Order, under Article 23 of the FSJL, which would require a person s licensed business to be subject to such supervision, restraint or conditions as the Court finds necessary. The Court has the authority to do this where the Court is satisfied that the licensed person is not fit and proper, has or is likely to breach the FSJL and where it is desirable for the protection of persons transacting investment business with the licensed person. 5.4 impose other conditions or sanctions? (Specify.) Answer :Yes. Other sanctions available to the Commission are:- the power to issue directions (Article 20); the power to make a public statement (Article 22); the power to object to a principal person or a change in share ownership (Article 11); the power to object to an increase in ownership over certain specified thresholds (Article 11); the ability for the Commission to apply to the Court for the appointment of an independent manager if there has been inadequate management of the affairs of the intermediary (Article 10A); the ability to apply to the Royal Court to issue an injunction restraining a person from committing (or, as the case may be, continuing or repeating) a contravention of paragraph 6(1) of Article 6, any condition prescribed or attached under Article 9, any provision of Articles 25, 27, or 28, any direction under Article 20, and any Regulation or Order made under the FSJL. Answer 21-6: Yes. Changes in status 21-6 Are intermediaries required to give notice to the licensing authority on the occurrence of specified events (e.g., cessation of business, change in ownership)? 12

14 If so, 6.1 Describe what events trigger a report. In particular, must a notice be given where there is a: a. significant change in the ownership of the firm; Answer (a): The Commission must be notified in advance (Article 12 of the FSJL) by any person intending to become a shareholder controller (over 10% of the issued share capital). Subsequent holding changes must be approved by the Commission in advance where they reach, exceed or fall below the thresholds of 20%, 33% or 50%. The penalty for failing to notify the Commission is a term of imprisonment of up to two years or a fine, or both. A licensed intermediary is also required (Article 12 of the FSJL) to notify the Commission within one month of becoming aware that there will be or has been a change in shareholder controller. The penalty for failure by the licensed intermediary to notify the Commission is a term of imprisonment of up to six months or a fine or both. b. change in the senior management or directors of the firm; Answer (b): The Commission must be notified in advance by any person intending to become a principal person (Article 12 of the FSJL). The term principal person is defined as including directors, shadow directors, proprietors of sole traders or partners of a partnership. The Commission has the authority to object to the appointment of a proposed principal person. The penalty for failing to notify the Commission is a term of imprisonment of up to two years or a fine, or both. A licensed intermediary is also required (Article 12 of the FSJL) to notify the Commission within one month of becoming aware that there will be or has been a change in principal person. The penalty for failure by the licensed intermediary to notify the Commission is a term of imprisonment of up to six months or a fine or both. The Codes (Section 3.6) require intermediaries to appoint a compliance officer and to notify the Commission of any change in the designated compliance officer. Section 9 of the anti-money laundering guidance notes issued by the Commission require that all financial services businesses, including intermediaries, register their money laundering reporting officers with the Commission. 13

15 c. change in the information delivered to the licensing authority during the licensing process or a material change in the intermediary's circumstances? Answer (c): Article 7(6) of the FSJL requires an applicant whose application is awaiting determination by the Commission to give written notice of any alteration to the application, or any event which may affect the application in any material respect. Section 6 of the Codes states that the licensed intermediary is expected to deal with the Commission and other authorities in an open and co-operative manner. The Codes require the licensed intermediary to advise the Commission promptly of any matter that might reasonably be expected to affect its registration or that would be in the interests of investors to disclose. Section 6 of the Codes also contains specific notification requirements. The licensed intermediary must inform the Commission at least 28 days before any changes are implemented, of the following: change in name of the licensed intermediary any business name used by the licensed intermediary to carry on investment business change in principal office of the licensed intermediary change in registered office of the licensed intermediary any other address which is to be used for the service of official documents A licensed intermediary must also inform the Commission immediately in writing of any of the following: the presentation of any application to court for bankruptcy, the winding up of the intermediary or a subsidiary or holding company of the intermediary, or the summoning of any meeting to consider such a winding up the application by any person for the start of any insolvency proceedings, appointment of a receiver, administrator or provisional liquidator under the law of any country in relation to the intermediary any arrangement or proposals for an arrangement with creditors of the intermediary where the intermediary is a partnership, any application to dissolve the partnership any disciplinary measures taken against the intermediary by another supervisory authority, investment exchange or clearing house 14

16 the conviction of the intermediary for any offence in any country under legislation concerning banking or other financial services, building societies, companies, credit unions, consumer credit, friendly societies, insolvency, insurance and industrial and provident societies, or for any offence involving fraud or dishonesty, or the imposition of any penalties for deliberate tax evasion the re-registration of an intermediary incorporated with unlimited liability as a limited liability company a general partner in an intermediary becoming a limited partner the granting or refusal of any application for, or revocation of, authorization to carry on investment, banking or insurance business in any other country or territory the granting or refusal of any application for, or revocation of, membership by the registered person of any investment exchange or clearing house the appointment of inspectors by a statutory or other regulatory authority to investigate the affairs of the intermediary any matter which would be material to the requirements of the intermediary, any of its principal persons or any of its employees to be fit and proper any other matter which would be material to the Commission s supervision of the intermediary or any of its investment employees An intermediary must also give written notice within seven days to the Commission of the following [Section 6 of the Codes]: where the intermediary is an individual, any changes in the information originally provided to the Commission on the licence application form relating to his name, good reputation or character where the intermediary is a corporate entity, the formation, acquisition, disposal or dissolution of a subsidiary specifying the subsidiary s name and its principal business where the intermediary is not a body corporate, when it acquires or disposes of a holding of more than half in nominal value of the equity share capital of a company, specifying the name of the company and its principal business An intermediary must also provide the Commission with a written report within seven days specifying any changes in information previously provided to the Commission under the following headings [Section 6 of the Codes]: branch offices anywhere in the world from which the registered person carries on investment business insurance arrangements 15

17 the countries outside Jersey in which the intermediary carries on investment business, and whether this is through a branch office, a subsidiary or otherwise 6.2 When must notice be sent? (If the required timing differs depending on the nature of the change to be reported, please explain.) Answer : See answer Indicate which, if any, of the proposed changes would require the approval or nonobjection of the licensing authority before the change becomes effective? If the decision is made by an SRO, describe what right the regulator has to review that decision. Answer : A new principal person (director or shareholder controller) requires the advance approval of the Commission [Article 12 of the FSJL]. Where a principal person intends to change his shareholding to exceed, reach or fall below the thresholds of 20%, 33% or 50%, the approval of the Commission must also be obtained in advance [Article 12 of the FSJL]. Transparency 21-7 Describe what information about licensed intermediaries is publicly available to investors. (Please indicate whether the information is made available by the regulator, SRO, or intermediary.) In particular, is there public access to the following information: 7.1. the category of licence held by an intermediary; 7.2 the scope of its permitted activities; 7.3 its financial condition/resources; 7.4 the names of its senior management; 7.5 the names of other individuals authorized to act in the name of the intermediary? Answer 21-7: The Commission publishes the following information on its website: list of all licence holders category of licence held, which defines the scope of permitted activities status of licence application, whether the licence has been granted or whether the application is still under consideration 16

18 Refusal of licenses In addition to this information, the registered office of all Jersey incorporated companies is available from the Companies Registry. All Jersey companies are required, by Article 45 of the Companies (Jersey) Law 1991, to provide any person with a list of all registered members on request. The names of senior management, details of financial resources and the names of others authorized to act in the name of the intermediary are not publicly available to investors. This information is however held by the Commission Under what circumstance does the licensing authority have the power to refuse a licence to an applicant (e.g., failure to meet minimum entry conditions, or at the authority's discretion)? Answer 21-8: Article 8(3) of the FSJL allows the Commission to refuse to grant a licence to an applicant on the grounds that: a) having regard to the information before the Commission as to the following, the Commission is not satisfied that the applicant is a fit and proper person to be registered: integrity, competence, financial standing, structure and organization of the applicant persons employed by or associated with the applicant for the purpose of his business or who are principal persons in relation to the applicant the description of the business which the applicant proposes to carry on b) the applicant has at any time and whether or not in relation to the application, in any case where information was required under the FSJL: failed to provide such information; or provided the Commission with information which was untrue or misleading in any material particular c) the applicant has at any time failed to comply with any licence condition on a current or previous application in any material respect d) the applicant or any person employed by him or associated with him for the purpose of his business has been convicted of any offence under the FSJL or of any offence involving dishonesty e) it appears to the Commission, as a result of information provided by the applicant, or other information, that the applicant should not be registered, as: 17

19 it is in the best interests of persons who may transact investment business with the applicant in order to protect the reputation and integrity of Jersey in financial and commercial matters it is in the best economic interests of Jersey f) the Commission has reason to believe that at any time there has been a failure on the part of the applicant to follow the Codes Is the licensing authority required to hold a hearing or otherwise give the applicant a right to provide additional information before a licence is refused? Are the licensing authority's decisions subject to some other form of oversight, such as independent review by a court, or other tribunal, or otherwise? (Specify.) Answer 21-9: Yes. Exemption from licensing The provisions governing the process by which a licence is refused or revoked are contained in Article 10 of the FSJL. Article 9(5) of the FSJL requires the Commission to give notice in writing that it intends to refuse or revoke a licence. Article 10(1) provides the applicant or registered person, as appropriate, with one month s notice before the licence refusal or revocation becomes effective. Article 10(3) provides the applicant with the opportunity to appeal to the Royal Court within this one month time frame where it feels that the Commission s decision was unreasonable. Where an appeal to the Court is made, the Commission s decision will not come into force until the date that the appeal is determined or withdrawn. The Commission may apply to the Court under Article 10(4) for the notice period given to applicants or registered persons to be either increased or waived; the Court has the authority to determine if this is desirable based on the interests of existing or prospective clients of the applicant or registered person. In addition, Article 10(2) allows an applicant or registered person to require the Commission to provide within 14 days a statement in writing of the Commission s reasons for refusing or revoking a licence Are there market intermediaries that may do business in your jurisdiction without licensing? If so, please explain. In particular, describe: Answer 21-10: No. 18

20 Article 6 of the FSJL requires any person undertaking financial service business [which includes investment business] in or from within Jersey to be licensed under the FSJL. However, Article 3 provides that activities described in Part I of the Second Schedule shall not be treated as investment business. Articles 6(2)(a)(ii) and (b) also provide that the FSJL shall not apply to any prescribed person, institution, or transaction, subject to such conditions restrictions as may be set who may carry on business; In line with Article 3 of the FSJL (and under circumstances and conditions established in the Second Schedule), the following activities shall not be treated as investment business. Newspapers, broadcasting and information services Executors and administrators, tuteurs and guardians Functionaries of collective investment funds Dealing as principal Dealing as agent by professional and non-investment businesses Giving advice in the course of non-investment business Instruments creating or acknowledging indebtedness Connected companies and joint enterprises Employees share schemes Issuing of shares, debentures, etc Sale of company Dealing as bare trustee Investment advice given by trustees Discretionary investment management by company directors Investment advice between directors Investment advice given by protectors Long term, insurance business by insurance companies Under Article 6(2)(a)(ii) and (b) of the FSJL, licensing exemptions apply also to insurance business, to certain overseas persons, to restricted investment business, and to special purpose investment business, though, with the exception of overseas persons, other parts of the FSJL apply. Exemptions are set out in: Financial Services (Investment Business (Insurance Business- Exemption) (Jersey) Order

21 Financial Services (Investment Business (Overseas Persons- Exemption) (Jersey) Order 2001 Financial Services (Investment Business (Restricted Investment Business- Exemption) (Jersey) Order 2001 Financial Services (Investment Business (Special Purpose Investment Business- Exemption) (Jersey) Order what activities are permitted; See answer to any applicable rules of business or market conduct; Where an exemption is held under the Financial Services (Investment Business (Insurance Business- Exemption) (Jersey) Order 2001, Codes of Practice issued under Article 17 of the FSJL are applicable any conditions or other restrictions that are applied to their activities? See answer to Do you have authority to exempt market participants from the requirement to be licensed or from one or more of the conditions of licensing? If yes, Answer 21-11: Yes Please provide the relevant text and the source of the specific statute or administrative provision that gives this authority. Answer : Article 3 of the FSJL provides for certain activities, as defined in the Second Schedule to the FSJL, to be exempt from all requirements of the FSJL. Articles 6(2)(a)(ii) and (b) also provide that the FSJL shall not apply to any prescribed person, institution, or transaction, subject to such conditions restrictions as may be set. Article 4 of the FSJL provides the Finance & Economics Committee of the States of Jersey with the power to create subordinate legislation which can vary the exemptions provided in the FSJL and subordinate legislation. 20

22 The Codes of Practice, issued by the Commission by the authority given in Article 17 of the FSJL, impose additional licensing requirements to those in the FSJL. The Commission has the authority to exempt intermediaries from the requirements of the Codes What are the policy reasons for permitting exemptions? Answer : The definition of investment business is extremely broad. Exemptions are permitted where: Activity is already regulated under other legislation, for example funds and insurance companies. An activity would otherwise be caught unintentionally, e.g. the provision of investment tips in newspapers. Investment schemes are intended solely for professional or sophisticated investors. Exceptions to specific requirements of the Codes are infrequently granted. Such exceptions are granted on a case by case basis and under controlled circumstances. In practice, where exceptions have been permitted to certain requirements of the Codes, they have been specific and accompanied by a condition on the licence which has restricted activities to operate within certain parameters compatible with the exception; for example the requirement to complete a specific professional examination may be waived by the Commission in conjunction with imposing a licence condition not to carry out business where the knowledge gained through that examination is essential Please describe, in general terms, the criteria for granting an exemption. Answer : See answer to The process for granting an exception to the Codes is an internal Commission process. The decision as to whether a specific exception will be granted is taken by the Board of Commissioners. As noted above, exceptions to the Codes are granted infrequently and as a result are specific to the circumstances of the particular intermediary. General criteria applied are that the exception be strictly defined, that the exception will have no adverse impact on the customers of the intermediary and that the intermediary s activities be restrained by appropriate licensing conditions to ensure that customers are protected. 21

23 Principle 22: There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake. 5 Nature and scope of requirements 22-1 Are capital requirements of any kind, whether initial or ongoing, imposed on market intermediaries carrying on business in your jurisdiction? Answer 22-1: Yes. If so, please describe the objective(s) of the capital requirements. If the objectives differ between initial and ongoing requirements, please note which objective(s) apply in each case. In particular, are the requirements intended to: 1.1 protect the financial system from systemic risk; Answer : Section 5 of the Codes requires a registered person to maintain and be able to demonstrate the existence of adequate risk management systems and adequate financial resources both at the licensing application stage and as an ongoing requirement. There is also a requirement to maintain professional indemnity insurance. 1.2 allow for orderly liquidation on the failure of a firm and repayment of liabilities to customers; Answer : Section 5 of the Codes, which specifies that there must be a surplus of adjusted net liquid assets over total requirements, is supplemented by the Financial Services (Appointment of a Manager) (Jersey) Order 2000, which facilities the appointment of a manager in a number of scenarios. These situations include when the market intermediary has ceased business but has failed to wind-up, liquidate, close or transfer the business in an orderly manner, or at all, where there is a need for a manager to collect, preserve or protect the assets or records of the market intermediary or the property of customers, or both and where there is a need to promote or implement a compensation scheme for customers. 1.3 ensure a firm has sufficient liquid assets to meet ongoing liabilities as they come due; 5 In this section, if applicable, you should also discuss any requirements regarding liquid or other assets to be held against risk. 22

24 Answer : Section 5 of the Codes requires a registered person to maintain and be able to demonstrate adequate financial resources. It requires a surplus of adjusted net liquid assets over total requirements. 1.4 other? (Specify.) Answer : Registered persons holding licences to deal, carry out investment management and to give investment advice with the ability to also hold client assets are required by Section 5 of the Codes of Practice to notify the Commission of the following: if the ratio of their adjusted net liquid assets to total resource requirements falls below 110%; any single significant contingency, financial commitment of large exposure exceeding 25% of its adjusted net liquid assets ; or any instrument, transaction or situation that appears not to be catered for in, or where the application of, the process for calculating financial resources might give a misleading impression of the adequacy of the financial resources Do licensing standards impose minimum initial capital on any applicant for licensing as a market intermediary? Answer 22-2: Yes. Capital requirements are described below. If yes, 2.1 What types of market intermediaries are required to have minimum initial capital? What types, if any, are not subject to these requirements? Answer : Those applying for Class A investment business licences [dealing in investments], Class B investment business licences [managing investments] and Class C investment business licences [giving investment advice] are required to have and to maintain a minimum of 25,000 paid up share capital or evidenced net assets (for non-incorporated entities) plus a surplus of adjusted net liquid assets over total resource requirements. Adjusted net liquid assets and total resource requirements must be calculated on a daily basis in accordance with the First Schedule to the Codes; total resource requirements consider the requirements needed to cover annual expenditure, position risk, counterparty risk and foreign currency risk. Those applying for Class D investment business [giving investment advice but who are prevented from holding client assets through a licence condition] are required to have and to maintain a minimum of 10,000 paid up share capital or evidenced 23