CONSULTATION PAPER NO BANKING: FINANCIAL REPORTING AND DISCLOSURES

Transcription

1 CONSULTATION PAPER NO BANKING: FINANCIAL REPORTING AND DISCLOSURES Regulatory requirements for Jersey registered deposit takers in respect of the provision of financial information and public disclosures ISSUED FEBRUARY 2010

2 CONSULTATION PAPER The Jersey Financial Services Commission (the Commission ) invites comments on this consultation paper. Jersey Finance Limited is co-ordinating all responses, which should be provided to it by 19 May Responses should be sent to: Robert Kirkby Technical Director Jersey Finance Limited 4th Floor Sir Walter Raleigh House Esplanade St Helier Jersey JE2 3QB Telephone: +44 (0) Facsimile: +44 (0) robert.kirkby@jerseyfinance.je Alternatively, responses may be sent directly to the Commission by 19 May If you require any assistance, clarification or wish to discuss any aspect of the proposal prior to formulating a response, please contact: David Fisher Senior Analyst, Banking Jersey Financial Services Commission PO Box Castle Street St Helier Jersey JE4 8TP Telephone: +44 (0) Facsimile: +44 (0) d.fisher@jerseyfsc.org It is the policy of the Commission to make the content of all responses available for public inspection unless specifically requested otherwise. 2 of 26 ISSUED FEBRUARY 2010

3 Glossary of terms bank the Banking Codes a Jersey registered deposit taker the Codes of Practice for Deposit-taking Business the Banking Law the Banking Business (Jersey) law 1991 the Commission the Jersey Financial Services Commission the Commission Law the Financial Services Commission (Jersey) Law 1998 DCS Depositor Compensation Scheme GPO Banking Business (General Provision) (Jersey) Order 2002 the Minister Minister for Economic Development Proposed Order proposed Banking Business (Reporting and Disclosure) Order 201- TCB/IB Order Financial Services (Trust Company and Investment Business (Accounts, Audits and Reports)) (Jersey) Order 2007 BANKING: REPORTING AND DISCLOSURE 3 of 26

4 Contents Glossary of terms...3 Contents EXECUTIVE SUMMARY Overview What is proposed and why? Who would be affected? CONSULTATION Basis for consultation Responding to the consultation Next steps THE COMMISSION Overview Commission s functions Guiding principles Reporting to the Commission Summary Background Issues Proposal Publication of Accounts Summary Background Issues Proposal Proposed Changes to the GPO and the Banking Codes Summary Proposed amendments COST BENEFIT ANALYSIS Costs to industry Costs to the Commission Benefits SUMMARY OF QUESTIONS...23 APPENDIX A...24 List of representative bodies who have been sent this consultation paper APPENDIX B...25 Draft changes to Section 7 of the Banking Codes, relating to the disclosure in deposit advertisements of Depositors Compensation Schemes of 26 ISSUED FEBRUARY 2010

5 1 EXECUTIVE SUMMARY 1.1 Overview This paper sets out proposals in respect of an Order - the Banking Business (Reporting and Disclosure) (Jersey) Order 201- (the Proposed Order ) - that the Jersey Financial Services Commission (the Commission ) considers should be established under the Banking Business (Jersey) Law 1991 (the Banking Law ) The Proposed Order would bring together in one Order the existing requirements for Jersey registered deposit takers ( banks ) in respect of: reporting certain financial information to the Commission; and the publication of financial accounts The Proposed Order would also establish new requirements of banks in respect of disclosures to the public, depositors and potential depositors Certain changes to the Banking Business (General Provisions) (Jersey) Order 2002 (the "GPO") and the Codes of Practice for Deposit-taking Business (the "Banking Codes") are proposed that would require disclosures regarding Depositor Compensation Schemes ("DCSs"), following the recent introduction of a DCS in Jersey. Changes are also proposed to the GPO and Banking Codes to reflect the requirements in the Proposed Order. 1.2 What is proposed and why? The Commission intends to consult with Industry during early 2010 with a view to amending the Banking Law, and other regulatory Laws, to enable the Minister for Economic Development (the Minister ) to make Orders (such as the Proposed Order) that will establish: requirements in respect of the publication of financial information; and powers to object to the appointment of an auditor These proposals are intended to establish a basis for introducing financial reporting provisions that are consistent with those for other sectors of industry and their coming into force will be dependent upon the amending Law being adopted by the States and receiving the sanction of Privy Council, the timescale for which is likely to be in the first half of The Proposed Order outlined herein will be established under the new provisions and is intended to bring together existing regulatory requirements in respect of the provision of financial accounts and prudential returns to the Commission. These are currently established either within Notices issued under Article 26 of the Banking Law or within the Banking Codes. The Order will better establish these as requirements under the Law, set out required BANKING: REPORTING AND DISCLOSURE 5 of 26

6 timescales for the provision of reports and establish public disclosure requirements The Commission intends mirroring as far as possible the provisions established by the Financial Services (Trust Company and Investment Business (Accounts, Audits and Reports)) (Jersey) Order 2007 (the TCB/IB Order ). Approximately 70% of banks are already subject to the TCB/IB Order, due to their being multi-licensed, which should reduce the impact on industry. Clearly, though, differences in the relevant Laws, Codes and reporting requirements will need to be allowed for, as described in this paper Do you agree that the Proposed Order is desirable, for the reasons given? Certain guidance will remain in place within the Banking Codes. The Codes will be amended to reflect the establishment of provisions in the Proposed Order but will also be added to, as proposed in this paper The GPO will be amended to avoid duplication Schedule 2 to the GPO, Conditions Applicable to a Deposit Advertisement, will be amended to require the disclosure of relevant DCSs and relevant provisions will be added to Section 7 of the Banking Codes in respect of the Jersey scheme In accordance with the Deposit-taking Business Fees Notice, first issued in January 2008 and last updated in February 2010, a fee of 100 per month, or part thereof, will be payable in respect of late filing of reports against the deadlines set out in the Proposed Order It is expected that compliance with the Proposed Order will be a statutory requirement, with applicable penalties subsequently to be established by the Minister The Proposed Order and associated changes to the Banking Codes and GPO will be sufficiently comprehensive to enable the rescindment of all remaining reporting Notices previously issued under Article 26 of the Banking Law. 1.3 Who would be affected? Depositors will: have greater access to information on the financial standing of banks when considering them via the Internet, which should enable a greater understanding of each bank s financial circumstance - paragraph 5.1.5; and be provided with relevant information in respect of DCSs paragraph and Appendix B. 6 of 26 ISSUED FEBRUARY 2010

7 1.3.2 Existing banks will not be significantly affected by most of these proposals as the requirements in respect of reporting to the Commission already exist Certain of the new requirements will potentially affect all banks. These include: changes to the Declaration of Compliance (timing and audit) paragraph 4.1.3; disclosure of information relating to the parent bank paragraphs and 5.1.4; publication on the Internet of financial accounts paragraph 5.1.5; changes regarding the publication of summarised accounts paragraph 5.1.6; and the disclosure of relevant DCSs paragraphs (GPO), (Banking Codes) and Appendix B All other persons that issue local deposit advertisements in Jersey will be impacted by the requirement to disclose relevant DCSs in such advertisements see paragraph (GPO) Requirements in respect of auditors of banks are broadly unchanged, save that they will be required to produce a report regarding the declaration of compliance. BANKING: REPORTING AND DISCLOSURE 7 of 26

8 2 CONSULTATION 2.1 Basis for consultation The Commission has issued this consultation paper in accordance with Article 8(3) of the Financial Services Commission (Jersey) Law 1998 (the Commission Law ), as amended, under which the Commission may, in connection with the carrying out of its functions -.consult and seek the advice of such persons or bodies whether inside or outside Jersey as it considers appropriate. 2.2 Responding to the consultation The Commission invites comments in writing from interested parties on the proposals included in this consultation paper. Where comments are made by an industry body or association, that body or association should also provide a summary of the type of individuals and/or institutions that it represents To assist in analysing responses to the consultation paper, respondents are asked to: 2.3 Next steps prioritise comments and to indicate their relative importance; and respond as specifically as possible and, where they refer to costs, to quantify those costs A period of three months, i.e. until 19 May 2010, has been allowed for feedback from interested parties. Following analysis of the responses to this Consultation Paper, the changes outlined in paragraph 6.2.8, regarding adding requirements to the Banking Codes in respect of DCSs will be made, which it is intended should take effect from 1 July Is July 2010 a reasonable timescale for implementing the Banking Codes changes in respect of DCSs? Drafts of the Proposed Order, the amended GPO and Banking Codes will be produced and made available for further consultation. This will partially be impacted by the availability of law drafting time and progress with respect to the enactment of connected enabling provisions in the Banking Law (as set out in paragraph 1.2.1) Subject to the approval of the Board of Commissioners, the Proposed Order and amended GPO will be recommended to the Minister. In the event that the Minister makes these Orders, it is intended that they will come into effect during For most banks, this will mean that the financial accounts and reports produced in respect of December 2011 will be the first to be subject to these requirements. 8 of 26 ISSUED FEBRUARY 2010

9 2.3.6 The relevant consequential amendments to the Banking Codes will come into effect on the same date as the related Orders Is 2011 a reasonable timescale for implementing the other changes proposed in this paper? BANKING: REPORTING AND DISCLOSURE 9 of 26

10 3 THE COMMISSION 3.1 Overview The Commission is a statutory body corporate established under the Commission Law. It is responsible for the supervision and development of financial services provided in or from within Jersey. 3.2 Commission s functions The Commission Law prescribes that the Commission shall be responsible for: the supervision and development of financial services provided in or from within Jersey; providing the States, any Minister or any other public body with reports, advice, assistance and information in relation to any matter connected with financial services; preparing and submitting to the Minister recommendations for the introduction, amendment or replacement of legislation appertaining to financial services, companies and other forms of business structure; such functions in relation to financial services or such incidental or ancillary matters as are required or authorised by or under any enactment, or as the States may, by Regulations, transfer; and such other functions as are conferred on the Commission by any other Law or enactment. 3.3 Guiding principles The Commission s guiding principles require it to have particular regard to: the reduction of risk to the public of financial loss due to dishonesty, incompetence, malpractice, or the financial unsoundness of financial service providers; the protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters; the best economic interests of Jersey; and the need to counter financial crime in both Jersey and elsewhere. 10 of 26 ISSUED FEBRUARY 2010

11 4 Reporting to the Commission 4.1 Summary Requirements for ongoing regulatory reporting to the Commission by banks will be established by the Proposed Order, rather than the current Banking Codes and Notice requirements The Proposed Order will specify reporting requirements and timescales for submission, with detailed specifications to be set out in the amended Banking Codes It is proposed that the timing of the submission of the existing annual Declaration of Compliance with relevant regulations is moved to coincide with the submission of year-end financial accounts and that it is certified by the bank s auditor, in line with existing regulatory requirements for other financial business sectors. 4.2 Background Six Notices have previously been issued under Article 26 of the Banking Law by the Financial Services Department, the predecessor of the Commission, summarised as follows: Notice 1: expired; Notice 2: prudential reporting requirements from 1 February 1992; Notice 3: year-end audit certification of the prudential return; Notice 4: published financial accounts; Notice 5: expired; and Notice 6: requirement for certification of interim profits if the bank requires them to be included in regulatory capital before year-end Article 11(3)(d) of the GPO establishes, as a general condition of registration, that all banks incorporated in Jersey are required to submit their audited financial accounts to the Commission within three months of their financial year-end The Banking Codes establish a wide range of reporting requirements, including some that overlap with Notice requirements, in respect of the: quarterly submission of prudential returns within 20 working days of the quarter-end date, plus supporting paperwork within an additional five working days; annual submission of audited financial accounts of Jersey incorporated banks within three months of their financial year-ends; BANKING: REPORTING AND DISCLOSURE 11 of 26

12 in the case of a branch, annual submission of audited financial accounts for the legal entity within three months of its financial yearend; annual submission of auditor-certified prudential returns within three months of the financial year-end. For a bank incorporated in Jersey, this must include a reconciliation to its audited financial accounts; and annual submission of audited financial accounts for the ultimate parent bank and all other parent entities, including holding companies, within four months of their financial year-ends The TCB/IB Order establishes a more detailed set of reporting requirements, which are relevant for most banks as they tend also to be registered to conduct related business. 4.3 Issues The Deposit-taking Business Fees Notice sets out the circumstances under which a fee may be levied by the Commission in respect of late submissions. However, the lack of established practice (in respect of charging fees) and the wide range of existent requirements of banks to provide data to the Commission, give rise to a lack of clarity regarding the specific circumstances in which an entity may definitely expect a fee to be levied All the Notices are out of date. For example, they do not refer to the Commission, as they were issued by the Financial Services Department and refer to the international accounting standard IAS 30 Disclosures in Financial Statements of Banks and Similar Financial Institutions", which was superseded by the (very different in nature) international financial reporting standard IFRS 7 Financial Instruments: Disclosures from 1 January The Commission considers that the TCB/IB Order includes certain requirements that should apply to all banks. 4.4 Proposal The Commission proposes the issue of a Reporting and Accounts Order to establish the following reporting requirements for each bank: annual submission of the audited financial accounts of the bank within three months of its financial year-end. If the bank is a branch of an overseas company, this refers to the financial accounts of that company; submission, at the same time as the above, of all other relevant auditor/consultant reports that relate to the reporting period in question; quarterly submission of the prudential return within 20 working days of the quarter-end, plus supporting paperwork within an additional five working days; 12 of 26 ISSUED FEBRUARY 2010

13 a prudential return as at the bank s financial year-end, if that yearend does not coincide with a quarter-end date, within 20 working days of the year-end; annual submission of auditor certification of the prudential return that coincides with the bank s financial year-end, within three months of that date. For Jersey incorporated banks, this must include a reconciliation to the financial accounts; submission, at the same time as the above, of an auditor certified declaration of compliance with the Banking Law, relevant Orders, Banking Codes, legislation in respect of the prevention of moneylaundering and the funding of terrorism, and relevant guidance issued by the Commission. This would replace the annual declaration required in conjunction with each request for reregistration, in accordance with the Banking Codes, paragraph 6.4; in connection with , and , a bank that is incorporated in Jersey will be required to provide its external auditor with true copies of its: financial accounts; directors report; declaration of compliance; and the prudential return that coincides with its financial year-end; in connection with , a bank that is a branch of an overseas bank will be required to provide the company s external auditor with true copies of its: financial accounts; directors report; and in connection with and , to provide the branch s external auditor with true copies of its: declaration of compliance; and the prudential return that coincides with its financial year-end; the bank s external auditor will be required to prepare reports, in connection with its audit of the bank, which must, unless the Commission otherwise agrees, be prepared in accordance with the International Standards on Auditing (U.K. and Ireland) issued by the Auditing Practices Board, concerning the: financial accounts; and directors report. BANKING: REPORTING AND DISCLOSURE 13 of 26

14 annual submission of: audited unconsolidated financial accounts of all banks parent companies; and the relevant audited group financial accounts within four months of the financial year-end but provisions will be proposed for: a power for the Commission to amend the standard reporting timescale, on request from a bank, where the relevant accounts are not normally produced by the relevant company within this timescale; and a power for the Commission to waive the requirement for an audit of the accounts of intermediate companies that are not otherwise subject to a requirement to produce audited accounts The Proposed Order will allow for exemption or variance of the above requirements, in addition to the specific measures in Transitional provisions will be proposed to allow for the grandfathering of variances previously granted by the Commission regarding similar current reporting requirements. In order to take advantage of this, a bank will need to notify the Commission of all such variances that it wishes to be treated in this manner within a prescribed period, before the Proposed Order comes into effect. It is intended that this period will start when the consultation regarding the draft is issued and conclude when the Proposed Order becomes effective. Therefore, no action in this respect is required at this stage Would any of the above provisions of the Proposed Order present a significant challenge? Should any other provisions be included in the Proposed Order? 14 of 26 ISSUED FEBRUARY 2010

15 5 Publication of Accounts 5.1 Summary The Proposed Order will establish requirements in respect of the publication of financial accounts, which are currently set out in the Banking Law, the GPO and Notice The core Banking Law requirement, as established in Article 32(1), will remain unchanged, this being that: A registered person shall at each of its offices in Jersey at which it holds itself out as accepting deposits (a) (b) keep a copy of its most recent audited financial accounts; and during normal business hours make that copy available for inspection by any person on request It is proposed that a bank should also keep a copy of the most recent audited financial accounts of its group and similarly make these available for inspection by depositors and potential depositors at its offices in Jersey Would any problems be caused by a requirement to provide depositors and potential depositors with group financial accounts? It is also proposed that the use of exemptions from disclosures in respect of related parties, which are normally permitted by some accounting standards, including UK GAAP, should be prohibited for Jersey incorporated banks. This is intended to enable depositors to understand the extent of a bank s exposure to its parent and other related parties What significant problems would be caused by not allowing accounting exemptions regarding related party disclosures? The Commission considers that the growth in Internet banking and other forms of non face-to-face banking has generated a need to make banks financial accounts available to depositors via the Internet. It is therefore proposed that banks also make financial accounts available on any of their websites that contain deposit-taking advertisements or inducements What significant challenges would be caused by a requirement to make available financial accounts on, or via, relevant websites? These proposals will not allow summarised accounts to be provided instead of full financial accounts. Hence, it is proposed that the existing rules in respect of the format of summarised financial accounts, which are established within the GPO and Notice 4, should be removed However, the Banking Codes will be amended to permit the provision to customers of information extracted from financial accounts in all other circumstances provided that the extract is not misleading, false or deceptive BANKING: REPORTING AND DISCLOSURE 15 of 26

16 5.2 Background and that an appropriate disclosure is made (see paragraph for full details). For example, this would apply to: the distribution by post of summarised accounts; and the use of extracted information within advertisements Article 32(1) of the Banking Law establishes a requirement that all banks make their financial accounts available for inspection at every office at which they conduct business The GPO establishes, as a general registration condition, that banks that are incorporated in Jersey must also publish their financial accounts within three months for the use of depositors and potential depositors and that these may either be full financial accounts or a summarised form determined by the Commission Notice 4 establishes requirements in respect of the content of summarised financial accounts. 5.3 Issues The Core Principles Methodology, re-issued by the Basel Committee on Banking Supervision in October 2006, states that the essential criteria that a supervisor must meet, to be compliant with Principle 22: Accounting and Disclosure, include the following: The supervisor requires banks to produce annual audited financial statements based on accounting principles and rules that are widely accepted internationally and have been audited in accordance with internationally accepted auditing practices and standards Laws, regulations or the supervisor require periodic public disclosures of information by banks that adequately reflect the bank s true financial condition. The requirements imposed should promote the comparability, relevance, reliability and timeliness of the information disclosed The required disclosures include both qualitative and quantitative information on a bank s financial performance, financial position, risk management strategies and practices, risk exposures, transactions with related parties, accounting policies, and basic business, management and governance. The scope and content of information provided and the level of disaggregation and detail should be commensurate with the size and complexity of a bank s operations Existing Jersey requirements fall short in three areas: Public disclosure: Existing requirements do not take into account the increased and widespread use of the Internet. It is felt that non face-to-face depositors should have similar access to a bank s financial accounts as is required to be available to those that use the 16 of 26 ISSUED FEBRUARY 2010

17 bank s offices; Financial standing: The Commission considers that the financial standing of many banks is highly dependent upon the financial standing of the group to which they belong. The financial accounts of the group are therefore relevant to depositors; and Disclosure of transactions with related parties: Accounting standards require disclosures in respect of related parties that contain information on the extent of a bank s exposure to other companies in its group. However, a Jersey registered bank may currently take advantage of exemptions allowed in certain accounting standards, including UK GAAP, from these requirements where it is part of a larger group, with little or no direct external ownership of it, as is the case with all Jersey incorporated banks The Banking Law, the GPO and the Banking Codes all contain requirements in respect of accounts and the Notices add to the possibility for confusion Notice 4 and the GPO could be interpreted as diluting the requirement in the Banking Law for subsidiaries to make available a full set of accounts at their offices. Specifically, it is possible to interpret the Notice such that summarised accounts may be distributed to depositors, including at the bank s Jersey offices, instead of the financial accounts required to be made available by Article 32(1) of the Banking Law Notice 4 refers to the international accounting standard IAS 30 in specifying the format of summarised accounts, which has been superseded by a new standard, IFRS 7, which does not specify a relevant summarised format. 5.4 Proposal The Commission considers that the availability of a bank s financial accounts and those of its group to current and potential depositors would be a proportionate measure that meets the essential criteria set out in the Core principles methodology. The provision of group accounts is necessary because of the typically high level of exposure to group companies that Jersey banks carry and because the group is likely to be relied upon as a source of financial support in the event of a Jersey incorporated bank suffering a financial crisis It is proposed that the use of related party exemptions be prohibited for Jersey incorporated banks because an understanding of these exposures is important in assessing a registered person s financial condition. Branches are subject to the disclosure requirements of their home regulator and it is therefore not proposed to extend this prohibition to their accounts The Proposed Order will establish a requirement for all banks to make available at all offices their group financial accounts in addition to their own financial accounts, as currently required by the Banking Law The Order will also require that an electronic copy of both group financial accounts and those of the bank be made available from websites that solicit deposits and are under the bank s control. BANKING: REPORTING AND DISCLOSURE 17 of 26

18 5.4.5 The above measures should ensure that depositors have appropriate access to full audited financial accounts of all banks and the groups to which they belong. In this respect, the Commission has reviewed current regulatory requirements relating to the publication and distribution of summarised accounts. Paragraph 4.2 of the Banking Codes requires that: A registered person must communicate information to customers in a way that is adequate, fair and not misleading. and paragraph 7.1 of the Banking Codes requires that: A registered person must ensure that its advertising and promotional literature is fair and not misleading A distribution to customers of summarised accounts would fall within the definition of promotional literature and it is therefore proposed that Section 7 of the Banking Codes be amended to address directly the provision to customers of information extracted from financial accounts, requiring that the extract is not misleading, false or deceptive and that an appropriate disclosure is made. See paragraph for full details. 18 of 26 ISSUED FEBRUARY 2010

19 6 Proposed Changes to the GPO and the Banking Codes 6.1 Summary The Proposed Order would supersede certain provisions of the GPO and an amended GPO is required to remove these. This would come into effect concurrently with the Proposed Order In Schedule 2 Conditions applicable to a deposit advertisement of the GPO, Condition 4, Deposit Protection, requires that a relevant deposit advertisement that contains a reference to deposit protection must also explain the nature and extent of the protection Relevant deposit advertisements are defined in the Banking Law and the GPO and are considered to include: for a bank: all means of providing information to a person that might reasonably be presumed to be intended to lead to the making of a deposit; and for a non-jersey registered bank: all advertisements contained within Developments, including: a newspaper or journal that principally circulates in Jersey; a broadcast that is principally received in Jersey; or an electronic communication that features Jersey as an essential element the establishment of a DCS in Jersey; and the various triggers of such schemes in the UK, Isle of Man and elsewhere, have led the Commission to conclude that relevant DCSs should be disclosed in all relevant deposit advertisements issued in Jersey. The changes proposed are set out below in A number of minor changes to the GPO are also proposed to address anomalies within it (see 6.2.4) The Banking Codes will be updated to reflect the introduction of the Proposed Order, with relevant references to the GPO replaced. Limited changes are also proposed to clarify existing reporting requirements, which are outlined below (see 6.2.5) Section 7 of the Banking Codes will be amended promptly to require an entity to make an appropriate disclosure in all cases where extracts from its BANKING: REPORTING AND DISCLOSURE 19 of 26

20 financial accounts are used in promotional literature, including the distribution of summarised accounts (see 6.2.6). 6.2 Proposed amendments The existing requirements of the GPO in respect of annual financial accounts will be removed where they are superseded by the Proposed Order In Schedule 2 Conditions applicable to a deposit advertisement of the GPO, Condition 4, Deposit Protection, will be amended to: make disclosure of a relevant DCS mandatory, whilst for all other types of protection this will remain optional; require deposit-taking advertisers that are not Jersey registered banks to state that they are not covered by the Jersey DCS; and continue to require any bank to make full disclosure of the nature of any protection claimed but, in respect of DCSs, allow this to be by way of pointing to a publically available website, provided that the following details are also disclosed: the maximum deposit protected; and the maximum payout in respect of any default Would the requirement to disclose the nature of protection provided by a relevant DCS create a significant challenge? Three minor amendments to the GPO are also proposed: Article 1 remove the definition of business continuity, as this definition related to the calculation of registration fees, which are no longer established by the GPO; Article 6(2) (c) amend reference to the Collective Investments Funds (Recognised Funds) (General Provisions) (Jersey) Order 1988 to the Collective Investment Funds (Recognised Funds) (Rules) (Jersey) Order 2003 ; and Article 9(1) remove reference to duplicate as duplicate applications are no longer required by the Commission The reporting requirements established in the Banking Codes (Section 6 and the Schedule) will be removed where they are superseded by the Proposed Order and replaced by references to that Order. Additions will be made to the Codes that clarify: the requirement for banks to provide comment to the Commission on material changes when submitting the prudential return; and the process for the audit certification of the year-end prudential return. This will be amended to require banks to provide a copy of the year-end prudential return to the external auditor, to be certified 20 of 26 ISSUED FEBRUARY 2010

21 in accordance with the requirements of the Proposed Order Requirements will be added to Section 7 of the Banking Codes relating to the use of extracts from a bank s financial accounts in promotional literature, including the distribution of summarised accounts. As this represents a significant change to the current requirements, draft text is provided here for comment: 7.5 Any advertisement or promotional literature that includes financial information extracted from the registered person s financial accounts must contain the following disclosure: The financial information given here is a summary extracted from <bank name> s audited financial statement for the year ended <insert year>. This might not contain sufficient detail to allow for a full understanding of <bank name> s financial affairs. The full annual financial statements, including the auditor s report on those financial statements, can be obtained from <list of offices and relevant websites>. Note 3: Any document that is distributed to customers that sets out a summary of the registered person s financial accounts is considered to be a form of financial promotion. As such, it must conform to the requirements set out in Section 7, including not being false, misleading or deceptive Are there any other relevant aspects of summarised financial accounts that should be addressed? Requirements will be also be added to Section 7 of the Banking Codes to establish principles and specify wording requirements in respect of disclosure in advertisements of depositor compensation schemes. The principles are in line with those to be established in the GPO but would also apply to advertisements issued elsewhere by Jersey registered banks. The Codes changes will be introduced promptly, whereas changes to the GPO are likely not to be effected until The proposed specified wording will be required until or unless the Board of the Jersey DCS issues a form of specified wording to be used in advertising. Draft text, including specified wording, is provided in Appendix B Would the proposed amendments to the Banking Codes create any significant challenges? BANKING: REPORTING AND DISCLOSURE 21 of 26

22 7 COST BENEFIT ANALYSIS 7.1 Costs to industry Where provisions replicate existing requirements, as is largely the case with these proposals, there should be no added cost to industry The new disclosure requirements are expected to be of low cost due to: making use of the Internet to disclose financial information to the public, where appropriate; and permitting the use of summarised financial accounts for distribution The additional cost of printing copies of parental financial accounts is considered to be limited as it will only be necessary for a single copy to be made available for inspection at each office The various provisions of the TCB/IB Order that are to be incorporated in the Proposed Order reflect current practice in other regulatory sectors, where most banks are already involved, and/or existing Banking Codes provisions. Mirroring the TCB/IB Order as a starting point may save costs for multilicensed businesses The DCS disclosure requirements will lead to a potentially significant, but largely one-off, cost to re-draft advertisements and statements to achieve compliance. The other changes proposed to the GPO and the Banking Codes should have minimal or no extra cost as they establish current practice or remove anomalies Would any specific measures proposed herein significantly increase your costs? 7.2 Costs to the Commission The proposals will not result in any increased ongoing costs to the Commission. 7.3 Benefits The main benefit for banks will be the bringing together of various financial reporting requirements in a single instrument, reducing the scope for confusion and simplifying the reference process Industry may benefit from the alignment, where possible, of the requirements of the Proposed Order with the TCB/IB Order Depositors should benefit through increased ease of access of relevant financial information in respect of banks and DCSs. 22 of 26 ISSUED FEBRUARY 2010

23 8 SUMMARY OF QUESTIONS REFERENCE QUESTION Do you agree that the Proposed Order is desirable, for the reasons given? Is July 2010 a reasonable timescale for implementing the Banking Codes changes in respect of DCSs? Is 2011 a reasonable timescale for implementing the other changes proposed in this paper? Would any of the above (4.4) provisions of the Proposed Order present a significant challenge? Should any other provisions be included in the Proposed Order? Would any problems be caused by a requirement to provide depositors and potential depositors with group financial accounts? What significant problems would be caused by not allowing accounting exemptions regarding related parties disclosures? What significant challenges would be caused by a requirement to make available financial accounts on, or via, relevant websites? Would the requirement to disclose the nature of protection provided by a relevant DCS create a significant challenge? Are there any other relevant aspects of summarised financial accounts that should be addressed? Would the proposed amendments to the Banking Codes create any significant challenges? Would any specific measures proposed herein significantly increase your costs? BANKING: REPORTING AND DISCLOSURE 23 of 26

24 APPENDIX A List of representative bodies who have been sent this consultation paper. Jersey Finance Limited Jersey Bankers Association Jersey Society of Chartered and Certified Accountants Jersey Consumer Council Jersey Citizens Advice Bureau Jersey Trading Standards Service 24 of 26 ISSUED FEBRUARY 2010

25 APPENDIX B Draft changes to Section 7 of the Banking Codes, relating to the disclosure in deposit advertisements of Depositors Compensation Schemes Underlining indicates additions to existing text. Strikethrough indicates the deletion of existing text. At the start of Section 7, it is proposed to insert two notes, clarifying the relevant statutory requirements relating to advertising, and a new paragraph 7.1 that clarifies the use of the term advertisement as distinct from the term deposit advertisement. In part this supersedes the definition contained within the current paragraph 7.7. Subsequent paragraphs will be renumbered. 7 A registered person must not make statements that are misleading, false or deceptive. Notes: 1. Under Article 23 of the Banking Law, it is an offence for any person to knowingly or recklessly make a misleading, false or deceptive statement, promise or forecast for the purpose of inducing another person to place a deposit. 2. Article 20 (5) of the Banking Law defines a deposit advertisement to include any means of bringing to the notice of the person or persons to whom it is addressed either: (a) (b) an invitation to make a deposit; or information which is intended or might reasonably be presumed to be intended to lead directly or indirectly to the making of a deposit. 3. The GPO establishes six conditions that apply to all deposit advertisements issued by registered persons in Jersey. 7.1 The definition of an advertisement is broad and includes conversations, letters and offer documents. References herein to advertising refer to all advertisements of any nature, including advertisements in respect of lending and other financial services, rather than solely deposit advertisements, excepting where specifically noted. Consequentially, the current paragraph 7.7 will be amended to remove duplication. 7.7 The definition of an advertisement is broad and includes conversations, letters and offer documents. The degree and point at which risks need to be disclosed to customers may vary. Notwithstanding the variation that may be appropriate, the registered person must be able to demonstrate that adequate disclosure of the relevant key risks was made to the customer before commitment was made, so as to enable the customer to make an informed decision. BANKING: REPORTING AND DISCLOSURE 25 of 26

26 The disclosure requirement in respect of DCSs will be established by adding four paragraphs after paragraph 7.8 and amending the two existing Notes. 7.9 All deposit advertisements issued in respect of a registered person s Jersey operations must: state that the issuer is covered by the Jersey DCS; provide key details of the DCS; and refer depositors to a source that provides full details of the DCS, if the advertisement does not contain these It is expected that the Board of the DCS, when established, may publish approved wording for advertisements issued by participants and provide a relevant source for referrals. Registered persons must ensure that such wording is used and such source identified in relevant advertisements. Until such time, registered persons must include the following wording, adapted as appropriate: [Bank X] is a participant in the Jersey Depositors Compensation Scheme. The Scheme offers protection for eligible deposits of up to 50,000. The maximum total amount of compensation is capped at 100,000,000 in any 5 year period. [For the purpose of the Scheme, deposits of Bank X are grouped with Banks Y & Z].The total eligible deposits of [Bank X/ this group] amount to [] as at [date]. Full details of the scheme are available on the States of Jersey website or on request Ongoing provision of relevant information regarding the Jersey DCS should also be provided to existing depositors, including: A notice containing the required wording given in must be displayed in all Jersey offices offering deposit-taking services; and All statements provided in respect of Jersey deposits must include the required wording given in Where deposit advertisements are issued overseas, relevant local regulations must be complied with. Such advertisements must state whether or not the DCS of the jurisdiction in which the advertisement is issued applies to the product advertised, state whether or not the Jersey DCS applies and, in respect of an advertisement issued in respect to an overseas operation, provide details of that jurisdiction s DCS, if any, including whether or not it applies. Notes: 1. For the avoidance of doubt, the Banking Law does not require advertisements to be approved by the Commission and accordingly the Commission would not normally contribute to any review or vetting process. 2. The requirements of sections 7.6 and, 7.8, 7.9, 7.10 and 7.12 do not apply to advertisements that only contain a business name, trademark and/or logo. 26 of 26 ISSUED FEBRUARY 2010