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Quality quest

This month, the International Monetary Fund will deliver its latest reviews of financial services regulation in Jersey and the Isle of Man, with a similar exercise for Guernsey due to be carried out in September this year.

The initial draft reports have been circulated to a handful of key officials in each jurisdiction and the full documents will be issued after the governments of the two centres have commented. But the run-up to the IMF visits has already provided extra incentive to these financial centres to ensure their regulatory structures will meet the IMF standard.

The IMF visits come at a time when, for a variety of reasons, there is a climate for increased regulation – not least from institutions that want to demonstrate to clients that their products and services meet high standards of oversight. The pressure is external but in the better managed centres there is an appreciation that high- quality regulation is a powerful calling card.

John Aspden, chief executive of the Isle of Man Financial Supervision Commission, which regulates fund administrators, says that Manx authorities are confident the IMF will deliver a positive report.

He says regulation of funds is an ongoing process: “We have established a high benchmark but the industry is keen that we are seen as competitive. This means we will seek to modernise our regulation in the areas where it is needed.”

In Jersey, there has been a package of industry consultations and then amendments to the rules governing fund regulation. Last year saw amendments to the fund sector codes of practice and the launch of the regulated funds’ regime.

Both regulators would argue that the IMF visit is not a factor in determining their regulatory strategy but it is undeniable that such reviews are high watermarks which focus targets and encourage both regulators and the fund sector to put improvements in place.

These so-called article IV consultations are important factors in sustaining the international reputation of offshore financial centres. The IMF reviews provide high quality independent verification of the integrity of financial services regulation in the centres.

In the current environment, with major economies and international bodies launching a series of anti-tax- haven strategies, these reviews can give expert testimony to the case propounded by the offshore centres.

The IMF – in this review – has been more demanding than in previous ones. Douglas and St Helier accept there may be improvements to be made at the margins but the overall result should be a comprehensive endorsement.

The financial industries in Jersey and the Isle of Man argue that their quality of regulation is world-class and that any challenge by supra-national bodies is misguided. Fund administrators in both centres say attacks on their regulatory regimes are ill-founded political rhetoric. They point to an ongoing process of toughening regulatory processes, including the adoption and revision of industry codes of practice.

These initiatives are based on internationally agreed standards for fund sector regulation. They are adapted for local market conditions but, if anything, are more rigorous than international requirements.

The Isle of Man and the Channel Islands have benefited substantially from previous IMF reports. Past missions have given glowing reports of the quality of regulation and word on the street is that new reports will be supportive of the two centres’ ongoing strategy to be seen as purposeful and co-operative.

For the fund sector, the IMF report comes at a time when regulation is in transition. For straightforwardly commercial reasons, in the year prior to the visits, both centres have strengthened their fund packages. They have sought to compete with a wide range of other jurisdictions and believe they need to broaden the range of fund products available. The major initiative in St Helier was the creation of the unregulated funds’ regime, which included two new classes of investment fund, the unregulated eligible investor fund and the unregulated exchange traded fund.

The key features of the unregulated eligible investor fund are:

  • A minimum investment criteria of $1m, or a need to be a sophisticated investor.

  • Applies to both open and closed-ended funds and can be structured using companies, unit trusts and limited partnerships.

  • No requirement for Jersey-domiciled administrator, directors or custodian.

  • No audit requirement.

  • Open-ended vehicles are permitted to list but only on certain exchanges that allow transfer restrictions.

    Key features of the unregulated exchange traded fund category include:

  • Choice of structures using companies, unit trusts and limited partnerships.

  • No requirement for Jersey-domiciled administrator, directors or custodian.

  • No audit requirement.

  • Applies to closed funds only.

  • Choice of exchanges on which a listing may be made.

    At the same time, Jersey is also strengthening its regulatory oversight.

    John Harris, director general of the Jersey Financial Services Commission, said recently that the commission would shortly accelerate its on-site supervision of fund administrators by a factor of 25 per cent.

    To enable this, Richard Thomas, chairman of Jersey Funds Association, said the JFSC increased its staffing in 2008 to enhance its supervision fund administrators as the amended code of practice for fund administrators kicked in.

    In addition, these staff members were supplemented by a team on secondment from Pricewaterhouse-Coopers and they have now begun a significant programme of on-site visits to fund administrators.

    The aim was to give the regulator greater knowledge of the operation of fund administrators and the issues they faced in meeting regulatory targets.

    “The focus of supervision had moved away from products to a risk analysis of service suppliers,” said Thomas. “This approach means the JFSC needs to understand the supervisory issues faced by service suppliers.”

    He emphasises the benefits that come from the regime of intensified on-site visits. “The regulator can cross-pollinate approaches, strengthening the industry all round.”

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