Working together for more effective regulation - the Jersey Financial ...

WORKING TOGETHER FOR MORE EFFECTIVE REGULATION STEP Conference, Jersey, 21 November 2014 Speech by Lord Eatwell Chairman, Jersey Financial Services Commission

The subject of my talk today is listed in your programme as “Introducing the new Chairman of the Jersey Financial Services Commission”. This suggests that I should spend the next half-hour talking about myself. Now whilst that might be very satisfying for me, and do no end of good to my self-esteem, it would totally defeat the object of me being here. My objective this afternoon is not so much to have you get to know me, as for me to begin to get to know you and your Industry – an Industry that is vital to the economic well-being and economic future of this Island.

A Listening Regulator In the five months since I took over as Chairman of the JFSC I have set out a number of attributes that I intend will inform the work of the Commission during the time I am in post, and will define its relationship with you and with the people of Jersey whom we serve. One of those fundamental attributes is that the JFSC should be a listening regulator. Too often regulators operate in an overly academic or legalistic bubble, divorced from the real day-to-day issues that determine the success or failure of the businesses they regulate. Yet it is those issues that really matter to regulators. Knowledge of business opportunities and of business pressures and constraints are the foundation stones of effective regulation, and that knowledge can only be gained by working hard to obtain a thorough understanding of the industry - by listening. So what is effective regulation? I would define effective regulation in this jurisdiction as a system that: •

reduces the risk to the public of financial loss due to dishonesty, incompetence or malpractice;

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is countering financial crime; Page 1 of 6

Speech by Lord Eatwell, Chairman, Jersey Financial Services Commission 21 November 2014

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protects and enhances the reputation and integrity of Jersey in commercial and financial matters; and given those goals

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serves the best economic interests of Jersey.

Those are the issues that matter to everyone doing business in Jersey. The success of your businesses depends on a regulatory system that achieves those objectives. And, as some of you may know, those are the legally mandated objectives of the JFSC. So whilst the success of the regulator depends on listening to, and understanding, the industry; the success of the industry depends on there being an effective regulator. I’m not trying to pretend that the regulator will be popular. How could we be, when the very essence of regulation is preventing people doing things that they want to do and requiring them to do things they don’t want to do. But the regulator can and must earn respect as a partner in the development of the financial services industry in Jersey.

A Changing Environment for Regulator and Industry I am belabouring this point because whilst I believe it to be true in general, I think it is particularly important today when the financial world is in such a state of flux, when change is in the air. Jersey has weathered the financial storms of the past 6 years far better than many comparable jurisdictions but there have been some important consequences: •

in line with global retrenchment the number of banking licences in the Island has diminished;

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trust company businesses (“TCBs”)have seen a substantial restructuring, some driven by private equity investment, but in the face of these changes employment levels are roughly the same as in 2008 – quite an achievement; and

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after initial declines, funds volumes are recovering and new opportunities appearing, as there a number of transfers into Jersey of hedge funds and others, adding valuable diversity to the business base.

Yet the shockwaves of the financial crisis are still reverberating as we see in changing products and markets, in changing regulation, and in changing engagement of politicians in how the financial services industry is run.

Changing Products and Markets As far as changing products and markets are concerned, I am sure you are all aware that whilst bank financing has stagnated around the world there has been extraordinary growth in bond markets, both sovereign and corporate.

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Now as we all know, bond markets are particularly sensitive to interest rate changes. On 21st May 2013, Ben Bernanke first mentioned the idea of gradually reducing or “tapering” the US Federal Reserve Board’s monetary expansion (quantitative easing). Bernanke’s announcement, by raising the prospect of increases in interest rates, led to a rush to cover potential losses, with violent movements in currency and bond markets. What this incident taught us is that systemic risk is no longer the sole preserve of leveraged banks. Unleveraged asset managers can create systemically unstable positions too. This is just one example of the way in which financial markets are relocating risk – and this is bound to affect Jersey financial services in entirely new, unexpected ways. As the regulator the JFSC must chart and understand the consequences of all these developments. Another example of change that has important regulatory implications is the shifting balance of economic and financial power between West and East. In consequence, the JFSC faces the formidable task of performing due diligence in respect of prospective financial flows from unfamiliar and often opaque jurisdictions. The TCB sector is reaching out to the Middle East and the Far East. We need to work together to ensure that the resultant business upholds the integrity of Jersey financial services. There are other changes that particularly affect the TCB sector, notably the increasingly diverse range of activities that TCBs are involved in, from crypto-currencies to the provision of services to the gambling industry, all adding to the list of items in the regulator’s risk assessment catalogue. Another challenge for risk assessment derives from the fact that the number of identified PEPs (Politically Exposed Persons) relevant to this jurisdiction has more than doubled in the last four years - from 2,400 to 5,500. Undoubtedly better identification processes will account for some of that increase, but nowhere near all of it. If firms’ risk appetites have increased, then control and mitigation frameworks should also have been enhanced. We are particularly pleased with the work that STEP does to raise standards in the Industry.

Changing Regulation outside Jersey Our second major set of post-crisis changes is occurring in the content and implementation of financial regulation: internationally, and in the European Union and in the UK, all with major implications for Jersey. Three recent developments pose challenges for the way in which the JFSC has approached its regulatory tasks. Firstly, the major regulators have declared that they will “protect the taxpayer” by seeking to establish effective resolution regimes for major banks, supposedly eliminating the threat of “too big to fail”, and hence undermining the Commission’s characterisation of a top 500 bank as having a public bail-out guarantee. Whether this attempt to insulate the taxpayer will succeed is another question. I, for one, don’t think it will – but that’s another story for another day. Secondly, and perhaps most importantly for this audience, the extension of quasi extra-territorial regulation in terms of demands from the EU for regulatory equivalence, or of truly extra-territorial

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rulings as in the case of FATCA, inevitably changes the dynamics of financial market development, and therefore financial regulation in Jersey. As far as we can tell at the moment, FATCA is working in Jersey’s favour. A number of major wealth managers currently located in Switzerland are planning to relocate to Jersey, because, so they tell us, of the superior legal and regulatory framework in this jurisdiction. It is likely that we will next have to deal with new regulations on beneficial ownership, from the UK, the EU or the US. As you know, Jersey already has a robust approach to this issue – but there is no guarantee that will protect us from change. Thirdly, one of the early events of 2015 will be the assessment of the island by MONEYVAL – or the “Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism” to give them their full name. We are expecting the assessment to be challenging but fair and once it is delivered all of us will then need to react to any recommendations for changing the way we approach AML regulation.

Changing Relationship between Government and Regulator Turning now to the final item in my catalogue of major changes - the relationship between regulator and government is changing. Whilst the Jersey Government is steadfastly committed to the independence of the JFSC, it is seeking a closer relationship with the regulator in the furtherance of the Island’s economic goals. This is essentially a “Jersey plc” approach, and is the rational response to the issues facing a small, highly specialised jurisdiction such as this one. The key problem to be solved is how to manage the development of financial and regulatory policy in a coherent, mutually supportive manner. And this doesn’t just involve the Government and the Commission, it involves Industry too – a key issue to which I will return in a moment.

Change at the JFSC The changes I have outlined all have profound implications for the future of financial services in Jersey and pose major challenges to the regulator. So in addition to being a listening regulator, the JFSC must become a thinking regulator, not simply a box-ticker. And it must become an agile regulator, ready to respond to innovation in products and markets. And it must also be an inquisitive regulator, following the up-to-date research on financial services to ensure that it is as well-informed as it is possible to be. I intend these criteria to define a process of change at the JFSC. Many of the consequences for the Industry may take time to crystallise. But already major developments are underway. The Commission has published a Policy Statement that begins the process of significant revision of our Bank Licensing Policy. We have made clear that our approach will be far more flexible than in the past, particularly if risk to retail depositors can be mitigated. Previous reliance on the proposition that members of major banking groups are “too big to fail” is now, in the light of experience and of regulatory reforms elsewhere, a meaningless disincentive to doing business in Jersey.

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So, together with other related restrictions, it is to be dropped. In its place will be a regulatory model that assesses the risk that a bank’s operating model poses to the Island – a supervisory approach in place of box-ticking. The revised Licensing Policy reflects new realities and provides a workable and flexible framework for a wide variety of banks to operate within the robust regulatory framework to which the Island remains committed. In similar vein the Commission, in conjunction with Industry and Government, is undertaking a fundamental review of the funds regime. The overall aim is to streamline and simplify what has become overly complex. In particular we intend to speed up or in some cases even eliminate the process of authorisation. Since this particular piece of work has yet to go out to consultation I cannot fill in the details this afternoon. But our intention is obvious; to provide a clear, responsive and agile regulatory framework that enhances the competitive strength of the Industry. These are early examples of the changes underway at the Commission: its approach will be more forward looking with a focus on outcomes rather than processes; there will be a significant investment in the development of risk management expertise to underpin the new commitment to risk-based regulation; the staff at the Commission will play a far greater role in policy development than has been the case in the past – a major reason why you need to communicate with them better, indeed part of the new mission of the JFSC is to build stronger relationships with the Industry. And there will be major operational changes too. The Commission will communicate more, though discussion papers, major seminars (such as the seminar with the US Securities and Exchanges Commission held in September), and via our website and social media. We are also investing in major IT changes, which will not only result in far superior database management and development, but will also greatly improve your access to the JFSC, and our speed of response. We also intend to develop new and faster approaches to consultation, using online survey tools.

Working Together The most important element in all this is listening, working more closely with you. But for this to succeed there must be commitment on both sides. We are prepared to listen, but you must be prepared to speak, and to speak openly and frankly. It is important that you should know your Commissioners. You should talk to them, send them e-mails, advise, complain, even congratulate – whatever you do, communicate. That’s your responsibility. If the JFSC is to work closely with Industry, then Industry must be prepared to work closely with the regulator, in a thoroughly transparent manner. Now I have heard it said dozens of times that firms shouldn’t adopt a transparent approach because it will only lead to the regulator picking on them in the future. Ridiculous and childish. When firms bring their difficulties to the regulator the JFSC is committed to helping them overcome their problems and to working with them to achieve the goal we are all pursuing, that Jersey should be known as the very best place to build well-regulated financial business. On TCBs, we are going to be particularly pro-active! Our initial thinking, to be discussed at our December Board meeting, is that a sub-group of Commissioners led by myself should meet a Page 5 of 6


number of firms over the first half of 2015 to engage in a full and frank dialogue, and in particular to listen to some of the strategic challenges facing your businesses. STEP, JATCo and Jersey Finance will also have a role to play in these discussions. Expect to hear more about this initiative in the New Year. Of course, it’s not the task of the regulator to be a financial entrepreneur, or to attempt to guide innovation – though the regulator can be an enabler. The JFSC is ready to play its part in working with market innovators to think through policies that stimulate the introduction of new products and new structures. It is after all one of the key tasks of the JFSC to provide a regulatory environment that is conducive to those innovations that serve the best economic interests of the Island – put simply, promote growth and jobs. I should make clear that the change programme underway at the JFSC is not going to be easy to accomplish. We need to develop a new understanding of risk management and of risk appetite throughout the organisation. We need to develop new procedures. And we need to carry on with “business as usual” whilst that learning process is underway. The talented staff at the Commission, although stretched already, have made it clear that they are up for it. Of course, a major financial disruption that absorbs many hours of staff time would slow down the process of change, as would serious adverse developments in the international climate. But although in those circumstances change may take place more slowly than I would like, the direction of travel will not alter. An up-to-date effective regulator is good for your business and good for Jersey. And, with your help, that’s what I intend to deliver. -End-

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