Offshore Services - Jersey

Introduction

Automatic transfer of fund functionaries into different regulatory regimes

Many Jersey companies established as trustees, managers, general partners, advisers or distributors of public funds have previously been subject to regulation in Jersey only pursuant to the Collective Investment Funds (Jersey) Law 1988 and through conditions on the permits issued to those companies under the law. This update is aimed at such companies, although companies already subject to the Financial Services (Jersey) Law 1998 (as amended) in respect of other classes of financial service business may also be affected by the change in the regulatory regime in relation to funds.

As part of a programme to consolidate the regulation of financial services in Jersey, the regulation of functionaries of publicly offered collective investment funds is being transferred from the Collective Investment Funds Law to the Financial Services Law, under which such functionaries will be regulated in future as 'fund services businesses'.

No action is required on the part of existing Collective Investment Funds Law permit holders in order to become registered as fund services businesses under the Financial Services (Jersey) Law, as this will happen automatically through the amending legislation.

Application of codes of practice

All registered fund services businesses will be required to comply with new codes of practice, expected to come into effect on November 14 2007.

Non-compliance

Failure by a registered person to follow the codes represents grounds for regulatory action. Although failure to follow codes of practice will not of itself render a person liable to proceedings of any kind or invalidate a transaction, the codes will be admissible in evidence where they may be relevant to questions arising in court proceedings and considered in determining such questions.

Therefore, every fund services business (ie, any entity currently holding a permit as a fund functionary under the Collective Investment Funds Law, unless as a company issuing units or in respect only of recognized funds) should instigate a review of the conduct of its business against the codes of practice as soon as possible.

Codes of Practice

The codes of practice consist of seven core principles for the conduct of fund services business, together with detailed requirements in respect of each of these principles.

The seven principles are as follows:

• A registered person must conduct its business with integrity.
• A registered person must have due regard for the interests of the fund.
• A registered person must organize and control its affairs effectively for the proper performance of its business activities and be able to demonstrate the existence of adequate risk management systems.
• A registered person must be transparent in its business arrangements with the fund.
• A registered person must maintain and be able to demonstrate the existence of both adequate financial resources and adequate insurance.
• A registered person must deal with the Jersey Financial Services Commission (JFSC) and other authorities in Jersey in an open and cooperative manner.
• A registered person must not make statements that are misleading, false or deceptive.

While compliance with the seven principles, whether documented or not, is expected to be found to varying degrees in the wide range of entities that will be required to comply with the codes, in future that compliance will have to be demonstrated in the practice and procedures of the fund services business in a way which is visible to external regulatory inspection.

The JFSC has acknowledged that some businesses may be unable to demonstrate full compliance with the codes immediately and has indicated that where this is the case, it will look favourably on circumstances where a business complies with the core principles of the codes and is actively taking steps to comply with their underlying detailed requirements. Certain fund services businesses will be required only to demonstrate compliance with the core principles of the codes.

The JFSC has also indicated that where strict compliance with detail of the codes in a particular business would produce an anomalous result, registered persons may apply to the JFSC for variance in practice from the codes.

Application of Codes to Managed Entities

'Managed entities' are those functionaries which are managed or administered by third-party service providers in Jersey under the supervision of a board of (usually) non-executive directors.

Managed entities acting in relation only to certain types of fund (broadly, those available to expert and similar investors) will be subject only to the seven core principles and a set of standard licence conditions.

Some of those conditions reflect those which have been imposed as a matter of practice on functionary permits under the Collective Investment Funds Law, but others (as currently drafted) refer to certain detail in the codes.

Managed entities may opt to meet the full prescriptive detail of the codes, but the initial position is that a managed entity's current conduct of its business may continue but must satisfy the core principles and the managed entity must observe the standard licence conditions.

The board of directors of managed entities to which these changes apply should undertake a compliance review.

Existing policies and procedures may need to be expanded or adapted. Assistance may be available from managed entities' local managers or administrators. It is expected that the board of directors of a managed entity may be able to determine that compliance with the codes is procured through existing service contracts.

Service contracts (usually administration, investment management and/or advisory agreements) on which the directors of a managed entity rely in order to undertake business should be reviewed and updated where necessary to:

• recognize requirements, such as appointing a compliance officer for compliance with regulatory outsourcing requirements;
• add compliance and other new reporting requirements where necessary; and
• ensure that service contracts do not include provision for termination in the event that any permit issued under the Collective Investment Funds Law is withdrawn or no longer available (since permits issued under the law will eventually become defunct).

The following licence conditions apply only to managed entities complying with core principles of the codes of practice:

• The registered person may not act for new or further funds without first obtaining the consent of an officer of the JFSC;
• The registered person must appoint a person registered to act as manager of a managed entity;
• The registered person must notify the JFSC of its intention to change its manager of a managed entity at least 28 days prior to the change taking effect;
• The registered person must adhere to such notification and consent requirements as the JFSC has set out in the codes of practice, as may be updated or revised from time to time;
• The registered person will permit, and will procure the agreement of any agent or subcontractor resident or established in Jersey and appointed by the registered person, for officers of the JFSC to conduct inspections of any part of the activities in relation to which the registration applies, and the registered person will, and will procure the agreement of any such agent or subcontractor to, give all assistance in connection with any such inspection which it is reasonably able to give;
• The registered person must adhere to such advertising standards as the JFSC has set out in the codes of practice, as may be updated or revised from time to time;
• The registered person must adhere to such record-keeping requirements as the JFSC has set out in the codes of practice, as updated or revised from time to time. This requirement and the final requirement will be satisfied where a manager of a managed entity has agreed to provide the registered person with the necessary means to comply; and
• The registered person must appoint a compliance officer and money laundering reporting officer and comply with the relevant notification and consent requirements as set out in the codes of practice (as updated or revised from time to time).

Additional Consequences of Regulation under Financial Services (Jersey) Law

The over-arching provisions of the Financial Services Law, applicable to all financial service businesses registered under the law, should also be noted as applying to all fund services businesses.

Prohibition of unauthorized fund services business

The Financial Services (Jersey) Law will operate to (i) prohibit fund services business being carried on in Jersey, and (ii) prohibit fund services business being carried on in any part of the world by a Jersey-registered company, unless in either case the person carrying on that business is a registered person and acting in accordance with the terms of his or her registration (including any licence conditions and observance of codes of practice). A contravention of this prohibition is punishable by up to seven years' imprisonment and/or a fine.

Refusal or revocation of registration

The JFSC can refuse or revoke a registration on a number of grounds, including where the JFSC is satisfied that the applicant (or registered person) is not a fit and proper person or that the applicant (or registered person) has failed to comply with the provisions of the Financial Services (Jersey) Law or certain requirements of the JFSC.

Conditions of registration

The minister (of the States of Jersey) for economic development can prescribe conditions, on the recommendation of the JFSC, which may apply generally to registered persons and fund services business conducted by them. However, the JFSC itself can attach conditions to any particular grant of registration. Such conditions may also indicate that all or part of a code of practice is to be disregarded.

Supervision of financial service business

The JFSC has power to control the identity of 'principal persons' (a owner or persons in control of a registered business) and to control the size of a person's holding in a registered business by requiring that the JFSC be notified in writing of any change of a principal person or their shareholding and by exercising its power to serve a notice of objection. Failure to comply with these requirements is an offence punishable by imprisonment and/or a fine. The JFSC also has the power to serve a notice of direction in relation to the transfer of shares or exercise of voting rights attaching to those shares and to apply to the court for an order to sell such shares.

Directions issued by the JFSC

The JFSC can issue directions in relation to any financial service business, with which the person to whom they are addressed will be required to comply, wherever it appears to the JFSC that:

• registration requirements of a registered person are no longer being satisfied;
• it would be in the interests of persons who may conduct business with a registered person or its
• creditors;
• it would be desirable to protect Jersey's reputation;
• it is in Jersey's best economic interests; or
• a financial service advertisement would be misleading or undesirable.

An appeal against a direction may be made to the court, but failure to comply with a direction is punishable by a fine and/or imprisonment.

Powers of the court

The JFSC has the power to apply to the court for an injunction restraining a person from contravening certain provisions of the law or for an order requiring a person to remedy a contravention, where possible. The court also has the power to make orders requiring that a registered person's business be subject to specified supervision, restraint or conditions, including the requirement that all or some of the assets of such a business be transferred to an appointed person.

Public statements

The JFSC may issue public statements concerning persons who appear to have contravened certain provisions of the Financial Services Law or failed to comply with codes of practice. The JFSC may also exercise this power if it appears to be in the interests of investors. However, the JFSC will have to give seven days' prior notice of a public statement concerning a registered person or a principal person to that person, as well as giving notice of the reasons why the JFSC believes that the public statement should be made.

Investigations

The JFSC may require persons to provide information or documents or to answer questions relating to:

• their fund services business;
• their integrity, competence and financial standing; or
• their compliance with the Financial Services Law, subordinate legislation, the codes of practice or any conditions of registration or directions made under the law.

An officer or agent of the JFSC will have the power to enter premises for these purposes and the JFSC can commission an investigation and report on such matters. The bailiff has the power to grant a warrant to enter and search premises without prior notice, in specified circumstances, where there is reasonable cause to suspect that unregistered fund services business is being conducted or that misleading statements or practices have occurred.

Cooperation with foreign supervisory authorities

The JFSC may impose, revoke or vary the conditions of a registration, or refuse or revoke a registration itself and utilize its investigative powers for the purpose of assisting a foreign supervisory authority. It may also communicate information which it has in its possession to such an authority (subject to certain safeguards).

Offences

A principal person or a partner, director, manager or other similar officer of a registered person which commits an offence under the Financial Services Law may be liable for such offence in the same manner as the primary offender.

Relevant Orders under Financial Services (Jersey) Law

Orders will be made on a number of technical matters - principally to preserve exemptions such that regulated fund services businesses are not also required to obtain separate licences for other categories of financial service business where they provide services only to funds, but also in two areas of direct practical concern to fund services businesses.

Accounts and auditors

The order will include provisions relating to:

• controls over choice of accounting period and auditors;
• the form and content of financial statements and auditors' reports, including new reporting requirements; and
• the submission of annual financial statements and auditors' reports and new time limits for such submissions to the JFSC.

Client assets

Registered financial service businesses are required, where they have control or responsibility for client assets, to arrange proper protection for those assets, typically by the segregation and identification of those assets. The order will impose detailed requirements in relation to fund services businesses' client assets.

International Law Office