## ISLE OF MAN — Financial System Stability Assessment Update (_cr09275) ## Source details **Canonical URL:** [ISLE OF MAN — Financial System Stability Assessment Update (_cr09275)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09275.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09275.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09275.pdf.json) --- ### Mission and context - Prepared by the Monetary and Capital Markets Department; Approved by Hervé Ferhani; dated August 19, 2009. - FSAP Update mission visited the Isle of Man (IOM), September 9–18, 2008. - Mission composition: Daniel Hardy (mission chief), Andrea Maechler, Ian Tower (all MCM/IMF), Peter Kruschel (BaFin, banking supervision expert), and Ronald MacDonald (banking supervision expert). - Mission coordinated with overlapping LEG mission (led by Terence Donovan) that assessed FATF AML/CFT standards. - Copies of the report available from International Monetary Fund ● Publication Services; Price: $18.00 a copy. ### Main findings — stability and supervisory environment - Global financial crisis has begun to affect the island, largely through travails of parent banking groups. - Risks from IOM operations appear well contained; soundness of locally-licensed banks and insurance companies depends on parent institutions. - Stress tests suggest local institutions would be resilient even to extreme shocks so long as parents remain strong; resilience is highly nonlinear. - Financial sector regulation and supervision generally of a high standard; supervisory efforts concentrated on areas most relevant to IOM institutions. - Since 2003 supervisors operate with more independence and accountability; considerable on-site supervision is conducted. - Major banks are subsidiaries of large international groups and channel deposits to parent groups — a risk-mitigator in normal times but a strong risk-transmittal mechanism in exceptional periods. - IOM has largely brought AML/CFT preventive measures into compliance with FATF Recommendations; Financial Crime Unit (FCU) acting as the FIU performs adequately but requires additional resources. - Authorities actively engage in international cooperation. ### Key contextual events and implications - Fall 2008: several foreign parent institutions came under extreme strain; some taken over or received government support; one local bank now in liquidation because of collapse of its parent. - DCS has recently been expanded in context of global turmoil and is to be reviewed again. - IOM’s limited resources and the large size of the financial sector relative to the domestic economy are structural constraints to contingency planning and potential fiscal exposure. ### Priority recommendations — High priority General - Compile and publish more systematically statistics on financial sector activities and soundness indicators. Banking - Revise regulations on exposures to related parties and liquidity to take more into account risks from exposure to parent institutions, while accommodating business needs. - In cooperation with home supervisors, confirm on a regular basis that parent banks have the capacity to support local subsidiaries. - Continue to develop contingency plans to deal with a variety of stress situations. - Keep the DCS under review with a view to maximizing its contribution to stability and social objectives, and, at an appropriate time, adjusting coverage levels to better limit contingent liabilities. Insurance - Issue regulations and develop procedures to achieve effective group supervision. ### Priority recommendations — Medium priority General - Strengthen capacity to assess system-wide vulnerabilities, including through stress testing. - Introduce explicit criteria for dismissal of FSC and IPA Commissioners, and require publication of the explanation. Banking - Develop (and publish) cross-bank comparisons and system-wide stability analysis. Insurance - Introduce explicit standards on corporate governance for insurance companies and related issues (internal controls, risk assessment and risk management). - Require (noncaptive) insurance companies to disclose information on their financial position to stakeholders, including policyholders. ### Financial sector size, structure, and key statistics - Role and macro background: - Annual GDP growth has averaged over 8 percent over the last decade. - Inflation in mid-2008 was about 4 percent. - Average residential house prices rose about 8 percent per year during 2003–07. - Unemployment is negligible. - Government required to budget for a surplus; builds reserves. - Financial sector shares of GDP: - Banking generates almost one-fifth of the IOM’s GDP. - Combined financial services makes up more than one-third of GDP. - Professional services, some finance-related, make up another fifth of GDP. - Selected banking and financial system figures (preserve source table values): - Banking Sector (December 2003): Number 56; Assets GBP33,499 (million); Percent of total assets 53.6 - Banking Sector (December 2007): Number 44; Assets GBP68,115 (million); Percent of total assets 48.8 - Banking Sector (December 2008): Number 40; Assets GBP73,856 (million); Percent of total assets 52.9 - Insurance sector (December 2003): Number 187; Assets GBP23,943 (million); Percent of total assets 38.3 - Insurance sector (December 2007): Number 172; Assets GBP43,654 (million); Percent of total assets 31.3 - Total financial system (December 2003): Number 446; Assets GBP62,482 (million); Percent 100.0 - Total financial system (December 2007): Number 1,130; Assets GBP139,673 (million); Percent 100.0 - Banking consolidated (end-2008, GBP thousands; relative to 2006/2007 GDP GBP1,817 million): - Total assets 61,657,453; In percent of total 100.0; In percent of GDP 3,392.2 - Total loans 58,947,774; In percent of total 95.6; In percent of GDP 3,243.1 - Inter-bank 50,924,287; In percent of total 82.6; In percent of GDP 2,801.7 - of which: intra-group 31,263,082; In percent of total 50.7; In percent of GDP 1,720.0 - Total liabilities 61,657,453; Total deposits 58,132,090; Total deposits In percent of total 94.3; In percent of GDP 3,198.2 - Capital and reserves 2,553,440; In percent of total 4.1; In percent of GDP 140.5 - Structure of total deposits (end-2008, GBP millions): - Total Deposits 54,642,783; In percent of total 100.0; In percent of GDP 3,006.3 - Domestic 17,803,873; In percent of total 32.6; In percent of GDP 979.5 - Cross-border 36,838,910; In percent of total 67.4; In percent of GDP 2,026.7 - UK 13,953,045; In percent of total 25.5; In percent of GDP 767.6 - Non-interbank deposits 39,890,948; In percent of total 73.0; In percent of GDP 2,194.7 - Interbank (banks and other) 14,751,835; In percent of total 27.0; In percent of GDP 811.6 - Structure of total loans (end-2008, GBP millions): - Total Loans 56,527,616; In percent of total 100.0; In percent of GDP 3,109.9 - Domestic 8,999,979; In percent of total 15.9; In percent of GDP 495.1 - Cross-border 47,527,637; In percent of total 84.1; In percent of GDP 2,614.8 - UK 29,893,003; In percent of total 52.9; In percent of GDP 1,644.6 - Interbank 47,610,935; In percent of total 84.2; In percent of GDP 2,619.4 ### Insurance sector composition and indicators - Main components: life assurance (mainly unit-linked savings products) and captives. - Life business underwrites mostly from policyholders in the UK, the Middle East, and the Far East. - Selected insurance figures (GBP millions and percent as in source): - Life: Gross premiums 2002–2008: 3,860; 3,133; 3,975; 6,666; 9,441; 8,427; 8,060 (Percent of total life 85.3) - Life: Total assets 2002–2008: 14,900; 18,059; 20,578; 26,677; 33,562; 38,634; 37,457 (Percent of total 87.4) - Life: ROE (percent) 2002–2008: 11.84; 16.53; 41.79; 50.16; 39.16; 18.62; 12.21 - Captives: Total assets 2002–2008: 4,632; 4,416; 3,503; 3,804; 3,644; 3,377; 3,725 (Percent of total 8.7) - Captives: ROE (percent) 2002–2008: 8.27; 18.40; 18.86; 15.60; 15.82; 19.73; 11.0 - Total gross premiums (life + captives) 2002–2008: 5,153; 4,513; 5,452; 7,800; 10,558; 9,784; 9,448 (Percent of total 100.0) - Total assets (insurance sector) 2002–2008: 20,850; 23,943; 25,630; 32,105; 38,606; 43,654; 42,848 (Percent of total 100.0) - IPA resources and staffing: - IPA has 12 staff in total to cover insurance and pensions. - IPA uses actuarial consultants rather than employ actuaries. ### Collective Investment Schemes, fiduciary services, and comparative advantages - Rapid growth in licensed investment funds and assets under management: - Number of licensed investment funds 2002–June 2008: 186; 203; 253; 375; 439; 464; 467 - Total value of assets under management (GBP millions) 2002–June 2008: 4,770; 5,040; 7,090; 14,670; 21,390; 26,720; 28,930 - Fiduciary services important to local economy; over 30,000 companies registered on the IOM. - Comparative advantages: - Convenient location to provide services to the London financial market; generally similar legal and regulatory structure to the UK; supporting services; tax system with zero taxation on most corporate profits (and 10 percent on banks’ profits), no capital gains or inheritance tax, and low personal income tax. - Evolving challenges: - Competition from lower-cost centers and EU/metropolitan regulatory/tax changes (example: withholding tax initially 15 percent with prospective increase to 35 percent in 2011). - Current global crisis may induce banks to mobilize retail deposits, where IOM has comparative advantage. ### Supervisory structure, independence, and powers - Main agencies: - Financial Supervision Commission (FSC): regulation and supervision of all financial service providers except insurance companies (and insurance managers and general insurance intermediaries) and pension funds; responsible for companies’ registry; current staffing about 66 staff, about half in supervision division. - Insurance and Pensions Authority (IPA): regulation of insurance and pension companies, and associated service providers. - Recent legislative framework: - Financial Services Act (FSA 2008) centralizes FSC provisions. - Insurance Act (IA 2008) in force December 1, 2008 for IPA. - Collective Investment Schemes Act 2008 streamlines CIS legislation. - Supervisory independence and accountability: - Agencies operate independently; memorandum of understanding (MOU) between FSC and Treasury emphasizes FSC independence; MOU between IPA and Treasury in preparation. - Some de jure dependence remains: Tynwald can vote to dismiss FSC Commissioners; Council of Ministers can dismiss IPA Board members without publishing an explanation; both agencies dependent on government for budgets. - FSA 2008 specifies FSC objectives including client protection, reduction of financial crime, and “supporting the IOM’s economy and its development as a financial center”; no explicit mandate to promote financial stability. - Agencies publish comprehensive annual reports and maintain websites. ### Supervisory assessments and international standards observance - Detailed assessments undertaken: - Basel Committee Core Principles for Effective Banking Supervision (BCP) - International Association of Insurance Supervisors Insurance Core Principles (IAIS ICP) - FATF 40+9 Recommendations on AML/CFT - Level of observance is high in laws and regulations, supervisory implementation, and practices of financial institutions, with identified gaps and recommended actions documented in assessment tables. ### Risk profile, performance indicators, and vulnerabilities - Linkages to parent banks: - Domestically incorporated banks provided between 3 and 25 percent of their groups’ customer funding (11 percent on unweighted average) and between 1 percent and 15 percent of total group funding (6 percent on unweighted average). - Intra-group exposures dominate balance sheets and constitute major solvency and liquidity vulnerabilities. - Financial soundness indicators (selected series, 2004–2008 as in source): - Regulatory capital / risk-weighted assets 2004–2008: 19.2, 15.8, 17.2, 14.3, 14.8 - Regulatory Tier I capital / risk-weighted assets 2004–2008: 18.1, 16.0, 15.6, 15.2, 15.0 - Capital / total assets 2004–2008: 3.5, 3.0, 3.3, 3.3, 4.8 - Non-interbank loans / total deposits 2004–2008: 14.8, 13.7, 15.5, 16.1, 16.1 - Liquid assets / total assets 2004–2008: 78.7, 82.6, 71.6, 67.5, 73.9 - Liquid assets / short-term liabilities 2004–2008: 102.1, 104.1, 87.2, 83.5, 115.9 - Return on assets 2004–2008: 0.7, 0.7, 0.6, 0.7, 0.6 - Return on equity 2004–2008: 15.4, 18.5, 15.6, 16.1, 17.2 - Comparative CAR and leverage: - IOM risk-weighted CAR in 2008: 14.8 percent (comparators: UK 12.9 percent, Ireland 10.6 percent, Luxembourg 16.1 percent). - Unweighted capital to asset ratios: IOM banks 4.8 percent (up from 3.3 percent the year before); comparator countries 4.4, 4.1 and 5.2 percent respectively. - Insurance indicators: - Life insurance accounts for 80 percent of gross premium income; net assets available to meet the required minimum margin (RMM) exceed RMM by five times. - Captive sector strongly capitalized; many overseas groups accumulate surpluses in IOM company structures. ### Stress testing — methodology and key results - Coverage and approach: - Stress tests covered banks and insurance companies representing "over 80 percent of the relevant financial institutions (by market share)" using end-June 2008 data where available; both top-down and bottom-up exercises conducted. - Banking stress-test highlights: - Main concern: concentration risk and spillovers from parent banks; hard to capture quantitatively. - Hypothetical: 10 percent provisioning of claims on parents would wipe-out the capital base of the Manx banking sector. - Credit risk tests: Doubling of all probabilities of default (PDs) produced less than one percentage point change in CAR for many banks due to small non-interbank loan portfolio and calibration choices (Credit Risk C1 result described). - A macro shock causing a 10 percent default on mortgage loan portfolio would reduce aggregate CAR by 124 basis points but leave it above minimum; at most one small bank severely affected. - Liquidity tests show ample system liquidity under many scenarios but several banks would have difficulty meeting rapid withdrawal of almost all short-term deposits without parent support. - Selected banking stress-test snapshot (pre-shock capital): - Pre-shock capital (unweighted average across twelve banks): 14.44 (Min. 11.72, Max. 34.64) - Insurance stress-test highlights: - Life insurance sector resilient; most business unit-linked, shifting market risk to policyholders. - Market risk shocks reducing fund values have significant solvency impact; IPA expects firms to meet a margin of at least twice the formal minimum. - Pre-shock coverage ratio (net admissible assets to required minimum margin) average: 421.54 - Selected results (coverage ratio averages and changes): - I1 (200 bp upward sterling shift) coverage ratio average: 466.23; percentage point change: 44.70 (Min. 0.00, Max. 191.33) - I2 (200 bp downward sterling shift) coverage ratio average: 338.06; percentage point change: -83.47 (Min. -353.35, Max. 0.50) - A1 (35% shares price decline on foreign stock markets) coverage ratio average: 488.26; percentage point change: 66.72 (Min. -50.88, Max. 1028.87) - M1 (Permanent 25% increase in mortality rates) coverage ratio average: 399.96; percentage point change: -21.58 (Min. -82.83, Max. 3.85) ### Contingency planning, Deposit Compensation Scheme (DCS), and insolvency - Contingency planning must reflect structural features: - Dependence of most banks on large parent institutions for risk management, operations, and placement of funds. - IOM’s limited resources. - DCS coverage and statistics (end-September 2008 as reported): - Depositors covered (number): 642,695 (Total) - Domestic Banks: 950 - Foreign-Owned Subsidiaries: 418,605 - Foreign-Owned Branches: 224,090 - Depositors with deposits GBP20,000 and below (number): 442,811 (Total) - Domestic Banks: 348 - Foreign-Owned Subsidiaries: 277,991 - Foreign-Owned Branches: 164,920 - Depositors with deposits over GBP20,000 (number): 199,784 (Total) - Domestic Banks: 602 - Foreign-Owned Subsidiaries: 140,614 - Foreign-Owned Branches: 59,170 - Covered deposits (In GBP thousands): 46,283,833 (Total) - Domestic Banks: 59,793 - Foreign-Owned Subsidiaries: 36,220,918 - Foreign-Owned Branches: 10,062,915 - Effective liabilities 5/ (In GBP thousands): 16,821,295 (Total) - Domestic Banks: 33,730 - Foreign-Owned Subsidiaries: 11,383,120 - Foreign-Owned Branches: 5,438,175 - DCS structure and recommendations: - After amendments, bank deposits are 100 percent insured up to GBP50,000 per individual depositor and GBP20,000 for other depositors. - Schemes cover residents and nonresidents depositing through IOM offices of locally incorporated institutions and depositors in IOM branches of institutions from abroad. - DCS funded ex post by remaining banking institutions that are members. - Recommendation: reexamine DCS when global strains ease to ensure contingent liabilities align with available resources; consider limiting deposit insurance coverage to truly local deposits to contain contingent liability and facilitate pre-funding. - Powers to intervene and insolvency regime: - Authorities have broadly adequate powers to direct and ultimately intervene but no special legal framework for resolution of financial institutions. - Recommendation: consider developing a dedicated bank insolvency regime and special provisions for “purchase and assumption” to transfer deposits and matching assets quickly. ### AML/CFT framework, ROSC findings, and recommendations - AML/CFT legal framework broadly in line with FATF Recommendations after significant upgrades in second half of 2008; most remaining deficiencies technical in nature. - FCU as FIU: - FCU performs its role adequately; receives reasonable flow of STRs mainly from financial institutions. - Clear separation within FCU between intelligence and investigative sides. - Low number of STRs resulting in investigations or prosecution raises effectiveness issues; additional resources being provided. - Preventive measures and supervision: - IOM formally adopted a risk-based approach; license-holders required to conduct risk assessments and apply enhanced CDD where higher risks identified. - New requirements include PEP-related measures and controls over reliance on business introducers. - Some concessions in CDD go beyond reasonable interpretation of FATF Recommendations. - Financial institutions generally well supervised for AML/CFT; authorities plan additional on-site inspections for banking and insurance sectors. - DNFBPs and registration: - CDD obligations for DNFBPs largely mirror those for financial institutions. - CSPs and TSPs integral to the IOM’s business; approximately 22,000 trusts and 42,000 companies managed or administered in/from the IOM by TSPs and CSPs respectively. - Trusts are not subject to a registration system. - Key ROSC ratings (selected): - R.1 PC; R.2 LC; R.3 PC; R.5 PC; R.6 C; R.7 C; R.8 LC; R.9 LC; SR.II LC; SR.III PC; SR.IX LC. - Key AML/CFT legal developments: - Proceeds of Crime Act 2008 (POCA 2008) came into operation October 22, 2008; remainder of legislation fully in force on August 1, 2009. - Terrorism (Finance) Act 2009 completed passage and is in force; provides Treasury powers to issue directions to enhance CDD, monitoring or systematic reporting and allows IOM to compile its own sanctions list and provide a local appeal mechanism. - Anti-Terrorism and Crime (Amendment) Bill 2009 ongoing work to enhance legislation in 2009. - Legal system notes: - As a British Crown Dependency, IOM is not empowered to sign or ratify international conventions on its own; the UK may extend ratifications to the IOM on request. - Vienna Convention extended to the IOM in 1993; Palermo Convention extension not yet requested; UN Convention for the Suppression of the Financing of Terrorism extended in 2008. ### Supervisory recommendations and action plans (selected) - Banking (from BCP/CP action plan): - CP1(2): Remove Tynwald’s legal powers to remove FSC members by resolution and to veto proposed FSC regulations. - CP2: Make explicit that only licensed deposit takers can use the term “bank”. - CP5: Develop criteria for assessing major acquisitions by locally incorporated banks. - CP10/CP11: Decide annually on exemptions for large exposures and regularly monitor parents’ status; formalize procedures. - CP14: Consider requiring banks to hold a stock of highly liquid assets in marketable assets or short-term balances with non-group banks. - CP15: Strengthen guidance on operational risk relating to legal risk. - CP19/CP24: Develop cross-bank comparisons, system-wide stability analyses, and a formal supervisory regime for consolidated supervision. - Insurance (from ICP action plan): - ICP3: Address institutional arrangements that leave scope for government intervention (dismissal provisions, Tynwald powers, funding). - ICP9/ICP10/ICP18/ICP25/ICP27: Issue binding guidance on corporate governance, internal controls, risk management, consumer protection, and fraud. - ICP17: Develop powers and processes to carry out group supervision and tests of group solvency as appropriate. - ICP26: Introduce disclosure requirements for insurance companies (other than pure captives) after consultation. ### Data, monitoring, and recommended enhancements - Supervisory agencies hold substantial data but should compile and analyze additional statistics regularly, including aggregate financial soundness indicators (FSIs) and balance sheets. - Need for better, more timely information on household and local corporate sector balance sheets and foreign borrowing. - Strengthen system-wide monitoring and regular stress testing to assess vulnerabilities. - Maintain confidentiality while integrating prudential returns and other sources for statistics. *Source: IMF staff Financial System Stability Assessment Update for the Isle of Man (FSAP Update mission report, mission dates September 9–18, 2008; approved August 19, 2009).* ### 2009. The views expressed in this document are those of the staff team and do not necessarily reflect ### ISLE OF MAN — Financial System Stability Assessment Update ### Mission and context - Prepared by the Monetary and Capital Markets Department; Approved by Hervé Ferhani; dated August 19, 2009. - The FSAP Update mission visited the Isle of Man (IOM), September 9–18, 2008. - Mission composition: Daniel Hardy (mission chief), Andrea Maechler, Ian Tower (all MCM/IMF), Peter Kruschel (BaFin, banking supervision expert), and Ronald MacDonald (banking supervision expert). - The mission worked closely with the overlapping LEG mission (led by Terence Donovan) that assessed FATF AML/CFT standards. - Copies of the report available from International Monetary Fund ● Publication Services; Price: $18.00 a copy. ### Main findings — stability and supervisory environment - The global financial crisis has begun to have an effect on the island, largely because of the travails of parent banking groups. - Risks arising from the IOM operations seem well contained. - The soundness of locally-licensed banks and insurance companies depends on that of their parent institutions; stress tests undertaken as part of the FSAP Update suggest that local institutions would be resilient even to extreme shocks so long as parents remain strong. - Financial sector regulation and supervision are generally of a high standard; supervisory efforts are concentrated in areas most relevant to IOM financial institutions. - Compared to the 2003 assessment, supervisors now operate with more independence and accountability, and a considerable amount of on-site supervision is conducted. - The FSC faces a conundrum: major banks are subsidiaries of large international groups and channel deposits to parent groups; this close relationship is a risk-mitigant in normal times but a powerful risk transmittal mechanism in exceptional periods. - The IOM has brought its AML/CFT preventive measures largely into compliance with the FATF Recommendations; the Financial Crime Unit (FCU), acting as the FIU, performs its role adequately but will require additional resources. - Authorities actively engage in international cooperation. ### Key contextual events and implications - In the fall of 2008 several foreign parent institutions came under extreme strain: some were taken over or received government support, and one local bank is now in liquidation because of the collapse of its parent. - The DCS has recently been expanded in the context of the current global turmoil and is to be reviewed again in due course. - IOM’s limited resources and the large size of the financial sector relative to the domestic economy are structural constraints to contingency planning and potential fiscal exposure. ### Priority recommendations — High priority General - Compile and publish more systematically statistics on financial sector activities and soundness indicators. Banking - Revise regulations on exposures to related parties and liquidity to take more into account risks from exposure to parent institutions, while accommodating business needs. - In cooperation with home supervisors, confirm on a regular basis that parent banks have the capacity to support local subsidiaries. - Continue to develop contingency plans to deal with a variety of stress situations. - Keep the DCS under review with a view to maximizing its contribution to stability and social objectives, and, at an appropriate time, adjusting coverage levels to better limit contingent liabilities. Insurance - Issue regulations and develop procedures to achieve effective group supervision. ### Priority recommendations — Medium priority General - Strengthen capacity to assess system-wide vulnerabilities, including through stress testing. - Introduce explicit criteria for dismissal of FSC and IPA Commissioners, and require publication of the explanation. Banking - Develop (and publish) cross-bank comparisons and system-wide stability analysis. Insurance - Introduce explicit standards on corporate governance for insurance companies and related issues (internal controls, risk assessment and risk management). - Require (noncaptive) insurance companies to disclose information on their financial position to stakeholders, including policyholders. ### Contingency planning, DCS, and insolvency - Contingency plans need to reflect structural features: dependence of most banks on large parent institutions for risk management, operations, and placement of funds, and the IOM’s limited resources. - The DCS expansion has been a near-term response to the global turmoil; a later review should consider developments in deposit guarantee schemes in advanced economies and IOM objectives/constraints. - After the crisis, the DCS should be amended to better relate contingent liabilities to available resources while ensuring investors are informed of coverage limits. - Authorities could consider developing a dedicated bank insolvency regime. ### Supervisory structure and evolving needs - Financial sector supervisors—the Financial Supervision Commission (FSC) and the Insurance and Pensions Authority (IPA)—operate with considerable independence and mechanisms for accountability; recent legal changes enhanced independence and accountability but legal provisions on dismissal of board members and dependence on government budgets/staffing leave potential exposure to political pressures. - As the financial system becomes more complex (e.g., potential application of Solvency II requirements), resource and structural constraints may become more problematic. - Insurance sector needs: introduction of group supervision regulations and procedures; explicit rules on corporate governance, internal controls, and risk management; disclosure requirements for noncaptive insurers. - For collective investment scheme (CIS), pension, and fiduciary service sectors: supervisory emphasis has shifted toward oversight of service providers rather than individual products; CIS provisions adjusted toward professional and institutional investors; fiduciaries supervised on a regular basis within an up-to-date legal framework. ### Data, monitoring, and stress testing - Authorities can enhance analysis of systemic stability and peer group analysis by compiling additional statistics such as aggregate financial soundness indicators (FSIs) and balance sheets. - Strengthen system-wide monitoring and regular stress testing to assess vulnerabilities. ### Observance assessments undertaken - Detailed assessments were conducted of: - Basel Committee Core Principles for Effective Banking Supervision (BCP), - International Association of Insurance Supervisors Insurance Core Principles (IAIS ICP), - FATF 40+9 Recommendations on AML/CFT. - Level of observance is high in terms of laws and regulations, supervisory implementation, and practices of financial institutions. *Source: IMF staff Financial System Stability Assessment Update for the Isle of Man (FSAP Update mission report, mission dates September 9–18, 2008; approved August 19, 2009).* ### 1. The ongoing refinement of the IOM’s regulatory framework in recent years and ### _cr09275 - 1. The ongoing refinement of the IOM’s regulatory framework in recent years and ### Context and macro-financial background - Annual GDP growth has averaged over 8 percent over the last decade. - Unemployment is negligible. - Inflation in mid-2008 was about 4 percent. - Average residential house prices rose fairly steadily at about 8 percent per year during 2003–07. - The government is required to budget for a surplus, allowing it to build up reserves. - The recent financial markets turmoil and the slowdown in Europe are likely to affect the economy going forward. ### Role and size of the financial sector - Banking generates almost one-fifth of the IOM’s GDP. - Combined financial services makes up more than one-third of GDP. - Professional services, some finance-related, make up another fifth of GDP. - The IOM is in the middle range of OFCs by balance sheet size, being smaller than the other Crown Dependencies in banking, but larger in insurance. ### Banking sector: structure and key balance-sheet figures - Most major British banks and building societies have operations on the IOM; in addition to two Manx banks, there are branches and subsidiaries from other EU countries (mainly Ireland) and some other countries. - Business models are diverse; an important component is the collection of retail deposits from overseas, often on-lent to parent banks. - Liquidity is generally managed by parent banks; banks do not operate trading books in almost all cases. - Key consolidated (unconsolidated where noted) balance-sheet figures (from Tables): - Table 1 (selected totals): - Banking Sector (December 2003): Number 56; Assets GBP33,499 (million); Percent of total assets 53.6 - Banking Sector (December 2007): Number 44; Assets GBP68,115 (million); Percent of total assets 48.8 - Banking Sector (December 2008): Number 40; Assets GBP73,856 (million); Percent of total assets 52.9 - Insurance sector (December 2003): Number 187; Assets GBP23,943 (million); Percent of total assets 38.3 - Insurance sector (December 2007): Number 172; Assets GBP43,654 (million); Percent of total assets 31.3 - Total financial system (December 2003): Number 446; Assets GBP62,482 (million); Percent 100.0 - Total financial system (December 2007): Number 1,130; Assets GBP139,673 (million); Percent 100.0 - Table 2 (end-2008, GBP thousands): - Total assets 61,657,453; In percent of total 100.0; In percent of GDP 3,392.2 (relative to 2006/2007 GDP of GBP1,817 million) - Total loans 58,947,774; In percent of total 95.6; In percent of GDP 3,243.1 - Inter-bank 50,924,287; In percent of total 82.6; In percent of GDP 2,801.7 - of which: intra-group 31,263,082; In percent of total 50.7; In percent of GDP 1,720.0 - Total liabilities 61,657,453; Total deposits 58,132,090; Total deposits In percent of total 94.3; In percent of GDP 3,198.2 - Capital and reserves 2,553,440; In percent of total 4.1; In percent of GDP 140.5 - Table 3 (structure of total deposits, end-2008, GBP millions): - Total Deposits 54,642,783; In percent of total 100.0; In percent of GDP 3,006.3 - Domestic 17,803,873; In percent of total 32.6; In percent of GDP 979.5 - Cross-border 36,838,910; In percent of total 67.4; In percent of GDP 2,026.7 - UK 13,953,045; In percent of total 25.5; In percent of GDP 767.6 - Non-interbank deposits 39,890,948; In percent of total 73.0; In percent of GDP 2,194.7 - Interbank (banks and other) 14,751,835; In percent of total 27.0; In percent of GDP 811.6 - Table 4 (structure of total loans, end-2008, GBP millions): - Total Loans 56,527,616; In percent of total 100.0; In percent of GDP 3,109.9 - Domestic 8,999,979; In percent of total 15.9; In percent of GDP 495.1 - Cross-border 47,527,637; In percent of total 84.1; In percent of GDP 2,614.8 - UK 29,893,003; In percent of total 52.9; In percent of GDP 1,644.6 - Interbank 47,610,935; In percent of total 84.2; In percent of GDP 2,619.4 ### Insurance sector: composition and indicators (Table 5, selected) - Main components: life assurance (mainly unit-linked savings products) and captives. - Life business underwrites mostly from policyholders in the UK, the Middle East, and the Far East. - Pension scheme regulatory framework introduced in 2005; sector still small. - Table 5 highlights (GBP millions unless indicated): - Life: Gross premiums 2002–2008: 3,860; 3,133; 3,975; 6,666; 9,441; 8,427; 8,060 (Percent of total life 85.3) - Life: Total assets 2002–2008: 14,900; 18,059; 20,578; 26,677; 33,562; 38,634; 37,457 (Percent of total 87.4) - Life: ROE (return on equity after tax, percent) 2002–2008: 11.84; 16.53; 41.79; 50.16; 39.16; 18.62; 12.21 - Captives: Total assets 2002–2008: 4,632; 4,416; 3,503; 3,804; 3,644; 3,377; 3,725 (Percent of total 8.7) - Captives: ROE (return on equity after tax, percent) 2002–2008: 8.27; 18.40; 18.86; 15.60; 15.82; 19.73; 11.0 - Total gross premiums (life + captives) 2002–2008: 5,153; 4,513; 5,452; 7,800; 10,558; 9,784; 9,448 (Percent of total 100.0) - Total assets (insurance sector) 2002–2008: 20,850; 23,943; 25,630; 32,105; 38,606; 43,654; 42,848 (Percent of total 100.0) ### Collective investment schemes (CIS) and securities market (Table 6, selected) - Rapid growth in number of funds and assets under management. - Table 6 (selected): - Number of licensed investment funds 2002–June 2008: 186; 203; 253; 375; 439; 464; 467 - Total value of assets under management (GBP millions) 2002–June 2008: 4,770; 5,040; 7,090; 14,670; 21,390; 26,720; 28,930 - Open end funds 2002–June 2008: 186; 203; 253; 349; 399; 418; 415 - Categories of funds (selected counts for June 2008): Authorised 610; Full International 2,440; Exempt International 2,910; Experienced Investor 6,050; Professional Investor 70; Overseas 9,890; Closed ended 5,990 ### Fiduciary services and corporate registry - Providers of fiduciary services are important to the local economy; services include establishment/transfer of companies, acting as director or secretary, maintenance of records and accounts, acting as trustee, and administering trusts. - More than 30,000 companies are registered on the IOM. - Manx corporate service providers (CSPs) and trust service providers (TSPs) administer many additional companies and trusts; sophisticated legal and accountancy services are available. ### Comparative advantages and evolving challenges (Box 1) - Comparative advantages described: - Convenient location to provide services to the London financial market. - Generally similar legal and regulatory structure to the UK. - Wide range of supporting services (accountancy, lawyers). - Tax system with zero taxation on most corporate profits (and 10 percent on banks’ profits), no capital gains or inheritance tax, and low personal income tax—facilitates tax-efficient asset management. - Operating costs reportedly somewhat lower than in other European financial centers. - Authorities maintain policy to keep high and up-to-date standards of regulation and supervision to minimize reputational risk. - Evolving challenges and risks noted: - Lower-cost centers likely to attract more routine business. - Competition from jurisdictions able to subsidize operating costs. - Relative decline in locally-administered retail CIS in favor of institutional investor-oriented funds. - Slowdown in establishment of new captive insurers. - Changes in regulations and taxation in metropolitan centers and the EU pose particular challenges: - IOM offers both the withholding tax and disclosure options under the EU Savings Directive. - 2005 introduction of withholding tax (initially at 15 percent) on interest income for EU residents did not seem to slow inflow of deposits. - Next prospective change is increase in withholding tax to 35 percent in 2011. - The current global crisis may induce banks to deemphasize wholesale and securitized funding and look more to mobilizing retail deposits, where the IOM’s comparative advantage lies. ### Regulatory and supervisory system: scope and recent evolution - The assessment updates the 2002 OFC program assessment finalized in 2003, reflecting integration of the OFC program into the FSAP (Executive Board meeting 08/48 on May 30, 2008) which widened the scope to include stability-related issues. - The report covers regulatory and supervisory system—mainly for the banking and insurance sectors—and matters relating to financial system soundness and ability to cope with stress. - The assessment is based on information available at the time of the September 2008 mission, updated to reflect documented regulatory and economic developments since then. - The 2003 OFC assessment had recommended increasing independence, accountability and resources of supervisory agencies, and intensifying on-site supervision; several specific recommendations were made in relation to individual principles. - Since then, the authorities have taken steps to address many issues raised (Appendix I and Annex with ROSCs). International standards and assessment methodologies have also evolved. ### Institutional structure of regulation and supervision - Main agencies: - Financial Supervision Commission (FSC) - Responsible for regulation and supervision of all financial service providers except insurance companies (and insurance managers and general insurance intermediaries) and pension funds. - Responsible for companies’ registry. - Current staffing about 66 staff, about half working in the supervision division. - Insurance and Pensions Authority (IPA) - Responsible for regulation of insurance and pension companies, and associated service providers. *Source: IMF staff report based on the September 2008 mission and updates provided in the documented regulatory and economic developments (content unit: _cr09275 - 1.).* ### 13. A considerable body of financial sector legislation has been passed since 2002 to ### 13. A considerable body of financial sector legislation has been passed since 2002 to ### Legislative framework and recent acts - The new Financial Services Act (FSA 2008) brings together most provisions on the functions and functioning of the FSC. - The Insurance Act (IA 2008), which came into force on December 1, 2008, plays a similar role for the IPA. - The Collective Investment Schemes Act 2008 streamlines legislation in this area and revises the classification of schemes. - Supervisory agencies have wide legal powers of intervention and sanction, although a court order is needed for more extreme action (such as the assumption of management) or action involving a non-regulated company or person. - The agencies are in the process of updating secondary legislation to be consistent with the recent acts. ### Supervisory independence and accountability (Box 2) - Both supervisory agencies operate independently; agencies and political authorities are publicly committed to maintaining this independence. - A recent memorandum of understanding (MOU) between the FSC and the Treasury emphasizes the FSC’s independence; an MOU between the IPA and the Treasury is in preparation. - Legislative changes since 2002 have strengthened formal independence, but some de jure dependence remains: - Members of Tynwald are not eligible to be members of either regulator under the FSA 2008 and the IA 2008. - The Tynwald has the right to vote to dismiss the FSC Commissioners for any reason. - The Council of Ministers can dismiss the IPA Board members without having to publish an explanation. - Tynwald approval is needed for binding regulations, although in urgent cases this approval can be sought after regulations take effect. - The provision allowing the Council of Ministers to “give direction” to the FSC in any matters affecting public interest has been removed; the Treasury can now “by order specify policies and strategies” to the FSC after consultation. - Both agencies remain dependent on the government for their budgets, even though the FSC receives considerable revenue from the companies’ registry. - Agencies’ staffing levels are set annually by the Treasury as part of the budget process, although both agencies have been able to increase staffing as responsibilities have expanded. - Clarified objectives: - The FSA 2008 specifies objectives of the FSC covering client protection, the reduction of financial crime, and “supporting the IOM’s economy and its development as a financial center.” - The FSA 2008 does not have an explicit mandate to promote the stability of the financial system. - No clear prioritization of objectives is specified. - The IPA’s mandate is similar but it must only “have regard to the desirability of maintaining the competitive position of the island.” - According to the Treasury-FSC MOU, the Treasury is to set the “Overall Regulatory Strategy”; the MOU clarifies that supervisors have operational independence and “instrument independence.” - Enhanced accountability mechanisms since 2002: - Agencies must explain their actions to the Treasury and Tynwald regularly (formalized in the MOU). - The Treasury checks that regulations are consistent with the legal framework and ensures operational budgets are properly carried out. - Both agencies publish comprehensive annual reports including audited financial statements and maintain websites providing access to regulations and other materials. ### Banking sector (BCP assessment and supervision) - The BCP assessment confirms the high standard of prudential regulation and supervision found in the 2003 assessment. - The FSC has strengthened supervisory practice by establishing a comprehensive, but risk-based system of on-site visits and meetings with bank management. - Good progress has been made in the implementation of Basel II. - A minimum risk asset ratio (RAR) (the term used for the risk-weighted capital adequacy ratio, CAR) is assigned to each bank; in practice no bank has a minimum RAR below 10 percent. - A trigger ratio for supervisory action is set at least 1 percent above the minimum RAR. - On-site visits and off-site monitoring generate a small, but significant number of recommendations from the FSC to banks; sanctions are imposed where appropriate. - The FSC consults with bank auditors and receives their reports on a timely basis, though supervisory functions are not delegated to auditors. - Close cooperation with home supervisors has been established and buttressed by numerous MOUs. - Major supervisory challenge: exposure to parent groups - Main business of IOM banks is collection of deposits and channeling financing to their parents, resulting in very large exposures to related parties and liquidity entirely dependent on parents. - Exposure to parents is more or less completely exempted from prudential limits. - The FSC’s licensing policies have admitted mostly subsidiaries or branches of diversified groups from major jurisdictions, mitigating some concerns. - Possible supervisory actions: - The FSC could expressly confirm on a regular basis that parents continue to have the will and capacity to support subsidiaries. - The FSC could seek more frequent updates from home supervisors of their assessment of group soundness. - Other supervisory issues: - Provisions for consolidated group supervision are relatively weak. - No predetermined criteria for judging major acquisition of financial and nonfinancial subsidiaries by banks. - These issues are not currently pressing because local banks do not have major subsidiaries and are largely owned by parent groups. - International standards and best practice are being reviewed in light of the global financial turmoil; authorities will need to adapt changing standards to local conditions. - Some global issues are not relevant to the IOM, but measures on anti-cyclicality and liquidity may be applicable. - Footnote: Local banks are not implementing the internal ratings-based approach. ### Insurance sector (ICP assessment and supervision) - Insurance regulation has been strengthened since the 2003 assessment, as documented by the ICP assessment. - The IPA now has a clear set of objectives and governance changes to reduce potential political intervention. - The IPA has developed regulations including new standards on valuation of life insurance liabilities and new AML/CFT requirements. - AML/CFT has been a focus of the IPA’s enhanced on-site supervisory work. - Regulation is broadly in line with international standards, taking into account the business carried out on the IOM. - The IPA’s approach has been developed with regard to IAIS standards and the international character of the IOM’s business. - The IPA is putting in place MOUs with home regulators and is exchanging information extensively, attending supervisory colleges and other meetings. - Effective regulation is facilitated by a sound legal and institutional framework and the availability of actuarial expertise locally and through the IOM’s connections to the U.K. profession. - The IPA engages a major actuarial consultancy rather than employ actuaries. - Gaps and ongoing work: - Significant gap in standards on corporate governance and related issues (including internal controls, risk assessment and risk management); the IPA is close to adopting new binding guidance setting out expectations in these areas. - IPA already covers governance and related issues in its on-site work (to date mainly in relation to AML/CFT controls in life insurance) and has experience of addressing weaknesses. - Enforcement powers can be used to address governance weaknesses. - Other gaps include powers and procedures for some aspects of group supervision and disclosure requirements. - The IPA needs to ensure it can carry out effective group supervision for existing and future insurance companies based on the IOM. - Companies are not formally required to publish information on financial position; the IPA is working with industry on possible new disclosure requirements, considering IAIS disclosure standards. - Resources and capacity: - The IPA’s resources are small: just 12 staff in total to cover insurance and pensions. - The IPA is bolstered by access to actuarial consultants and cooperative work with the local actuarial society. - The IPA has recruited skilled individuals to assist in development of on-site work. - The IPA faces challenges responding to the EU Solvency II initiative, which will affect most parent groups and set a new international standard. - Current resources could be stretched by development of major new lines of insurance business (there is interest in attracting reinsurance). ### Collective Investment Schemes (CIS) - General regulatory approach: protect more at-risk investors and the reputation of institutions operating on the IOM, while limiting regulatory burden by leveraging oversight by well-regarded overseas authorities. - Reorganization of CIS classes: - CIS oriented toward small-value retail investors are most tightly regulated and supervised. - CIS oriented toward sophisticated and institutional investors face lighter regulation in areas such as portfolio composition, disclosure, and reporting, with mechanisms to ensure investor awareness of risks and to prevent regulatory arbitrage. - Categories have been adjusted and streamlined; some CIS remain “grandfathered” under the old classification scheme. - The regulation of CIS managers and administrators does not differentiate by type of fund. - IOSCO Multilateral MOU: - The IOM has become a signatory to the IOSCO Multilateral MOU, which the FSC can implement using the full range of its powers because it qualifies under the FSA 2008 as a mutual assistance agreement. - The FSA 2008 strengthened the FSC’s powers to investigate insider dealing and market manipulation, on its own behalf or on behalf of overseas authorities. - Risks and vigilance: - Authorities must keep up with regulatory changes abroad given reliance on overseas regulators. - Need vigilance for regulatory arbitrage and abuse, such as marketing lightly regulated CISs to unsuitable clients, which would harm the IOM’s reputation. - Clients’ complaints in CIS and life insurance are likely to multiply during market deterioration, as misunderstood practices become more contentious when returns are negative. ### Company and Trust Service Providers (CSPs and TSPs) - CSPs and TSPs do not present a major source of financial stability risk; they only manage client assets and economic losses in this sector would not threaten the financial soundness of the Manx system. - Sector brings reputation and AML/CFT-related risks; the FSC regulates closely. - Supervisory focus is on ensuring directors and trustees fulfill corporate governance responsibilities. - The Fiduciary Services Act 2005 set the framework for regulation and supervision of TSPs; related regulations including “fit and proper” rules are in place and enforced through reporting requirements and on-site visits. - Many CSPs have acquired TSP licenses. - Money transmission services are within the scope of regulation under the Regulated Activities Order 2008, which came into effect on August 1, 2008. - Supervisory resources and workload: - Due to recent hirings, supervisory resources for this sector appear adequate. - In 2007, fiduciary service providers accounted for 65 percent of all focused supervisory visits. - Currently, 10 staff are responsible for licensing and supervising the 195 license holders and conducting on-site visits to them on a three-year rolling basis. - Future trade-off: FSC could face a trade-off between allocating additional resources to a more systemic sector (such as banking) rather than to a more labor-intensive sector (such as fiduciary services). ### AML/CFT provisions and implementation - The IOM’s AML/CFT legal framework is broadly in line with the FATF Recommendations, having been upgraded significantly in the second half of 2008. - Remaining deficiencies are mostly technical in nature and implementation is generally effective. - Money laundering (ML) is criminalized broadly in line with the international standard; most technical aspects of the Vienna and Palermo Conventions are complied with. - All categories of predicate offenses listed in the international standard are covered. - Statutory sanctions for ML-related offenses are, in a formal sense, comprehensive, dissuasive, and proportionate, but sentences actually imposed by the courts appear rather low. - Legal framework for seizure and confiscation is generally comprehensive. - Implementation of UN resolutions and EU Regulations on combating the financing of terrorism follows that of the UK. - Financial Crime Unit (FCU) acting as the FIU: - The FCU performs its role adequately and receives a reasonable flow of suspicious transaction reports (STRs), mainly from financial institutions. - There is a clear separation within the FCU between the intelligence and the investigative sides. - Low number of cases in which STRs result in investigations or prosecution raises an effectiveness issue that needs to be addressed. - Additional resources are being provided to the FCU. - Preventive measures and supervision: - The IOM has brought preventive measures largely into compliance with the FATF Recommendations and has formally adopted a risk-based approach. - License-holders are required to conduct a risk assessment of their businesses and apply enhanced customer due diligence (CDD) where higher risks are identified. - Recently-enhanced requirements include those relating to conducting business with politically exposed persons (PEPs) and controls over reliance on business introducers to conduct certain CDD measures. - Some available concessions go beyond a reasonable interpretation of the FATF Recommendations. - Financial institutions are generally well supervised for AML/CFT purposes; authorities plan additional AML/CFT on-site inspections, particularly for banking and insurance sectors. - CDD obligations for designated nonfinancial businesses and professionals (DNFBPs) largely mirror those for financial institutions. - CSPs and TSPs are regulated and closely supervised by the FSC. - The on-line gaming sector, while small, presents inherent challenges in relation to CDD. - The company registration system is well developed. *Source: _cr09275 - 13. A considerable body of financial sector legislation has been passed since 2002 to* ### 36. The IOM authorities actively engage in international cooperation in this area. ### _cr09275 - 36. The IOM authorities actively engage in international cooperation in this area. ### International cooperation and AML coordination - "The IOM authorities actively engage in international cooperation in this area." - The range of available mutual legal assistance (MLA) is broad; requests are frequent and dealt with efficiently. - Domestic coordination and cooperation is well developed, particularly through the initiatives of the Joint AML Advisory Group. ### Stability issues — Risk to the financial system - Linkages to parent banks: - Close linkage of domestically incorporated banks to financially sound and well-managed parent banks underpins resilience; parents could support affiliates if need be. - Manx operations account for a non-negligible share of net group funding, raising the likelihood of parental support in case of stress, particularly if the shock originates in the IOM. - Domestically incorporated banks provided between 3 and 25 percent of their groups’ customer funding (11 percent on unweighted average) and between 1 percent and 15 percent of total group funding (6 percent on unweighted average). - These linkages create concentration risk and vulnerability to financial problems at the group level; problems at parent banks have affected Manx subsidiaries. - Reputational risk: - Investors could withdraw deposits owing to financial stress in another part of the financial system or parent bank. - Reputational risk could be realized if some event occurred on the IOM that affected its attractiveness relative to other financial centers. - Reputational risk extends beyond banking to the insurance and CIS sectors; recent scandals elsewhere highlight the possibility of dubious practices by agents. - Other risk factors: - Banks’ loan exposure to the nonbank sector is small relative to their balance sheet. - Significant share of loan portfolio is collateralized or guaranteed by the parent institution, reducing credit risk. - Less than half of banks’ non-interbank loans are channeled through the local economy (6 percent of total claims); this exposure remains substantive relative to GDP (estimated at twice 2007 GDP). - Financial institutions do not take large market positions or engage in very complex operations (handled by parents), so exposure to market risk and certain operational risks should be small. ### Performance and stability indicators — banking and insurance - Impact of global turmoil: - Recent global financial turmoil severely affected parent groups of banks on the IOM in the last quarter of 2008; direct effect on local banks had been slight until then. - Local banks have no significant exposure to the most affected asset classes; largely retail deposit base insulated them from interbank and securities market disruption. - Several UK and other EU banks and building societies with local subsidiaries or branches received various forms of assistance and in some cases merged; local banks will reduce staffing in some cases. - One parent difficulty led to suspension of a local bank’s license; that bank is now in liquidation. The payout to insured depositors is expected to be completed shortly; substantial government support to the DCS has been provided, final net cost pending resolution of the UK affiliate. - Profitability, capitalization, leverage: - High risk-weighted CAR reflects high share of intra-group loans that attract a low risk weight. - In 2008, the IOM’s risk-weighted CAR was 14.8 percent (compared for example to 12.9 percent in the UK, 10.6 percent in Ireland, and 16.1 percent in Luxembourg). - Unweighted capital to asset ratios: IOM banks 4.8 percent (up from 3.3 percent the year before); comparator countries 4.4, 4.1 and 5.2 percent respectively. - Average quality of assets driven by relatively low share of non-intrabank loans (16 percent of total claims), many collateralized; nonperforming loans minor and adequately provisioned. - Banks’ main source of earnings is net interest income derived from transfer of customer deposits to parent banks. - Liquidity: - Banking sector usually exhibits ample liquidity given claims on groups are mostly very short term; in some cases assets shorter maturity than liabilities. - Standard liquidity indicators were falling through mid-2008, but strengthened at end-2008. - Insurance sector: - Insurance sector highly profitable relative to low risk profile and particularly well-capitalized. - Life insurance companies account for 80 percent of gross premium income and achieved especially high returns. - Net assets available to meet the required minimum margin (RMM) exceed the RMM by five times over. - Captive sector is even more strongly capitalized in aggregate; many overseas insurance groups accumulate surpluses in the IOM company for future growth or tax management. - Selected banking sector Financial Soundness Indicators (Table 7; unweighted or as labeled) - Regulatory capital / risk-weighted assets 2004–2008: 19.2, 15.8, 17.2, 14.3, 14.8 - Regulatory Tier I capital / risk-weighted assets 2004–2008: 18.1, 16.0, 15.6, 15.2, 15.0 - Capital / total assets 2004–2008: 3.5, 3.0, 3.3, 3.3, 4.8 - Non-interbank loans / total deposits 2004–2008: 14.8, 13.7, 15.5, 16.1, 16.1 - Liquid assets / total assets 2004–2008: 78.7, 82.6, 71.6, 67.5, 73.9 - Liquid assets / short-term liabilities 2004–2008: 102.1, 104.1, 87.2, 83.5, 115.9 - Return on assets 2004–2008: 0.7, 0.7, 0.6, 0.7, 0.6 - Return on equity 2004–2008: 15.4, 18.5, 15.6, 16.1, 17.2 - Net interest income / gross income (most recent): 74.6, 75.4, 79.8 (years vary as table) - Nonresidents share of sectoral loan distribution / total loans 2004–2008: 10.7, 9.8, 9.9, 15.0, 21.7 - Share of loans to banks (of nonresidents): 54.1, 63.6, 64.7, 63.1, 73.1 - Nonbanking sector indicators (Table 8) - Corporate sector total debt / GDP 2002–March 2008: 94.4, 82.9, 92.6, 70.7, 110.8, 103.5, 122.0 - Household sector total debt / GDP (2004–March 2008): ----, 104.4, 99.3, 98.8 - Household debt service burden / disposable income: --, 18.6, 19.9, 20.5, 19.4, 19.3 - Real estate sector house price inflation 2002–March 2008: 10.5, 15.3, 12.5, 9.7, 4.3, 3.9, 12.0 ### Stress testing — methodology and key results - Overview: - Stress tests performed to assess resilience of banks and insurance companies to a variety of shocks. - Methodologies and shocks chosen in consultation between the FSC, IPA, and the FSAP team. - Shocks based on historical stress scenarios, periods of heightened volatility, and historical distributions of key macro variables for peer economies. - Estimation performed both "top down" by the authorities with the FSAP team, and "bottom up" by individual commercial institutions. - Banking stress-test findings: - Main potential concern: concentration risk and spillovers from parent banks—difficult to capture quantitatively. - Hypothetical: 10 percent provisioning of claims on parents would wipe-out the capital base of the Manx banking sector. - Major shocks to parent banks likely correlated with general economic downturn, affecting loan portfolio. - Resilience is highly nonlinear: limited impact in mild stress, disastrous in extreme stress. - Liquidity resilience hinges on parent banks’ ability to provide day-to-day liquidity and financial guarantees; difficulty if deposit drain relates to parent solvency or liquidity. - Credit risk is not dominant: test C1 showed all banks reported less than one percentage point change in their CAR under doubling of PDs, reflecting small non-interbank loan portfolio and calibration choices. - A macroeconomic shock causing a 10 percent default on banks’ mortgage loan portfolio would reduce aggregate CAR by 124 basis points but leave it comfortably above the minimum; at most one small bank would be severely affected and require support from its foreign parent. - Market risk moderate due to minimal position-taking and group transfer pricing/matching arrangements. - Banking system exhibits ample liquidity buffers to absorb dramatic deposit drains; however, a number of banks would have difficulty meeting rapid withdrawal of almost all short-term deposits if parent banks do not provide support. - Selected banking stress-test scenarios and illustrative results (Table 9) - Pre-shock capital (unweighted average across twelve banks): 14.44 (Min. 11.72, Max. 34.64) - Interest Rate Risk scenarios include 200 basis points parallel shifts in sterling, dollar, euro yield curves with reported percentage point and percent-of-pre-shock-capital effects (detailed rowed results in Table 9). - FX Risk scenarios include 20% pound depreciation/appreciation and 20% dollar depreciation/appreciation with reported effects. - Credit Risk C1: Doubling of all probabilities of default (PDs) on loans resulted in percentage point changes ranging (example entries) 0.03 (Average), -0.33 (Min.), 0.10 (Max.); effects in percent of pre-shock capital include -0.66 to -11.81 (Min. to Max.) in bottom-up / top-down columns as per table. - A1: If 10% of domestic nonbank loan fail — reported impacts include -1.42 to -8.26 in some columns and -10.53 to -44.78 in others, per table. - A2: If 10% of mortgage loans fail — aggregate CAR reduction example: -1.24 to -21.63 in some columns and -9.21 to -164.52 in others. - A4: If 10% of parent bank fails — reported effects include -10.58 in one column and -73.97 in another (Table 9). - Insurance stress-test findings: - Manx life insurance sector exhibits considerable resilience against shocks; most business is unit-linked and many risks are borne by policyholders. - Mortality risk shocks are negligible; insurers have limited credit and property risk. - Market risk shocks that reduce fund values have significant impact on solvency because reserves equal difference between future expenses and expected future charges (charges linked to funds under management). - On average, minimum requirements are still comfortably covered in all tests; IPA expects firms to meet a margin of at least twice the formal minimum, which is also well-covered after shocks. - Existing solvency approach in the IOM for unit-linked business is typically more prudent than the one expected on the Solvency II basis. - Selected life-insurance stress-test results (Table 10) - Pre-shock coverage ratio (net admissible assets to required minimum margin) average: 421.54 - I1 (200 bp upward sterling shift) coverage ratio average: 466.23; percentage point change: 44.70 (Min. 0.00, Max. 191.33) - I2 (200 bp downward sterling shift) coverage ratio average: 338.06; percentage point change: -83.47 (Min. -353.35, Max. 0.50) - A1 (35% shares price decline on foreign stock markets) coverage ratio average: 488.26; percentage point change: 66.72 (Min. -50.88, Max. 1028.87) - M1 (Permanent 25% increase in mortality rates) coverage ratio average: 399.96; percentage point change: -21.58 (Min. -82.83, Max. 3.85) ### Data, monitoring, and contingency planning - Data and FSIs: - Supervisory agencies have a great deal of data on financial institutions; more could be compiled and analyzed for the system as a whole on a regular basis. - Better statistical base would be useful for authorities in tracking developments and conducting peer group analysis, and for outside observers and potential investors. - Feasible to integrate information from prudential returns (taking care to preserve confidentiality) and other sources currently used to provide statistics to international organizations. - Useful to collect more and more timely information on balance sheets of household and local corporate sectors, which may have large assets and liabilities abroad; their financial position may be of limited importance to banking stability but matters for overall policy purposes. - No data are available on households’ and corporates’ borrowing abroad (e.g., credit card debt) and through nonregulated retail financing houses. - Contingency planning: - Section heading: "D. Intervention and Contingency Planning — Intervention powers, resolution procedures, and safety nets" indicates following material addresses these topics (text beyond heading not provided in supplied content). *Source: _cr09275 - 36. The IOM authorities actively engage in international cooperation in this area.* ### 51. The authorities have broadly adequate powers to direct and ultimately intervene ### _cr09275 - 51. The authorities have broadly adequate powers to direct and ultimately intervene ### Powers to supervise and resolve troubled institutions - Authorities have broadly adequate powers to direct and ultimately intervene in a troubled financial institution, but: - There is no special legal framework for the resolution of financial institutions. - There is no automaticity in intervention; banks are aware they will be requested to take remedial action if their CAR falls to within one percentage point of the required minimum. - Recommendation / observation: - Experience elsewhere suggests a dedicated bank insolvency regime would be useful. - Special provisions for “purchase and assumption” could be helpful so that bank deposits and matching assets can be quickly transferred to a healthy bank. ### Depositors Compensation Scheme (DCS) coverage and risks - Coverage and structure: - After recent amendments, bank deposits are 100 percent insured up to GBP50,000 per individual depositor and GBP20,000 for other depositors. - Investors in authorized (retail) CISs and life insurance policyholders are protected by separate schemes. - All schemes cover residents and nonresidents investing or depositing through the IOM offices of locally incorporated institutions, and depositors in IOM branches of institutions from abroad. - In case of need, the DCS would be funded ex post by the remaining banking institutions that are members of the scheme. - Recent experience and fiscal implications: - Recent pay-outs to depositors in a relatively small bank required a substantial contribution from the government. - The DCS is legally a contingent liability of the banks themselves, which pay premia, but in the event of a large pay-out banks may be reluctant to pay for compensation to the depositors of a failed competitor; they have the option to relocate. - The government might assume liability for any large pay-out, but fiscal resources are small relative to the financial system. - Recommendations / possible reforms: - When global financial market strains ease, reexamine the DCS to ensure contingent liabilities are in line with resources effectively available. - Consider limiting deposit insurance coverage to truly local deposits to: - Contain the contingent liability, - Facilitate the achievement of adequate pre-funding, - Ensure that social objectives are met. - Ensure depositors are made aware in advance of the main features of the scheme to avoid undermining depositors’ confidence. ### Key DCS statistics (as reported, end-September 2008) - Depositors covered (number): 642,695 (Total) - Domestic Banks: 950 - Foreign-Owned Subsidiaries: 418,605 - Foreign-Owned Branches: 224,090 - Depositors with deposits GBP20,000 and below (number): 442,811 (Total) - Domestic Banks: 348 - Foreign-Owned Subsidiaries: 277,991 - Foreign-Owned Branches: 164,920 - Depositors with deposits over GBP20,000 (number): 199,784 (Total) - Domestic Banks: 602 - Foreign-Owned Subsidiaries: 140,614 - Foreign-Owned Branches: 59,170 - Covered deposits (In GBP thousands): 46,283,833 (Total) [table shows components] - Domestic Banks: 59,793 - Foreign-Owned Subsidiaries: 36,220,918 - Foreign-Owned Branches: 10,062,915 - Effective liabilities 5/ (In GBP thousands): 16,821,295 (Total) [computed as per table footnote] - Domestic Banks: 33,730 - Foreign-Owned Subsidiaries: 11,383,120 - Foreign-Owned Branches: 5,438,175 (Note: footnote 5/ computation rule preserved in source: sum of 100 percent of net deposits of GBP20,000 and below for non-individuals, plus GBP 20,000 for each non-individual depositor with net deposits over GBP20,000, plus 100 per cent of net deposits of GBP50,000 and below for individual depositors, plus GBP 50,000 for each individual depositor with net deposits over GBP 50,000.) ### Contingency planning and stress-testing - Authorities have begun contingency planning; suggested enhancements include: - Strengthen stress testing capacity to calibrate possible stress scenarios. - Design considerations for contingency plans and stress tests: - (i) Large financial exposure of local institutions to their parent institutions, and operational dependence on them. - (ii) Absence of a lender of last resort (LOLR) facility or other mechanism to provide banks with liquidity, given the monetary union with the UK. Fiscal resources are relatively small. - (iii) High probability that, in a crisis, home supervisors will give low priority to timely cooperation with the Manx authorities and minimizing costs to the IOM. - (iv) Limited ability of the authorities to track developments overseas in real time (e.g., cannot monitor the payments system). - (v) Dependence of most banks’ business models on the attractiveness of the IOM as a low-cost, low-risk location to channel resources to their parent institutions and, to a much more limited extent, other investments. - Institutional roles and cooperation: - The FSC is taking the lead in contingency planning; the Treasury has responsibility for possible mobilization of resources; the FSC-Treasury MOU provides a framework. - Authorities should strengthen in advance arrangements for cooperation and communication with home supervisors of institutions represented on the IOM. - Consider developing arrangements paralleling or linked to the EU’s June 2008 MOU on financial crisis management (e.g., early notification of strains and possible participation in relevant cross-border stability groups). ### Basel Core Principles assessment — main findings and risks - Assessment context: - Assessment undertaken during an IMF FSAP Update mission in September 2008, following the revised Core Principles Methodology (October 2006). - Institutional, market, and legal setting: - The IOM is a self-governing Crown Dependency in a monetary and customs union with the UK. - The FSC is the sole supervisory authority for banks operating on the IOM; legal basis for banking regulation located in the FSA 2008. - The entire Financial Services Rule Book 2008 came into force on August 1, 2008 for new licenses; for existing license-holders the Rule Book is not fully applicable until January 1, 2009 (AML part effective August 1, 2008 for all license-holders). - Macroeconomic and banking sector metrics: - Annual GDP growth has averaged over 8 percent over the last 10 years. - Banks’ total assets increased from GBP 33.5 billion to GBP 68.1 billion since 2003. - The average risk weighted capital adequacy ratio at end-2007 was 16.1 percent. - Structure and risk characteristics of banks: - With the exception of two Manx banks, all banks are branches and subsidiaries from EU countries (mainly the UK and Ireland) and some other countries. - Banks’ business models often rely on collection of retail deposits from overseas; intra-group claims account for over 70 percent of customer deposits. - Limited lending to the local economy; liquidity is in almost all cases managed by parent banks; banks do not operate trading books. - Supervisory strengths: - IOM’s compliance with international supervisory standards is generally high; many issues from the 2003 assessment have been addressed. - The FSC has improved regulatory and prudential supervisory practice, established a comprehensive risk-based system of on-site visits, and made good progress in Basel II implementation. - FSC operational autonomy has been reinforced; supervisory staff are highly trained and respected. - The FSC has adequate powers to ensure compliance, broad enforcement powers, and the FSA 2008 allows petitioning the court for appointment of a manager for a bank’s business. - Main vulnerabilities and priorities: - Major supervisory challenge: dealing with exposure to parent groups. - Major risk factors highlighted by the global financial crisis relate to large exposures toward parent banks; intra-group exposures generally dominate local banks’ balance sheets, creating major solvency and liquidity risks. - Authorities recognize these concerns and need to prioritize further development of relevant regulations and supervisory practice. - Selected summary points from Table 12 (CP highlights): - CP 1 (objectives, independence, powers, transparency, cooperation): FSC has wide powers and autonomy; operational independence enhanced though Tynwald retains certain controls (e.g., approval of regulations). - CP 6 (capital adequacy): Capital adequacy requirements are fully adequate; Basel II introduced. - CP 7 (risk management process): FSC regulates and effectively supervises risk management processes. *Source: IMF staff report (IMF FSAP Update for the Isle of Man, September 2008).* ### 8. Credit risk The FSC regulates and effectively supervises credit risk. ### _cr09275 - 8. Credit risk The FSC regulates and effectively supervises credit risk. ### Credit risk and related prudential matters - The FSC regulates and effectively supervises credit risk. - Banks are required to recognize problem assets and make provisions in a timely fashion. - Exposures to related parent banks are generally not limited and constitute the main vulnerability for the system. - Country and transfer risks, while limited for most banks, are adequately regulated and supervised. - Market risk, while limited for most banks, is adequately regulated and supervised. - Interest rate risk in the banking book is adequately regulated and supervised. - Operational risk is addressed; the FSC should strengthen its guidance on operational risk relating to legal risk. - Local banks’ liquidity management capacity is limited given the typical business model. Consideration should be given to requiring them to hold a stock of highly liquid assets in the form of marketable assets or short-term balances with non-group banks. ### Supervisory framework and practices - Supervisory approach: use of cross-bank comparisons and system-wide stability analyses should be developed, for example, through more regular stress testing, evaluation of systemic developments, and review of the distribution of financial soundness indicators. - Supervisory techniques: the FSC makes use of an array of supervisory techniques, including sophisticated off- and on-site supervision. - Supervisory reporting: fully satisfactory; strict control should continue to be maintained to prevent unauthorized access to confidential data. - Internal control and audit: banks are required to have effective internal controls and audit. - Accounting and disclosure: banks maintain a high level of accounting and disclosure. - Corrective and remedial powers: authorities enjoy a full range of corrective and remedial powers, which they have exercised when needed. - Consolidated supervision: although not currently of great materiality for the IOM, the FSC should establish an adequate supervisory regime for consolidated supervision. - Home-host relationships: the FSC actively pursues constructive cooperative relationships with home supervisors. - Abuse of financial services: extensive provisions, supported by supervision, are in place to deter and prevent the abuse of financial services. ### Recommended action plan (selected items from Table 13) - CP1(2): Remove Tynwald’s legal powers to remove members of the FSC by resolution and to veto proposed FSC regulations. - CP1(4): Consideration should be given to more use of fines other than for infringement of purely administrative requirements. - CP2: Make explicit that only licensed deposit takers can use the term “bank” and derivatives thereof in relevant names. - CP5: Develop criteria for assessing major acquisitions by locally incorporated banks. - CP10: Decide on a regular basis whether or not an exemption for large exposures should be renewed. - CP11: Regularly monitor the status and financial condition of parent companies of local subsidiaries, and review whether exemptions of group-related exposures from the concentration risk requirements should be renewed. - CP14: Consider requiring banks to hold a stock of highly liquid assets in the form of marketable assets or short-term balances with non-group banks; keep liquidity guidance under review in light of evolving international standards in this area. - CP15: Strengthen guidance on operational risk relating to legal risk. - CP19: Develop cross-bank comparisons and system-wide stability analyses, and publish more analysis. - CP24: Establish a formal supervisory regime for consolidated supervision. ### Authorities’ response to recommended actions (selected items from Table 14) - CP1(2): The Commission will ask Treasury to take forward amending legislation to address these recommendations. - CP1(4): Consideration will be given to adopting this recommendation in an update to the Rulebook which is planned for 2009. Civil Penalties for submission of late returns was introduced as a first stage of a Civil Penalties regime. - CP2: The Commission will ask the Treasury to take forward amending legislation to address this recommendation. - CP5: The Commission can demonstrate the criteria that was used in assessing a major acquisition by a locally incorporated bank. This will be reviewed and formally adopted as the criteria to be used in the future during 2009/early 2010. - CP10: This will be done annually. - CP11: This is already being done but more formalized procedures will be adopted. - CP14: Discussions have occurred during 2008 and will continue in 2009. (Note: “This has been implemented.” appears in the source context for a CP14-related action.) - CP15: Strengthen guidance on operational risk relating to legal risk — this will be done during 2009. - CP19: Develop cross-bank comparisons and system-wide stability analyses, and publish more analysis — this will be done either during 2009 or early 2010. - CP24: Establish a formal supervisory regime for consolidated supervision — this will be done during 2009/early 2010. ### Insurance Core Principles — scope, market structure, and key statistics - Assessment context: IMF FSAP Update for the IOM in 2008; assessment based on information available in September 2008. - Regulator: IPA is the regulator of insurance and pensions; responsibilities consolidated in the IA 2008. IPA governed by a five member board; 12 staff in total. - Market categories: long-term (life) insurance, general insurance, reinsurance, and restricted (captive) insurance. - Life sector: GBP8.4 billion in gross written premiums (GWP) in 2007 and GBP 38.6 billion in assets at end- 2007; 17 companies (as at end-March 2008), writing mainly unit-linked business. - Captive sector: 128 companies and GBP833 million in GWP, 2007; 23 firms authorized as managers of captive companies. - Pensions sector: 1,187 schemes with GBP1.2 billion in total assets at end-2007. - Sector profitability and capitalization: life insurance companies account for 80 percent of gross premium income; returns on equity (on a statutory accounting basis) of up to 50 percent in recent years; relevant available net assets exceed the RMM five times over. ### Main findings on insurance supervision - Overall compliance: Insurance regulation in the IOM broadly meets international standards; regulation has been strengthened since a 2003 IMF assessment. - IPA strengths: proactive stance, effective enforcement, availability of actuarial expertise, development and extension of on-site supervision, extensive information exchange and MOUs with home regulators. - Independence and governance concerns: IPA has clear regulatory objectives and a high degree of operational independence, but some scope remains for government and political intervention (e.g., dependency on government budgetary allocations; members of the Authority can be dismissed by the Council of Ministers without public reasons). No evidence of political interference in supervisory performance was found. - Supervisory practices: IPA uses both desk-based work and on-site visits; has extensive internal guidance and templates; broadening the onsite program to cover all aspects of all insurance companies’ business over the next few years. - Powers and sanctions: IPA has adequate powers and a broad and flexible range of sanctions; supervised dialogue facilitated by small number of firms on the island. ### Identified gaps and planned enhancements (insurance) - Corporate governance: no industry-specific standards currently; IPA is close to adopting new binding guidance setting out its expectations and already addresses governance in onsite work. - Group supervision: gaps in powers and procedures for group supervision for the limited number of cases where necessary; IPA focuses on solo entity supervision and cooperation with parent supervisors but recognizes the need, in some cases, to test group solvency. - Disclosure requirements: gaps exist; IPA is working on enhancements taking into account relevant IAIS standards. *Source: _cr09275 - 8. Credit risk The FSC regulates and effectively supervises credit risk.* ### 90. The IPA faces challenges in the future, including developing a response to the ### _cr09275 - 90. The IPA faces challenges in the future, including developing a response to the ### IPA capacity, challenges, and near-term priorities - The IPA’s resources are small: "12 staff in total for insurance and pensions". - Skilled individuals have been recruited to assist further development of IPA work, including onsite supervision focused on strengthening AML/CFT rules. - While the existing regime for reserving and solvency is described as sound, the IPA will face challenges developing a response to the EU’s Solvency II directive: - Solvency II is not binding on the IOM but will affect most parent groups and set a new international standard. - The IPA is standing ready to respond to any development of major new lines of insurance business on the Island (there is interest in attracting reinsurance) and is keeping its resource needs under review. ### Summary findings on Insurance Core Principles (Table 15) — key points by ICP - ICP1 - conditions for effective insurance supervision - The IOM has well-defined, transparent and effective policy, legal and institutional frameworks for insurance business and access to well-functioning financial markets; benefits from local professional services and access to UK resources. - ICP2 - Supervisory objectives - The IPA has clear and appropriate objectives; staff understand objectives and the distinction between regulation and promotion. - ICP3 - Supervisory authority - Institutional arrangements have aspects that could constrain regulatory objectives (Council of Ministers’ ability to dismiss the IPA Board; Tynwald power to annul Regulations; funding arrangements). In practice, the IPA enjoys a high degree of operational independence. - ICP4 - Supervisory process - IPA conducts functions in a transparent and accountable manner; comprehensive information provided to government, Tynwald, and the public. - ICP5 - Supervisory cooperation and information sharing - IPA recognizes importance of exchanging information, is extending MOUs, committed to becoming a signatory to the IAIS Multilateral MOU, and exchanges information in practice. - ICP6 - Licensing - Comprehensive licensing framework; IA 2008 extends provisions to authorize companies from outside the EU establishing as branches in the Island and to exempt them from some prudential requirements; number of companies expected to be limited. - ICP7 - Suitability of persons - Comprehensive framework for considering suitability of key persons. - ICP8 - Changes in control and portfolio transfers - Comprehensive framework; non-life portfolio transfers (mostly captives) not covered currently but will be brought within forthcoming regulations; interim binding guidance will require insurers to notify the IPA in advance of proposed transfers. - ICP9 - Corporate governance - IPA committed to high governance standards, able to require specific actions, has taken enforcement action; planned new binding guidance on corporate governance expected by end of 2009 to clarify detailed standards. - ICP10 - Internal controls - Corporate governance comments apply to internal controls. - ICP11 - Market analysis - IPA monitors market developments through industry relationships and international supervisory group membership. - ICP12 - Reporting to supervisors and off-site monitoring - Well-developed process for analyzing annual returns; IPA employs no qualified actuaries and relies on UK consultants for technical issues; arrangement functions effectively. - ICP13 - On-site inspection - Well-structured approach with internal guidance; onsite work has prioritized AML compliance but is broadening to cover all aspects over next few years, requiring careful management to avoid resourcing strains. - ICP14 - Preventive and corrective measures - IPA uses supervisory dialogue readily and has powers to impose formal requirements where needed; powers used in practice. - ICP15 - Enforcement or sanctions - IPA rarely uses formal powers but availability reinforces supervisory actions; market perceives IPA as ready and willing to use formal enforcement where necessary. - ICP16 - Winding-up or exit from the market - Framework provides routes for orderly exit, insolvency procedures, and mechanisms to protect policyholders (particularly through transfer of policies). Framework not tested in practice; no life insurer has failed nor has IPA sought a winding up. - ICP17 - Group-wide supervision - IPA focuses on solo entity supervision and cooperation with parent supervisors; in some cases it may be appropriate for the IPA to carry out, or ensure another regulator carries out, a test of group solvency informed by wider risk assessment. - ICP18 - Risk assessment and management - Corporate governance/internal controls comments apply. - ICP19 - Insurance activity - IPA has adequate powers and procedures to ensure insurers can price business and manage insurance risks effectively. - ICP20 - Liabilities - Developed framework for establishment of adequate technical provisions; supervisory staff and actuarial consultants work together on assessments. - ICP21 - Investments - Adequate framework of requirements on insurers’ investments. - ICP22 - Derivatives and similar commitments - Use of derivatives limited to life insurers; planned binding guidance on corporate governance will set out IPA expectations. - ICP23 - Capital adequacy and solvency - Well-founded solvency regulations combining a hard minimum with a flexible approach to higher standards for individual firms; well-defined monitoring and breach-response processes. - ICP24 - Intermediaries - Extensive requirements for intermediaries under IPA (general insurance) and FSC (life insurance); IPA’s powers over general insurance intermediaries extended under IA 2008. - ICP25 - Consumer protection - No explicit requirements in IA 2008; IPA attaches importance to high standards and covers market conduct in supervision and enforcement; planned binding guidance will set expectations. - ICP26 - Information, disclosure and transparency towards markets - No disclosure requirements currently; IPA engaged with industry on standards but timing for requirements unclear. - ICP27 - Fraud - IPA has powers and covers fraud risks in supervisory work but lacks standards on internal controls in this area; planned binding guidance will address this. - ICP28 - Anti-money-laundering, combating the financing of terrorism - IPA has a well-developed set of requirements, especially for life insurance; AML issues prioritized in onsite work. (See also AML/CFT ROSC.) ### Recommended action plan (Table 16) — prioritized interventions - ICP3 - Supervisory authority - Authorities should address parts of institutional arrangements that leave scope for government intervention: dismissal provisions for IPA Board members, Tynwald’s power to annul Regulations, and funding arrangements. - ICP9, ICP10, ICP18, ICP25, ICP27 - Corporate governance, internal controls, risk assessment and management, consumer protection, fraud - IPA needs to complete as soon as possible its comprehensive new binding guidance on corporate governance and related issues to ensure firms are aware of detailed standards expected. - ICP17 - Group-wide supervision - IPA needs powers and processes to carry out group supervision (a test of group solvency informed by a wider assessment of group risks); approach to be kept under review as IAIS policy develops. - ICP26 - Disclosure and transparency - IPA should introduce disclosure requirements for insurance companies (other than pure captives), after consultation, or consider publishing supervisory returns itself. ### Authorities’ response to the assessment — commitments and timelines - The assessment is considered "a fair and accurate summary of the position in relation to insurance regulation in the IOM as at the date of the assessment." - ICP3: IPA will discuss matters further with the Treasury to examine how they might be addressed. - ICP9, ICP10, ICP18, ICP25, and ICP27: - IPA is continuing to develop draft binding guidance on corporate governance. - IPA expects to issue the guidance for consultation in "April 2009" with a view to implementing it by "the end of 2009". - ICP17: - IPA is considering development and implementation of appropriate group supervision requirements using IA 2008 enabling provisions and taking into account IAIS work. - ICP26: - IPA’s current preference is for relevant companies to be required to publish certain information rather than the IPA publishing it itself. - IPA will continue discussions with the Manx Actuarial Society to set initial principles, taking into account ICP detail and IAIS published standards. ### AML/CFT ROSC (FATF 40 + 9 Special Recommendations) — scope and key findings - Report preparation and methodology - This ROSC was prepared by IMF staff and assessed the FATF 40 Recommendations for AML and 9 Special Recommendations for CFT using the "2004 Methodology". - Assessment based on information available as of "September 18, 2008, or shortly thereafter." - Key findings (summarized) - The IOM is an international financial center significant for banking and insurance-related products to nonresidents; funds business growing; some online gambling businesses licensed. - The financial services sector represents "36 percent of GDP". - The IOM legal system is based on English common law; governance and transparency standards appear high. - Much financial services business is UK-related; IOM institutions provide liquidity to U.K. money markets. - Competitive tax regime has been a key driver of sector growth; authorities emphasize international cooperation and entering into TIEAs. - Overall compliance - IOM is broadly compliant with most aspects of the FATF Recommendations, having upgraded requirements significantly, particularly in the second half of 2008; most deficiencies are technical. - No formal published AML/CFT strategy, but political commitment has been given to adhere to FATF principles. - Risk characteristics - More than "90 percent" of business is conducted on a non face-to-face basis for nonresidents, often established through introducers. - Services include private banking and use of legal persons and arrangements such as trusts, complicating customer and ultimate beneficial owner identification. - Criminalization, confiscation, and counter-terrorism measures - ML criminalized broadly in line with international standard; many technical aspects of Vienna and Palermo Conventions complied with. - All categories of predicate offenses listed in the international standard are covered. - Statutory sanctions are formally comprehensive, dissuasive, and proportionate, but sentences imposed by courts appear rather low. - Legal framework for seizure and confiscation is generally solid and comprehensive. - Implementation of UNSCRs "1267 and 1373", and EC Regulations "2001 and 2002", follows that of the UK. - Financial Intelligence Unit (FCU) performance - The FCU, acting as the FIU, performs adequately and receives a reasonable flow of STRs mainly from financial institutions. - Clear separation within FCU between intelligence and investigative handling of reports. - Low number of STRs resulting in investigations and prosecutions raises effectiveness concerns. - Additional resources are being provided to the FCU. - Risk-based approach and preventive measures - IOM formally adopted a risk-based approach; license holders required to conduct risk assessments and tailor CDD, with enhanced CDD where higher risks identified. - Preventive measures largely brought into compliance with FATF Recommendations after recent revisions, including PEPs and controls over reliance on introducers; some concessions may exceed reasonable interpretation. - Supervision and sanctions - Financial institutions generally well supervised for AML/CFT; range of administrative sanctions should be enhanced. - Authorities plan additional AML/CFT on-site inspections, particularly for banking and insurance. - DNFBPs and registration issues - CDD obligations for DNFBPs largely mirror those for financial institutions. - CSPs and TSPs conduct substantial cross-border and non face-to-face business; regulated and closely supervised by the FSC. - Online gaming sector small but faces inherent CDD challenges. - Department of Home Affairs (DHA) has overall AML/CFT responsibility for remaining DNFBPs and was advanced in developing appropriate measures to supplement existing requirements for TSPs, CSPs, and most lawyers. - Company and trust registration - Company registration system well developed and operates within FSC structures. - Trusts recognized under IOM law but not subject to a registration system. *Source: Excerpts from the IMF staff assessment and ROSC as presented in the supplied content.* ### 103. As a British Crown Dependency, the IOM is not empowered to sign or ratify ### As a British Crown Dependency, the IOM is not empowered to sign or ratify ### Legal systems and related institutional measures - ML is criminalized broadly in line with the international standard; most technical aspects of the Vienna and Palermo Conventions are complied with. - All relevant categories of predicate offenses are covered. - For the offense of “acquisition, possession or use,” IOM law provides a defense of “having given adequate consideration” for illicit funds received, which could be open to abuse. - Purpose requirements for acts constituting ML are narrower than in the conventions; the scope of the ML provision for terrorism-related predicate offenses is also too narrow. - ML offenses extend to all property that represents the proceeds of crime. - Self laundering is criminalized for all money laundering offenses except “acquisition, possession and use.” - All ancillary offenses are criminalized in line with the standard. - Mens rea requirement varies by offense; at minimum, criminal liability requires intentional action and knowledge that the property stems from a criminal source. - Intent may be inferred from objective factual circumstances based on an English common law principle. - Criminal liability extends to legal persons. - Statutory sanctions for ML are formally comprehensive, dissuasive, and proportionate, but sentences actually imposed by the courts appear rather low. - There have been no convictions for autonomous ML; low number of domestic investigations or prosecutions suggests ML is not yet dealt with as a stand-alone offense. - Financing of terrorism (FT) is criminalized, but the definition does not cover all elements under the FT Convention. - Financing of individual terrorists is criminalized in line with the international standard. - Unclear whether coverage extends to funding for living or other private expenses. - There were no prosecutions or convictions for terrorist financing. - Seizure and confiscation framework is comprehensive, allowing value-based confiscation subject to detailed court assessment. - ATCA 2003 provisions focus on deprivation of assets related to terrorism financing. - Issues remain: lacunae in scope of criminalization of ML and FT; corpus delicti confiscation of laundered assets is untested and its application doubtful. - Equivalent value seizure appears not to be fully covered; the issue identified in the IMF’s 2002/03 assessment regarding nonavailability of confiscation of assets of equivalent value in connection with FT remains unresolved. - Implementation of UNSCRs 1267 and 1373 and 2001/2002 EC Regulations is closely linked to the UK; all UK lists automatically incorporate into the IOM freezing regime. - IOM has its own listing and freezing provisions in ATCA Part VII, but ATCA provisions are insufficient for a comprehensive preventive, pre-investigative approach required by international standards. - The FCU acts as the FIU and has been an Egmont Group member since 2000. - FCU is a joint police/customs unit with civilian support; operationally independent. - FCU remit as receiving/processing agency for ML and FT disclosures is formalized in the AML Code 2008. - FIU financial intelligence unit operates separately from its investigative law enforcement unit. - Statistics for 2004–08 show reasonable reporting by the financial sector; some DNFBP categories show low reporting and timeliness can be improved. - FIU lacks powers of direct or indirect access to financial and other additional information when following up on STRs. - Number of STRs resulting in investigation: six in two years. - Only two prosecutions have been instituted in cases originating from an STR. - Assessors note difficulties due to financial services business involving funds received from abroad on behalf of nonresidents; transferring cases to other jurisdictions can be more efficient, but developing domestic case law is important. ### Cross-border cash controls - IOM opted for a declaration system aligned with EU external border regime. - Obligation to declare cash and bearer-negotiable instruments of more than EUR 10,000 on import into or export from the IOM. ### Preventive measures — financial institutions - Coverage includes all main financial businesses per FATF definition of “financial institution.” - Banking, investment services, CSPs, and TSPs are licensed and supervised (including for AML/CFT) by the FSC. - Insurance business is regulated by the IPA. - Significant upgrades between August and mid-December 2008 brought AML/CFT preventive measures broadly into compliance with FATF Recommendations. - Anonymous accounts and accounts in fictitious names effectively prohibited through secondary legislation. - AML Code 2008 requires identification (and reasonable steps to verify) of all customers and beneficial owners. - Appropriate requirements for legal persons, legal arrangements, and persons acting on behalf of others. - Latest amendments limited previous scope regarding timing of initial CDD. - Requirements for occasional transactions align with the standard. - Some CDD concessions go beyond reasonable interpretation of FATF Recommendations (example: fiduciary business). - Quality of AML/CFT implementation in financial institutions mostly high. - Most financial institutions apply CDD measures using permitted risk-based approach. - Assessors questioned whether increased risk of nonresident non face-to-face business is fully accounted for. - Uneven controls noted where institutions rely on third parties for CDD. - AML Code 2008 introduced PEP-related business requirements fully in line with the standard; assessors found high awareness and compliance. - AML Code 2008 introduced a requirement to prevent misuse of technological developments, but no detail was included; issuance of additional guidance recommended. - Requirement introduced for adequate measures to compensate risk from dealing other than face-to-face. - A protocol exists to accommodate business introducers under detailed conditions to eliminate duplication; some institutions place full reliance on third parties, others are selective. - Regulators should focus on third-party reliance during onsite inspections. - Secondary legislation addresses ongoing due diligence and suspicious transaction reporting to the FCU, supported by detailed guidance. - Protection for suspicious transaction reporting is not as broad as the standard requires in some respects and is not limited to good faith reporting. - Record keeping requirements are fully in line with the standard. - No secrecy provisions inhibit AML/CFT implementation. - Ongoing due diligence requirements are well developed and comprehensive. - A more formal approach is needed for enhanced measures, including countermeasures, related to jurisdictions not or inadequately complying with FATF Recommendations. - Audit requirements do not explicitly include AML/CFT within their scope. - Wire transfers: IOM implemented European Regulation 1781/2006 on Wire Transfers with appropriate modifications. - The UK obtained from EU member states a derogation so a reduced information requirement can apply to payments passing between the UK and the IOM. - Informal funds transfer systems do not appear to be relevant in the IOM. - No explicit prohibition on establishing a shell bank, but an FSC license is required to take deposits and will not be issued unless applicant is managed and controlled in the IOM. - IOM financial institutions are for the most part subject to adequate AML/CFT regulation and supervision, though additional AML/CFT on-site supervision is needed in some significant areas (banking, insurance). - All IOM financial institutions have a designated regulatory authority for AML/CFT purposes. - FSC supervision follows its published Supervisory Approach with an on-site visit cycle of between one and three years, depending on risk. - FSC plans AML/CFT-themed focus visits for 2009/10 to test compliance with latest requirements. - IPA plans additional inspections from 2009. - Range of sanctions at the FSC’s and IPA’s disposal is broad; for serious breaches, ‘fit and proper’ directions are used. - FSC must issue regulations to apply its power of financial penalty in new areas and has yet to do so in AML/CFT. ### Preventive measures — designated nonfinancial businesses and professions (DNFBPs) - CDD obligations for DNFBPs largely mirror those for financial institutions and share the same strengths and weaknesses. - TSP and CSP sector integral to IOM financial services; authorized and supervised actively by the FSC with AML/CFT focus. - Approximately 22,000 trusts and 42,000 companies are managed or administered in or from the IOM by TSPs and CSPs, respectively. - On-line gaming sector conducts entire business non face-to-face with identification via electronic means. - Gambling Supervision Commission (GSC) authorized and supervises a terrestrial casino and 11 on-line casinos. - Legal profession: advocates (licensed in the IOM) and registered legal practitioners (registered in other prescribed jurisdictions). - Both groups are subject to the AML Code 2008. - Only advocates are members of the IOM Law Society; registered legal practitioners are not subject to any IOM supervision, as required for compliance with the standard. - Accounting profession is subject to the AML Code 2008. - DHA was negotiating with accountancy bodies to agree a program for ongoing monitoring of sector compliance at time of assessment. - Real estate agents and dealers in precious stones and precious metals are subject to AML Code 2008. - Implementation of AML/CFT measures for DNFBPs (other than TSPs, CSPs, and most lawyers) was still being developed. - DNFBPs interviewed appeared well informed about CDD and record keeping obligations. - FSC devotes substantial resources to improving AML/CFT compliance of TSPs and CSPs. ### Legal persons and arrangements & non-profit organizations - IOM laws governing legal persons: - Companies Act 1931-2004 - Companies Act 2006 - Limited Liabilities Companies Act 1996 - Trusts recognized under IOM law and subject to the Trustee Act 1961 and subsequent amendments; common law principles of trust law and equity applied and recognized by courts. - About 31,000 companies and 23,000 trusts were set up under IOM law. - IOM relies primarily on licensed TSPs and CSPs to obtain, verify, and retain records of beneficial ownership and control of legal persons and arrangements. - All IOM legal entities incorporated under the Companies Act 2006 must utilize services of and identify to the Companies Registry the respective CSP. - Of IOM companies otherwise registered, an estimated 70 percent utilize CSP services; the balance mainly comprises local businesses. - Number of trusts administered by TSPs is unknown; trusts are not registered in the IOM. - TSPs and CSPs must identify the natural person who ultimately owns or controls a customer or person on whose behalf a transaction is conducted and take reasonable steps to verify identity. - For companies or legal arrangements not using licensed TSPs or CSPs, no formal measures are in place regarding beneficial ownership information. - Persons providing director services and nominee shareholders, protectors/enforcers, and letter of wishes are permitted and frequently used for trusts under IOM law. - Charitable bodies are registered with the General Registry, which has undertaken a desk-top review of registered charities’ objectives and mandates. - No evidence of FT abuse was identified; authorities are proceeding with a planned review of the sector. ### National and international cooperation - As a British Crown Dependency, the IOM cannot sign or ratify international conventions on its own behalf; following an IOM government request, the UK may extend ratification of any convention to the IOM. - Vienna Convention was extended to the IOM in 1993. - Extension of the Palermo Convention has not yet been requested because IOM law does not yet comply with all its provisions. - UK extended ratification of the UN Convention for the Suppression of the Financing of Terrorism to the IOM in 2008. - Range of mutual legal assistance (MLA) that the IOM can provide is broad. - MLA requests are frequent and make up a substantial part of the workload of the Attorney General’s Chambers and the FCU and are dealt with constructively and efficiently. - There have been no refusals on record since 2004. - IOM authorities take international cooperation responsibilities seriously, including in the FIU (applying Egmont Group principles) and in financial supervision (notably under the IOSCO multilateral MOU). - Domestic coordination/cooperation is well developed, particularly via the Joint AML Advisory Group, which represents all relevant authorities and involves extensive consultation with supervised financial institutions and other businesses. ### Other issues - Relevant authorities are generally well resourced, but additional resources are recommended: - Additional resources for regulatory authorities for AML/CFT on-site inspection work, particularly for banks and insurance businesses. - Additional AML/CFT resources needed by the GSC and DHA. - Authorities have approved additional resources for the FCU. *IMF staff assessment text from the provided content unit.* ### 134. Relevant statistics are well maintained in most areas, including by the regulatory ### _cr09275 - 134. Relevant statistics are well maintained in most areas, including by the regulatory ### Overview and assessment (Table 17; compliance schema) - Table 17 presents FATF 40+9 Recommendations and Ratings plus key assessor recommendations. - Compliance categories defined: - Compliant (C) - Largely compliant (LC) - Partially compliant (PC) - Non-compliant (NC) - Not applicable (NA) ### Legal system & related institutional measures — Criminalization of ML and TF - R.1 PC - R.2 LC - Key recommendations: - Amend Articles 17C CJA 1990 and 45 DTA 1996 to: - provide for two alternative purposes for converting and transferring proceeds: to avoid prosecution for the predicate offense or to conceal the illicit origin of the funds; - eliminate the purpose requirement for the acts of converting and transferring proceeds of crime. - Eliminate the defense (payment of adequate consideration) in Sections 17B(3) CJA 1990 and 47(3) DTA 1996. - Amend Section 10 ATCA 2003 to cover all material elements of the ML provisions of the Palermo and Vienna Conventions. - Amend acquisition, possession, or use offenses in CJA 1990 and DTA 1996 and the ML offense in ATCA 2003 to include criminal proceeds obtained through commission of a predicate offense by the self launderer. - Authorities should: - (i) address barriers to stand-alone ML prosecutions, including the level of proof needed to determine property stems from a specific predicate offense; - (ii) develop jurisprudence on autonomous money laundering to establish ML as a stand-alone offense. - SR.II LC (Criminalization of Terrorist Financing) - Amend Article 1 ATCA 2003 to include international organizations as well as governments. - Amend definition of “terrorism” in Section 1 ATCA 2003 to extend to all terrorism offenses in the nine Conventions and Protocols listed in the Annex to the FT Convention. - Consider impact of including “intention of advancing a political, religious or ideological cause” on IOM’s ability to prosecute in contexts contemplated by the FT Convention. ### Confiscation, freezing, seizing of proceeds of crime - R.3 PC - Key recommendations: - Amend law to address deficiencies affecting scope of ML and FT offenses to improve criminal confiscation regime. - Amend law to: - Allow equivalent value seizure at any stage of the investigation; - Address equivalent value confiscation in ATCA 2003 for FT-related assets. - Develop case law on stand-alone ML confiscations. - Improve effectiveness of asset recovery measures, focusing on timely tracing and immobilization of recoverable or realizable assets. - SR.III PC (Freezing of funds used for terrorist financing) - Put in place a formal procedure for receipt and assessment of requests based on foreign freezing lists (UNSCR 1373). - Amend UN Resolutions and EC Regulations implementation to expressly extend definition of ‘funds’ to cover assets ‘jointly’ or ‘indirectly’ owned or controlled. - Provide procedure for considering requests for delisting or unfreezing under EC Regulations. - Provide and publicize a clear procedure enabling access to UNSCR 1267 frozen funds for humanitarian purposes and to cover basic expenses. ### Financial Intelligence Unit (FIU) and reporting - R.26 LC - Recommendations: - Formally provide FIU access to additional information held by covered entities for analytical work (supplementing current informal arrangement). - FCU and other authorities should implement steps to improve effectiveness of the reporting system to support an increase in: - number of investigations and (potentially) prosecutions; - funds and other assets frozen. ### Law enforcement, prosecution and other competent authorities - R.27 LC - R.28 C - Recommendation: - Implement steps to improve effectiveness by increasing the number of investigations and prosecutions pursued domestically. ### Cross-border controls - SR.IX LC - Recommendation: - Extend cross-border control requirements to cover cash transportation by mail between the UK and the IOM. ### Preventive measures — Financial institutions (CDD, wire transfers, monitoring, reporting) - R.5 PC; R.6 C; R.7 C; R.8 LC - R.5 recommendations: - Eliminate residual inconsistencies in AML/CFT legal requirements and terminology. - Expand list of higher-risk customer categories (examples: private banking; business involving trusts or other legal arrangements). - Conduct risk-based review of the Acceptable Applicant facility; require financial institutions to determine whether a customer is acting on behalf of another person and take reasonable steps to verify identity of that other person. - If exceptions to CDD requirements in secondary legislation are retained, amend secondary legislation accordingly. - Tighten use of source of funds as principal evidence of identity if retained for certain low-risk circumstances. - Review concession allowing operations to commence prior to completion of full CDD procedures on a risk basis. - Ensure insurance managers and insurance intermediaries are within scope of all relevant AML/CFT requirements. - Consider reducing the EUR 15,000 threshold for application of CDD measures to one-off transactions by money and value transfer (MVT) service providers. - R.8 recommendations: - Issue more detailed guidance on specific ML and FT risks of new technologies (examples: e-money and e-commerce). - R.9 LC (Third parties and introduced business) - Review business introducers subject to concessions to ensure equivalent AML/CFT requirements. - Assess effectiveness of CDD obtained from Eligible Introducers or Introducers (including Introducer’s Certificates for insurers). - Remove residual inconsistencies in secondary legislation after AML Code 2008. - R.4 LC (Financial institution secrecy/confidentiality) - Bring into force provision that financial institutions do not breach confidentiality duty exchanging customer information for AML/CFT purposes. - R.10 C; SR.VII LC (Record keeping and wire transfer rules) - FSC should reconsider current risk-based implementation for incoming wire transfers lacking full originator information. - FSC should continue including wire transfers within its on-site supervision program. - R.11 C; R.21 LC (Monitoring of transactions and relationships) - Authorities should formalize means of applying counter-measures to countries that do not or insufficiently apply FATF Recommendations. - R.13 LC; R.14 PC; R.19 C; R.25 LC; SR.IV PC (STRs and other reporting) - R.13: Enhance timeliness of reporting suspicious transactions to FCU; amend law to require reporting of suspicious attempted transactions promptly to FCU. - R.14: Amend law to extend protection for persons reporting suspicions to FIU to cover all aspects in international standard and limit protection to reporting in good faith; consider measures to ensure confidentiality of reporters (including in Court). - SR.IV: Amend law to address ATCA 2003 scope deficiencies for STR reporting; enhance timeliness of reporting, including for suspicions of FT; require reporting of suspicious attempted transactions. - R.15 LC; R.22 C (Internal controls, compliance, audit and foreign branches) - Introduce in law/regulation/enforceable means a requirement that financial institutions maintain an adequately resourced and independent audit function to test AML/CFT compliance, proportionate to size and nature of business. - R.18 C (Shell banks) — none. ### Supervisory and oversight system (competent authorities and SROs) - R.17 LC; R.23 LC; R.25 LC; R.29 LC - R.17: FSC should consider issuing further regulations to allow additional administrative sanctions where warranted. - R.23: - Apply AML/CFT requirements directly to any category of financial institutions not currently covered. - FSC should implement supervisory regime for money-services businesses, including bureaux de change, as soon as possible. - R.29: FSC and IPA should increase use of powers to conduct AML/CFT on-site inspections of banks and insurance businesses. ### Money and value transfer services - SR.VI LC - Recommendations: - FSC to conduct AML/CFT supervision of MVT service providers early. - Implement measures to identify informal MVT service providers in the IOM. - Consider significantly reducing EUR 15,000 threshold for CDD on one-off transactions by MVT providers. ### Preventive measures — Non-Financial Businesses and Professions (DNFBPs) - R.12 PC; R.16 PC; R.17 LC; R.24 PC; R.20 LC - R.12 CDD & record-keeping: - Keep under review list of higher-risk customers and consider adding categories on a risk basis. - Risk-based review of Acceptable Applicant facility; if exceptions to CDD in secondary legislation persist, amend secondary legislation. - Review concession allowing operations to commence prior to completion of full CDD, particularly for advocates. - DHA to proceed quickly with arrangements to ensure effective AML/CFT measures for accountancy professionals (including non-members of main bodies). - DHA to implement AML/CFT measures for dealers in high-value goods engaged in cash transactions on a risk-sensitive basis. - Extend requirement to consider filing an STR if unable to complete CDD to casinos. - R.16 STRs for DNFBPs: - Clarify legal privilege in relation to ML/FT issues and STR reporting. - Continue awareness-raising to increase STR effectiveness by DNFBPs, particularly rarely-reporting categories. - Amend law to extend protection for persons reporting suspicions to FIU to cover all aspects of international standard and limit protection to good faith reporting. - Consider measures to ensure confidentiality of reporters (including in Court). - Introduce requirement for DNFBPs to maintain adequately resourced and independent audit function to test AML/CFT compliance. - Amend law to require reporting of suspicious attempted transactions. - R.17/R.24 regulatory/supervision recommendations: - Provide and implement regular and full on-site audits for advocates. - Ensure registered legal practitioners are supervised for AML Code 2008 compliance. - Finalize DHA agreement with professional accounting bodies, issue guidance adapted to IOM AML/CFT requirements, and implement on-site supervisory regime for the industry. - Formalize basis for on-site assessments for DNFBPs outside FSC/GSC/IOM Law Society mandates. - Proceed with legislative amendments to provide DHA adequate powers and resources for registration and regulation of DNFBPs. - Assess adequacy of GSC staffing and specialist skills to address growth in on-line and terrestrial casino business. - R.20 LC (Other DNFBPs) - Continue awareness-raising to determine which categories of NFBP should be within AML/CFT scope. ### Legal persons, arrangements, and NPOs - R.33 LC; R.34 LC - Seek measures to ensure accurate, complete, and current beneficial ownership information is available for all 1931 Companies and LLCs and for legal arrangements administered by trustees not covered by FSA 2008 licensing. - Consider extending formal monitoring of trust and corporate service providers for AML Code 2008 compliance to those “exempted” or “excluded” from FSA 2008 licensing. - SR.VIII LC (Nonprofit organizations) - Complete review of NPO laws/regulations and consider expanding charity coverage to include other NPOs based on an FT risk assessment. - Conduct periodic vulnerability reviews and outreach to NPO sector regarding FT abuse risk. ### National & international cooperation, conventions, MLA, extradition - R.31 C (National cooperation and coordination) - R.35 PC; SR.I PC (Conventions and UN Special Resolutions) - IOM should request extension to it of the Palermo Convention. - Ensure full implementation of Palermo and Vienna Conventions. - Ensure implementation of the United Nations International Convention for the Suppression of Financing of Terrorism. - R.36 C; R.37 C; R.38 PC; R.39 LC; SR.V PC (MLA & Extradition) - Amend law to correct criminalization deficiencies affecting ML and FT to facilitate full compliance with MLA requests related to seizure and confiscation and remove extradition obstacles where dual criminality applies. - Remove restriction limiting MLA involving coercive conservatory and recovery matters to ‘designated countries’. - In amending law on equivalent value confiscation/seizure in FT matters, remove obstacles to related international mutual assistance. - R.40 C (Other forms of cooperation) — none. ### Other relevant AML/CFT measures or issues — Resources and statistics - R.30 LC; R.32 LC - Recommendations: - Consider assigning additional resources to AML/CFT supervision of banks and insurance businesses to increase on-site inspections. - Provide some additional resources needed by the GSC and DHA. - The authorities should take steps to maintain comprehensive statistics on seizures and confiscations. ### Authorities’ response - Paragraph 135: The IOM authorities thanked the evaluators for the time and resources devoted to preparing a comprehensive and constructive report; discussions aided understanding of enforcement and will guide improvements in AML/CFT measures. *Content drawn from the source PDF extract (Table 17 and accompanying text).* ### 136. The island is fully committed to the Recommendations of the FATF on the prevention ### 136. The island is fully committed to the Recommendations of the FATF on the prevention ### AML/CFT legislative developments and compliance culture - The island "is fully committed to the Recommendations of the FATF on the prevention of ML and FT." - Proceeds of Crime Act 2008 (POCA 2008): - Came into operation on October 22, 2008, but "not all of the legislation was brought into force at that time." - POCA 2008 "amalgamated drugs and all-crimes AML legislation and makes changes to the offences relating to STRs." - "The remainder of the legislation has now come fully into force on August 1, 2009." - Terrorism (Finance) Act 2009: - "Completed its passage through Tynwald, and is now in force." - Provides the Treasury with powers to issue directions to individuals or companies to enhance CDD, monitoring or systematic reporting. - "Mirrors parts of the U.K.’s Counter Terrorism Act which came into effect in November 2008." - Allows IOM authorities to compile its own list of suspects subject to sanctions when required (e.g., if FATF advises measures) and "will also provide a new, local appeal mechanism for those subject to UN terrorism or Al-Qaida and the Taliban sanctions." - Anti-Terrorism and Crime (Amendment) Bill 2009: "work has been ongoing" in 2009 to further enhance counter-terrorism legislation in line with developing international standards. - Criminal Justice (ML) Code 2008: "will continue to be reviewed and revised where necessary." - International cooperation: "continues to place a very high priority on cooperation with regulators and law enforcement authorities in other jurisdictions" and "continues to commit to TIEAs" in taxation matters. ### Implementation of 2003 Recommendations (Basel Core Principles, IAIS, IOSCO) — actions taken - CP 1(2) – Operational independence and adequate resources: - Recommended: address government dependence and lack of budgetary autonomy; perform in-depth resource analysis and establish change plan for banking supervision. - Action taken: FSA 2008 contains provisions to strengthen independence of the FSC (e.g., making Tynwald members ineligible to be members of the commission). "In practice, the FSC has considerable independence, but the budget is still decided by government." "The FSC considers that it has broadly adequate resources for current banking supervision tasks." - CP 16 – On-site and off-site supervision: - Recommended: complete examination methodology for full scope examinations with formalized quality control; explore synergies with external auditors. - Action taken: "FSC has well-developed procedures for on- and off-site supervision, and makes frequent on-site inspections." FSC receives auditors’ management letters and certain compliance certificates; may require reporting accountants but does so infrequently; "It does not delegate supervisory responsibility to auditors." - IAIS (Insurance) — Organization of an Insurance Supervisor (CP 1): - Recommended: distance IPA from political influence and remove Tynwald representation. - Action taken: IA 2008 strengthens independence of the IPA (e.g., Board members to have appropriate qualifications). "No Tynwald member is a member of the board now." Budget still decided by government; Tynwald may annul Regulations and Board members may be dismissed by the Council of Ministers without requirement for reasons to be published. - IAIS — Corporate Governance and Internal Controls (CPs 4–5): - Action taken: IPA increased supervisory focus but "still lacks standards in relation to corporate governance and internal controls." "New binding guidance in these and related areas is expected to take effect in Q1 2009." - IAIS — Prudential Rules (CPs 6–10): - Action taken: "Procedures for on-site work have been substantially revised and extended." Reporting requirements expanded to monitor reserving adequacy and compliance with solvency requirements. - IAIS — Market Conduct (CP 11): - Action taken: IPA covers general insurance intermediaries; FSC covers intermediaries for life insurance. Noted arguments remain about bringing all intermediaries within one act. - IAIS — Monitoring, Inspection, and Sanctions (CPs 12–14): - Action taken: "Staff resources—and the depth and range of available skills—have been reviewed and increased where necessary." IPA should keep overall resources under review. - IOSCO — Principle 2 and Principle 3 (Trust and company service providers): - Recommended: enforce "fit and proper" requirements and complete licensing for CSPs; enact Fiduciary Services Bill to extend regime to TSPs. - Action taken: "CSPs are now all licensed. 'Fit and proper' rules are applied to all CSPs." Fiduciary Services Act (2005) extended regime to TSPs; consolidated and replaced by the FSA 2008. Extensive regulations on corporate governance, CDD, conduct of client business, financial soundness, and controls have been issued for CSPs and TSPs; FSC monitors compliance through reporting requirements and on-site inspections. ### Stress testing methodology and coverage - Exercise design: - Included bottom-up analyses by Manx banks and insurance companies using in-house risk systems, and top-down analyses by the FSC in collaboration with the mission. - Covered "over 80 percent of the relevant financial institutions (by market share)." - Used end-June 2008 data, where available. - Focused on local institutions and subsidiaries of foreign parents; liquidity tests included "in addition four branches." - Rationale: "Given the nature of banks’ business and the limited domestic macroeconomic impact on the financial sector, more elaborate scenario tests or more extreme single factor tests are not worthwhile." ### Banks — stress test design and shocks - Single-factor shocks tested: - Interest rate shocks: "200 basis point parallel upward and downward shifts of the sterling, dollar and euro yield curve." - Exchange rate shock: "20 percent depreciation of the dollar and the pound Sterling." - Credit risk tests: resilience to "the default of their three largest exposures (net of claims to parent banks)" and various other credit portfolio components. - Liquidity tests: assessed resilience to "a daily withdrawal of liabilities without access to external funding, including from parent banks." - Liquidity test assumption (footnote): - "The test assumed a daily drawdown of liabilities on demand (including fiduciary deposits) and due within one month by 30 percent over 30, 60, and 90 days." - Result reporting (as described): - Results expressed as (i) "the average percentage point change from the pre-shock capital (the starting point is shown in the first row), with the minimum and maximum percentage change across banks (Columns 1–3)"; and (ii) "the average income loss/gain in percent of pre-shock capital, with the minimum and maximum percent change across banks (Columns 4–6)." - First six columns refer to bottom-up approach; remaining six columns to top-down approach. - Overall: "both approaches produce similar results, although the top-down results tend to be less robust, due to supervisors less detailed knowledge of the banks’ collateral and guarantees, some of which are managed at group-level." ### Insurance — stress test design and shocks - Scope and vulnerabilities: - "Insurance sector business is limited in scope, but there are vulnerabilities in risk and capital management and potentially exposure to reinsurers." - Single-factor tests: - Interest rate and foreign exchange tests focused on single-factor shocks to the sterling pound yield curve (insurance companies have limited exposure to other key currencies). - Credit risk test included "a 20 percent real estate price decline" to capture real estate exposure. - Insurance risks assessed: - "A 25 percent permanent increase in mortality and morbidity." - "A permanent 25 percent reduction in annuitant mortality across all current and deferred annuitants, i.e., increased longevity." - Result reporting (as described): - Results expressed as (i) "the post-shock coverage ratio (where 100 percent means that net admissible assets match the minimum reserve requirements) (Column 1)"; and (ii) "the average percentage point change from the pre-shock coverage ratio, with the minimum and maximum percentage point change across insurers (Columns 2–4)." *Source: _cr09275 - 136. The island is fully committed to the Recommendations of the FATF on the prevention* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09275.pdf_