## _cr09281 ## Source details **Canonical URL:** [_cr09281](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09281.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09281.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09281.pdf.json) --- ### Introduction and methodology - Assessment part of an IMF Financial Sector Assessment Program (FSAP) Update for Jersey in 2008; mission visited Jersey in November 2008. - Assessors: Jürgen Dreymann (BaFin) and Keith Bell (banking supervision consultant). - Assessment based on: study of legal and regulatory framework; a self-assessment prepared by the authorities; detailed discussions with government, the Jersey Financial Services Commission (JFSC), Jersey Bankers Association, and senior management of banks and auditing firms. - Conducted in accordance with the Basel Committee on Banking Supervision’s revised Core Principles Methodology (October 2006), with ratings taking into account the essential criteria only. - Assessment is qualitative and recognizes differences in domestic circumstances and evolving supervisory practices. ### Institutional, macroeconomic setting, and market structure—overview - Key macro and structural statistics: - Annual real gross value added (GVA) growth averaged 3.8 percent over 2003-07. - Retail price inflation: 5.6 percent in the twelve months to June 2008. - House prices rose by over 40 percent between end-2005 and mid-2008. - GVA in 2007 is estimated at GBP 4.1 billion. Gross national income (GNI) is estimated at GBP 3.7 billion. With a population slightly over 90,000, GNI per head is about GBP 41,000 (44 percent more than in the UK). - Banking sector scale: total non-interbank lending over 700 percent of GVA; financial services contribute over half of GVA; total assets under management are a large multiple of GVA. - Structural features: - Jersey: one of the three British Crown Dependencies; not part of the UK; uses pound Sterling; customs union with the EU for trade in goods. - Financial sector basis: banking, fund management, fiduciary services. Banking dominated by branches/subsidiaries of major British and international banks. Principal business includes collection of retail deposits from overseas and placements with parent banks. - Recent conditions: - Banks exhibit high asset quality, profitability, and capitalization, but leverage is high; ample liquidity given short-term group claims. Recent global financial turmoil had some limited impact. ### Preconditions for effective banking supervision - Legal and institutional environment: - Legal system broadly based on common law with French and Norman elements; courts experienced in financial matters. - Jersey is not an EU member or in the EEA; voluntarily adopts international standards; implemented information exchange and withholding tax per the EU Savings Directive. - Supervisory powers and arrangements: - Authorities possess substantially adequate powers to direct, intervene in, and close troubled financial institutions. - No depositor compensation or insurance scheme in place. No bank failures in recent decades. ### Main findings and overall BCP grading - Overall conclusion: high standard of prudential regulation and supervision consistent with the 2003 assessment; issues identified in 2003 largely addressed. - JFSC features: - Integrated regulator with supervision and development responsibilities; operates Companies Registry; enjoys considerable independence and suitable accountability provisions; MOU with the minister limits ministerial direction (never exercised). - Powers include requesting information, issuing binding directions, publishing warnings/advice, appointing managers/co-signatories, revoking licenses, and requesting courts to start bankruptcy/winding-up proceedings. Fines mostly for administrative matters. - JFSC adequately resourced; cooperates with home supervisors and uses numerous MOUs. - Core Principle aggregate counts: - Compliant (C) – 26 - Largely compliant (LC) – 5 - Materially noncompliant (MNC) – 0 - Noncompliant (NC) – 0 - Not applicable (N/A) – 0 - Selected CP-specific assessments (preserved verbatim where given): - CP1.1 Responsibilities and objectives: LC - CP1.2 Independence, accountability and transparency: C - CP1.3 Legal framework: C - CP1.4 Legal powers: C - CP1.5 Legal protection: C - CP1.6 Cooperation: C - CP2 Permissible activities: C - CP3 Licensing criteria: C - CP4 Transfer of significant ownership: C - CP5 Major acquisitions: C - CP6 Capital adequacy: C - CP7 Risk management process: C - CP8 Credit risk: C - CP9 Problem assets, provisions, and reserves: LC — "Review policies and procedures for provisioning and write-offs" - CP10 Large exposure limits: LC — "Replace general exemption for large inter-bank exposures" - CP11 Exposure to related parties: LC — "Replace general exemption for large inter-bank exposures" - CP12 Country and transfer risks: C - CP13 Market risks: C - CP14 Liquidity risk: C - CP15 Operational risk: C - CP16 Interest rate risk in the banking book: C - CP17 Internal control and audit: C - CP18 Abuse of financial services: C - CP19 Supervisory approach: C - CP20 Supervisory techniques: C - CP21 Supervisory reporting: C - CP22 Accounting and disclosure: LC - CP23 Corrective and remedial powers of supervisors: C - CP24 Consolidated supervision: C - CP25 Home-host relationships: C ### Key supervisory issues identified (three priority areas) - Exemptions for parent/group exposures: - Authorities have exempted banks’ exposures to their parents from limits on connected lending and large exposures, despite these exposures representing the major system risk. - A permanent and blanket exemption from single counterparty limits is inconsistent with the BCP. - Recommendation: make exemptions less automatic by requiring regular confirmation from the JFSC that the parent still has the will and capacity to support its subsidiary and encourage local banks to develop more autonomous risk management capacity. - Loan classification and provisioning: - Authorities rely largely on banks’ internal controls and auditors to ensure adequate loan classification and provisioning. - Recommendation: more attention should be paid to this risk factor, especially in the current environment. - System-wide supervision and statistics: - JFSC should develop more capacity to assess overall financial sector stability and banks’ risk models; current focus seems on individual banks. - Recommendation: consider publishing more statistics on banks and other financial institutions (aggregate balance sheets, mean and distribution of financial soundness indicators). ### Recommended action plan (selected recommendations preserved verbatim) - CP1(1) - The JFSC should publish statistics and a commentary on the performance of the Jersey banking system as a whole. - The JFSC should place greater emphasis on registered persons having available for access by the public either summarized or audited financial statements. - CP1(2) - Schedule 1 of the Financial Services Commission (Jersey) Law 1998 (FSC(J)L) should provide an explicit requirement that the reasons for the dismissal from office of a Commissioner be made public. - CP6 - With regard to public disclosure, the JFSC should require any registered person to display prominently in its premises and in applicable promotional documentation a uniform notice informing the reader of the status of their deposits in Jersey-registered banks in so far as any guarantees, compensation or an insurance scheme apply. - CP7 - JFSC should consider establishing a more formal process to observe developments at parent company or head office level and within the home jurisdiction of the group. - Consider inserting a provision into Principle 3 of the Banking Codes under paragraph 3.1.4.5 that exceptions to established policies, processes and limits should be reported and receive prompt attention of senior management and the board. - Consider explicit inclusion of minimum requirements on new product approval processes and procedures in Appendix I of the Banking Codes. - CP9 - JFSC should on a regular basis form its own view on the adequacy of a bank’s provisioning policies and processes, and approach banks, parent institutions and respective home supervisors to confirm adequacy of provisioning policy. - CP10 - Consider having only one single definition of the term “exposure” in the large exposure and concentration risk context. - Reconsider the general exemption of inter-bank loans or placements, certificates of deposit or similar instruments issued by a bank with a maturity of one year or less from concentration risk regulation. - JFSC should decide on a regular basis whether an exemption for large exposures should be renewed. - CP11 - Reconsider regulation of exposures entered into in the inter-bank market and to connected parties; review requirements to cover all transactions with related parties (investments, placement of deposits, capitalization, etc.). - Enlarge scope and increase frequency of regular review of status and financial condition of parent companies of local subsidiaries; explicitly consider whether exemption of group related exposures from concentration risk requirements could be renewed. - For subsidiaries, consider requiring a letter of comfort from parent companies more frequently than every five years (perhaps annually). - Consider including in Appendix I, paragraph 1.5 of the Banking Codes a provision that policies and procedures ensure all material concentrations are reviewed and reported periodically to the board. - CP12 - JFSC could incorporate explicit questions on transfer and country risk in its "route planners" and introduce it as a separate topic for the "Annual Review Meeting." - CP13 - Consider introducing key requirements for management of market risk into Appendix I of the Banking Codes (e.g., foreign currency and interest rate risk requirements). - CP14 - Banking Codes should include policies and procedures to limit liquidity risk and require regular analysis of funding requirements under alternative scenarios/stress tests. - Liquidity risk provisions should consider diversification of funding sources and review of concentration limits. Standardized questions on these topics should be integrated into the route planner. - Consider incorporating maximum mismatch limits from the Liquidity Management and Reporting Guidance Notes into Appendix I of the Banking Codes. - Given recent market turmoil, JFSC should review liquidity regulations and guidance in light of the Basel Committee paper on liquidity management and supervision published in September 2008. - CP15 - Consider including the standard definition of operational risk explicitly under paragraph 4.1 of Appendix I of the Banking Codes. - CP16 - Introduce into the route planner a separate section of specific questions dealing with interest rate risk and interest rate risk in the banking book; consider price sensitivity of banking book items and volumes. - CP19 - JFSC should devote more effort to assessing risks affecting the financial system as a whole, including aggregate stress testing and examination of distribution of financial soundness indicators. - CP22 - JFSC should publish statistics and a commentary on the performance of the Jersey banking system as a whole. - Place greater emphasis on registered persons having summarized or audited financial statements available to the public. - Hold bilateral discussions with external auditors more regularly. - CP25 - Depositors should be made aware of the status of deposits in Jersey banks with respect to depositor-insurance schemes. - JFSC should strive to obtain regularly from home supervisors a written statement indicating whether they have knowledge of any significant problems of which the JFSC should be aware. - JFSC should strive to obtain from home supervisors a commitment to communicate promptly and on their initiative information critical to the stability of the Jersey financial system. ### 1. Summary of Compliance with the Basel Core Principles—Detailed Assessments.......9 ### 1. Summary of Compliance with the Basel Core Principles—Detailed Assessments.......9 ### Introduction and methodology - Assessment undertaken as part of an IMF Financial Sector Assessment Program (FSAP) Update for Jersey in 2008; mission visited Jersey in November 2008. - Assessors: Jürgen Dreymann (BaFin) and Keith Bell (banking supervision consultant). - Assessment based on: study of legal and regulatory framework; a self-assessment prepared by the authorities; detailed discussions with government, the Jersey Financial Services Commission (JFSC), Jersey Bankers Association, and senior management of banks and auditing firms. - Conducted in accordance with the Basel Committee on Banking Supervision’s revised Core Principles Methodology (October 2006), with ratings taking into account the essential criteria only. - Assessment is qualitative and recognizes differences in domestic circumstances and evolving supervisory practices. ### Institutional, macroeconomic setting, and market structure—overview - Jersey is one of the three British Crown Dependencies; not part of the United Kingdom (UK); has its own parliament (the States of Jersey), legal and regulatory system, and tax regime. - In December 2005, a system of ministerial government was established (chief minister plus nine other ministers). - Annual real gross value added (GVA) growth averaged 3.8 percent over 2003-07. - Retail price inflation: 5.6 percent in the twelve months to June 2008. - House prices rose by over 40 percent between end-2005 and mid-2008. - GVA in 2007 is estimated at GBP 4.1 billion. Gross national income (GNI) is estimated at GBP 3.7 billion. With a population slightly over 90,000, GNI per head is about GBP 41,000 (44 percent more than in the UK). - Economy highly oriented to the UK; uses pound Sterling; customs union with the European Union (EU) for trade in goods. - Financial sector basis: banking, fund management, fiduciary services; combined financial services sector contributes over half of GVA; total assets under management are a large multiple of GVA. - Banking dominates: branches/subsidiaries of major British banks and other international banks. Principal business includes collection of retail deposits from overseas and placements with parent banks. Non-interbank lending mainly to individuals, property companies, and some nonbank financial institutions (NBFIs); the total is over 700 percent of GVA. - Banks exhibit high asset quality, profitability, and capitalization, but leverage is also high; ample liquidity given short-term group claims. Recent global financial turmoil had some limited impact. ### Preconditions for effective banking supervision - Macroeconomic performance generally satisfactory: low unemployment; satisfactory trend growth and inflation. - Legal system broadly based on common law with French and Norman elements; courts experienced in financial matters. - Jersey is not an EU member state or in the European Economic Area; has voluntarily adopted international standards such as those of the Basel Committee. Implemented information exchange and withholding tax in accordance with the EU Savings Directive. - Authorities possess substantially adequate powers to direct, intervene in, and close troubled financial institutions. No depositor compensation or insurance scheme in place. No bank failures in recent decades. ### Main findings (summary) - The BCP assessment confirms a high standard of prudential regulation and supervision consistent with the 2003 assessment; issues identified in 2003 largely addressed. - The JFSC now conducts a large program of on-site supervision supported by off-site analysis and follows up with detailed recommendations. Minimum prudential standards provided by the Banking Business (Jersey) Law 1991, Banking Business (General Provisions) (Jersey) Order 2002, and the Codes of Practice for Deposit-taking Business (Banking Codes). - The JFSC is the integrated regulator with responsibilities including supervision and development of financial services; by law it should have regard to reduction of risk to the public, protection and enhancement of the island’s reputation, the best economic interests of Jersey, and the need to counter financial crime. The JFSC also operates the Companies Registry. - JFSC enjoys considerable independence and suitable accountability provisions; memorandum of understanding (MOU) with the responsible minister clarifies ministerial direction powers are exceptional; the minister has never exercised this power. - JFSC powers: request information, issue binding directions, publish warnings/advice, appoint managers/co-signatories, revoke licenses, request courts to start bankruptcy/winding-up proceedings. Fines mostly for administrative matters. JFSC is adequately resourced. - Authorities cooperate with home supervisors; numerous MOUs signed; information exchanged and regular supervisory visits undertaken. ### Key supervisory issues identified (three broad areas for further work) - Exemptions: Authorities have exempted banks’ exposures to their parents from limits on connected lending and large exposures, despite these exposures representing the major system risk. A permanent and blanket exemption from single counterparty limits is inconsistent with the BCP. Recommendation: make exemptions less automatic by requiring regular confirmation from the JFSC that the parent still has the will and capacity to support its subsidiary and encourage local banks to develop more autonomous risk management capacity. - Loan classification and provisioning: Authorities rely largely on banks’ internal controls and auditors to ensure adequate loan classification and provisioning. More attention should be paid to this risk factor, especially in the current environment. - System-wide supervision and statistics: JFSC should develop more capacity to assess overall financial sector stability and banks’ risk models; current focus seems on individual banks. JFSC should consider publishing more statistics on banks and other financial institutions (aggregate balance sheets, mean and distribution of financial soundness indicators). ### Summary grading by Core Principle (as presented) - Core Principle aggregate counts: Compliant (C) – 26, Largely compliant (LC) – 5, Materially noncompliant (MNC) – 0, Noncompliant (NC) – 0, Not applicable (N/A) – 0. - Selected CP-specific notes preserved verbatim where given: - CP1.1 Responsibilities and objectives: LC - CP1.2 Independence, accountability and transparency: C - CP1.3 Legal framework: C - CP1.4 Legal powers: C - CP1.5 Legal protection: C - CP1.6 Cooperation: C - CP2 Permissible activities: C - CP3 Licensing criteria: C - CP4 Transfer of significant ownership: C - CP5 Major acquisitions: C - CP6 Capital adequacy: C - CP7 Risk management process: C - CP8 Credit risk: C - CP9 Problem assets, provisions, and reserves: LC — "Review policies and procedures for provisioning and write-offs" - CP10 Large exposure limits: LC — "Replace general exemption for large inter-bank exposures" - CP11 Exposure to related parties: LC — "Replace general exemption for large inter-bank exposures" - CP12 Country and transfer risks: C - CP13 Market risks: C - CP14 Liquidity risk: C - CP15 Operational risk: C - CP16 Interest rate risk in the banking book: C - CP17 Internal control and audit: C - CP18 Abuse of financial services: C - CP19 Supervisory approach: C - CP20 Supervisory techniques: C - CP21 Supervisory reporting: C - CP22 Accounting and disclosure: LC - CP23 Corrective and remedial powers of supervisors: C - CP24 Consolidated supervision: C - CP25 Home-host relationships: C ### Recommended action plan (selected recommendations preserved) - CP1(1) - The JFSC should publish statistics and a commentary on the performance of the Jersey banking system as a whole. - The JFSC should place greater emphasis on registered persons having available for access by the public either summarized or audited financial statements. - CP1(2) - Schedule 1 of the Financial Services Commission (Jersey) Law 1998 (FSC(J)L) should provide an explicit requirement that the reasons for the dismissal from office of a Commissioner be made public. - CP6 - With regard to public disclosure, the JFSC should require any registered person to display prominently in its premises and in applicable promotional documentation a uniform notice informing the reader of the status of their deposits in Jersey-registered banks in so far as any guarantees, compensation or an insurance scheme apply. - CP7 - JFSC should consider establishing a more formal process to observe developments at parent company or head office level and within the home jurisdiction of the group. - Consider inserting a provision into Principle 3 of the Banking Codes under paragraph 3.1.4.5 that exceptions to established policies, processes and limits should be reported and receive prompt attention of senior management and the board. - Consider explicit inclusion of minimum requirements on new product approval processes and procedures in Appendix I of the Banking Codes. - CP9 - JFSC should on a regular basis form its own view on the adequacy of a bank’s provisioning policies and processes, and approach banks, parent institutions and respective home supervisors to confirm adequacy of provisioning policy. - CP10 - Consider having only one single definition of the term “exposure” in the large exposure and concentration risk context. - Reconsider the general exemption of inter-bank loans or placements, certificates of deposit or similar instruments issued by a bank with a maturity of one year or less from concentration risk regulation. - JFSC should decide on a regular basis whether an exemption for large exposures should be renewed. - CP11 - Reconsider regulation of exposures entered into in the inter-bank market and to connected parties; review requirements to cover all transactions with related parties (investments, placement of deposits, capitalization, etc.). - Enlarge scope and increase frequency of regular review of status and financial condition of parent companies of local subsidiaries; explicitly consider whether exemption of group related exposures from concentration risk requirements could be renewed. - For subsidiaries, consider requiring a letter of comfort from parent companies more frequently than every five years (perhaps annually). - Consider including in Appendix I, paragraph 1.5 of the Banking Codes a provision that policies and procedures ensure all material concentrations are reviewed and reported periodically to the board. - CP12 - JFSC could incorporate explicit questions on transfer and country risk in its "route planners" and introduce it as a separate topic for the "Annual Review Meeting." - CP13 - Consider introducing key requirements for management of market risk into Appendix I of the Banking Codes (e.g., foreign currency and interest rate risk requirements). - CP14 - Banking Codes should include policies and procedures to limit liquidity risk and require regular analysis of funding requirements under alternative scenarios/stress tests. - Liquidity risk provisions should consider diversification of funding sources and review of concentration limits. Standardized questions on these topics should be integrated into the route planner. - Consider incorporating maximum mismatch limits from the Liquidity Management and Reporting Guidance Notes into Appendix I of the Banking Codes. - Given recent market turmoil, JFSC should review liquidity regulations and guidance in light of the Basel Committee paper on liquidity management and supervision published in September 2008. - CP15 - Consider including the standard definition of operational risk explicitly under paragraph 4.1 of Appendix I of the Banking Codes. - CP16 - Introduce into the route planner a separate section of specific questions dealing with interest rate risk and interest rate risk in the banking book; consider price sensitivity of banking book items and volumes. - CP19 - JFSC should devote more effort to assessing risks affecting the financial system as a whole, including aggregate stress testing and examination of distribution of financial soundness indicators. - CP22 - JFSC should publish statistics and a commentary on the performance of the Jersey banking system as a whole. - Place greater emphasis on registered persons having summarized or audited financial statements available to the public. - Hold bilateral discussions with external auditors more regularly. - CP25 - Depositors should be made aware of the status of deposits in Jersey banks with respect to depositor-insurance schemes. - JFSC should strive to obtain regularly from home supervisors a written statement indicating whether they have knowledge of any significant problems of which the JFSC should be aware. - JFSC should strive to obtain from home supervisors a commitment to communicate promptly and on their initiative information critical to the stability of the Jersey financial system. *Source: IMF FSAP Update—Assessment of compliance with the Basel Core Principles for Jersey (mission November 2008), "Summary of Compliance with the Basel Core Principles—Detailed Assessments.......9".* ### 22. The Commission acknowledges with gratitude all aspects of this assessment ### _cr09281 - 22. The Commission acknowledges with gratitude all aspects of this assessment ### II. DETAILED ASSESSMENT - "The Commission acknowledges with gratitude all aspects of this assessment and is committed to fully considering recommendations made." *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09281.pdf* ### 23. The Methodology provides that supervision of an individual principle is ### _cr09281 - 23. The Methodology provides that supervision of an individual principle is ### Methodology: compliance gradations - Compliant: all essential criteria are generally met without any significant deficiencies. - Largely Compliant: only minor shortcomings observed; do not raise concerns about the authority’s ability and intent to achieve full compliance within a prescribed period of time. - Materially Noncompliant: shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance despite progress. - Noncompliant: no substantive progress toward compliance has been achieved. - Not Applicable: assessors judge the principle does not apply given structural, legal, and institutional features of a country. ### Principle 1 — Objectives, autonomy, powers, and resources (summary) - Core expectation: clear responsibilities and objectives for each authority; operational independence; transparent processes; sound governance; adequate resources; accountability; suitable legal framework including authorization, ongoing supervision, powers to address compliance and safety/soundness concerns; legal protection for supervisors; arrangements for information sharing and confidentiality. - High-level description: see detailed comments below. - Overall assessment shown in document: Compliant (title-level statement preceding detailed CPs). ### Principle 1(1) — Responsibilities and objectives - Legal basis of JFSC responsibilities: FSC(J)L and related statutes: - The Banking Business (Jersey) Law 1991 (BB(J)L); - The Collective Investment Funds (Jersey) Law 1988; - The Insurance Business (Jersey) Law 1996; and - The Financial Services (Jersey) Law 1998. - JFSC functions (FSC(J)L (Article 5)): - the supervision and development of financial services provided in or from within Jersey; - providing the States, any minister or any other public body with reports, advice, assistance and information in relation to any matter connected with financial services; - preparing and submitting to the minister recommendations for the introduction, amendment or replacement of legislation appertaining to financial services, companies and other forms of business structure (the FSC(J)L (Article 1) defines “the Minister” to be the Minister for Economic Development); - such functions in relation to financial services or such incidental or ancillary matters as are required or authorized by or under any enactment, or as the States may, by Regulations, transfer. - BB(J)L role: regulates deposit-taking business; JFSC solely responsible for supervision of persons registered for deposit-taking activities (BB(J)L; Article 6). - JFSC not involved in promotion of Jersey’s financial services industry (FSC(J)L). - Prudential framework: BB(J)L, the Banking Business (General Provisions) (Jersey) Order 2002 (GPO) and the Banking Codes. - Banking Codes introduced August 2006, effective from February 2007. - Banking Codes amended in 2007, effective 1 February 2008, to reflect revisions to the BCP in October 2006 and updated again in July 2008. - Public information: - Limited publicly available information on Jersey banking industry financial strength and performance as a whole. - An annual Financial Institutions Survey is published by the Island’s government but does not address financial strength or most aspects of performance. - GPO (Article 11(5)) requires each “registered person (that) is a subsidiary of an organization” to have available for access by the public either: - “(a) summarized accounts of the registered person in a form determined by the Commission, or - (b) “true and fair” audited accounts.” - BB(J)L (Article 32) contains a similar requirement for “registered persons” operating as branches. - Assessors’ impression: in practice this information is readily available from many but not all banks. - Supervisory approach: regulatory package used to determine off-site and on-site programs; higher supervisory resources for high risk/high impact banks. - Assessment: Largely Compliant - Comments / recommended action: - To be consistent with Essential Criterion 4, the JFSC should publish statistics and a commentary on the performance of the Jersey banking system. - On a single entity basis, the JFSC should place greater emphasis on registered persons having available for access by the public either summarized or audited financial statements. ### Principle 1(2) — Independence, accountability and transparency - Legal independence: FSC(J)L (Article 2(4)) provides that, except as provided therein, the JFSC shall be independent of the Minister for Economic Development (Minister) and of the States. - Commissioner appointments: - Appointed by the States from persons nominated by the minister (FSC(J)L; Article 3). - Nominations committee proposes chairman and deputy chairman; States appoints chairman (nominated by minister); minister appoints deputy chairman. - Procedures for appointment, terms and removal: FSC(J)L Articles 3 and 4 and Schedule 1. - By convention, members of the States are not considered for appointment as members of the Board. - Commissioners appointed for a period not exceeding three years and are eligible for re-appointment (FSC(J)L Schedule 1); generally serve for two periods; exceptional circumstances may extend to three. - Jersey Appointments Commission (JAC) processes: application and appointment procedures follow JAC recommendations; a member of the JAC normally sits on the selection panel. - Grounds for dismissal (FSC(J)L Schedule 1) — minister may dismiss a commissioner only if satisfied that the Commissioner: - has been absent from meetings of the JFSC for a period longer than six consecutive months without the permission of the JFSC; - has become bankrupt; - is incapacitated by physical or mental illness; or - is otherwise unable or unfit to discharge the functions of a commissioner. - Publicity of dismissal: no explicit statutory requirement that reasons for dismissal be made public; by convention removal of public officials is publicized. - Ministerial guidance/direction (FSC(J)L Article 12): - Minister may, after consulting with JFSC and where considered in the public interest, give guidance or written general directions to JFSC on policies to be followed. - To date, no guidance or directions have been given. - MOU between JFSC and Minister (Article 12) Section 4: minister may only exercise power where in public interest; any guidance/direction will be general and not used to influence particular cases. - Accountability mechanisms: - JFSC accountable to the States via annual report and financial statements presented to the States by the minister (FSC(J)L; Article 21). - Periodic meetings of director general and/or Board chairman with chief minister or minister; whole Board meets annually with States’ representatives. - JFSC publishes an annual report and an annual business plan in the first quarter of the calendar year. Annual report generally includes: - details of achievements of the past year; - priorities for the coming year; and - summary financial data (latest year actual income and expenditure results against budget for same period, actual results for previous year and the budget for the coming year). - JFSC independent status, accountability and governance structure publicly disclosed on website and in annual report. - Board composition (FSC(J)L (Article 3(3)) requires Commissioners to include): - persons with experience of the type of financial services supervised by the JFSC; - regular users on their own account or on behalf of others, or representatives of those users, of financial services of any kind supervised by the JFSC; and - individuals representing the public interest. - Current Board size and expertise: - Currently the Board comprises ten individuals. - Commissioners appointed to date include individuals with expertise and experience, several from abroad and several who have played prominent roles in relevant international fora. - JFSC staff profile and resources: - Staff have experience in public and private sectors, in Jersey and other parts of the British Isles; financial regulation within the UK and Europe, other Crown Dependencies and other offshore financial centers; and academia. - Professional qualifications actively encouraged; staff include qualified accountants, lawyers and chartered secretaries and individuals studying for professional qualifications. - JFSC and staff displayed expertise and professionalism during the mission, confirmed by industry representatives. - Funding and fees: - JFSC funded through fees and charges levied on regulated financial services businesses. - FSC(J)L provides for the States, if necessary, to pay a grant to the JFSC (Article 16) or for JFSC to borrow money (Article 17); neither has occurred to date. - JFSC can set its own fees (previously government had a role). FSC(J)L (Article 15(2)) states: - “The fees mentioned in paragraph (1) [of Article 15] are to be retained by the Commission and must, together with any other income..., be such as are necessary – • to raise sufficient income to meet (its) liabilities; • to cover (its) expenses; and • to provide a reserve for (it) of such amount as it considers necessary.” - Fee-setting objective: fees from a sector should cover costs of regulating that sector plus a share of JFSC overheads. - Monitoring: fee income per sector monitored against expense of regulating that sector via monthly management accounts. - Separate charging methodologies set out on the JFSC's website (document notes). - FSC(J)L (Article 15(3) (c)) requires JFSC to publish a report giving details of duty/power for which fee is to be determined, proposed fee amount, request for comments and at least a 28 day comment period; reports meet criteria and provide justification of fee levels relating fees to actual and projected costs. - Dispute mechanism (Article 15(4)): if unable to agree with representative body, Commission must request the Bailiff to appoint 3 Jurats to consider if proposed fee is unreasonable; no recourse has occurred to date. - Financial position: for the past two complete years the JFSC has recorded a surplus of income over expenses, mainly from the funds industry and company registry and lower litigation costs. - From 2009, JFSC will no longer pay government a fixed amount of its revenue from the Companies Registry; instead it will collect and remit to government a tax applied by the States on annual returns made by companies. - Human resources: - Salary scales: JFSC has access to local salary surveys; annual review of job hierarchies and pay bands; senior management: no evidence that prospective employees reject JFSC based on pay; leavers do not cite pay as primary reason for leaving. - Labor constraints: JFSC loses trained staff to local finance industry. - Authorized headcount: 118. - Banking and Insurance Division staffing: headed by a Director, assisted by a Deputy, a Senior Manager, and three portfolio managers. An analyst works full-time on Basel II and Liquidity Management issues. There are two support staff. - Resources considered adequate for current size and activities of the industry. - Use of external expertise: - JFSC uses secondees and can hire or consult outside experts as needed. - Under BB(J)L (Article 28), JFSC may appoint competent persons (typically lawyers and accountants) to investigate and produce reports with wide powers to collect information. - Training and development: - JFSC encourages staff to obtain professional qualifications and second staff to relevant positions inside or outside Jersey to gain experience. - Staff regularly attend conferences and seminars and share knowledge internally. - JFSC is looking to appoint a Learning and Development Manager to fill a vacancy. - All staff have annual personal development reviews. - Equipment and travel budgets: - Budget for computers and equipment is adequate. - Sufficient travel budget to attend appropriate international regulatory gatherings and conduct on-site visits to banks with branches in overseas jurisdictions, including the Middle East. - Assessment: Compliant - Comments / recommended action: - To be strictly consistent with Essential Criterion 1, Schedule 1 (FSC(J)L) should provide an explicit requirement that the reasons for the dismissal from office of a Commissioner be made public, although in practice the dismissal would be made public. ### Principle 1(3) — Legal framework (authorization and ongoing supervision) - JFSC exclusive powers to grant and withdraw deposit-taking registrations: BB(J)L (Articles 9 and 10). - Codes of Practice authority: JFSC authorized (BB(J)L; Article 19A) to issue Codes of Practice setting out sound principles for conduct of deposit-taking business, including prudential requirements. - Amendment and consultation: amendments to primary laws, secondary laws (“Regulations” and “Orders”) and Codes are subject to appropriate industry consultation; documented consultation policy in place. - Information powers: FSC(J)L (Article 8) empowers JFSC to require entities to supply information in specified format and times and to provide answers; BB(J)L (Article 26) allows JFSC to require a registered person to provide any information by formal notice. - Binding directions: JFSC can issue directions that are binding (BB(J)L; Article 21(7)). - Assessment: Compliant - Comments: - While States can make Regulations and a Minister can, on JFSC recommendation, make an Order (both secondary legislation), the JFSC can issue only Codes of Practice and guidance, which strictly speaking do not have the force of law, though they set requirements that are enforceable by the JFSC. ### Principle 1(4) — Legal powers (to address compliance and safety/soundness) - Statutory powers (FSC(J)L Article 8): - Power includes, as part of routine examination of a supervised entity: - (a) to require the entity to supply information in a format and at times specified by (it); - (b) to require the entity to provide answers to questions; and - (c) to require the entity to allow (its) officers or agents to enter the entity’s premises. - BB(J)L (Article 6): “the Commission shall have the powers conferred on it by this Law and the duty generally to supervise the persons registered by it in the exercise of those powers”. - Access rights: FSC(J)L (Article 8) and BB(J)L (Article 26) provide JFSC with legal right of access to a bank’s board, management, staff and records. - Supervisory methods: qualitative judgment combined with on- and off-site techniques to safeguard safety and soundness. - Remedial actions available under BB(J)L: - revocation of registration (BB(J)L; Article 10); - the issue of a condition on the bank’s registration (BB(J)L; Article 11); - the removal of an existing shareholder controller (BB(J)L; Article 15); - a restriction on the sale of shares (BB(J)L; Article 17); - the issue of a direction (BB(J)L; Article 21); - the appointment of inspectors (BB(J)L; Article 28); and - the ability to make public statements (BB(J)L; Article 48). - Additional ministerial power: BB(J)L (Article 37A) provides that the Minister may, on the JFSC’s recommendation, by Order, prescribe circumstances in which it may appoint a manager to the registered person. - Assessment: Compliant - Comments: none provided in source text for CP 1(4). ### Principle 1(5) — Legal protection - Limitation of liability (FSC(J)L (Article 9)): - “1. No person or body to whom this Article applies shall be liable in damages for anything done or omitted in the discharge or purported discharge of any function under, or authorized by or under, this Law or any other enactment unless it is shown that the act or omission was in bad faith.” *Source: _cr09281 - 23. The Methodology provides that supervision of an individual principle is (excerpt).* ### 2. This Article applies to – ### _cr09281 - 2. This Article applies to – ### Scope and applicability - This Article applies to: - (a) the Commission, any Commissioner or any person who is, or is acting as, an officer, servant or agent of the Commission or who is performing any duty or exercising any power on behalf of the Commission; and - (b) the States or any Minister in respect of any delegation of functions to the Commission. - The JFSC has adequate insurance arrangements to cover the cost of defending any actions (except for acting in bad faith) that have occurred during the discharge of its duties. - Assessment: Compliant ### Principle 1(6). Cooperation — information sharing and confidentiality - Description: - The JFSC is Jersey’s sole financial services regulator. - The BB(J)L provides statutory gateways (Articles 43, 44 and 45) for disclosure of restricted information to specified authorities, including the Viscount and the Attorney General or a police officer for investigation or prosecution (Articles 26, 28, 29, 30). - BB(J)L (Article 47) provides JFSC powers to assist a “relevant supervisory authority” in areas including: - refusal or revocation of a registration; - imposition, revocation or variation of a condition on a bank registration; - usage of the JFSC’s powers of intervention (BB(J)L; Article 19); - requiring the provision of information and documents; - investigation; and - powers of entry and search of premises (through application to Jersey’s Bailiff [Chief Judge]). - “Relevant supervisory authority” is defined in BB(J)L (Article 1 Interpretation). - Under Article 47 the JFSC may communicate information it possesses to a relevant supervisory authority only if satisfied that the information will be treated with appropriate confidentiality. - BB(J)L (Article 47) lists factors JFSC may consider when deciding whether to co-operate, including: - whether corresponding assistance would be given in that country or territory to the JFSC; - whether the case concerns a law with no close parallel in Jersey or involves assertion of unrecognized jurisdiction; - the seriousness and importance of the case and whether assistance could be obtained by other means; - whether it is otherwise appropriate in the public interest to give the assistance sought. - The JFSC has a significant number of MOU agreements to assist in information sharing between jurisdictions (details available on its website). - BB(J)L (Article 42) sets restrictions on disclosure of restricted information; penalty for failing to comply: imprisonment for a term not exceeding two years, or a fine, or both. - Assessment: Compliant ### Principle 2. Permissible activities - Description: - The term “bank” is not clearly defined in the BB(J)L or FSC(J)L; the activity-based substitute is “deposit-taking business” defined in BB(J)L (Article 3); “deposit” meaning provided in BB(J)L (Article 2) with specified exclusions. - GPO (Article 11(1)(a)) requires any “registered person” wishing to undertake a new activity that has, or may have, a significant effect on its business or profitability in Jersey to obtain the JFSC’s prior consent. - Banking Codes (paragraph 6.8) require any bank to notify the JFSC, prior to commencement, of a new activity likely to have a material effect on the business. - BB(J)L (Articles 38 to 41) restrict use of names indicating “bank”, “banker” or “carrying on a banking business” to “registered person” unless authorized by the JFSC (Article 39). - BB(J)L (Article 8) reserves taking of proper deposits from the public to appropriately licensed institutions; Article 35 contains provisions for repayment of unauthorized deposits. - GPO (Articles 3 to 7) provides exempt transactions (charities, solicitors, trustees). - BB(J)L (Article 3) permits businesses that do not hold themselves out to accept deposits on a daily basis to fall outside “deposit taking business”. - The JFSC publishes an up-to-date list of all registered deposit-takers (including branches) on its website. - Assessment: Compliant ### Principle 3. Licensing criteria - Description and key requirements: - JFSC is responsible for both licensing and supervising banks. - BB(J)L (Article 10) sets out minimum criteria for licensing deposit-takers; JFSC has a published policy statement and a policy on dominant shareholders. - Licensing and ongoing supervision criteria are consistent; additional reporting obligations may apply during ongoing supervision. - BB(J)L (Article 10) sets grounds for refusal to grant registration; failure to provide information is a reason for refusal; written confirmation required where application is refused (BB(J)L; Article 17A). - The JFSC’s licensing policy requires that an applicant bank be a member of “a group of stature” (i.e. one ranked in the top 500 by Tier 1 capital), systemically important in its “home” jurisdiction, with government willingness to provide support when warranted, and consolidated supervision of international standard by the primary regulator. - The JFSC requires notification of shareholder controllers (those holding 15 percent or more of shares or equivalent voting power as defined in BB(J)L; Article 1). Shareholder controllers must complete a ‘Personal Questionnaire’ (PQ). - Banking Codes (paragraph 5.1) stipulate a minimum of £5,000,000 Tier 1 capital. - One registered person currently has a capitalization below this figure (registration granted before requirement came into effect). However, its capital ratio exceeds the minimum risk asset ratio (10 percent). - BB(J)L (Article 10(3)) authorizes refusal where directors/controllers/managers have convictions for fraud/dishonesty or other circumstances likely to lead to improper conduct. - Guidance notes require submission of a detailed business plan for the first three years, pro-forma financial statements, parent audited financials, details of external funding, completed application form, and statements on control, risk management and business projections. - For a branch, a PQ is required from a senior officer located outside Jersey who acts as its external point of contact. - JFSC conducts meetings with applicants and documents information requirements in a checklist; may impose conditions on registration (BB(J)L; Article 11). - For deposit-taking applicants, JFSC obtains written consent from home supervisor confirming consolidated supervision, satisfactory record and adherence to international standards. - BB(J)L (Article 22) makes it an offence to knowingly or recklessly provide specified false or misleading information; JFSC may revoke registration where false or misleading information was provided (BB(J)L; Article 10). - JFSC assesses competence of directors via PQs and meetings; may issue a direction (BB(J)L; Article 21) or impose conditions (BB(J)L; Article 11) to prevent unsuitable activities. - Registered Jersey-incorporated companies must obtain a letter of comfort from parent stating support to maintain adequate capital and liquidity. - JFSC closely monitors new entrants including on-site examination once measurable business established. - Assessment: Compliant ### Principle 4. Transfer of significant ownership - Definitions and requirements: - BB(J)L (Article 25(1)) defines a “significant shareholder” as a person entitled to exercise between 3 percent or more but less than 15 percent voting power of a Jersey-registered person. - “Shareholder controller” (BB(J)L; Article 1) = someone holding not less than 15 percent of voting power; sub-categories: - minority shareholder controller – 15 percent to 50 percent voting power; - majority shareholder controller – 51 percent to 75 percent voting power; and - principal shareholder controller – above 76 percent voting power. - Subsidiaries incorporated in Jersey: - Confirmation of no objection from the JFSC required pursuant to BB(J)L (Article 14(1)) before becoming a minority, majority or principal shareholder controller or an indirect controller. - Persons who become “significant shareholders” (above 3 percent) must notify JFSC within 14 days (BB(J)L; Article 25(1)). - Branches: - Confirmation of no objection required pursuant to BB(J)L (Article 24(1)) before a person becomes director, controller, key person or manager; definition of “controller” includes managing director or chief executive officer. - All controllers must provide PQs covering probity, competence, soundness of judgment and diligence. - JFSC may object if proposed change fails fit and proper criteria; BB(J)L (Article 24(9), (11), (12)) provides legal action including imprisonment and/or fine for non-compliance. - For Jersey-incorporated subsidiaries BB(J)L (Article 17(2)) gives JFSC powers to restrict rights of shares transferred without approval (void transfers, suspend voting rights, prevent share issues, stop dividends). - For branches, JFSC cannot restrict rights of shares issued outside Jersey; criminal offence applies for failure to notify or becoming a controller without confirmation of no objection (BB(J)L; Article 24(9), (11), (12)). - Banking Codes (paragraph 6.1) require registered persons to advise JFSC promptly of any matter that might reasonably be expected to affect its registration or be in interests of customers to disclose. - Assessment: Compliant ### Principle 5. Major acquisitions - Description and thresholds: - GPO (Article 11) requires registered person to obtain JFSC prior consent for any new activity in Jersey with significant effect on business or profitability. - If registered person is a subsidiary, it must not establish or acquire a representative office, branch or subsidiary outside Jersey or participate in joint ventures involving deposit-taking, banking or investment business without JFSC approval. - Banking Codes (paragraph 6.8) defines: - “New Activity” – includes new acquisitions or investments made by the bank; and - “Material” – defined as an amount in excess of 5 percent of a bank’s agreed capital base for acquisitions or investments, or 5 percent of total income for other new activities. - Banking Codes (paragraph 6.10) requires written notice within seven days to the Commission of formation, disposal or dissolution of a subsidiary company or acquisition of a holding of more than half in nominal value of share capital. - JFSC considers host jurisdiction regulatory standards and maintains home-host communication when a bank wishes to acquire a significant holding in another jurisdiction. - JFSC can issue directions (BB(J)L; Article 21) to prevent activity if detrimental to customers, creditors, other registered persons, reputation or economic interests of Jersey. - Investments and acquisitions that impact capital (investments in subsidiaries, holdings of equity in other banks or lending of a capital nature to associated companies) are deducted from the bank's capital in the quarterly prudential return and thus affect the bank’s risk asset ratio. - Assessment: Compliant ### Principle 6. Capital adequacy - Minimums and application: - Banking Codes (paragraph 5.2.1) prescribe maintenance of a minimum risk asset ratio of at least 10 percent (versus the Basel minimum of 8 percent) for all Jersey-incorporated “registered persons”, calculated quarterly by the methods established in the Basel II Capital Accord. - Note: JFSC does not impose capital requirements on branches registered in Jersey. - JFSC has assessed each Jersey-incorporated bank’s ICAAP (Pillar 2) and, where appropriate, increased minimum risk asset ratios by attaching conditions (BB(J)L; Article 11). - Components of capital are defined in accordance with Basel II definitions in the quarterly prudential return instructions. - Quarterly prudential return that coincides with a bank's year end is assessed and confirmed as materially correct by the bank's external auditor. - Prudential return instructions include list of assets requiring specific capital charge following relevant Basel guidance; JFSC may instruct specific capital treatment for particular assets (enforceable by direction BB(J)L; Article 21). - Banking Codes (paragraph 5.4.5) and reporting instructions require notification to JFSC of significant credit concentration risk exposures that exceed 10 percent of a bank’s agreed capital base. - GPO (Article 11(3)(c)) and Banking Codes (paragraph 5.4.1) require JFSC prior approval for credit exposures in excess of 25 percent of agreed capital base, subject to defined exemptions. - Both on-balance sheet and off-balance sheet risks are included in risk assessments and risk asset weightings. - JFSC permits deposit-takers to use advanced models subject to: - availability of ongoing model validation and support from the home supervisor; - the process adequately reflecting the entity’s local risk profile; and - the outputs being adequate for JFSC’s assessment purposes. - Permission granted by condition on registration (BB(J)L; Article 11). Only two registered persons have sought such permission. - JFSC has required some banks to increase length of financial projections to assess future capital requirements; Banking Codes (paragraph 5.2) require banks to maintain adequate capital and procedures to monitor capital adequacy. - Each Jersey-incorporated bank required to maintain adequate capital on consolidated and solo basis; JFSC also imposes solvency requirements on non-banking financial services subsidiaries it regulates. - Assessment: Compliant - Comments: - CP 6 assessed as Compliant. For future implementation of Pillar 3 requirements regarding market discipline and minimum public disclosure, reference is made to comments at CP 1(1). - It would be constructive for the JFSC to require any registered person to display prominently in its premises and in applicable promotional documentation a uniform notice informing the reader of the status of their deposits in Jersey-registered banks in so far as any guarantees, compensation or an insurance scheme apply. ### Principle 7. Risk management process - Description and required elements: - Principle 3 of the Banking Codes establishes requirements for corporate governance and span of control. - Banking Codes (paragraph 3.1.4.5) requires appropriate oversight by the board (or senior management for branches) of all relevant areas of risk management. - Banking Codes (paragraph 3.1.4.3) requires banks to put in place risk management strategies ratified at board level (or by the senior officer for branches); strategies and procedures must be documented, regularly reviewed, communicated and adhered to. - Principle 3 of the Banking Codes sets expected minimum standards covering: - Corporate governance; - Internal control systems; - Internal audit; - Appointment of a Compliance Officer, Money Laundering Reporting Officer and Money Laundering Compliance Officer; - Record keeping and reporting; - Complaints; - Integrity and competence; and - Continuing professional development. - JFSC addresses matrix organization challenges to ensure local corporate governance responsibilities are fulfilled. - Banking Codes (paragraphs 2.2 and 3.7.3) require a policy for dealing with conflicts of interest and paragraph 3.1.4 requires separation of critical functions. - Banking Codes (paragraph 3.1.4.4) requires board (or senior management) oversight of: - risk assessment; - measurement, monitoring and controlling of risks; - exposure limits; - effective communication; - individual authority levels; - management information; and - documented system of internal control. - Paragraph 3.1.4.4 requires assessment of resource requirements and mandates an independent risk management unit for large and complex banks. - Paragraphs 3.2.1.5 and 3.2.1.6 require management to identify and regularly assess all relevant risks and monitor adequacy of capital relative to business dynamics and risk profiles; paragraph 3.1.4.4 requires accurate and reliable management information and reporting systems. - Assessment: (assessment text in source indicates requirements described; referenced earlier assessments for related principles are Compliant) *Source: _cr09281 - 2. This Article applies to –* ### Appendix I to the Banking Codes establishes minimum control requirements for a number of ### _cr09281 - Appendix I to the Banking Codes establishes minimum control requirements for a number of ### Scope of risk coverage in Appendix I - Appendix I cross-refers to Basel Committee papers on: credit risk; country and transfer risks; market risk; operational risk; interest rate risk; liquidity risk; and customer due diligence. - More comprehensive guidance has been separately issued in respect of: liquidity management; and the trading book. - Appendix I requires regular reviews of limits and underlying assumptions, including independent reviews. - Appendix I requires that an adequate assessment of risk relating to new products is accomplished prior to their launch. - Banking Codes paragraph 3.1.4.3 requires that major risk management initiatives are ratified at board level. ### Internal audit, compliance, and independent risk management - Paragraph 3.3 requires banks to have an internal audit function with appropriate status so directors react to and determine whether to act upon its recommendations. - Paragraph 3.3.1: the internal audit function has appropriate independence and assesses whether existing risk practices remain sufficient and appropriate. - Paragraph 3.1.4: larger and more complex banks have an independent risk management unit for evaluation, monitoring and control of risk. - Paragraphs 3.3 and 3.4: internal audit and the compliance officer function must have appropriate independence and be separated from risk taking functions. - Paragraph 3.1.4.4 requires assessment of resource requirements to ensure an appropriate risk management system exists; large and complex banks must have an independent risk management unit. - Paragraph 3.3.2 states the internal audit function is responsible for assessing risk management practices and reviewing whether these practices remain sufficient and appropriate. - Given the nature and size of some banks in Jersey, the Banking Codes allow internal audit to be provided from elsewhere within a group; JFSC expects to meet visiting internal audit teams when audits are performed (paragraph 3.3, Note 2). ### JFSC supervisory powers, information access, and oversight tools - Article 26 of the BB(J)L and Article 8 of the FSC(J)L give the JFSC the power to obtain information required to perform statutory duties; the JFSC can also use directions to obtain such information. - Article 8 of the FSC(J)L and Article 26 of the BB(J)L require persons employed by the bank to provide explanations of documents and permit JFSC officers to enter bank premises. - JFSC obtains assurance that exceptions to policies, processes and limits are promptly corrected by reviewing external and internal audit reports, meetings (particularly annual review meetings), and monitoring resolution of findings from JFSC on-site examinations. - The JFSC can issue a direction under Article 21 of the BB(J)L to require a bank to implement changes if it fails to do so within a reasonable timeframe. ### On-site examinations, route planners, and themed programs - On-site examinations utilize formalized ‘route planners’ that: - require assessment of whether reports on the bank’s exposures are provided timely to the board/senior management and reflect the bank’s risk profile and capital needs; - require assessment of whether models used to measure components of risk are adequately validated; - are comprehensive in scope and include standardized questions tailored to specific risk categories. - The JFSC performed themed examinations in 2007 focusing on risk management; summarized results were published on the JFSC’s website. - In 2004, the JFSC undertook a themed examination program on credit risk, including the credit decision making process. - Findings from on-site examinations are fed back as recommendations; implementation is monitored through a diary system. ### Off-site monitoring and reporting - Quarterly prudential returns submitted by banks are reviewed and provide information on the quality of information systems, business development, and associated risks. - The JFSC makes off-site requests for information, including reviewing information passed to the board and the board’s conclusions. ### ICAAP, stress testing, and capital adequacy (Pillar 2) - The JFSC has assessed Jersey-incorporated banks’ ICAAP documentation and concluded on the appropriateness of the methodology given the size and complexity of the bank. - Each bank is required to keep its ICAAP up to date; the JFSC performs at least an annual review of the ICAAP. - The ICAAP requires senior management to understand and document the nature and levels of risk taken and how this relates to adequate capital levels. - Consistent with Pillar 2, and where appropriate, the JFSC has increased the minimum risk asset ratio to take account of additional risks identified. - The “Basel II in Jersey: Quarterly Reporting and Pillar 2” guidance paper emphasizes stress testing, including forward looking stress testing, as part of the ICAAP process; example requirement: “bank’s management should conduct periodic stress tests of its major risk concentrations and review the results of those tests to identify and respond to potential changes in market conditions that could adversely impact the bank’s performance”. ### New products, board oversight, and records - The JFSC has not placed a specific requirement that regulated banks have a board-level (or board committee) approval process specifically for new products, but expects board/senior management oversight and assessment procedures to cover new products. - Banking Codes require pre-notification to the JFSC of any new activities that will have a material effect on the business or profitability (paragraph 6.8). - New products and initiatives are covered in the annual review meeting held with registered persons. - Paragraph 3.5.2 requires accounting and other records to: - capture and record every transaction and commitment; - be maintained so information can be extracted promptly to enable directors and senior management to monitor all relevant exposures; - contain details of exposure limits; and - provide information that can be summarized to enable actual exposures to be readily, accurately and regularly measured against such limits. - JFSC “route planners” require staff to assess timeliness and adequacy of exposure reporting to the board and senior management and validation of risk models. ### Assessment findings and supervisory recommendations - Assessment: Compliant (noted in the text regarding the JFSC licensing process). - Observations and recommended enhancements: - The JFSC should consider establishing a more formal process to observe developments at parent company or head office level and within the home jurisdiction (e.g., regular assessment of published accounting information, rating developments and outlooks, share price developments, media coverage, and intensified contact with home country supervisors) to assess capital adequacy and risk management developments in time to take early supervisory measures. - The JFSC should consider inserting a provision into Principle 3 (paragraph 3.1.4.5) requiring that any exceptions to established policies, processes and limits be reported and receive prompt attention of senior management and the board, where necessary. - The JFSC should consider explicit coverage in Appendix I of the Banking Codes for new product approval processes and procedures, as no minimum risk management control requirements for new products are set out in the Banking Codes or Appendix I despite route planner questions on the topic. - For issuance of specific risk management standards, see descriptions and comments to CPs 8–16 in the source. ### Principle 8. Credit risk — description and requirements - General requirement: supervisors must be satisfied that banks have a credit risk management process considering the institution’s risk profile, with prudent policies and processes to identify, measure, monitor and control credit risk (including counterparty risk). - The JFSC requires, through the Banking Codes, that management assesses and manages all principal risks; paragraph 3.1.4.3 requires risk management strategies be ratified at board level (or by senior officer for branches). - Principle 3 and Appendix I require credit risk policies and procedures to include: - a sound and well documented credit granting and investment process; - documentation of factors considered, analysis undertaken, and authorization/rejection of each loan, advance, or other credit exposure; - maintenance of appropriate credit administration, monitoring, reporting and asset grading processes enabling credit risk measurement on all on- and off-balance sheet facilities provided, including stress testing; - a system for early remedial action on deteriorating credits, appropriate provisioning policy and impairment policy; - maximum repayment periods for different types of lending and preferred covenanting arrangements; and - setting of exposure limits, including recording the basis of decisions for individual limits. - Appendix I requires credit officers to make credit decisions free of conflicting interests, on an arm’s length basis and free from inappropriate pressures. - Paragraph 3.1.4.5 and Appendix I require authority levels be set for relevant risk areas, including credit risk, to provide appropriate oversight by the board or senior management. - JFSC route planners require careful consideration of credit risk during on-site examinations, including board approval and implementation of credit management strategy, clarity of authority/responsibility/accountability, and avoidance of conflicts of interest. - On-site examinations are informed by external audit, internal audit, and quarterly prudential returns. ### Principle 9. Problem assets, provisions and reserves — description and requirements - Supervisory requirement: banks must establish and adhere to adequate policies and processes for managing problem assets and evaluating adequacy of provisions and reserves. - Banking Codes require management to monitor asset quality and make provisions for credit risks; paragraph 3.5.2.3 allows prompt extraction of appropriate information for directors and senior management to monitor relevant exposures. - Paragraph 3.2 and Appendix I oblige banks to regularly assess credit risk and have a policy to deal with problematic credits; management must ensure ability to make appropriate provisions for bad and doubtful debts and other exposures, on- and off-balance sheet. - Appendix I requires that a bank’s policy to deal with problematic credits should, as a minimum: - have a system for early remedial action on deteriorating credits; - have a system for classifying loans into categories when payments are contractually a minimum number of days in arrears; - treat loans as impaired when there is reason to believe that principal or interest will not be collected according to contractual terms; and - require appropriate provisioning policies. - Credit risks are measured and reported in all on- and off-balance sheet facilities provided. *Source: _cr09281 - Appendix I to the Banking Codes establishes minimum control requirements for a number of* ### Appendix I to the Banking Codes also requires that the bank has appropriate credit ### _cr09281 - Appendix I to the Banking Codes also requires that the bank has appropriate credit ### Credit administration, classification, provisioning, and reporting - Appendix I to the Banking Codes requires appropriate credit administration, monitoring, reporting and asset grading processes, including stress testing exposures, and a clearly documented policy over collateral valuations. - Paragraph 5.4.10 of the Banking Codes requires valuation, classification and provisioning of large exposures to be conducted on an individual item basis. - Credits, assets and total provisions are reported in the quarterly prudential returns to the JFSC for its review. - Credits are classified by sector and split between domestic and non-domestic exposure. - An analysis is provided of security held against such credits. - Assets are split by type: cash; market loans; certificates of deposits; investments; loans and advances; debtors; prepayments and fixed assets. - Assets are also split by credit quality and by number of days past due. - Prudential returns are delivered quarterly and reviewed by the JFSC; individual banks’ provisioning and write offs are challenged against supervisory expectations. - The JFSC may review banks’ internal audit reports and audited financial statements and places some reliance on this independent work. - The JFSC has opted not to be more prescriptive because Jersey banks are branches or subsidiaries of major international banking groups required to adopt group standards. - Under the BB(J)L Article 21, the JFSC may issue directions imposing requirements on a bank relating to credit risk and provisioning, including requiring increases in provisions, reserves, or overall financial strength in the interests of depositors or potential depositors. - On-site examinations consider existence of policies/procedures over classification, provisioning and write-off of problem assets; assess risk reports to the board for appropriateness and timeliness; the route planner lists questions based on scope. - Themed examinations: a credit risk themed examination was undertaken in 2004 (self assessment questionnaires and follow-ups); Banking Codes themed visits assessed information provided to boards in 2007. - Basel II credit guidance notes by the JFSC provide rules for credit risk mitigation, stating that the value of a risk mitigant is proportionally reduced according to the period of re-assessment. - Assessment: Largely compliant - Key comment findings and recommendations: - The JFSC should take a more active approach to assessing adequacy of a bank’s provisioning policies and processes and form its own view regularly, despite group/home supervisor standards. - The JFSC should approach banks, parent institutions, respective home supervisors, or relevant accountants to confirm adequacy of provisioning and write-off policy and inform its understanding of provisioning applied (see also comment to CP 12). - The JFSC could make more explicit in its Banking Codes that: - banks are required to perform periodic reviews of their problem assets, and of their asset classification, provisioning and write-offs; - the board receives timely and appropriate information thereon; - banks must have appropriate policies and procedures for collecting past due obligations; and - banks must have appropriate mechanisms for periodically assessing the value of risk mitigants, including guarantees and collateral. ### Large exposure limits (Principle 10) - Definition and reporting: - Appendix II defines a large exposure as “... an exposure to a counterparty or group of connected counterparties which is greater than or equal to 10 percent of a registered person’s agreed capital base”. - Appendix II paragraphs 2.1 and 2.2 provide an extensive definition of “exposure” (maximum gross loss) including on- and off-balance sheet positions. - Paragraph 5.4 of the Banking Codes contains a slightly different definition of an exposure. - Note 1 to paragraph 5.4.3 defines connected counterparties as persons that together may pose a single risk, including family ties, common endeavor, and companies linked financially or by common ownership, management or function. - Paragraph 5.4 requirements: - Exposures over 10 percent of agreed capital base (“Large Exposures”) are reported quarterly in prudential returns; additionally, the ten largest exposures are reported quarterly. - Exposures over 25 percent of agreed capital base require prior approval from the Commission. - Exemptions and aggregate limits: - Paragraph 5.4.5 allows the JFSC to approve exemptions where the exposure is adequately secured by cash deposits, Zone A government securities, or certificates of deposit issued by the bank; also applies where an adequate legally enforceable parental guarantee or loan takeover agreement is provided. - Paragraph 5.4.8 requires registered persons to restrict the total value of all large exposures to a total of 800 percent of its agreed capital base, except for large exposures supported by a legally enforceable parental guarantee or loan takeover agreement with prior JFSC approval. - Paragraph 5.4.7 exempts from concentration risk regulation: - an inter-bank loan or placement, certificate of deposit or similar instrument issued by a bank with a maturity of one year or less; - an exposure to, or one that is guaranteed by, a central government or a central bank from Zone A country; - an exposure to, or one that is guaranteed by, a Zone B central government if it is denominated in the currency of that government’s country and funded by liabilities in the same currency. - Exempted exposures still must be reported via quarterly prudential reports. - Monitoring and information: - Paragraph 3.5.2.3 requires that appropriate information can be extracted promptly for directors and senior management to monitor all relevant exposures. - Appendix I sets minimum control requirements over credit risk and country and transfer risk, including identification of portfolio concentrations and documentation of sectors with limited or no appetite. - Quarterly prudential returns provide sectoral and foreign currency exposures; geographic exposure is only captured as domestic vs non-domestic lending. - JFSC explores significant geographical exposures on an individual basis (example: one bank with exposures to Middle Eastern countries). - The JFSC performed a credit risk themed examination in 2004, including review of management information systems. - In 2008 the JFSC assessed incorporated banks’ ICAAPs, including concentration risk and documentation of processes for controlling concentrations of credit risk. - Assessment: Largely compliant - Key comments and recommendations: - The JFSC should consider adopting a single definition of “exposure” for large exposure and concentration risk contexts to avoid overlap and unclear distinctions between paragraph 5.4.3 and Appendix II. - Reconsider the general exemption of short-maturity inter-bank instruments (maturity of one year or less) from concentration risk regulation given historical events (e.g., Bankhaus Herstatt in 1974) and recent market turmoil; these exposures represent a dominant vulnerability of Jersey as a financial center. - The JFSC should decide on a regular basis whether exemptions for large exposures granted should be renewed, potentially making renewal periodic. - See related comments on exposures to related parties under CP 11. ### Exposures to related parties (Principle 11) - Definitions and requirements: - Appendix I defines ‘related parties’ to include subsidiaries, affiliates, persons the registered person controls or is controlled by, major shareholders, directors, senior management, key staff, their close family members and corresponding persons in affiliated companies. - JFSC retains discretion to grant variances. - Paragraph 1.5 of Appendix I requires specific policies and procedures for related parties, including prior approval at an appropriately senior level for transactions or write-offs exceeding specified amounts or posing unique risks. - Policies must provide for adequate assessment of terms and whether proposed terms are inappropriately favorable, and monitoring/reporting via an independent credit review process. - Limits, reporting and deductions: - No specific regulations limit exposures to related parties other than Large Exposures (CP 10). - The JFSC’s Core Financial Data Guide requires investments to certain related parties to be deducted from capital when assessing capital adequacy; circumstances for deduction are laid out in the Core Financial Data Guide and include investments in subsidiaries and associated companies and other capital connected lending. - Banks are required to aggregate and report some related party exposures quarterly to the JFSC. - Assurance and supervisory actions: - Banks must adhere to generally accepted accounting principles, including disclosure of material related party transactions and balances; the JFSC reviews financial statements for related party disclosures. - On-site examinations, internal audit requirements (Banking Codes paragraph 3.3), and annual external audit provide assurance that exceptions and limit breaches are adequately reported. - Under Article 21 of the BB(J)L the JFSC could set limits for exposures to related parties on a case-by-case basis; require such lending to be deducted from capital; and require collateralization. - Assessment: Largely compliant - Key comments and recommendations: - Regulation of inter-bank market exposures and connected party exposures should be reconsidered (see CP 10). - JFSC should ensure requirements cover all transactions with related parties (investments, placement of deposits, capitalization, etc.). - Given the funding role of local subsidiaries for parent/group companies, the JFSC should consider: - review at least annually the exemption of group-related inter-bank exposures from concentration risk requirements; - refine and increase the frequency of regular review of the status and financial condition of parent groups of local subsidiaries; - press home regulators for more frequent updates on their view of the parent group’s financial condition. - As standard practice the JFSC writes to the home supervisor at least annually and could ask whether circumstances exist that would hinder the exemption being granted. - Evidence to inform exemption renewals could include share price developments, accounting information, and other relevant financial market information. - Aim: establish a regular, distinct and transparent process for renewing exemptions of exposures to parent and group companies on a semi-annual or annual basis. - The JFSC should consider revising the Banking Codes’ requirement for a “letter of comfort” from the parent company to provide for regular (perhaps annual) submission (paragraph 5.3). - The JFSC should consider including in Appendix I, following paragraph 1.5, an explicit provision that policies and procedures ensure all material concentrations are reviewed and reported periodically to the board. ### Country and transfer risks (Principle 12) - Requirements and supervisory approach: - Banking Codes require management to assess and manage all principal risks; Principle 3 requires adequate information systems, risk management systems and internal control systems. - Appendix I requires banks to have country limits and to identify and monitor exposures on an individual country basis; banks must monitor and evaluate developments in country risk and transfer risk and apply countermeasures. - As part of licensing and ongoing monitoring the JFSC considers significant areas of country risk; specific concerns are raised during on-site examinations or annual review meetings. - Identification and reporting: - Exposure identification uses the structured “route planner”, “Themed Examination Programs”, “Annual Review Meetings”, and quarterly prudential reporting files. - The quarterly prudential return coinciding with a bank's year end is assessed and confirmed as materially correct by the bank's external auditor. - Provisioning policy: - To date the JFSC has not set prescribed provisioning levels against country or transfer risk; it considers it more appropriate for individual banks to set provisioning levels themselves, often following group or home regulator requirements. - External auditors are responsible for assessing appropriateness of provisions and reserves for “true and fair” financial statements. - Under Article 21 of the BB(J)L the JFSC could issue a direction to require a bank to set appropriate provisions if concerns are identified. - Assessment: Compliant - Key comments and recommendations: - The JFSC should take a more active approach in assessing adequacy of provisioning policies and processes relating to country and transfer risk (see CP 9 comments). - The JFSC could incorporate explicit transfer and country risk questions in its “route planners” and introduce transfer/country risk as a separate topic for the “Annual Review Meeting.” ### Market risk (Principle 13) — introductory note - The JFSC requires, via the Banking Codes and Principle 3, that bank management assesses and manages all principal risks, including market risk. *Source: _cr09281 - Appendix I to the Banking Codes also requires that the bank has appropriate credit* ### Appendix I to the Banking Codes provides for a number of minimum control requirements ### _cr09281 - Appendix I to the Banking Codes provides for a number of minimum control requirements ### Market risk: minimum control requirements (Appendix I) - Appropriate limits for all significant risks incurred and regular reviews of these. - Controls in place to ensure that all transactions are captured on a timely basis and that the bank’s positions are re-valued on an appropriately regular basis, using reliable and appropriate market data (or in the absence of market prices the use of industry accepted models). - Policies and processes in place to consider valuation adjustments for positions that cannot be otherwise prudently valued, including concentrated, less liquid and stale positions. - Performance of scenario analyses, stress testing and contingency planning, as appropriate, and periodic validation of measurement systems used. ### JFSC on-site examinations and route planner (market risk) - The JFSC’s route planners used for specific on-site examinations require that market risk is carefully assessed by JFSC staff. - The JFSC reviews the policies and procedures for assessing, monitoring, and controlling market risks, under the guidance of standardized questions. - The JFSC investigates the accuracy of data inputs, processing, and reporting outputs from the market risk system used by the bank. - The route planer requires that limits are considered carefully by JFSC staff to assess whether they are adhered to in practice and assesses board and senior manager oversight of the bank’s policies and procedures. ### Additional rules, Basel II reporting, and assessment (market risk) - In February 2008 the JFSC published extensive and detailed guidance on additional rules and requirements that apply to deposit-takers that have a trading book. The guidance paper provides for a comprehensive coverage and addresses general trading book rules, foreign exchange, interest rate and equity risk. Commodity and settlement risks are covered likewise. Capital charges are in place for foreign exchange, interest rate and commodity risk. - Basel II reporting was introduced in Jersey for the first quarter of 2008 with new reporting requirements for market risk, including interest rate risk in the banking book. Banks in Jersey need to report their market risk exposures depending on whether they are a Jersey incorporated subsidiary or a branch and whether they run trading books or have market risk in their banking book. - Assessment: Compliant. - Comments: Although fully compliant, the JFSC should consider introducing key requirements for the management of market risk into Appendix I of the Banking Codes, e.g., requirements related to foreign currency and interest rate risks. ### Principle 14 — Liquidity risk: description and requirements - Supervisors must be satisfied that banks have a liquidity management strategy that takes into account the risk profile of the institution, with prudent policies and processes to identify, measure, monitor and control liquidity risk, and to manage liquidity on a day-to-day basis. Supervisors require banks to have contingency plans for handling liquidity problems. - Paragraph 3.1.4.3 of the Banking Codes requires that a clearly defined, documented and implemented risk management strategy for all significant risks is in place. The board has to ratify this risk management strategy. - Paragraph 3.2.1.6 of the Banking Codes requires that all relevant risks, explicitly including liquidity risk, are regularly assessed. - According to Appendix I of the Banking Codes banks have to measure and monitor net funding requirements, perform a regular review of underlying assumptions and provide for adequate contingency planning to cover possible disruptions. Those requirements also hold true for all material currency exposures. ### Liquidity Management and Reporting Guidance Notes; reporting framework - The Liquidity Management and Reporting Guidance Notes, issued May 2007, set out standards for the management of liquidity in Jersey registered persons. These include guidance and core requirements to: - produce a Liquidity Management Policy; - adhere to maximum mismatch limits set by the JFSC for reporting; - provide the JFSC with proposals for reports to be submitted on a behaviorally adjusted basis; and - produce a Liquidity Contingency Plan. - For reporting the JFSC has set out maximum mismatch limits that apply to all registered persons in Jersey, and therefore does not take into consideration individual bank’s stress testing results in setting mismatches. - The Liquidity Reporting Guide, issued September 2007, requires consideration of undrawn commitments and other off-balance sheet liabilities and establishes a standard format for regular reporting of a bank’s liquidity profile, including foreign currency exposures, to the JFSC which analyses assets and liabilities by type and residual maturity. - During on-site examinations, which include liquidity risk in their scope, the JFSC considers whether policies and procedures exist to monitor, control and limit liquidity risk. The route planner utilized during such examinations lists questions to be asked depending on the scope of the respective examination. ### Liquidity assessment and recommendations - Assessment: Compliant - Comments and recommendations: - Convert the current guidance note into a separate section of the Banking Codes given the predominating business model in the jurisdiction. - The Banking Codes should include appropriate policies and procedures to limit liquidity risk and foresee the conduct of a regular analysis of funding requirements under alternative scenarios/stress tests. - Liquidity risk provisions of Appendix I of the Banking Codes should take into account the degree of diversification of funding sources and the necessary review of concentration limits (which were yet to be established at the time of the assessment; see CP 10 and 11). - Standardized questions with regard to those topics should be formulated and integrated into the route planner. - The JFSC should consider incorporating the maximum mismatch limits from the Liquidity Management and Reporting Guidance Notes into Appendix I of the Banking Codes. - The JFSC should review its liquidity regulations and guidance delivered to the banks in light of the new paper on liquidity management and supervision published in September 2008 by the Basel Committee. ### Principle 15 — Operational risk: description and controls - Supervisors must be satisfied that banks have in place risk management policies and processes to identify, assess, monitor and control/mitigate operational risk. These policies and processes should be commensurate with the size and complexity of the bank. - Paragraph 3.1.4.3 of the Banking Codes requires banks to have a clearly defined, documented and implemented risk management strategy for all significant risks in place; the board of Jersey incorporated banks must ratify this risk management strategy. The section requires clearly defined procedures for appropriate oversight by the board of all relevant areas of risk management. - Section 4 of Appendix I of the Banking Codes establishes minimum operational risk management controls and requires appropriate policies, processes and procedures for managing operational risk in all material products, activities, processes and systems and explicitly addresses e.g. documentary and legal risk, internal and external fraud and physical damage. - Minimum requirements include an adequate assessment of risk related to new products prior to launch and the existence of an adequate business continuity plan. - A cross-reference to the relevant Basel Committee guidance is made within the operational risk subsection. There is an obligation to establish a procedure for regular review of risk profiles. ### JFSC assessment, tools and supervisory measures (operational risk) - The risk management strategies and procedures over operational risk are assessed during specific on-site examinations by JFSC staff. - The JFSC’s route planner includes references to the operational risk area, for use when appropriate, during on-site examinations by JFSC staff. - The JFSC has developed a set of 88 standardized questions covering all aspects of operational risk (definition of operational risk, enumeration of specific control objectives, categories of specific risks relevant and tackled as operational risk etc.). - The JFSC considers whether management is continually aware of, and adjusts to, bank’s operational risks, including risks originating from people, processes and technology, as well as external events. - A self assessment questionnaire on compliance with the Banking Codes was issued to all banks in 2007, which was followed by examinations by the JFSC on a sample basis. This themed examination program covered a review of compliance with the Banking Codes, focusing on corporate governance, risk management and internal control. - In 2005 and 2006, the JFSC addressed within its themed examination program topics which have a close connection to operational risk: outsourcing and information technology, respectively. - In October 2008, the JFSC updated its Policy Statement and Guidance Notes on Outsourcing. The paper requires a written agreement with the delegate specifying the terms of the engagement and the levels of services to be provided, and provides that nothing should prevent the JFSC from exercising its statutory oversight responsibilities, especially from inspecting books and records. - In May 2007, the JFSC published together with the Guernsey Financial Services Commission and Isle of Man Financial Supervision Commission the pan-island approach to Basel II – Operational risk. This paper takes due account of the operational risk definition employed by the Basel Committee and describes the different approaches to measuring operational risk and the respective supervisory requirements to be fulfilled prior to approval of the more advanced measurement approaches. - The JFSC has assessed each of the incorporated banks’ ICAAPs, according to Pillar 2 methodology, and where appropriate has increased the minimum risk asset ratio to take account of additional risks identified. The ICAAP process specifically requires that the senior management of the bank understands and documents the nature and levels of risk being taken by the bank, including operational risk. - Assessment: Compliant - Comment: The JFSC should consider including the standard definition of operational risk explicitly under paragraph 4.1 of Appendix I of the Banking Codes. ### Principle 16 — Interest rate risk in the banking book: description - Supervisors must be satisfied that banks have effective systems in place to identify, measure, monitor and control interest rate risk in the banking book, including a well defined strategy that has been approved by the Board and implemented by senior management; these should be appropriate to the size and complexity of such risk. - The JFSC requires, through Principle 3 of the Banking Codes, that the management of a bank assesses and manages all its principal risks. Paragraph 3.1.4.3 of the Banking Codes requires that a clearly defined and documented and implemented risk management strategy for all significant risks is in place, including interest rate risk. The board (or senior officer for branches) must ratify the risk management strategy. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09281.pdf* ### Appendix I of the Banking Codes set out the minimum control requirements required from each ### _cr09281 - Appendix I of the Banking Codes set out the minimum control requirements required from each ### Interest rate risk (Appendix I; Prudential reporting; ICAAP) - Appendix I (section 5 “Interest rate risk”) requires that established standards for valuing positions and measuring risk are employed, ongoing assessment of the effects of interest rate changes are conducted, and independent reviews and appropriate stress testing are performed. - Prudential reporting requirements introduced in 2008 under Basel II: - include a section on interest rate risk, covering interest rate mismatch positions classified in specific bands according to their residual maturity. - include a 200 basis point shock test on the interest rate risk in the banking book as part of the quarterly prudential returns of each bank. - The JFSC obtains assurance that adequate measurement systems are in place by reviewing positions based on this reporting and challenging where appropriate. - The on-site route planner includes questions on: the comprehensiveness of a bank’s measurement systems, validation of models and assumptions applied, and limits in place with regard to interest rate risk. - The JFSC has assessed incorporated banks’ ICAAP documents, according to Pillar 2 methodology, and where appropriate has increased the minimum risk asset ratio to take account of additional risks identified. - The Pillar 2 process specifically requires that the senior management of the bank understands and documents the nature and levels of risk being taken by the bank, including interest rate risk. - Stress testing forms a necessary part of the ICAAP, which is subsequently assessed by the JFSC. - Stress testing of interest rate risk based on worst case scenarios would be required if interest rate risk were ever perceived to be a material risk to the bank. - If cooperation is not forthcoming from the bank in such an instance, an appropriate direction could be issued under Article 21 of the BB(J)L. - Assessment: Assessment Compliant - Comments: - The JFSC should consider introducing into the route planner a separate section of specific questions dealing with interest rate risk generally and interest rate in the banking book, and should also take into due regard such questions as the price sensitivity of banking book items and their respective volumes, etc. ### Principle 17 — Internal control and audit (Banking Codes; route planners; internal audit and compliance) - Principle summary: Supervisors must be satisfied that banks have internal controls adequate for the size and complexity of their business, including delegation arrangements, separation of committing/paying/accounting functions, reconciliation, asset safeguarding, and independent internal audit and compliance functions. - Banking Codes (Principle 3) require minimum requirements for corporate governance and internal controls and defined responsibilities for bank directors and senior managers (paragraph 3.1). - Specific Banking Codes provisions incorporated (exact paragraph identifiers preserved): - 3.1.4.2 - apportionment of responsibilities amongst senior managers and/or directors such that their individual responsibilities are clear and there is separation of critical functions; - 3.2.1.1 - business is planned and conducted properly and adequately; - 3.2.1.2 - transactions are entered into in accordance with documented authorities; - 3.2.1.3 - assets are safeguarded and liabilities controlled; - 3.2.1.4 - accounting and other records are complete, accurate and timely; - 3.2.1.5 - ability to assess and monitor adequacy of capital; and - 3.2.1.6 - ability to identify and assess all relevant risks. - On-site route planners require consideration of the adequacy of internal controls during specific inspections and reporting. - Board and senior management responsibilities: - The Banking Codes (paragraph 3.2) require the registered person to ensure business is planned and conducted properly and adequately and in an orderly manner. - It is a duty of the board to ratify a clearly defined, documented and implemented risk management strategy (paragraph 3.1). - Board composition must meet the JFSC’s corporate governance requirements (Banking Codes; paragraph 3.1), including a minimum number of directors and an appropriate number of non-executive directors. - BB(J)L (Article 24) provides that no person shall become a director, controller, key person or manager without confirmation by the JFSC that it does not object. - The JFSC can require a bank to change the composition of its board and senior management due to prudential concerns via issue of a direction (BB(J)L; Article 21(2)(b)). - Senior management and back office requirements: - Banking Codes (paragraph 3.1.4) require an adequate number of senior managers and/or directors and apportionment of responsibilities so that individual responsibilities are clear and there is separation of critical functions. - There must be an appropriate balance of skills and resources of back office functions relative to the front office. - The on-site route planner includes questions on procedures to ensure only fit and proper persons are employed and whether personnel are suitably experienced and qualified. - Compliance officer requirements (Banking Codes paragraph 3.4): - has appropriate independence and direct access to the registered person’s Jersey board of directors or equivalent; - has unfettered access to all business lines and support departments; - be based in Jersey; - has appropriate status within the registered person to ensure that directors and senior management react to and determine whether to act upon his or her recommendations; and - has sufficient resources to properly discharge the responsibilities of the position. - The JFSC maintains details of each bank’s compliance officer in central records and ensures through off-site monitoring that a compliance function is in place. - The JFSC considers structure and reporting lines of compliance departments during on-site inspections and annual review meetings to determine board oversight without unduly affecting compliance independence. - Internal audit requirements (Banking Codes paragraph 3.3): - has appropriate independence and reports directly to the board of directors or a group audit committee or equivalent function; - has unfettered access to all business lines and support departments; - has appropriate status within the registered person to ensure that directors and senior management react to and determine whether to act upon its recommendations; - has sufficient resources and staff that are adequately trained and have relevant auditing experience to understand and evaluate the business they are auditing; and - employs a methodology that identifies all significant risks run by a registered person and allocates resources accordingly. - Given the nature and modest size of some Jersey banks, allowance is made for the internal audit function to be provided from elsewhere within a group. - Expectations and supervisory interaction: - The JFSC expects that the internal audit team meet with the JFSC during visits at least annually. - The on-site route planner includes questions on whether the internal audit function meets the requirements of the Banking Codes (paragraph 3.3). - The assessment includes whether the internal audit approach audits the design and implementation of policies and processes. - Copies of internal audit reports are requested from bank management to supplement JFSC oversight. - Additional Banking Codes provisions: - Banking Codes (paragraph 3.1.2.2) require that, for a Jersey-incorporated company, there are an “appropriate number” of non-executive directors and that the internal audit function reports directly to the board of directors or a group audit committee or equivalent function (paragraph 3.3.1.1.). - Banking Codes (paragraph 6.9.10) require that any matter arising that the registered person considers as material to the requirements placed on it, or any of its employees, regarding fitness and propriety, should be notified to the JFSC immediately. - Practice note: - Given that all registered Jersey-incorporated banks are subsidiaries of large banking groups from major, well-regulated jurisdictions, the JFSC does not make mandatory that an audit committee include non-executive directors. - Assessment: Assessment Compliant - Comments: (none provided beyond the assessment) ### Principle 18 — Abuse of financial services (AML/CFT framework; agencies; inspection program) - Principle summary: Supervisors must be satisfied that banks have adequate policies and processes, including strict “know-your-customer” rules, to promote high ethical and professional standards and prevent use for criminal activities. - Primary legislation and regulatory sources implementing the 40 FATF recommendations and 9 special recommendations in Jersey: - the Proceeds of Crime (Jersey) Law 1999 (POC(J)L); - the Terrorism (Jersey) Law 2002 (T(J)L); - the Drug Trafficking Offences (Jersey) Law 1988 (DTO(J)L); - the Money Laundering (Jersey) Order 2008 (ML(J)O); and - the Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism for Financial Services Business regulated under the Regulatory Laws (the AML/CFT Handbook). - Enforcement and supervisory responsibilities: - Legislation is enforced by the Attorney General and the Joint Financial Crimes Unit (JFCU). - Regulatory requirements in the AML/CFT Handbook are enforced by the JFSC. - JFSC role: - The JFSC has responsibility for overseeing compliance by registered persons with AML/CFT requirements, including compliance with United Nations and EU sanctions legislation, under Article 5(1) of the Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 (Supervisory Bodies Law). - The AML/CFT Handbook was published in February 2008 and is issued under Article 22 of the Supervisory Bodies Law. - The Supervisory Bodies Law provides that the JFSC, and any other supervisory body designated by Order, may issue Codes of Practice for establishing sound principles for compliance; once issued, the Codes may be revised, revoked, varied, amended or added to. - Attorney General: - Has statutory investigatory and prosecution powers for serious and complex fraud, money laundering and terrorist financing offences. - The Law Officers’ Department acts as the central authority in mutual legal assistance matters and sets guidelines for disclosure of financial intelligence obtained from SARs to authorities outside Jersey. - The Law Officers’ Department and the JFCU work closely together in case identification, investigation, and sharing information relevant to mutual legal assistance requests. - Joint Financial Crimes Unit (JFCU): - A partnership between the States of Jersey Police Force and the States of Jersey Customs and Immigration Service. - SARs are made to the JFCU, which analyses and shares intelligence with other financial intelligence units outside Jersey. - Along with the Law Officers’ Department, the JFCU conducts money laundering and terrorist financing investigations and works closely with the Law Officers’ Department in serious or complex fraud investigations. - Operational cooperation: - The JFSC works closely with the JFCU at an operational level. - The JFCU prepares aggregate data on SARs for analysis by the JFSC (and the Law Officers’ Department). - Where a SAR raises an issue at a particular registered person, the JFCU discusses those issues with the JFSC, which then takes appropriate action. - Periodically, the JFCU provides details to the JFSC of registered persons that have failed to submit any SARs. - Inspection program: - In 2008, the JFSC is undertaking 17 on-site inspections focusing on banks’ compliance with the AML/CFT Handbook. - These inspections are to assess the adequacy of policies and procedures, the effective implementation of these procedures, and the reporting of suspicious activities to the appropriate authorities. - It is the current intention to continue this program of inspections until the majority of registered persons have been assessed. - Banking Codes (paragraph 6.9.17) require that any suspicious activities or incidents of fraud, whether internal or external, that are material to the safety, soundness or reputation of the bank should be notified to the JFSC. *Source: _cr09281 - Appendix I of the Banking Codes set out the minimum control requirements required from each* ### Section 3 of the AML/CFT Handbook summarizes the legislative customer due diligence ### _cr09281 - Section 3 of the AML/CFT Handbook summarizes the legislative customer due diligence ### Customer due diligence and KYC - The AML/CFT Handbook summarizes legislative customer due diligence requirements contained in the ML(J)O and sets additional regulatory requirements, of which ‘know-your-customer’ (KYC) forms a part. - Banking Codes (paragraph 3.2.1.8) require that the bank’s management is able to perform sufficient due diligence on its customers and prospective customers to assess adequately all relevant risks, including that of money laundering. - Inspections in the current thematic program include assessment of whether the following are in place: - a customer acceptance policy that identifies business relationships that the bank will not accept; - a customer identification, verification and due diligence program including the verification of beneficial ownership; - policies and processes to monitor and recognize unusual or potentially suspicious transactions, particularly of higher-risk accounts; - escalation to senior management level of decisions on entering into business relationships with higher-risk accounts; - clear rules on records to be kept on consumer identification and individual transactions and their retention period. ### Correspondent banking - AML/CFT Handbook section on correspondent banking lists legal and regulatory requirements on locally registered persons, including: - gather sufficient information about the respondent to understand fully the nature of its business; - determine the reputation of the respondent and the quality of its supervision; - require new correspondent relationships to be approved by the board. - The JFSC is not aware of any correspondent banking relationships where a Jersey-registered person acts as a correspondent bank for another party. ### Inspection and thematic review program - The thematic inspection program provides a current view of AML/CFT controls and potential weaknesses; summary findings will be published for industry guidance when thematic reviews are completed and interim findings have already been published. - Weaknesses identified are reported back to the registered person and their elimination followed up. - Inspections assess adequacy of policies and procedures, reporting of concerns to the MLRO, and the management information provided to compliance teams and senior managers on internal suspicions raised. ### AML/CFT Handbook compliance, enforcement and regulatory consequences - Compliance with the AML/CFT Handbook is considered by the JFSC in supervisory inspections; failure to follow a Handbook requirement can lead to regulatory action by the JFSC (in line with the Supervisory Bodies Law). - Ability to comply with the AML/CFT Handbook is directly relevant to regulated status and assessments of fitness and propriety of directors, controllers, key persons and managers. - The JFSC’s policy for supervising and enforcing compliance with the requirements of the AML/CFT Handbook is set out in Part 3 thereof. - The JFSC has published a policy in respect of making referrals to the Attorney General on matters relating to the POC(J)L and the ML(J)O. - The Enforcement Division investigates using powers provided by the BB(J)L and takes regulatory action where appropriate. ### Staff vetting, training, reporting protections and SARs - Banking Codes (paragraphs 3.3 and 3.7) require an internal audit function and that a Compliance Officer be appointed; ML(J)O (Article 8) requires appointment of a Money Laundering Reporting Officer (MLRO) and ML(J)O (Article 7) requires a Money Laundering Compliance Officer. - Appointments are assessed by the JFSC to confirm fitness and propriety (BB(J)L; Article 24). - Article 11 of the ML(J)O provides for policies and procedures relating to screening of employees. - The AML/CFT Handbook (Section 7.3) provides guidance on vetting procedures and legal/regulatory requirements for promoting awareness and providing training (Section 7.2). - Banking Codes (paragraph 3.1.4.7) require procedures for employees to communicate material bona fide concerns confidentially to the board or senior management independently of normal line management; ML(J)O also includes obligation to make a report to the MLRO. - SAR reporting: whenever a bank makes a SAR to the relevant authority, the report is made by the MLRO of the bank and is recorded as having been made by the bank and not the individual. - POC(J)L (Articles 32 and 33) states a person does not commit an offence if disclosure is made to a police officer, or appropriate person at the employer, if the disclosure is made on the person’s initiative and as soon as it is reasonable for the person to make it. - POC(J)L (Article 34D) incorporates a requirement to make a report where a person has knowledge or suspicion, or reasonable grounds for knowing or suspecting that another person is carrying on money laundering or terrorist financing. - Similar provisions are set out in the DTO(J)L and T(J)L. ### Information sharing, statutory gateways and MOUs - BB(J)L (Articles 43, 44 and 45) provides domestic statutory gateways enabling the JFSC to disclose restricted information to: - the Viscount who handles matters such as bankruptcy; and - the Attorney General or to a police officer of information obtained by virtue of the BB(J)L (Articles 26, 28, 29, or 30). - Under Article 23 of the ML(J)O, the JFSC is required to disclose any information that it obtains that indicates that any person has or may have been engaged in money laundering. - The JFSC has entered into 33 MOUs, including with banking regulators in France, Germany, the UK, Guernsey, the Isle of Man, Mauritius, and Gibraltar (MOUs are not essential for the JFSC to share information with external financial sector supervisors). - The JFSC recognizes information exchange is two-way and will consult with an overseas regulator where problems exist with a regulated person licensed in both jurisdictions on a “home” and “host” basis. - Assessors had access to documentation proving two-way communication with supervisors abroad is integral to the JFSC’s supervisory strategy. ### Supervisory approach, on-site and off-site techniques - Principle 19: most registered persons are subject to an on-site inspection at least every three years, with follow up on issues raised. - The JFSC employs on-site and off-site techniques including: - themed on-site inspections; - discovery on-site inspections; - focused on-site inspections; - annual review meetings with each bank; - reports by an accountant or other professional as required (BB(J)L; Article 26); - reviews of internal audit reports and external audit findings; - large exposure approvals; - assessing customer complaints; - financial statements reviews (including parent financial statements); - quarterly prudential returns reviews; - running a risk model to assess probability and impact of certain risks; - monitoring local and international press. - In 2007: - 19 banks were subject to themed on-site inspection; - 3 banks were subject to discovery on-site inspection; - 5 were subject to focused on-site inspection. - In 2006: - 11 banks were subject to themed on-site inspection; - 11 banks were subject to discovery on-site inspection; - 3 were subject to focused on-site inspection. - The JFSC maintains a “Strength, Weakness, Opportunity, and Threat” (SWOT) document populated by the banking team for system-wide trend assessment. - Assessment for CP 19: Compliant. Comment: JFSC should devote more effort to assessing risks affecting the financial system as a whole, including aggregate stress testing and examination of the distribution of financial soundness indicators. ### On-site inspection process and frequency - The “regulatory package” establishes minimum regularity of on-site assessments; the Banking Division has consistently exceeded those minimum levels, carrying out 25+ inspections per annum. - On-site supervision uses “route planners”, notification 6-8 weeks in advance, pre-inspection information submitted at least one week prior, opening meeting, completion of route planners, staff interviews, documentation review, closing meeting within one week, draft report usually issued within 3 weeks, final report issued after bank comment with deadlines for completion and follow-up. - Themed inspections began with self assessment questionnaires; key findings from themed inspections are sanitized and published on the JFSC’s website for industry guidance. - Themed inspection topics since 2004: Credit (2004); Outsourcing (2005); Treasury operations (2005); Information Technology (2006); Liquidity (2006); Adherence to the Banking Codes (2007); Adherence to AML/CFT requirements (2008). ### Off-site supervision, reporting and meetings - Quarterly prudential returns are assessed using checklists, automated summaries and graphical representations; deviations investigated and enquiries made of the bank where necessary. - The JFSC meets with each bank annually to discuss strategic objectives, significant changes, outstanding regulatory issues, risk management; interim meetings held as necessary. - Main contact points at each bank: compliance officer and Chief Executive Officer or senior branch manager; since 2008 non-executive directors are asked to attend annual review meetings. ### Prudential reporting, data collection and legal powers - JFSC requires completion of quarterly prudential returns by all banks (solo and/or consolidated basis) under BB(J)L (Article 26) and FSC(J)L (Article 8); laws allow more frequent requests if required. - Quarterly prudential return standard includes: - on- and off-balance sheet assets and liabilities; - profit and loss; - capital adequacy; - liquidity; - large exposures; - asset concentrations; - asset quality; - loan loss provisioning; - interest rate risk; - market risk. - The Schedule to the Banking Codes requires returns prepared using accounting standards based on internationally accepted principles; JFSC issued Guidance Note on IFRS valuation techniques in January 2006. - Data collected from all banks at the end of March, June, September and December and fed into a summary pack for industry analysis including peer comparisons. - BB(J)L (Article 26(6)) empowers the JFSC to require submission of information from a bank’s holding company, subsidiaries, related companies, and fellow subsidiaries. - BB(J)L (Articles 6 and 26) and FSC(J)L (Article 8) provide the JFSC with legal right of access to bank records and to any director, manager or staff member. - Offence for failing without reasonable excuse to supply information requested by the JFSC: imprisonment for a term not exceeding 6 months or a fine not exceeding £2,000, or both (BB(J)L; Article 26). - Offence for knowingly or recklessly providing false or misleading information: fine or imprisonment for a term not exceeding 2 years, or both (BB(J)L; Article 26). - The Schedule to the Banking Codes requires quarterly prudential returns for Jersey-incorporated subsidiaries to be signed off by two directors; for branches the principal manager must sign the report and year-end report must be signed by the senior officer approved by the JFSC (GPO; Article 11). ### Accounting, disclosure and external audit - Banking Codes (paragraph 3.2.1.4) require registered persons to have accounting and other records that are complete, accurate and timely. - BB(J)L (Article 32) requires each “registered person” to keep a copy of its most recent audited financial statements at its offices and make the copy available for inspection by any person on request. - GPO (Article 11(5)) requires a “registered person (that) is a subsidiary of an organization” to have available for the public either summarized accounts in a form determined by the Commission or “true and fair” audited accounts; this is a condition of registration. - GPO (Article 11(4)) requires Jersey-incorporated subsidiary banks to use “generally accepted accounting principles”. - For the last financial year, most Jersey registered persons were audited in accordance with either International Standards on Auditing, or International Standards on Auditing (UK and Ireland), with a few exceptions (Indian, Swiss and US auditing standards applied). - The GPO (Article 11(4)(5)) requires Jersey-incorporated subsidiaries to publish audited financial statements within 3 months of the date of the balance sheet for depositors’ use. - Presentation of aggregate information on Jersey’s banking system is limited to schedules of outstanding deposits, categorized by currency and source, and published quarterly. - The JFSC does not require banks to rotate external auditors and has no explicit power to require access to external audit working papers except where it has appointed a competent person (BB(J)L; Articles 26 and 28). - Assessment for Principle 22: Largely Compliant. Comments include need for JFSC to consider publication of commentary on performance of Jersey-incorporated “registered persons”, greater emphasis on GPO (Article 11(5)) requirements being met, and increased use of external auditors as an information source. ### Corrective and remedial powers of supervisors - Supervisory concerns are brought to a bank via written document addressed to the board; agreed remedial period is monitored via a diary system. - Undue delays could lead to further regulatory action under BB(J)L, e.g., appointing reporting accountants (Article 26), issue of a direction or removal of a director, controller or manager (Article 21). - For a Jersey-incorporated bank, JFSC may apply to the Royal Court for a winding up order under “just and equitable” grounds (Companies (Jersey) Law 1991; Article 155). - Key JFSC powers under BB(J)L and GPO include: - issue of a condition on a registration (Article 11); - issue of a direction on the bank (Article 21); - removal of a shareholder controller (Article 15); - removal of a director, controller or manager (GPO; Article 11) or via direction (Article 21); - appointment of a manager to a bank (Article 37A); - restricting rights applicable to shares of a bank (Article 17); - appointment of a competent person (Article 26); - issue of public statements (Article 48); - appointment of inspectors (Article 28); - revocation of registration (Article 10); - denial of permission for a new activity or acquisition (GPO; Article 11); - restriction of asset transfers by imposition of a condition (Article 11) or via direction (Article 21); - ban an individual from working in the finance industry via a direction (Article 21). - The JFSC has agreed trigger ratios with Jersey-incorporated banks under the Pillar 2 process of Basel II which, if breached, require immediate notification to the JFSC. - BB(J)L (Article 52) provides liability for corporate offences committed with consent, connivance or attributable neglect by specified officers. - Assessment for CP 23: Compliant. Comment addresses practical limitations of “ring-fencing” given typical Jersey business model and parent country actions. ### Consolidated supervision - The JFSC’s structure ensures staff supervising a bank are aware of local activities of other parts of the bank and its subsidiaries, including investment and insurance activities. - GPO (Article 11) requires banks to obtain JFSC consent to undertake any new activity within Jersey and consent to acquire or establish representative office, branch, or subsidiary outside Jersey. - BB(J)L (Article 26) and FSC(J)L (Article 8) empower the JFSC to review all activities performed by banks, including those conducted in other jurisdictions. - Banking Codes (paragraph 6.2) require Jersey-incorporated subsidiaries submit solo prudential report each quarter and an additional consolidated report at financial year-end if the reporting bank has a material subsidiary that is a financial services business. - JFSC assessed each Jersey-incorporated bank’s ICAAP according to Pillar 2 methodology and, where appropriate, increased minimum risk asset ratio to take account of non-banking activities and associated risks. - The JFSC supervises 12 banks that have overseas activities; on-site inspections are made to a number of overseas branches on average every 15 months (including the group’s regional head office). - Assessment for CP 24: Compliant. ### Home-host relationships and information exchange - JFSC has statutory gateways for information sharing (BB(J)L; Article 47) and has established 33 MOUs (MOU content published where other regulator agrees). - JFSC writes formally to the home regulator of every Jersey-registered deposit taker annually to: - maintain the regulatory relationship; - remind the “home” regulator of the Jersey-registered person; - give the “home” regulator an indication of the JFSC’s overall view and specific concerns; - advise of on-site activity in the previous 12 months and significant findings and their resolution; - “invite” the home regulator to provide input in respect of the wider group. - Before registration, the home country supervisor is asked to confirm knowledge of and agreement with the operation proposed for Jersey and its role as consolidated supervisor; registration is not permitted until the home supervisor confirms no objection and JFSC is satisfied as to adequacy of home supervision. - No shell banks operate in Jersey; they are formally prevented (BB(J)L; Article 10). - Assessment for CP 25: Compliant. Comments note limitations exposed by recent global financial turmoil, including: - JFSC did not receive timely and unprompted warning of “acute system-wide pressures on financial institutions” from some home supervisors (example referenced: Bank of England: Financial Stability Report (Oct. 2008; Issue No. 24) in source text); - Asymmetry of relationship with large home supervisors disadvantages the JFSC; - Practices to be revisited: exemption from large exposure quantum limitations for interbank loans of one year or less; depositors should be made aware of the status of their deposits and applicable government guarantees as they are removed; JFSC should obtain regular written statements from home supervisors indicating whether they have knowledge of significant problems; JFSC should seek commitment from home supervisors to communicate promptly critical information. - As regards managed banks, the JFSC would find it constructive to maintain annual inspections of managed banks. *Source: _cr09281 - Section 3 of the AML/CFT Handbook summarizes the legislative customer due diligence* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09281.pdf_