## _cr09282 ## Source details **Canonical URL:** [_cr09282](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09282.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09282.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09282.pdf.json) --- ### Executive summary and policy agenda - Updates the 2003 OFC program assessment; based mainly on information available at the time of the November 2008 mission. - Financial sector continued to expand since 2003; comparative advantage shifted toward investment funds aimed at expert investors. - Regulation and supervision comply well with international standards; processes and resourcing have been enhanced. - Detailed assessments undertaken of: - Basel Committee Core Principles for Effective Banking Supervision (BCP); - International Association of Insurance Supervisors Insurance Core Principles (IAIS ICP); - Financial Action Task Force (FATF) 40+9 recommendations on AML/CFT. - Key systemic vulnerabilities identified: - Banks’ high intra-group exposures and concentration risk vis-à-vis parents. - Spill-over risks from parent banks and limited JFSC capacity for deep group-wide analysis. - Authorities are developing contingency plans; consideration of a dedicated bank insolvency regime and a depositor compensation scheme (DCS) is under way. ### Main findings — high level - Financial sector regulation and supervision are of a high standard; JFSC operates with considerable independence and broadly adequate resources. - Banking sector dominated by inter-group funding activity: end-2008 banking sector assets 319,090 (GBP million); loans to Banks 266,363; loans to Parent 248,572. - Financial sector contributes over half of gross value added (GVA): Financial sector contribution to GVA (December 2007) 2,177 (GBP millions); 53.2 percent of GVA. - Stress tests and FSIs show resilience to a range of shocks, but concentration risk and spillovers from parent banks are main concerns. - AML/CFT framework comprehensive with high compliance; Joint Financial Crime Unit (JFCU) effective but resource and legal gaps exist. ### Main recommendations — high priority - General - Continue to develop contingency planning, including through a clear allocation of roles between the JFSC, the Treasury, and other institutions. - Seek to develop mechanisms to receive early information on financial strains, including from home supervisors. - Banking - Replace the general exemption for inter-bank exposures from risk concentration provisions by a defined and transparent procedure under which the JFSC renews such permissions on a regular basis following a review of risks and risk mitigants. - Develop capacity to assess overall financial system soundness, including through stress testing. ### Main recommendations — medium priority - General - Study the design of a possible DCS based on explicit objectives and recognizing constraints. - Continue to ensure that creditors receive clear information on counterparty risk and compensation scheme coverage, if any. - Strengthen powers to impose fines for breach of JFSC regulations. - Banking - Supervise more actively loan classification and provisioning by banks, and maintain up-to-date expertise in evaluating risk models. - More regularly discuss individual banks with auditors. - Other - Survey activities of SPVs registered on the island. ### Financial sector structure and key statistics - Banking sector assets (end-2008): Assets 319,090 (GBP million); Percent of total assets 99.7; Percent of 2007 GVA 7,803.6. - Total banking and insurance sectors (December 2008): Number 60; Assets 319,987 (GBP million); Percent of total assets 100.0. - Number of employees in financial sector (December 2007): 12,480; Percent of total employees 23.5. - Financial sector contribution to GVA (December 2007): 2,177 (GBP millions); 53.2 percent of GVA. - Banking system balance sheet (end-2008, GBP millions; percent of total assets; percent of 2007 GVA): - Assets 319,090; 100.0; 7,803.6. - Cash 413; 0.1; 10.1. - Loans to Banks 266,363; 83.5; 6,514.1. - Loans to Parent 248,572; 77.9; 6,079.0. - Marketable Assets 10,718; 3.4; 262.1. - Loans and Advances 34,650; 10.9; 847.4. - Deposits due to: 209,792; 65.7; 5,130.6. - CDs and Other Debt 87,072; 27.3; 2,129.4. - Capital 15,792; 4.9; 386.2. - Structure of deposits by size and residence (end-October 2008, GBP millions; percent): - Total balance 33,934; 100.0 percent. - Balances < £50k 3,676; 10.8 percent. - Resident 605; 1.8 percent. - Non-resident 3,067; 9.0 percent. - Balances > £50k 30,258; 89.2 percent. - Resident 2,729; 8.0 percent. - Non-resident 27,525; 81.1 percent. - Number of deposits: - Balances < £50k: 516,545; 82.1 percent. - Resident 125,312; 19.9 percent. - Non-resident 390,233; 62.0 percent. - Balances > £50k: 112,484; 17.9 percent. - Resident 11,995; 1.9 percent. - Non-resident 100,489; 16.0 percent. - Non-interbank loans by type (end-June 2008, GBP millions; percent of total credit; percent of total assets; percent of 2007 GVA): - Total credit 34,590; 100.0 percent; 10.8 percent; 845.9. - Persons 15,702; 45.4 percent; 4.9 percent; 384.0. - House Purchase 6,301; 18.2 percent; 2.0 percent; 154.1. - Financial 5,176; 15.0 percent; 1.6 percent; 126.6. - Business & Other Services 5,575; 16.1 percent; 1.7 percent; 136.3. - Jersey-related credit 5,904; 17.1 percent; 1.9 percent; 144.4. - Persons (Jersey-related) 2,626; 7.6 percent; 0.8 percent; 64.2. - House Purchase (Jersey-related) 2,193; 6.3 percent; 0.7 percent; 53.6. ### Fund management, CISs and insurance snapshot - At end-September 2008: - 1,452 funds (open and closed) with total NAV of GBP 239 billion. - Over 1,000 specialist funds with NAV of GBP 138 billion. - Assets under management (selected): - Total AUM: 2008 = 241,172 (GBP millions). - Jersey AUM: 2008 = 111,629 (GBP millions). - Non-Jersey AUM: 2008 = 129,543 (GBP millions). - Insurance sector small: - 14 insurance companies incorporated on the island (Category B); about 172 Category A firms incorporated overseas licensed to write Jersey business. - Net premium income in 2007 of Category B firms less than GBP 4 million; total assets around GBP 800 million. ### Regulatory and supervisory framework — JFSC - JFSC statutory objectives include reducing public risk of financial loss, protecting island’s reputation and integrity, protecting economic interests of Jersey, and countering financial crime. - Independence and accountability: - Commissioners cannot be dismissed without good cause; power of minister to give “guidance” is constrained by MOU and not used. - Publication of annual reports and consultations provide accountability. - Powers and enforcement: - JFSC can obtain information, share information (subject to confidentiality), issue binding directions, publish warnings, appoint managers/co-signatories, revoke licenses, and request court winding-up. - Fines: JFSC can impose fines mostly for administrative matters; courts impose fines for criminal offences. Recommendation to broaden fining power. - Resourcing: - JFSC has over 100 staff (increase of about 40 over five years); funded by industry fees; staff well regarded but expertise in areas such as risk-model assessment is limited. ### Capacity to assess system-wide stability and risk models - Findings: - JFSC could engage more with banks’ risk managers and foreign supervisors if it had greater capacity for quantitative risk assessment and scenario simulation. - Publishing aggregate balance sheets and the mean and distribution of FSIs would aid transparency and peer comparisons. - Authorities could gather comprehensive information on total indebtedness including credit from abroad and local non-bank lenders. - Policy recommendations: - Develop capacity for quantitative risk assessment and scenario simulation to compare vulnerabilities across banks. - Publish aggregate balance sheets and the mean and distribution of FSIs. - Collect comprehensive data on total indebtedness including credit from abroad and local non-bank lenders. - Establish an enhanced framework for macroprudential analysis and decision taking. ### Stress tests — methodology and selected results - Scope: - Top-down and bottom-up tests based on end-June 2008 data; focused on 18 of 20 local subsidiaries (liquidity tests included additional branches). - Key calibrations: - Interest rate shocks: 200 basis point parallel shifts. - Exchange rate shock: 20 percent depreciation of the dollar and the pound sterling. - Credit shocks: default of banks’ three largest exposures (excluding parent) and 10 percent default scenarios. - Liquidity tests: 20 percent daily withdrawal of deposits with maturity up to one month. - Selected outcomes (verbatim from source): - Pre-shock capital (unweighted average across banks in sample) reported as 15.4 percent (min 11.1, max 22.8) in market-risk/credit-risk table. - Credit shock C1 (default of largest three exposures excluding the parent bank): pre-shock CAR 14.6; No. banks breaching min. CAR = 2 (top-down) and 11 (bottom-up). - Credit shock C2 (10% of domestic nonbank loans fail): pre-shock CAR 15.3; No. banks breaching min. CAR = 0 in top-down. - Credit shock C3 (10% of mortgage loans fail): top-down pre-shock CAR 14.9; No. banks breaching min. CAR = 0; bottom-up shows 3 banks breaching. - Credit shock C4 (10% of non-resident non-bank loans fail): top-down shows 1 bank breaching; bottom-up shows 4 banks breaching. - Parent-counterparty shock: A 10 percent loss on claims on parent banks would lead 14 banks to become insolvent. - Liquidity test L1 Day 5: Number of illiquid banks — Subsidiaries 4, Branches 4, Total 8; Market share of assets 2.1, 2.6, 4.7 (percent of total assets). - Liquidity test L2 Day 5: Number of illiquid banks — Subsidiaries 5, Branches 4, Total 9; Market share of assets 3.0, 2.6, 5.7. ### Financial-soundness indicators (selected, 2002–2008) - Regulatory capital to risk-weighted assets: 16.7, 17.4, 16.3, 16.9, 16.1, 14.6, 13.8. - Regulatory Tier I capital to risk-weighted assets: 15.3, 15.8, 14.7, 14.2, 13.4, 12.6, 11.2. - Capital to assets: 4.3, 4.2, 2.9, 2.8, 1.8, 1.9, 2.1. - Nonperforming loans (NPLs) to total gross loans: 0.5, 0.5, 0.3, 0.2, 0.2, 0.1, 0.1. - Loan-loss provisions to nonperforming loans: 69.5, 51.2, 68.8, 88.5, 93.0, 82.2, 74.5. - FX-denominated loans to total loans: 66.3, 38.9, 34.5, 35.4, 30.3, 39.7, 74.0. - Return on assets: 1.0, 0.9, 0.8, 1.0, 1.0, 1.1, 0.3. - Return on equity: 18.2, 16.1, 14.8, 16.2, 17.1, 19.7, 22.6. - Liquid assets to total assets: 80.5, 79.8, 75.4, 76.5, 76.8, 78.3, 82.6. - Loans as a percentage of deposits: 7.7, 8.0, 9.5, 9.9, 11.0, 13.9, 16.5. ### Safety nets, contingency planning, and resolution - Current arrangements: provisions exist for ad hoc compensation or formal schemes in banking, insurance, and CIS sectors; no formal schemes except one for “recognized” CISs. - Jersey has no central bank and no lender of last resort (LOLR) capacity. - Deposit compensation scheme (DCS) considerations: - Study benefits and costs carefully; strongest case for limited coverage for Jersey residents, potentially funded largely from a levy on resident deposits. - Rapid payouts require considerable borrowing capacity and/or substantial pre-funding. - All depositors must receive clear information on who is responsible for safeguarding claims and the DCS coverage, if any. - Resolution and intervention: - JFSC has powers to direct, intervene in, and close troubled institutions but may lack real-time information. - Recommendations include frequent reporting by affected institutions, enhanced MOUs with home authorities, cooperative participation in intervention/resolution, and consideration of a dedicated bank insolvency regime with tools such as “purchase and assumption.” ### AML/CFT — overall assessment and JFCU - AML/CFT framework comprehensive and robust; high compliance with FATF Recommendations. - Jersey assessed as “compliant” or “largely compliant” with 44 of the 49 Recommendations and 15 of the 16 “core” and “key” Recommendations. - Selected compliance ratings (verbatim list excerpts): - R.1 — LC - R.2 — C - SR.II — LC - R.3 — LC - SR.III — LC - R.26 — LC - R.27 — LC - R.28 — C - SR.IX — LC - R.5 — PC - R.6 — LC - R.7 — C - R.8 — LC - R.9 — PC - R.4 — LC - R.10 — C - SR.VII — LC - R.11 — C - R.21 — LC - R.13 — LC - R.14 — PC - R.19 — C - R.25 — C - SR.IV — LC - R.15 — LC - R.22 — LC - R.18 — C - R.17 — LC - R.23 — C - R.29 — C - SR.VI — LC - R.12 — PC - R.16 — PC - R.24 — LC - R.20 — C - R.33 — C - R.34 — LC - SR.VIII — C - R.31 — C - R.35 — LC - SR.I — LC - R.36 — LC - R.37 — C - R.38 — LC - R.39 — LC - SR.V — LC - R.40 — C - R.30 — LC - R.32 — LC - JFCU operations: - JFCU receives a satisfactory flow of SARs, mostly from banks and trust businesses. - JFCU can consent/non-consent to the activity underlying a SAR; non-consent equivalent to a freezing order. - JFCU an active Egmont Group member; decision to provide additional resources welcomed. - Identified legal and implementation gaps: - Offences of acquisition, possession, or use do not extend to self-laundering. - Scope of “concealing or disguising” and “converting or transferring” is limited by a purpose requirement. - FT offence does not extend to all offences under the FT Convention. - Concessions allowing reliance on intermediaries/introducers for CDD are a material issue (assessors view them as overly-generous; authorities dispute this). - No legal requirement for financial institutions to have an independent audit function to test AML/CFT compliance. - Key assessor recommendations (selected, verbatim highlights): - Amend POCL, DTOL, TL to address self-laundering, scope of concealing/transforming offences, and terrorism-related ML coverage. - Conduct a risk-based review of concessions allowing reliance on third parties for CDD and limit availability. - Enhance timeliness of SAR reporting and limit legal protection for SAR filers to those acting in good faith. - Provide additional resources to the JFCU and develop its statistical collection system to demonstrate action resulting from SARs. - Consider expanding JFSC sanctioning powers to include monetary fines. ### Insurance sector assessment — main gaps and recommendations - Insurance regulation broadly meets international standards; strengthened since 2003. - Identified gaps and recommended actions: - Narrow exemptions to the Insurance Business (Jersey) Law 1996 to bring under JFSC regulation one significant domestic insurer currently subject to a separate statute. - Amend IB(J)L to require potential shareholder controllers to seek JFSC consent at appropriate control levels. - Extend Insurance Codes to include further provisions on risk management, including operational risk. - Consider additional powers for group supervision, including information from group companies and a group solvency test. - Review Category A regime: establish a framework to assess equivalence of home-state regulation and apply appropriate regulation to branches present in Jersey. ### Governance, supervisory practice and implementation progress - JFSC has increased on-site supervision; about 25 on-site bank inspections annually. - Basel II introduced in 2008; JFSC minimum risk-weighted capital adequacy requirement set at 10 percent. - JFSC uses a risk model and “route planners” to guide on-site work and supervisory resourcing. - Implementation actions since 2003 include enhanced autonomy, expanded staff (about 100), revised Banking Codes (Appendix I), and Codes of Practice across sectors. *Source: International Monetary Fund — Financial System Stability Assessment Update for Jersey (FSAP Update mission report, mission visited November 11-21, 2008; approved September 1, 2009).* ### 2009. The views expressed in this document are those of the staff team and do not necessarily ### JERSEY — Financial System Stability Assessment Update ### Background and mission - Prepared by the Monetary and Capital Markets Department; Approved by José Viñals; September 1, 2009. - FSAP Update mission visited Jersey, November 11-21, 2008. - Mission team: Daniel Hardy (mission chief), Andrea Maechler, Ian Tower (all MCM/IMF), Jürgen Dreymann (BaFin, banking supervision expert), and Keith Bell (banking supervision expert). - Mission worked closely with overlapping LEG mission (led by Terence Donovan) on AML/CFT assessment. - Copies of the report available from International Monetary Fund Publication Services; Price: $18.00 a copy. ### Executive summary and policy agenda — key points - This report updates the 2003 OFC program assessment and concentrates on priorities going forward, based mainly on information available at the time of the November 2008 mission. - The financial sector has continued to expand since 2003; Jersey’s comparative advantage has shifted toward investment funds aimed at expert investors. - Regulation and supervision comply well with international standards; processes and resourcing have been enhanced in recent years. - Detailed assessments undertaken of observance of: - Basel Committee Core Principles for Effective Banking Supervision (BCP); - International Association of Insurance Supervisors Insurance Core Principles (IAIS ICP); - Financial Action Task Force (FATF) 40+9 recommendations on AML/CFT. - The JFSC operates with considerable independence and accountability; resources are broadly adequate and staff well-regarded. - The 2008 global financial crisis highlights Jersey banks’ vulnerability to events in major financial centers due to close links with large international groups. - The JFSC cannot feasibly analyze in depth the soundness of major international banking groups but should detect and react to intensified spill-over risks and develop capacity to assess system-wide soundness (e.g., stress testing). - Regulation and supervision of collective investment schemes (CISs) largely incorporate 2003 OFC recommendations; significant reform to attract institutional investors and enhanced supervision of fund service providers. - Insurance supervision: regulation mostly sound but gaps remain (for example, risk management) that should be addressed. - Trust and company services business sector: comprehensive regulatory and supervisory framework; implementation catalyzed sector consolidation. - Jersey has experienced some effects from the global turmoil—outflows from banks and CISs, expected decline in profitability—but no bank failures. Available FSIs for licensed institutions are satisfactory. - Stress tests confirm system resilience to a range of shocks, but concentration risk and spillovers from parent banks are main concerns; credit risk is significant for the local economy. - Authorities are developing contingency plans; cooperation with home supervisors and domestic authorities is essential. Experience elsewhere suggests usefulness of a dedicated bank insolvency regime. - Authorities are considering a bank depositor compensation scheme (DCS). Introduction would require careful assessment of net benefit given constrained resources; all depositors must receive clear information on who is responsible for safeguarding claims and the DCS coverage, if any. - Jersey has a comprehensive and robust AML/CFT framework with high compliance; financial institutions and trust company businesses are well supervised for AML/CFT purposes. The Joint Financial Crime Unit (JFCU) functions effectively and resource limitations are being addressed. - A list of main recommendations is attached to the report; many could be implemented within 6 to 12 months. ROSCs contain numerous specific recommendations. ### Main findings (as presented) - Financial sector regulation and supervision are of a high standard; processes and resourcing have been significantly enhanced since the 2003 OFC assessment. The Jersey Financial Services Commission (JFSC) operates with considerable independence as well as accountability, and has broadly adequate resources. - The financial crisis highlighted the vulnerability of Jersey’s banks to events in major financial centers. Jersey supervisors cannot feasibly analyze in depth the soundness of the financial groups to which their Jersey operations provide extensive funding, but should be able to detect and react to intensified risks stemming from parent institutions. - Jersey has experienced some effects from the global crisis, but financial soundness indicators (FSIs) for institutions licensed on the island have been satisfactory, and stress tests confirm that the system is resilient to a range of shocks. However, there is high concentration risk and spill-over risk from parent banks. - The authorities are making contingency plans; cooperation with home supervisors is a key element. Experience elsewhere suggests the usefulness of a dedicated bank insolvency regime. - Possible introduction of a bank depositor compensation scheme would require careful study. In any case, all depositors must receive clear information on who is responsible for safeguarding their claims and the scheme’s coverage, if any. ### Main recommendations — high priority - General: - Continue to develop contingency planning, including through a clear allocation of roles between the JFSC, the Treasury, and other institutions. - Seek to develop mechanisms to receive early information on financial strains, including from home supervisors. - Banking: - Replace the general exemption for inter-bank exposures from risk concentration provisions by a defined and transparent procedure under which the JFSC renews such permissions on a regular basis following a review of risks and risk mitigants. - Develop capacity to assess overall financial system soundness, including through stress testing. ### Main recommendations — medium priority - General: - Study the design of a possible DCS based on explicit objectives and recognizing constraints. - Continue to ensure that creditors receive clear information on counterparty risk and compensation scheme coverage, if any. - Strengthen powers to impose fines for breach of JFSC regulations. - Banking: - Supervise more actively loan classification and provisioning by banks, and maintain up-to-date expertise in evaluating risk models. - More regularly discuss individual banks with auditors. - Other: - Survey activities of SPVs registered on the island. *Source: International Monetary Fund — Financial System Stability Assessment Update for Jersey (FSAP Update mission report, mission visited November 11-21, 2008; approved September 1, 2009).* ### 1. The on-going refinement of the Jersey regulatory framework and the growth in ### The on-going refinement of the Jersey regulatory framework and the growth in ### Context and economic role of financial sector - Jersey is one of the three British Crown Dependencies (others: Guernsey and the Isle of Man). It is not part of the United Kingdom (UK); it has its own parliament (the States), legal and regulatory system, and tax regime. Jersey uses the pound Sterling as its currency and is in a customs union with the European Union (EU) for trade in goods. - The economy is dominated by financial services and is expected to suffer a slowdown in the context of global financial turmoil and the slowing of the British economy. - The financial sector contributes over half of gross value added (GVA). ### Financial sector structure and key statistics - Banking is the dominant component of the financial sector. - Table highlights (as presented): - Banking sector assets (end-2008): Assets 319,090 (GBP million); Percent of total assets 99.7; Percent of 2007 GVA 7,803.6. - Total banking and insurance sectors (December 2008): Number 60; Assets 319,987 (GBP million); Percent of total assets 100.0. - Number of employees in financial sector (December 2007): 12,480; Percent of total employees 23.5. - Financial sector contribution to GVA (December 2007): 2,177 (GBP millions); 53.2 percent of GVA. - Banking system balance sheet (end-2008, GBP millions; percent of total assets; percent of 2007 GVA): - Assets 319,090; 100.0; 7,803.6. - Cash 413; 0.1; 10.1. - Loans to Banks 266,363; 83.5; 6,514.1. - Loans to Parent 248,572; 77.9; 6,079.0. - Marketable Assets 10,718; 3.4; 262.1. - Loans and Advances 34,650; 10.9; 847.4. - Deposits due to: 209,792; 65.7; 5,130.6. - CDs and Other Debt 87,072; 27.3; 2,129.4. - Capital 15,792; 4.9; 386.2. - Structure of total deposits, by region (December 2007 and September 2008, GBP millions): - By residence (December 2007): Sterling 69,402; Other 142,919; Total 212,320. - By residence (September 2008): Sterling 69,392; Other 127,584; Total 196,975. - Channel Island and U.K. share (December 2007): 66.9 percent Sterling; 26.8 percent Other; 39.9 percent Total. - Structure of deposits by size and residence (end-October 2008, GBP millions; percent): - Total balance 33,934; 100.0 percent. - Balances < £50k 3,676; 10.8 percent. - Resident 605; 1.8 percent. - Non-resident 3,067; 9.0 percent. - Balances > £50k 30,258; 89.2 percent. - Resident 2,729; 8.0 percent. - Non-resident 27,525; 81.1 percent. - Number of deposits: - Balances < £50k: 516,545; 82.1 percent. - Resident 125,312; 19.9 percent. - Non-resident 390,233; 62.0 percent. - Balances > £50k: 112,484; 17.9 percent. - Resident 11,995; 1.9 percent. - Non-resident 100,489; 16.0 percent. - Structure of non-interbank loans by type (end-June 2008, GBP millions; percent of total credit; percent of total assets; percent of 2007 GVA): - Total credit 34,590; 100.0 percent; 10.8 percent; 845.9. - Persons 15,702; 45.4 percent; 4.9 percent; 384.0. - House Purchase 6,301; 18.2 percent; 2.0 percent; 154.1. - Financial 5,176; 15.0 percent; 1.6 percent; 126.6. - Business & Other Services 5,575; 16.1 percent; 1.7 percent; 136.3. - Jersey-related credit 5,904; 17.1 percent; 1.9 percent; 144.4. - Persons (Jersey-related) 2,626; 7.6 percent; 0.8 percent; 64.2. - House Purchase (Jersey-related) 2,193; 6.3 percent; 0.7 percent; 53.6. ### Fund management, insurance, and other services - Fund management and associated services are the other main component of the financial sector; the insurance sector is small. - The numbers and assets of CISs have been growing strongly in the past decade; the sector is increasingly dominated by schemes aimed at institutional and high net worth individuals, many specialist funds such as hedge fund/alternative investments. - Jersey hosts a small but diverse group of SPVs and a few Structured Investment Vehicles (SIVs) used for securitization purposes. - There are only 14 insurance companies incorporated on the island, although many more firms incorporated overseas are licensed to write Jersey business. ### Regulatory and supervisory system — overall assessment - The 2003 OFC assessment found Jersey’s financial regulatory and supervisory system complied well with international standards; progress was noted in banking, insurance, securities, and AML/CFT. - Areas previously recommended for improvement (2003) included: - Enhancing the independence of the JFSC. - Increasing its resources and improving processes, especially on-site supervision. - Formalizing supervisory guidance for credit policies, loan evaluation, and loan-loss provisioning. - Introducing prudential requirements for market risk. - Since 2003, authorities have: - Increased on-site supervision and become more risk-oriented (use of a risk model for assessing regulated firms). - Updated legislation and begun steps toward a single legislative framework applying to all sectors. - Elucidated regulatory principles in new codes of practice and regulations. ### Institutional structure and governance of the JFSC - The Jersey Financial Services Commission (JFSC) is the integrated regulator responsible for supervision and development of financial services. - Statutory objectives the JFSC must regard include: - Reducing the risk to the public of financial loss due to dishonesty, incompetence or malpractice or the financial unsoundness of financial institutions. - Protecting and enhancing the island’s reputation and integrity. - Protecting the best economic interests of Jersey. - Countering financial crime. - Potential conflict: responsibility for both supervision and development could lead to conflicting objectives; an explicit ranking, giving highest priority to financial stability, might facilitate consistent policy-making and accountability. - Independence and accountability: - JFSC independence is grounded in law; commissioners cannot be dismissed without good cause; the JFSC approves (and can terminate) the appointment of a Director General. - The government may give “guidance” or “general direction,” but an MOU clarifies this would be used only in exceptional circumstances and with explanations to the States and the public; this power has never been exercised. - Accountability provisions include publication of annual reports, regular meetings with government and the States, and wide consultation when formulating policy. - Regulatory instruments and powers: - The JFSC sets detailed regulatory framework largely through codes of practice and has wide powers to obtain information and to share information domestically and with overseas authorities (subject to confidentiality assurances). - Enforcement powers include binding directions, publishing warnings and advice, appointing managers or co-signatories, revoking licenses, or requesting court bankruptcy/winding-up proceedings. - Fines: JFSC can impose fines mostly for administrative matters; courts may impose fines for criminal offences. The limited fining power constrains enforcement options; a broader fining power could make breaches damaging to profitability as well as reputation. - JFSC and staff enjoy legal protection. - Cooperation with home supervisors: - Numerous MOUs with supervisors abroad exist; information is exchanged and regular visits and on-site supervision are undertaken. - During current financial turmoil, communication with home authorities has been effective, though initiatives generally came from Jersey. - Resourcing and skills: - JFSC funded by industry fees adjusted to cover sector costs and overheads; fee levels allow building a reserve for contingencies. - JFSC has over 100 staff (an increase of about 40 over the last five years), most in regulatory and supervisory functions. - Retention of good staff can be difficult; expertise in some areas (e.g., assessment of risk models) is in short supply. - Regulated sector representatives view JFSC as rigorous and expert; consults but is not beholden to industry. - Forward challenge: - JFSC will be challenged to react to changes in supervisory standards from the global financial turmoil and to implement them proportionately to island risks. - Especially relevant are changes to standards on bank liquidity management and capitalization requirements, and potential expansion of the regulatory perimeter affecting CIS and companies registry sectors. ### Banking sector supervision — findings and recommendations - BCP assessment confirms high standard of prudential regulation and supervision; issues from 2003 largely addressed. - JFSC now conducts a large program of on-site supervision supported by off-site analysis; follows up visits with detailed recommendations. - Legislative framework: minimum prudential standards provided by the Banking Business (Jersey) Law 1991 and other legislation. - Basel II implementation: - Pillars 1 and 2 of Basel II capital requirements were introduced in 2008; most banks adopt the standardized approaches. - JFSC minimum risk-weighted capital adequacy requirement (CAR) set at 10 percent; in some cases additional capital requirements under Pillar 2. - If a bank’s capital approaches the minimum, consultations on remedial action are triggered. - JFSC has reviewed banks’ Internal Capital Adequacy Assessment Processes (ICAAP); maintaining up-to-date expertise on complex and evolving internal models will be necessary. - Entry policy and parent group reliance: - Policy of limiting entry to banks with strong parents: only groups among the global top 500 in terms of Tier I capital and meeting other requirements are permitted. - Such groups are presumed able and willing to support Jersey affiliates and tend to have centralized risk management, central treasury, trading and risk modeling functions, making Jersey operations relatively straightforward. - Concentration and intra-group exposure risks: - Banks’ intra-group claims on parents represent the major systemic risk. - JFSC exempts inter-group exposures with maturity of one year or less from limits on exposures to related parties and large exposures. - Jersey banks are highly vulnerable to concentration risk with respect to their groups; recent experience shows even largest banks can come under extreme stress and Jersey affiliates could lose access to almost all assets temporarily. - A permanent and blanket exemption from single counterparty limits is inconsistent with the BCP, which requires a prudent limit. - Recommended supervisory adjustments: - Make exemptions from exposure limits less automatic: - JFSC could confirm on a regular basis that the parent continues to have the will and capacity to support its subsidiary. - Encourage development of more autonomous local bank risk management capacity where feasible. - Seek more frequent updates from home supervisors on their assessment of group soundness. - Recognize that full development of local treasury and risk management capacity may be uneconomic and introduce other risks (e.g., operational risk). - Credit supervision beyond parents: - Supervision of credit other than to parent groups is adequate but should not be neglected. - Such credits are a small portion of most banks’ assets but significant relative to GVA; vulnerabilities could emerge suddenly. - JFSC relies largely on banks’ internal controls and auditors for loan classification and provisioning; it does not engage in intensive dialogue with auditors on individual banks. - Recommendation: more frequent discussions between supervisors and auditors on individual banks to access an important information source. *Source: IMF staff report based on the November 2008 mission and documented regulatory and economic developments through December 2008.* ### 21. The JFSC should develop more capacity to assess overall financial sector ### 21. The JFSC should develop more capacity to assess overall financial sector stability and banks’ risk models ### Capacity to assess financial sector stability and banks’ risk models - Findings: - The JFSC could engage more with banks’ risk managers and modelers, and with foreign supervisors, if it had more ability to quantify risks and simulate scenarios, including scenarios that allow for comparisons of vulnerability across banks. - Publishing more statistics on banks and other financial institutions—such as aggregate balance sheets and the mean and distribution of FSIs—would contribute to Jersey’s reputation for stability and transparency, and facilitate peer group comparisons. - Authorities could gather more comprehensive information on the overall indebtedness of Jersey households and the corporate sector by accounting for credit from abroad and from local non-bank lenders, to better assess borrowers’ ability to absorb shocks and potential spillovers in a credit crunch. - Policy recommendations: - Develop capacity for quantitative risk assessment and scenario simulation to compare vulnerabilities across banks. - Publish aggregate balance sheets and the mean and distribution of FSIs. - Collect comprehensive data on total indebtedness including credit from abroad and local non-bank lenders. ### Macroprudential analysis and decision taking - Findings: - With no central bank, there is no authority with an explicit mandate to maintain overall financial stability. - Creating a more formal framework for addressing macroprudential issues could enhance the authorities’ ability to identify potential problems and take appropriate action. - Policy recommendations / issues to consider: - Establish an enhanced framework for macroprudential analysis and decision taking. - Address information gaps (for example, on the total indebtedness of the domestic economy), stress testing, and contingency planning. ### Investment business (funds and fund services) - Findings: - Since the 2003 OFC assessment, Jersey has reformed the funds regulatory framework to make Jersey funds more attractive to institutional and larger private investors. - “Expert funds” target investors with $1 million in net worth or making a minimum $100,000 investment; regulation of such funds is light. - Funds offered to fewer than 50 investors are regulated under the Control of Borrowing (Jersey) Law 1947 rather than the CIF Law. - Specialist funds generally permitted unlimited leverage, subject to disclosure and JFSC approval when leverage in excess of 200 percent of NAV is proposed. - Since February 2008, “Unregulated Funds” require only notification to the JFSC, have a minimum initial investment of $1 million (except where exchange listed), and require a risk warning waiver from each investor; 29 had been registered at the time of the FSAP discussions. - The JFSC does not collect data on the value of these unregulated funds and they are therefore not included in official statistics for total asset values of the funds sector. - Fund services providers: - Until November 2007, managers, administrators, advisers, custodians, and registrars had to be authorized separately for each fund; now they can seek a general authorization under the Financial Services (Jersey) Law 1998 to provide services to any fund (excluding funds eligible for sale in the UK). - Fund service business can be done through a managed entity. - Reforms aimed to reduce regulatory burden and allow JFSC to divert resources to supervision. - Supervision: - Codes of Practice for Fund Services Business introduced setting out expectations on corporate governance and financial resources. - Fund services businesses are subject to the JFSC’s risk assessment model and on-site visits, with emphasis on “themed” visits (example: 2007 program on expert funds). - Continued strict supervision of service providers is necessary to offset reputational risks attached to light regulation of certain fund categories. - International cooperation: - Jersey was an early signatory of the IOSCO Multilateral MOU and exchanges information regularly with other regulators. - The JFSC responds to about 10 enforcement-related requests a year across responsibilities, mostly from European and U.S. regulators. - Additional recommendation: - Gather information on the gross balance sheet size and leverage of funds and other investment vehicles. ### Insurance sector - Findings: - Insurance regulation has been strengthened since 2003; the JFSC expanded supervisory resources, applied its general risk assessment model, and undertook on-site visits to all insurers. - The sector has been contracting; some companies are scheduled to close or relocate, with further contraction expected. - Challenges and recommendations: - Maintain effective and proportionate regulation of a small sector with limited insurance risk by tailoring requirements to the risk profile of each insurer. - Narrow exemptions to the Insurance Business (Jersey) Law 1996 to bring under JFSC regulation one significant domestic insurer currently subject to a separate statute. - Introduce new requirements on controllers of insurers, risk management (especially operational risk), and groups (additional powers to gather information from group companies and a group solvency test could prove valuable). - Review the regime for companies incorporated abroad to assess equivalence of home state regulation and ensure appropriate regulation for branches operating in Jersey rather than merely offering cross-border services. ### Trust and company service providers (TCB) - Findings: - Regulatory and supervisory framework is comprehensive and consistent with OGBS Statement of Best Practices. - States amended the Trust (Jersey) Law 1984 in October 2006; JFSC refined Codes of Practice for Trust Company Business most recently in January 2008. - Transitional licensing process completed; regulatory sanctions and powers extended to all key persons; explicit record keeping requirements introduced. - Supervision activity: - Over 70 on-site examinations in 2007 and over 50 completed at end-October 2008. - Examinations vary in scope and coverage; typical businesses reviewed under a three-year cycle with a risk-based priority list. - Common shortcomings: corporate governance issues and, to a more limited extent, liquidity requirements. - Sector trends: - Regulatory regime implementation catalyzed sectoral consolidation over five years and outsourcing of back-office functions to cheaper centers. - The Foundations (Jersey) Law allows trust companies to expand services. ### Other entities: SPVs, audit oversight - SPVs: - SPVs registered on the island are normally organized as companies established by trusts; registered as public companies and subject to Companies (Jersey) Law 1991 regulation (for example, on disclosing financial results) but not supervision. - Institutions associated with SPVs (such as trust service providers) are subject to oversight; JFSC seeks reputable sponsors. - Little information on SPV activities is compiled; only a few score SPVs established annually recently, and only a handful used for securitization or to finance relatively risky investments. - Several such SPVs are being closed by investors and one is being liquidated following heavy losses. - Recommendation: the JFSC should survey SPVs and SIVs associated with the island to achieve a more detailed understanding of their activities. - Audit oversight: - No official oversight of audit quality of Jersey companies; auditors subject to reviews by their professional bodies (for example, practice assurance review scheme by the Institute of Chartered Accountants in England and Wales). - Legislation to amend the Companies Law is being drafted that, for companies whose shares are admitted to trading on a regulated market, will result in one or more professional bodies monitoring audit quality and enable action against auditors that breach rules for those audits. ### AML/CFT - Findings: - Authorities have a comprehensive and robust AML/CFT legal framework incorporating almost all aspects of the FATF Recommendations, updated substantially in the last two years in response to the 2003 revision and EU Third AML Directive. - Substantial resources have been devoted to developing AML/CFT laws and regulations, consultations, and testing industry compliance, notably in trust company business. - ML and FT are criminalized largely in line with the international standard; the JFCU receives a satisfactory flow of suspicious activity reports and carries out its FIU role effectively. - High level of compliance with FATF Recommendations on preventive measures, with most deficiencies technical in nature. - Formal AML/CFT requirements had only recently been applied to some DNFBPs (notably certain accountants and lawyers) at the time of the on-site visit, making assessment of effectiveness infeasible. - One material issue: concessions allowing reliance on intermediaries and introducers for customer due diligence measures do not fully comply with the international standard; authorities dispute this finding. - Jersey has adopted a risk-based approach at all levels; AML/CFT policy coordinated by an AML/CFT Strategy Group comprising all relevant authorities. - Jersey engages actively in international cooperation and can share information with counterparts subject to appropriate safeguards; legal framework for mutual legal assistance is in place and effective. ### Stability issues — vulnerabilities of the financial system - Findings: - Overall, banks have a low risk profile, conditional on the health of their parent banks remaining sound. - Banks tend to have simple balance sheet structures; primary role is to collect deposits and provide a stable source of liquidity to the group. - Large intra-group exposures mean deterioration in parent groups could destabilize the local financial system. - Authorities admit only subsidiaries and branches of major banking groups from large jurisdictions, but the global turmoil shows even these groups can suffer severe difficulties. - Threat to Jersey’s reputation for probity and safety is a significant vulnerability; a major instance of malfeasance or mis-management even in smaller institutions (CIS or SPV) could provoke a sudden withdrawal of deposits. - Banks could meet claims by running down deposits with parent banks, but this could threaten the banks’ business model and impose longer-term costs on the island. - Credit risk toward third parties is less important but not negligible given small domestic resources: Almost 85 percent of banks’ non-interbank loans are to non-residents, and one quarter are mortgage-related, creating marked exposure to a global recession or further fall in housing prices. - Domestic indicators: domestic non-financial bank loans amounted to 95 percent of GVA at end-June 2008; domestic bank credit growth was 13 percent on average for 2004-2007. - Other risk factors: insurance and pension sectors are small; risks in CISs largely borne by investors; mis-selling and mismanagement (operational risks for fund services providers) remain concerns; trust and company service businesses’ assets are off-balance sheet and losses there would not threaten Jersey’s financial soundness. - SPVs currently pose no direct system-wide risk because risks are borne by investors or sponsoring non-resident institutions, but a highly leveraged SPV or fund failure could have reputational effects. ### Bank credit growth, 2004-08 (GBP millions unless indicated otherwise) - Levels: - Total Loans: 14,946; 18,190; 20,825; 29,557; 34,590; ... - Real estate (total): 4,945; 5,848; 6,719; 7,952; 9,169; ... - Property Companies (total): 1,152; 1,545; 2,012; 2,560; 2,868; ... - House Purchase (total): 3,793; 4,303; 4,707; 5,392; 6,301; ... - Jersey (total): 3,847; 4,498; 4,902; 5,501; 5,904; ... - Real estate (Jersey): 2,226; 2,559; 2,799; 2,897; 2,975; ... - Property Companies (Jersey): 428; 616; 792; 748; 782; ... - House Purchase (Jersey): 1,798; 1,943; 2,008; 2,149; 2,193; ... - Non-Jersey (total): 11,099; 13,691; 15,924; 24,056; 28,686; ... - Real estate (Non-Jersey): 2,718; 3,289; 3,920; 5,055; 6,194; ... - Property Companies (Non-Jersey): 724; 929; 1,221; 1,813; 2,086; ... - House Purchase (Non-Jersey): 1,995; 2,360; 2,699; 3,243; 4,108; ... - Annual growth in percent: - Total: ...; 21.7; 14.5; 41.9; 17.0; 23.8; ... - Real estate: ...; 18.3; 14.9; 18.3; 15.3; 16.7; ... - Property Companies: ...; 34.1; 30.3; 27.2; 12.0; 25.9; ... - House Purchase: ...; 13.5; 9.4; 14.5; 16.9; 13.6; ... - Jersey (annual growth): ...; 16.9; 9.0; 12.2; 7.3; 11.4; ... - Real estate (Jersey, annual growth): ...; 14.9; 9.4; 3.5; 2.7; 7.6; ... - Property Companies (Jersey, annual growth): ...; 43.8; 28.6; 5.5-; 4.5; 17.8; ... - House Purchase (Jersey, annual growth): ...; 8.1; 3.3; 7.0; 2.1; 5.1; ... - Non-Jersey (annual growth): ...; 23.4; 16.3; 51.1; 19.2; 27.5; ... - Real estate (Non-Jersey, annual growth): ...; 21.0; 19.2; 29.0; 22.5; 22.9; ... - Property Companies (Non-Jersey, annual growth): ...; 28.4; 31.4; 48.5; 15.1; 30.8; ... - House Purchase (Non-Jersey, annual growth): ...; 18.3; 14.4; 20.1; 26.7; 19.9; ... - Sources: JFSC, and staff estimates. *IMF staff report excerpt* ### 45. Were these risks to materialize and result in major losses, there would be an ### _cr09282 - 45. Were these risks to materialize and result in major losses, there would be an ### Risks and macroeconomic impact - Were financial-sector risks to materialize and result in major losses, there would be an adverse effect on the local economy, with major effects on employment and government revenue and knock-on effects on other sectors. - Deterioration in the financial health of parent institutions could lead to a domestic credit squeeze, hurting local economic development. - Additional feedback channels include nonbank lending companies operating on the island and foreign indebtedness (e.g., UK-based credit card debt) not captured in domestic statistics. - Jersey may transmit international shocks; a Jersey-specific shock would likely lead to rapid transfer of business to another international center, reducing global effects on parent banks, but: - Deposits in one Jersey bank currently fill 10 percent or more of the parent bank’s funding gap. - Worries about the parent could provoke withdrawal of deposits from Jersey, further pressuring the parent’s liquidity position. - Negative shocks are likely correlated (e.g., a recession may strain the parent while the subsidiary’s loan book deteriorates). - Jersey may be involved in transmission through highly leveraged specialist investment funds and SPVs. ### Performance and stability indicators - Banks show high asset quality, profitability, and capitalization, but leverage is also high. - Asset quality and especially loans to the local economy have been satisfactory. - Risk-weighted CARs are elevated in international comparison, driven by low risk-weighted assets and profit retention in a low tax jurisdiction. - Overall capital to asset ratio is about 2 percent; excluding branches, the ratio is 5.6 percent. - Profitability has been comfortable, partly reflecting transfer pricing arrangements with parent institutions. - Liquidity: the banking sector exhibits ample liquidity given that claims on groups are mostly short term; banks typically match maturities (and currencies) of deposits with those of claims on parents. - Impact of global turmoil on institutions: - The system as a whole lost 6 percent of its deposits by value in the year to March 2009 (principally during 2008Q2); certain individual banks suffered large deposit outflows. - One bank suffered significant losses on its investment portfolio. - The CIS sector: total NAV declined by about 11 percent from December 2008 through March 2009, and the number of funds declined by about 2½ percent. - Insurance companies are financially strong. - Limited data on financial soundness of other NBFIs or the nonfinancial sector. ### Selected financial-soundness statistics (from Table 7) - Regulatory capital to risk-weighted assets: 16.7, 17.4, 16.3, 16.9, 16.1, 14.6, 13.8 (2002–2008). - Regulatory Tier I capital to risk-weighted assets: 15.3, 15.8, 14.7, 14.2, 13.4, 12.6, 11.2 (2002–2008). - Capital to assets: 4.3, 4.2, 2.9, 2.8, 1.8, 1.9, 2.1 (2002–2008). - Nonperforming loans (NPLs) to total gross loans: 0.5, 0.5, 0.3, 0.2, 0.2, 0.1, 0.1 (2002–2008). - Loan-loss provisions to nonperforming loans: 69.5, 51.2, 68.8, 88.5, 93.0, 82.2, 74.5 (2002–2008). - FX-denominated loans to total loans: 66.3, 38.9, 34.5, 35.4, 30.3, 39.7, 74.0 (2002–2008). - Return on assets: 1.0, 0.9, 0.8, 1.0, 1.0, 1.1, 0.3 (2002–2008). - Return on equity: 18.2, 16.1, 14.8, 16.2, 17.1, 19.7, 22.6 (2002–2008). - Liquid assets to total assets: 80.5, 79.8, 75.4, 76.5, 76.8, 78.3, 82.6 (2002–2008). - Loans as a percentage of deposits: 7.7, 8.0, 9.5, 9.9, 11.0, 13.9, 16.5 (2002–2008). (Note: all figures taken verbatim from Table 7.) ### Stress test results and scenarios - Stress tests conducted in consultation between the JFSC and the FSAP team; the most material risk identified is counterparty risk with the parent. - Parent-counterparty shock: - A 10 percent loss on claims on parent banks would lead 14 banks to become insolvent (paragraph 50). - Credit-risk scenarios: - A macroeconomic shock that leads to default of 10 percent of banks’ (nonfinancial) credit outside of Jersey could reduce the system-wide CAR by 340 basis points to 12 percent. - Default of the banks’ three largest (nonparent) exposures would have an even larger impact, though tests may not capture cash collateral and parental guarantees. - Market-risk scenarios: - Banks exhibit resilience to large market-risk shocks due to small position-taking and transfer pricing/matching arrangements. - A two-notch downgrade on all marketable securities would lead to a breach at one bank and a 50 bps reduction of the system-wide CAR. - Liquidity scenarios: - A 20 percent daily withdrawal of deposits with maturity up to one month would lead 9 banks (accounting for 6 percent of total assets) to become illiquid after five days, assuming banks can access only assets with maturity up to one month (excluding liquid marketable instruments). - Selected stress-test outcomes (from Table 8 and Table 9): - Pre-shock capital (unweighted average across banks in sample) reported as 15.4 percent (min 11.1, max 22.8) in market-risk/credit-risk table. - Credit shock C1 (default of largest three exposures excluding the parent bank): pre-shock CAR 14.6; No. banks breaching min. CAR = 2 (top-down) and 11 (bottom-up) with loss/gain metrics reported in the table. - Credit shock C2 (10% of domestic nonbank loans fail): pre-shock CAR 15.3; No. banks breaching min. CAR = 0 in top-down. - Credit shock C3 (10% of mortgage loans fail): top-down pre-shock CAR 14.9; No. banks breaching min. CAR = 0; bottom-up shows 3 banks breaching. - Credit shock C4 (10% of non-resident non-bank loans fail): top-down shows 1 bank breaching; bottom-up shows 4 banks breaching. - Credit shock C5 (If 10% of parent bank fails): stresses produce extreme losses; table entries indicate severe negative CAR outcomes and show 17 banks breaching min. CAR in some measures. - Liquidity test L1 and L2 (20 percent daily run on short-maturity deposits with varying access assumptions): - Test L1 Day 5: Number of illiquid banks — Subsidiaries 4, Branches 4, Total 8; Market share of assets 2.1, 2.6, 4.7 (percent of total assets). - Test L2 Day 5: Number of illiquid banks — Subsidiaries 5, Branches 4, Total 9; Market share of assets 3.0, 2.6, 5.7. ### Safety nets, contingency planning, and resolution - Current arrangements: - Jersey has provisions in laws covering banking, insurance, and CIS sectors for the possibility of ad hoc compensation or a formal scheme, but no formal schemes established except for one covering “recognized” CISs. - Jersey is in a monetary union with the UK and has no central bank to act as a lender of last resort (LOLR). - Deposit compensation scheme (DCS): - Authorities are considering introduction of a bank DCS following broadened deposit insurance and guarantees announced by other countries. - Jersey should study benefits and costs carefully; the strongest case is for a transparent scheme concentrating on limited coverage for Jersey residents, potentially funded largely from a levy on resident deposits. - Wider coverage may not be credible given the size of the financial sector relative to Jersey’s resources. - A DCS is most valuable when payouts can be made rapidly, which requires considerable borrowing capacity and/or substantial pre-funding. - All depositors and other claimants must receive clear information on who is responsible for safeguarding their claims and the DCS coverage, if any; the JFSC should ensure banks provide prominent explanations that uninsured deposits are the sole liability of the institution and neither Jersey nor a home jurisdiction offers any insurance. - Investor and policyholder compensation: - Discretionary or case-by-case schemes could bias investor expectations, weaken market discipline, and put government funds at risk. - Authorities should review policy on investor and insurance policyholder compensation in light of decisions on a DCS. - Consideration of a financial sector ombudsman for consumer protection issues. - Contingency planning priorities and constraints: - Suggested objectives: (i) safeguarding the savings of Jersey residents; (ii) maintaining availability of financial services and financing for the local economy; (iii) preserving Jersey’s competitiveness and reputation; (iv) limiting fiscal and other costs. - Constraints to account for: - Large exposure of local institutions to parents and operational dependence. - High probability that a distressed parent would attempt to extract liquidity and capital from subsidiaries and branches. - Absence of LOLR capacity and relatively small fiscal resources. - Home authorities will likely prioritize minimizing costs to their own taxpayers in a crisis. - Limited ability of Jersey authorities to track developments in real time (e.g., inability to monitor the payments system). - Intervention and resolution: - The JFSC has broadly adequate powers to direct, intervene in, and close troubled financial institutions but may lack sufficient information to identify incipient problems; reliance on parent supervisors is necessary. - Response should include measures to increase local real-time information, e.g., frequent (even daily) reporting by affected institutions. - The JFSC should enhance relationships with relevant home authorities and review MOUs (including the June 2008 EU MOU on financial crisis management) to ensure Jersey’s interests receive timely consideration. - Jersey might offer cooperative participation in intervention and resolution, help limit reputational risks, and engage in equitable burden sharing. - Consideration should be given to a dedicated bank insolvency regime to recognize the systemic nature of banking and provide tools such as “purchase and assumption” of assets and deposit liabilities; compatibility with UK (and EU) insolvency regimes is important. *Source: IMF staff report text (Jersey Financial Services Commission data and staff estimates).* ### 63. The regulatory system and prudential supervisory practice have been improved, ### _cr09282 - 63. The regulatory system and prudential supervisory practice have been improved, ### Assessment context and methodology - Assessment undertaken as part of an IMF FSAP Update for Jersey in 2008; prepared during an IMF mission that visited Jersey during November 2008. - Follows up an earlier BCP assessment from the 2002/2003 IMF OFC assessment of Jersey. - Conducted in accordance with the Basel Committee’s revised Core Principles Methodology (October 2006). - Based on study of legal and regulatory framework, documentation provided by authorities, and detailed discussions with relevant authorities and stakeholders, including the JFSC’s self-assessment. ### Institutional, macroeconomic, and market overview - Jersey is a British Crown Dependency with its own legislature (the States), legal and regulatory system, and tax regime; ministerial government established in December 2005. - Annual real GVA growth averaged 3.8 percent over 2003-07. - GVA in 2007 is estimated at GBP 4.1 billion (GVA equals GDP less net taxes on products). - Financial sector is the economic base: banking, fund management, fiduciary services; combined financial services sector contributes over half of GVA. - Banks on the island are largely branches and subsidiaries of banks from the UK, other EU countries, North America, and some other countries. - Banks’ principal business: collection of retail deposits from overseas and corporates/trusts managed on the island; these funds are mainly placed with parent banks. - Non-interbank lending mainly to individuals, property companies, and some nonbank financial institutions. - Banks have relatively little real estate exposure and most do not operate trading books or independent treasury functions. - The banking sector exhibits high asset quality, profitability, and capitalization, but leverage is high. Claims on groups are mostly very short term. - No depositor compensation or insurance scheme in place. No bank failures in recent decades. ### Supervisory framework, powers, and practices - The Jersey Financial Services Commission (JFSC) is the integrated regulator responsible for supervision and development of financial services on the island. - Laws and regulations amended to enhance compliance with international standards; JFSC operational autonomy has been reinforced. - JFSC has established a comprehensive, risk-based system of on-site visits and conducts a large program of on-site supervision supported by off-site analysis. - Most registered banks are subject to an on-site inspection at least every three years, with follow up on issues raised. - JFSC powers include requesting information, issuing binding directives, publishing warnings and advice, appointing managers or co-signatories, revoking licenses, and requesting court action for bankruptcy or winding-up proceedings. - Fines are available but are currently used mostly for administrative matters. - JFSC is adequately resourced and enjoys considerable independence; the responsible minister’s statutory power to give “direction” is limited to exceptional circumstances and general policy, and has never been exercised. - Numerous MOUs are in place; cooperation and information exchange with home supervisors occur, and regular visits to and from home supervisors are undertaken, including for on-site supervision. ### Key findings against Basel Core Principles (high-level) - The BCP assessment confirms the high standard of prudential regulation and supervision described in the 2003 assessment; issues identified previously have largely been addressed. - Banking Business (Jersey) Law 1991, Banking Business (General Provisions) (Jersey) Order 2002, and the Codes of Practice for Deposit-taking Business provide a framework of minimum prudential standards. - Capital adequacy requirements (currently 10 percent) are fully adequate. Basel II has been introduced. Via Pillar 2, the JFSC has agreed trigger ratios with all Jersey-incorporated banks which, if breached, would require immediate notification to the JFSC. - Supervisory reporting: standard quarterly prudential return 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; and market risk. - Accounting: banks generally follow international accounting standards, but implementation of disclosure standards by banks can be variable; published aggregate information on Jersey’s banking system is limited to schedules of outstanding deposits categorized by currency and source, published quarterly. - Supervisory approach: JFSC employs on-site and off-site techniques, uses inspections for verification and remediation, and conducts inspections on particular subjects across the sector. Cross-bank comparisons and system-wide stability analyses should be developed further. ### Principal supervisory challenges and risks identified - Major supervisory challenge: banks’ exposures to parent groups. - The authorities have exempted banks’ exposures to their parents from limits on exposures to related parties and large exposures, even though these exposures represent the major risk to the system. - Reliance on banks’ internal controls for adequate loan classification and provisioning—JFSC has chosen not to be very prescriptive on provisioning because Jersey banks are branches or subsidiaries of major international banking groups and are required to adopt established group standards. - Limited JFSC capacity to assess overall financial sector stability and banks’ risk models; current focus is on individual banks rather than system-wide analysis. ### 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. - CP1(1) 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 (Financial Services Commission (Jersey) Law 1998 (JFSC(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, 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. - CP7 The JFSC should consider establishing a more formal process to observe developments at a parent company or the head office level and within the home jurisdiction of the group. - CP7 The JFSC should consider inserting a provision into Principle 3 of the Banking Codes under Paragraph 3.1.4.5 according to which any exceptions to established policies, processes and limits should be reported, and should receive the prompt attention of senior management and the board of a bank, where necessary. - CP7 The JFSC should consider the explicit inclusion of minimum requirements on new product approval processes and procedures in Appendix I of the Banking Codes. - CP9 The JFSC should on a regular basis form its own view with regard to the necessary assessment of the adequacy of a bank’s provisioning policies and processes, and should also approach banks, parent institutions and the respective home supervisors in order to confirm so far as possible the adequacy of the provisioning policy. - CP10 The JFSC should consider having only one single definition of the term “exposure” in the large exposure and concentration risk context. - CP10 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 should be reconsidered. - CP10 The JFSC should decide on a regular basis whether or not an exemption for large exposures granted should be renewed. - CP11 The regulation of exposures entered into in the inter-bank market and, as it is predominantly the case in this jurisdiction, to related parties, should be reconsidered. - CP11 The JFSC should review requirements to ensure they cover all transactions with related parties, for example, all kinds of investments, placement of deposits, and capitalization. - CP11 The JFSC should enlarge the scope, and increase the frequency of its regular review of the status and financial condition of parent companies of local subsidiaries, including through an explicit need for the JFSC to consider whether the exemption of group related exposures from the concentration risk requirements applicable could be renewed. - CP11 In the case of banks that are subsidiaries, the JFSC may wish to consider requiring receipt of a letter of comfort from parent companies more frequently than every five years (perhaps annually). - CP11 The JFSC should consider including in Appendix I, Paragraph 1.5, of the Banking Codes an explicit provision according to which policies and procedures ensure that all material concentrations should be reviewed and reported periodically to the board. - CP12 The JFSC could incorporate explicit questions with regard to transfer and country risk in its “route planners” and introduce it also as a separate topic for the “Annual Review Meeting.” - CP13 The JFSC should consider introducing key requirements for the regulation of market risk into [text truncated in source]. ### Cross-cutting recommendations on system-wide supervision - Develop more capacity to assess overall financial sector stability and banks’ risk models. - Consider publishing more statistics on banks and other financial institutions, such as aggregate balance sheets and the mean and distribution of financial soundness indicators. - Develop cross-bank comparisons, regular stress testing, evaluation of systemic developments, and review of the distribution of financial soundness indicators. *Source: IMF FSAP Update—BCP assessment for Jersey (2008), as presented in the supplied content unit.* ### Appendix I of the Banking Codes; e.g., requirements related to foreign currency and interest ### _cr09282 - Appendix I of the Banking Codes; e.g., requirements related to foreign currency and interest rate risks and the capital charges applied with regard to different risk types ### Liquidity and interest-rate risk in Appendix I of the Banking Codes - CP14: - Banking Codes should include appropriate policies and procedures to limit liquidity risk. - Banking Codes should foresee the conduct of a regular analysis of funding requirements under alternative scenarios/stress tests. - Liquidity risk provisions of Appendix I 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 on these 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. - Given recent market turmoil, the JFSC should review its liquidity regulations and guidance delivered to banks with a view of taking into account the new paper on liquidity management and supervision published in September 2008 by the Basel Committee. - CP16: - The JFSC should introduce into the route planner a separate section of specific questions dealing with interest rate risk generally and interest rates in the banking book. - The route planner should take due regard of questions such as the price sensitivity of banking book items and their respective volumes. - CP15: - The JFSC should consider including the standard definition of operational risk explicitly under Paragraph 4.1 of Appendix I of the Banking Codes. ### Systemic / macroprudential surveillance and disclosure - CP19: - The JFSC should devote more effort to assessing risks affecting the financial system as a whole, including: - undertaking aggregate stress testing; and - examining the distribution of financial soundness indicators. - CP22: - 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. - Bilateral discussions with external auditors should be held more regularly. - CP25: - The JFSC should strive to obtain regularly from home supervisors a written statement indicating whether they have any knowledge of any significant problems of which the JFSC should be aware. - The JFSC should strive to obtain from home supervisors a commitment to communicate promptly and on their initiative information that is critical to the stability of the Jersey financial system. ### Authorities’ response to the assessment - The Commission acknowledges with gratitude all aspects of this assessment and is committed to fully considering the recommendations made. ### Insurance sector assessment—overview and context - General: - Insurance regulation in Jersey broadly meets international standards. - The assessment updates and replaces the 2002 assessment (published in 2003) in the context of the OFC assessment of the island. - The assessment was made based on information available in November 2008 at the time of the FSAP Update mission. - The assessment was based on the 2003 version of the IAIS ICP and Methodology and took into account relevant IAIS standards and guidance. - The assessment of ICP 28 (AML/CFT) was informed by the parallel assessment of Jersey’s compliance with the FATF’s AML/CFT recommendations, using the 2004 Methodology. - Institutional and market structure: - Jersey is one of the three British Crown Dependencies (others: Guernsey and the IOM). It is not part of the UK, has its own parliament (the States), legal and regulatory system, and tax regime. The island uses the pound Sterling as its currency and is in a customs union with the EU for trade in goods. - The Jersey economy: annual economic growth averaged 3.8 percent over 2003-07. - The basis of the economy is the financial sector (banking, fund management, fiduciary services). The island is among the larger OFCs in the banking sector. - The insurance sector is underdeveloped relative to banking and investment and to the insurance sectors in Guernsey and the IOM. - Many insurers are licensed to sell cross-border into Jersey (“Category A firms”); some established on the island (“Category B firms”) are closed to new business or relocating. There is no data for overall market size. - The JFSC is the sole regulator of insurance in Jersey and has 108 staff in total. - Auditors of Jersey companies must be members of a professional body in the UK or Ireland. - Financial statements of insurance companies must be prepared in accordance with International Financial Reporting Standards (IFRS) or the GAAP of the UK, the United States (US) or, with prior JFSC approval, “the country or territory in which the beneficial owner of the permit holder resides or is incorporated.” - Life insurers must appoint as actuary a Fellow of the Institute of Actuaries in England and Wales or a Fellow of the Faculty of Actuaries in Scotland or someone who can satisfy the JFSC that he has “such actuarial qualifications and experience as are appropriate.” - Impact of global market strains: - The impact of global credit and liquidity problems on Jersey insurers (Category B) has been limited; there have been no significant losses. - All Category B firms maintain solvency cover well in excess of their minimum required margins. ### Main findings and recommended legal/regulatory gaps to address in insurance - Strengthening since 2003: - Insurance regulation has been strengthened since the 2003 assessment. - The JFSC has expanded supervisory resources, applied its general risk assessment model, and undertaken on-site visits to all insurers. - The JFSC outsources some thematic work to large international audit firms. - General insurance brokers were brought within regulation in 2005. - Extensive Codes of Practice for Insurance Business (Insurance Codes) have been introduced covering corporate governance and internal controls. - Identified gaps and recommended actions: - (i) Exemptions to the Insurance Business (Jersey) Law 1996 (IB(J)L) should be narrowed to bring under JFSC regulation one significant domestic insurer currently subject to a separate statute. - (ii) The IB(J)L should be amended to require potential shareholder controllers of insurance companies to seek the JFSC’s consent at the appropriate levels of control. - (iii) The Insurance Codes should be extended to include further provisions on risk management, including operational risk. - (iv) Requirements on insurance companies to disclose appropriate information to stakeholders should be introduced, taking into account the nature and scale of their insurance business. - The JFSC has no specific powers in relation to group supervision; additional powers to gather information from group companies and a group solvency test could prove valuable in future. *Source: _cr09282 - Appendix I of the Banking Codes; e.g., requirements related to foreign currency and interest rate risks and the capital charges applied with regard to different risk types* ### 95. The JFSC would benefit from a review of the Category A regime (companies ### The JFSC would benefit from a review of the Category A regime (companies incorporated abroad) ### Category A regime and branches - Most Category A firms originate from the UK and other EU jurisdictions (97 percent); there are also firms from South Africa and the US. - The JFSC’s approach, on licensing and subsequent supervision, relies heavily on the home state regulator. - The existing regime has served Jersey-based insurance consumers well. - The JFSC should: - establish a framework for assessing where home state regulation is equivalent to its own approach; - apply appropriate regulations to the small number of companies operating as branches in Jersey rather than treating them as merely offering cross-border services. ### Summary compliance with the Insurance Core Principles — key findings (ICP1–ICP28) - ICP1 - Conditions for effective insurance supervision - Jersey has well-defined, transparent and effective policy, legal and institutional frameworks for insurance business and access to well-functioning financial markets. - The jurisdiction benefits from the availability of professional services locally and through access to the resources of major practices in the UK and elsewhere. - ICP2 - Supervisory objectives - The JFSC has clear and appropriate objectives (expressed as functions and guiding principles) and there is a clear distinction between regulation and promotion of the insurance sector. - ICP3 - Supervisory authority - The JFSC has adequate powers and resources and is operationally independent. - The need for government to make regulations and orders covering key aspects of the regulatory requirements could in certain circumstances constrain the JFSC’s ability to meet its regulatory objectives and could expose it to political influence. - In practice, the JFSC enjoys a high degree of operational independence from government. - Schedule 1 (Financial Services Commission (Jersey) Law 1998 (FSC(J)L)) should provide an explicit requirement that the reasons for the dismissal from office of any commissioner be made public. - ICP4 - Supervisory process - The JFSC conducts its functions in a transparent and accountable manner. - Comprehensive information on its activities is provided to government, the States, and the public through various means. - More information could be made available specifically on the insurance sector and regulatory activities for insurance. - ICP5 – Supervisory cooperation and information sharing - The JFSC is committed to exchanging information with other supervisors, as evidenced by its readiness to become a signatory to the IAIS Multilateral MOU, and is doing so in practice in respect of both insurers and intermediaries. - The JFSC is focusing on developing contacts with overseas regulatory agencies most important to its market, particularly the UK. - ICP6 – Licensing - There is a comprehensive framework for the licensing of insurance business as defined by the IB(J)L. - One general insurance business with significant domestic business is exempted from licensing requirements in Jersey. - While licensing a foreign insurer (a Category A firm), the JFSC must satisfy itself that the regulatory framework in the home state is “adequate”; the JFSC has not developed an internal policy for making such an assessment (e.g., is equivalence considered). - Category A insurers include a small number of firms with physical presences in Jersey, i.e., branches. The JFSC should review its approach to these firms to implement regulation that reflects their branch status. - ICP7 – Suitability of persons - The JFSC has a comprehensive framework for considering the suitability of key functionaries. - The range of functionaries subject to these requirements is limited compared with some jurisdictions, but is adequate to enable the JFSC to properly assess the suitability of those persons with the main influence on compliance. - The JFSC could consider an explicit provision preventing a person holding two positions in a company with potential for conflict of interest. - The JFSC has adequate powers to identify and address conflicts where they arise in practice. - ICP8 – Changes in control and portfolio transfers - The IB(J)L provides a framework for the regulation of changes in control and portfolio transfers. - There is a gap in respect to changes in control—the IB(J)L does not place obligations directly on controllers to seek approval and shareholder controllers are not required to notify or seek approval for increases above predetermined control levels. - In practice, the requirements on firms to make notifications should enable the JFSC to identify and deal with most changes of control effectively. - ICP9 – Corporate governance - The JFSC has developed a comprehensive set of requirements for corporate governance in its Insurance Codes. - ICP10 – Internal controls - The JFSC has developed a comprehensive set of requirements for internal controls in its Insurance Codes. - ICP11 – Market analysis - The JFSC monitors the activities of licensed firms and wider market developments—taking into account the limited business conducted in Jersey. - ICP12 – Reporting to supervisors and off-site monitoring - The JFSC has a well-developed process for analyzing annual returns and taking follow-up action. - The JFSC by choice employs no qualified actuaries and the off-site work therefore relies on the UK Government Actuary’s Department (GAD) for the analysis of the most technical issues. - This relationship functions effectively; supervisory staff take responsibility for communication and follow-up at all stages. - ICP13 - On-site inspection - The JFSC has greatly increased on-site work in the last 18 months using a well-structured approach that links visit frequency and scope to the firm’s risk rating and the wider supervisory program. - The JFSC should develop a thematic visit program—useful for intermediaries given sector diversity—and apply the model to branches (Category A firms with physical presences on the island). - ICP14 - Preventive and corrective measures - The JFSC’s approach is informed by its ability to communicate regularly with the small number of authorized insurance companies. - The JFSC has powers that it has used in practice to make more formal requirements of firms when necessary. - ICP15 - Enforcement or sanctions - The insurance regulatory framework includes extensive formal enforcement powers—many can be exercised directly by the JFSC, others require application to the Royal Court and fines require court proceedings. - The JFSC rarely uses its powers in practice—reflecting the limited insurance business on the island and success with preventive and corrective measures. - The JFSC has taken enforcement action in other sectors under similar powers. - ICP16 - Winding-up or exit from the market - The framework provides for appropriate routes for orderly exit and procedures for dealing with insolvency, including transfer of policies to another insurer. - The insolvency framework has not been tested in practice as no insurer has failed nor has the JFSC ever sought a winding up. - ICP17 - Group-wide supervision - The JFSC currently has no responsibilities as group/home supervisor of any insurance group. - Its current framework lacks key elements needed were it to acquire such responsibilities, particularly a group solvency test. - The JFSC should be able to adopt necessary requirements and apply them via directions and conditions powers if the need arises. - ICP18 - Risk assessment and management - The JFSC has requirements for risk assessment and risk management in its Insurance Codes. - Provisions on risk management are relatively limited and could be expanded, for example to require insurers to have a statement of risk appetite and to assess, monitor and manage operational as well as other risks. - ICP19 - Insurance activity - The JFSC has adequate powers and procedures to require insurance companies to have the tools necessary to price business and manage insurance risks effectively. - ICP20 - Liabilities - The JFSC has no framework of requirements for establishment of adequate provisions and valuation of amounts recoverable under reinsurance; instead it requires firms to use international standards—normally those of the UK. - Given the currently limited range of insurance business and limited insurance risks in the island, this approach is practical and efficient. - The JFSC uses external actuarial support (GAD) to review adequacy of individual firms’ provisions. - ICP21 - Investments - The JFSC has an adequate framework of requirements on insurers’ investments in the IB(J)L, Orders and Insurance Codes. - To be fully effective, these requirements need enforcement and periodic exercises such as stress-testing and thematic visit programs. - The JFSC should continue to monitor compliance through on-site work. - ICP22 - Derivatives and similar commitments - Given the limited scope of insurance business, use of derivatives by insurers in Jersey is low. - The Insurance Codes include key requirements for derivatives business and in practice the JFSC adopts a tailored, case-by-case supervisory approach. - ICP23 - Capital adequacy and solvency - The JFSC has an appropriate framework of solvency regulations and processes to monitor solvency levels and respond to breaches of minimum requirements. - The JFSC should consider whether reliance on the EU Solvency I framework is appropriate; many other jurisdictions have strengthened requirements pending developments in international standards. - ICP24 - Intermediaries - The JFSC has a comprehensive framework for regulation of insurance intermediaries. - While regulation is carried out under different laws and requirements from those for insurance companies, the JFSC has equivalent powers, including enforcement. - ICP25 - Consumer protection - The JFSC has well-developed requirements on market conduct, applying to both insurers and intermediaries and, with the exception of Category A firms, assesses issues in supervisory work. - While Jersey insurers are writing little new business, the JFSC could review consumer protection issues in firms closed to new business. - ICP26 – Information, disclosure and transparency towards markets - The JFSC has no requirements on disclosure by insurance companies of any of the information specified in this ICP. - For many Category B firms such disclosure would have limited value or be inappropriate, but one firm has significant numbers of policyholders and some are open to new business. - ICP27 - Fraud - The JFSC has powers to require that insurance companies address fraud risks and covers these in risk assessment and supervisory work. - The JFSC should consider including in the Insurance Codes requirements that insurers allocate resources and have effective procedures and controls to deter, detect, record, and report fraud. - ICP28 - Anti-money-laundering, combating the financing of terrorism - The JFSC has a well-developed set of requirements and includes AML issues in on-site supervision work. - See also the IMF’s assessment, carried out in November 2008, of compliance with the FATF AML/CFT standards, using the 2004 Methodology. ### Recommended action plan (selected recommendations) - ICP3 - Supervisory authority - Amend Schedule 1 of the FSC(J)L to provide an explicit requirement that the reasons for the dismissal from office of any commissioner be made public. - ICP6 - Licensing - Narrow the scope of exemptions from the IB(J)L so that all insurers are required to be licensed and subject to JFSC supervision. - Develop an internal policy on assessing whether home state regulation of Category A firms is equivalent to the JFSC. - Review regulation of Category A firms with a presence in the island so they are regulated as branches. - ICP8 - Changes in control and portfolio transfers - Amend the IB(J)L to require potential shareholder controllers of insurance companies to seek the JFSC’s consent at appropriate control levels. - ICP13 - On-site inspection - Apply the JFSC’s risk model to branches (Category A firms with physical presences on the island) and undertake on-site work as justified by risk assessment. - Introduce a thematic (cross-firm) approach to supervisory work. - ICP17 - Group-wide supervision - Review whether the JFSC would have adequate powers and policies if it were to take on group/home supervisory responsibilities; consider legislative opportunities to obtain information from unregulated entities within a group. - ICP18 - Risk assessment and management - Develop further requirements on risk management, e.g., require insurers to have a statement of risk appetite and to assess, monitor and manage operational risk. - ICP23 - Capital adequacy and solvency - Continue to monitor development of international standards for risk based solvency. - Pending introduction of new standards, review existing solvency requirements and, where appropriate, introduce revised standards or set individual minimum requirements based on the risk assessment of each firm. - ICP26 - Disclosure and Transparency - Work with insurers to develop disclosure requirements, taking into account the nature of local business and which insurers they should apply to (for example, Category A insurers with physical presence on the island). - Consider publishing all or part of supervisory returns. ### Authorities’ response - The JFSC notes the IMF assessment acknowledges that insurance regulation in Jersey has been strengthened since the 2003 assessment. - The JFSC appreciates the meetings and subsequent dialogue during the IMF assessment. - The JFSC is broadly in agreement with the report and recommendations and has prepared an action plan to address each recommendation, mindful of the very limited nature of the Jersey insurance market. - For example, ICP 26 (disclosure requirements) will be developed in the context of the specialized nature of the local market. - Some actions involve amending legislation to incorporate explicit provisions that reflect current JFSC practices. - The JFSC will continue to consider developments in international standards for insurance regulation and intends to continue seeking to incorporate these in its regulatory requirements. ### AML/CFT — introduction and key findings (from the ROSC) - The ROSC for the FATF 40 Recommendations and 9 Special Recommendations for CFT was prepared by IMF staff. - The assessment used the 2004 Methodology and is based on information available at completion on November 13, 2008, or shortly thereafter. - Key findings: - Financial services is a key sector of Jersey’s economy accounting for approximately half of the total economic activity and a quarter of the workforce (approximately 13,400 employed). - Banking, fund administration, and trust company sectors dominate, supported by extensive legal and accountancy practices. - Financial services expertise and international reputation, close working relationship with the UK financial system, and favorable tax arrangements have been significant in attracting business to Jersey. - A substantial proportion (believed to be around 90 percent in some sectors) of customer relationships is established with nonresidents. - Jersey’s financial sector is inherently exposed to the risk of money laundering, particularly in the layering and integration phases, given the typically nonresident, non-face-to-face nature of many client relationships. - No particular vulnerability to terrorism financing (FT) was noted. - Jersey has a comprehensive and robust AML/CFT legal framework with a high level of compliance with almost all aspects of the FATF Recommendations. - Key AML/CFT elements were first introduced in the 1980s and have been kept updated, most substantially in the last two years to reflect the 2003 revision of the FATF Recommendations, in parallel with implementation by EU member states of the EU Third AML Directive. - Both money laundering (ML) and financing of terrorism (FT) are criminalized largely in line with the international standard and Jersey has implemented the provisions effectively. - Some technical shortcomings were identified that may limit somewhat the scope of criminal confiscation and the effectiveness of procedures for freezing of terrorist assets. *Source: IMF assessment contained in _cr09282 - 95. The JFSC would benefit from a review of the Category A regime (companies incorporated abroad).* ### 104. The Joint Financial Crime Unit (JFCU) carries out the role of a financial intelligence ### _cr09282 - 104. The Joint Financial Crime Unit (JFCU) carries out the role of a financial intelligence ### JFCU role, operations, and resourcing - The JFCU carries out the role of a financial intelligence unit effectively and is benefiting from an increase in its resources. - The JFCU receives a satisfactory flow of suspicious activity reports (SARs), mostly from banks and trust businesses (TCBs). - Once the JFCU receives a SAR, it can consent or not to the financial activity that gave rise to the SAR; nonconsent has the same effect as a freezing order. - Most SARs are received from banks or TCBs. - The JFCU is an active member of the Egmont Group and frequently exchanges information with other financial intelligence units. - The assessors welcomed the decision to provide the JFCU with additional resources to deal with its expanding workload and to improve guidance to reporting entities and its statistical database. - The AG and JFSC can acquire additional legal expertise on contract to handle increases in case-load. ### AML/CFT legal framework and criminal justice findings - Both ML and FT are criminalized largely in line with the international standard; all relevant offences under the standard are criminalized. - Identified legal gaps and limitations: - The offences of acquisition, possession, or use do not extend to self-laundering. - The scope of the offences of “concealing or disguising” and “converting or transferring” is not sufficiently wide due to the requirement that these acts be carried out with the purpose of avoiding a prosecution for a predicate offence. - For terrorism-related ML, not all elements of the ML provisions of the Palermo and Vienna Conventions are covered. - The FT offence does not extend to all offences under the FT Convention. - These omissions also impact to some extent on the scope of criminal confiscation. - Some further steps are needed to improve the effectiveness of procedures relating to requests for freezing of terrorist assets. - Jersey’s implementation of UNSCRs 1267 and 1373 is largely sufficient but procedures governing the receipt and assessment of foreign requests and coverage of jointly or indirectly owned or controlled assets need attention. - The legal framework for the investigation and prosecution of ML and FT offences operates effectively, though past resource constraints at the JFCU had impacted capacity to conclude investigations. - Prosecution statistics: In the period 2005-08, there were 12 relevant prosecutions, of which 10 resulted in a conviction for ML, and a substantial amount of funds was seized and confiscated. - Jersey introduced a disclosure system for cross-border currency movements in January 2009; this was post-assessment and effectiveness could not be assessed. ### Preventive measures — legal foundations and standards - Primary legislation: Proceeds of Crime (Jersey) Law 1999 (POCL), which defines ML to also include FT offences. - Secondary legislation: Money Laundering (Jersey) Order 2008 (MLO). - Supplementary guidance: JFSC Handbook issued in 2008 (qualifies as other enforceable means (OEM)). - Jersey has adopted a risk-based approach to AML/CFT at all levels. - Jersey’s CDD requirements comply with the FATF Recommendations in most respects; identified deficiencies are largely technical. - A material issue: concessions allowing financial institutions and certain DNFBPs to rely on intermediaries and introducers in conducting CDD are an overly-generous interpretation of the international standard and may increase risk; this risk is partially mitigated by strong JFSC supervision and on-site inspections. - Specific preventive requirements: - Customers and ultimate beneficial owners are required to be identified in all relevant cases (subject to concessions). - Detailed CDD requirements apply to legal entities and trusts. - Enhanced due diligence is required for higher-risk customers, including PEPs. - Records of customer identification and of transactions must be retained for at least five years. - All suspicious activity in relation to ML or FT is required to be reported to the JFCU. - Gaps in protective measures: - Some scope to improve timeliness of SAR reporting. - Legal protection for those filing SARs should be limited to those acting in good faith. - The tipping-off offence needs to be broadened to comply with the international standard. - There was no requirement for financial institutions to have an independent audit function to test for AML/CFT compliance. ### Supervision, enforcement, and sanctions - The JFSC is an effective regulator and supervisor for financial institutions and TCBs; its AML/CFT role was extended in 2007 and 2008 to cover money service businesses and the remainder of the DNFBPs. - The JFSC has delivered an active program of on-site inspections, resulting in many financial institutions and TCBs being required to implement CDD remedial measures, including on beneficial owners. - Implementation shortcomings in some TCBs led to sanctions, including termination of businesses in Jersey in some cases. - The range of available sanctions was found to be largely effective, proportionate, and dissuasive, but could be enhanced by providing the JFSC with the power to apply monetary fines. ### Designated non-financial businesses and professions (DNFBPs) - CDD obligations for DNFBPs are largely the same as for financial institutions. - Trust company business is defined as a “financial service business” and has been supervised by the JFSC since 2000. - Lawyers and accountants (in respect of auditing, accounting, and legal services) and other DNFBPs (estate agents, high value dealers) only recently became subject to AML/CFT oversight (extension in 2008); effectiveness of implementation could not be fully tested at the time of the assessment. - The JFSC established an AML unit to address the new areas of responsibility; initial progress appears positive and additional resources might be warranted as the work expands. - There are no casinos in Jersey, though some support services could be based there in future as a result of a recent change in the law. ### Legal persons, trusts, and non-profit organizations - Company registration and establishment of trusts are significant activities in Jersey and subject to strong AML/CFT requirements. - Jersey allows incorporation of public and private companies and LLPs, subject to registration with the Registrar of Companies. - Close to 34,000 companies were registered at the time of the assessment, a large majority being private companies; all information from the companies’ register is publicly available, including online. - Pursuant to the Control of Borrowing (Jersey) Order 1958 (COBO), beneficial ownership information must be provided to the JFSC in respect of all registered companies; this information is not publicly available but may be accessed by court order. - TCBs are required to obtain, verify, and retain beneficial ownership information on client legal entities and legal arrangements; the JFSC monitors compliance and has wide powers to access information held by registered TCBs. - Jersey trusts are governed by the Trusts (Jersey) Law 1984; there is no requirement for all trusts to be registered or to file information with a central authority, and no statistics are maintained on the number of Jersey trust arrangements or the volume of trust assets administered in Jersey. - Non-profit organizations became subject from August 2008 to a requirement under the Non-Profit Organizations (Jersey) Law 2008 to register with the JFSC; following the closing of the registration period in November 2008, the authorities should proceed to analyze the sector to seek to identify any FT vulnerability. ### National and international cooperation - Day-to-day cooperation on AML/CFT issues between the domestic authorities is close and effective. - The Jersey authorities established in 2007 an AML/CFT Strategy Group to coordinate policy in implementing the FATF Recommendations. - Formal gateways are in place to facilitate exchange of information between domestic authorities. - At the international level: - The JFCU frequently exchanges information with other financial intelligence units and is an active Egmont Group member. - The JFSC is active in international cooperation and shares information subject to appropriate safeguards. - There is no statutory banking secrecy provision; information sharing is subject to the common law duty of client confidentiality. - Mutual legal assistance and extradition: - The legal framework for MLA and extradition is largely in place and effective. - More than 70 percent of MLA requests received were granted within three months. - Where dual criminality is required, technical deficiencies in the ML and FT offenses may limit Jersey’s ability to provide MLA, including in extradition cases. ### Resource considerations and recommendations implied by assessment - Additional resources provided to the JFCU were welcomed and considered necessary to deal with expanding workload. - The resources of the JFSC may need to be increased somewhat to adequately cover its expanded areas of AML/CFT responsibility, while maintaining the level of AML/CFT supervision of financial institutions and TCBs. - Consider enhancing JFSC sanctioning powers by providing the power to apply monetary fines. - Proceed to analyze the non-profit organization sector following registration closure to identify any FT vulnerability. - Address identified legal gaps in ML and FT offences (including self-laundering, scope of concealing/disposing offences, terrorism-related ML coverage, and FT offence coverage) to improve effectiveness of confiscation, freezing, MLA, and extradition. *Source: _cr09282 - 104. The Joint Financial Crime Unit (JFCU) carries out the role of a financial intelligence (PDF).* ### 132. Relevant statistics are generally available and well maintained, though the JFCU ### _cr09282 - 132. Relevant statistics are generally available and well maintained, though the JFCU ### Overview - Relevant statistics are generally available and well maintained, though the JFCU would need to develop its statistical collection system to demonstrate what action results from submitted SARs, particularly as its workload increases. - Table 14 presents FATF 40+9 Recommendations and ratings with assessor recommendations for improving the AML/CFT system. ### FATF 40+9 Recommendations and Compliance Ratings (selected highlights) - Jersey assessed as “compliant” or “largely compliant” with 44 of the 49 Recommendations and 15 of the 16 “core” and “key” Recommendations. - Specific Recommendation ratings and key assessor recommendations: - R.1 — LC - R.2 — C - SR.II (Criminalization of Terrorist Financing) — LC - R.3 (Confiscation, freezing, seizing of proceeds of crime) — LC - SR.III (Freezing of funds used for terrorist financing) — LC - R.26 (The Financial Intelligence Unit and its functions) — LC - R.27 — LC - R.28 — C - SR.IX (Cross Border Declaration or disclosure) — LC - R.5 — PC - R.6 — LC - R.7 — C - R.8 — LC - R.9 — PC - R.4 — LC - R.10 — C - SR.VII — LC - R.11 — C - R.21 — LC - R.13 — LC - R.14 — PC - R.19 — C - R.25 — C - SR.IV — LC - R.15 — LC - R.22 — LC - R.18 — C - R.17 — LC - R.23 — C - R.29 — C - SR.VI — LC - R.12 — PC - R.16 — PC - R.24 — LC - R.20 — C - R.33 — C - R.34 — LC - SR.VIII — C - R.31 — C - R.35 — LC - SR.I — LC - R.36 — LC - R.37 — C - R.38 — LC - R.39 — LC - SR.V — LC - R.40 — C - R.30 — LC - R.32 — LC ### Key assessor recommendations to improve AML/CFT system - Criminalization and legal framework - Amend Articles 34 of the POCL and 30 of the DTOL to: provide for two alternative purposes for the acts of converting and transferring proceeds (to avoid prosecution for the predicate offense or to conceal the illicit origin of the funds); and to eliminate the purpose requirement for the acts of converting and transferring proceeds of crime. - Eliminate the defense (payment of adequate consideration) in Articles 33(2) of the POCL and 38(2) of the DTOL. - Amend Article 18 of the TL to cover all material elements of the money laundering provisions of the Palermo and Vienna Conventions. - Amend offenses of acquisition, possession, or use in the POCL and DTOL and the money laundering offense in the TL 2002 to include criminal proceeds obtained through predicate offense by the self-launderer. - Assess whether the level of proof to show that property stems from a specific predicate offence poses a barrier to obtaining convictions for stand-alone money laundering. - Terrorism financing and freezing measures - Amend Article 2 of the TL to include a reference to international organizations and extend the definition of “terrorism” in Article 2 of the TL to cover all terrorism offenses in the nine Conventions and Protocols listed in the Annex to the FT Convention. - Put in place a formal procedure governing receipt and assessment of foreign requests to designate/freeze to comply with UNSCR 1373. - Amend legal framework to expressly extend definition of ‘funds’ subject to freezing to cover assets ‘jointly’ or ‘indirectly’ owned or controlled. - Develop procedures to assess effectiveness of UNSCR implementation and keep statistics regarding implementation. - Confiscation, restraint and informal freezing - Amend laws to address deficiencies affecting the scope of the ML and FT offenses and improve the criminal confiscation regime. - Consider providing for restraint of property or its equivalent from the beginning of an investigation. - Provide for restraint and confiscation of property of corresponding value in matters arising under the TL. - Provide a more direct legal basis for the current ‘informal freezing’ or consent/nonconsent arrangement administered by the JFCU. - Financial Intelligence Unit (JFCU) - Adequately staff the Intelligence Wing of the JFCU. - Issue periodic reports including statistics, typologies, trends and information on activities. - Maintain comprehensive statistics on Intelligence Wing work relevant to effectiveness and efficiency of ML and FT systems. - Reporting, supervision and preventive measures - Increase investigative resources to improve effectiveness. - Maintain comprehensive statistics on matters relevant to the effectiveness and efficiency of systems for combating ML and FT. - Implement the newly-established disclosure system to detect physical cross-border transportation of currency and bearer negotiable instruments related to ML and FT. - Conduct a risk-based review of concessions allowing reliance on third parties for CDD and limit their availability to be strictly consistent with FATF Recommendations. - Tighten requirements where source of funds is used for identity verification in certain low-risk circumstances. - Review and amend exemptions from CDD measures in Article 18 of the MLO and condition concessions on absence of higher-risk scenarios. - Expand list of higher-risk customer categories in the MLO for enhanced CDD (consider including private banking and nonresident customers). - Conduct risk-based review of scope to defer full identification under Article 13(4) of the MLO and issue guidance to limit deferral practice. - Ensure all legal arrangements (beyond trusts) are adequately addressed in CDD requirements and guidance. - Clarify that, when permitting an employee of a relevant person to act on behalf of a customer, the relevant person must verify the employee's authority. - Issue more detailed guidance on ML and FT risks of new and developing technologies (e.g., e-money and e-commerce). - Require relevant persons to obtain all necessary CDD information from intermediaries/introducers immediately and consider spot-testing intermediary performance. - Limit concession allowing reliance on intermediaries outside Jersey or certain domestic DNFBPs until full implementation; eliminate concession allowing reliance on group members not supervised for CDD compliance. - Provide explicit legal basis that financial institutions do not breach confidentiality in exchanging customer information between themselves for AML/CFT purposes. - Ensure stricter approach by Jersey financial institutions for incoming wire transfers lacking originator information. - Amend power to apply countermeasures to remove limitation tying it to actions of the FATF. - Enhance timeliness of reporting suspicious transactions to the JFCU; amend law to limit protection for reporting to those acting in good faith. - Broaden tipping-off offense by removing limitation referring to situations that might prejudice an investigation. - Introduce legal/regulatory requirement for financial institutions to maintain an adequately resourced and independent audit function to test AML/CFT compliance. - Clarify provisions for timely information access for compliance officers to include customer identification data and other CDD information, transaction records, and relevant information held by third parties in or outside Jersey. - Require financial institutions to apply AML/CFT measures at least equivalent to Jersey for branches or subsidiaries in countries that do not or insufficiently apply FATF Recommendations; apply consistent AML/CFT requirements at group level. - Consider expanding range of sanctioning powers available to the JFSC to include monetary fines. - Sustain training and onsite supervision to improve compliance for MSBs. - DNFBPs and professional sectors - Remove concession allowing lawyers to apply reduced/simplified CDD where funds are received/paid only to an account in a customer’s name. - Repeal concession allowing lawyers and accountants to self-certify identification of existing clients. - Sustain close supervision of TCBs to improve CDD and record keeping compliance. - Continue program to evaluate effectiveness of implementation by lawyers, accountants, real estate agents, and high value dealers. - Continue on-site monitoring of SAR reporting practices by lawyers, accountants, and estate agents. - Continue testing implementation of AML/CFT requirements for all DNFBPs not previously supervised by JFSC. - Legal persons, arrangements, and NPOs - Seek measures to ensure accurate, complete, and current beneficial ownership information for legal arrangements administered by trustees not covered by POCL registration requirements. - Put in place measures to ensure beneficial ownership information is obtained, verified, and maintained for all general partnerships. - Based on registration information, analyze FT vulnerability of the NPO sector. - International cooperation and mutual legal assistance - Ensure full implementation of Palermo and Vienna Conventions and UN International Convention for the Suppression of Financing of Terrorism. - Consider requesting extension of the remaining 10 international counter-terrorism related legal instruments. - Amend law to correct deficiencies affecting criminalization of ML and FT offenses to facilitate full compliance with MLA requests related to seizure and confiscation and remove obstacles to complying with extradition requests where dual criminality applies. - Resources and statistics - Provide additional resources to the JFCU to deal with increasing workload. - Develop JFCU capacity to maintain relevant statistics on all aspects of SAR analysis and external cooperation. ### Institutional Capacity and Statistics - The JFCU needs to develop its statistical collection system to demonstrate actions resulting from submitted SARs as workload increases. - Recurrent recommendations: - Maintain comprehensive statistics across JFCU, JFSC, and competent authorities on matters relevant to effectiveness and efficiency of ML/FT systems. - JFCU to issue periodic reports with statistics, typologies, and trends. ### Authorities’ Response (summary of official reaction) - Jersey welcomed the IMF assessment team and shared actions taken since 2003 to protect the jurisdiction from ML and FT. - Authorities noted the report confirms Jersey has a “high level of compliance” with almost all aspects of the revised FATF Recommendations. - Acknowledged being assessed “partially compliant” with Recommendation 5 and also with Recommendations 9, 12, 14, and 16. - Authorities dispute the assessors’ view that concessions permitting reliance on third parties are “overly-generous”; assert implementation is equivalent to the EU Third AML Directive. - Since the on-site assessment, the JFSC had visited half of the lawyers, accountants, and estate agents registered with it and is generally satisfied with compliance levels observed. - Insular authorities plan to publish an annual report on consideration of recommendations and actions taken; an amendment to the MLO will address some technical points raised. ### Appendix I — The Economy and Financial System (selected statistics) - Annual real GVA growth averaged 3.8 percent over 2003-07. - The report notes real GVA fluctuated considerably over the past decade due to variations in financial institutions’ net value added. - Retail price inflation accelerated for much of 2008, reaching 6.4 percent in the 12 months to September, before falling sharply in late 2008 and early 2009. - House prices rose by over 40 percent between end-2005 and September 2008 before falling 5 percent in the final quarter of 2008. - Unemployment is described as negligible; the government is obliged not to run a budget deficit and has accumulated considerable reserves. *Source: _cr09282 - 132. Relevant statistics are generally available and well maintained, though the JFCU* ### 142. The main activities in the economy are banking, fund management, and ### The main activities in the economy are banking, fund management, and fiduciary services ### Economic structure and contribution of financial services - The combined financial services sector contributes over half of GVA. - Total assets under management are a large multiple of GVA. - The island is among the larger OFCs in the banking sector. - There has been some decline in the number of financial institutions on the island, largely due to consolidation and shifts in business models, but the volume of assets rose fairly steadily at least through mid-2008. ### GVA and income statistics - GVA in 2007 is estimated at GBP 4.1 billion. - Gross national income (GNI) is estimated at GBP 3.7 billion. - Population: slightly over 90,000. - GNI per head is about GBP 41,000 (44 percent more than in the UK). - Table 15. Jersey. Sectoral Composition of GVA (GBP millions) - Total GVA: 2003 = 3,153 (100.0); 2007 = 4,089 (100.0) - Agriculture: 2003 = 48 (1.5); 2007 = 53 (1.3) - Manufacturing: 2003 = 63 (2.0); 2007 = 53 (1.3) - Electricity, gas & water: 2003 = 34 (1.1); 2007 = 36 (0.9) - Construction: 2003 = 160 (5.1); 2007 = 212 (5.2) - Wholesale & retail: 2003 = 210 (6.7); 2007 = 259 (6.3) - Hotels, restaurants, bars: 2003 = 113 (3.6); 2007 = 119 (2.9) - Transport and communication: 2003 = 133 (4.2); 2007 = 157 (3.8) - Financial intermediation: 2003 = 1,584 (50.2); 2007 = 2,177 (53.2) - Other business activities: 2003 = 585 (18.6); 2007 = 746 (18.2) - of which: business activities: 2003 = 232 (7.4); 2007 = 297 (7.3) - of which: rental income: 2003 = 353 (11.2); 2007 = 449 (11.0) - Public administration: 2003 = 223 (7.1); 2007 = 276 (6.7) - Sources: States of Jersey, States Statistics Unit. 1/ Provisional figures. ### Banking sector (dominant financial component) - Banking is the dominant component of the financial sector. - Most major British banks have operations on the island; branches and subsidiaries from other European countries, North America, and some other countries also operate there. - The sector is not concentrated. - Banks’ principal business is the collection of retail deposits from overseas (e.g., from British expatriates and high net worth non-domiciled UK residents). - A growing share of deposits are from corporates and the trusts that are managed on the island. - These funds are mainly placed with parent banks, where they earn market-related rates. - Many banking groups have licenses to perform other financial services, such as fund management and fiduciary services, ancillary to wealth management. - Non-interbank lending is mainly to persons (on the island and also, for example, non-domiciled UK residents), property companies, and some NBFIs; the total is over 700 percent of GVA. - Banks have relatively little real estate exposure and most do not operate trading books or independent treasury functions. - One bank headquartered on the island (part of a larger UK group) does not offer services locally but has significant lending operations in the Middle East. - Another bank currently books a significant part of group funding—including the issue of medium-term notes—through its Jersey branch. - Footnotes: - Many of the banks have affiliates in the other Crown Dependencies. - Some banks receive the current market rate available to their respective parents, and others receive Libor plus a fixed mark-up. - There is also retail lending by nonbank companies and direct borrowing from the UK, notably in the form of credit card debt. ### Fund management and collective investment schemes (CISs) - Fund management and associated services are a main component of the financial sector. - The numbers of CISs and the value of their assets have been growing strongly in the past decade. - While mass market retail funds continue to be offered, the sector is increasingly dominated by schemes aimed at institutional and high net worth individuals; retail funds have tended to migrate to larger centers in the EU. - At end-September 2008: - There are now 1,452 funds (open and closed—Jersey regulates both types) with total NAV of GBP 239 billion. - Of these, over 1,000 (with NAV of GBP 138 billion) are specialist-property, venture capital, hedge/alternative investment, and private equity funds. - Fund services (management and administration) are offered by 104 groups, many also including banks. - In addition to CISs, Jersey-based discretionary asset managers manage a further GBP 17 billion for private and institutional clients. - Table 16. Jersey: Securities Sector Indicators (in GBP millions unless indicated otherwise) - Number of collective investment schemes: - 2003 = 552; 2004 = 833; 2005 = 965; 2006 = 1,157; 2007 = 1,311; 2008 = 1,472 - Jersey funds: 2003 = 441; 2004 = 651; 2005 = 743; 2006 = 904; 2007 = 1,011; 2008 = 999 - Public (Jersey CIF): 2003 = 323; 2004 = 447; 2005 = 560; 2006 = 706; 2007 = 817; 2008 = 817 - Private (Jersey COBO): 2003 = 118; 2004 = 204; 2005 = 183; 2006 = 198; 2007 = 194; 2008 = 182 - Non-Jersey funds: 2003 = 111; 2004 = 182; 2005 = 222; 2006 = 253; 2007 = 300; 2008 = 473 - Assets under management (GBP millions): - Total AUM: 2003 = 98,525; 2004 = 104,110; 2005 = 137,430; 2006 = 179,111; 2007 = 246,150; 2008 = 241,172 - Jersey AUM: 2003 = 42,133; 2004 = 62,116; 2005 = 75,321; 2006 = 96,275; 2007 = 135,693; 2008 = 111,629 - Jersey Public: 2003 = 33,734; 2004 = 50,465; 2005 = 64,706; 2006 = 84,384; 2007 = 120,542; 2008 = 100,613 - Jersey Private: 2003 = 8,399; 2004 = 11,651; 2005 = 10,615; 2006 = 11,891; 2007 = 15,151; 2008 = 11,016 - Non-Jersey AUM: 2003 = 56,392; 2004 = 41,994; 2005 = 62,109; 2006 = 82,836; 2007 = 110,457; 2008 = 129,543 - Fund Services Business indicators: - Number of investment managers: ...............81 - Number of custodians: ...............28 - Intermediaries - investment businesses: Number of licensed investment businesses: 2003 = 136; 2004 = 124; 2005 = 124; 2006 = 119; 2007 = 113; 2008 = 113 - Class A - dealing: 2003 = 76; 2004 = 72; 2005 = 76; 2006 = 73; 2007 = 72; 2008 = 76 - Class B - managing: 2003 = 66; 2004 = 64; 2005 = 67; 2006 = 59; 2007 = 56; 2008 = 60 - Class C - advising 2/: 2003 = 70; 2004 = 65; 2005 = 69; 2006 = 68; 2007 = 66; 2008 = 75 - Class D - advising 3/: 2003 = 38; 2004 = 35; 2005 = 33; 2006 = 33; 2007 = 32; 2008 = 34 - Class E - non-exempted functionaries: 2003 = 33; 2004 = 33; 2005 = 33 - Assets under management (GBP millions) for investment businesses: 2003 = 18,135; 2004 = 15,885; 2005 = 18,243; 2006 = 18,254; 2007 = 19,297; 2008 = 18,843 - Source: Jersey Financial Services Commission, Securities Supervision Division. - Footnotes: - 1/ A licensed investment business may be registered to undertake more than one class of business. - 2/ Able to hold client money. - 3/ Unable to hold client money. ### Trust and company service providers, SPVs and SIVs - Numerous trust and company service providers operate on the island. - They manage companies (either registered on Jersey or elsewhere) and trusts, and provide administration and other services to private clients (e.g., succession planning, tax mitigation planning) and to corporations (e.g., employee share option plans). - Trust and company service providers are increasingly diversifying into fund services business. - Jersey hosts a small but diverse group of SPVs and a few SIVs registered as Jersey public companies used for securitization purposes. - Because of the credit crisis, new company formations of this sort have largely dried up. ### Insurance sector - The insurance sector is small. - There are only 14 firms incorporated on the island (Category B firms), of which 3 are closed to new business and a further 3 have yet to write any business. - The remaining firms write mostly specialist business. - A further 172 firms incorporated overseas (Category A firms), of which most are based in the UK and other EU jurisdictions, are licensed to write Jersey business. - Jersey insurance business derives from local businesses and individuals (property, motor, household risks, life assurance and pensions) and from trust and company service providers seeking cover for international risks such as property portfolios. - Most cover is obtained from Category A insurers through the many brokers on the island. - There are no data for overall market size. - Net premium income in 2007 of the Category B firms was less than GBP 4 million and their total assets are around GBP 800 million. - Pension schemes are not regulated (though service providers are, where funds are established as trusts), but they are minor. - Table 17. Jersey: Insurance Sector Indicators (in GBP millions unless indicated otherwise) - Life: - Gross premiums: 2002 = 150; 2003 = 1............... - Net premiums: 2002 = 72; 2003 = 1............... - Total assets: 2002 = 369; 2003 = 347; 2004 = 290; 2005 = 259; 2006 = 219; 2007 = 198; 2008 = 161 - Non-Life: - Gross premiums: 2002 = 119; 2003 = 88; 2004 = 77 - Net premiums: 2002 = 7 3? 32? 11? 1? (table entries fragmented) - Total assets: 2002 = 181; 2003 = 105; 2004 = 404; 2005 = 731; 2006 = 548; 2007 = 172; 2008 = 1? - Reinsurance: - Gross premiums: 2002 = 8 ? 86? 76? 63? 3? (table entries fragmented) - Net premiums: 2002 = 7 ? 86? 66? 62? (table entries fragmented) - Total assets: 2002 = 383; 2003 = 630; 2004 = 323; 2005 = 131; 2006 = 31; 2007 = 10 - Captives: - Gross premiums: 2002 = 233; 2003 = 71; 2004 = 100; 2005 = ... - Net premiums: 2002 = 9; 2003 = 17; 2004 = 1...; 2005 = 00 ... - Total assets: 2002 = 44; 2003 = 485; 2004 = 533; 2005 = 35 - Sources: Jersey Financial Services Commission, Insurance Division. - Note: Some table entries are fragmented in the source. ### Legal, accountancy, and judicial environment - A wide range of legal and accountancy services are available on the island; all four of the major international accountancy firms are represented. - The judicial system is reportedly expert in financial matters, and statutes are supported by extensive case laws. ### Comparative advantages of Jersey as a financial center (Box 1) - Structural advantages: - UK time zone and geographically close to London and other European financial centers. - Legal system related to that of the UK. - English is predominantly used. - The island is secure and politically stable. - It uses a major currency for monetary purposes. - Service provision and workforce: - Jersey offers a wide range of relevant services and a highly skilled workforce. - Ancillary sectors such as legal advice, accountancy and trust and company services offer a wide choice of providers. - “Critical mass” has not been achieved in all areas; international insurance business has become established in other centers with little prospect of expansion in Jersey. - Regulatory strategy: - Authorities have deliberately adopted a strategy of maintaining a high level of financial sector regulation and oversight, and restricting entry, which is reassuring to major financial institutions and customers. - A reputation for integrity and effective regulation is essential for retaining stable and high value-added business. - Tax and fiscal regime: - The tax system is designed to deliver “fiscal neutrality” to international customers but this advantage has declined in importance as other centers have adopted similar fiscal regimes. - The recent shift to a “zero/ten” system of corporate taxation will bring Jersey more into line with systems seen elsewhere.1/ - Availability of fiscal neutrality is still essential to future success. - Authorities have cooperated with tax authorities in other countries as part of a strategy of maintaining a sound reputation. - Early voluntary participation under the EU Savings Directive (with withholding tax and disclosure options) has reportedly had little effect on deposit business. - Costs and migration of activities: - The island’s success brings costs: housing is expensive, and salaries high, in part because of immigration restrictions and proximity to London. - Lower value-added services, such as back office functions, have migrated elsewhere. - Operations with high fixed costs, such as management of CISs targeted at a mass market, have largely shifted to larger financial centers in the EU. - There is a risk that further regulatory and fiscal changes in major markets will require Jersey to adjust its business model again. - Footnote 1/: - Until the end of 2008, income tax was levied at a marginal rate of 20 percent for households and corporates (although non-resident companies were exempt). - From 2009, the corporate tax rate has been reduced to zero for non-financials and 10 percent for financials and utilities. - There is no inheritance or capital gains tax. - A 3 percent goods and services tax has recently been introduced. ### Appendix II — Implementation of the 2003 Assessment recommendations (selected supervisory reforms) - Institutional independence and resourcing (CP 1(2)): - Recommended: Conduct a review of the Finance and Economic Committee’s power of direction and the JFSC’s development function; prepare an in-depth analysis of resources required to fulfill supervisory objectives and establish a charge plan. - Action taken: - The Financial Services Commission (Jersey) Law 1998 (the Commission Law) (Art. 2(4)) provides that, except as provided therein, the JFSC shall be independent of the Minister for Economic Development (the Minister) and of the States. Procedures for appointment, term of appointment and removal of Board members are established. Board members cannot be removed except with good cause and, by convention, a public explanation. - The JFSC’s independent status, accountability and governance structure is publicly disclosed on its website and in its Annual Report. - The Commission Law (Art.12) states that the Minister may, after first consulting with the JFSC and where he/she considers it to be in the public interest to do so, give guidance or give in writing general directions to the JFSC. To date, no guidance or directions have been given to the JFSC. - The JFSC has entered into a MOU with the Minister in respect of Art. 12. The MOU (Section 4) sets out that the Minister may only exercise power to give guidance or direction where it is in the public interest and confirms any guidance or direction will be general in nature and will not be used to influence particular cases. The MOU also removes the JFSC from involvement in the promotion of Jersey’s financial services industry. - The JFSC is broadly adequately resourced. Art. 15 of the Commission Law has been amended so that the JFSC has the ability to set its own fees following due consultation with and agreement from the industry. Fees are set to cover the costs of regulation plus overheads. From 2009, the JFSC no longer pays to government a fixed amount of its revenue from the operation of the Companies Registry. Instead it will collect and remit to government a tax which is to be applied on annual returns that must be made by companies. - Staff numbers have grown substantially in the past six years to about 100. - Credit policies, loan evaluation and loan loss provisioning (CP 7 and 8): - Recommended: Develop guidance/guidelines or orders covering generally accepted credit risk policies and procedures. - Action taken: - The JFSC requires, through the Banking Codes, standards of corporate governance that ensure management assesses and manages all principal risks. The codes (most recently revised in July 2008) specifically establish minimum credit risk management controls. - In 2004, the JFSC issued industry guidance by way of summarized findings from a themed examination program on credit risk. - The JFSC issued Quarterly Reporting and Pillar 2 Guidance in August 2007 under which “Banks must have counterparty credit risk management policies, processes and systems that are conceptually sound and implemented with integrity relative to the sophistication and complexity of a firm’s holdings of exposures that give rise to counterparty credit risk.” - The Banking Codes require a system to classify loans into discrete categories when payments are contractually a minimum number of days in arrears, and require “appropriate provisioning policies.” The JFSC has chosen not to be more specific because Jersey banks generally adopt established group standards and credit other than to parent institutions is not a major business line of most banks. Specific policies on loan classification and provisioning are largely left to the discretion of bank management. - When the JFSC conducts credit risk assessment inspections, its applicable “route planner” addresses problem loan classification and provisioning policy. - Market risks (CP 12): - Recommended: Impose market risk capital requirements. - Action taken: - Appendix I to the Banking Codes requires minimum control requirements relating to market risk, including appropriate limits for all significant risks incurred and regular reviews of these; controls 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; policies and processes to consider valuation adjustments for positions that cannot be otherwise prudently valued; and performance of scenario analysis, stress testing and contingency planning. - In 2005, the JFSC issued industry guidance by way of summarized findings from a themed examination program on treasury operations. - Basel II requirements introduced in 2008 include new reporting requirements for market risk, including interest rate risk in the banking book. The JFSC has published guidance on additional policies that are required for trading books. - Other risks (CP 13): - Recommended: Develop guidance and “best practice” documents. - Action taken: - Appendix I of the Banking Codes specifically establishes minimum operational risk management controls, and cross-refers to relevant Basel guidance. - In October 2008 the JFSC released an updated Policy Statement and Guidance Notes on Outsourcing. - Internal control and audit (CP 14): - Recommended: Systematic confirmation by senior management and Board regarding their fiduciary responsibilities; introduce a “best practice” paper on internal controls and internal audit. - Action taken: - Under the Banking Codes, a bank must provide an annual declaration to the Commission, signed by the directors, acknowledging that the directors accept and understand their responsibility for compliance with relevant regulatory and anti-ML, guidance notes, other regulation and guidelines, and the Banking Codes, and that such legislation and all the aforementioned have been complied with, or if not, in what respect. The declaration is to be presented on annual renewal of registration. - The Banking Codes (Principle 3) contains minimum requirements for corporate governance and internal controls and, in particular, requires defined responsibilities for bank directors and senior managers (Paragraph 3.1). *IMF staff report excerpt.* ### 3.2 requires that the registered ### _cr09282 - 3.2 requires that the registered ### Governance, internal controls, and compliance requirements - Paragraph 3.2 requires that the registered person must ensure that the business is planned and conducted properly and adequately and in an orderly manner, and that a registered bank has an appropriate internal audit function that, inter alia, has appropriate independence and reports directly to the board of directors or a group audit committee. - Paragraph 3.4 requires that an appropriately skilled compliance officer is appointed. - Firms are now required to make an annual declaration to the JFSC, signed by directors, acknowledging that they accept and understand their responsibilities for compliance with relevant regulations (including internal controls). ### On-site and off-site supervision (CP16) and supervisory practice - The JFSC currently carries out about 25 on-site bank inspections annually, and has annual review meetings with bank management. - The JFSC conducts on- and off-site inspections of banks’ nonbank affiliates. - The JFSC has assessed banks’ ICAAPs. - The JFSC has developed a model to assess the probability of certain risks occurring at each bank, and the impact if any of these risks should crystallize; the model and other formalized techniques are used for analysis and supervisory resourcing. - On-site supervision is guided by “route planners” defining priorities and procedures, and results in post-assessment recommendations, which are effectively followed up. - On-site inspection results and off-site findings are reviewed and approved by the Banking Director/Deputy Director to ensure consistency, quality and appropriateness. - The inspection process is supported by documented procedures and checklists to ensure a consistent methodology is applied. ### Implementation of 2003 recommendations to improve observance of IAIS Insurance Core Principles (selected ICPs) - ICP 1 (Organization of an insurance supervisor) - Recommended Action: Increase number of staff of the Insurance Division. Avoid impairment of the independence of the supervisor. - Action Taken: Staff numbers have been significantly increased by recruitment since mid-2007—also to reflect widening responsibilities (regulation of general insurance intermediaries). Staffing is now in line with what is required to regulate the sector effectively. An MOU between the JFSC and the Minister for Economic Development clarifies and limits the ability of government to give guidance or direction to the JFSC. - ICP 4 (Corporate Governance) - Recommended Action: The JFSC should complete its initiative to incorporate corporate governance requirements into Codes of Practice. - Action Taken: Corporate governance requirements have been incorporated into the Codes of Practices for Insurance Business. - ICP 5 (Internal controls) - Recommended Action: Systematic confirmation by senior management and Board regarding their responsibility for internal controls. Introduce quickly Codes of Practice containing the requirements for the existence of adequate risk management systems. - Action Taken: Firms required to make an annual declaration to the JFSC, signed by directors. The Codes of Practices for Insurance Business refer to the need for adequate risk management systems. - ICP 8 (Capital adequacy and solvency) - Recommended Action: The JFSC should continue to review the minimum capital standards, in light of recent European developments, to ensure that the legal minimum remains appropriate and in line with international standards. - Action Taken: The JFSC has been monitoring EU (and wider international) developments on solvency regulation. Its solvency standards are in line with current EU legal minimum requirements, although they do not reflect latest standards and thinking on the development of risk-based requirements. - ICP 9 (Derivatives) - Recommended Action: It is recommended that the present practices of the JFSC in relation to derivatives be incorporated in the Codes of Practice. - Action Taken: The Codes of Practices for Insurance Business incorporate provisions on derivatives. - ICP 13 (On-site inspection) - Recommended Action: Intensify on-site inspections (increasing the number of staff, see above). - Action Taken: Onsite work has been undertaken for all Category B insurance companies and many intermediaries within the framework of the JFSC risk model for assessing firms. In the future, onsite work will be a major part of the JFSC’s insurance regulation, with the frequency of visits determined by the risk assessment of each firm. - ICP 14 (Sanctions) - Recommended Action: Complete the range of sanctions by the power of the supervisor to impose monetary penalties (administrative fines). - Action Taken: Article 15(6) of the Commission Law provides the JFSC with power to impose an administrative fee where a document is to be filed with or delivered to the JFSC or the Registrar by virtue of an enactment and the documentation is filed or delivered late. There are no immediate plans to introduce civil money penalties - though this will be kept under review. ### Implementation of 2003 recommendations to improve observance of IOSCO Principles (selected CPs) - CP 1–5 (Principles Relating to the Regulator) - Recommended Actions: Consider recognizing IOSCO Objectives more explicitly; recognize statutory accountability of the Registrar of Companies in annual report; review authority under the Control of Borrowing (Jersey) Law 1947; review authority for F&E Committee guidance; complete review of JFSC fee powers and transfers to government; complete Codes of Practice for CIF functionaries. - Action Taken: After review, IOSCO’s first and third objectives are considered adequately addressed by the JFSC’s guiding principles; the second objective is considered not relevant to a jurisdiction with no secondary market. The JFSC’s responsibility to appoint the Registrar of Companies is highlighted in each annual report. The JFSC regulates and supervises institutions involved in offers of interest in SPVs and other investment activity; SPVs are registered public companies. Powers under the Control of Borrowing (Jersey) Law 1947 are viewed as adequate, with need for some streamlining recognized. An MOU with the Minister for Economic Development clarifies and limits government guidance. Art. 15 of the Commission Law amended so the JFSC can set its own fees following consultation; fees set to cover costs of regulation plus overheads. From 2009, the JFSC will no longer pay to government a fixed amount of its revenue from the operation of the Companies Registry; instead it will collect and remit to government a tax applied on annual returns. In November 2007, regulation of fund functionaries (except for functionaries of Recognized Funds) was transferred from the Collective Investment Funds (Jersey) Law 1988 to the Financial Services (Jersey) Law 1998. Codes of Practice for fund services business have been published. Codes for certified funds product are currently being prepared and it is anticipated that they will be issued for consultation early in 2009. - CP 8–10 (Principles for the Enforcement of Securities Regulation) - Recommended Actions: Review respective roles of JFSC, government and Court in enforcement; place greater emphasis on ensuring timely, balanced, clear and accurate information to investors; tighten time frames for communicating information; recognize investment adviser responsibility in promotional literature; clarify power to undertake on-site inspections without formal power of entry; consider empowering JFSC to levy administrative fines. - Action Taken: Enforcement has been shown to work well in practice. Regular meetings held between officers of the Law Officers’ Department, the JFSC and the Joint Financial Crimes Unit. The JFSC has published a policy on referrals to the AG of breaches of AML/CFT legislation. Enforcement division reviewed policies and internal procedures; internal procedures made available electronically to all JFSC staff. Codes of Practice for Investment Business companies include elements on communicating timely, balanced, clear and accurate information to investors. Filing deadlines for funds vary between four and ten months; Codes for Certified Funds will set a maximum filing deadline of seven months. The Financial Services (Advertising) (Jersey) Order 2008 came into effect in June 2008 covering written or broadcast financial services advertisements. The Regulatory Laws provide the JFSC power to acquire information or documents; Article 8 of the Commission Law provides a statutory power to conduct oversight. Article 15(6) provides power to impose an administrative fee for late filing; there are no immediate plans to introduce civil money penalties - kept under review. - CP 14–16 (Principles for Issuers) - Recommended Action under Principle 16: The JFSC should continue to monitor international developments on financial reporting and audit standards applying to issuers. - Action Taken: The JFSC has agreed with UK bodies (and other Crown Dependencies) a model for auditor oversight. Legislation to amend the Companies Law is being drafted so that, for companies with securities admitted to trade on regulated EU markets, (i) one or more professional accountancy bodies will monitor the quality of audit work; and (ii) action can be taken against auditors that breach rules. - CP 21–24 (Principles for Market Intermediaries) - Principle 24 Recommended Action: Finalize and disseminate a contingency plan for dealing with the failure of a market intermediary. - Action Taken: The JFSC has prepared a contingency plan for dealing with the failure of a market intermediary. ### Stress testing methodology and shocks (Appendix III) - Scope and data - Tests included bottom-up analyses performed by Jersey banks using their in-house risk management systems, and top-down analyses performed by the JFSC in collaboration with the mission. - Many banks have limited independent treasury management functions; tests were often performed by or in close collaboration with the parent bank. - The exercise used end-June 2008 data and focused on 18 of the 20 local subsidiaries of foreign parents, except liquidity tests which included an additional 20 foreign branches. - Types of shocks and calibration - Single factor shocks assessed: credit quality, interest rates, exchange rates, asset prices, and liquidity. - Calibration aligned with recent FSAP Updates for EU and other mature market countries, particularly the UK, and accounted for larger shocks experienced during recent global financial turmoil. - Interest rate shocks included 200 basis point parallel upward and downward shifts of the sterling, dollar and euro yield curve. - Exchange rate shock: 20 percent depreciation of the dollar and the pound sterling. - Credit risk tests: resilience to the default of their three largest exposures (net of claims to parent banks) and various other components of credit portfolio. - Liquidity tests: resilience to a daily withdrawal of liabilities without access to external funding, including from parent banks. - Given the nature of banks’ business and the limited domestic macroeconomic impact on the financial sector, more elaborate scenario tests or more extreme single factor tests were deemed not worthwhile. - Results reporting and comparison - Results (Table 8) expressed in three measures: - (a) the average post-shock CAR (the starting point is shown in the first row of each shock), with the minimum and maximum percentage change across banks (Columns 1-3); - (b) the number of banks breaching the minimum regulatory capital of 10 percent (Column 4); - (c) the average income loss/gain in percent of pre-shock capital, with the minimum and maximum percent change across banks (Columns 5-7). - The first seven columns refer to the bottom-up approach; the remaining seven columns refer to the top-down approach. - Overall, both approaches produce broadly similar results, although the top-down results tend to be more volatile, due to supervisors' less detailed knowledge of banks’ collateral and guarantees and hedging strategies, some of which are managed at group-level. *Source: _cr09282 - 3.2 requires that the registered* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09282.pdf_