## 1. Summary of Compliance with the Basel Core Principles—Detailed Assessments ## Source details **Canonical URL:** [1. Summary of Compliance with the Basel Core Principles—Detailed Assessments](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1103.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1103.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1103.pdf.json) --- ### Introduction, scope, and methodology - Assessment undertaken as part of an IMF Financial Sector Assessment Program (FSAP) Update for Guernsey in 2010; mission visited Guernsey during March 2010. - Assessors: Peter Kruschel (BaFin) and Keith Bell (banking supervision consultant). - Basis of assessment: - Study of legal and regulatory framework. - Self‑assessment prepared by the Guernsey Financial Services Commission (GFSC). - Detailed discussions with government representatives, GFSC, Association of Guernsey Banks (AGB), senior management of banks, and auditing firms. - Methodology: revised Core Principles Methodology issued October 2006 by the Basel Committee on Banking Supervision; qualitative assessment based on essential criteria only. - Rating definitions used: “compliant”, “largely compliant”, “materially noncompliant”, “noncompliant”, and “not applicable”. ### Institutional and macroeconomic setting — key statistics and features - Political/monetary status and taxation: - Guernsey is a British Crown Dependency (not part of the UK); has its own parliament, the States of Deliberation. - Uses the pound Sterling; in a customs union with the European Union (EU) for trade in goods. - Individual income tax rate retained at 20 percent (2007 review). - Corporate income tax reduced from start of 2008 to zero except: - traditional banking (lending) activities taxed at 10 percent; - utilities and property companies taxed at 20 percent. - No capital gains, wealth, inheritance or general sales taxes; residents subject to social security contributions. - Guernsey has signed 15 Tax Information Exchange Agreements (TIEAs); minimum is 12. - Economic and financial sector indicators: - Financial services accounted for nearly 40 percent of GDP (2008) and a quarter of total employment. - Real GDP growth averaged 2 percent over the last decade; relatively volatile and was negative in 2003 and 2005. - GDP growth for 2008 is provisionally estimated at 7.6 percent. - Current estimates for 2009: contraction in GDP of between 2 percent and 3 percent. - Unemployment rate 1.4 percent (noted as having doubled since mid-2007). - Retail price inflation was 2.2 percent for 2009. - Number of licensed banks fell from 54 in 2002 to 43 at 31 December 2009. ### GFSC mandate, resources and governance - GFSC responsible for regulation and supervision of all financial institutions and services (exceptions: consumer credit and pensions); statutory mandate includes effective supervision and countering financial crime. - Funded by fees on the industry; currently has over 100 staff. - GFSC enjoys considerable independence; FSC(G) L amended in 2009 to remove “development of the financial services industry” as a function and to clarify Policy Council instruction powers. - GFSC chairman appointed for a one-year term. - Banking Division (BD) staffing and budget: - BD budgetary staff allocation: 12 people (increased to 13 in 2010). - BD staff composition: Director, Deputy Director, two Assistant Directors, four Senior Analysts, two Analysts and two administration staff. - BD budget (approx. £1mn in 2009); making all divisions self‑sufficient would require banking fees to increase by some 70%. ### Financial sector structure, risks and prudential metrics - Main activities: banking, insurance (particularly captive insurance), trust and company services related mainly to non‑retail collective investment schemes (CIS). - Banking sector principal business: collection of retail deposits from overseas, placed with parent banks; 69 percent of banks’ total assets are exposures to parents. - Limited commercial lending; trend toward private banking and services to high net worth individuals and institutional fund/securities services. - Prudential metrics: - Capital adequacy ratios (CAR) average 19 percent as of September 2009, up from 15 percent at the end of 2008. - Aggregate capital to asset ratio has remained below 2 percent in recent years. - Almost all bank capital is in the form of Tier 1 instruments. - Profitability described as comfortable, possibly reflecting transfer pricing by parent institutions. ### Crisis events and regulatory response - Failures and impacts: - 2007: Intervention in Northern Rock; UK blanket guarantee for Northern Rock extended to Guernsey liabilities; UK government subsequently took the bank into public ownership. - Late 2008: Landsbanki Guernsey (Icelandic group) placed in administration; some 1,600 depositors had £120m on deposit; recoveries to date have amounted to around 70 percent. - Other impacts from problems of U.K. building societies with operations on the island. - GFSC response measures: - Strengthened oversight of banks’ exposure to parents: disclosure requirements to inform depositors, individually set exposure limits, contingency planning for parent problems. - Depositor compensation scheme introduced from November 2008. ### Depositor compensation scheme (design specifics) - Covers deposits, mainly from retail depositors, wherever located, up to £50,000 per person. - Scheme is not funded, although it has government guaranteed liquidity back‑up. - Aims to pay compensation within three months of a bank failure. - Maximum total amount of compensation capped at £100 million in any five year period. - Funding to be provided by banks through annual charges and special charges in the event of a bank failure. - Comparison note: GBP 1.2 billion in deposits covered by the scheme — i.e., amounts under GBP 50,000. ### Preconditions for effective supervision and market infrastructure - Legal system broadly based on common law with French and Norman elements; courts reportedly able to act quickly in financial matters. - High‑quality accountancy, audit, legal, and ancillary financial services available on the island. - Guernsey is not an EU member state and voluntarily adopts international standards (e.g., Basel Committee standards); has implemented EU Savings Directive information exchange and withholding tax. - GFSC published an Implementation Paper on Upstreaming in November 2009; provisions came into force in January 2010 requiring Guernsey‑incorporated banks to notify depositors that “upstreaming” occurs. ### Main supervisory findings and practices - Overall: BCP assessment confirms the high standard of prudential regulation and supervision described in the 2003 assessment; issues identified in 2003 have largely been addressed. - Supervisory practices: - GFSC conducts on‑site supervision supported by off‑site analysis; on‑site program emphasizes inspection of risk management procedures for AML/CFT and credit; thematic inspections also conducted. - On‑site visits followed by recommendations and close tracking of corrective action. - Legal and regulatory framework based on: - Financial Services Commission (Bailiwick of Guernsey) Law 1987 (FSC(G)L, as amended), - Banking Supervision (Bailiwick of Guernsey) Law 1994, as amended, - Banking Supervision (Bailiwick of Guernsey) Regulations 1994, - Codes of Practice for Banks, applicable Guidelines and Guidance Notes issued by the GFSC. - GFSC powers include requesting information, issuing directions, imposing licence conditions, appointing inspectors, revoking licences, and requesting courts to place banks in administration. - Fines for administrative matters cannot yet be imposed (though enabling powers exist in law at time of mission). ### Aggregate BCP compliance and selected principle gradings - Aggregate: Compliant (C) – 23, Largely compliant (LC) – 8, Materially noncompliant (MNC) – 0, Noncompliant (NC) – 0, Not applicable (N/A) – 0 - Selected principle gradings (verbatim where provided): - 1. Objectives, independence, powers, transparency, and cooperation — C - 1.1 Responsibilities and objectives — C - 1.2 Independence, accountability and transparency — C — GFSC Chairman appointed annually by the States. - 1.3 Legal framework — C - 1.4 Legal powers — C - 1.5 Legal protection — C - 1.6 Cooperation — C - 2. Permissible activities — C - 3. Licensing criteria — C - 4. Transfer of significant ownership — LC — Law does not provide GFSC power to review, object to and reject any proposal to transfer a “significant ownership” interest. - 5. Major acquisitions — LC — Regulations to define types and amounts of acquisitions/investments needing prior supervisory approval have yet to be tested. - 6. Capital adequacy — C - 7. Risk management process — C - 8. Credit risk — C - 9. Problem assets, provisions, and reserves — LC — No power to require banks to increase their levels of provisions. - 10. Large exposure limits — LC — Large discretion to banks in applying exemption from large credit limit of 25 % on large exposures to parents. - 11. Exposure to related parties — LC — No legal requirement that transactions with related parties receive prior board approval or be explicitly on market terms. - 12. Country and transfer risks — C - 13. Market risks — C - 14. Liquidity risk — C - 15. Operational risk — LC — Extent of outsourcing for administered banks should be reduced; no guidance on outsourcing requirements and legal risk in place at mission time. - 16. Interest rate risk in the banking book — C - 17. Internal control and audit — LC — Banks not required to have local internal audit; no explicit legal requirement for permanent compliance function. - 18. Abuse of financial services — C - 19. Supervisory approach — C - 20. Supervisory techniques — C - 21. Supervisory reporting — LC — Regulations permitting imposition of administrative fines had not been issued; prudential reports did not require “top management” certification at mission time. - 22. Accounting and disclosure — C - 23. Corrective and remedial powers of supervisors — C - 24. Consolidated supervision — C - 25. Home-host relationships — C ### Key selected recommendations and action plan (selected CP-specific) - CP1.2: Extend Chairman’s term of appointment to international norm. - CP4: Amend law so GFSC has power to review, object to and reject any proposal to transfer a “significant ownership” interest. - CP9: GFSC should have explicit authority to require banks to increase their levels of provisions. - CP10: Continue to restrict large limits of banks to their parents as exposures approach the 25 % large exposure limit. - CP11: Establish regulations requiring prior board approval for related‑party transactions and that related‑party exposures not be granted on more favourable terms. - CP15: Reduce extent of outsourcing for administered banks for essential functions; issue detailed guidance on outsourcing and legal risk. - CP17: Banking legislation should require banks to have a permanent internal audit and compliance function in place. - CP21: Issue regulations to permit administrative fines and require “top management” certification of prudential reports. ### Authorities’ response (verbatim excerpts) - CP1.2: GFSC will request an amendment to the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 to address IMF recommendation. - CP4: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation. - CP9: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation. - CP10: Commission revised the Principle and Guidance regarding large exposures for locally incorporated banks to satisfy the IMF’s recommendation. - CP11: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation. - CP15: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation on employment of sufficient individuals to cover essential functions. GFSC has issued an outsourcing guidance paper. - CP17: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation. - CP21: The Financial Services Commission (Administrative Financial Penalties) (Bailiwick of Guernsey) Regulations, 2010 came into force on 1 September and satisfy the IMF’s recommendation re administrative fines; Banking Supervision Regulations, 2010 satisfy requirement for top management certification of prudential reports. --- ### 2. Cooperation, supervisory powers, and specific principle excerpts ### Cooperation with home supervisors — practices and limitations - Numerous memorandums of understanding (MOU) with supervisors abroad have been signed; GFSC has signed Memoranda of Understanding with 17 other regulatory bodies. - Information is exchanged and regular visits to and from home supervisors are undertaken; GFSC meets UK FSA at least annually and Swiss FINMA annually. - Asymmetry: relationship with certain home regulators is asymmetric and can limit benefits GFSC derives from cooperation (examples cited from UK FSA and Icelandic FME during 2008 crisis). ### Transfer of significant ownership and Section 14 / Section 17 powers - Definitions and notification: - “Significant shareholder” (BSL ss23(2)): 5 per cent or more but less than 15 per cent of voting power. - “Shareholder controller” (BSL s56): 15 per cent or more of voting power. - Prior approval required for proposed “shareholder controller” or “indirect controller” (BSL ss14(1)); persons who become a “significant shareholder” must give notice within 14 days (BSL s23). - Supervisory powers: - GFSC may serve a notice of objection under ss14(3); GFSC did not have prior power to reject acquisition of “significant shareholder” status (<15%) at time of mission. - Section 6B(c) of the Banking Supervision (Bailliwick of Guernsey) Regulations 2010 (operation from 30 April 2010) provided GFSC the required powers; new provisions to be tested. - Section 17 restrictions on shares include voiding transfers, removing voting rights, withholding payments, and powers for the Court to order sale of specified shares; proceeds paid for the benefit of beneficial owners. ### Principle 5. Major acquisitions — practice and gaps - Licence conditions prohibit establishing branches outside the Bailiwick or investing to form subsidiaries/associates without GFSC written consent. - Laws/regulations did not precisely define types and amounts (absolute and/or in relation to capital) of proprietary acquisitions and investments requiring prior supervisory approval at mission time. - Exposures >25 per cent of capital base must be notified in advance; exposures >10% and <25% reported quarterly in arrears on form BSL/1/BSL/2. - Assessment: Largely Compliant. Section 6B(a)/(b) of 2010 Regulations expected to enable full compliance; provisions remain to be tested. ### Principle 6. Capital adequacy — approach and tools - Each incorporated bank’s licence imposes requirement to complete quarterly returns including computation of Risk Asset Ratio (RAR) against prescribed minimum. - Components of capital defined in GFSC returns and guidance; definition aligns with international requirements; almost all capital is Tier 1. - Under Basel I GFSC applied prescribed RARs between 10% and 16%; through Basel II specific capital charges for Pillar 2 risks set via SREP. - GFSC can impose specific capital charges/limits and has powers to demand remedial actions, including directions, licence conditions, appointing inspectors or revoking licence. - Assessment: Compliant. ### Principle 7. Risk management process and Section 36C obligations - Section 36C requires banks to carry out an annual review of board control over every aspect of risk management and the control environment; banks must report shortcomings immediately with remedial steps. - Banks must have comprehensive risk management processes commensurate with size and complexity; Code of Practice and Schedule 3 require adequate systems of control and records. - GFSC conducts SREP, reviews ICAAPs, on‑site visits, and requires board sign‑off of ICAAP submissions. - No banks in Guernsey using advanced regulatory approaches or economic capital models at time of mission; models permitted only with close home supervisor cooperation. - Assessment: Compliant. ### Principles 8–12 — Credit risk; provisioning; large exposures; related parties; country risk - Principle 8 (Credit risk): Banks submit credit modules (BSL/2) quarterly; ten largest exposures reported; on‑site credit reviews and prudential meetings. Assessment: Compliant. - Principle 9 (Problem assets, provisions and reserves): Schedule 3 requires adequate provisioning and annual review; GFSC did not have explicit power to require increased provisions at mission time. Assessment: Largely Compliant. Planned regulation amendments (Schedule 3, 6B(d) and 6B(e)) to introduce explicit powers and Board reporting requirements. - Principle 10 (Large exposure limits): 25% of capital limit with prior GFSC approval required; disclosure and reporting rules exist (10% and 25% thresholds). GFSC exercises discretion for parent exposures. Assessment: Largely Compliant. Revised Principles & Guidance to define consolidated limits. - Principle 11 (Exposures to related parties): Related exposures must be identified and reported; no explicit legal prohibition on more favourable terms or mandatory prior board approval at mission time. Assessment: Largely Compliant. Planned regulation to require prior board approval and arm’s length terms (amend Schedule 3 – 6B(g)). - Principle 12 (Country and transfer risks): Banks required to monitor and limit country exposures; locational reporting via LOC/1; GFSC may impose limits and contingency plans. Assessment: Compliant. ### Principles 13–16 — Market, liquidity, operational, IRRBB - Principle 13 (Market risk): Guidance and reporting forms exist; market risks included in ICAAP; Commission does not require stress testing and periodic validation at mission time. Assessment: Compliant. Recommendation: require stress testing and validation. - Principle 14 (Liquidity risk): Guidance on maturity analysis: Commission would not normally expect a maturity negative mismatch at one month of more than -20%. Transition to new liquidity regime aimed by end‑Q1 2010; board sign‑off on Liquidity Management Programmes required. Assessment: Compliant. - Principle 15 (Operational risk): Code requires internal audit, fraud controls, system security; thematic reviews on BCP and outsourcing conducted; many administered banks outsource essential functions—Assessment: Largely Compliant. Recommendation: reduce outsourcing of essential functions and require local staffing; GFSC to issue Outsourcing Guidance and amend Schedule 3 – 6C BSL. - Principle 16 (IRRBB): Quarterly IRRBB reporting module created; stress testing required annually as part of SREP; Commission monitors and applies Pillar 2 add‑ons. Assessment: Compliant. ### Principle 17 — Internal control and audit - Legal and supervisory expectations: Board responsible for internal controls; Schedule 3 requires adequate systems and annual Section 36C review. - Observed gap: Banking legislation did not explicitly require a permanent local internal audit or permanent compliance function at mission time; reliance on group internal audit common. - Assessment: Largely Compliant. Planned regulations to require internal audit/compliance locally or compliant outsourcing arrangements. ### Principle 18 — AML/CFT and customer due diligence - Handbook for Financial Services Business on Countering Financial Crime and Terrorist Financing sets standards; Regulation 3 required business risk assessments (submitted February 2008). - Regulation 15 requires policies, procedures and controls; Regulation 12 requires MLRO appointment and notification within fourteen days. - Enhanced CDD, PEP definitions, correspondent banking prohibitions with shell banks, training and reporting requirements detailed in Handbook. - GFSC carried out on‑site AML/CFT inspections; intends to review all banks AML/CFT systems against new Regulations and Handbook in less than three years. - Assessment: Largely Compliant. ### Principles 19–21 — Supervisory approach, techniques, reporting - Supervisory approach: - BD uses both on‑site and off‑site supervision, SREP, annual prudential meetings, risk grading (“high”, “medium”, “low”) driving visit frequency. - Licence conditions require no significant change in nature of business without prior consultation and immediate notification of material adverse developments. - Assessment: Compliant. - Supervisory techniques: - Consistent on‑site methodology, pro‑forma questionnaires, desk pre‑visit analysis, Exception Letters, follow‑up and peer review processes. - BD Procedures Manual, scheduling norms and record‑keeping practices in place. - Assessment: Compliant. - Supervisory reporting (Principle 21): - Required forms: MA/1, BSL/1, BSL/2, LOC/1; BSL/2 Basel II modules adopted from Q1 2008. - Returns require signature by a person “senior enough to commit the licensee”; external audit verification on a sample basis conducted in arrears. - At mission time GFSC had yet to set regulations to impose administrative penalties for late filing; top management certification of prudential reports not mandated then. - Assessment: Largely Compliant. Implementation of Section 6B of the 2010 Regulations expected to rectify omissions. ### Principles 22–24 — Accounting, corrective powers, consolidated supervision - Accounting and disclosure: - BSL Schedule 3 and Banking Supervision (Accounts) Rules, 1994 require audited accounts publicly available within three months, auditor’s report statements, and valuation rules for investments. - GFSC publishes aggregate banking system information quarterly; auditors must report certain matters to GFSC. - Assessment: Compliant. - Corrective and remedial powers (CP 23): - GFSC powers include imposing licence conditions (BSL s9), giving directions (s12), appointing inspectors (s27), revoking licences (s8), court applications for administration, and imposing financial penalties under FSC(G)L (s11D) up to £200,000. - RAR policy: if within 1 per cent of minimum GFSC engages management; can require capital injection, licence conditions, or revocation. - Assessment: Compliant. - Consolidated supervision (CP 24): - GFSC has legal powers (BSL ss25(5)–(8), s27) and practices to obtain group information, require consolidated reporting and measure capital on a consolidated basis. - Bilateral confirmations from overseas regulators required annually. - Assessment: Compliant. ### Principle 25 — Home‑host relationships and crisis experience - GFSC operates as host regulator; policy requires home supervisor confirmation before licensing a bank in Guernsey. - Good standing letters, regular meetings, MOUs in place; GFSC active in bilateral cooperation. - Shortcoming: asymmetry evident during mid‑September/early October 2008 crisis—GFSC did not receive timely warning of UK system‑wide support package announced 08 October 2008. GFSC initiatives included depositor disclosures, seeking periodic written statements from home supervisors, and restricting exposures to parents where warranted. - Assessment: Compliant, with noted practical limitations in crisis information flows. --- *Italic: IMF Staff Report excerpt (selected sections) from the assessment of the Guernsey Financial Services Commission (content unit: _cr1103).* ### 1. Summary of Compliance with the Basel Core Principles—Detailed Assessments .............11 ### 1. Summary of Compliance with the Basel Core Principles—Detailed Assessments ### Introduction and Methodology - Assessment undertaken as part of an IMF Financial Sector Assessment Program (FSAP) Update for Guernsey in 2010; mission visited Guernsey during March 2010. - Assessors: Peter Kruschel (BaFin) and Keith Bell (banking supervision consultant). - Basis of assessment: - Study of legal and regulatory framework. - Self-assessment prepared by the Guernsey Financial Services Commission (GFSC). - Detailed discussions with government representatives, GFSC, Association of Guernsey Banks (AGB), senior management of banks, and auditing firms. - Methodology: revised Core Principles Methodology issued October 2006 by the Basel Committee on Banking Supervision; qualitative assessment based on essential criteria only. - Rating definitions preserved as per methodology: “compliant”, “largely compliant”, “materially noncompliant”, “noncompliant”, and “not applicable”. ### Institutional and Macroeconomic Setting; Market Structure - Political and monetary context: - Guernsey is a British Crown Dependency (not part of the UK); has its own parliament, the States of Deliberation. - Uses the pound Sterling; in a customs union with the European Union (EU) for trade in goods. - Economic structure and key statistics: - Financial services accounted for nearly 40 percent of GDP (2008) and a quarter of total employment. - Real GDP growth averaged 2 percent over the last decade; relatively volatile and was negative in 2003 and 2005. - GDP growth for 2008 is provisionally estimated at 7.6 percent. - Current estimates for 2009: contraction in GDP of between 2 percent and 3 percent. - Unemployment rate 1.4 percent (noted as having doubled since mid-2007). - Retail price inflation was 2.2 percent for 2009. - Number of licensed banks fell from 54 in 2002 to 43 at 31 December 2009. - Taxation and competitiveness: - 2007 review: individual income tax rate retained at 20 percent. - Corporate income tax reduced from start of 2008 to zero, except: - traditional banking (lending) activities taxed at 10 percent; - utilities and property companies taxed at 20 percent. - No capital gains, wealth, inheritance or general sales taxes; residents subject to social security contributions. - Corporate tax regime under review; a uniform 10 percent rate contemplated. - Guernsey has signed 15 Tax Information Exchange Agreements (TIEAs); minimum is 12. - GFSC mandate and resources: - GFSC responsible for regulation and supervision of all financial institutions and services (exceptions: consumer credit and pensions). - Statutory mandate includes effective supervision and countering financial crime. - Funded by fees on the industry; currently has over 100 staff. - GFSC enjoys considerable independence; FSC(G) L amended in 2009 to remove “development of the financial services industry” as a function and to clarify Policy Council instruction powers. - GFSC chairman appointed for a one-year term. ### Financial Sector Structure and Condition - Sector composition and activities: - Main financial services: banking, insurance (particularly captive insurance), trust and company services related mainly to non-retail collective investment schemes (CIS). - Banking sector principal business: collection of retail deposits from overseas, placed with parent banks. - 69 percent of banks’ total assets are exposures to parents. - Limited commercial lending, mainly to domestic borrowers. - Trends and complexity: - Accelerating trend away from retail business toward private banking and services to high net worth individuals and institutional fund/securities services. - Limited treasury, trading or capital markets business on the island. - Aggregate balance-sheet and prudential metrics: - Capital adequacy ratios (CAR) average 19 percent as of September 2009, up from 15 percent at the end of 2008. - Almost all bank capital is in the form of Tier 1 instruments. - Aggregate capital to asset ratio (the inverse of the leverage ratio) has remained below 2 percent in recent years. - Profitability described as comfortable, possibly reflecting transfer pricing by parent institutions. ### Crisis Events and Authorities’ Response - Notable failures and impacts: - 2007: Intervention in Northern Rock (UK-based bank with Guernsey subsidiary); UK blanket guarantee for Northern Rock extended to Guernsey liabilities; UK government subsequently took the bank into public ownership. - Late 2008: Guernsey subsidiary of Landsbanki (Icelandic group) placed in administration; some 1,600 depositors had £120m on deposit; recoveries to date have amounted to around 70 percent. - Other impacts from problems of U.K. building societies with operations on the island. - Regulatory response: - GFSC strengthened oversight of banks’ exposure to parents: - Disclosure requirements to inform depositors on exposure to parents. - Exposure limits set individually by bank. - Contingency planning for problems at the parent. - Depositor compensation scheme introduced from November 2008. ### Preconditions for Effective Supervision - Macroeconomic and legal preconditions: - Macroeconomic performance generally satisfactory: low unemployment; satisfactory trend growth and inflation. - Legal system broadly based on common law with French and Norman elements; courts reportedly able to act quickly in financial matters. - High-quality accountancy, audit, legal, and ancillary financial services available on the island. - Guernsey is not an EU member state and voluntarily adopts international standards (e.g., Basel Committee standards); has implemented EU Savings Directive information exchange and withholding tax. - Depositor compensation scheme specifics: - Covers deposits, mainly from retail depositors, wherever located, up to £50,000 per person. - Scheme is not funded, although it has government guaranteed liquidity back-up. - Aims to pay compensation within three months of a bank failure. - Maximum total amount of compensation capped at £100 million in any five year period. - Funding to be provided by banks through annual charges and special charges in the event of a bank failure. - Comparison note: GBP 1.2 billion in deposits covered by the scheme — i.e., amounts under GBP 50,000. ### Main Findings on Supervision and Compliance - Overall assessment: - The BCP assessment confirms the high standard of prudential regulation and supervision described in the 2003 assessment. - Issues identified in 2003 have largely been addressed. - Supervisory practices: - GFSC conducts a program of on-site supervision, supported by off-site analysis. - On-site program emphasizes inspection of licensees’ risk management procedures for AML/CFT and credit; other thematic inspections are also conducted. - On-site visits are followed up with recommendations and close tracking of corrective action. - Legal and regulatory framework: - Framework of minimum prudential standards provided by: - Financial Services Commission (Bailiwick of Guernsey) Law 1987 (FSC(G) L, as amended), - Banking Supervision (Bailiwick of Guernsey) Law 1994, as amended, - Banking Supervision (Bailiwick of Guernsey) Regulations 1994, - Codes of Practice for Banks, applicable Guidelines and Guidance Notes issued by the GFSC. - GFSC responsibilities and powers: - Main responsibilities include supervision of financial services, reducing public risk from financial unsoundness or mismanagement, protecting and enhancing the island’s reputation, promoting the island’s economic interests, and countering financial crime. - GFSC is broadly adequately resourced and perceived to act with rigor and expertise. - Disciplinary powers include requesting information, issuing directions, imposing license conditions, appointing inspectors, revoking licenses, and requesting courts to place banks in administration. - Fines for administrative matters (e.g., late supervisory returns) cannot yet be imposed, though enabling powers exist in law. - Performance under stress: - Authorities faced two major challenges from problems elsewhere that transmitted quickly to entities operating in Guernsey and led to failures. - Subsequent reviews of GFSC performance under stress have been favorable. *Source: _cr1103 - 1. Summary of Compliance with the Basel Core Principles—Detailed Assessments .............11* ### 28. The GFSC cooperates with the home supervisors of institutions active on the ### 28. The GFSC cooperates with the home supervisors of institutions active on the island ### Cooperation with home supervisors and practical limitations - Numerous memorandums of understanding (MOU) with supervisors abroad have been signed to address both on-going supervision and information exchange. - Information is exchanged, and regular visits to and from the home supervisors are undertaken, including for the purpose of on-site supervision. - Asymmetry in the relationship between the GFSC and certain “home” regulators severely limits the benefit that the GFSC can draw from cooperation with them. ### Broad areas for further action (legislative and practical) - These require primary or secondary legislative changes and the latter’s consequent practical application. - Specific areas identified: - CP 4 “Transfer of significant ownership”: GFSC should be given power to review and, if necessary, rescind, transfers of controlling interests in licensed banks. - CP 5 “Major acquisitions”: A similar power for the GFSC is required. - CP 9: GFSC should have the explicit power to require that a bank increase its level of provisioning and, if necessary, its overall financial strength. - CP 10 and CP 11: Large exposure limits (CP 10) should be applied on a consolidated basis; all transactions with banks’ related parties should receive prior board approval and be on market terms (CP 11), given related party lending that characterizes several major participants’ business models. - CP 21 Supervisory reporting: Imposition of a requirement for senior level certification and capacity for the GFSC to impose administrative penalties for tardy reporting would be beneficial. - CP 1(2): Consider amending GFSC governing statute to increase the term of office of its chairman from the current one year period to a term consistent with international practice. - The Banking Supervision (Bailiwick of Guernsey) Regulations 2010, which came into operation on April 30, 2010, together with contemplated amendments to the GFSC’s Codes of Practice, have been designed to address areas identified in (i) through (v). ### Summary of compliance with the Basel Core Principles (aggregate and key gradings) - Aggregate: Compliant (C) – 23, Largely compliant (LC) – 8, Materially noncompliant (MNC) – 0, Noncompliant (NC) – 0, Not applicable (N/A) – 0 - Selected principle gradings and comments (verbatim where provided): - 1. Objectives, independence, powers, transparency, and cooperation — C - 1.1 Responsibilities and objectives — C - 1.2 Independence, accountability and transparency — C — GFSC Chairman appointed annually by the States. - 1.3 Legal framework — C - 1.4 Legal powers — C - 1.5 Legal protection — C - 1.6 Cooperation — C - 2. Permissible activities — C - 3. Licensing criteria — C - 4. Transfer of significant ownership — LC — Law does not provide GFSC power to review, object to and reject any proposal to transfer a “significant ownership” interest. - 5. Major acquisitions — LC — Law requires the GFSC to be consulted prior to a major change in business focus. Regulations to define types and amounts (absolute and/or in relation to capital base) of acquisitions and investments needing prior supervisory approval (or ex poste notification) and to provide criteria to assess proposals have yet to be tested. - 6. Capital adequacy — C - 7. Risk management process — C - 8. Credit risk — C - 9. Problem assets, provisions, and reserves — LC — No power to require banks to increase their levels of provisions. - 10. Large exposure limits — LC — Large discretion to banks in applying exemption from large credit limit of 25 % on large exposures to parents. - 11. Exposure to related parties — LC — No legal requirements that: (a) transactions with related parties subject to prior approval by the bank's board; and (b) that exposures to related parties explicitly may not be granted on more favourable terms. - 12. Country and transfer risks — C - 13. Market risks — C - 14. Liquidity risk — C - 15. Operational risk — LC — The extent of outsourcing regarding the administered banks should be reduced and not cover essential functions as risk management. No guidance on the requirements of outsourcing and legal risk in place. - 16. Interest rate risk in the banking book — C - 17. Internal control and audit — LC — Banks are not required to have internal audit function in place; the GFSC relies on the group audit systems. Banking legislation does not explicitly require banks to have a permanent compliance function. - 18. Abuse of financial services — C — Main relevant rules are covered in the Handbook. - 19. Supervisory approach — C - 20. Supervisory techniques — C - 21. Supervisory reporting — LC — Regulations permitting the imposition of administrative fines have not been issued. Prudential reports do not require “top management” certification. - 22. Accounting and disclosure — C - 23. Corrective and remedial powers of supervisors — C - 24. Consolidated supervision — C - 25. Home-host relationships — C ### Recommended action plan (selected CP-specific recommendations) - CP1.2: Extend Chairman’s term of appointment to international norm. - CP 4: Amend law so GFSC has power to review, object to and reject any proposal to transfer a “significant ownership” interest. - CP 9: Commission should get authorisation to require banks to increase their levels of provisions. - CP 10: The Commission should continue to restrict large limits of banks to their parents in relation to their own capital approaching the 25 % limits to all banking exposures. - CP 11: Establish regulations that require transactions with related parties to be subject to prior approval by the bank's board; legislation should be introduced that exposures to related parties explicitly may not be granted on more favourable terms. - CP15: The extent of outsourcing regarding the administered banks should not cover essential functions as risk management. The GFSC should stipulate detailed guidance on the requirements of outsourcing and continue its work on Guidance on legal risks. - CP 17: The banking legislation should require banks to have a permanent internal audit and compliance function in place. - CP21: Issue regs. to permit administrative fines. Require “top management” certification of prudential reports. ### Authorities’ response to the assessment (verbatim responses) - CP1.2: The Guernsey Financial Services Commission will request an amendment to the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 to be amended in order to address the IMF’s recommendation - CP4: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation - CP9: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation - CP10: The Commission revised the Principle and Guidance to be followed by the locally incorporated banks regarding large exposures in order to satisfy the IMF’s recommendation - CP11: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation - CP15: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation on the employment of sufficient individuals to cover essential functions. The Guernsey Financial Services Commission has also issued an outsourcing guidance paper which satisfies the IMF’s recommendation on outsourcing. With reference to the IMF’s recommendation on legal risk, the GFSC is, as recommended, continuing its work on legal risk. - CP17: The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation - CP21: The Financial Services Commission (Administrative Financial Penalties) (Bailiwick of Guernsey) Regulations, 2010 came into force on 1 September and satisfy the IMF’s recommendation in relation to the imposition of administrative fines. The Banking Supervision (Bailiwick of Guernsey) Regulations, 2010 came into force on 30 April 2010 and satisfy the IMF’s recommendation in relation to the prudential reports of banks being required to have “top management” certification ### Detailed assessment — Principle 1 (excerpt) - Principle 1 description (verbatim): "An effective system of banking supervision will have clear responsibilities and objectives for each authority involved in the supervision of banks. Each such authority should possess operational independence, transparent processes, sound governance and adequate resources, and be accountable for the discharge of its duties. A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking establishments and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place." - Principle 1(1) Responsibilities and objectives — Description (verbatim): "Responsibilities of the Guernsey Financial Services Commission (the “Commission” or “GFSC”) are established in the Financial Services Commission (Bailiwick of Guernsey) Law 1987 (the “FSC(G)L”) and related statutes (as amended), including the Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “BSL”). The FSC(G)L sets out the GFSC’s general functions. Inter alia, these require the GFSC: 1. to take such steps as it considers necessary or expedient for effective supervision of finance business in the Bailiwick; and" *Italic: IMF Staff Report excerpt (selected sections) from the assessment of the Guernsey Financial Services Commission.* ### 2. to counter financial crime (as defined) and of the financing of terrorism; ### _cr1103 - 2. to counter financial crime (as defined) and of the financing of terrorism; ### Prudential and AML/CFT framework - The Bailiwick’s minimum prudential standards are provided by the BSL, Guidance Notes, Codes and Regulations, including: - The Banking Supervision (Bailiwick of Guernsey) Regulations 1994 as amended; - Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing; - Code of Practice for Banks 2003; - Principle 1/1994/24 on large exposures; - Guidance on verification of prudential returns; - Guidance on trilateral discussions (March 1997); - Guidance issued under s1(a) and s1(b)(ii) of the Accounts Rules; - Guidance on prudential and statistical returns; - Code of Conduct on deposit advertisements; - Principles of conduct of finance business; - Principles of conduct of derivatives business; - Guidance on corporate governance; - Guidance on Basel II implementation; - Principles for the Management of Credit Risk; - The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended; - The Transfer of Funds (Guernsey/Alderney/Sark) Ordinance, 2007; - Guidance on Liquidity Risk Management 2009; - Implementation Paper on Upstreaming 2009. - The BSL (1994) has been amended several times, most recently in 2008. The minimum criteria for licensing set out in Schedule 3 were amended and came into force on 23 January 2008. - Regulated entities must produce audited accounts that are publicly available. Sector statistics are publicized at least quarterly and reported to BIS, IMF CPIS, and the Bank of England. Detailed quantitative information on financial strength and performance is not regularly published. - Assessment: Compliant. - Comment: GFSC published an Implementation Paper on Upstreaming in November 2009; provisions came into force in January 2010, requiring Guernsey‑incorporated banks to notify depositors that “upstreaming” occurs and to advise depositors to satisfy themselves of the parent’s ability to enable repayment. ### Independence, accountability and transparency of the GFSC - Legal and governance arrangements: - GFSC is a body corporate established by statute with between five (5) and seven (7) Commissioners (FSC(G)L; Schedule 1; Sec. 1). - Chairman is nominated by the Policy Council and elected annually by the States; current incumbent has served as Chairman since January 2006. - Commissioners appointed for periods not exceeding three years; eligible for re-appointment (Commissioners generally serve for two periods); mandatory retirement age 72. - Chairman may declare a Commissioner’s office vacant for specified reasons, including absence from three (3) consecutive meetings without consent, insolvency, incapacitation, or inability/unfitness to discharge functions. - Policy Council may give written guidance or directions of a general character (ss. 7(1)(2)(2A)), subject to publication and public‑interest constraints; the Policy Council has never given such written guidance or directions. - Senior executive: - Director‑General (D‑G) is the most senior executive (FSC(G)L; s11). Present incumbent has a term from 30 June 2009 through 31 December 2012 and may be dismissed by the Commission only for specified causes including absence from three (3) consecutive meetings, insolvency, incapacitation, or inability/unfitness. - Reporting, audit and transparency: - GFSC Annual Report is laid before the States each year and is available free of charge on the GFSC’s website; the Report details financial information and approach to topical issues and results of activities. - GFSC is audited annually by external auditors and undergoes internal audit by a separate external audit firm. - Assessment: Compliant. - Comment: Annual legislative renewal of the Chairman’s mandate is at variance with international standards and merits review despite repeated renewals. ### Resources, staffing and operational capabilities (Banking Division - BD) - Staffing and skills: - BD budgetary staff allocation: 12 people (increased to 13 in 2010). - Staff composition: Director, Deputy Director, two Assistant Directors, four Senior Analysts, two Analysts and two administration staff. - Of the twelve current staff, four have been GFSC employees for more than five years, eight are graduates, and one has a professional qualification. - Director and Deputy Director have extensive senior banking supervision experience in offshore jurisdictions and international organizations. - BD has an annual staff training program reviewed twice yearly. - Budget and funding: - GFSC is funded by fees paid by the finance sector under the Financial Services Commission (Fees) Regulations. - Management considers the BD budget (approx. £1mn in 2009) adequate for the current complement. - Commission is consulting to make all divisions self‑sufficient; this would require banking fees to increase by some 70%. - Salary levels are competitive with the finance sector; external consultancy used to benchmark pay annually. - GFSC may supply exceptional budgetary needs subject to a business case; GFSC may borrow under FSC(G)L (s15) subject to borrowing limits (aggregate outstanding principal by way of monies borrowed must not exceed one third of the GFSC’s fee income for the preceding calendar year). - IT and infrastructure: - BD draws on GFSC central IT resource; GFSC IT budget adequate with four IT staff in Operations Division. - GFSC subscribes to databases (World‑Check, Lexis‑Nexis Companies House, SIS) for monitoring and intelligence. - Major project underway to upgrade software facilities: electronic archiving, cross‑divisional licensee referencing, electronic invoicing. - Travel and international engagement: - BD travel budget supports visits to parental companies and home regulators; attends OGBS twice yearly, ICBS biennially, Basel Cross Border Banking Resolution Group; regularly meets FSA and other regulators. - Assessment: Compliant. ### Legal framework, supervisory powers and protections - Legal framework and instruments: - BSL specifies GFSC responsibility for granting and revoking banking licences (BSL:s6; s8); appeal to Royal Court (BSL:s18). - GFSC may introduce codes, guidance, principles and rules under BSL (ss36A(1)) without changing primary law. - GFSC policy: proposed rules/regulations/codes subject to public consultation; must publish regulations, rules, codes and guidance (FSC(G)L:s11A(a)). - Examples of consultation: Basel II implementation, Guidance on Liquidity Risk Management 2009, Implementation Paper on Upstreaming 2009. - Supervisory powers: - GFSC can obtain information and documents and enter premises (BSL:s25) and banks provide monthly and quarterly prudential and statistical returns and inform GFSC of material adverse developments. - GFSC has unfettered and routine access to banks’ files, conducts on‑site file reviews and Board/senior management access. - Remedial actions: impose licence conditions (BSL:s9), give directions (BSL:s12), appoint inspectors (BSL:s27), revoke licences (BSL:s8). - Examples provided of substantive remedial action on multiple licensees. - Legal protection for supervisors: - FSC(G)L (s22) provides that no member, officer or servant of GFSC is personally liable in civil proceedings for acts done or omitted in discharge of functions unless done in bad faith. - GFSC meets legal defense costs for staff acting in good faith. - Assessment: Compliant. ### Cooperation and information sharing - Domestic cooperation: - GFSC shares information with government committees, police, customs and excise, Financial Intelligence Service (FIS); regular meetings held via Bailiwick AML/CFT Advisory Committee and Financial Crime Group; Guernsey Terrorist Finance Team includes GFSC, customs and excise, police Special Branch, Attorney General’s office. - International cooperation: - Regular meetings at least annually with UK FSA; annual meetings with Swiss FINMA; OGBS annual meetings; formal bilateral meeting with Bermuda; ICBS biennial meeting includes other international supervisors. - GFSC executives have visited home supervisors and central banks where required (e.g., Iceland July 2008; Cyprus, Greece, Ireland 2009). - GFSC has signed Memoranda of Understanding (MOUs) with 17 other regulatory bodies. - GFSC has signed two EC Multi-lateral Cooperation and Coordination Agreements (MCCs) as condition to attend college meetings for two EU‑headquartered banks and intends to sign other MCCs as required. - Information disclosure regime: - BSL (s43) restricts disclosure of information; unlawful disclosure is an offence. - BSL (s44) and FSC(G)L (s21) permit disclosure of bank information in specified circumstances if GFSC satisfied information requested only for proper supervisory functions and will be treated confidentially. - Standard wording used when sharing information: indicates confidentiality, reliance on s.21 of FSC(G)L, and restricts further dissemination without written consent; use confined to supervisory purposes. - Assessment: Compliant. - Comment: GFSC notes asymmetry of information and seeks to improve home/host information flow through OGBS and Basel Cross‑Border Banking Resolution Group; Commission has written to FSA CEO with suggestions. ### Permissible activities and use of “bank” title - Definition and scope: - The term “bank” is not explicitly defined in BSL or FSC(G)L; scope is determined by “deposit‑taking business” (BSL s1, s2, s3). - “Deposit” defined generically as a sum of money paid on terms under which it will be repaid, with or without interest. - “Deposit‑taking business” defined in BSL s3(1)(a),(b) and exceptions in s3(2). - Controls on use of the word “bank”: - BSL (s37) prohibits persons other than licensed institutions (or those with permission) from describing themselves as a bank or using names indicating banking unless licensed or permitted; use of ‘bank’ in a name is referred to BD for permission. - GFSC publishes a list of licensed institutions annually (La Gazette Officielle) and maintains a current list on GFSC website. - Permissible activities of licensed institutions: - Effectively: (i) taking deposits and (ii) lending monies raised thereby; GFSC licences do not specify particular activities per bank as is common in some other jurisdictions. - Assessment: Compliant. ### Licensing criteria, fitness and propriety, and supervisory oversight - Licensing authority powers and criteria: - GFSC responsible for licensing and supervision; BSL Schedule 3 sets minimum criteria for licensing and continuous observance; amendments effective 23 January 2008. - BSL (s6(2)) requires GFSC be satisfied that Schedule 3 criteria are fulfilled for applicant, directors, controllers, managers. - Minimum capital requirement stipulated in BSL (s36B) at L1million “or such other sum as the Commission may by regulation prescribe”; no such regulation has been made. - Fit and proper tests and documentation: - Schedule 3 para. (1)-(4) sets detailed fit and proper considerations (probity, competence, diligence, depositor interests, qualifications, AML/CFT compliance references (various laws), prior conduct, offences, business conduct). - All managers, directors, money laundering reporting officers and company secretaries must complete personal questionnaire form PQ; PQ renewable every five years. - Application requires group structure diagram, resume of parent organisation, beneficial owner details (not required for holdings <5% or traded on Recognised Stock Exchange), names/addresses of senior officers, Guernsey resident managers, latest audited accounts of parent and ultimate parent, three‑year pro forma financial projections, business plan with operational structure, internal controls, risk management, AML/CTF procedures. - Licence applications undergo inter‑divisional assessment committee review; divisional directors must unanimously agree and sign off. - Home supervisor involvement: - GFSC requires home country supervisor’s prior consent before granting a banking licence and seeks assurances that home supervisor will take into account Guernsey transactions and consolidated prudential soundness of the group. - Corporate governance responsibilities: - GFSC does not permit banks to pursue activities where no director has sound knowledge; BSL (36C) requires annual review of activities for directors’ sound knowledge and immediate reporting of deficiencies. - Assessment: Compliant. ### Transfer of significant ownership and control - Definitions and notification requirements: - “Significant shareholder” defined (BSL ss23(2)) as person alone or with associates entitled to exercise, or control exercise of, 5 per cent or more but less than 15 per cent of voting power. - “Shareholder controller” defined (BSL s56) as person alone or with associates entitled to exercise, or control exercise of, 15 per cent or more of voting power. - Prior approval required for proposed “shareholder controller” or “indirect controller” (BSL ss14(1)): “No person shall become a shareholder controller or an indirect controller … unless he has notified the Commission in writing … and the Commission has notified him in writing that there is no objection.” - Persons who become a “significant shareholder” must give notice in writing within 14 days of the event (BSL s23). - Supervisory powers to object: - GFSC may serve notice of objection under ss14(3) if not satisfied that person is fit and proper, depositor interests not threatened, or Schedule 3 criteria would continue to be fulfilled given the person’s likely influence. - GFSC does not have prior power to reject acquisition of “significant shareholder” status (5%–<15%), but does have prior approval power to reject becoming a “shareholder controller” (>=15%). - Monitoring: - Shareholders of Guernsey‑incorporated banks identified in annual audited accounts and discussed at BD prudential meetings; changes in publicly‑traded parents are transparent and notified. - Statutory powers for unapproved control change: - BSL (ss16 and 17) provides powers for action where change of control occurs without GFSC approval. - Assessment: Compliant. *Source: _cr1103 - 2. to counter financial crime (as defined) and of the financing of terrorism;* ### Section 14(1); or ### _cr1103 - Section 14(1); or ### Offences and notification requirements - A person who becomes, or continues to be, a controller after a notice of objection under Section 14 or 15 is guilty of an offence unless: - in the case of an offence under paragraph (a) he shows that he was not aware of the acts or circumstances by virtue of which he became a controller of the description in question; but - in such a case he shall be guilty of the offence if he fails to give the Commission notice in writing of the fact that he has become a controller of the description in question within a period of 14 days immediately following the day on which he becomes so aware. ### Restrictions on sale of shares (Section 17) - Scope and exercise: - Powers apply where a person has become a shareholder controller in contravention of Section 14(1) or has become or continued to be such a controller after a notice of objection under Section 14 or 15. - The Commission may serve a written notice directing that specified shares be, until further notice, subject to any of the following restrictions: - (a) any transfer of, or agreement to transfer, those shares or, in the case of unissued shares, any transfer of, or agreement to transfer, the right to be issued with them, shall be void; - (b) no voting right shall be exercisable in respect of those shares; - (c) no further shares shall be issued in right of them or in pursuance of any offer made to their holder; - (d) except in a liquidation, no payment shall be made of any sum due on the shares from the licensed institution, whether in respect of capital or otherwise. - Court powers and timing: - The Court, on application of the Commission, may order the sale of any specified shares and may order that restrictions under subsection (2) cease to apply. - No order under subsection (3) shall be made where a notice of objection has been served under Section 14 or 15: - (a) until the end of the period within which an appeal can be brought against the notice of objection; - (b) if such an appeal is brought, until the appeal is determined or withdrawn. - The Court may make further orders relating to sale or transfer as it thinks fit. - Proceeds and beneficiaries: - Where shares are sold pursuant to an order, the proceeds of sale, less the costs of the sale, shall be paid to Her Majesty's Sheriff for the benefit of the persons beneficially interested in them; any such person may apply to the Court for an order for the whole or part of the proceeds to be paid to him. - Application breadth: - This section applies: - (a) to all shares in the licensed institution of which the person in question is a controller of the relevant description which are held by him or any associate of his and which were not so held immediately before he became such a controller of that institution; - (b) where control resulted from acquisition of shares in another body corporate, to all shares in that body corporate which are held by him or any associate of his and which were not so held before he became such a controller of that licensed institution. - Notice service: - A copy of the notice served under subsection (2) must also be served on the licensed institution or body corporate to whose shares the notice relates and, if relating to shares held by an associate, on that associate. ### Assessment - Principle on supervisory powers over transfers and controllers - Overall assessment: Largely Compliant - Key findings and context: - The Principle requires supervisor power to review, object to and reject proposals to transfer (i) significant ownership or (ii) controlling interests. - At time of mission on-site work, GFSC had required power for controlling interests but not for significant ownership transfers. - Section 6B(c) of the Banking Supervision (Bailliwick of Guernsey) Regulations 2010, which came into operation on 30 April 2010, provided the GFSC the required powers. The mission did not discuss the proposals that resulted in those legislative changes. The new provisions remain to be tested. ### Principle 5. Major acquisitions - Principle summary: - Supervisor must have power to review major acquisitions or investments by a bank against prescribed criteria, including cross-border operations, and confirm corporate affiliations do not expose the bank to undue risks or hinder supervision. - Description of GFSC practice and rules: - Licence condition on every bank: - “should not establish a branch outside the Bailiwick or invest in any company, which after such investment would be a subsidiary, associate or joint venture without the prior consent in writing of the Commission.” - Terms “subsidiary” and “associate” are defined in the BSL (s 56); “joint venture” is not defined. - The BD undertakes periodic surveys requiring banks to disclose the name and activities of subsidiaries (last survey in 2008 revealed only one non-reported subsidiary). - Information on subsidiaries, associates and joint-ventures also sought from notes to banks’ audited accounts. - Laws/regulations do not precisely define types and amounts (absolute and/or in relation to a bank’s capital) of proprietary acquisitions and investments requiring prior supervisory approval. - If “exposure” is interpreted to mean all claims and transactions, a bank may not incur an exposure to an individual counterparty which exceeds 25 per cent of the bank’s capital base without prior reference to the GFSC. - Neither laws nor regulations provide precise criteria by which to judge individual proprietary acquisitions and investments proposals. - Licence condition also: “there shall be no significant change in the nature of the business conducted without prior consultation with the Commission;” - GFSC relies on relationships with licensed institutions and prior consultation to determine whether proposals would maintain minimum licensing criteria (BSL; Sched.3) or warrant formal license conditions or prohibition. - GFSC can refuse written consent where acquisition/branch establishment would breach minimum criteria, e.g., secrecy jurisdiction concerns or inappropriate investments (example: objection to acquisition of a general partner stake in a specialist investment fund). - When prior consultation occurs, proposals are considered by BD’s Assessment Committee; required submission: - “a summary of analysis of the effect of the proposal on the bank (or banks in the case of amalgamation), detailing the pre- and post-event position of the bank, including a summary of changes to ownership, capital, management and business plan.” - Exposures over 25 per cent of the capital base must be notified to the GFSC in advance. - Para 10 of Principle 1/1994/24 states: - “If an exposure which exceeds 25% of capital base has been entered into without prior notification to the Commission notification must be made within two working days of entering such an exposure. A bank would not be expected to enter such exposures without notification unless the nature of the business is such that prior notification would be commercially disadvantageous but it would be expected that such possible circumstances are discussed with the Commission and outlined in the bank’s large exposures policy.” - Large credit exposures of more than 10 per cent and less than 25 per cent of a bank’s capital base are reported quarterly in arrears on form BSL/1 for subsidiaries and BSL/2 for branches. - As a unitary regulator the GFSC also licences other non-bank financial activities; material adverse findings circulate via Heads of Divisions meetings; action against a firm within a group is communicated to other relevant Divisions. - Assessment: Largely Compliant - Comments: - Under 2006 BCP methodology, Principle 5’s emphasis is on existence of prescribed criteria against which supervisor assesses actions. First Essential Criterion: “Laws or regulations clearly define what types and amounts (absolute and/or in relation to a bank’s capital) need prior supervisory approval”. - In Guernsey direct exposure of banks to asset price risk is minimal; most licensees are parts of larger groups and decisions on acquisitions are normally taken at group level and subject to home supervisor review. Application of Principle 5 to Guernsey is limited. - Section 6B(a) and (b) of the Banking Supervision (Bailliwick of Guernsey) Regulations 2010 (in operation from 30 April 2010) should enable the Criteria to be met in full. The mission did not discuss the proposals that resulted in those legislative changes. The new provisions remain to be tested. ### Principle 6. Capital adequacy - Principle summary: - Supervisors must set prudent and appropriate minimum capital adequacy requirements reflecting risks banks undertake and define components of capital; for internationally active banks requirements must not be less than applicable Basel requirements. - Description of GFSC approach: - Each incorporated bank’s licence imposes requirement to complete specified quarterly returns including computation of actual risk asset ratio (RAR) against prescribed minimum. - Components of capital are defined in the GFSC quarterly prudential return (BSL/1) and Guidance to Prudential and Statistical Returns. - Definition of capital aligns with international requirements. In practice almost all bank capital in Guernsey is “Tier 1” (equity or reserves); there is some “Tier 2” subordinated debt. - Calculation method follows Basel Committee. For Basel I, GFSC applies prescribed RARs between 10% and 16%. - GFSC has power to impose specific capital charges and/or limits on all material risk exposures. BSL (Sched.3 ss6(2)) states requirements that an institution maintain a capital base: - (a) commensurate with nature and scale of operations; and - (b) of an amount and nature sufficient to safeguard interests of depositors and potential depositors, having regard to factors in sub-paragraph (3) and any other relevant factors. - Sub-paragraph (3) factors: - (a) the nature and scale of the institution’s operations; and - (b) the risks inherent in those operations and in operations of any other institution in the same group so far as capable of affecting the institution. - Through Basel II, specific capital charges are being made for bank specific risks identified through the Supervisory Review and Evaluation Process (SREP). - Under Basel I, RARs were set based on GFSC’s perception of a bank’s risk profile from prudential meetings, regulatory returns, meetings with home regulator and group strength; internally challenged and summarised via risk rating methodology. - Off-balance sheet exposures are captured through regulatory returns and factored into RAR. - Under Basel II, a RAR is set referencing current Basel I absolute level of capital and Basel 1 RAR, with detailed breakout of bank specific Pillar 2 risks. - For off-balance sheet exposures, Basel I applied a charge for committed undrawn facilities in Pillar 1; GFSC applies an automatic Pillar 2 charge for undrawn uncommitted facilities. - Peer group analysis is applied for consistency under both Basel I and Basel II. - Given potential for off-balance sheet exposure, litigation and operational risk in many Guernsey banks (private banking operations), all banks have a RAR above the Basel minimum. - A bank falling below its prescribed minimum RAR raises questions about meeting minimum licensing criteria (BSL: Sched.3, para. 6). GFSC corrective measures include issuance of directions (BSL:s12), imposition of license conditions (s9; BSL), appointing reporting accountants or inspectors; ultimately revocation of licence if criteria are not fulfilled. Breaching a licence condition is an offence (BSL:ss9(5)). No bank has ever breached its RAR. - Under the FSC(G)L, GFSC may impose discretionary financial penalties and issue public statements: - “11D. (1) Where the Commission is satisfied that a licensee, former licensee or relevant officer - (a) has contravened in a material particular a provision of, or made under, the prescribed Laws, or (b) does not fulfil any of the minimum criteria for licensing specified in the regulatory Laws and applicable to him, it may, subject to the provisions of Section 11E, impose on him a penalty in respect of the contravention or non-fulfilment of such amount not exceeding £200,000 as it considers appropriate.” - Example action: In 2008 GFSC demanded distressed assets be transferred from the balance sheet of a Guernsey-incorporated bank to that of its parent to preserve subsidiary’s capital position; demand was met within a month. - All Guernsey-incorporated banks use standardised approaches. GFSC stands ready to address model use; lack of credit default history, limited book sizes and limited critical mass suggest model use will be very limited. - Assessment: Compliant ### Principle 7. Risk management process - Principle summary: - Supervisors must be satisfied that banks have comprehensive risk management processes (including Board and senior management oversight) to identify, evaluate, monitor and control/mitigate material risks and to assess overall capital adequacy relative to risk profile; processes should be commensurate with size and complexity. - Description of GFSC requirements and practice: - Code of Practice for Banks (section 36A of BSL), paragraph 7: banks should have comprehensive risk management processes to identify, measure, monitor and control material risks; processes must be adequate for size and nature of activities and periodically adjusted in light of changing risk profile and external market developments; include appropriate board and senior management oversight. - Section 36C of the BSL requires banks to carry out an annual review whether there has been effective control by the board over every aspect of risk management and control environment. - As a condition of licence, banks must immediately report any shortcomings or deficiencies to the Commission with proposed remedial steps. - The Commission requires sight of annual reviews and requires them to be signed off by the board of directors or senior management of a branch. - Schedule 3 paragraph 6 of the BSL states a bank shall not be regarded as conducting its business in a prudent manner unless it maintains adequate systems of control of its business and records. - Local banks benefit through adoption of group wide risk management policies and processes. - The Commission undertakes on-site visits assessing risk management policies and processes in detail. The SREP involves a detailed examination of a firm’s ICAAP. *Source: _cr1103 - Section 14(1); or* ### Section 36C of the BSL requires banks to carry out an annual review whether there has ### _cr1103 - Section 36C of the BSL requires banks to carry out an annual review whether there has ### Legal and licence requirements - Section 36C of the BSL requires banks to carry out an annual review whether there has been effective control by the institution’s board of directors over every aspect of risk management and of the bank’s control environment. - As a condition of their licence, banks are required to immediately report any shortcomings or deficiencies to the Commission together with the steps they propose to take to rectify the position. - The Commission requires sight of these annual reviews and requires them to have been signed off by the board of directors or senior management of a branch (S36C). - The Commission requires business risk assessments to be reviewed and signed off by the board. - The Commission requires to be informed of significant changes to the business plans of a bank, including discussion of new products and major risk management initiatives. ### Reporting, prudential limits, and monitoring - Conditions placed on banking licences oblige banks to report exceptions in prudential limits immediately to the Commission. - Where material the Commission investigate to determine whether the exception is systematic of a failure to implement high level policies. This includes liquidity, capital, and large exposures. - The Commission reviews quarterly prudential returns produced by banks. These calculate a bank’s risk asset ratio. - Capital issues are discussed at prudential meetings with subsidiaries, including the likelihood of breach of the minimum prescribed risk asset ratio. ### ICAAP, SREP, and board approval - ICAAP submissions must be agreed by the Board. - The SREP process has required subsidiaries to identify Pillar 2 risks; whilst the Commission has required subsidiaries to maintain regulatory capital levels above 8%. - The SREP process has focussed on corporate governance and board oversight of risk. - The SREP process has led to banks in general allocating the required Pillar 2 risks in order to reach minimum regulatory capital levels. - As part of the ICAAP process the Commission investigates the process by which new products and major risk management initiatives are approved internally and by the board. - The requirement for senior management to carry out this exercise annually compels them to review and understand the implications and limitations of the management information they receive. ### Capital assessment practices and models - Banks in Guernsey are generally non-complex, adopting a more qualitative approach to capital planning. This includes the application of internal capital buffers and the retention of significant amounts of excess capital as a response to customer perception and taxation. - Some banks have used a quantitative approach to determine certain Pillar 2 risks. An example would be the additional funding cost that might arise in the event of a two notch downgrade of the external rating, of the parent and/or the group. - No bank is using either the advanced regulatory approaches or economic capital models to help determine regulatory capital requirements. - At present no model is being used in Guernsey; the Commission does not expect models to be used but of course is willing to engage with banks wishing to use models. ### Conditions for permitting advanced modelling under Basel II - Models to measure components of risk will be permitted under Basel II where the Commission is able to work closely with the home supervisor on the model approval process. - In determining whether or not to permit a bank to utilise the advanced approaches the Commission would take into account, inter alia, the following: - the willingness of the home supervisor to share with the Commission the details of its model approval process in so far as it applies to the risks present in the Guernsey subsidiary; - the supervisory resources of the home supervisor; - the appropriateness of the models being used in light of the risks being faced by the Guernsey subsidiary bank; - how much data has been collated, for how long and how relevant it is to the Guernsey subsidiary’s risks; - the resources available in Guernsey with which the bank intends to implement the advanced approach; - the resource implications for the Commission. ### On-site reviews, internal audit, and information systems - On-site visits include assessing the effectiveness of board policies, the way in which exceptions are dealt with by the board and how remedial actions are resolved. - The Commission probes the understanding of key risk issues by the senior executive members of the bank at prudential meetings and periodically asks to see key board data to determine the extent to which senior management understands the key management information. - Internal audit reports, which are often part of the annual review submissions, include assessments of banks’ procedures and processes. - The quality and assurance arrangements for information systems are considered during on-site visits. This includes consideration of the use of IT and end user computer risk, as well as the assurance over information flows. - The Commission seeks assurance around the internal challenge process during on-site reviews and ICAAP discussions. ### Governance outcomes and supervisory actions - The Commission as a consequence identified several banks with weaknesses and has required those banks to improve corporate governance. - The Commission requires sight of samples of controls, checks and procedures and may request internal audit reports as part of annual review submissions. *Source: _cr1103 - Section 36C of the BSL requires banks to carry out an annual review whether there has — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1103.pdf* ### Section 36C of the BSL requires banks to carry out an annual review of whether there ### _cr1103 - Section 36C of the BSL requires banks to carry out an annual review of whether there ### Section 36C: annual reviews and reporting - Banks must carry out an annual review of whether there has been effective control by the institution’s board of directors over every aspect of risk management and of the bank’s control environment (section 36C of the BSL). - As a condition of licence, banks must immediately report any shortcomings or deficiencies to the Commission together with the steps they propose to take to rectify the position. - The Commission requires sight of these annual reviews and requires them to have been signed off by the board of directors or senior management of a branch. - The Commission uses the 36C process (off-site) and face-to-face challenges during SREP to assess management perception of risks and controls, documented in ICAAPs. ### Principle 8 — Credit risk: frameworks, supervision, and reporting - Requirement summary: - Supervisors must be satisfied that banks have a credit risk management process that takes into account the risk profile of the institution, with prudent policies and processes to identify, measure, monitor and control credit risk. - Internal evaluation of banks’ credit policies, practices and procedures is required by the Code of Practice for Banks. - Commission practices: - Prudential meetings discuss credit committee composition, reporting lines, loan book condition, credit granting process, individual credit limits, large exposures and staff discretionary limits. - On-site credit reviews verify credit granting is approved by management and the board. - Banks must submit a separate credit risk reporting module in prudential return BSL/2 each quarter; new reporting incorporates Basel II weightings and credit risk mitigation techniques. - Banks must detail large exposures, loans by risk weight, specific loan provisions, non-performing assets, and loan classifications in quarterly prudential returns. - At least the ten largest exposures / non-bank investments and the ten largest money market placements are reported to the Commission in quarterly returns; subsidiaries must notify all non-bank exposures over 10% of the capital base. - Assessment: Compliant (as presented in the content). ### Principle 9 — Problem assets, provisions and reserves - Legal and reporting requirements: - Schedule 3 of the BSL requires institutions to make adequate provision for depreciation or diminution in value of assets (including bad or doubtful debts). - Banks must review annually their individual loans, asset classification and loss provisioning (including on and off balance sheet exposures); any shortcomings must be reported immediately to the Commission with remedial steps. - Banks must detail specific loan provisions and non-performing assets in quarterly prudential returns. - Provisioning is reviewed by external audit during annual audit process and discussed during prudential meetings and credit reviews. - Commission powers and limitations: - The Commission does not explicitly have power to require a bank to increase its level of provisions and reserves, but could revoke a licence if remedial action is not taken and minimum licensing criteria are not met. - Identified gaps and planned regulatory changes: - Assessment: Largely compliant. - Comment: The Commission should receive explicit power to require banks to increase provisions and reserves and require the Board to receive timely information on asset portfolio condition. - Information from GFSC: regulation amending Schedule 3, 6B(d) of the BSL will introduce an explicit requirement for banks to increase capital base and provisions; regulation 5 amending Schedule 3 6(B)(e) BSL will explicitly require the Board to provide information to the Commission regarding information which could have material effect on problem assets, the level of provisions, capital base and overall strengths. (These rules have to get approved in practice.) ### Principle 10 — Large exposure limits - Legal limits and definitions: - Principle 1/1994/24 defines closely related counterparty and group of connected counterparties; exposures to such parties should be aggregated and treated as a single exposure. - Paragraph 6: a bank may not incur exposures which exceed 10 percent of capital base to individual counterparties or groups of closely related counterparties which in aggregate exceed 800 percent of the bank’s capital base without prior agreement of the Commission. - Paragraph 9: a bank may not grant a loan to an individual counterparty which exceeds 25 per cent of the bank’s capital without the Commission’s approval. - Reporting and supervisory practice: - Banks must report exposures over 25 per cent of capital before entering into them; all banks report exposures over 10% of capital base in quarterly prudential returns. - Ten largest interbank exposures must be reported quarterly. - Board must adopt a large exposure policy statement and supply a copy to the Commission; control systems must be specified and monitored by the Board. - Section 36C requires banks to review control environment annually; compliance tested by the Commission. - Commission discretion and consolidation issues: - The Commission extensively exercises discretion to grant exemptions from the 25 % large credit limits regarding exposures to parent credit institutions, restricting or lifting exemptions only in certain circumstances. - Section 24(3) permits the Commission to require reporting of large credits as if subsidiaries’ transactions and capital were included, but the Commission does not confirm that large credit limits are not exceeded on a consolidated basis. - Assessment: Largely compliant. - Comments and planned actions: - The Commission should continue to restrict large limits of banks to their parents as banks’ exposures approach the 25 % limits. - The Commission should require banks to comply with credit limits on a consolidated basis. - Revised Principles & Guidance will define limits for exposure to connected parties and explicitly require limits not be exceeded on a consolidated basis. ### Principle 11 — Exposures to related parties - Definitions and expectations: - BSL section 25(6) defines a related company; Principle 1/1994/24 lists connected counterparties including associated companies, directors, controllers and their associates. - Paragraph 17 of Annex 1 grants Commission discretion in judging connections. - Exposures to connected persons require special care, must be on an arm’s length basis, and justified only for clear commercial advantage of the lending bank. - Reporting and supervisory practice: - Exposures to connected parties must be identified and reported in quarterly prudential returns and are reviewed during on-site credit reviews and prudential meetings. - The Commission can deduct connected exposures from capital base if they are capital investments or concessionary terms. - Section 36C requires annual board review of effective control over risk management. - Legislative gaps and proposed remedies: - No explicit legislation forbids granting related-party exposures on more favourable terms or mandates prior board approval for related-party transactions and write-offs; Companies (Guernsey) Law section 162 requires directors to disclose interests to the board. - Assessment: Largely compliant. - Comment: Regulation should require that transactions with related parties and write-offs exceeding specified amounts or posing special risks are subject to prior board approval and that related-party transactions may not be on more favourable terms. - GFSC action: regulation amending Schedule 3 – (6B(g)) BSL will require prior board approval and that transactions with related entities must not be on more favourable terms than those with unrelated parties. (These rules have to get approved in practice.) ### Principle 12 — Country and transfer risks - Bank obligations: - Point 5 of the Code of Practice requires banks to implement policies and procedures to monitor and evaluate developments in country risk, sectoral risk and transfer risk, and apply countermeasures including stress testing where appropriate. - Banks are expected to set limits for country exposures based on their own risk assessments and policies. - Commission practice: - The Commission does not publish guideline percentages for country exposure but may insist on limits in particular circumstances. - Certain banks have had limits placed on exposure to certain countries; in some cases banks are required not to book deposits or transact business of certain countries. - Country exposures are reported quarterly on LOC/1 returns (locational statistics reported to BIS). - During 2008-9 crisis additional sovereign risk analyses were conducted for certain countries; banks may be required to put in place a closure contingency plan where concerns arise. - Assessment: Compliant. ### Principle 13 — Market risk - Requirements and supervisory approach: - Code of Practice requires banks with a trading book to have market risk control systems; Schedule 3 requires adequate systems of control and records. - The Commission carries out an annual survey of trading book size and requires banks to inform the Commission if they intend to carry out material proprietary trading. - Where markets are volatile the Commission may require adjustments to holdings and may impose licence conditions. - A paper issued in November 2007 provides guidance and reporting forms for market risk capital charges and deals with settlement risk and offers a methodology for reporting interest rate risk on the banking book. - Stress testing and validation: - The Commission does not require banks to perform stress testing and contingency planning and periodic validation of market risk measurement systems; however, market risks are included in ICAAP models assessed by the Commission. - Assessment: Compliant. - Comment: The Commission should require banks to perform stress testing and contingency planning and periodic validation of market risk measurement systems. ### Principle 14 — Liquidity risk - Reporting, thresholds, and requirements: - Guidance on maturity analysis: the Commission would not normally expect a maturity negative mismatch at one month of more than -20%. - Where banks exceed or approach a -20% mismatch at one month, the Commission undertakes a desk-top analysis and may consider inclusion of bond portfolios or hold discussions with the bank. - Deposits must be reported by earliest repayment date; loans by final maturities; assets and liabilities reported at true residual maturities; undrawn commitments and other off balance sheet liabilities included in quarterly liquidity report. - Transition to new liquidity regime: - In response to Basel guidance, by end-September 2009 banks were required to have submitted new internal liquidity policies and by end-Q1 2010 the Commission aimed to have transitioned most banks onto the new liquidity regime. - New approach divides banks into two sets: - Branches apply the mismatch of -20% (acting as a proxy for behavioural adjustment). - Subsidiaries apply a more bespoke approach including individual behavioural adjustments and mandatory stress testing. - Legal and supervisory tools: - Schedule 3 requires institutions to maintain adequate liquidity relative to actual and contingent liabilities. - The paper for liquidity requires Board sign off on Liquidity Management Programmes. - Information to identify institutions performing significant foreign currency liquidity transformation is provided in quarterly returns and locational statistics; net short open positions attract a capital charge. - The Commission has taken proactive regulatory action to maintain local liquidity when parents faced runs and has, in some cases, studied parent liquidity with home regulators. - Assessment: Compliant. ### Principle 15 — Operational risk - Governance and framework: - Code of Practice section 7 requires robust and independent internal audit, procedures to counter external fraud and financial crime, system security, data protection, and procedures for internal fraud and negligence, including professional indemnity insurance. - Schedule 3 requires adequate systems of control and an annual review under section 36C; banks must report shortcomings immediately to the Commission with remedial steps. - Guidance on Corporate Governance requires the Board to be proactive in recognising and understanding risks and to ensure timely, accurate and complete information systems. - Commission oversight and reviews: - The Commission assesses operational risk frameworks through the off-site 36C process, ICAAP, SREP, and on-site visits focused on Business Continuity Planning and Outsourcing (2008). - The Commission reviews allocation of capital to operational risk and applies Pillar 2 add-ons where necessary, typically as an add-on rather than gearing Pillar 1. - The Commission performed thematic reviews on Business Continuity Planning (results issued September 2008) and outsourced activities (results issued October 2008). - The Commission issued “Legal Risk Guidance Note for Banks” on 11 January 2010, treating legal risk as a subset of operational risk and requiring responsibility, Board reporting, policies, procedures and consideration of stress testing. - Outsourcing and administered banks: - There is no guidance on the policies/processes to assess and monitor outsourced activities or on outsourcing agreement content (at the time of the content). - Many "administered banks" rely on providers; some administered banks have no staff in Guernsey; one service provider manages 8 administered banks. - Assessment: Largely compliant. - Comments and planned actions: - Extent of outsourcing for administered banks should be reduced for essential functions (e.g., risk management); a minimum number of persons should be locally employed to cover essential functions. - GFSC: regulation amending Schedule 3 – 6C BSL will require banks to employ a sufficient number of individuals in Guernsey to cover essential functions including risk management. - Commission will issue Outsourcing Guidance requiring due diligence, oversight, contingency arrangements and exit strategies; banks must consider effects and conduct risk assessment before outsourcing. (These regulations and guidance have to get approved in practice.) ### Principle 16 — Interest rate risk in the banking book (IRRBB) - Requirements and supervisory practice: - Point 7 of the Code of Practice states there should be management information and stress testing of interest rates and associated interest rate risk. - The Commission created a module to allow banks to report Interest Rate Risk on the Banking Book each quarter; guidance issued in 2007. - As part of ICAAP, banks must consider and document interest rate risk and how it is managed (controls, capital allocation, or both). - Appropriate stress testing to measure vulnerability to adverse interest rate movements is required annually as part of SREP. - The Commission monitors IRRBB via prudential reporting and SREP and applies Pillar 2 add-ons where material. - Assessment: Compliant. ### Principle 17 — Internal control and audit - Governance and legal framework: - Commission guidance on Corporate Governance lays out Board responsibilities; amended guidance under consultation. - Code of Practice paragraph 8: the Board is responsible for ensuring internal controls adequate for the nature and scale of the bank’s business. - English legal principles on directors’ duties are adopted by Guernsey law regarding fiduciary duties, acting bona fide, avoiding conflicts, and exercising reasonable care and skill. - Supervisory expectations: - The Commission expects clear arrangements for delegating authority and responsibility, segregation of duties, reconciliations, safeguarding assets, and appropriate independent internal audit and compliance functions (as reflected across the guidance and Code of Practice). - External auditors are required to communicate to the Commission if Schedule 3 criteria may not have been fulfilled. *Source: text from the IMF content unit titled "_cr1103 - Section 36C of the BSL requires banks to carry out an annual review of whether there" (extracted from the provided PDF content).* ### Section 49 of the BSL states that where an offence under this Law is committed by an ### _cr1103 - Section 49 of the BSL states that where an offence under this Law is committed by an ### Legal liability and fit-and-proper framework - Section 49 of the BSL: where an offence under this Law is committed by an institution and is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of, any director, chief executive, controller, manager, secretary or other similar officer of the institution or any person purporting to act in any such capacity, he as well as the institution is guilty of the offence and may be proceeded against and punished accordingly. - Section 17A of the BSL: gives the Commission the powers to issue a prohibition order against a person considered not to be fit and proper prohibiting that individual from performing any function, any specified function or any specified description of function. - Section 22A of the BSL: permission in writing from the Commission is required before a director or manager may be appointed. - Section 22 of the BSL: institutions shall give notice in writing to the Commission when any person has become or ceased to be a director, controller or manager; such notices must be given within a period of 14 days immediately following the day on which the institution becomes aware of the relevant fact. Failure to give notice in accordance with this section is an offence. - Schedule 3 to the BSL (licensing minimum criteria): directors of banks must be fit and proper persons; at least two individuals resident in Guernsey of appropriate standing and experience and sufficiently independent of each other shall effectively direct the business of the institution; the business must be conducted in a prudent manner. ### Board responsibilities, corporate governance and checks & balances - Section 36C of the BSL: banks must review, at least annually, the responsibilities and conduct of the bank’s board of directors with respect to corporate governance principles; the review must assess whether any activity has been entered into in respect of which no director has a sound knowledge, the responsibilities and conduct of the board with respect to corporate governance, and whether there has been effective control by the board over every aspect of risk management. If shortcomings are identified the bank must immediately report them to the Commission together with steps proposed to remedy the position. - The Commission recommends that at least one non-executive member of a corporate board should be drawn from outside the group. - The Guidance on Corporate Governance in the Finance Sector in Guernsey: board should establish internal control procedures necessary and sufficient for managing operational risks and conducting the organisation’s business having regard to its size, nature and complexity. - The Code of Practice for Banks: board of directors responsible for banks having internal controls adequate for the nature and scale of the bank’s business. - Minimum licensing criterion: license assessments and annual prudential meetings review prudential criteria, reporting lines, and organisational structure; on-site visits (including on-site credit reviews) examine reporting lines for key responsibilities (such as compliance and risk management). ### Internal controls, internal audit and compliance functions - The BSL does not explicitly require a permanent compliance function; obligation is derived from general internal control rules. - The Commission requires regular reviews by sufficiently robust internal audit; all Guernsey banks must have regular reviews by internal audit (some provided by group internal audit rather than local function). - Code of Practice for Banks (point 9): internal audit function should report direct to a parent undertaking with demonstrable independence from local senior management or to an audit committee providing requisite independence and experience. - The Commission reviews internal audit during annual prudential meetings, Section 36C submissions, and on-site visits. All external audit reports are copied to the Commission. - Assessment: Largely compliant. - Comments noted in source: - Banks are not required to have an independent, permanent and effective internal audit function locally; in practice internal audit is provided by group function. - Banking legislation does not explicitly require a permanent compliance function to assist senior management in managing compliance risks. - Recommendation in source text: - Supervisory regulations should require banks to establish internal audit and compliance and the Commission should stipulate criteria on the processing. - If outsourcing of those functions to group entities is accepted in certain circumstances, guidelines should nevertheless be met. - According to the GFSC, new regulations will require banks to have an internal audit function, or an audit function compliant with the Commission’s Outsourcing Risk Guidance Note for Banks; the Guidance will explicitly require banks to consider the effects and conduct risk analysis before outsourcing. ### Anti-money laundering / Countering the financing of terrorism (AML/CFT) and customer due diligence - Principle 18 summary: Supervisors must be satisfied that banks have adequate policies and processes in place, including strict “know-your-customer” rules, to prevent misuse for criminal activities. - FSC Law: one function of the Commission is countering financial crime and the financing of terrorism (includes fraud, handling proceeds of crime, misuse of financial market information). - The Policy Council and the Commission endorse the Financial Action Task Force on Money Laundering’s Forty Recommendations and the IX Special Recommendations. - The Handbook: statement of standards required by the Commission; applies to all financial services businesses in Guernsey including branches of banks incorporated outside Guernsey. - Schedule 3: business to be carried on with prudence and integrity and not bring Guernsey into disrepute. - Regulation 15 of the Handbook: financial services business must establish policies, procedures and controls appropriate and effective for forestalling, preventing and detecting money laundering and terrorist financing; board must take responsibility for review of compliance and ensure reviews are discussed and minuted at board meetings; size, nature and complexity must be taken into account. - Handbook requires a risk-based approach: risk identification and assessment, risk mitigation, risk monitoring, and policies/procedures/controls. - Regulation 3 of the Handbook: banks must carry out a suitable and sufficient business risk assessment and ensure it is reviewed and updated as the business evolves; banks must identify their risk appetite and determine relationships they will not accept. - Rule 50: financial services business must assess the risk of any proposed business relationship or occasional transaction and decide whether to accept it. - Rule 29: Board must ensure the Commission is advised of any material failure to comply with the Regulations and any serious breaches of policies, procedures or controls. - Rule 51: documented procedures to demonstrate how assessment of each business relationship has been reached. - Rule 52: businesses with diverse customer base or wide range of products must develop a more structured and rigorous system to show individual judgement. - Rule 70 and Rule 74: enhanced verification checks for high risk individuals; data to be collected on individuals includes legal name, former names, principal residential address, date and place of birth, nationality, any occupation, public position held, employer where appropriate, and an official personal identification number or other unique identifier in an unexpired official document bearing a photograph. - Rule 160 and Regulation 5: require enhanced CDD measures where a relationship is assessed as high risk. - Definitions and processes: - Politically exposed person are explicitly defined in the Handbook. - Enhanced customer due diligence includes senior management approval for establishing a business relationship, establishing source of funds and wealth, more frequent and extensive ongoing monitoring. - Correspondent banking: - Regulation 8(2) (Handbook): must not enter into or continue a correspondent banking relationship with a shell bank; must ensure respondent bank does not permit its accounts to be used by a shell bank. - Regulation 8 of the Criminal Justice (Proceeds of Crime) (Financial Services Business) Regulations 2007 (as amended): a financial services business must not enter into, or continue, a correspondent banking relationship with a shell bank. - No correspondent accounts have been identified. - Implementation and supervisory activity: - In February 2008 all banks were required to submit a business risk assessment pursuant to Regulation 3. - Desk-based review of customer due diligence was carried out; gaps required corrective measures with imposed deadlines. - The Commission’s Banking Division has carried out a series of on-site Countering Financial Crime and Financing Terrorism inspections to banks since 1999 focusing on customer-related risk, CDD, account opening, AML, fraud prevention and CFT controls. - The Commission carries out AML/CFT through on-site visits to all banks; visits are prioritised based on perceived ML/FT risks. - All banks have a licence condition to report material adverse events, including discovery of fraud or losses from unauthorised trading. - Banks do report cases of alleged fraud and unauthorised dealing to the Commission. - The Commission intends to review all banks AML/CFT systems against the new Regulations and Handbook in less than three years. ### Supervisory practices, meetings, and reporting - The Commission conducts regular and annual meetings with bank management; due to the small population and close physical proximity the quality and nature of banks’ management is well understood. - Annual prudential meetings and on-site visits review reporting lines, organisational structure, risk framework, operational risk (including corporate governance). - The Commission looks at a bank’s risk framework as part of the SREP process and emphasises operational risk. - Example supervisory interaction: the Commission requests clarification on risks identified in a risk assessment that were not included in the quarterly operational risk report to the board. - All directors, branch managers, company secretaries, money laundering reporting officers, members of branch management committees and managers reporting directly to directors are required to complete a very detailed personal questionnaire (form PQ). - If the Commission does not approve a board member or manager (not “fit and proper”) it can threaten to remove a licence, impose a condition on a licence, fine, or issue a public statement on grounds that Schedule 3 minimum criteria have not been met (e.g., bank not conducting business “in a prudent manner” under section 6(1) of Schedule 3 to the BSL). - Banks must submit any management letter produced by auditors to the Commission; management letters include deficiencies found. ### Assessment, gaps and planned enhancements - Assessment recorded in source: Largely compliant. - Identified gaps and comments: - Lack of explicit legislative requirement for a permanent local internal audit function and a permanent compliance function; reliance on group-provided internal audit in practice. - Planned measures: - Additional measures to strengthen corporate governance are under consultation. - GFSC: new regulations will require banks to have an internal audit function, or an audit function compliant with the Commission’s Outsourcing Risk Guidance Note for Banks, and the Guidance will require consideration of effects and conduct risk analysis before outsourcing. - The Commission intends to review all banks AML/CFT systems against the new Regulations and Handbook in less than three years. - Supervisory tools employed: on-site visits, annual prudential meetings, Section 36C submissions, personal questionnaires, licensing minimum criteria (Schedule 3), review of internal and external audit reports, management letters, and the Commission’s internal on-site questionnaire modelled on the Regulations and Handbook. *Source: _cr1103 - Section 49 of the BSL states that where an offence under this Law is committed by an (IMF document).* ### Appendix 13 is the questionnaire and Appendix 110 provides the 2009 On-site ### Appendix 13 is the questionnaire and Appendix 110 provides the 2009 On-site schedule, an example of the project overview to date, together with the 2010 On-site schedule. ### On-site schedules, questionnaires, and project overview - Appendix 13: the questionnaire. - Appendix 110: provides the 2009 On-site schedule, an example of the project overview to date, together with the 2010 On-site schedule. - On notification of a Countering Financial Crime and Terrorist Finance on-site visit the Commission requires both branches and subsidiaries of a bank to submit pre-visit material, including a copy of the latest internal auditors’ report relating to client take-on, countering financial crime and terrorist financing. - Submitted internal audit report(s) are used for desk-based pre-on-site analysis. - Internal audit and external expert reports are made available by a bank during an on-site visit at the request of the Commission. ### Board oversight, Section 36C Annual Review, and risk management - Section 36C Annual Review (BSL) requires banks to review whether any activity has been entered into in the course of the bank’s business in respect of which no director of the institution has a sound knowledge. - Section 36C Annual Review requires banks to review whether there has been effective control by the bank’s board of directors over every aspect of risk management (see attached Appendix 76 ‘Form AR’). - The Banking Division gains assurance that banks have established policies and processes to designate compliance officers at management level through: - ongoing prudential supervision; - the section 36C annual review; and - CFC/TF on-site visits. ### Licensing conditions, Section 9, and remedial action - Under Section 9 of the BSL the Commission may impose conditions on a bank’s licence. - A contravention of a condition of a banking license can be a ground for a license revocation. - Conditions imposed that the bank is complying with its anti-money laundering obligations are not explicitly stated in section 9. - In 2009, one bank had a licence condition imposed following an on-site visit which revealed weaknesses in particular on transaction monitoring. The bank has been part of a remedial action plan to deal with the licence condition. ### Pre-visit material and supervisory use of audit reports - Pre-visit submissions include the latest internal auditors’ report on client take-on, countering financial crime and terrorist financing. - The Commission uses these reports for desk-based pre-on-site analysis and may request internal audit and external expert reports during an on-site visit. ### Regulatory requirements for AML/CFT policies and board responsibility - Regulation 15 requires banks to establish such other policies, procedures and controls as may be appropriate and effective for forestalling, preventing and detecting money laundering and terrorist financing. - Regulation 15 requires banks to establish and maintain an effective policy, for which responsibility must be taken by the board, for the review of its compliance with the requirements of these Regulations. - Such policy shall include provision as to the extent and frequency of such reviews. ### Designation of compliance officers, MLRO appointment, and fit-and-proper assessment - Regulation 12 requires a financial services business shall appoint a person of at least management level as the money laundering reporting officer and provide the name and title of that person to the Commission and the Financial Intelligence Service as soon as is reasonably practicable and, in any event, within fourteen days starting from the date of that person’s appointment. - Regulation 12 requires nomination of another person to receive disclosures under Part I of the Disclosure Law and Section 15 of the Terrorism Law (“nominated officer”) in the absence of the money laundering reporting officer, and to ensure relevant employees are aware of the nominated officer. - Section 22A of the BSL requires banks to notify the Commission of a proposal to appoint a manager and obtain the Commission’s approval of the appointment. - The Commission requires a Personal Questionnaire to be submitted by all bank staff at level of manager or above, including the MLRO, to enable the Commission to judge fit and properness. - Paragraph 35 of the Handbook states conditions regarding the appointment of the MLRO and deputy MLRO, including: - both must be employed by the financial services business (exception regarding administered banks); - must be resident in Guernsey; - must have sufficient resources to perform duties; - must have access to the CDD records; - must be available on a day to day basis; - must report directly to the Board; - must be fully aware of both his obligations and those of the financial services business. ### Hiring, screening, training, and internal controls - Regulation 13 requires that a financial services business shall maintain appropriate and effective procedures, when hiring employees, for the purpose of ensuring high standards of employee probity and competence. - A bank’s screening policies and processes are reviewed during CFC/TF on-site visits. - Regulation 13 of the Handbook requires that relevant employees receive comprehensive ongoing training in the relevant enactments, these Regulations and the Handbook, the personal obligations of employees and their potential criminal liability under these Regulations and the relevant enactments, the implications of non-compliance by employees with any rules or guidance, and its policies, procedures and controls for forestalling, preventing and detecting money laundering and terrorist financing. - A financial services business shall identify relevant employees who should receive additional and ongoing training, appropriate to their roles, and must provide such additional training. - During CFC/TF on-site visits the existence and extent of ongoing training is assessed; on-site teams identify specific areas requiring additional training, including correct identification of risks in customer relationships. - The Handbook requires banks to have clear policies and processes for reporting financial services abuse to appropriate personnel within the bank. - Paragraph 35 reiterates that the MLRO and any deputy MLROs must have sufficient resources to perform duties. - Paragraph 273 of the Handbook states a financial services business must have appropriate and effective internal reporting policies, procedures and controls to ensure: - employees know to whom and in what format suspicions must be reported internally; - all suspicion reports are considered by the MLRO; - if the MLRO decides not to make a disclosure to the FIS, the reasons are documented and retained; - once a disclosure has been made to the FIS, the MLRO immediately informs the FIS where subsequent relevant information or documentation is received. - The Commission reviews records of suspicious transaction reports made by staff to the MLRO and disclosures to the FIS during on-site visits to confirm compliance. ### Legal protections, Commission disclosures, and information sharing - Section 49(5) of the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 states a disclosure made to a police officer or to any other person or body under the provisions of regulations under subsection shall not be treated as a breach of any obligation as to secrecy or other restriction upon the disclosure of information imposed by statute or contract or otherwise and shall not involve the person making it in any liability of any kind to any person by reason of such disclosure. - The Commission has an obligation to make disclosures to the FIS and has done so under the Terrorism and Crime (Bailiwick of Guernsey) Law, 2002, and The Disclosure (Bailiwick of Guernsey) Law, 2007. - If the Commission did not have in place adequate procedures for reporting suspicious transactions under the CJL then it would be in breach of Regulation 12 of the Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended. - The FSC and BSL Laws permit the Commission to share information for the purpose of investigation, prevention or detection of crime or for the investigation of, or otherwise for the purposes of, any criminal proceedings. - The Commission shares such information with both domestic and foreign financial sector supervisory and law enforcement authorities using gateways contained in: - the Money Laundering (Disclosure of Information) Laws (MLDIs); - The Disclosure (Bailiwick of Guernsey) Law, 2007; - Section 44 of the BSL; and - Section 21 of the FSC Law. - The MLDIs state that no obligation of secrecy, confidence or other restriction on disclosure shall be regarded as contravened by disclosure to Her Majesty’s Procureur or Comptroller, to any member of the salaried police force of the Island of Guernsey, to any officer of customs and excise, or to any officer or servant of the Guernsey Financial Services Commission authorised by the Commission to receive disclosures for the purpose of this Law. - Section 44 of the BSL states that information relating to the business or other affairs of a person (including a bank) may be disclosed where disclosure is for the purpose of enabling or assisting a relevant supervisory authority in a country outside the Bailiwick to exercise its supervisory functions. *Source: text from the supplied content unit.* ### Section 21 of the FSC Law states that the Commission may disclose information if such ### _cr1103 - Section 21 of the FSC Law states that the Commission may disclose information if such ### Section 21 (Disclosure powers) - Description: - Section 21 of the FSC Law permits the Commission to disclose information if such a disclosure appears to the Commission to be (inter alia) for the purpose of the investigation, prevention or detection of crime or with a view to the investigation of, or otherwise for the purposes of, any criminal proceedings, in connection with the discharge of any international obligation to which the Bailiwick is subject, or to assist, in the interests of the public or otherwise, any authority which appears to the Commission to exercise in a place outside the Bailiwick functions corresponding to any of the functions of the Commission. - Assessment: - Compliant - Comments: - Many relevant rules on money laundering are included in the Handbook for Financial Services Business on Countering Financial Crime and Terrorist Financing. - According to the opinion of the Law Officers of the Crown and the Commission, the rules in the Handbook are legally binding, although this has not been tested in the courts. ### Principle 19. Supervisory approach - Objective: - Supervisors must develop and maintain a thorough understanding of the operations of individual banks and banking groups, and of the banking system as a whole, focusing on safety, soundness, and stability. - Description / Practices: - BD carries out both on-site and off-site supervision to maintain comprehensive risk profiles of licensees. - On-site supervision: - Annual prudential visits and visits for CFC/TF, credit and thematic reviews (outsourcing, business continuity planning). - CFC/TF reviews use a standard template, interview staff at several levels, and review samples of client files. - Credit reviews use a pro-forma questionnaire, interview staff at various levels, and examine credit files. - Off-site supervision: - Analysis of monthly and quarterly statistical, locational and prudential returns. - Quarterly prudential returns verified in arrears on a sample basis by external auditors who must report exceptions to the GFSC. - Annual accounts and external auditor’s management letters reviewed and analysed. - SREP: - Mixture of on- and off-site work; GFSC has developed SREP procedures. - Annual off-site review (BSL:s36A) copied to GFSC; includes licensees’ own risk assessments and risk management descriptions. - Annual risk grading review for all licensed institutions using risk grading review questionnaire; licensees graded “high”, “medium” or “low”. - Risk gradings drive supervisory programme; frequency of on-site CFC/TF and prudential visits varies by grade: - High risk: may have annual on-site visit for credit reviews and CFC/TF plus normal prudential visits and BSL (s36C) reviews. - Medium risk: may be visited annually for prudential visits and over a two year cycle for CFC/TF. - Low risk: may be visited biennially for prudential visits and for CFC/TF reviews over a three year cycle. - Two licence conditions imposed on all licences: - “there shall be no significant change in the nature of the business conducted without prior consultation with the Commission;” - “Senior management should notify the Commission as soon as they become aware of any material adverse development surrounding the bank’s operations including but not limited to: - breaches of legal obligations; - breaches of prudential supervisory requirements; - the discovery of fraud or losses from unauthorised trading; - decisions to write off bad debts or to make new specific loan provisions; - involvement by the bank or its senior staff in litigation; or a significant deterioration in profitability.” - External auditors required to communicate to the GFSC under section 3 of the Banking Supervision (Bailiwick of Guernsey) Regulations, 1994 when circumstances give them reasonable cause to believe schedule 3 criteria are not fulfilled or circumstances are of material relevance to the Commission’s functions. - BSL reporting and notification requirements: - BSL (s23; s24): notify GFSC of acquisition in capital of a significant shareholding or assumption of a large exposure. - BSL (s22): notify GFSC within 14 days of a change in directorship or manager. - BSL (s22A): written permission required before appointment of a director or manager. - BSL (s32): notify GFSC of change to auditors; auditors must inform GFSC if resigning before term or if they qualify accounts. - Assessment: - Compliant - Comments: - In 2008 and 2009 the risk-grading cycle was disrupted by the banking crisis; GFSC diverted resources to crisis cases (example: crisis at the parent of Fortis). - In 2009 priority was processing ICAAPs of all banks to passport them onto Basel II; now risk gradings informed by ICAAPs are again central. ### Principle 20. Supervisory techniques - Objective: - Effective supervisory system should consist of on-site and off-site supervision and regular contacts with bank management. - Description / Practices: - All on-site and off-site work in BD undertaken by the same staff set (avoids split communication problems). - Visits generally by Division staff alone; occasional joint visits with Policy and International Affairs Division or other regulatory Divisions (e.g. on AML/CFT). - Off-site work generally not contracted out. - Annual programme set at start of calendar year; revised risk grading approach will change visit frequency by risk. - Work balance changes in response to developments (e.g., 2008 concentration of AML/CFT visits; 2008 credit crunch led to substitution of some prudential visits with off-site analysis). - Effectiveness assessments: - Senior management reviews on-site visits and other work. - Peer review by Deputy Directors from other regulatory Divisions reported to GFSC’s Audit and Risk Committee. - GFSC subject to multiple external reviews (FATF/OGBS, FSF, UK Home Office (Edwards Report), FATF (NCCT), IRS (QI), IMF), external and internal audit, and Promontory Report. - Annual report laid before the Island’s parliament. - BD Procedures Manual includes detailed planning process for on-site visits: scheduling, pre-visit analysis, evidence gathering, scoring, post visit analysis, on-site re-visits. - Scheduling process: - Planned visits arranged in Autumn each year following risk assessment by risk assessment panel [Assistant and Deputy Director and the Director] for implementation next calendar year. - Banks informed by letter ~ one month before the visit. - Changes to timing require written request; changes accepted only for serious operational difficulties; Director of Banking or Deputy Director must authorise and document reason. - Commission committed to tight schedule; undue changes can impact onward scheduling. - On-site methodology: - Consistent methodology, pro-forma questionnaires, review of findings letters by Director and Deputy Director. - Advice Letter provided before visit; Exception Letter after visit sets out material gaps and remediation timeline; analyst approves completion. - Accurate record-keeping emphasised (noted in Promontory Review). - On-site cycles cover corporate governance via interviews, questionnaires, document assessment; follow-up on-site reviews if remediation needed. - Off-site tools: - Analysis of monthly and quarterly statistical, locational and prudential returns; quarterly returns verified in arrears on a sample basis by external auditors. - Licensees must submit copies of annual reviews to GFSC (BSL:s36); analysis provides insight. - Monitoring media and market place; information exchange with other supervisors and law enforcement; visits from head office personnel, directors, compliance officers, MLROs, external auditors and visiting regulators. - Annual accounts and external auditor’s management letters reviewed. - Management and governance assessment: - GFSC meets MLROs, Heads of Risk and Compliance, NEDs and business heads at on-site visits and prudential meetings. - Internal audit reports sought if material shortcomings; group internal audit generally used but not solely relied upon. - Personal Questionnaire (PQ) required for directors, company secretaries, MLROs and managers reporting to Board; Form PD for material changes; new PQ required if more than 5 years since prior PQ. - Exceptional measures: - GFSC may require presence of key senior banking personnel where problems arise. - Assessment: - Compliant - Comments: - Scheduling and methodology will continue with redistribution of visit frequency under the new Risk Rating approach. ### Principle 21. Supervisory reporting - Objective: - Supervisors must collect, review and analyze prudential reports and statistical returns from banks on solo and consolidated basis, and independently verify these reports through on-site examinations or external experts. - Description / Practices: - Required forms: MA/1, BSL/1, BSL/2 and LOC/1. - Licence condition: “completed prudential returns are provided to the Commission and any other such similar routine returns that may from time to time be required. The Commission will on occasion require an institution to provide confirmation from an external auditor that prudential returns accurately reflect the business on the reporting date.” - Form contents: - Form MA/1: monetary aggregate statistics. - Form BSL/2: on- and off-balance sheet liabilities and assets, profit and loss, capital adequacy, liquidity, large exposures, loan loss provisioning, foreign and exchange rate related contracts, loan classification, staffing, maturity of on and off balance sheet items and deposit currencies. - Form LOC/1: geographical location of all assets and liabilities by currency. - Basel II adoption: - Ahead of full adoption of Basel II in 2009 and following a pilot survey, GFSC issued Basel II compliant modules (Form BSL/2) to every licensed subsidiary and branch in Guernsey. - From Q1 2008 licensed institutions completed these modules as part of reporting obligations; BSL/2 ensures capital resources calculation is Basel II compliant. - Concentration monitoring: - Economic sector asset concentrations picked up from large exposure notifications and annual prudential meetings. - Enhanced surveillance: - Due to recent economic difficulties, several licensed institutions placed on enhanced surveillance; supplementary information requested including daily or weekly liquidity monitoring. - Resulting assessment “Banks under Scrutiny” submitted to Commissioners. - Guidance and valuation rules: - GFSC Guidance on Verification of Prudential Returns: reports should be “prepared, in the case of Guernsey subsidiaries, using the same accounting policies as those applied in the current period of statutory accounts;” - Banking Supervision (Accounts) Rules, 1994 (s1(a)) valuation rules: - “Debt securities are held for long term investment and included at cost adjusted for amortisation of premium and accretion of discounts. Other investments held for the long term are included at cost. Other instruments are included in the balance sheet at market value with any resultant profits and losses included in the profit and loss account.” - Data collection and consolidation: - Data collected monthly, quarterly and annually and on an ad hoc basis; all data analysed by BD for prudential meetings, on-site work or regulatory actions. - All licensed institutions must submit data at same frequency; selected licensees (those with holdings of debt) provide data for the IMF annually. - Data collected from all licensees at the same dates representing the same periods. Consolidated data selected from four banks with Jersey branches. - Powers to obtain information: - BSL (s25) grants broad powers to require information, reports by nominated accountants or professionals, and production of documents; powers extend to related bodies corporate where desirable in interests of depositors. - Failure to file prudential returns on time is breach of licence condition; BSL (s9(5)) states: “An institution which contravenes any condition of a banking licence is guilty of an offence.” - FSC(G)L (s11I) allows GFSC, after consultation with Policy Council, by regulation to provide for administrative financial penalties for late filing; to date no such regulations made. - GFSC management notes powers under FSC(G)L to impose penalties up to £200,000 per Section 11D(1) where appropriate. - Certification and verification: - Returns required to be signed by a person senior enough to commit the licensee (see “Front Sheet” notes). - Inaccurate returns required to be re-submitted if errors are significant; deliberate mis-representation could be breach of minimum criterion (BSL Sched. 3 s6 (1)) and lead to licence conditions or revocation. - Supervisory returns verified on a sample basis by external audit: GFSC selects each year, in arrears, one of the four quarterly returns submitted by each licensee for auditors to verify to books and records. - BSL (ss25(1)) empowers GFSC to establish scope and standards for external experts’ work; GFSC uses external experts for routine validation and specific reviews (example: recent external review of a licensee’s control environment). - Auditors’ communications: - Banking Supervision Regulations, 1994 Regulation 3 sets circumstances for auditors to communicate to Commission where auditors have reasonable cause to believe Schedule 3 criteria not fulfilled or circumstances materially relevant. - BSL Section 33 clarifies no duty is contravened by an auditor communicating in good faith to the Commission any relevant information; applies to matters auditors become aware of in capacity as auditor. - Assessment: - Largely Compliant - Comments: - Three factors influenced rating: - GFSC accepts certification from an official “senior enough to commit the licensee” rather than requiring CEO and CFO/Comptroller certification (standard in some jurisdictions). - At mission time GFSC had yet to set regulations to impose administrative penalties for late filing as contemplated by FSC(G)L; Implementation of Section 6B of the Banking Supervision (Bailliwick of Guernsey) Regulations 2010 (came into operation on 30 April 2010) will rectify this omission. - FSAP team identified mis-classification of one significant transaction involving asset-backed securities where misclassification continued on the balance sheet over several quarters (GFSC had been informed before execution). ### Principle 22. Accounting and disclosure - Objective: - Supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with accounting policies and practices widely accepted internationally, and publishes information that fairly reflects financial condition and profitability. - Description / Legal requirements: - BSL (Sched.3 (s6) – Minimum Criteria for Licensing) states: - “6(2)(d) An institution shall not be regarded as conducting its business in a prudent manner unless it maintains.... (i) adequate accounting and other records of its business and (ii) adequate systems of control of its business and records. (4)(c) For the purposes of sub-paragraph 2(d)- (i) records and systems shall not be regarded as adequate unless they are such as to enable (A) the business of the institution to be managed prudently, and (B) the institution to comply with the duties imposed on it by or under this Law...... (ii) in determining whether those systems are adequate the (GFSC) shall (without limitation) have regard to the functions and responsibilities in respect of them of any of the institution’s directors.” - Assessment: - (Assessment text for Principle 22 not explicitly provided in source excerpt.) *Source: IMF Financial Sector Assessment content unit _cr1103 (excerpts provided).* ### Section 36C of The BSL (s36C) also requires a licensed institution to review- at least ### Section 36C of The BSL: review, reporting, and audited accounts requirements ### Review and reporting obligations under s36C - Section 36C of The BSL requires a licensed institution to review, at least annually, whether its financial record keeping systems and data systems are reliable. - Licensed institutions must also review whether they have control systems effective to ensure: - all returns and other documents required by or under the BSL to be submitted to the GFSC are duly submitted; and - any inaccuracies in any such returns and other documents are identified, corrected and reported expeditiously. - Shortcomings or deficiencies must be reported to the GFSC immediately, along with proposed remedies. ### Audited accounts and public availability (BSL s31 and Banking Supervision (Accounts) Rules, 1994) - The BSL (s31) requires audited accounts to be made publicly available. - The Banking Supervision (Accounts) Rules, 1994 state (excerpt): - "1. In the case of a licensed institution incorporated in the Bailiwick – (a) audited accounts of the institution containing at least the information (including notes and statements) set out in guidelines issued from time to time by the Commission shall be drawn up to dates at intervals not exceeding twelve months unless other arrangements have been specifically agreed in writing with the Commission. (b) not later than three months after each date to which the said audited accounts are drawn up, except with the prior specific written consent of the Commission – (i) a copy thereof shall be delivered to the Commission; and (ii) either those audited accounts or abridged accounts containing at least the information set out in guidelines issued from time to time by the Commission shall be available to any person on request; and (c) the auditor’s report on the accounts of the licensed institution shall include, inter alia, statements on the following matters: (i) the basis of the auditor’s opinion; (ii) whether, in the auditor’s opinion, the accounts (and, in the case of group accounts submitted by a holding company, the group accounts) show a true and fair view and have been properly prepared in accordance with applicable accounting standards and also in accordance with the provisions of the Law and of the Companies (Guernsey) Law, 1994; and (iii) as regards the abridged accounts as described in paragraph (b)(ii) of this rule, a statement to the effect that they have been drawn up in accordance with the provisions of the Law and in a manner authorised by the Commission; and in the case of such abridged accounts the auditor’s report shall also include a verbatim copy of the auditor’s report on the audited accounts." ### Compliance timelines and availability - Audit frequency and preparation: - audited accounts must be drawn up to dates at intervals not exceeding twelve months (unless the Commission has specifically agreed otherwise in writing). - Delivery and public availability: - not later than three months after each date to which audited accounts are drawn up, a copy must be delivered to the Commission (except with prior specific written consent of the Commission). - within the same three-month period, either the audited accounts or abridged accounts (containing at least the information set out in Commission guidelines) must be available to any person on request. ### Auditor’s report required statements - The auditor’s report must include statements on: - the basis of the auditor’s opinion; - whether, in the auditor’s opinion, the accounts (and group accounts where applicable) show a true and fair view and have been properly prepared in accordance with applicable accounting standards and the Law and the Companies (Guernsey) Law, 1994; - for abridged accounts described in paragraph (b)(ii), a statement they have been drawn up in accordance with the provisions of the Law and in a manner authorised by the Commission, and a verbatim copy of the auditor’s report on the audited accounts must be included. *Source: _cr1103 - Section 36C of The BSL (s36C) also requires a licensed institution to review- at least* ### 2. In the case of a licensed institution whose principal place of business is ### _cr1103 - 2. In the case of a licensed institution whose principal place of business is ### Audited accounts, accounting and audit standards - GFSC’s Guidance issued under the Banking Supervision (Accounts) Rules (s1(a)). 1994 requires a director’s report to be included in the audited accounts of Guernsey-incorporated licensed institutions. - Requirements and practices: - Latest audited accounts of the main group (for licensed institution whose principal place of business is outside the Bailiwick) shall: - (i) be delivered to the Commission not later than one month following publication; and - (ii) be available to any person on request. - Financial statements reviewed by assessors included the qualitative and quantitative information itemized in EC 9. - BD staff review financial statements to ensure disclosures required by the GFSC’s Guidance issued under the Banking Supervision (Accounts) Rules (s1(a)), 1994 are made. - Valuation rules for investments (auditors preparing audited accounts): - “Debt securities are held for long term investment and included at cost adjusted for amortisation of premium and accretion of discounts. Other investments held for the long term are included at cost. Other instruments are included in the balance sheet at market value with any resultant profits and losses included in the profit and loss account.” - Profit and loss accounts are required to include provisions for loan losses. - Auditors must provide an opinion that accounts are prepared in accordance with Accounting Standards issued by the Accounting Standards Board (“ASB”) i.e. GAAP. - Example auditor statements from two licensees reviewed: - “conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board” - opinion “in accordance with United Kingdom Auditing Standards”. - International Standards on Auditing (UK and Ireland) cover loan portfolio, loan loss reserves, non-performing assets, asset valuations, trading and other securities, derivatives, asset securitizations and the adequacy of internal controls. - Powers over external audit: - BSL (ss25(1)) empowers GFSC to establish scope of external audit and standards to be followed and to require reports “by a person who is an accountant or has relevant professional skill and who is nominated or approved by the (GFSC) on, or on any aspect of, any matter in relation to which the (GFSC) may require information (for performance of its functions under the BSL).” - The FSC(G)L (s11B(1)) permits GFSC to make a disqualification order against the auditor where the auditor: - a. has failed to comply with any duty imposed by or under the regulatory Laws, or - b. is for any other reason unfit...(whether by reason of lacking the necessary skills or resources to carry out effectively his responsibilities as auditor or otherwise) - or that for any other reason it is in the interests of the public or any class therof to do so. ### Publication and system information - The GFSC publishes aggregate information on the banking system in quarterly web releases, in its annual report, through the BIS, IMF and Bank of England and in the local press. - Assessment: Compliant ### Corrective and remedial powers of supervisors (CP 23) - Principle: Supervisors must have an adequate range of supervisory tools to bring about timely corrective actions, including ability to revoke banking licence or recommend revocation. - Description of GFSC practice: - High level supervisory concerns taken up with senior management and, where required, the Board; remedial action execution clarified and timeline agreed in writing. - Follow-up assured through surveillance of Directors; escalation to Director General or Commissioners when needed. - Problem bank situations in Guernsey have arisen from failure of parents of Guernsey licensed institutions; GFSC actively participated in deciding when and how to effect orderly resolution (examples: Guernsey-incorporated subsidiary of Northern Rock PLC; Landsbanki Guernsey Limited). - GFSC convened a meeting on 6th October 2008 (included HM Procureur); Landsbanki Guernsey Limited board applied that night to the Royal Court for an administration order and GFSC supported it. - Companies (Guernsey) Law, 2008 provides administration order application power: - “375. (1) An application for an administration order may be made by – (e) the Commission, in respect of supervised companies and companies engaged in financial services business” - Statutory powers and enforcement tools: - BSL (s9; s10) affords powers to impose conditions on licences and to revoke a banking licence; contravention of licence condition is an offence under BSL (s9(5)). - Conditions may be imposed “at any time” after granting a banking licence and may be “such conditions in respect of the licence as it (GFSC) thinks fit” (s9(1)); a condition may be varied or rescinded. - GFSC has imposed licence conditions in practice (e.g., Northern Rock (Guernsey) Limited; four conditions on Landsbanki Guernsey Limited). - When serving notice to revoke a licence GFSC may give directions “as appear to the (GFSC) to be desirable in the interests of the institution’s depositors or potential depositors, whether for the purpose of safeguarding its assets or otherwise.” - Requirement for written notice of intention and right to appeal under the BSL (s18) when imposing a condition or revoking a licence. - Measures available to address EC3 scenarios (primary tool: licence conditions, BSL: s9): - 9(4) conditions may: - (a) require institution to take certain steps, refrain from particular actions, or restrict scope of business; - (b) impose limitations on acceptance of deposits, granting of credit or making of investments; - (c) prohibit soliciting deposits generally or from persons who are not already depositors; - (d) prohibit entering into any other transaction or class of transactions; - (e) require removal of any director, controller, manager or employee; - (f) specify requirements to be fulfilled otherwise than by action taken by the institution; - (g) require furnishing to the Commission of specified information, documents, accounts, in specified form and containing specified particulars; - (h) prohibit, restrict or impose limitations on deposit-taking business carried on in or from any place outside the Bailiwick by: - (i) the institution itself; - (ii) any undertaking established by the institution (including branches or subsidiaries); - (iii) through or by means of a relationship with any person (including partnership, affiliation or association). - Court injunctions under BSL (ss 35(3)) may include appointment of a receiver, powers to locate, ascertain, hold, gather in, sequester or take possession or control of assets. - GFSC powers (BSL: s14; s15) to withhold approvals of intending shareholder controllers or withdraw acceptance of existing shareholder controllers. - BSL (s17A) empowers GFSC to issue orders against persons not “fit and proper” prohibiting them from performing functions in relation to a deposit taking business. - Minimum Criteria for Licensing (BSL:Sched.3; s6) includes requirement that: - “6(1) The institution conducts.... its business in a prudent manner.” - 6(2)(a) institution maintains a capital base... of an amount which the (GFSC) considers appropriate. - 4(a) For purposes of subparagraph 2(a), an appropriate amount is: - (i) an amount commensurate with the nature and scale of the institution's operations; and - (ii) of an amount and nature sufficient to safeguard the interests of the institution's depositors and potential depositors, having regard to: - (A) the nature and scale of the institution’s operations; - (B) the risks inherent in those operations and in the operations of any other institution in the same group so far as capable of affecting the institution, and - (C) any other factors appearing to the (GFSC) to be relevant. - Risk Asset Ratio (RAR) policy: - GFSC sets a minimum Risk Asset Ratio (RAR) for each licensed institution and monitors through prudential reporting. - If the RAR is within 1 per cent of the minimum, GFSC raises issue with management and may request voluntary injection of further capital; if cooperation not forthcoming, GFSC could impose licence conditions and, at the extreme, revoke the licence. - Removal of directors/controllers/managers: - GFSC may impose conditions to “require the removal of any director, controller or manager” (BSL: ss9(4)(e)); directions when serving notice to revoke may also require removal (BSL: ss12(2)(e)). - Court injunctions (BSL: s35) may restrain disposal of assets and grant powers to protect assets while contraventions are investigated. - Financial penalties: - Under The FSC(G)L: - “11D. (1) Where the (GFSC) is satisfied that a licensee, former licensee or relevant officer - (a) has contravened in a material particular a provision of, or made under, the prescribed Laws, or (b) does not fulfil any of the minimum criteria for licensing specified in the regulatory Laws and applicable to him, it may, subject to the provisions of Section 11E, impose on him a penalty in respect of the contravention or non-fulfilment of such amount not exceeding £200,000 as it considers appropriate.” - GFSC practice: - Communication with licensed institution management and Board is a mix of verbal and written. - Range of available actions found adequate and effective; example cited where GFSC successfully required a different CEO. - Assessment: Compliant ### Consolidated supervision (CP 24) - Principle: Supervisors must supervise the banking group on a consolidated basis and apply prudential norms to all aspects of the group worldwide. - GFSC awareness and arrangements: - GFSC aware of banking group structures supplying licensed institutions as Guernsey-incorporated subsidiaries or branches. - Regular bilateral meetings with home supervisors and with host supervisors of members of those banking groups. - Currently no banking subsidiaries of Guernsey-incorporated banks and only four overseas branches; all in Jersey. - GFSC unitary regulator structure ensures staff supervising a bank are aware of local activities of other parts of the bank and its subsidiaries, including investment business and insurance activities. - Legal powers to obtain group information: - BSL (ss25(5)–(8)) provides powers to exercise section powers in relation to holding company, subsidiary, related company, and other bodies specified (reproduced in text). - BSL (s27) affords similar capacity to an Inspector appointed by GFSC (not tested practically). - Consolidated reporting and capital: - GFSC has powers to implement prudential standards on a consolidated basis. - For large exposures, where institution has subsidiaries which are not licensed institutions, GFSC may by notice direct that consolidated reporting occur (BSL:(ss24(3)). - GFSC measures capital adequacy on a consolidated basis. - Under guidance issued under s1(a) of the Banking Supervision (Accounts) Rules, 1994 banks are required to submit consolidated annual audited financial statements. - Information sharing and oversight: - BD works with sister Divisions and overseas regulators to ensure information on financial condition, risk management and controls for material subsidiaries and branches is well understood. - Bilateral annual meetings with home supervisors in UK, Switzerland, Jersey, Isle of Man, Cyprus and Bermuda. - GFSC requires annual written confirmation from each overseas regulator that the overseas bank is in compliance and in satisfactory condition and that the overseas regulator will continue to take into account the business in Guernsey in assessing overall prudential soundness on a consolidated basis. - Overseas regulator required to disclose whether it has imposed special conditions relevant to business in Guernsey and any issues for GFSC attention. - Policy and operational measures: - GFSC has written a code of practice for relations with home regulators; sought agreement from CEO of the UK FSA on adopting elements; matter remains outstanding. - GFSC may impose licence conditions circumscribing a branch or subsidiary’s activities (BSL: ss9(4)(h)). - Where activities of subsidiaries are significant, their accounts are required and Guernsey management expected to know risks to the bank in their non-Guernsey entities. - GFSC uses BSL (s36C(d)(f)) review process to obtain information on senior management of subsidiaries and branches to satisfy fit and proper requirements; active subsidiaries must submit audited accounts to GFSC. - Adequacy of oversight of foreign operations assessed in annual prudential meetings and on-site supervision; overseas on-site visits consider reporting, compliance, internal controls and oversight. - GFSC does not permit Guernsey-licensed institutions to conduct foreign operations of a higher risk profile or in jurisdictions with a markedly different supervisory regime. - Assessment: Compliant ### Home-host relationships (CP 25) - Principle: Cross-border consolidated supervision requires cooperation and information exchange between home and host supervisors; local operations of foreign banks should be conducted to same standards as domestic institutions. - GFSC role and practice: - GFSC operates primarily as a host regulator for branches and Guernsey-incorporated subsidiaries of foreign banks. - Regular engagement with home regulators and host regulators; letters exchanged each year to confirm banks’ good standing in home jurisdiction. - GFSC copies letters to licensed institution where appropriate; examples provided to assessors. - Good working relationship with Jersey counterpart (MOUs agreed in 1998); only jurisdiction with significant overseas operations for Guernsey-incorporated banks is Jersey. - GFSC supports and usually attends on-site visits by regulators from Bermuda, Canada, Germany, Jersey, the Netherlands, Switzerland, UK and the USA. - No shell banks operate in Guernsey. - Administered bank model permitted with functions outsourced under formal agreements to a separate licensed bank; all books and records must be kept on the Island and operations subject to annual audit conducted in Guernsey. - GFSC and UK FSA agreed to monthly discussions centered on institutions with Guernsey incorporated subsidiaries; GFSC conventionally discusses implications of information received from another supervisor and keeps them informed where possible. - Home-host asymmetry and limitations: - In practice GFSC initiates contact with home supervisors when there are developments in the parent bank. - In crisis situations, home supervisors do not always give GFSC key information relating to the parent, even though Guernsey operations may help fund the parent. Recent examples cited: UK FSA and the Icelandic FME. - Asymmetric relationship disadvantages GFSC because Guernsey-licensed institutions are important locally but less so to consolidated-group supervisors. - Licensing practice: - As a matter of policy, a letter is always sent to home supervisor before licensing a bank in Guernsey requiring home supervisor confirmation of: - (a) no objection to establishment of branch/subsidiary in Guernsey; - (b) satisfaction with respect to soundness of the bank and its overall financial position; and - (c) that, in supervising the bank, the home supervisor will take into account transactions in Guernsey and satisfy itself as to overall prudential soundness of the group on a consolidated basis. - A licence is never granted until the home country supervisor has confirmed these facts; GFSC still assesses whether home supervisor undertakes consolidated supervision. - Practical cooperation: - GFSC has supported on-site visits by various overseas regulators with full cooperation of GFSC and licensees; no objection to such visits. - GFSC takes care to ensure home supervisor is aware of material issues in Guernsey; meets UK FSA and FINMA at least once a year and other home supervisors periodically; copies letters and briefs by ‘phone if urgent material issues arise. - GFSC is proactive in creating dialogue and periodically asks home supervisors for information on particular points. - Shortcomings noted in crisis (mid-September/early October 2008): - Despite CP 25 overall assessment “Compliant”, events of mid-September/early October 2008 underlined limitations in home-host relationship with the UK FSA. - Essential Criterion 3 of CP 25 requires timely information from home supervisor concerning significant problems in head office likely to materially affect subsidiaries/branches in host countries. - Enquiries indicated Commission did not receive timely warning of “acute system wide-pressures on financial institutions” that led to UK system-wide support package announced by UK authorities on 08 October 2008. - GFSC initiatives in response to asymmetry: - (a) ensuring depositors are aware of the status of their deposits in Guernsey-licensed institutions; - (b) striving to obtain from home supervisors a periodic written statement indicating whether they have knowledge of any significant problems concerning institutions for which the home supervisor has primary responsibility; - (c) practice of reducing where warranted the level of permitted exposure to the parent. - Assessment: Compliant *Source: _cr1103 - 2. In the case of a licensed institution whose principal place of business is* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1103.pdf_