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Of couse more business is wanted, but not at any cost
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This is one of the economic activities that helps to make Jersey famous. It has been the source of a considerable amount of revenue for many years, and in 2011 the trust and company administration sector earned net profits of £113 million, second only to the dominant banking industry. Moreover, a total of 3,780 Islanders were employed in trust and company administration in that year.
So why does the industry now appear to be in crisis? There may not be much statistical evidence of a dramatic drop in business, and in fact anecdotal evidence suggests that some trust companies are booming. However, listening to some trust industry experts, you have to conclude that it’s now suffering from a crisis of confidence.
Whether this is justified or not depends on where you stand. The problem appears to be either the amount or the style of regulation imposed by the Jersey Financial Services Commission, or the fact that trust companies are becoming involved in risky business without sufficient safeguards. As I say, it depends where you stand.
The case against the JFSC was put recently by the chief executive of a leading trust company at an Institute of Law debate. According to a report in this newspaper, the chief executive called for ‘an end to a culture of fear and paranoia’ where some practitioners appeared to be in dread of being closed down.
I can vouch for this being the view of some in the trust business, because I was approached recently by one expert who appeared to be at the end of his tether. He had to spend so much time (and money) satisfying the JFSC that he wondered whether the business was worth it any more. I thought that they might just be targeting him because he runs a fairly small business, which some believe are more risky than large, very well capitalised businesses.
However, I know for a fact that my informant is well respected and has been in the industry for many years, so I was surprised that he now had so little support for the stance being taken by the JFSC. He believed that many of the checks being made on his business were simply unnecessary and, in some cases, illogical.
The case for the JFSC was made by the commission’s director of trust company business at the same Institute of Law debate. Again, according to the JEP report, the director warned against some finance firms courting ‘obviously high-risk’ private-client work from jurisdictions such as Russia. He said that some industry participants did not have sufficiently robust controls to mitigate the risks of this business, for which they charged ‘inflated fees’. This threatened the reputation not only of the business, but also of the Island, he said.
This clear divergence of views is a bit confusing for observers like me who are stuck in the middle. However, it’s a rather worrying development which needs to be dealt with urgently. Reputations might well be at stake, but there is no doubt that valuable business is at risk.
From my point of view, the Island in general and the finance sector in particular is in a vulnerable position because of the work it does. There’s not only the threat of becoming involved in money laundering and helping terrorist funding, but there are also the well-known risks of helping the wealthy and big businesses to evade their taxes, and now even tax avoidance is fraught with danger.
In this kind of environment, local businesses have to be very, very careful about who they deal with. The newspapers are full of stories of what happens when things go wrong, and sometimes even when nothing much has gone wrong but the Island’s reputation has suffered regardless. It’s actually a feather in Jersey’s cap that the Island has had very few of these problems in recent years, but that’s not an excuse for relaxing the controls.
On the other hand, it’s quite possible for the checks to have got out of hand and, in theory, become stricter than is absolutely necessary. The question is, has Jersey’s fiduciary industry reached this point?
I’m not sufficiently close to this highly technical subject to have an informed view, but I do believe that there are problems with both the regulator and the regulated.
Whether justified or not, the JFSC appears to have gained a reputation for not communicating clearly with the industry. Some practitioners at least seem to believe that the rules are too draconian, or are being applied in a heavy-handed manner. They might not think the same if they understood why the JFSC is doing what it is doing. Communication is vital, and that means much more than just going through a consultation process when new rules are proposed.
On the other hand, trust company practitioners must be realistic about the threats the industry faces and must understand that there can be no let-up in measures which are simply designed to protect the Island from dodgy business. There’s no point in identifying new markets in Russia or anywhere else if you are not also going to be aware of the risks those markets could pose.
There is also no guarantee that long-established markets are risk-free either, so every piece of business has to be checked in great detail, and the JFSC has to be happy that suitable systems are in place to make the checks. This may seem unnecessary to the trust company, but it is designed to protect the Island’s good reputation, without which there wouldn’t be a trust industry.
Unfortunately, there certainly seems to be a lot of misunderstanding in the industry. The trust company chief executive at the Institute of Law debate seemed to expect the JFSC to be able to advise trust companies from ‘a regulatory perspective on prospective business and the places from which it is sourced’, and even have a whistleblower’s helpline.
I’m sure that the commission is only too willing to give advice on how trust businesses can meet their local regulatory obligations. However, giving advice on new markets might be a step too far. I would have thought that Jersey Finance, which tends to spearhead efforts into new markets, should be in a position to give this advice.
However, perhaps the best advice for trust companies is the simplest advice: if you don’t understand the risks, don’t do it. We could certainly use more business, but not at any cost.
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