Economic substance rules that should give Jersey a solid future

Economic substance rules that should give Jersey a solid future

Helen Hatton spent ten years as deputy director general of the Jersey Financial Services Commission, helping set up the regime which has seen the Island flourish as a modern, respected international finance centre.

Since leaving the JFSC, she has carried out international assessment work for the FATF and IMF, and is getting ready to celebrate ten years as the managing director of Sator, now BDO Sator, a regulatory consulting practice which she founded.

nWhere do you think Jersey, Guernsey and the Isle of Man are positioned today with the increasing pressures from the likes of Money Val, FATF reviews and the economic substance requirements?

‘We are in a very fortunate position in that we are three jurisdictions that have the skills pool and the infrastructure to be able to comply with that. We will be able to deliver services to clients such that the client structures will be able to evidence substance, and that is not the case in the majority of other offshore jurisdictions, which fundamentally are just booking centres.

‘I remember when we introduced mandatory competency requirements in investment business and in the trust company regime there were great cries: ”This will be the end of the industry – the costs of having qualified staff are unsustainable.”

‘Well, you don’t need to think about that too long to realise how inappropriate that response was at the time. If you don’t have competent qualified staff, how on earth are you fit to manage other people’s money?

‘I do a lot of work in the Caribbean, as you appreciate. It’s quite commonplace in a number of the islands when I go to do an onsite regulatory examination of a licensed corporate service provider that it’s a one-room-and-a-kitchenette office. There is perhaps one or two people working in there and they will have 5,000 companies registered there.’

nDo you think therefore that the Caribbean centres’ days are numbered?

‘Absolutely, and it’s high time. I don’t think jurisdictions with thin skills pools will survive, and that’s not restricted to the Caribbean: that would include some of the Pacific Islands, places like Nauru, Cook Islands and Marshall Islands. They have a challenge on the way.

‘Mauritius is a fairly substantial centre with quite a good and deep skills pool, but the Seychelles starts to get a bit thin. There is a watershed coming up and a number of jurisdictions will not survive.’

nIs there a danger we’ll see a brain drain out of Jersey and Guernsey?

‘Maybe, but I think almost the other way. I think it’s more likely that there’ll be a flight to quality and more operations of substance will come here. The challenge from a governmental point of view is how big do we want this industry to grow? How big do we want the population to be?’

nDo you think the substance requirements will be particularly challenging?

‘I think firms, particularly the trust company businesses, have got to very carefully consider and review how they can advise their clients to evidence substance. We cannot risk tranches of high-net-worth clients leaving because the services we offer them don’t meet the OECD standards. So we need to reinvent the nature of the services that we offer. And that thinking has already begun – a number of our clients are well down that track. But the whole industry needs to be thinking about that. And I think this is something where industry members should not consider themselves in competition with each other.

‘If trust company A comes up with a good solution and successfully advises their clients, but they keep it a secret and trust company B is all over the newspapers for failing, Jersey’s still done badly. I don’t think the individual industry members should behave competitively in this space.’

nWhat else would you like to see happening? We’ve come a long way.

‘I think first of all, we need to do more of the same. Secondly, I would like to see the continuance of a trend that picked up over the last couple of years, which is new start-ups. People have gone into good companies, as university leavers, school leavers. They’ve learned their craft, they’ve got their professional qualifications, they get to their mid-30s or early 40s and they decide they’re going to establish their own business.

‘New blood always needs to be coming in and people should realise that there is still that opportunity – the regulatory regime does not preclude that situation. In fact, the commission welcomes seeing that happen. It’s got to be done right; they’ve got to manage their risk properly; they need the right infrastructure and so on. That’s the price of the ticket to play the game. It’s got to be safe.

‘A lot of people, I think, just assume that because all of the trust companies in the fund service business now are so big, that it’s too late to start; well, there’s still loads of opportunity.’

nDo you think there’s a need for any new regulation?

‘I’m coming to a view that the HR functions of financial service businesses should be controlled functions; they should be elevated to key persons. Currently, directors and shareholders are approved by the commission, as are compliance officers and money-laundering reporting officers.

‘I think the HR function is so absolutely essential in businesses that they need to be a controlled function; they need to be a key person, at the least. So if you look at commission public statements and the regulatory sanctions that the commission has issued to financial services businesses, the most common cause is lack of competency.

‘So which function in your organisation has oversight of competency and skills training, the standard of people recruited, the remuneration system? Is the remuneration system rewarding the right behaviours, or is it actually rewarding people who cut corners? We’ve got this whole compliance framework in organisations and yet very rarely do the compliance monitoring programmes have oversight or include within them whether or not the HR functions are effective.

‘So I would like to see the commission moving into human capital risk. It’s the norm in most other jurisdictions, so we wouldn’t be ploughing a new furrow. It’s an important control function in the UK, for example. And I think that’s good news for HR professionals, because it increases their profile and gives them more opportunity. So I think something that increases people’s career options and reduces the risk of our prime industry – it’s got to be a good outcome.’

nWe are fairly used to looking after Russian business, but has the changing sanctions environment added issues?

‘I’d like to see businesses more aware of sanctions risk. All the businesses we deal with are very aware of making sure that their customers are not listed in the sanctions. But across the board, the industry is less aware of whether or not the structures they’re offering facilitate sanction evasion.

‘It’s fine doing due diligence on your immediate customer, but you have to understand more. For example, two investors in one fund. You’ve identified one investor is a young high-net-worth entrepreneur who has made a shedload of money, estimated net worth $800 million, and funnily enough, the other co-investor has exactly the same profile also: young entrepreneur who made a lot of money, high net worth of $800 million.

‘When you do the enhanced due diligence, which we do for a number of businesses, you realise that these guys used to work, until quite recently, for a sanctioned company and the object of the fund is investing into exactly what the sanctioned company can’t do. So you have to ask yourself whether that money is really their money, or whether they’re frontmen for the sanctioned firm.

‘That level of awareness is not widespread in the industry. It’s there and certainly the best firms are already up there with it, but I would like to see more firms aware because our reputation is everything. We cannot be producing authorised structures, the purpose of which is evading sanctions.’

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