Regulation watch: are we there yet?

Posted: 25/07/2019

MalinNilsson_DuffPhelpsEleven years since the financial crisis, there is a growing sense of regulatory fatigue among regulated firms. So what does this mean for the islands, asks Malin Nilsson, Managing Director, Duff & Phelps’ Channel Islands office

One area that has dominated the regulatory environment globally, as well as in the Channel Islands, is anti-money laundering/countering the financing of terrorism (AML/CFT). Despite the manpower and expense devoted to compliance with AML regulations, trillions of dollars continue to move through the illicit economy. 

The key to fighting this is to ensure AML and CFT measures work. AML/CFT compliance is too often seen as an exercise in demonstrating adherence to and documentation of procedures, rather than risk reduction through intelligence gathering. 

Is AML overrated?

As Duff & Phelps’ 2019 Global Regulatory Outlook survey notes, when asked what changes would have most impact on global AML efforts, respondents gave less priority to AML/CFT procedures, instead citing improved coordination and information sharing among global institutions as being key.  

While the Channel Islands have implemented recent changes to their AML/CFT regimes to bring them in line with international standards, updating both their AML/CFT Handbooks, information sharing and transparency have long been a focus. Both islands implemented the Common Reporting Standard in the fight against tax evasion, and enhanced registers of beneficial owners for sharing of information with authorities have been introduced. 

To extend the concepts underpinning these initiatives, there will be an increasing focus on tax and global programmes – such as the OECD’s Harmful Tax Practices project, which addresses Base Erosion and Profit Shifting – and new substance requirements to go hand-in-hand with efforts to improve transparency.

Our view is that the focus of upcoming legislative and regulatory change will continue to be on AML/CFT matters and transparency as the islands prepare for the next visit by MONEYVAL [the Council of Europe’s committee of experts on the evaluation of AML measures and the financing of terrorism]. 

In particular, the transparency agenda is likely to be dominated by the topic of a public register of beneficial owners of companies and the need to establish a public register of trusts, as driven by the European Union’s Fifth Money Laundering Directive. Firms will be required to focus on the execution of existing and new AML/CFT measures, as well as those related to information sharing and transparency, which will address concerns from a criminal perspective and a fiscal angle.

Walking the accountability tight rope 

Another key theme globally is the increase in the pace of implementation of accountability regimes by regulators, such as the Senior Managers and Certification Regime in the UK and the Manager in Charge regime in Hong Kong. The Channel Islands are no exception. Both islands have ‘fining’ powers that can be extended to individuals. This has led to a shift in what it means to be under regulatory scrutiny. As these regimes come into force, firms will have to be mindful of the balance between collective decision-making and personal responsibility. 

So, what might this mean for firms regulated in the Channel Islands? While Guernsey has imposed civil penalties on both firms and individuals in the past, Jersey has yet to do so. It remains to be seen how high or low the bar will be set. While governance has always been a key focus of both regulators, the prospect of individual penalties means that firms and individuals should review their governance arrangements and decision-making processes at both the collective and personal level.

An IFC arms race

The world of finance and regulation is moving at what appears to be breakneck speed. As survey respondents now view New York as having overtaken London as the pre-eminent financial centre, with Brexit casting a shadow of uncertainty over the UK’s economy, Channel Islands firms must adapt and remain flexible. New York was ranked as the top financial centre by 52% respondents – up from 42% in 2018 and higher than London, which has dropped from 53% to 36% in a year. 

Both islands have a history of planning for the long term, in terms of how regulators adopt international regulation, and how firms react to market forces and diversify their client bases. Both the regulators and industry will need to continue along this path for the foreseeable future and, while we may never ‘be there yet’, the journey will be an interesting one. 

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