The year in regulation

Written by: Richard Willsher Posted: 01/11/2018

BL59_reg review illoTen years on from the financial crisis, regulation continues to be imposed on businesses operating in the financial services sector. At times, it’s felt relentless. So just what has played out this year, and How have the Channel Islands met the challenge?


The most burdensome of this year’s compliance workload derived from the EU’s General Data Protection Regulation (GDPR), which was implemented on 25 May. It had businesses from all over the European Union and beyond, and across all sectors, scurrying around trying to figure out what to do.

Then they had to send out millions of emails to fulfil their statutory obligations with regard to how much of our data they could keep, while gaining our permission to do so. 

For this reason, GDPR will probably go down as the issue that most distracted management and staff within Channel Island businesses this year.

“GDPR is the one that’s had the biggest impact by far,” says Matt Sanders, a Group Partner at law firm Walkers in Guernsey. “Although it doesn’t directly apply to the Channel Islands, they’ve chosen to put in place an equivalent regime. People didn’t have much time. Although there’s a one-year transitional period, many businesses have UK and other EU customers, so they needed to be ready by 25 May.”

Sanders adds that it wasn’t just about all those emails. “It’s about ensuring your data’s under lock and key, justifying your use of it, how long you hold it and where and how you store it. There was a heavy IT focus.” 

This meant, in many cases, a complete overhaul of databanks, to clean out unwanted or out-of-date material and decide if what was left needed following up. By common consent among people we spoke to for this article, the months leading up to 25 May were a major headache – although in the end, most businesses had done what was required to comply.


The year began with both the Markets in Financial Instruments Directive (MiFID II) and the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation coming into force.

Among the procession of regulation ushered in this year, MiFID II was a big one. Its aim was to bring greater efficiency, resilience and integrity to European financial markets, creating a level playing field in financial instruments across the EU. 

It covered every aspect of an investment firm’s business from authorisation, product creation, selling and trading, to execution. Even though the islands aren’t in the EU, affected firms were those dealing in investments and managing them, and those giving investment advice, such as banks, stockbrokers and financial advisers.

The key point is that they must also be delivering these services to clients within the EU, including of course those in UK, which is a major feeder jurisdiction for Channel Islands business. 

MiFID II was last year’s story, given that the work it produced needed to have been done before it took effect on the first day back after the New Year. And so too for PRIIPS. 

But, as Max Hilton, Founder of Clarus Risk, a risk management fintech firm that collects fund data and issues risk reports, says, many firms were less well prepared for PRIIPS.

“We recognised that some firms were behind the curve in understanding what obligations they had to meet. Although this is an EU regulation, it affects people in the UK and it affects Channel Islands companies with European retail investors as MiFID defines them, which is very broad. 

“Many island companies may have, or have the potential to have, retail investors. Also, because it’s a European regulation, the Guernsey Financial Services Commission and the Jersey Financial Services Commission have been quite passive on the matter.”

Hilton points out, for example, that a number of hedge funds and private equity funds with wholesale investment offerings found that they were deemed to fall within the scope of PRIIPS because their partners or management hold shares in their funds.

The same goes for some local authority entities and public bodies. Consequently, they found that they had to produce so-called PRIIPS KIDs – key information documents – to enable investors to fully understand the risk of investing in them and enable them to compare competing products.

Moreover, KIDs are also required where products are offered on a stock exchange, form part of funds of funds, or are among those offered by private banks that construct portfolios with other people’s products. Clearly, a quoted fund can’t be certain that retail investors aren’t buying its shares. Also, KIDs make it easier for platform providers to produce their own PRIIPS documents.

Hilton says there are further stings in the tail. PRIIPS rules are quite prescriptive and based on historical performance measures. As the markets have been going great guns for a while, KIDs can mislead investors by offering too rosy a picture of what investors can expect in terms of risk and reward going forward.


The Alternative Investment Fund Managers Directive (AIFMD) has, thankfully, proved a little less onerous than anticipated. Its provisions call for managers to produce reports covering a wide range of criteria, including investment profile, concentrations of risk within a portfolio, and the risk profile of individual alternative funds. 

Even though so many of the islands’ funds can be classified as ‘alternative’ – including real estate, private equity, infrastructure and other funds – Dr Andy Sloan, Deputy Chief Executive, Strategy, at Guernsey Finance, notes that only three per cent of EU alternative investment funds are distributed in more than three member states. 

“It’s always been the case that the national private placement regime [NPPR] is a proven, smarter and faster route to market,” he says. “Guernsey is fully able to distribute into the markets that managers want to reach through NPPR.”

Walkers’ Matt Sanders agrees and points out that if third-country status is achieved, funds would be subject to the same requirements as EU managers. “But that’s stuck in the long grass,” he adds. “Not much has been said since Jersey and Guernsey received news that there was no obstacle to their achieving third-country passporting status. Maybe this is the reason AIFMD hasn’t had the impact it might have had. We’re a few years down the track with this now and people know what they need to do.”


In any case, firms finding themselves over-burdened by regulation now or in the future could always outsource their compliance obligations. Or could they?

In principle yes, but in practice, maybe no. Malin Nilsson, Managing Director of Compliance and Regulatory Consulting at advisory firm Duff & Phelps, agrees that a regulated business can outsource some of its compliance, but it has to beware of appearing to be a ‘letter box’ entity. The key consideration, she says, is that the regulated business remains fully responsible and accountable to the regulator. 

“Any outsourced activity that, if disrupted, could affect the delivery of regulated activities, is within the scope of the revised regulatory outsourcing framework issued by the JFSC in 2017. This includes regulated activities such as client due diligence, and also non-regulated activities such as IT or accounting.”  

The benefits of lower staff costs and drawing on external excellence are certainly appealing. However, larger firms that can afford to keep their compliance internal, may feel they have greater control of their own activities. But, as Nilsson concludes, “Smaller firms that don’t, or aren’t able to outsource, may be at a competitive cost disadvantage. Conversely, however, they may also have a potential advantage in their client service delivery knowledge residing with a smaller group of staff.”

5AMLD and more 

For sure, the flood of new regulation and compliance duties is unlikely to abate in the foreseeable future. Just like taxes, once they’re on the statute book they seem never to be rescinded.

Looking ahead, there are new measures in the pipeline. On 26 June 2017, the EU’s fourth Anti-Money Laundering Directive (4AMLD) came into effect. Now 5AMLD is waiting in the wings. It came into force on 9 July this year, but member states will have until 10 January 2020 to adapt their own legislation.

Because so much of the islands’ business is with the EU, businesses there have to be mindful. However, several commentators told us that, as the AML regime is already so strong in the islands, and widely recognised as such by multilateral organisations, EU countries are effectively playing catch-up. 

Nonetheless, 5AMLD will reach across the regulation of virtual currencies; information on beneficial owners; use of prepaid cards; powers of financial intelligence units (FIUs) and supervisors; and due diligence for high-risk countries. It’s something to watch out for.

In the islands themselves, there are several noteworthy developments. Frances Watson, a Partner within the corporate team at Mourant Ozannes, highlights a couple. The GFSC has updated the Registered Collective Investment Scheme Rules 2018 and the Prospectus Rules 2018, which took effect from 6 October 2018. This means that registered funds will be able to achieve a faster track to market based on representations and warranties given by fund administrators. 

At the same time, the new rules require all fund prospectuses for existing and new open- or closed-ended funds to be updated immediately if there’s material change to the fund. In any case, all open-ended registered funds are now required to review their offering documents at least every 12 months.

All in all, then, the international financial services regulatory and governance juggernaut grinds slowly forward into its second decade. Despite sounds from the Trump administration that they are considering rolling back some banking measures in the US, the EU looks unlikely to follow suit. 

In Guernsey and Jersey, nimble reactions to regulatory moves elsewhere and the speedy adoption of their own high standards are key to underpinning the credibility of the jurisdictions among competitors around the globe. And they’re doing pretty well, according to reports from the EU and the OECD, among others. 

While some in the islands’ financial services sectors, as in other financial centres, may bemoan the amount of administration and compliance they now need to carry out, they also know it’s mandatory, not optional. What’s more, reputation is the lifeblood of offshore financial centres. High regulatory standards are key to the future prosperity of the islands’ finance sectors. 

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