Roisin Hocking, Legal Assistant
The Codes of Practice are issued by the Commission under provisions in regulatory laws and set regulatory requirements that registered persons must comply with. A registered person is defined as ‘a person who is registered, or holds a permit or certificate, as applicable, under one or more of the regulatory laws’.
Background
The proposed amendments fall broadly into three categories:
1. amendments that could be referenced as that of ‘routine maintenance’ character e.g. clarifying certain rules and concepts;
2. amendments that modify regulatory requirements as a result of the issues the JFSC has identified during its supervision of registered persons; and
3. amendments designed to ensure that the JFSC’s regulatory requirements comply and keep up to date with international standards.
The proposals in the consultation paper have the potential to affect all registered persons. It is noted that some of the amendments are generic and others are more specific to certain Codes. Below is a summary of the generic amendments and then references to individual Codes where there are noteworthy amendments. The JFSC considers that none of the amendments should be too costly or onerous for registered persons to implement.
The proposals
1. Generic amendments
1.1 Payment of financial penalties
With the exception of the Certified Funds Code, where a financial penalty is imposed by the JFSC on a person, it will be that person who will pay the penalty, not any insurer. Insurance should not be sought to cover financial penalties. It is made clear that it is not intended to prevent a registered person from securing insurance that indemnifies against costs associated with defending JFSC enforcement action.
1.2 Cyber risk management
With the exception of the AIF Code, it is expected that a registered person will have specifically considered the risk of a cyber security incident and have in place a corresponding documented policy to identify assets and risks, to protect them, to quickly detect potential cyber security incidents, to respond to contain the impact of an incident and to recover from it. This proposal is in line with international standards and is not intended to create a disproportionate burden on registered persons.
The note draws attention to the NIST cybersecurity framework such that a registered person’s policy will feature the following five stages: Identify, Protect, Detect, Respond and Recover.
1.3 Client, Customer and Fund Money
The Codes will be amended to include a requirement for a registered person to conduct, at least annually, an independent review of the client, customer or funds money under its control. This is to prevent the loss, misuse and misappropriation of such money.
The review should be performed by an appropriately qualified independent person who may be an internal or external part. Where an internal party performs such review they must be operationally independent from the individuals or functions within the registered person responsible for the operation of the controls under review.
1.4 PII Arrangements
The JFSC, during 2017, performed a review of Professional Indemnity Insurance (“PII”) with the results being published on 7 December 2017 and an updated PII guidance note being published on 26 June 2018. The most recent proposals aim to harmonise and make consistent the PII Requirements between the Codes for general insurance mediation businesses, fund service businesses, investment businesses and trust company businesses.
The harmonisation and alignment include clarifications around “adequate PII cover” when a registered person is complained against with the Financial Services Ombudsman and clarifying the period that “run off” PII should cover where a registered person ceases to conduct a class of financial services business.
2. Specific Amendments to the Code
2.1 Amendments to the AIF Code
The Code has been updated to clarify the introduction of passporting and withdrawal of private placement rules has not taken effect during 2018. As such, non-EU alternative investment funds continue to be able to market direct AIFs under the Private Placement Rules for the time being.
2.2 Amendments to the Banking Code
The key change is that a Jersey bank must notify the JFSC, in writing, not less than 10 business days before a change to its capital structure is implemented and that “no objection” is received before such change takes place.
2.3 Amendments to the Certified Funds Code
It is proposed to amend paragraph 6.7.2 to clarify the notification requirements in the event of the winding up or dissolution of a fund (except where the event has already been agreed by the JFSC). The purpose of this amendment is to make clear that the JFSC expects notification for all such events and not just in specific circumstances or specific fund vehicles.
2.4 Amendments to the General Insurance Mediation Business Code
There are three key amendments proposed to this Code:
1. Paragraph 3.2.1 will clarify the requirements for the holding of policy and procedure manuals in Jersey;
2. sub-paragraph 3.3.4.1 is amended to make clear that where a registered person has a physical presence in Jersey, its Compliance Officer must be based on the island also; and
3. for each and every policy of insurance, clients will receive a breakdown of costs, must not be misled and be informed about all relevant and material facts.
In terms of proposal 3 above, this is to ensure public trust and confidence and that all clients are treated fairly.
2.5 Amendments to the Insurance Code
The main proposal for this Code is to clarify that the JFSC’s Policy on Outsourcing applies to Category B Permit Holders only.
Implementation
The intention is that amended Codes of Practice will be issued during Q1 2019. The JFSC recognises that registered persons may require a period to update their internal procedures to facilitate compliance with the amended Codes and therefore the proposal is to bring them into force two months after issue.
The Future
Comments on the consultation paper will have been received by 7 January 2019 by such persons or bodies as appear representative of the interests concerned.
The JFSC state that the amended Codes will provide clarity and alignment as well as help registered persons understand their regulatory obligations under the relevant Codes. The JFSC also acknowledge that industry-specific tailoring would be needed. Overall the amendment of the Codes will ensure that Jersey provides greater consistency when it comes to clarity in the regulation of financial service businesses.
Please contact Roisin Hocking if you have any queries.