Navigating Conduct Risk Amid Regulatory Shifts
1 September 2023
However, as businesses focus heavily on AML / CFT and PF issues one aspect that may be going under the radar is the concept of Conduct Risk and, more specifically, the implementation of Fiduciary Rules and Guidance Notes, 2021.
The Fiduciary Rules and Guidance Notes,2021 (the “Fiduciary Rules”)
As of 1st November 2021, a significant regulatory change came into effect with the introduction of the Fiduciary Rules, supplanting the previously established Codes of Practice for Corporate Service Providers and Trust Service Providers dating back to 2009. While both sets of regulations share common themes, such as the handling of client funds and the contents of client agreements, the Fiduciary Rules take these requirements to a more intricate level.
Examples of this include:
- The Codes of Practice require the funds of each client company/trust to be kept separate from each other and the administrator's own funds. However, the Fiduciary Rules build upon this foundation by mandating that licensees establish comprehensive policies and procedures pertaining to client funds, disclose these requirements to clients, and define how accounts should be designated. Furthermore, the engagement with banks is underlined, with written acknowledgements from banks regarding account maintenance now required.
- The Codes of Practice required licensees to treat each client’s best interests as paramount. Additionally, the Fiduciary Rules set standards for executing client transactions, maintaining client confidentiality, ensuring clients receive appropriate advice, and documenting beneficiary interests. These extensions of the previously held principles highlight a heightened level of scrutiny and attention to detail.
These are just two examples of many throughout the Fiduciary Rules.
It is Redwood’s ‘House View’ that beyond the immediate concern of MoneyVAL, the Guernsey Financial Services Commission (“GFSC”) will pivot its focus towards evaluating the industry's adaptation to the Fiduciary Rules. This evaluation will seek to investigate how effective the industry has been at implementing the rules from both a written and practical perspective. From an approximate timeframe of June 2024 onwards, it will allow the industry to showcase its diligence and commitment to regulatory compliance.
In participation, the financial sector is advised to take proactive steps to ensure compliance. Below are Redwood’s pro tips to consider:
Whilst licensees were required to review and implement revised Policies and Procedures at the time the rules were introduced it does no harm to review and ensure the alignment of Policies and Procedures against the regulatory requirements. As a matter of good corporate governance, these results should be presented to the Board and address any identified gaps promptly.
Re-evaluate the Compliance Monitoring Programme to reflect the new regulatory landscape accurately. Pay particular attention to conduct-related testing, focusing on beneficiaries' best interests.
Offer training sessions highlighting the nuances of conduct-related requirements embedded within the Fiduciary Rules. For those who have undergone such training previously, consider offering refresher sessions.
Encourage thorough minutes regarding decision-making and ensure that those empowered to make decisions are sufficiently skilled and possess sufficient information to justify decisions.
Redwood Group can assist with any of the above, whether that is through our compliance consultancy business, coaching or provision of Co-Sec support.
As the dust settles from MoneyVAL's visit, a new chapter of regulatory focus is likely to emerge. We believe the GFSC's attention will shift to assessing how the industry has embraced the Fiduciary Rules and augmented it’s operations within the new framework. Licensees are encouraged to prepare themselves by aligning their practices with these rules, ensuring their commitment to compliance is unshakable.
In the ever-evolving landscape of financial regulations, compliance remains a cornerstone for maintaining the industry's integrity. The imminent visit of MoneyVAL, coupled with the recent emphasis on Anti-Money Laundering (AML), Counter Financing of Terrorism (CFT) and Proliferation Financing (“PF”), has cast a spotlight on the compliance landscape.