Regulatory Updates: Q1 2023
5 April 2023
Update on regulatory matters in the period
As usual we have set out below a round-up of various regulatory updates in the quarter.
The following is a headline summary of what Redwood believes to be noteworthy regulatory news, media statements or certain, but not all, enforcement actions.
The numerous, and varied, Sanctions updates have been issued by the authorities that are applicable across multiple jurisdictions. Therefore, these have not been included below but are available on request, and across a number of jurisdictions there have been notifications against various companies being struck off or bogus. Again, these have not been included but are available on request for current clients of Redwood.
Whilst a number of the areas covered are not directly related to any particular industry, they provide a strong steer on the Regulators’ direction of travel into what is expected.
As usual, we recommend that key areas are considered by your Compliance function against your current business to assess whether similar risks or issues exist and, if they do, take the appropriate action. Should you require further assistance with this we would be pleased to help and do not hesitate to contact us.
Jersey Financial Services Commission (“JFSC”)
New updates to help you with the Prescribed NPO Order
The JFSC have updated the AML/CFT Handbook with new information and guidance on NPOs.
Notice designating “senior management functions” published
Following the conclusion of the JFSC consultation they have published: -
a Statutory Notice designating “senior management functions”. It came into effect on 13 March 2023. The Notice determines which senior managers in a registered person will fall within the scope of the JFSC’s civil financial penalties regime should they be culpable in a registered person’s significant and material contravention of the Money Laundering Order or a Code of Practice.
a consultation Feedback, outlining the changes made to the originally proposed form of Notice, following respondent comments.
As a matter of best practice, registered persons should identify which of their employees they consider fall into one of the four categories of senior management function and notify those employees accordingly. The categories are set out in the Notice.
However, registered persons are requested not to send the JFSC details of who they consider their senior managers to be.
It is also important to note that senior managers should not submit personal questionnaires to the JFSC. If the JFSC requires information about a registered person’s senior managers, they will specifically request it.
Thematic examination programme 2023
The JFSC’s thematic examinations are conducted in response to a perceived, current or emerging regulatory risk. A particular topic or topics are selected for consideration and review across a number of different entities and/or individuals from either the same sector or across sectors. This enables the standard of compliance and associated risks on the topic to be assessed more broadly.
The themes for the JFSC’s 2023 thematic examination programme are: -
Natural persons undertaking Class G trust company business;
Reliance on obliged persons;
Countering the Financing of Terrorism / Countering Proliferation Financing; and
Independent Financial Advisers – investment advice to vulnerable persons
In the event your business is selected for inclusion in a thematic examination, the JFSC will contact you in due course to provide further details about the examination process. More details on the specific themes can be located here.
New Appointments at the JFSC
David Eacott has been appointed as Executive Director of Supervision. David is the former Head of Banking Supervision at the Malta Financial Services Authority. Prior to this he worked for the Bank of England and the United Kingdom Financial Services Authority, including two years in the UK’s permanent representation to the EU, as the UK’s Financial Attaché during the last UK Presidency.
In his new role, David will lead the prudential, conduct and anti-money laundering/countering the financing of terrorism supervision, of Jersey’s financial services industry.
Amendment to Schedule 2 Business Activities
The Proceeds of Crime (Jersey) Law 1999 (the Proceeds of Crime Law) was amended by the Proceeds of Crime (Amendment No.6) (Jersey) Law 2022 (the Amendment) came into force on the 30 January 2023.
As a result, Schedule 2 to the Proceeds of Crime Law has been recast so that activities and operations subject to AML/CFT/CPF obligations align to the definitions within the Financial Action Task Force Standards.
All previous scope exemptions from AML/CFT/CPF obligations and exemptions from registration have been removed. This has also resulted in the business activities set out in Schedule 2 widening to include activities not previously within scope.
The JFSC’s website has been redesigned to cater for Financial Institutions (FIs), Designated Non-Financial Businesses and Professions (DNFBP) and Virtual Asset Service Providers (VASPs).
What action is required now?
The Amendment may impact both entities that were in and out of scope of the pre-Amendment Schedule 2. Industry must consider the guidance “What Action Required now Schedule 2 amended”, which includes details of the forms that need to be completed and including how the transitional period applies. If you were undertaking a Schedule 2 activity before it was amended on 30 January 2023, this document may assist you in reviewing how those activities are described in the amended Schedule 2: Converting to amended Schedule 2.
JFSC’s Business Plan 2023
The JFSC unveiled their 2023 Business Plan, setting out its priorities to help businesses and the wider stakeholder community understand their focus for the year ahead. In November 2021 they published their strategic framework for 2021-2024, which outlined their long-term vision to be a high performing regulator, building for the long-term success of Jersey. Their Business Plan for 2023, links directly to this strategy.
The strategic focuses for 2023 are:
increasing the JFSC’s effectiveness in the combating of financial crime
harnessing technology and influencing the digitalisation of Financial Services
developing the JFSC’s people, systems and capability to be a high-performing organisation
Application and amendment fees for Registered Persons specified in Schedule 2 business excluding firms of Accountants and Lawyers
In January 2023, the JFSC asked Industry for feedback on proposed changes to its fees for applications and amendments relating to certain registered persons under the Supervisory Bodies Law.
Considering the feedback received, the JFSC has proceeded with the implementation of the amended fees for those required to register and elect to appoint an Anti-Money Laundering Services Provider and those financial institutions that are Alternative Investment Funds or Jersey Private Funds.
Additional trust services sanctions under the Russia sanctions regime
On 21 March 2023, the 1,730 asset-freezing designations under the Russia sanctions regime were additionally designated in respect of trust services sanctions with immediate effect.
Under the Russia (Sanctions) (EU Exit) Regulations 2019, trust services include:
The creation of a trust, or similar arrangement;
The provision of a registered office, business address, correspondence address; administrative address for a trust or similar arrangement;
The operation or management of a trust or similar arrangement; or
Acting, or arranging for another person to act, as a trustee of a trust or similar arrangement.
The UK Sanctions List and OFSI’s Consolidated List have been updated to reflect this.
Effects in Jersey
Any changes to designations made under the UK Regulations are effective immediately by virtue of the ambulatory provisions in the Sanctions and Asset Freezing (Implementation of External Sanctions) (Jersey) Order 2021. The Government of Jersey issued a Sanctions Notice stating new amendments to the Russian sanctions’ regime. This means that it is now prohibited to provide trust services to or for the benefit of these designations, unless permitted by a licence or there is an applicable exception. The UK General licence has an automatic effect in Jersey.
The additional actions you are obliged to undertake have been expanded by the following: -
check whether you provide any trust services to or for the benefit of designated persons.
cease the provision of any trust service(s) to or for the benefit of designated persons unless licensed by the Minister.
You should keep your supervisor informed of any potential sanctions breaches and if required, submit an asset-freeze application form and/or the suspected sanctions compliance reporting form.
Additional information on 2023 Reliance Thematic. Reliance on Obliged Persons or Group Companies
Supervised persons are required to implement and adhere to effective systems and controls. This includes sound customer due diligence measures (CDD). These measures are key to the prevention and detection of money laundering, terrorist financing and proliferation financing.
What is reliance?
Supervised persons may meet their obligations to apply certain CDD or enhanced CDD measures by placing reliance on measures that have already been applied by an obliged person to obtain evidence of identity of a mutual customer.
Reliance must always be subject to six conditions set out in the Order and, to the extent that a supervised person places reliance on an obliged person, it must be able to demonstrate that it meets the required conditions.
Sound identification measures are vital because they: -
help to protect the supervised person and the integrity of the financial sector in which it operates by reducing the likelihood of the business becoming a vehicle for, or a victim of, financial crime, including money laundering, terrorist financing, and proliferation financing;
assist law enforcement, by providing available information on customers or activities and transactions being investigated;
constitute an essential part of sound risk management, e.g., by providing the basis for identifying, limiting and controlling risk;
help to guard against identity fraud.
The Money Laundering (Jersey) Order 2008 (the Order) and the AML/CFT/CPF Handbook (the Handbook) including the Codes of Practice applicable to all supervised persons contain obligations in relation to CDD. This includes instances where supervised persons place reliance on obliged persons (OPs).
The six conditions for placing reliance.
The conditions which must be met can be summarised as follows: -
the OP consents to being relied upon
the identification measures have been applied by the OP in the course of an established a business relationship/one off transaction with the customer;
the OP must provide adequate written assurance that it has: -
applied full identification measures; and
it is required to keep (and does keep) evidence of identity. There should be no chain of reliance;
information in relation to the identification of the customer must be immediately obtained by the supervised person. It is the evidence of identification to support the full CDD identification measures that is the subject of reliance;
the OP must provide adequate written assurance that evidence of identity will be kept until provided to the supervised person or until the OP is notified that it is no longer required to provide it to the supervised person on request and without delay;
supervised persons must assess the risk of placing reliance on an OP.
Key areas of focus
The key areas of focus for the JFSC in this thematic examination will include: -
Policies and Procedures: are the appropriate policies and procedures relating to the application of the requirements set out in Articles 16 and 16A of the Order in place?
Risk Assessment: have supervised persons adequately assessed and documented the risks involved with placing reliance on an OP before proceeding?
Written Assurance: have supervised persons obtained adequate written assurance from the OP to meet the obligations?
Testing: have supervised persons conducted appropriate periodic testing of the OP on which reliance has been placed to adequately meet the obligations?
Guernsey Financial Services Commission (“GFSC”)
GFG Limited (in voluntary liquidation)
The GFSC imposed a discretionary financial penalty of £280,000 on GFG Limited (in voluntary liquidation). This sanction was imposed as a result of the firm’s failure to meet the minimum criteria for licensing under the Protection of Investors (Bailiwick of Guernsey) Law, 2020.
Mr. William Stephen Cairns and Mr. Du Preez Gert Vermeulen.
The GFSC imposed discretionary financial penalties as follows: -
Mr. William Stephen Cairns (“Mr. Cairns”) a financial penalty of £133,000; and
Mr. Du Preez Gert Vermeulen (“Mr. Vermeulen”) a financial penalty of £35,000.
Further, on the above date, the Commission imposed the prohibitions as follows: -
Mr. Cairns prohibited from all functions for a period of ten years and six months; and
Mr. Vermeulen prohibited from acting as a director for a period of two years and one month.
The exemption set out in section 3(1) (g) of The Regulation of Fiduciaries, Administration Business and Company Directors, etc. (Bailiwick of Guernsey) Law, 2020 (which would otherwise permit those prohibited to act as a director of not more than six companies) has also been disapplied in respect of Mr. Cairns for a period of ten years and six months; and in respect of Mr. Vermeulen for a period of two years and one month.
The above sanctions have been imposed on Mr. Cairns and Mr. Vermeulen following their failure to meet the Minimum Criteria for Licensing as set out in Schedule 1 to The Regulation of Fiduciaries, Administration Business and Company Directors, etc. (Bailiwick of Guernsey) Law, 2020.
Lending, Credit & Finance
The GFSC published its feedback paper following the consultation on Lending, Credit & Finance issued on 21 July 2022, together with the final Lending, Credit & Finance Rules and Guidance and a s40 instrument giving notice of various exemptions from the requirement to hold a licence in respect of the carrying on of business regulated by the law.
The Lending, Credit and Finance (Bailiwick of Guernsey) Law, 2022 was approved by the States of Deliberation, the States of Alderney and the Chief Pleas of Sark in July 2022. It will come into effect in full on 1 July 2023, by which time firms carrying on business regulated by the law will need to be licensed and to follow the rules set out by the GFSC. As well as regulating the provision of consumer credit, the law regulates Virtual Asset Service Providers and replaces The Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law, 2008.
Financial Crime Return Rules 2023
The GFSC published a Consultation Paper proposing rules for the mandatory filing of three existing financial crime returns to which administrative financial penalties will apply for late filings and inaccurate submissions.
They are intending to make rules which will make mandatory the filing of the following returns within the timeframes set: -
The annual financial crime risk return from all licensed firms by 31 October each year;
The annual intermediary multi-scheme return from administrators of authorised and registered collective investment schemes by 31 May each year; and
The quarterly financial flows return from banks within two months of quarter end.
Retail General Insurers
The GFSC issued a Consultation Paper on Retail General Insurers. General, as opposed to life, insurance concerns coverage for house contents, bikes, health costs and so on. Guernsey already offers such insurance on a global basis and aims to grow this business. To support this aim, the GFSC intends to develop further the current regulatory regime. This involves a strengthening of requirements around governance, financial strength and systems and controls. The consultation will run until 1st June 2023.
Amendments to Schedule 3 to the Law regarding Independent Audit, Business Risk Assessments and VASPs
A consultation paper has been issued on proposed amendments to Paragraphs 3 and 15 of Schedule 3 to the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 as amended (“Schedule 3 to the Law”) and associated rules and guidance in the Handbook on Countering Financial Crime and Terrorist Financing in relation to an independent audit function and on business risk assessments.
The consultation also includes further development of the regulatory framework for virtual assets service providers proposed in a draft ordinance to the Law which will provide for the information requirements for virtual asset transfers, the introduction of a £1,000 threshold on virtual asset transactions over which customer due diligence will be required and extension of the definitions of “funds” and “property” to specifically include virtual assets.
The Consultation Papers can be found on the Commission's Consultation Hub.
The GFSC updates its website
The GFSC’s website has been updated and re-launched with some new features designed to improve its functionality, user experience and accessibility. Recognising that the website is a key tool which the GFSC uses to relay messages and information to industry, these changes have been delivered as part of the GFSC’s 2021-24 three-year business plan.
The search capability has been overhauled to introduce the option to display results by ‘most recent’ or by ‘most relevant’ as well as the ability to filter results by year or content type. The search algorithm behind the website has been adjusted to allow results to be returned that are more relevant. It now allows for the use of criteria such as keywords and popularity.
The user experience has also been enhanced. Changes includes the consolidation of the legislation and guidance pages into one area. These pages now have the option to filter results by sector and with specific search functionality, helping users to locate the information they need, quickly and efficiently.
AI & Finance in Guernsey: The Power and the Implications
The GFC is jointly hosting a conference, on 28th June 2023 at Beau Sejour, on the power and potential of AI. The event will feature keynote speakers and educational sessions where you can hear more about the potential impact of AI on the Finance Industry.
UK Financial Conduct Authority (“FCA”)
Guaranty Trust Bank (UK) Limited (GT Bank)
The FCA fined GT Bank £7,671,800 for serious weaknesses in its anti-money laundering (AML) systems and controls between October 2014 and July 2019.
During the relevant period, GT Bank failed to undertake adequate customer risk assessments, often not assessing or documenting the money laundering risks posed by its customers.
The bank also failed to monitor customer transactions and business relationships to the required standard.
These weaknesses were repeatedly highlighted to GT Bank by internal and external sources, including the FCA, but despite this, GT Bank failed to take appropriate action to fix them.
From early 2018 GT Bank stopped taking on new customers. Later that year GT Bank agreed to wider voluntary restrictions on business, given the FCA’s ongoing concerns. Requirements remained in place until the middle of 2021 when they were lifted after the bank completed a remediation plan, checked by an independent third party.
GT Bank’s conduct is particularly egregious as this is not the first time that the bank has faced enforcement action in relation to its AML controls, with the FCA fining GT Bank £525,000 in August 2013 for serious and systemic failings.
Al Rayan Bank PLC (Al Rayan)
The FCA fined Al Rayan £4,023,600 for failing to put in place adequate anti-money laundering (AML) controls.
Between 1 April 2015 and 30 November 2017, Al Rayan allowed money to pass through the bank and be used within the UK without carrying out appropriate checks. The firm failed to adequately check its customers’ Source of Wealth and Source of Funds when it was required to make sure the money was not connected to financial crime.
The failings were made worse by the lack of proper training provided to staff about how to handle large deposits, which further heightened the risk of money laundering and financial crime.
Al Rayan was aware of these weaknesses and failed to implement effective changes to fix them, despite the FCA raising concerns about the inadequacies of their systems.
Michael Nascimento sentenced for failing to pay confiscation order
Michael Nascimento has been sentenced to an additional almost four years in prison for failing to pay a confiscation order made against him.
In 2018, Mr. Nascimento was sentenced to 11 years’ imprisonment for his role in a £2.8 million investment fraud, where he was convicted with five associates of defrauding investors through a series of boiler room companies.
Members of the public were cold-called and subjected to high-pressure sales tactics to persuade them to buy shares in a company that owned land on the island of Madeira. Investors were promised guaranteed returns of between 125% and 228%. The money was, in fact, used to maintain the fraud and to fund the lifestyle of Mr. Nascimento.
Five individuals face conspiracy to commit insider dealing and money laundering charges
The FCA has started criminal proceedings against five individuals for conspiracy to commit insider dealing and money laundering.
The FCA alleges that Redinel Korfuzi, Oerta Korfuzi, Iva Spahiu, Rogerio de Aquino and Dema Almeziad conspired to commit offences of insider dealing between 17 December 2019 and 25 March 2021. Specifically, the FCA alleges that Mr. Korfuzi used confidential inside information he accessed as an Analyst in his former role at Janus Henderson to enable timely and profitable trading in 49 companies through accounts held by his co-conspirators.
In each case, the defendants used a derivative product called Contracts for Difference in relation to each of these companies, betting that the value of shares would go down after the announcements. In doing so, they were able to realise profits of approximately £1.5 million.
All five are also charged with money laundering offences relating to over 170 cash deposits totaling approximately £200,000.
Amigo Loans Limited
The FCA has publicly censured Amigo Loans Ltd for failing to conduct adequate affordability checks on borrowers and guarantors.
The FCA would have imposed a fine of £72,900,000, however Amigo demonstrated that this would cause it serious financial hardship. A fine would also have threatened Amigo’s ability to meet its commitments to a High Court-sanctioned scheme of arrangement, which aims to pay redress to customers.
Between 1 November 2018 and 31 March 2020, Amigo did not have appropriate processes in place to ensure it adequately assessed borrower and guarantor circumstances before approving a loan. Amigo’s failures led to a high risk of consumer harm, both to borrowers and guarantors.
Thematic review of retirement income advice
The FCA is undertaking a thematic review assessing the advice consumers are receiving on meeting their income needs in retirement.
This review is a piece of discovery work to explore how financial adviser firms are delivering retirement income advice and assess the quality of outcomes consumers are getting.
What has prompted this work?
The introduction of the Government’s pension freedom reforms has changed the way consumers access their retirement savings. Given the wider range of retirement options available, it is vital that consumers get good advice at the point they first access their pension savings and, where relevant, on an ongoing basis.
Since 2015, there has been a significant shift to consumers drawing an income from pension funds which remain invested. Advice in this area can be complex, so it is important firms understand the needs of their consumers and ensure their advisory solutions deliver consistently suitable advice.
The FCA highlights areas of focus for firms implementing the Consumer Duty
With 6 months to go before the Consumer Duty comes into force, the FCA has published a review of how firms are planning to implement the Duty.
The FCA reviewed a sample of implementation plans and found that many firms show they understand and embrace the shift to delivering good customer outcomes, which the Duty will bring, and have established extensive programmes of work to comply with it properly.
However, the FCA also found that some firms are further behind in their planning, so there is a risk that they may struggle to apply the Duty effectively once the rules come into force.
Isle of Man Financial Services Authority (“IoM FSA")
Phased implementation of new fees for financial regulation and oversight
The phased implementation of a new fee structure for firms regulated or overseen by the IoM FSA will take effect from 1 April 2023.
Tynwald Members approved the Fees Orders and Regulations marking a key milestone in the transition to an updated funding approach for the Island’s finance industry.
The legislation sets out the revised fees for regulated entities and designated businesses in 2023/24, 2024/25, and 2025/26. Changes are being introduced over three years to allow fee payers time to adjust.
In future, the fees charged by the Authority will better reflect the nature and scale of activities being carried out by regulated entities and designated businesses.
Gibraltar Financial Services Commission (“Gib FSC”)
Insurance Industry Event 2023 Presentation Slides
Following on from the Gib FSC's recent Insurance Industry Event which provided an update on last year’s key areas of regulatory focus and the Gib FSC's regulatory priorities for the next 12 months. The Gib FSC issued the slides and they can be located here.
Central Bank of Ireland (“CBoI”)
The Individual Accountability Framework, Financial Regulation and the Central Bank – consultation and next steps
Following enactment of the Central Bank (Individual Accountability Framework) Bill 2022 on 9 March, the CBoI has launched a three-month consultation on key aspects of the implementation of the Individual Accountability Framework (IAF), including the publication of draft Regulations and guidance.
The draft regulations and guidance seek to provide clarity in terms of the CBoI’s expectations for the implementation of three aspects of the framework: the Senior Executive Accountability Regime (SEAR), the Conduct Standards and certain aspects of the enhancements to the Fitness & Probity regime.
To ensure a focus by firms on high quality implementation of the framework, the following implementation period is proposed: -
Conduct Standards including accountability of senior individuals for running their parts of the business effectively to apply from 31 December 2023;
Fitness & Probity Regime - Certification and inclusion of Holding Companies to apply from 31 December 2023;
Regulations prescribing responsibilities of different roles and requirements on firms to clearly set out allocation of those responsibilities and decision making to apply to in-scope firms from 1 July 2024.
The full consultation paper, draft Regulations and guidance are available here.
The IAF includes the following key elements: -
Senior Executive Accountability Regime (SEAR): This will require in-scope firms to set out clearly and fully where responsibility and decision-making lie within the firm’s senior management.
Conduct Standards: Common Conduct Standards are basic standards such as acting with honesty and integrity, with due skill, care and diligence, and in the best interest of customers, and will apply to individuals in all regulated firms. Senior executives will also have Additional Conduct Standards related to running the part of the business for which they are responsible.
Enhancements to the current Fitness & Probity (F&P) Regime: This will include clarifying firms’ obligations to proactively certify that individuals carrying out certain specified functions are fit and proper.
Amendments to the Administrative Sanctions Procedure (ASP): A key change will be the Central Bank’s ability to take enforcement action under the ASP directly against individuals for breaches of their obligations rather than only for their participation in breaches committed by a firm.
Central Bank sets out regulatory and supervisory priorities for 2023
The CBoI’s core areas of focus will include: -
continuing to remain vigilant in assessing and managing the financial and operational resilience of firms;
enhancing the Bank’s regulatory and supervisory approaches to mitigate risks from the changing financial system;
providing a clear, open and transparent authorisation process through active engagement with industry and other stakeholders;
progressing actions on the systemic risks generated by non-banks, in particular advancing a macro-prudential framework for non-banks;
continuing to oversee the consolidation of the Irish banking sector and associated programme of account migration;
supervising how firms are supporting borrowers to manage the challenges of the current economic environment (including issues related to affordability and arrears);
Consulting and engaging on the review of the Consumer Protection Code, the cornerstone of the Bank’s consumer protection framework, and the Individual Accountability Framework, the objective of which is to enhance governance across the regulated sector;
Continuing vigilance of the financial system, supervising firms’ compliance with AML/CFT obligations, detecting and sanctioning market abuse, and enforcing financial sanctions (working closely with An Garda Síochána and other relevant bodies in all these areas);
Implementing new EU regulations on digital operational resilience (DORA) and markets in crypto assets (MiCA), as well as contributing to the development of other regulations, such as the review of the Payment Services Directive (PSD2).
Strengthening the resilience of the financial system to climate change risks and its ability to support the transition to a climate-neutral economy, along with implementing the EU’s Sustainable Finance Disclosures Regulation.
These priorities are in keeping with the Central Bank’s vision of a resilient and trustworthy financial system, which sustainably serves the needs of the economy and its customers, in which firms and individuals adhere to a culture of fairness and high standards.
by Ian Journeaux, Senior Consultant