A Committee tasked with ensuring the continuing health of Guernsey's investment sector has recommended fundamental changes to regulatory laws.
The key recommendation of the Committee, chaired by Advocate Peter Harwood, is to create a "registered" fund sector, alongside the existing "regulated" sector. Unlike regulated funds, registered funds would not need prior approval from GFSC.
The report suggests that the same framework should apply to both open and closed end funds, which should be subject to a dedicated Funds Law, leaving the existing Protection of Investors Law to deal with other aspects of investment business. It also recommends public offers should be made subject to specific Prospectus legislation, rather than to the current Control of Borrowing regime, and that provision of services to certain funds domiciled outside Guernsey should also be liberalised.
The report also recommends that definitions of investment business in the POI Law be reviewed, that economic benefit should be abandoned as a criterion for licensing investment firms, and that some of the sets of rules made under the POI Law should be merged.
The report reflects on the importance of expanding Guernsey's intellectual capital by attracting new service providers in areas other than fund administration; and notes the significance of personal tax rules and housing policy in achieving those objectives.
Peter Neville, Director General of the Guernsey Financial Services Commission, said: "We very much welcome the proposals put forward in the Harwood Committee report. Streamlining authorisation and licensing processes will benefit:
- the investment sector by allowing faster responses;
- the Commission by letting its dedicated staff extend their monitoring of licensees rather than on pre-vetting funds;
- and Guernsey in general by ensuring that the service delivered by Guernsey investment firms continues to support and enhance our established reputation.
Recent trends have seen new businesses - stockbrokers, asset managers and private wealth managers - outside the pure funds sector establish themselves here in Guernsey. We also endorse the report's recognition of the importance of expanding the widest range of investment activity in Guernsey.
Once we have seen how the investment sector responds to the consultation, we look forward to working with them, with the Finance Sector Group and the Department of Commerce and Employment to bring about agreed change as soon as possible."
Review of Investment Sector Legislation and Regulation
The committee chaired by Advocate Harwood was appointed in 2005 to consider investment sector legislation and regulation and to report to the Guernsey Financial Services Commission and to the Commerce and Employment Department. Its terms of reference were:
'To consider the investment industry in the Bailiwick of Guernsey and the conditions required for its continued prosperity.
The review will include, but not be limited to, the legal and regulatory framework as well as aspects of public policy relating to the industry, and will, where appropriate, make recommendations for change.
Consideration will be given to the statutory objectives contained in the Protection of Investors Law and the rules and regulations made under it, as well as the Commission's powers, duties and responsibilities. The review will also consider aspects of Company Law and other enactments which are relevant to the development of investment business. Business environment dependencies, such as telecommunications, would also be in the scope of the review.'
The Committee's report was delivered to the Commission and to the Commerce and Employment Department on 21 March 2006. The Report has now been considered in detail by the Finance Sector Group which has endorsed its conclusions and proposals. The conclusions were that:-
- the existing COBO ordinances should be repealed and replaced with legislation - applicable to offers of securities by all Guernsey entities - dealing generally with minimum criteria for disclosure of information;
- the distinction between open and closed-ended funds was probably no longer justified;
- the regulatory focus should concentrate less on individual funds and more on licensees providing services to such funds.
The working party did not generally endorse proposals to allow Guernsey-domiciled funds to be administered by non-Guernsey entities, but recognised that the current outsourcing policy, which allows Guernsey services providers to use non-Guernsey resource for day-to-day activities, should be kept under review.
The Committee felt that an economic benefit criterion was inappropriate in a regulatory law. Furthermore, in order to attract intellectual capital to the Bailiwick, the Committee noted that two principal issues - tax capping, and reform of the current housing licence system - needed to be addressed.
The Committee's detailed proposals are to:-
- repeal the COBO ordinances and replace them with a generic 'Prospectus' law, applicable to all Guernsey entities, setting out minimum disclosure criteria for Offering Documents;
- take the funds provisions from the existing Protection of Investors Law and modify them to become a generic Funds Law applying to both the open and closed-ended sectors;
- establish two categories of fund - Regulated and Registered - and to remove the current requirement for Principal Managers. All funds, whether Regulated or Registered, would have to appoint a locally licensed administrator. Registered fund prospectuses would have to make it clear that the fund was not regulated by the Commission;
- Guernsey service providers should be permitted to offer services to non-Guernsey vehicles, subject only to a notification requirement to the Commission;
- the current Designated Persons and Licensees (Financial Notification Resources, Conduct of Business and Compliance) Rules should be amalgamated;
- the custody function should clearly be seen as a trustee/oversight role, which could be separated from the activity of custody/safekeeping. Capital adequacy requirements should also be reviewed;
- categories of regulated activity set out in the Protection of Investors Law should be reviewed. The report also noted that there was some overlap between the regulated activities set out in the various regulatory laws, and suggested this could also be reviewed.
Implementing the proposals of the Harwood Committee will involve both legislative change and policy and rule amendment. The main elements of the process therefore appear to be:
- amending the Protection of Investors Law to permit closed-end funds to be brought within the prior authorisation and regulation regime similar to that applied to open-ended funds;
- extending exemption powers under the Protection of Investors Law to take 'Registered' open and closed-end funds out of the prior authorisation and regulation regime, subject to notification requirements;
- the Commission and industry to establish appropriate sets of fund rules for:
- 'Regulated' closed-end schemes;
- notification requirements for registered funds;
- the exemption of inter-professional business;
- amending the Protection of Investors Law by deleting section 3(2)(d) of the Law which requires the Commission to consider economic benefit in considering whether to grant a licence.