Financial Regulation – Guernsey well placed to attract sophisticated financial services business

For more than 10 years Guernsey has seen a steady stream of public statements from the regulator in respect of enforcement action, enabling the jurisdiction to benefit from a clear understanding of the standards expected of licensees and the parameters of remediation and enforcement. This has given Guernsey an advantage over other jurisdictions, some of which have been slower to develop a regulatory regime with teeth, and are now taking significant action to demonstrate compliance with international standards.

We are fortunate in Guernsey to work within a regime that is well thought out, flexible, sufficiently sturdy and appropriately applied. As a result we benefit from a flow of sophisticated consumers of financial services, including those moving from less-well-regulated jurisdictions. Guernsey has carved out a strong position as tried-and-tested when finding the right balance between robust regulation and pragmatic solutions which enable the financial services sector to get on with business. This balance also protects the island from the threats posed by the reputational issue of over- or under-regulation and differentiates Guernsey in the face of the rise of midshore and onshore jurisdictions.

Guernsey has always been a well-regulated jurisdiction, which is to say that the right regulation has been proportionately and sensibly applied. That approach has earned the island commendation from international bodies in carrying out their jurisdictional assessments, and significant work has gone into securing the island’s reputation at the forefront of offshore financial centres.

Nonetheless, across the board, regulation is increasing every year and often the standard is set internationally, by organisations like the Financial Action Task Force (FATF), the Organisation for Economic Co-operation and Development (OECD) or the EU, and then applied at the local level by jurisdictional regulators like the Guernsey Financial Services Commission (GFSC). Also relevant is where we are in the regulatory cycle. With the next visit from MONEYVAL around the corner, and an ever-increasing requirement for local regulators to evidence their effectiveness, firms must anticipate and prepare for greater regulatory scrutiny.

The GFSC understands the local business landscape and regulates accordingly, and there are many examples of this. Solvency II was deemed not appropriate to adopt because of the type of insurance business which Guernsey continues to attract. Instead, the regulator developed its own, more relevant, version. The GFSC agreed that there was a need for regulation within this space but that a cut-and-paste solution wasn't appropriate. Similarly AIFMD.

Equally, where equivalence is practically important for local financial services businesses, for example in the case of the single euro payments area, the GFSC has been quick to ensure that it adopts a regime that is consistent with other financial centres.

Currently Guernsey is in the position to pick and choose which EU requirements to implement depending on relevance to the business conducted on island or requirements for market access, for example. Given Brexit, and the EU's approach of imposing equivalence requirements, at some point choices may need to be made whether to follow the UK and Rest of the World approach or to stay close to the EU. Government and the GFSC are alive to these types of issues and the need to balance competing stakeholder views as to what route Guernsey should follow.

What does that mean for Guernsey businesses?

In a year when the GFSC’s revision of laws project will see wholesale review, update and alignment of the Island's principal regulatory laws, businesses themselves must seize the opportunity to ensure procedures and operations are in order, and further strengthen the Guernsey offering. The aim is for greater consistency across industry, which should help firms to interpret and apply the regulations to their business.

Of course, any legislative update does mean organisations need to take action to continue to be compliant, all at a cost, and operating in Guernsey, with its reputation as a well-regulated jurisdiction to protect, will inevitably have consequences for firms that aren't fully prepared to meet all regulatory requirements.

By far the most effective way to deal with mounting regulation is to be proactive. Risk and compliance is a board-level issue for the modern financial services business seeking to navigate the regulatory landscape. Equally, it is a broader business issue and impacts the day-to-day running of an organisation. Education across all levels is key and senior teams have a responsibility to instil a culture with compliance and risk management at its heart.

In the event that something does go wrong, or is about to go wrong, businesses need to take advice on how to work with the regulator to remediate. This may involve support to interpret the regulatory regime and requirements and apply them to a specific scenario, or to consider the GFSC's expectations and their views on how to sit comfortably within the legislative framework. When it comes to enforcement, both the standards and the stakes are high, the issues arising will always be complex and it is best to be advised.

Futureproof

While robust regulation is essential for consumer protection and to protect the reputation of the Bailiwick of Guernsey, it must not go so far as to prohibit business entirely. This is where Guernsey has got it right, remaining competitive and respected in the financial services market whilst encouraging an adaptive entrepreneurial spirit.

Robust and clear regulation which upholds international standards, but which is pragmatically applied and flexibly adapted to reflect the business environment, has become Guernsey's great strength.

Guernsey is fortunate to be hungry, adaptable and nimble with strong experience and expertise. All of that is not easy to replicate, meaning we're well placed as the world of regulation continues to evolve.