Discussion Paper on Proposals to Create a Single Fiduciary Handbook and Revise Pension Rules (March 2019)

Guernsey Financial Services Commission Discussion Paper on Proposals to Create a Single Fiduciary Handbook and Revise Pension Rules Issued 5 March 2019

Contents Introduction ..................................................................................................................................................4 Purpose of the Discussion Paper...................................................................................................................4 Background to the proposals........................................................................................................................4 Fiduciaries.....................................................................................................................................................4 Review of Pension Licensees (Conduct of Business) & Domestic and International Pension Scheme and Gratuity Scheme Rules (No. 2) 2017 (the “Pension Rules”)...........................................................................5 Next Steps .....................................................................................................................................................5 Part 1 – Proposed amendments ...................................................................................................................6 Proposed scope and structure of the new framework..................................................................................6 A single Fiduciary Handbook.........................................................................................................................6 Pension services providers ............................................................................................................................6 Personal Fiduciary Licensees (“PFLs”) ...........................................................................................................6 Specific provisions.........................................................................................................................................7 Client Money Rules........................................................................................................................................7 Outsourcing...................................................................................................................................................8 Terms of Business..........................................................................................................................................9 Other proposed provisions..........................................................................................................................10 Part 2 – Feedback on Pension Rules............................................................................................................11

Responses to this Discussion Paper are sought by 30 April 2019. We welcome and strongly encourage respondents to provide feedback or comment on any section and question. Feedback may be provided via the Consultation Hub section of the Commission’s website (www.gfsc.gg).

Introduction Purpose of the Discussion Paper The Commission seeks to regulate and supervise financial services in the Bailiwick of Guernsey, with integrity, proportionality and professional excellence, and in so doing help to uphold the international reputation of the Bailiwick of Guernsey as a finance centre. Consistent with the Commission’s objectives, the proposals in this Discussion Paper are designed to enhance the levels of confidence and security in the Bailiwick’s regulatory and supervisory framework for fiduciary services and private pension provision thereby further augmenting its development as a financial centre. The purpose of this Discussion Paper is to seek feedback from all interested parties on potential enhancements to the regulatory framework under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the “Fiduciaries Law”) with the objective of ensuring that the regime continues to be both compliant with international standards and appropriate for the Guernsey market. Responses to this Discussion Paper will be considered by the Commission with a view to making more detailed policy proposals in the form of a Consultation Paper to be issued later in the year. This Discussion Paper is a working document and does not prejudge any final decision to be made by the Commission.

Background to the proposals Fiduciaries The Commission proposes a refresh of the policy framework underlying the Fiduciaries Law, primarily in the area of business conduct. This proposed change will ensure compliance with international standards while building on ongoing policy initiatives. This change will also introduce simplification and consolidation with the creation of a single Fiduciary Handbook (the “Fiduciary Handbook”). The Group of International Finance Centre Supervisors (“GIFCS”), of which the Commission is a member, issued the Standard on the Regulation of Trust and Corporate Service Providers1 (“the GIFCS Standard” or “the Standard”) in 2014. The Standard sets a minimum benchmark for the supervision of businesses administering international trusts and companies. All GIFCS members have committed to be ‘largely compliant’ with the Standard by 2019. Whilst a number of necessary related changes to the Fiduciaries Law, including the introduction of the concept of secondary licensees, are due to be addressed under the Revision of Laws Project (“RoL”), further

1 http://gifcs.org/images/GIFCSStandardonTCSPs.pdf

enhancements to the underlying policy framework are also proposed. Such changes will include new provisions concerning client money, outsourcing, communication to clients (including advertisement) and terms of business. At present firms licensed under the Fiduciaries Law are subject to relevant Codes of Practice (Codes of Practice for Corporate Service Providers (CSP), Trust Service Providers (TSP) and Foundation Service Providers (FSP), together, “the Codes”). It is proposed that these Codes will be repealed and the current provisions reframed and strengthened under a single Fiduciary Handbook. New provisions relating to the GIFCS Standard will also form part of this new Handbook. It should be noted that in the event that a Fiduciary Handbook is introduced it will not remove the requirement for licensees to comply with the Handbook on Countering Financial Crime and Terrorist Financing.

Review of Pension Licensees (Conduct of Business) & Domestic and International Pension Scheme and Gratuity Scheme Rules (No. 2) 2017 (the “Pension Rules”) Following the introduction of the Pension Rules in July 2017, the Commission invited comment from industry taking the opportunity to review the drafting in light of experience and observations post-implementation. A number of suggestions for amendments were received and Part 2 of this Discussion Paper summarises these responses and provides the Commission’s feedback. Additionally, this Discussion Paper makes a significant proposal in respect of the structure of the regulatory framework for pension licensees. As licensed fiduciaries, firms subject to the Pension Rules are also subject to the Codes. Consequently such firms must comply with two sets of requirements which may overlap or lack consistency, increasing regulatory burden. The Commission proposes alleviating this burden and clarifying requirements through the consolidation of the conduct of business-related elements of the Pension Rules into the new single Fiduciary Handbook. It should be noted that it is not proposed to repeal the Code of Practice - Company Directors.

Next Steps The closing date for the Discussion Paper is 30 April 2019. The Commission will then consider all the comments received and engage with relevant industry representative bodies with the view to consulting on detailed proposals in due course.

Part 1 – Proposed amendments Proposed scope and structure of the new framework A single Fiduciary Handbook It is proposed that a consolidated Fiduciary Handbook be introduced encompassing the current scope of the Codes of Practice for TSP, CSP and FSP and introducing new rules in line with the GIFCS Standard. It is viewed that a shift from codes to rules would provide greater clarity and certainty on the requirements placed on a fiduciary licensee. The current Codes of Practice would be repealed. This proposal provides a simpler regime with one key reference source for licensees, as opposed to the introduction of a number of disparate pieces of policy. Q1: Do you agree with the proposal to create a single consolidated Fiduciary Handbook? Agree Disagree Please comment on the reasoning for your reply.

Pension services providers It is further proposed that Chapters 2 to 9 of the Pension Rules (concerning Conduct of Business) would be repealed and absorbed within the consolidated Fiduciary Handbook. This would eliminate the existing, inefficient and burdensome two-tier regime whereby pension services providers have to comply with both the Code of Practice for TSPs and the Pension Rules. It is not anticipated that the Conduct of Business requirements of the Fiduciary Handbook would materially exceed the existing Codes. Consequently, revised Pension Rules would be issued, based on Chapter 10 of the Pension Rules, with enhancements made following feedback from industry (as discussed in Part 2 of this Paper). Q2: Do you agree with the proposal to consolidate conduct of business-related Pension Rules within a new single Fiduciary Handbook? Agree Disagree Please comment on the reasoning for your reply.

Personal Fiduciary Licensees (“PFLs”) It is recognised that while there are common duties, there are differences in how Full Fiduciary Licensees (“FFLs”) and PFLs operate. Under the current regulatory regime, the three Codes apply to both FFLs and PFLs depending on their respective business activity with certain provisions being of little or no applicability to PFLs owing to the more limited scope of their licence. If the Fiduciary Handbook were to be introduced, it would apply to both FFLs and PFLs in a similar

manner as the Codes apply today. The only exception proposed is that for PFLs acting as directors only the Code of Practice – Company Directors would continue to apply. The Commission has given thought to an alternative approach whereby two separate Handbooks, one for FFLs and the other one for PFLs, might be issued. However, given the current relatively small number of holders of personal fiduciary licences, the Commission is of the view that publication of a dedicated PFL Handbook is not merited. It is proposed, however, that the Fiduciary Handbook would aim to make clear which rules are applicable to PFLs. Q3: Do you think that having one Handbook which applies to both FFLs and PFLs is appropriate? Agree Disagree Please comment on the reasoning for your reply.

Specific provisions Client Money Rules The Commission carried out a Thematic Review on Client Money in 2016 and findings have been published on the Commission’s website2 . This Review found that the sector largely demonstrated good practice and strong controls but also highlighted a number of areas for improvement. The introduction of Client Money Rules will formalize existing good practice, address necessary improvements and move towards compliance with GIFCS Standard in this area3 , thereby providing clients of licensed fiduciaries with a greater degree of protection in the event of firm failure, equivalent to that afforded to the customers of other financial institutions. The GIFCS Standard addresses appropriate segregation, reconciliation and control of Client Money. Q4: Do you think that Client Money Rules should form part of the new Fiduciary Handbook? Agree Disagree Please comment on the reasoning for your reply. It is envisaged that rules concerning client money would apply to licensed fiduciaries which hold or have control of client money. During the Thematic Review in 2016, a number of firms queried

2 https://www.gfsc.gg/sites/default/files/Fiduciary%20Client%20Money%20Report%20V4.pdf 3 GIFCS standard E3 addresses Client Money Rules

the definitions of “Client” and “Client Money”, particularly as these might be applied in the case of trust services. The Commission proposes that the definition used in the Handbook of “Clients” would be consistent with that used in the Fiduciaries Law and the definition of “Client Money” would be consistent with that used in the Thematic Review questionnaire: “Clients”, in relation to any person, means (a) persons who have entered into or may enter into agreements for the provision of services by that person when carrying on by way of business any regulated activities, or (b) persons who have received or may reasonably expect to receive the benefit of services provided or arranged or to be provided or arranged by that person when carrying on by way of business any regulated activities. “Client Money” means money which a licensed fiduciary – • holds or receives on behalf of a Client; or • owes to a Client. Q5: Do you agree with the proposed definitions? Agree Disagree Please comment on the reasoning for your reply and provide alternative suggestions for the definition(s) if applicable.

Outsourcing Under the current regulatory regime, provisions concerning outsourcing by licensed fiduciaries are limited to paragraph 4.7 of the Code of Corporate Governance which relates to Board retention of the responsibility and accountability for all material outsourced functions. The Commission proposes introducing sector-specific outsourcing rules with the objective of consistency with the Code of Corporate Governance and approaches applicable to other sectors, and broad compliance with the GIFCS Standard4 . It is intended that this proposal will assist licensed fiduciaries by providing greater clarity around the Commission’s expectations with respect to outsourcing and will reinforce existing standards of good practice and control observed by licensees. In line with the objective of meeting a level largely compliant with the GIFCS Standard the Commission is minded to implement the standards in a pragmatic fashion and therefore it is suggested, for example, that no supervisory approval would be required in the case of a sub- outsourcing arrangement on the basis that the licensed fiduciary would continue to be responsible for monitoring outsourcing risk and regulatory compliance. Similarly, the Commission would expect notification only of significant outsourcing arrangements.

4 GIFCS Standard H. 3. - Outsourcing of Key Functions

Q6: Do you agree that Outsourcing Rules should form part of the Fiduciary Handbook as proposed? Agree Disagree Please comment on the reasoning for your reply. Q7: Do you have a view as to what would constitute a “significant outsourcing arrangement”? Yes No Please comment on the reasoning for your reply.

Terms of Business GIFCS Standard5 require written terms of business with persons for whom a firm has agreed to act and prescribes what should be included within the terms of business, including: • a description of the services to be provided; • the fees to be charged and the basis of the calculation of those fees; • any exit fee and the basis upon which it is calculated; • the means by which complaints about the firm’s services can be made; and • termination notice terms. Under the current regulatory regime, Principle 5 of the Codes of Practice - CSP and FSP provides for similar requirements. It is proposed that these provisions will be revised to ensure broad compliance with the GIFCS Standard and included in the new Fiduciary Handbook. In addition the scope of Terms of Business provisions will be extended to include licensees carrying on trust business. Q8: Do you agree with the proposal for Terms of Business Rules? Agree Disagree Please comment on the reasoning for your reply.

5 GIFCS Standard F. 5. - Terms of Business and F. 3. Interaction with Clients

Other proposed provisions In addition to the provisions highlighted above it is proposed that the new Fiduciary Handbook will also address a number of other areas currently covered by the Codes and that some revision will be made to modernise these elements and bring them closer to compliance with the GIFCS Standard. These provisions include employee Screening & Training, Conflicts of Interest, Record Keeping, Complaints, Financial Resources and Insurance Arrangements. Q9: Please provide any further comments you may wish to share with respect to the proposals in this Discussion paper Please comment on the reasoning for your reply.

Part 2 Feedback received in relation to The Pension Licensees (Conduct of Business) & Domestic and International Pension Scheme and Gratuity Scheme Rules (No.2) 2017 (the “Pension Rules”) Part 2 of this document is set out in a different format to Part 1 given that Part 2 addresses feedback already received in relation to the Pension Rules. Background The Commission in 2018 invited feedback in relation to the Pension Rules following engagement with the Guernsey Association of Pension Providers (“GAPP”) and engagement with other stakeholders. The Commission would like to thank all who took the time to provide feedback in respect of the Pension Rules and to representatives of GAPP for their ongoing engagement in discussions regarding the content of the Pension Rules. The feedback received included suggestions for amendments to the Pension Rules and highlighted where areas of clarification might be required. The current version of the Pension Rules was issued by the Commission on 25 August 2017 and the Pension Rules included a transitional period allowing licensees a period to review and, where necessary, enhance their policies, procedures and controls in order to ensure that they meet their obligations under the existing Pension Rules. The end of the transitional period was 30 September 2018. This document provides the Commission’s response and proposed changes in light of feedback and our lessons learned since the Pension Rules were introduced. Overall, no fundamental changes in policy are currently proposed. The majority of amendments proposed relate to refinement of drafting and definitions with the aim of increasing clarity and removing any perceived ambiguity or duplication. Draft revised Pension Rules will be published along with the Consultation Paper on the Fiduciary Handbook planned for future publication. It should be noted that if the proposals within Part 1 of this paper are adopted the structure of the existing Pension Rules will need to change to reflect the removal of Rules 2 to 9 and the associated definitions. For ease of reference, rule numbering reflecting that used in the current Pension Rules is used in the s