Lending, Credit & Finance Consultation Paper (July 2017)

Guernsey Financial Services Commission •www.gfsc.gg July 2017 2017 Guernsey Financial Services Commission 18 July 2017 Lending, Credit & Finance Consultation Paper

Guernsey Financial Services Commission •www.gfsc.gg July 2017 Contents Title Page

1. Executive Summary........................................................................................................................ 1
2. Discussion Paper Feedback........................................................................................................... 4
3. The LCF Law Framework.............................................................................................................. 5
4. The Lending, Credit & Finance Law........................................................................................... 12
5. Class 1 Alternative Financial Products & Services .................................................................... 21
6. Class 1 Crowdfund And P2P Business Models............................................................................ 27
7. Class 3 Lending, Credit & Finance Consumer Protection.......................................................... 32
8. Minimum Criteria For Licensing................................................................................................. 44
9. Supervision .................................................................................................................................. 45
10. Implementing The New Framework........................................................................................... 48
11. Consultation Questions.............................................................................................................. 54
    Appendix A. Principles Of Conduct Of Finance Business............................................................... 56
    Appendix B. The Indicative Lending, Credit And Finance Law (Class 1) Rules 20[XX]................ 58
    Appendix C. The Indicative Lending, Credit & Finance Law (Class 3 Licensee) Rules 20[XX].... 75
    Appendix D. Matchmaking Crowdfunding Model ........................................................................... 93
    Appendix E. Affordability Assessment Suggested Criteria. ............................................................. 94
    Appendix F. The Customer Journey................................................................................................. 95
    Appendix G. Definitions................................................................................................................... 97

Guernsey Financial Services Commission •www.gfsc.gg July 2017 Responding to the Consultation Paper Responses to this Consultation Paper are sought by Monday, 15 September 2017. We welcome and strongly encourage recipients to provide feedback or comment on any section or question. You can send your responses to us using the online submission tool, Citizen Space, accessible on our website at:
https://consultationhub.gfsc.gg
Or in writing to:
Steve Chandler
Guernsey Financial Services Commission
Fiduciary Supervision, Policy & Innovations Division Glategny Court, Glategny Esplanade St Peter Port Guernsey GY1 3HQ Telephone +44 (0) 1481 712706 Email Lending Credit and Finance - lcf@gfsc.gg

Guernsey Financial Services Commission •www.gfsc.gg July 2017 Foreword Bailiwick residents are not immune from an over reliance on credit following the prolonged low interest rate environment or unaffected by unscrupulous lending. The Bailiwick shares potential lending hot spots, which have been publicised in the UK; for example a lack of understanding of the terms of a Personal Contract Plan (“PCP”) for a new car, or unaffordable loans. The Commission in conjunction with the States of Guernsey wants to ensure that for the first time Bailiwick residents are given regulatory consumer protection. Financial services businesses in the Bailiwick have an opportunity to innovate, evolve and grow through the regulatory framework proposed in this paper. We have included some enterprising innovative alternative finance opportunities, such as the regulation of Customer Due Diligence (“CDD”) Platforms, which merit consideration. The Commission has sought to create a principles based regulatory environment which could act as a stimulus for both the innovative business of today and potential finance business of the future; ultimately we want to see good finance business flourish. I hope that whatever your background (and we are all ultimately consumers), you will consider feeding into this consultation process. All comments, in writing, via Citizen Space, or even simply over a coffee with us, will be valued. Gillian Browning Director, Fiduciary Supervision Policy & Innovations Division Guernsey Financial Services Commission

Regulatory Infrastructure for Lending Credit & Finance | Executive Summary Guernsey Financial Services Commission •www.gfsc.gg July 2017 1

1. Executive Summary
   1.1. Purpose of the Consultation Paper
   Consistent with the Commission’s objectives, the proposals in this Consultation Paper are designed to enhance the levels of confidence and security in the Bailiwick’s lending, credit and finance infrastructure thereby further augmenting its development as a financial centre. In August 2016 a Discussion Paper was issued that outlined a set of proposals relating to the introduction of new regulation and legislation. Thirty nine responses were received, analysed and used to further develop the proposals described in this consultation. The purpose of this Consultation Paper is to consult on new lending, credit and finance legislation. We welcome comments on our proposals. Following analysis of responses to the consultation, we intend to ask the States of Guernsey (via the Committee for Economic Development), to consider passing a Policy Letter asking the Law Officers of the Crown to produce a Projet de Loi giving effect to the proposals set out in this Consultation Paper. This Consultation Paper is a working document and does not prejudge any final decision to be made by the Commission, the Committee for Economic Development or the States of Guernsey. The proposals for the Lending, Credit & Finance project have been developed with assistance from focus groups that included representatives from industry, associations, consumer bodies and the States of Guernsey. We are grateful for all the contributions, support and input provided.

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1.2. Objectives
The Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law 2008 (“NRFSB Law”) is to be repealed and replaced by a new Lending, Credit & Finance Law. The Lending, Credit & Finance Law seeks to provide:

• A stable regulatory environment that enables the Bailiwick’s digital strategic
  aims for business growth;
  1
• A framework that supports the reputation of the Bailiwick as a financial
  services jurisdiction and a good place to do business; and
• Regulation of Bailiwick and non-Bailiwick firms providing lending, credit &
  finance products and services to ensure appropriate consumer protection is in place. Frequently during the development of the proposals, participants and respondents to the Discussion Paper emphasised the need to apply controls and measures that are practical and proportionate. The proposals we put forward here seek to meet that aim.
  1.3. Scope
  This Consultation Paper seeks to formulate a legislative framework which (1) promotes growth in respect of lending, credit and financial services, (2) provides compliance with international AML/CFT standards and (3) protects the interests of the consumer. The proposed regulatory framework will make it a formal requirement for:

1. Firms operating by way of business in or from within the Bailiwick and
   providing lending, credit and finance; and
2. Bailiwick firms operating in the sphere of lending and credit services and
   operating alternative financial services anywhere in the world.
   To apply standards and behaviours that are in accordance with international standards, to conduct themselves with integrity and to treat their customers fairly.
   1.4. Overview of Reasons for Change
   If vulnerable consumers are not to be exploited by the unscrupulous, it is important that laws are in place to ensure that usury2 cannot be practiced. Despite effective, equitable and transparent consumer credit legislation being an expected component of a modern economy, the Bailiwick of Guernsey does not currently have any legislation to enable the Commission to supervise the conduct and prudential controls of entities offering lending and ancillary activities. Additionally, the pace of technological change is such that the Bailiwick needs to be able to respond nimbly to ensure appropriate prudential, consumer and financial crime protection is in place. It is important that consumers are able to exercise choice and avail themselves of new options confident in the knowledge that providers are reputable.

1 SMART Guernsey The Digital Sector Strategic Framework 2 Lending of money at excessively high rates of interest “Islanders seek help for £5.5m worth of debt” Guernsey Press 25 May 2017

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1.5. Customer Financial Vulnerability
The statistics stated below are taken from The Citizens Advice Guernsey Annual Report 2016. 3 The statistics serve as evidence of current levels of consumer financial vulnerability within the Bailiwick.

3 Citizens Advice Guernsey Annual Report May 2016 Citizens Advice Guernsey Annual Report 2016 10,245 £5.5M 2,388 10,245 enquires received by the Citizens Advice Guernsey. Money advisors negotiated repayments of £5,542,744 2,388 enquiries related to debt and money issues. £4.29M £83,810 £305,550 The amount that Citizens Advice Guernsey advisors negotiated repayments for in respect of secured and unsecured loans. The amount that Citizens Advice Guernsey advisors negotiated repayments in respect of catalogue or HP The amount that Citizens Advice Guernsey advisors negotiated repayments in respect of credit cards “2,388 Enquiries made to Citizens Advice Guernsey”

Regulatory Infrastructure for Lending Credit & Finance | Discussion Paper Feedback Guernsey Financial Services Commission •www.gfsc.gg July 2017 4
2. Discussion Paper Feedback
The Discussion Paper used the differing types of Guernsey milk as a means to describe the Lending, Credit & Finance Law’s proposed legislative and regulatory framework. The majority of respondents agreed with the Discussion Paper’s 4 proposed framework, although a number considered the proposals to be retail orientated and consequently outside the scope of their business activities. These comments have been incorporated into the proposals included in this Consultation Paper. The Discussion Paper outlined various proposals to introduce controls and measures in respect of financial promotions, assessing creditworthiness, transparency and responsible lending. The majority of respondents replied encouragingly and provided examples of existing best practice, which have been instrumental in some of the proposals outlined in this Consultation Paper. Consideration was given as to whether the Bailiwick should introduce a code of practice for consumer lending or amalgamate with the Jersey Code of Practice for Consumer Lending but ultimately it was concluded that an unenforceable code was insufficient for the Bailiwick’s needs. The Discussion Paper sought specific views on topics such as the transparency of financial arrangements. Generally respondents were in favour of introducing an obligation on lending, credit and finance firms to provide a full explanation of all the features of a loan, credit arrangement or any funding mechanism, including fees, and key risks prior to agreement. Despite majority agreement, a proportion commented that such controls already exist due to businesses having to comply with legislative and regulatory requirements of other jurisdictions. Equally it was expressed that some firms had such procedures in place since it was an accepted best practice. The Commission has recognised and catered for such practice in the proposals. Some respondents raised concern about creating an imbalance with businesses located in other jurisdictions and the potential to create a competitive disadvantage through excessive local controls. The Commission’s view is that the proposals are consistent with other jurisdictions and indeed as noted by some respondents a proportion of licensees are already obliged to comply with requirements relating to financial promotions. 5 Respondents to the Discussion Paper commented on the potential beneficial advantages of regulation from both a lender and consumer’s perspective; for example an existing lending institution remarked on the competitive benefits of having a level playing field with jurisdictions that have established legislative and regulatory financial consumer protection. In summary, the Discussion Paper feedback demonstrated material acceptance and support of the proposals and provided the mandate for development of this Consultation Paper.

4 https://www.gfsc.gg/news/article/commission-consults-proposals-revise-bailiwicks-financial-regulatoryinfrastructure 5 The Association of Guernsey Banks (“AGB”) has published a non-statutory code outlining the requirements for Association members in respect of deposit advertisements. The Protection of Investors (Bailiwick of Guernsey) Law, 1987 or the Licensees (Conduct of Business) Rules 2016, (“the COB Rules”) and included within the COB Rules are the requirements expected of a Licensee regarding promotions and advertising.

Regulatory Infrastructure for Lending Credit & Finance | Framework Guernsey Financial Services Commission •www.gfsc.gg July 2017 5
3. The LCF Law Framework
This section of the Consultation Paper sets out the proposed framework of the Lending, Credit & Finance Law.
3.1. The Lending, Credit & Finance Law
The NRFSB Law will be repealed and replaced by a new Law, the Lending Credit & Finance Law (“the LCF Law”).
3.2. The Lending Credit & Finance Law Purpose
The LCF Law will set out:

• The activities that will require licensing and registration for anti-money laundering and
  countering financing of terrorism (“AML/CFT”) purposes, consumer protection and alternative financial products and services;
• The ability for the Commission and States of Guernsey Policy & Resources Committee
  to make rules in respect of certain classes of Licensee;
• The minimum criteria for licensing; and
• The supplementary provisions found in the Principal Regulatory Laws (e.g. appeals,
  service of notices).
  3.3. The Lending, Credit & Finance Law Regulation Structure
  It is anticipated that the LCF Law will be structured similarly to the other Principal Regulatory Laws. Licensees will be required to comply with the Principles of Conduct of Financial Business and specific Principles, Rules or Guidance to the extent they are issued in respect of the conduct of their business.
• The Law sets out who needs to be a Licensee.
• The Principles establish the behaviour and standards of a Licensee.
• The Rules state the controls and measures that a Licensee must observe.
• The Guidance describes the means by which Licensees comply with the stipulated
  requirements.
  Law Principles Rules Guidance

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3.4. The Lending Credit & Finance Law Classes
The LCF Law is intended to cover three strands of registration or licensing (i.e. alternative financial products and services, AML/CFT and consumer protection,), each of which have distinct and separate rationales and therefore risks and exemptions. The Commission therefore intends that the LCF Law will create three separate classes of Licensee that are required to register, each with their own exemptions and rules (where appropriate):
3.5. Class