Jersey Financial Services Commission: Annual Report 2011

2011

 ANNUAL REPORT

CONTENTS

THE ISLAND OF JERSEY  02 THE JERSEY FINANCIAL SERVICES COMMISSION  04 THE COMMISSIONERS  05 CHAIRMAN S STATEMENT  07 DIRECTOR GENERAL S REPORT  11 STRUCTURE CHART  18 INTERNATIONAL STANDARDS AND POLICY DEVELOPMENT  21 SUPERVISORY APPROACH  25 ENFORCEMENT  32 REGISTRY  35 THE SUPPORT DIVISIONS  37 STATISTICAL ANNEXE  40 FINANCIAL STATEMENTS  51 CORPORATE GOVERNANCE  64

ANNUAL REPORT 2011 | 01

THE ISLAND OF JERSEY

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international finance centre

THE ISLAND OF JERSEY

Jersey is situated off the north-west coast of France, 14 miles from Normandy and 85 miles from the south coast of England.

Within its 45 square miles the Island has a population of around 98,000 and enjoys a reputation as a well-regulated international finance centre.

Jersey s allegiance is to the British Crown but it is not part of the United Kingdom. The Island is not a Member State of the European Union nor a part of the European Economic Area.

Jersey has its own legislative assembly, called the States of Jersey,

which comprises 53 elected members plus the President. Jersey has its own system of local administration, fiscal and legal systems, and courts of law.

Jersey has a ministerial system of government comprising a Council of Ministers led by a Chief Minister. Further information on the workings of government in Jersey can be found on the States of Jersey website, www.gov.je

THE JERSEY FINANCIAL SERVICES COMMISSION

The Jersey Financial Services Commission (the  Commission ) is responsible for the regulation, supervision and, within its legal remit, the development of the financial services industry in the Island.

The Commission is a statutory body corporate, set up under the Financial Services Commission (Jersey) Law 1998 (the  Commission Law ). The Commission Law provides for a Board of Commissioners to be the governing body of the Commission. The Commission Law established the Commission as an independent body, fully responsible for its own regulatory decisions.

The Commission is accountable for its overall performance to the States of Jersey through the Minister for Economic Development.

The Commission is also responsible, pursuant to powers granted to it under the Companies (Jersey) Law 1991, for appointing a person to exercise certain statutory responsibilities as the Registrar of Companies. The Commission has appointed the Director General of the Commission as the Registrar.

The Commission s key purpose is:

To maintain Jersey s position as an international finance centre with high regulatory standards by:

• reducing risk to the public of financial loss due

to dishonesty, incompetence, malpractice or the financial unsoundness of financial service providers;

• protecting and enhancing the reputation and integrity of Jersey in commercial and financial matters;

• safeguarding the best economic interests of Jersey; and

• countering financial crime both in Jersey and elsewhere.

In support of its key purpose, the Commission aims to:

• ensure that all entities that are authorised meet fit and proper criteria;

• ensure that all regulated entities are operating within accepted standards of good regulatory practice;

• match international standards in respect of banking, securities, trust company business and insurance regulation, and anti-money laundering and terrorist financing defences;

• identify and deter abuses and breaches of regulatory standards; and

• ensure that the Commission operates effectively and efficiently, and is properly accountable to the Minister for Economic Development.

THE COMMISSIONERS

Non-Executive Commissioners

Clive Jones - Chairman

Clive Jones joined the Board of Commissioners on 23 October 2007 and was appointed Chairman in September 2009.

Clive retired in June 2007 from an international career with Citi which took him from London to Seoul, Sydney, Melbourne, Athens, Zurich and finally to Jersey over a 36-year period. In Jersey he was the Citigroup Country Officer for the Channel Islands.

He has previously held the posts of President  of the Jersey Bankers Association, Chairman  of the Jersey Finance Industry Association,  and was one of the founding Board members of Jersey Finance Limited.

Clive is a Fellow of the Institute of Directors and a Chartered Director.

John Mills CBE

John Mills CBE, joined the Board of Commissioners on 23 October 2009.

John s public service career, until his

retirement in 2007, included appointments as Director of Rural Policy, Department for the Environment, Food and Rural Affairs; as Chief Executive, Policy and Resources, States of Jersey; as Chief Executive, Cornwall County Council; as Director of Consumer Affairs at the Office of Fair Trading; as a member of the Prime Minister s Policy Unit; and as a  Principal Assistant Secretary in the Hong Kong Civil Service.

John is a member of the Jersey Harbours and Airport Shadow Board, and also serves in the Island on the States Members Remuneration Review Body and as an Income Tax Commissioner of Appeal. In the UK he is vice-chairman of the Port of London Authority and a board member of the Commission for Rural Communities.

John Averty Deputy Chairman

John Averty joined the Board of Commissioners in December 2005 and was appointed Deputy Chairman on 1 June 2010.

He was born in Jersey and educated at Victoria College.

John is the Chairman and Chief Executive  of the Guiton Group Limited. The Group publishes daily and weekly newspapers in  the Channel Islands. It also has a  technology division.

From 1969 to 1984, John served as a Member of the States of Jersey, initially as a Deputy and latterly on the Senatorial benches.

He is currently a non-executive director of a Jersey registered private bank.

Advocate Debbie Prosser

Advocate Debbie Prosser joined the Board  of Commissioners on 30 November 2008. Debbie qualified as a Jersey Advocate in 1990 and is a member of the Jersey

Law Society.

Debbie joined the law firm Bailhache Labesse (now Appleby) in 1984 where she was a partner from 1991 to 2005. She was appointed Managing Partner in 1998 and Managing Director of Bailhache Labesse Trustees Limited in 2000. Debbie previously held the position of chairman of the Jersey Child Care Trust and the States of Jersey Education Audit Committee, and was also  

a member of the States of Jersey Audit Commission and the Tourism  

Development Fund.

Debbie is currently a member of the Jersey Police Complaints Authority and the Jersey Youth Court Panel and holds a number of non-executive directorships.

Lord Eatwell of Stratton St Margaret

Lord Eatwell joined the Board of Commissioners on 22 April 2010.

Lord Eatwell is currently Professor of Financial Policy at the University of Cambridge and,  for a number of years, his work has focussed on issues of financial regulation. He leads a work stream within the Centre for Financial Analysis and Policy (CFAP, a research centre  he directs) on financial regulatory issues.

In 1998, Lord Eatwell played a pivotal role in analysing the problem of systemic risk in financial markets, which led in due course to

the creation of the Financial Stability Forum (now the Financial Stability Board). Lord Eatwell has undertaken a number of roles with UK regulators and has acted as an adviser on regulatory matters to the Bank for International Settlements, the Banking Committee of the  

US Senate, the European Parliament and the Hong Kong Monetary Authority.

Markus Ruetimann

Markus Ruetimann joined the Board of Commissioners on 13 September 2010.

Markus is Group Chief Operating Officer for Schroder Investment Management Limited, based in London, and his global responsibilities encompass portfolio services, fund services, information technology, group change and project management and corporate services. Markus joined Schroders in November 2004 and was appointed Chairman of Schroder Investment Management (Luxembourg) S.A.  in January 2005. Markus has been a member of the Group Management Committee of Schroders plc since June 2005 and was appointed as a director of Schroder & Co. Bank AG, Zurich in September 2009.

Markus was Global Head of Technology & Portfolio Services at UBS Global Asset Management in London from 1999 to 2004. He was Chief Operating Officer at Phillips & Drew (now part of UBS Global Asset Management) in London from 1988 until 1998.

THE COMMISSIONERS

Non-Executive Commissioners

Philip Taylor , FCA (until February 2012)

Philip Taylor , FCA, joined the Board of Commissioners on 23 October 2009.  

He retired as the Global Leader of PwC Assurance Quality Review in September 2009 following a 40 year career with PwC and its predecessor companies. He was the Senior Partner of the Channel Islands firm from 1992 to 2007. During his career Philip worked in London and Johannesburg as well as in the Channel Islands.

Philip is a Member of the Jersey Financial Services Advisory Board, Chairman of the Board of Governors of the Jersey College for Girls and a director of several companies.  Philip resigned from the Board of Commissioners on 2 February 2012.

Executive Commissioner

John Harris - Director General

John was appointed the Director General of the Commission on 6 November 2006 and subsequently joined the Board of Commissioners on 1 March 2007. He is a fellow of the Chartered Institute of Bankers.

From 2002 to 2006, he held the position of Director - International Finance in the States of Jersey Chief Minister s Department where he had responsibility for all aspects of the Government s policy on the maintenance and enhancement of Jersey s position as an international finance centre.

John spent 22 years working internationally

for the NatWest Bank Group and from 1998

to 2002 he was Chief Executive Officer for NatWest Offshore with responsibility for offices in Jersey, Guernsey, Isle of Man, Gibraltar, Cayman, Bermuda and the Bahamas.

Crown Advocate Cyril Whelan

Crown Advocate Whelan joined the Board  of Commissioners on 1 June 2010.

Called to the English bar in 1979 and to the Jersey bar in 1982, Advocate Whelan has spent 28 years as senior legal adviser in the Law Officers Department in Jersey. He was appointed to the office of Crown Advocate immediately upon the creation of that office  in 1987 and remains the Island s Senior Crown Advocate.

As head of the Section within the Law Officers Department responsible for Serious Crime and International Mutual Legal Assistance, Crown Advocate Whelan has advised on all aspects of public law, including serious crimes such as complex fraud and money laundering. He also acted on behalf of successive Attorneys General in the implementation of major regulatory and mutual assistance legislation in Jersey.

Crown Advocate Whelan retired from the Law Officers Department in 2007 and is currently a Senior Consultant at the local law firm Baker & Partners and is also a Door Tenant of Chambers at Seven Bedford Row, London.

Sir Nigel Wicks

Sir Nigel Wicks joined the Board of Commissioners in July 2007. Sir Nigel is currently the Chairman of Euroclear, having previously been non-executive Deputy Chairman, and a director of the Edinburgh Investment Trust plc. Sir Nigel was a member of the British Civil Service for 32 years.

Sir Nigel held the position of Second Permanent Secretary and Director of International Finance at HM Treasury from 1989 to 2000. Sir Nigel has held senior positions in the offices of former British Prime Ministers. Sir Nigel served as Chair of the Committee on Standards in Public Life between 2001 and 2004.

CHAIRMAN S STATEMENT

The Commission continues to work with international bodies in order both to be seen to be a pragmatic standard- setter as well as to be seen to be active among its peers.

2011 saw a continued evolution of international financial services legislation. Indeed, it is evolving at a faster pace than many of us have seen in the course of our careers. For a jurisdiction such as Jersey, which is committed to meeting international standards and, for an authority as modest in size as the Jersey Financial Services Commission (the  Commission ), this evolution presents challenges. It also presents challenges for our Industry, which has to meet the requirements of new extraterritorial legislation in order to be able to continue to conduct its business in certain key markets. I shall reflect on these challenges later in this statement, but it is clear that addressing them with care and skill is going to be one of our key tasks in 2012.

During 2011, one of the Commission s main aims was to consolidate and enhance the effectiveness of its supervisory activities. The Commission believes that on-site supervision continues to represent one of the  best tools it has for policing adherence to the relevant legislation and Codes of Practice, for sharing best  practice with the wider Industry, and for monitoring general standards of conduct. The total number of  on-site examinations conducted in 2011 was 208.

This was slightly down on 2010 s total of 248.

This was partly due to senior staff having to be diverted to help manage a number of serious cases of apparent non-compliance and also in part to the need to manage a number of entities that have been subject to heightened supervision as they work to correct  previously identified shortcomings.

Finding a balance between the need for effective on-site supervision and the increased consumption of human resources that it requires is a matter the Board has spent time considering during the year. The Commission is funded by its licence holders and the Commission is conscious it does not have a mandate to levy fees to an unlimited extent in order to fund its work, however well justified it may feel such funding to be. To the extent possible for a regulatory organization, the Commission will seek to develop models that deploy supervisory staff in the most effective way and also will harness technology to make supervisory processes more efficient. To this end the Board authorized preliminary changes to the supervisory packages for Funds and for Trust Company Business, to take effect in 2012. It has also authorised funding for the first of a series of technology projects to improve the Industry s interaction with the Commission in the area of Personal Questionnaires.

 Scaleability is not a concept readily associated with financial services regulators. Whilst it may never be achievable in its purest sense, the Commission will continue to look for ways in which to conduct its important work more effectively. That said, it must be recognized on all sides that the Island s stated objective  of meeting international standards will continue to require investment in people and systems if we are to avoid falling behind.

As I noted earlier, those international standards  continue to evolve rapidly. During 2011 work continued with Jersey Finance Limited and with the Jersey Funds Association on the EU s Directive on Alternative Investment Fund Managers ( AIFM Directive ).  During the year, dialogue with the Island s insurance sector led us to conclude there was no regulatory or other reason to adopt Solvency II at this time. Coming hard on the heels of the FSA s revised liquidity regime for banks, the report of the Independent Commission on Banking may pose further challenges to the business models of

a number of banks operating in the Island and these challenges will be receiving close attention in 2012,  in consultation with the Industry.

In September 2011 the International Organization of Securities Commissions ( IOSCO ) published its revised Methodology, and the Financial Action Task Force

( FATF ) published its revised recommendations in February 2012. Close attention will be given to the best way to meet these revised standards in 2012.

In a number of areas the Commission has worked closely with its sister Commissions in the Isle of Man and in Guernsey. In many instances there is a high degree of common interest and therefore a strong tripartite approach can be more effective than going it alone .

One example of this tripartite approach concerns working with the government of the UK so that the three Crown Dependencies can all participate in the mutual evaluation processes and procedures of MONEYVAL, which operates as a FATF style Regional Body and which can therefore formally keep our compliance with the FATF Recommendations under review. Another example is the approach of the Crown Dependencies to the European Securities and Markets Authority to discuss possible approaches to third country passporting arrangements under the AIFM Directive.

The Commission continues to work with international bodies in order both to be seen to be a pragmatic standard-setter as well as to be seen to be active among its peers. To this end, members of the Executive worked throughout the year with IOSCO s Implementation Task Force, and with the Group of International Finance Centre Supervisors by attending a number of FATF meetings.

During the year, a Memorandum of Understanding was signed with France s AutoritØ de Contr le Prudentiel,  and relationships with the German regulator BAFIN  were further cemented when the latter delivered its government s formal acceptance of the equivalence of Jersey s Anti-money Laundering and the Countering of the Financing of Terrorism ( AML/CFT ) regime.

ANNUAL REPORT 2011 | 09

CHAIRMAN S STATEMENT

There were no changes to the Board of Commissioners during 2011. However at the end of the year Commissioner Philip Taylor gave notice of his intention to stand down early in 2012. Commissioner Taylor has given valuable service since his appointment in October 2009 and we shall miss his counsel.

As foreshadowed in my statement last year,

a Proposition was duly lodged by the Minister for Economic Development, debated by the States and approved in July 2011 whereby Commissioners terms of appointment now run for five years rather than the previous three. It is hoped that this measure will give Commissioners more opportunity to develop their experience in this demanding role and at the same time help to extend the Board s corporate memory .

During the year an appraisal of the Board s performance was conducted by the Institute of Directors. This was the second successive such appraisal and it yielded further helpful results. However, there is a limit to the value in conducting the exercise annually - and indeed the UK Corporate Governance Code does not require it - and so we will probably not return to this until 2013, by which time we will have been joined by two new Commissioners.

In 2011, more emphasis began to be placed on ensuring members of the Board received appropriate training for their roles. One manifestation of this was a two day course on international financial regulation, devised in conjunction with the London School of Economics

( LSE ), which was put on for the Boards of all three Crown Dependencies Commissions by the LSE prior to the Commissions annual tripartite meeting. This was generally felt to be a success, and Board training and development will continue to receive attention in 2012.

The Board feels itself fortunate to have a Director General, Executive and staff who conduct the business of the Commission with such skill and dedication. On its behalf I thank them. I too am fortunate to be supported by a Board of talented and experienced individuals who, by their actions, are clearly committed to the success of the Island and its premier industry. I thank them for that support.

DIRECTOR GENERAL S REPORT

Without any doubt 2011 saw the increasingly significant impact of external change on both the financial services sector in the Island and on the Commission.

During 2011, the Commission was once again called upon to address a generally difficult economic environment, coupled with the increasingly fast pace of regulatory change worldwide, in order to meet its external and internal challenges. The general backdrop was one

of an anaemic recovery in Jersey from the economic lows generated by the financial crisis of 2008 and in some respects elements of recovery within the financial services sector in the Island were difficult to discern at all.

Notwithstanding this environment, or perhaps because

of it, a good deal of hard work was done by the Commission to consolidate progress made in recent years in disparate fields. These ranged from international co-operation, through to enhancing regulatory standards to keep pace with emerging new international norms, to dealing with variable conduct within some financial services firms in the Island as a function of the Commission s supervisory oversight, and to equipping the Commission in terms of both technology and evolving working practices to meet the dynamic demands of the modern work place. All of this added up to a substantial body of activity and effort and I believe the Commission and the Island, albeit without the need for fanfare,

can be pleased with the results achieved.

International Development

Without any doubt 2011 saw the increasingly significant impact of external change on both the financial services sector in the Island and on the Commission. In the Jersey banking sector, the landscape was dominated by significant reforms internationally including those being implemented by the Basel Committee on Banking Supervision ( BCBS ) both in terms of new capital standards under Basel 2.5 and Basel 3, as well as

(under the same set of new accords) additional liquidity management requirements for banks. These new

standards will be implemented in Jersey and work began during 2011 involving the Commission and Island based banks to ensure a satisfactory glide path towards achieving this objective. In addition, individual liquidity management measures undertaken by regulators elsewhere, particularly the UK Financial Services Authority ( FSA ), impacted on Jersey banks

necessitating the agreement of further measures between them and the Commission s Banking Division, in addition to a consultation undertaken on large exposures which was largely completed during the year. At the same time, the euro crisis in the latter part of 2011 could not but intrude upon Jersey banks to a large extent given the predominant European ownership of banking entities in Jersey and the consequent concern about downstream consequences for the Jersey entities of parent groups potentially exposed by the crisis. Some very good contingency planning work was carried out between

the Commission and the banks with respect to modelling the impact of a euro crisis on the local sector with broadly reassuring results.

It remains to be seen whether the pattern of early 2012, which has seen some improvement in the euro crisis environment, particularly following large scale liquidity operations of the European Central Bank, will have positive effects flowing down to Jersey entities in the short term. Whatever the short term may hold, it seems likely that further modelling will be required with most commentators agreeing that the euro crisis is far from over.

The second significant matter which saw further clarification and implementation in 2011, having been begun in 2010, was the European Union ( EU ) Alternative Investment Funds Manager Directive ( AIFM Directive ). With the publication of the AIFM Directive Level Two implementation measures by the European Securities and Markets Authority ( ESMA ) in November 2011, the future requirements for Jersey fund managers and funds have become clearer and a significant amount of work has commenced in order to put in place the necessary co-operation agreements between Jersey as

an identified third country within the AIFM Directive process and European regulatory counterparts to meet the various demands of each implementation phase of the AIFM Directive. These seek to allow the Island to continue to offer in the medium term private placement funds to European investors in addition to seeking

 passporting capability for all alternative funds into EU markets as foreseen by the AIFM Directive from 2015 onwards. At the time of writing, a good relationship has been established between all three Crown Dependency

( CD ) regulators in Jersey, Guernsey and the Isle of Man, and ESMA regarding the detailed implementation of such agreements, and a practical and focused

dialogue has commenced. The Commission has also recognised that the scope and extent of this work is such that a full time resource at senior level will need to be dedicated to the task for at least the next two years. This resource has been identified and is already in place within the Commission to work with other Island agencies, CD counterparts and with the EU bodies to address this hugely important work stream for the Island.

During the year the relationship with the International Organisation of Securities Commissions ( IOSCO )

also continued to evolve. The development of the revised set of Principles for securities regulation worked on by IOSCO throughout 2010 was concluded in 2011 and

the revised Principles and accompanying Methodology for compliance were published. The Commission continued its previous involvement with the development of the Principles, in addition to being involved in other IOSCO working party activity, and detailed work has now commenced for the Island to seek opportunities to demonstrate compliance with the revised Principles.

The Commission once again sought to develop its general international profile and relations during the past year.

The signing of a new Memorandum of Understanding

( MoU ), respectively with the United Arab Emirates Central Bank and the French AutoritØ de Contr le Prudentiel, being two highlights. Both represent the development of relationships in markets which in differing ways are critical to Jersey s future. Further MoU development work is on-going and additional agreements can be anticipated during 2012 in furtherance of the objective of developing the Jersey profile and forging relationships with important overseas counterparts.

The Commission also maintains its active membership of the Group of International Finance Centre Supervisors

( GIFCS ) (formerly known as the Offshore Group of Banking Supervisors (OGBS)). Through this the Island continues to benefit from access to major multi-lateral standard setting bodies such as the Financial Action Task Force ( FATF ) and the BCBS. It is appropriate at this point to record appreciation of the work done by Colin Powell CBE, formerly Chairman of the Commission,

as Chairman of the GIFCS over more than 30 years from 1981 until September 2011, when he stepped down to be succeeded by John Aspden, Director General of the Isle of Man Financial Supervision Commission.

Colin s contribution during this long tenure was highly influential in assisting Jersey and other small finance centres to be understood and hopefully better appreciated by the wider international community, including standard setting bodies and national regulators. He is certainly owed a great deal of gratitude by many in this respect.

More specifically, the Commission continues to develop its bi-lateral relationships with other national regulators with individual visits during the year to counterparts in India, the Middle East, Germany and Switzerland,

and regularly to the FSA in the UK. The Commission will continue to put effort into such bi-lateral contacts not least in seeking to consolidate its relationship with the successor bodies to the FSA when they become operational during the next 12 months. In this,

the benefits of the work over recent years with the FSA on international securities development, banking supervision and joint working with the FSA s own intelligence and enforcement communities will be maintained.

Regulatory and Supervisory Developments

In terms of overall numbers of licence holders,

2011 saw a stabilisation following a pattern of decline post the 2008 financial crisis, with banking registrations once again reaching 40 in number, maintenance of the overall number of trust company registrations and a reasonable increase in the number of new funds launched using the Island as domicile over the past 12 months. Particularly notable amongst the latter were the 72 Jersey expert funds launched during the year, together with a number of other unclassified and private fund structures.

This is not to say that the overall climate for capital raising has dramatically improved and Jersey will need to continue to fight hard to retain, let alone grow, its current market share in the competitive funds universe. In this endeavour, the good relationship between the Jersey funds sector, its various representative bodies and the Commission will be helpful. As would be expected, interests are not wholly aligned between Industry and regulator, but nonetheless there is a community of interest which is readily apparent in terms of the regular review of the regulatory regime for funds and where, if appropriate, modification of it, seeking always to meet the twin objectives of compliance with international standards and maintaining competitiveness. There is a constant and evolving dialogue in this respect between various  

Island stakeholders.

At the end of 2011, while carrying out work in the Securities Division in relation to proposed changes to fund fees, it was discovered that amendments made to the Financial Services Commission (Jersey) Law 1998

(the  Commission Law ) and to the Collective Investment Funds (Jersey) Law 1988 (the  CIF Law ) had resulted in a legal anomaly.

In January 2008, an amendment to the Commission Law came into force that, inter alia, provided authority for the Commission to set its own fees rather than require it to obtain a Fees Order signed by the Minister for Economic Development (the  Minister ) as had been the case previously. The amendment also made the necessary consequential changes to each of the other laws,

as they were at the time.

In April 2008, as part of the package of changes to the regulation of collective investment funds other than recognized funds, an amendment to the CIF Law came into force that included the introduction of the concept of fund certificates. In making provision for fees to be charged in relation to this new type of certificate,

the amendment maintained the old arrangements that involved the fees being prescribed by Order.

However, having amended the Commission Law,

such an Order was not made. Since that time, fees in respect of certificates have continued to be charged by the Commission and paid by Industry in accordance with the fee scales accepted by Industry through the consultation (in 2007), on the proposed new regulatory arrangements, and then subsequently published by the Commission.

Work has begun with the Law Draftsman to introduce legislation to correct the anomaly in the CIF Law: this will enable the fees to be charged on the same basis as for all other fees payable to the Commission. Pending that amendment coming into force, an Order has been made for fees to continue to be charged on the previously agreed basis. Meetings to explain the situation have been held with the Minister, and, separately, with representatives of the funds industry and Jersey Finance Limited, who have each indicated support for the action being taken by the Commission.

Despite the general pattern of stabilisation of licence numbers, a certain tension between maintenance of the Commission s supervisory work in respect of licensed entities and the need to concentrate resources on a

number of problem firms did emerge during the year.

A higher level of enforcement activity was observed than at any given time in the Commission s history, with a consequent demand on the specialist resources the Commission was able to mobilise to deal with the demands this created. At times, it has been necessary to draw from the Supervisory Divisions to achieve this and, in consequence, the Commission has struggled to

maintain the overall number of supervisory visits at the same level as seen in 2009 and 2010. An exacerbating factor was also a certain increase in staff turnover as markets generally recovered and the Commission became once more an interesting environment from which the private sector at times has sought to recruit. To all of this can be added a rise in the overall complexity of activities on which supervision is focused and the way supervision is delivered in a fast changing financial services environment. Such supply and demand tensions are

likely to be a continuing theme into 2012 to which the answer is unlikely to lie simply in a constant increase to supervisory manpower at the Commission funded ultimately by Industry fees. For these reasons, reviewing the best supervisory package for each Industry sector is becoming a necessity with attention being given to defining the Commission s optimum risk appetite for each sector, finding the right balance between on-site and off-site supervision, and between themed, discovery and focus type visits, as well as placing greater reliance on  self-certification by firms, greater reliance on auditors findings and considering changes in underlying methodology (for example concentrating more on specific client related issues as opposed to firm wide governance control reviews). There is a delicate balance to be struck in this task, as 2011 once again saw a number of relatively disappointing themes emerging in terms of some firms ability to demonstrate good governance, proper oversight in accounting for their own activities as well as legal entities administered by them, management of conflicts of interest, and the proper identification of and responsibility for AML/ CFT issues.

As promised at the end of 2010, the Commission was successful in publishing a Position Paper contemplating its own version of the FSA s Retail Distribution Review (RDR)

- in Jersey called the Review of Financial Advice ( RFA ). This seeks a transition towards a new model of investment advice built around a move away from fees generated for advisors from commission based products towards more transparent, fee paying advice, itself backed also by a higher level of professional qualification for practitioners. The Commission intends to publish a consultation paper

on its proposed next steps regarding the RFA in the early part of 2012.

Again as promised in 2010, the Commission was also successful in launching a new website containing guidance in respect of consumer education,

comprising some dos and don ts of investing and suggested best practice for consumers in buying investment services from providers. This initiative, known as Protect Your Money, can be found at the following website linked from the Commission s own main website at www.protectyourmoney.je It is intended as the Commission s first steps in contributing towards a wider effort on the Island to promote better buying by consumers of significant financial services and the need to take some responsibility for that buying process. The Commission notes with interest that the successor body to the FSA, the Financial Conduct Authority ( FCA ), is also suggesting the necessity for such consumer education and the taking of some individual responsibility by consumers for investment decisions. The reasons for such an initiative are rooted in the reality that before the financial crisis there had been a propensity on the part of some residents in Jersey and many elsewhere to invest in overly complex and poorly understood financial products, asset types and investment structures. Often these involved some consumers certifying themselves as sophisticated investors when their real risk profile and their understanding of certain products being offered to them would not in reality reflect such status - only to discover years later that the supposed safety of and returns from such investments did not materialise, with capital invested having been much diminished or lost altogether. Such cases in Jersey are relatively few in number but their high profile should not be underestimated when they do occur. In drawing attention to this, it is not the Commission s intention to suggest that the balance of responsibility for risk management lies wholly with consumers rather than with providers,

or perhaps supervisors, in order to avoid such negative outcomes. However, some responsibility on the part of the consumer is being acknowledged as a worldwide trend for regulators and other commentators to highlight and to address through consumer education efforts and initiatives.

The trust company business sector in 2011 continued

to be relatively stable overall, albeit without evidence of great growth, as wealth management customers

continued to consolidate post the financial crisis.

The annuity nature of such business is generally a

relative protection in times of downturn in economic performance but it would be wrong for any complacency to be felt suggesting the sector is in the rudest of health. The themes seen in previous years continue to dominate

in a minority of cases where certain firms evidenced material breaches of the regulatory regime, with failures

in new business take-on and due diligence procedures,

the management of conflict of interests and the identification of AML/CFT risks - a growing challenge with clients drawn from increasingly far flung jurisdictions -

in a more global world. Many firms, however,

have robust systems procedures and controls, allied to an understanding of the need for balance between revenue generation and good compliance and control, and the Commission will continue to work with the sector as a whole to ensure that overall standards remain high.

The Commission once again sought to develop its general international profile and relations during the past year.

For the banking sector, other than those issues already identified in terms of new international capital and

liquidity standards, the overriding challenge identified in 2011 and, again likely to predominate in 2012 and

beyond, is the significant challenge represented by the work of the UK s Independent Commission on Banking

( ICB ) led by Sir John Vickers. This proposes a UK version of the separation of retail and investment banking activity (also to an extent proposed in recent years in the USA under the so called Volcker rule). However, in the UK the reforms are intended to be more structural, more radical and more sweeping and indeed Her Majesty s Treasury ( HMT ) has largely accepted the overall design put forward by the ICB with publication of a Green Paper in the UK Parliament to plan for implementation of the actual reform measures scheduled by mid-2012.

These measures may in turn have downstream consequences for Jersey banking operations and, indeed, the overall Jersey banking model. There is a great deal of technical detail around how the ICB reforms will ultimately impact and, to some extent, much is still unknown, but the Commission, working with Industry

and Jersey Government, has sought to become involved

in the process in dialogue with HMT and ICB representatives, and it is hoped that during 2012 a

successful way forward can be identified to allow Jersey to both embrace and support the proposed reforms, whilst at the same time maintaining the overall substance and success of its own banking sector.

Finally in terms of Supervision, a mention must be made for the Commission s Anti-Money Laundering Unit (AML Unit) which has successfully continued its oversight activity of designated non-financial businesses and professions ( DNFBPs ) comprising sectors such as lawyers, accountants, estate agents and others.

During 2011, a successful fee model was implemented

to allow for a sharing of the costs of oversight of DNFBPs to maintain compliance with the relevant international standard in this respect. This fee model was ultimately agreed by a process of third party adjudication during 2011 and consensus reached on a way forward.

The agreement allowed for costs to be shared between

the Island s Government and practitioners in the individual DNFBP sectors, with a make-up contribution from the broader Jersey financial services sector.

Enforcement

As mentioned, the last twelve months have again seen a very high level of enforcement activity by the Commission with a record number of new cases tackled. Many of

these were lengthy and complex, although a variety of types of case were seen with a substantial rise in the number of internet based scams or unauthorised

business type problems being detected and deterred by

the Enforcement Division. In many cases these resulted

in the issuing of a Public Statement to warn unknowing investors of the dangers of transacting with firms purporting to be licensed in Jersey when this was not in fact the case. At the other end of the spectrum, a number of significant and very complex cases were dealt with and successfully concluded during the year involving a range of problems broadly falling into the three categories of failings in corporate governance, client management and conflicts of interest. Whilst settlement agreements continue to be used for the conclusion of some of these cases, this methodology cannot be deployed in every

case and the Commission worked further on enhancing the transparency and clarity of its Decision-Making Process to deal with cases which are contested. Nonetheless, in whichever form, the position remains the same as previously advised in 2010, which is to say that the Commission is determined to deal with cases where standards have fallen below the level to which the Island aspires in terms of good conduct and the observance of regulatory obligations.

Other activities

During 2011, the Companies Registry continued a solid programme of work to develop its own technological and automation capability in delivering Registry services to Island users. In addition, agreement was reached with the Island s Government for the implementation during 2012 of a new Security Interests Register ( SIR ). This will, in due course, complement those new registers introduced during 2011 for new investment vehicles, including separate limited partnerships (SLPs) and incorporated limited partnerships (ILPs) in addition to the consolidation of existing registers. In this context, 2011 was the year in which the Registry began to embrace a mission as the Island utility best placed to deliver a greater variety of registry services of wider interest to the Jersey community built on its concentration of experience and expertise. In this respect the SIR can perhaps be seen as the first of

a number of new registers to be developed by Jersey in future years and the Commission is certainly keen and willing to play its full role in this respect.

In the Human Resources and Information Technology fields, the Commission continued to invest in both new and continuing activity during 2011. For ICT, the main priority is to provide overall support the Commission s platform work in re-engineering its technological interface with Industry, both in the Supervisory and Registry areas.

A key priority project begun in 2011 in this area is the Personal Questionnaire (PQ) project, which seeks to automate the receipt of information needed by the Commission for the vetting and authorisation of Principal Persons and Key Persons acting for financial services firms. This, however, is only a part of a wider project of platform development supporting the Commission s supervisory functions, which seeks to create a fully automated environment receiving information electronically from Industry licence holders and disseminating it automatically across the Commission s various databases, thereby eradicating the need for manual rekeying, and to generate other productivity benefits. This is a three year project begun in 2011, which will continue with increasing intensity over the  next two years.

For Human Resources, the Commission continues its endeavour to foster increased managerial learning and personal development of its staff alongside the traditional qualities of technical excellence demonstrated by Commission staff. To this effect, continuing learning and development initiatives were supported during the past twelve months, including the wider roll out of existing management development programmes and the commissioning (for delivery in early 2012) of a bespoke Change Management and Enhanced Team Work programme for the Commission s Directors and Deputy Directors, which aims to foster an ever improving environment of collective responsibility and effective cross-divisional working within the organisation.

Relations with Industry and Government

The Commission s relationship with individual Industry practitioners and their various representative bodies remained good throughout 2011 and considerable interaction and interface is enjoyed by all parties as would be expected in a small Island environment.

The Commission is particularly well served by its good relationship with Jersey Finance Limited, the Industry s umbrella representative body, without this excellent relationship at any time undermining the respective roles that each agency plays, i.e. regulator and Island promoter and developer of financial services. Regular dialogue is held at all levels between our respective agencies aimed at facilitating good knowledge sharing, an absence of surprises and, through the Commission s formal process of consultation and feedback, achieving the objective of ensuring that proposed changes to the regulatory regime are understood and, hopefully, broadly accepted by the practitioner community. The dialogue in this respect is understandably one in which complete agreement is rarely achieved, but one where nonetheless good understanding of respective positions does tend to generate acceptable and practical solutions again aimed at striking that delicate balance between achieving high standards of conduct and compliance on the one hand and maintaining a competitive finance Industry on the other.

This objective is also shared by the Island s Government. Again good relations are maintained at all levels between Commission and Government to ensure understanding on both sides is achieved. The Commission Board meet formally at least once a year with relevant Ministers in addition to a number and range of other contacts.

The Commission s Executive has a good relationship with the relevant officers in various Government Departments, including those in the Law Officers Department and the Law Draftsman s Office, which represent critical relationships for the Commission in ensuring its ability to discharge its regulatory function inclusive of the creation of legislation to develop the regulatory regime.

Priorities in 2012

Another year of significant development and fast moving events is anticipated. It is unlikely there will be any let-up internationally in terms of the initiation and implementation of new international standards and regulatory requirements. Whilst not an exhaustive list, the Commission will,

as mentioned, be concentrating on the further development of the AIFM Directive and the conclusion of IOSCO work, together with other important EU related matters, such as the Single European Payments Area (SEPA) and the conclusion of the quest for equivalence recognition from the EU in respect of the oversight arrangements for Jersey auditors who act for companies admitted for trading on EU exchanges. It was hoped that this latter process could be completed during 2011 but, largely as a function of the

EU s own process, it has been delayed, although it is

hoped it may be concluded over the coming 12 months. Work in respect of the developing outcome of the work of the Vickers Commission and with the new regulatory authorities in the UK to succeed the FSA are obviously of significant importance.

A further external project to progress will be securing

some form of participation by all three CDs in MONEYVAL (the Council of Europe s AML/CFT regional oversight body) where the CDs interest lies in being able to demonstrate an adherence to the international

requirement for regional body peer review of assessments

in respect of compliance with international supervisory standards. As the three CDs are not nation states,

and recognising the UK s ultimate responsibility for the international representation of their interests, the ability

to secure such participatory status is necessarily an

approach to be agreed with the HMT for which

preparatory work done in 2011 should, it is hoped,

pave the way towards a satisfactory conclusion in 2012.

Other ongoing work to be continued into 2012 will be the full consultation on the early stage implementation of a civil penalties regime, together with further consideration and development of the Companies (Jersey) Law 1991 and changes to the Control of Borrowing (Jersey) Order 1958. The Island will need the latter not only to assist in its embracing of the co-operation agreements within the AIFM Directive process, but also more generally in terms of modernising and updating this important legislation for users of Jersey private funds.

Further development of the Island s initiative in the area of the RFA will also be taken forward with the publication of a feedback paper in the early part of 2012.

The Commission will also work with other Island authorities in the further development of macro prudential regulation, another demand to have emerged from the financial crisis, whereby good contingency plans to address the potential for financial services entity failures, the maintenance of Island infrastructure during crisis periods and bank resolution plans will all need to be further developed. In addition, it is anticipated that a review of wider financial services infrastructure for Jersey in areas such as the Depositor Compensation Scheme and the possible implementation of a Financial Services Ombudsman Scheme will also require Commission involvement and input, which it is, of course, more than prepared to give.

It had been the intention during 2011 to conduct a further Industry opinion survey on the Commission s activities and general capabilities, which for a variety of operational reasons was not progressed. However, this was taken forward during the early part of 2012.

A main focus of attention for the Companies Registry over the next 12 months will be the actual implementation of the SIR once the Island s new Security Interests Law comes into force, which is anticipated by mid-year.

Conclusions

In summary, the overall regulatory environment both within Jersey and internationally continues to be one that demands a balance to be struck between the competing demands of: (i) resourcing policy development, particularly in terms of new, developing international norms; (ii) supervisory business as usual activity in order to ensure the maintenance of high standards of compliance across the Island; and (iii) internal reform within the Commission in order to equip itself to best effect for the challenges of the future. This is of no little complexity and difficulty but one which I am confident the Commission is well equipped to meet. In this endeavour it is greatly assisted by its Board of Commissioners whose energy, drive and interaction with the Executive greatly informs the Commission s internal activities, as well as its engagement and relationships with the outside world. The Commission s Executive Directors and Staff are also owed a large vote of thanks for their continuing and unstinting efforts to meet the range of commitments and obligations that the Commission must embrace and to continue to make the contribution that it does to the international profile of the Island and to its overall good standing in financial affairs. Having now been in the post for over five years as Director General,  I count myself very fortunate to be supported by such dedicated and committed staff in this respect, and it is my belief that, despite the numerous and complex challenges with which we are faced, the Commission will continue to be successful in discharging its regulatory function and responsibilities.

STRUCTURE CHART

Andrew Le Brun Director, Office of the Director General

Barry Faudemer Director Enforcement

Jamie Biddle Gail Chadwick Deputy Director  (Until March 2012)

Enforcement Deputy Director Internal Audit

Mark Sumner Director Banking,

Insurance and  Investment Business

Darren Boschat David Hart Nick Troy Deputy Director   Deputy Director   Deputy Director Banking Insurance and   AML Unit Investment Business

David Banks Director Securities

Roy Geddes Michael Jones Deputy Director   Deputy Director Securities Securities

Page 18 |  ANNUAL REPORT 2011

STRUCTURE CHART

John Harris Director General

Nigel Woodroffe Annette Cullen Chief Financial Officer Director Human Resources

and Facilities Management

Chris Renault Commission Secretary

Debbie Sebire Director Trust Company Business

David Oliver Eric Dolan Deputy Director   Deputy Director

TCB Supervisory Operations

Julian Lamb Director Registry

Sarah Kittleson Deputy Director Registry and Non-Supervisory Operations

ANNUAL REPORT 2011 | 19 Page

The Division has continued to be active in countering money laundering and terrorist financing and promoting the understanding of sanctions legislation within the Island.

INTERNATIONAL STANDARDS AND

POLICY DEVELOPMENT

One of the Commission s aims is to match international standards in

respect of banking, securities, trust company business and insurance regulation, and anti-money laundering and terrorist financing defences . Within the Commission, the International and Policy Division, the Supervisory Divisions and the Registry develop policy to ensure that this aim can be met.

Review of 2011

The International & Policy ( I&P ) Division has continued to promote, and assist other Divisions with, the development of the regulatory and supervisory framework in which the Commission functions. It has also continued to consider the scope of the Commission s current regulatory activities in light of developments in the UK and elsewhere in the European Union (the  EU ).

Legislation

Law drafting on a number of maintenance amendments to the Collective Investment Funds (Jersey) Law 1988, the Banking Business (Jersey) Law 1991, the Insurance Business (Jersey) Law 1996, the Financial Services (Jersey) Law 1998, and secondary legislation made under these laws (collectively referred to here as the

 Regulatory Laws ) and also the Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 (the

 Supervisory Bodies Law ), has now progressed well, and public consultation on those amendments will start in the second quarter of 2012.

The legislation changes proposed in this consultation comprise a miscellany of items that have emerged over the past two or three years. Whilst some amendments affect only one particular item of legislation, a secondary objective has been to enhance the level of consistency across the Regulatory Laws. Consequently, the opportunity has often been taken to consider and amend as appropriate the corresponding provisions in the relevant Regulatory Laws.

In line with Government policy, work is now in hand to draft legislation to implement relevant parts of the EU Payment Services Directive - in order to support a future application by Jersey s government for the Island to join the Single Euro Payments Area (the  SEPA ). The effect of this legislation would be to regulate payments made in euros using the SEPA s payment instruments.

Prompted in part by an International Monetary Fund (the  IMF ) recommendation, the States adopted an amendment to the Financial Services Commission (Jersey) Law 1998 in July 2011.

As a result of the amendment, if the Minister for Economic Development (the  Minister ) decides to terminate the appointment of a Commissioner, there must now be a degree of public disclosure of the reasons. In line with the practice of the Jersey Appointments Commission, the amendment also extends the maximum period for which a person may be appointed as a Commissioner, from three years to five years.

In 2010, work started on drafting amending legislation to provide for the Commission to be able to recover some or all of its costs and disbursements due to enforcement action and investigations leading to such action. Conclusion of this work was subsequently put on hold pending separate discussions on whether the Commission should have a power to impose civil penalties where a regulated business had failed to comply with a principle or rule that is set in the Codes of Practice ( Codes ) that are issued by the Commission. Those discussions supported the introduction of a power to impose penalties, and, accordingly, the Division has assisted the Enforcement Division with the development of such a penalties regime. The principles behind such a regime will be the subject of consultation in 2012.

The Division has continued to develop and contribute to the development of legislation that sets out how companies and other legal persons are to be constituted, administered and audited. The Companies (Jersey) Law 1991 (the  Companies Law ) was amended in 2010 to introduce a mechanism for registering and overseeing the work of auditors of market traded companies (referred to as  Recognized Auditors ). At the start of 2011, agreement was reached on the fees to be charged under the regulatory regime, and oversight of Recognized Auditors started in April 2011.

Meanwhile, Jersey (along with Guernsey and the

Isle of Man) has been included in extended transitional provisions that will allow auditors of Jersey market traded companies to continue to perform audit activities in the EU, pending an assessment of the regime for Recognized Auditors by the European Commission (the  EC ).

The intention of such an assessment is that it should be possible for a Member State in which a Jersey market traded company s securities are traded to place reliance on the regime that has been introduced in Jersey

(without duplication of registration and oversight).

POLICY DEVELOPMENT

In support of this application, a detailed description of Jersey s regime for Recognized Auditors was provided to the EC in December 2011 and it is hoped that this submission will enable a formal equivalence assessment to be undertaken before the end of 2012.

The Division has also contributed to discussions on Government proposals to amend the Limited Liability Partnerships (Jersey) Law 1997 and also the Companies Law. In addition, the Division provided input to a Government policy group which is considering how Jersey might support international initiatives on debt relief for countries that are in receipt of international aid.

Policy statements and guidance notes

Work also continued on revising the Commission s sensitive activities policy for applications that are made under the Control of Borrowing (Jersey) Order 1958

( COBO ). A draft of the policy is shortly to be discussed with the Companies Registry Users Group.

A significant amount of time has been spent in 2011 co-ordinating changes that are proposed to the Codes. Changes are proposed to bring the wording of the seven sets of Codes closer together and also to deal with matters that are specific to a particular set of Codes. Consultation on amendments to the Codes closed in August 2011 and it is intended to publish a feedback paper and seven sets of amended Codes during the second quarter of 2012.

Assistance was also provided to the Enforcement Division on redrafting the Guidance Note on the Decision-making Process. The Division also supported preparation by the Securities Division of a consultation paper on proposed changes to fees paid under the Collective Investment Funds (Jersey) Law 1988 and the Financial Services (Jersey) Law 1998.

Anti-money laundering and countering the financing of terrorism ( AML/CFT )

The Division has continued to be active in countering money laundering and terrorist financing and promoting the understanding of sanctions legislation within the Island. Throughout the year, support was provided to the Anti-Money Laundering Unit ( AML Unit ) on the introduction of fees to be paid by persons carrying on business activities that are listed in Schedule 2 of the Proceeds of Crime (Jersey) Law 1999. This included the preparation of material to be considered by a Panel of three Jurats appointed by the Bailiff to consider whether the fees proposed by the Commission were unreasonable, having regard to all the circumstances of the case.  

The Panel concluded that the fees proposed for 2011 were not unreasonable having regard to the relevant statutory criteria.

The Division devoted a substantial amount of time to assisting the Island s authorities with the development of two separate pieces of legislation which now allow the Chief Minister to:

• Freeze the property of persons who are suspected of being connected to terrorism; and

• Apply countermeasures to a person who is

suspected of money laundering, terrorist financing or assisting with the proliferation of weapons.

This work culminated in the Terrorist Asset Freezing (Jersey) Law 2010 coming into force on 1 April 2011 and the Money Laundering and Weapons Development (Directions) (Jersey) Law 2012 on 13 January 2012.

Guidance for Industry on sanctions was published in January 2011 and on proliferation and proliferation financing in October 2011.

Ahead of a wider review of the application of simplified and enhanced customer due diligence measures

( CDD measures ) in Jersey, a consultation paper was published in November 2011 proposing a number of discrete (but important) amendments to CDD measures. The consultation period closed on 29 February 2012.

International focus

The Division has also continued to support the Commission in its representation at meetings of international standard setters. In particular, the Division has participated in the work of:

• The Implementation Task Force of the International Organisation of Securities Commissions ( IOSCO ).

• The Group of International Finance Centre Supervisors through attendance of a number of meetings of the Financial Action Task Force (the  FATF ).

IOSCO s Methodology was published in September 2011 and the revised FATF Recommendations were published in February 2012.

The Division has also worked with regulators in Guernsey and the Isle of Man in support of a proposed application by the UK for the Crown Dependencies to participate in the mutual evaluation processes and procedures of MONEYVAL (a body of the Council of Europe).

The principal purpose of the application will be to make compliance with the FATF Recommendations subject to ongoing review by a FATF Style Regional Body (something that is now required by the FATF).

The Division is also responsible for co-ordinating and assisting with the agreement of memoranda of understanding ( MoU ) with domestic and overseas agencies and promoting cooperation more generally.

INTERNATIONAL STANDARDS AND

POLICY DEVELOPMENT

A MoU was signed with France s AutoritØ de Contr le Prudentiel in July 2011. Discussions are ongoing with the German regulator - BaFin - on the content of a new MoU to replace the two currently in place with BaFin s predecessor organisations.

More generally, co-operation with Francophone regulators should be assisted by the publication in 2011 of a French language version of the Commission s Handbook on International Co-operation and Information Exchange.

Domestic focus

At home, support was provided to the Enforcement Division with the drafting of a MoU with the States of Jersey Police on information exchange and mutual assistance. The MoU was signed in October 2011.

The Division has also actively followed a number of developments in the domestic environment in which the Commission functions.

The Division closely followed various drafts of the Freedom of Information (Jersey) Law 200-

(the  FOI Law ). Whilst adopted by the States,

no date has been set for the FOI Law (which will not initially extend to the Commission) to come into force.

The Division discussed a number of practical concerns that it had surrounding a proposal for the Jersey Vetting Bureau to check the credentials of persons employed in the finance sector. As a result, it has been agreed that the proposed system should not be introduced and, instead, that enhancements should be made to the system that is currently used (through the States of Jersey Police).

The Division also provided assistance to the States of Jersey Economic Development Department with the development of proposals to introduce an Ombudsman scheme.

POLICY DEVELOPMENT

KEY TASKS FOR 2012

I&P has been folded into the Office of the Director  In line with long-standing commitments, a funds General at the start of 2012 and it is intended that  sector specific section for the AML/CFT Handbook the Office of the Director General, incorporating the  will be published along with updated versions of former I&P Division, will have a more tightly defined  handbooks for the legal and accounting sectors.

set of organisational responsibilities.

The Division will continue to provide support for The focus of the Division will be on: applications made by the UK for Jersey to be added

to a list of equivalent third countries that is

• Managing high level relations with other  maintained under the EU Third Money Laundering regulators and regulatory authorities, including  Directive and to participate in the mutual evaluation cooperation through MoUs. processes and procedures of MONEYVAL.

• Setting policy and requirements for countering  As part of its function to coordinate changes to

illicit financing: i.e. money laundering, terrorist  legislation, amongst other things, the Division will: financing, and the financing of the proliferation of

weapons; and guiding industry on the application  •  Present to the Minister draft legislation to

of financial sanctions. generally maintain the Regulatory Laws and the

Supervisory Bodies Law.

• Coordinating changes to the regulatory laws  

and other legislation that is administered by   •  Review the adequacy of enforcement tools in the the Commission.  Companies Law.

• Controlling the quality of content and presentation  •  Promote amendments to accounting and

of the Commission s external output e.g. policy  record-keeping requirements in the Companies documents, Codes, and consultation papers. Law and similar legislation in order to address

recommendations made by the Global Forum on

• Introducing an effective records  Transparency and Exchange of Information for  management system. Tax Purposes.

Under transitional arrangements, the Division will  •  Consider how the current definition of  

finish work that it has started to support Jersey s  principal person may be revised to reflect the intention to apply for membership of the SEPA, and  introduction into Jersey legislation of new forms  on the application for Jersey s regime for Recognized  of legal person.

Auditors to be assessed as equivalent by the EC.  

The Division will also continue to support the  •  Consult on proposals to introduce a consistent Enforcement Division s proposals to introduce a  regime that will allow the Commission to object to regime for imposing civil penalties. the appointment (and continued appointment) of

auditors of persons that are supervised under the In addition, the Division will continue to follow and  regulatory laws, if it is not satisfied that the

respond to developments in the domestic legislative  (proposed) auditor has the requisite qualifications, environment in which the Commission functions. skill, resources or experience for a particular audit,

Prompted in part by recommendations made by the  or if it would not be in the best interests of clients/ IMF, the Division will prepare instructions to update  customers of a registered person.

and amalgamate the Drug Trafficking Offences  Following on from consultation started in 2011 on (Jersey) Law 1988, the Proceeds of Crime (Jersey)  proposals to revise the Codes, the Division will also Law 1999, and the Terrorism (Jersey) Law 2002.  publish a feedback paper and seven sets of amended The Division will also review the application of  Codes during the second quarter of 2012.

simplified and enhanced CDD measures in Jersey,

address other outstanding recommendations made  The Division will continue to support the Commission by the IMF, and consider the changes that will be  in its representation at meetings of international required to Jersey s framework for tackling illicit  standard setters and consider the status of

financing in order to accommodate proposed  preparations for the next assessment of Jersey s revisions to the FATF Recommendations. compliance with international standards, including

identification of standards against which the Island may be assessed.

SUPERVISORY APPROACH

The Supervisory Divisions are responsible for two of the Commission s five aims. These are to ensure all entities that are authorised meet fit and proper criteria

and to ensure that all regulated entities are operating within accepted standards of good regulatory practice.

Authorisations

Work continued with authorising new funds and fund services businesses, in addition to approving changes to existing fund arrangements. Over 100 new Jersey funds were authorised during 2011. Liaison was maintained with the Funds Authorisation User Group.

The number of licensed investment businesses has reduced by six following revocations arising mostly from further consolidation in the IFA sector.

2011 was another busy year for the Insurance Division, with 32 applications approved and 28 licences surrendered, which resulted in the overall total of regulated persons increasing by four.

The very modest levels of interest in opening new banking operations in the Island evidenced in recent years continued in 2011. One new registration was granted, taking the total number to 40.

There were 24 new trust company business

applications successfully determined during 2011, comprising three affiliation leaders, seven individuals who were registered to provide directorship services and fourteen participating members. The three affiliation leaders represented two new start-up businesses and one existing fund service business that expanded into the provision of some trust company business services. The participating members were predominately additions to existing affiliations.

During 2011, the Anti-Money Laundering Unit  

( AML Unit ) registered 28 persons who were carrying on a business specified in Schedule 2 of the Proceeds of Crime (Jersey) Law 1999, where that person  

was not carrying on a business already regulated  

by the Commission under one or more of the  Regulatory Laws1.

Examinations

The Commission has continued its focus on risk-based supervision through on-site examinations and following up any necessary action arising out of those examinations. The themes arising from the examinations have also been fed back to Industry in various ways - through seminars, presentations, dialogue with Industry associations, letters to chief executive officers  

( Dear CEO letters ), the eNewsletter and the website. The Commission completed 208 examinations during 2011 against a target of 226. There were 248 examinations during 2010.

Total Examinations 2011

Examination activity was a significant feature of 2011. The main issues that have arisen from the on-site examination programme during 2011 are summarised below by each Industry sector.

1 The Regulatory Laws are:

- the Banking Business (Jersey) Law 1991;

- the Collective Investment Funds (Jersey) Law 1988;

- the Financial Services (Jersey) Law 1998; and

- the Insurance Business (Jersey) Law 1996.

SUPERVISORY APPROACH

Banking

The on-site programme was completed in full, including overseas examinations in the Isle of Man and the Middle-East. Two new themed on-site programmes were run, focusing on prudential reporting and information security. Jersey banks benefit from being part of large international organisations that have well developed policies and procedures in the latter area,

and risk management in this area was therefore found to be reasonably good. Shortcomings in prudential reporting were, though, higher than had been expected and that programme has to been extended into 2012 in order to cover every banking group operating in Jersey. Summary findings and observations from both exercises have been published in early 2012.

Insurance

The planned number of 16 on-site examinations was duly completed during 2011. A number of common findings arose within some of the companies assessed during the year. These included a failure to implement an adequate compliance monitoring plan and several instances where registered persons had failed to adequately manage the potential for conflicts of interests arising where the compliance officer retains a client- facing role. In addition, a number of registered persons had failed to adequately monitor relevant employees continuing professional development. The Division has been working with entities to remedy

identified shortcomings.

Investment Business

The Investment Business Team ( IB Team ) completed 23 on-site examinations of investment business firms in 2011, including a themed programme of examinations which focussed on Class E investment business licence holders. The key result was the determination that, in most cases, a Class E was no longer the most appropriate registration and three out of the four entities examined will be revoking their registrations in due course.

The IB Team also liaised closely with colleagues in the Commission s Enforcement Division in relation to a number of enforcement cases involving investment business licence holders.

A summary report was published sharing the conclusions of a second mystery shopping exercise, which targeted independent financial advisors

( IFAs ) and retail banks.

Two Dear CEO letters were issued, one highlighting key findings from examining investment businesses, the second explaining the Commission s view

on providing advice on investments within

pension schemes.

Funds

The Funds Supervision Unit undertook 34 on-site examinations during 2011. Common findings included a lack of appropriate due diligence on investor suitability and other parties in relation to new funds, a failure to demonstrate proper oversight by the board and a failure to comply with all the requirements of the Island s AML/CFT regime.

The Funds Team continued to manage a number of forensic investigations in conjunction with the Enforcement Division.

Trust Company Business

Good examination momentum was maintained during 2011 with 47 registered persons assessed across a broad spectrum of areas ranging from top level corporate governance through to reviewing underlying customer files. Whilst many businesses were found to be in good order, examiners identified a small but not insignificant number of businesses where weak corporate governance and an inadequate control environment had led to potentially serious issues. The Division reacted swiftly to these situations,

with appropriate safeguarding directions put in place and in some cases requiring Reporting Professionals or an Inspector to be appointed to fully assess the extent of the issues. This coupled with the continued heightened supervision of registered persons already under remediation or, in a small number of cases those selling their business, took up most of the focus during 2011.

In order to share newly identified issues with Industry ahead of the annual examination feedback, two Dear CEO letters were issued during the year. One letter identified to Industry the concerns regarding applications to incorporate Jersey companies and an increasing trend towards an apparent insufficiency of due diligence and documentation of associated risks being undertaken by trust companies. The second letter shared with Industry some examples of issues identified concerning COBO only and private fund structures, namely conflict of interest issues, investor suitability and an absence of disclosures.

AML Unit

The AML Unit conducted 66 on-site examinations during the year. Once again, business risk assessments, sanctions and suspicious activity reporting issues continued to dominate the examination findings.

Regulatory Developments

2011 saw a period of reflection in relation to the changes made to the Island s regulatory framework during previous years. Against a backdrop of the international regulatory response to the recent financial crises, the Commission monitored and, where possible, participated in these discussions. The 2012 Business Plan anticipates a number of consultations with Industry, some of which reflect international developments.

Banking

The critical issues affecting the finance industry worldwide had considerable local impact. All emerging problems have been identified and appropriately addressed, with successful outcomes whilst maintaining working relationships. The consequent need for a heightened supervisory approach has absorbed a significantly greater part of the Division s efforts since the global financial crisis commenced in 2007,

such required effort having increased year-on-year since then.

Supervising local entities to the required level has become significantly more complex and challenging in recent years and also involves looking beyond the immediate Jersey entity to a far greater extent than historically. The Division has responded and coped well with the greater demands now seen. These have included more regular and extensive dialogue and co-ordination with overseas regulators, another trend that will continue upwards, given developing international practice and needs in this respect.

A consultation was issued and largely finalised on the introduction of a concession limit approach towards large exposures to banks and sovereigns. This will require Jersey incorporated banks to fully consider and document what are typically their biggest credit risk counterparties and, in turn, enable the Commission to better understand these.

The Division has worked with Industry in considering and addressing emergent issues affecting it, most particularly UK adoption of the recommendations of the Independent Commission on Banking ( ICB )

- also known as the Vickers report - and the FSA s revised liquidity requirements. Both of these have or will require local banks to review their operating models. Consequent changes will be seen in risk profiles, which the Commission must understand and agree with individual banks.

Banks were also required to review and advise the Commission of their planning in respect of a Eurozone crisis and potential impacts here. The wider macro implications for the Island have been raised and discussed with Government.

A revision of the Bank Licensing Policy was completed and published. The additional flexibility of approach reflected therein may well be needed in addressing the changed banking models that may emerge in

the future.

The Banking Business (General Provisions) (Jersey) Order 2002 was amended to establish a legal requirement for all banks advertising in the Island to disclose the applicability of depositor compensation schemes.

The Division was pleased to be able to extend bank registration fees at their present level for a further 12 months, given the headcount reduction made in light of the reduced bank registration numbers seen.

Securities

The Funds and Investment Business Teams have continued to review and update the regulatory environment in their sectors.

Funds Team

Work continued on the revised Certified Funds Prospectuses Order and the Codes of Practice for Certified Funds although completion has been delayed until 2012.

Close liaison is being maintained with Jersey Finance and the Jersey Funds Association on a number of initiatives, including the EU Directive on Alternative Investment Fund Managers ( AIFM Directive ). One of those initiatives resulted in the introduction of a new product called the Private Placement Fund

in January 2012.

There has been active participation in the proposed changes to IOSCO s core principles of securities regulation and related methodology. The Commission is represented on the Implementation Task Force considering the changes and has attended a number

of key meetings.

Investment Business Team

The key policy initiative for the IB Team in 2011 was the publication of a position paper on the Review of Financial Advice ( RFA ). This was launched in response to the FSA s Retail Distribution Review

( RDR ). The aim of the RFA is to raise the professional standards of investment advisors and eradicate possible conflicts of interest that can be caused by commission based remuneration arrangements. A number of presentations were given to local trade and professional bodies outlining the Commission s position. A large number of responses were received to the position paper and the Commission continues to work with Industry in order to achieve the desired aims of the RFA and make the necessary changes to the regulatory framework.

The Commission has continued its focus on risk-based supervision through on-site examinations and following up any necessary action arising out of those examinations.

The IB Team contributed to the Commission wide project to review and revise all Codes of Practice.

The IB Team also continued work on the investor education initiative, with the launch of the Protect Your Money website in Q1 of 2011, and provided input on the proposal to establish a Financial Services Ombudsman.

Insurance

Revisions to the Insurance Core Principles were adopted by the International Association of Insurance Supervisors ( IAIS ) in October and work has commenced locally on a self assessment against these in order to identify whether any amendments are required to the Island s regulatory regime to ensure compliance with international standards.

Developments in respect of Solvency II have been monitored closely and in 2011 the Insurance Division invited input from members of the Jersey insurance sector to assess the potential impact on the local market. A press release was issued in July 2011

to confirm that the dialogue with Industry had not identified any regulatory or other reason to adopt Solvency II and that focus will instead be given to adopting the revised IAIS standards, which include provisions for risk-based solvency.

AML Unit

The AML Unit has responsibility for the regulation and supervision of Money Service Business ( MSB ) in the Island. MSBs have become increasingly complex since relevant legislation under the Financial Services (Jersey) Law 1998 was first introduced in 2007, and the AML Unit, together with the Office of the Director General, has thus commenced an exercise to assess its current and future suitability.

2011 saw the culmination of the protracted first annual fees consultation process for Designated Non Financial Businesses and Professions ( DNFBPs ). In response

to challenges from some of these DNFBPs, a Panel of Jurats was formed to consider the fee proposals.

The Panel issued its conclusions on 31 May 2011, which supported the methodology applied by the Commission in allocating costs to the AML Unit (which then need to be recovered through levying annual fees). All registered DNFBPs have now paid their annual fees for 2011.

International Communication

The Commission continued its active involvement in international regulatory fora.

The Banking Division played a key part in supporting the hosting by Papua New Guinea, a member of the Commonwealth, of the annual plenary of SEANZA (South East Asia, New Zealand & Australia central banking forum), which focused on implications of Basel III for developing countries. It also continued to support the Offshore Group of Banking Supervisors (renamed during the year as Group of International Financial Centre Supervisors) activities.

Monitoring of the development of international regulatory standards continued throughout 2011, partly through the Insurance Division s active involvement in the Offshore Group of Insurance Supervisors ( OGIS ) and the International Association of Insurance Supervisors ( IAIS ). In addition, Jersey, as a signatory to the IAIS Multilateral Memorandum of Understanding, participates in meetings of the Signatories Working Group and Supervisory Co-operation Subcommittee of that organisation, thereby developing the Island s reputation within

the international insurance industry.

In addition, the Commission signed Memoranda of Understanding with the French AutoritØ de Contr le Prudentiel, the Central Bank of the United Arab Emirates and, locally, with the States of Jersey Police.

The FSA s RDR project and the development of the equivalent imitative RFA in Jersey has been the subject of discussions with the regulatory authorities in Guernsey and the Isle of Man.

The Securities Division maintained its international obligations by attending meetings of the International Organisation of Securities Commissions ( IOSCO ) in Mumbai, Singapore and Madrid, and dealing with inter-regulator enquiries. The Commission also hosted a meeting of securities regulators from across the globe.

The AML Unit has continued with its diverse

 outreach activities , liaising with representative bodies and presenting at seminars and conferences. International fora attendance included the Wolfsberg Forum and the Interpol Working Group on Money-Laundering and Terrorist Financing.

SUPERVISORY APPROACH

KEY TASKS FOR 2012:

• The Commission will continue to spend a  •  Continue to support the RFA project throughout significant portion of time working with Industry  2012 and 2013. Working party meetings will be on responding to the AIFM Directive. held with Industry to review responses received to the related position paper, and consideration will

• A consultation paper seeking an increase in fees

be given to issuing a feedback paper. Once

from July 2012 for both CIF and FSB has been

agreement is reached, Industry will be further issued to Industry.

consulted on related changes to the Investment

• Codes of Practice for Certified Funds to be  Business Codes of Practice and relevant  launched during Q2 of 2012. issued guidance.

• Provide assistance in relation to a new Collective  •  Continue to engage internally on operational Investment Funds (Certified Funds Prospectuses)  process improvements, including the aim to (Jersey) Order 201-. enable quarterly statistics returns and bi-annual

• Completion of a self assessment against the  investment business employee information to be revised Insurance Core Principles of the IAIS in  submitted electronically.

order to identify any revisions required to the  •  Issue guidance on the Overseas Persons

Island s related regulatory requirements necessary  Exemption Order for non-Jersey investment

to continue to meet international standards. businesses and publish on the  

• Monitoring developments in respect of the   Commission s website.

EU s Solvency II insurance regime. •  Undertake research on paraplanning activity in  

• Monitoring the proposed revisions to the   the Island to determine whether it would be

EU s Insurance Mediation Directive and   appropriate to widen the definition of an assessing any possible impact on the Island s   investment employee to include paraplanners.

regulatory requirements for general insurance  •  Continue heightened oversight of the banking mediation business. sector, including the implications for Industry of

• Completion of the drafting of an Accounts Order  international/overseas developments.

for the Insurance Business (Jersey) Law 1996. •  Review of Basel III and consideration of local

• The issuance of a guidance note on insurance  application issues, working in co-ordination with business transfer schemes under Schedule 2  the two other Crown Dependencies. to the Insurance Business (Jersey) Law 1996. •  Completion and adoption of the planned revised

• Continuing to support the efforts of the IAIS and  Banking Codes of Practice.

the OGIS to promote and develop international  •  Completion and adoption of the proposed regulatory standards. concession limit approach to large exposures.

• Maintain the Protect Your Money website and  •  Support to Government in its review of financial continue with the consumer education drive,   system stability issues and oversight. in line with an IOSCO requirement for regulators  

• Continued work with all stakeholders on

to play an active role in the education of investors.

addressing implications of UK adoption of the  In this respect, the Commission will also  

ICB recommendations.

engage with the International Forum for  

Investor Education.

The Commission will continue to spend a significant portion of time working with Industry on responding  to the AIFM Directive.

ENFORCEMENT

The Enforcement Division is responsible for work relating to the aim of the Commission to identify and deter abuses and breaches of regulatory standards .

Deterring, detecting, and preventing regulator breaches and striving to protect investors

2011 has been a challenging year for the Enforcement Division with a 28% increase in the volume of new cases. The complexity and demands of some cases

has also increased, placing a significant strain on enforcement resources. Poor standards of corporate governance exercised at board level continued to be at the root cause of several complex enforcement cases. One such case resulted in the closure of a regulated service provider together with the issuing of directions to the directors preventing or restricting their future employment within the finance industry in Jersey. The Commission will continue to look to the board of regulated entities for any shortcomings in compliance with regulatory standards, particularly where such shortcomings place customers and the Island s international reputation in jeopardy.

The Enforcement Division completed 102 investigations that, inter alia, led to the issuing of 18 public

statements. Seven individuals conduct was of such concern that they were issued with directions preventing or restricting them from obtaining employment with a registered person in Jersey, without first obtaining the written consent of the Commission. No such consents were granted in 2011. Public statements continue to be an important and effective regulatory sanction. In addition, such statements are

an effective means of alerting the public and serve to provide the regulated community with an opportunity to learn from the mistakes of others.

79 notices were issued to obtain information from individuals or businesses to progress enforcement investigations compared to 73 in the previous year. The volume of compulsory interviews declined from 25 in 2010 to only four in 2011 due, in part, to the increased use of settlement agreements negating the need to conduct such compulsory interviews.

Eight settlement agreements were executed in 2011. Such agreements allow the Commission to increase the volume of cases it investigates and reduces the costs associated with contested enforcement action. The use of settlement agreements was incorporated into the Commission s Decision-making Process, which was updated in 2011 and published on the Commission s website.

16 requests for assistance from other regulatory authorities were received and serviced compared to 18 the previous year. The majority of the requests sought to recover evidence of insider trading where the trade had either been placed through Jersey or

the funds from the insider trading were deposited in the Island.

A challenging economic climate has seen some practitioners willing to take the risk of conducting unauthorised financial services business and,

in particular, providing registered office addresses or acting as a company secretary by way of business from their home address. Due to the risks associated with such individuals seeking to operate under the

 regulatory radar the Enforcement Division will give priority to investigating such cases. Ten such cases were subject to enforcement investigation during the year and, as part of a wider investigation in respect of which the Commission provided assistance, one individual was subsequently convicted of money laundering at Southwark Crown Court and is now serving a substantial term of imprisonment.

Members of the public both in Jersey and overseas continue to search for better returns on their savings and have been tempted to invest money in response

to unsolicited telephone calls or emails. Unfortunately, this has frequently resulted in individuals falling victim to a scam. Once the victim makes an initial payment, the fraudster invariably seeks to obtain further money by providing bogus information and promises that are later broken. Payments to the fraudster are often routed via bank accounts in other jurisdictions.

The Commission will report such matters to the Police but will also alert the regulator in the jurisdiction where the bank account is operated. The Commission always endeavours to issue a public statement as soon as possible where the fraudster claims to be a legitimate Jersey based financial services business. Such statements have proven effective in disrupting the fraud. 16 such cases were dealt with in 2011 and frequently result in considerable correspondence from investors around the world who, alerted by the public statement, contact the Commission to report that they have been victims of the scam.

The Commission s capability to collate and develop intelligence has been essential in ensuring that enforcement resources are focussed in the correct manner by adopting an intelligence led approach to regulation. Whilst the volume of intelligence received increased, the number of calls to the whistleblowing telephone line showed a decline, as many whistleblowers preferred to meet with officers of the Commission to explain their concerns.

The Commission s capability to collate and develop intelligence has been essential in ensuring that enforcement resources are focussed in the correct manner by adopting an intelligence led approach to regulation.

In December 2011, the Enforcement Division held a presentation for senior staff of regulated businesses.  The aim of the presentation was to provide an overview of the trends and developments identified through dealing with enforcement cases. Following positive feedback from the attendees, the event will be repeated in Q4 of 2012.

Following, inter alia, comments made in the International Monetary Fund report, the Commission researched and carefully considered the need to obtain powers to impose civil penalties for breaches of the Codes of Practice which set the regulatory standards for regulated businesses. This work culminated in the publication of a consultation paper in April 2012 seeking views on the introduction of a power for the Commission to impose civil penalties for serious, uncorrected or recurring breaches of the Codes  

of Practice.

KEY TASKS FOR 2012:

• Continue to progress towards obtaining an ability to impose civil penalties for breaches of the Codes of Practice.

• Rigorously investigate cases where  individuals seek to avoid regulatory oversight by conducting unauthorised financial  services business.

• Hold another seminar in Q4 of 2012 on  the subject of the trends and developments arising from enforcement cases.

ENFORCEMENT

Enforcement case statistics

Percentage breakdown of Enforcement Division activity during the year ended 2011

Financial Services (J) Law - Investment Business - Non Regulated 16.5% Financial Services (J) Law - Investment Business - Regulated 6.6%

Financial Services (J) Law - Trust Company Business - Non Regulated 11.6% Financial Services (J) Law - Trust Company Business - Regulated 14.9% Financial Services (J) Law - Fund Services Business - Regulated 4.1% Financial Services (J) Law - GIMB - Regulated 0.8%

Financial Services (J) Law - Insider Dealing 9.9%

Financial Services (J) Law - Market Manipulation 2.5%

Financial Services (J) Law - Misleading Statements and Practices 2.5% Banking Business (J) Law - Non Regulated 1.7%

Banking Business (J) Law - Regulated 1.7%

Companies (Jersey) Law 3.3%

Proceeds of Crime (Jersey) Law 19.0%

Insurance Business (J) Law - Regulated 0.8%

Collective Investment Funds (J) Law - Non Regulated 0.8%

Collective Investment Funds (J) Law - Regulated 3.3%

Total Enforcement Cases during the period from 1 January to 31 December 2011

REGISTRY

The Commission operates Jersey s Companies Registry (the  Registry ).

The Registry registers Jersey statutory bodies for use by the finance industry and the wider public to aid entrepreneurial endeavour and the free flow of capital. The Registry maintains the registers for companies, foundations, limited liability partnerships, limited partnerships, incorporated limited partnerships, separate limited partnerships and business names. The Registry s primary function is to maintain these registers and to provide an efficient and effective service.

The Registry s work complements the Commission s aim to ensure that all entities that are authorised meet fit and proper criteria .

Registry

The Registry incorporated 2,520 companies in 2011, an increase of 1.4% compared with the previous year. The increase shows the change in business activity as the global economy progresses slowly out of recession. The number of live companies registered as at the 31 December 2011 was 32,508.

Limited partnership formations during the year were 122 compared to 102 during 2010.

Nearly all other Registry registrations and

processing, such as special resolutions and searches, have significantly increased particularly where supplied online. The filing of public company accounts was

in line with the previous year. This is a result of the Registry s continued drive to improve public company filings.

The Registry adheres to published response time-scales, all of which were met in 2011, as shown in the table

on page 40.

In May 2011, the Registry User Group met and discussed a number of issues such as the quality of service provided by the Registry, online services, and business volumes flowing through the Registry, and new products and fees.

During 2011, there were changes to the Companies (Jersey) Law 1991, in particular an amendment to allow cross-border mergers. In addition, incorporated limited partnerships and separate limited partnerships were introduced through separate legislation.

Work also progressed on the amendments to the security interests legislation.

Automation and e-commerce projects

During 2011, the online search facility, online monitoring and the online filing system were enhanced. All systems continued to be embedded in our online environment known as Easy Company Registry ( ECR ).

Work on developing an automated Security Interests Register was started with a number of progress demonstrations of the test system being given to Industry during its development.

International Development of the Registry

The Registry has continued to enhance the profile of the Registry internationally, speaking at events such as the European Commerce Registries Forum ( ECRF )

in Germany. Jersey is also responsible for the management and enhancement of the ECRF website. A local website design firm continues to provide maintenance services to the ECRF website.

After entering into an information sharing agreement with the European Business Register ( EBR ) in 2006, basic Jersey company information was made available through the EBR network from May 2007. The EBR now has a membership of 26 European countries providing access to information on more than 24 million companies. The Director, Registry, attended and spoke at two EBR general meetings, and he is also responsible for presenting the annual budget and audited financial statements to the members. In May 2010, the Director, Registry, was elected for a two year period to the Board and holds the position of vice chair of the EBR.

In May 2011, the Director, Registry, attended and

spoke at the International Association of Commercial Administrators ( IACA ). IACA represents the company registries of the United States ( US ) and Canada.

The Director, Registry, was elected as vice chair of the international section of IACA.

During 2011, there were changes to the Companies (Jersey) Law 1991, in particular an amendment to allow cross-border mergers.

The US continues to review its disclosure requirements for the beneficial ownership of US companies and  other global issues affecting registries. Canada and the US are regarded as the leading jurisdictions for the administration of secure transactions. With Jersey s  new Security Interests Law being developed in 2011, access to expert support has been beneficial.

Jersey continues to promote greater communication between registries globally. Contributions to EBR and the European e-justice initiatives during 2011 have kept initiatives on cross-border migration to the fore, ensuring that the Registry continues to be  active internationally.

KEY TASKS FOR 2012:

• Maintain an efficient service to users of  the Registry.

• Continue to progress the implementation  of the Registry s ECR online environment, and commence work on a root and branch review of legislation and systems related to the use of the Registry, which will include business-to-business (B2B) developments.

• Contribute to the development of Registry related legislation, such as amendments to the Security Interests Law and the introduction of Amendments No. 11 and 12 to the Companies (Jersey) Law 1991.

• Continue to monitor relevant European directives and global issues which may have an impact on Jersey and enhance the profile of the Registry internationally.

THE SUPPORT DIVISIONS

One of the aims of the Commission is to ensure the Commission operates effectively and efficiently . A number of Divisions are responsible for ensuring that the Commission has in place the necessary information technology, human and physical resources to ensure that this aim is met.

Support Divisions - Information and Communications Technology ( ICT ) and Human Resources ( HR )

ICT

During 2011, the ICT Division continued to work closely on delivering high availability services to the organisation and to external users. ICT has continued to use Microsoft SharePoint to deliver flexible low cost systems for the Commission. Notable additions in 2011 included a new project management system for controlling major projects and a new AML Risk Monitoring System to replace a legacy application. ICT has also designed a new SharePoint based Supervision Platform which will be used to deliver a series of projects for the Supervisory Operations Team over the next two to three years.

Following changes in the Divisional structure, support and development resources have been recruited to underpin the new service focused approach as well as to increase the Commission s internal systems development capabilities. ICT concluded the year with an extensive network and governance audit carried out by a team of external auditors.

HR

The HR Division aims to provide excellence in human resource leadership in order to secure the Commission s aims and objectives. The Division s goal is to attract, retain, develop and nurture high calibre and diverse staff to ensure that the Commission is fully equipped to discharge its responsibilities. The Commission continued to develop its management capability through targeted programmes delivered during 2011. The Commission is seen as an employer of choice and one of the key challenges will be to maintain this position.

Learning and development has continued to be strengthened during 2011, resulting in the Commission being entered for the 2011 Jersey Enterprise awards, specifically for the Skills Jersey Development of People award category. The Commission was successful in its submission and was shortlisted for the award.

The HR Division is committed to helping ensure improvement in the quality of performance, management and development of all Commission staff.

The HR Division is committed to working innovatively and strategically with a strapline of continuous improvement and excellence in order to identify and respond to both the Commission s and the Island s changing needs.

THE SUPPORT DIVISIONS

KEY TASKS FOR 2012:

ICT HR

• Continue with service delivery improvements  •  Produce a Strategic Resource Plan. including a new consolidated helpdesk and

change management system. The ICT Division  •  Undertake a Recruitment and  will also complete a programme of changes  Selection Strategic Review.

related to the 2011 security and   •  Develop relationships with FSA governance audit. and international bodies.

• Continue to work closely with the Commission s  •  Re-accreditation of the Investors  Operations Teams to deliver business led  in People award.

systems and services using the new Supervisory

Platform which will be completed in the first half  •  Promote regulatory careers.

of 2012. The new platform represents a

significant investment in the Commission s

SharePoint systems and creates a workflow

based facility to improve internal processes and

provide Industry with a portal through which to

interact with the Commission online.

• Support the Registry with the expansion of its

 Easy Company Registry online system as well as providing assistance with the review of all Registry systems due to commence in 2012.

The Commission continued to develop its management capability through targeted programmes delivered  during 2011.

STATISTICAL ANNEXE

Companies

Registry Processing - performance against target

All Companies % Partnerships % Searches % Certification % Business names % Achieved 98.2 96.6 100 100 99.9

95 achieved  95 achieved  95 achieved  95 achieved  90 achieved

Target

within 2 days within 2 days within 2 days within 2 days within 2 days

Registry Processing - items processed

Printed search  Limited  Certificates of Year Company searches Business names

documents partnerships good standing

2009 48,464 8,313 775 94 1,922 2010 57,645 4,518 823 102 2,258 2011 60,801 3,230 837 122 2,286

Quarterly Company Incorporations

Year 31 March 30 June 30 September 31 December Annual Total 2009 577 533 628 591 2,329 2010 709 586 605 584 2,484 2011 629 576 640 675 2,520

Live Companies on the Register

At 31 December 2011 (2010) there were 32,508 (32,722) live companies registered in Jersey.

31  30  30  31 Year

March June  September December

2009 33,579 33,811 33,187 33,074 2010 33,379 33,570 33,634 32,722 2011 32,998 33,116 33,194 32,508

Live Companies on the Register

35.0

32.5

30.0 31 March 30 June 30 September 31 December

2009 2010 2011

Insurance Business

Total number of insurance licences = 189 of which:

Category A = 180

Category B = 9

At 31 December 2011 there were 125 registered general insurance mediation businesses.

Funds

Collective Investment Funds (Jersey) Law 1988 ( CIF Law ) Control of Borrowing (Jersey) Order 1958 ( COBO )

Summary of Statistical Survey of Funds Serviced in Jersey as at 31 December 2011

From 1 October 2003, the Commission has excluded from the figures the collective investment funds for

which a certificate or permit was issued under the CIF Law for the function of distributor or similar minor function. However, the Commission now collects statistics on the private schemes administered in the Island, which, although not requiring a certificate or permit under the CIF Law, require consent under COBO (such funds are termed  COBO Funds ). Funds regulated under the CIF Law are referred to herein as  CIFs .

Date Net asset value (£ billions) Number of funds Number of separate pools 31 December 2009 166.156 1,294 2,725

31 December 2010 184.703 1,324 2,522

31 December 2011 189.424 1,392 2,454

Analysis of CIFs and COBO Funds

Analysis by Class - 31 December 2011

Analysis of funds by classification

160 140 120

100 80 60

40 20 0

Unclassified Recognised Listed Expert COBO

CIFs  CIFs  Funds CIFs Funds

2009 2010 2011

Funds

CIFs & COBO Funds - Analysis by Investment Policy Codes

Funds - Analysis by Investment Code Policies

140  

120  

100  

Specialist Equity

80

Bond

Mixed

60

Money Market 40

20

0

2009 2010 2011

Breakdown of Trust Company Businesses by size

Super Large (50+ employees) 8.5% Large (31-50 employees) 8.5% Medium (11-30 employees) 22.6% Small (0-10 employees) 18.1% Single class registration 21.5% Class O 6.2%

Managed trust companies 14.7%

Banking

Deposit takers registered under the Banking Business (Jersey) Law 1991 are referred to herein as Banks . Banks and Bank Deposits - £ billions

Bank Deposits

180

160

140

120

100

80

60

40

20

0

31 December 31 December 31 December 2009 2010 2011

Sterling Currency

Analysis of Bank Deposits - 31 December 2011 (£ billions; currency stated in sterling equivalent)

Geographical analysis of deposit-taking licence holders at 31 December 2011

UK (16)

Other EU (8) Switzerland (3) North America (6) Middle East (3) Africa (3)

Asia (1)

Assets of Banks

Totals and sub-totals for all Banks, split between those that are incorporated in Jersey ( Jersey Banks ) and those that operate in Jersey through a branch of an overseas incorporated bank ( Jersey Branches ).

All values are in £ millions.

2011 Commentary

The balance sheet total declined by 3.3% (£8.0 billion), with the largest movement being a £5.4billion decrease in funding of group companies, driven by reduced surplus deposits. Other assets decreased by £3.4 billion, principally as a result of falling levels of hedging transactions, much of which related to issued debt. Partly offsetting these movements, non-group interbank loans increased by £1.2 billion, reflecting increases in short term cash placements. Customer lending decreased marginally, within which a small shift was seen from commercial loans (down £0.6 billion) to residential mortgages (up £0.4billion).

Intra-Jersey funding represents deposits placed by banks registered in Jersey with other Jersey banks.

Funding of Banks

Totals and sub-totals for registered deposit takers, split between those that are incorporated in Jersey ( Jersey Banks ) and those that operate in Jersey through a branch of an overseas incorporated bank ( Jersey Branches ). All values are in £ millions.

2011 Commentary

The balance sheet total declined by 3.3% (£8.0 billion), with the largest movement being a reduction in deposits from banks (£5.5 billion), partly offset by an increase in customer deposits (£2.2 billion). Issued debt declined by £3.3 billion and other liabilities and equity declined by £1.4 billion. However, within the latter, regulatory capital increased by £0.4 billion, due to a mixture of retained profits and share issues.

Key trends and profitability of Banks that are incorporated in Jersey

2011 Commentary

2011 saw modest growth continue, although customer lending declined. Net interest income has stabilised, with a small increase in volumes offsetting the continued decline in margins, which remain impacted by the low interest rate environment. Profitability has continued to improve due to a reduction in the rate of new provisions for bad debt.

Key performance indicators of Banks that are incorporated in Jersey

2011 Commentary

Profitability rebounded in 2011, although profitability ratios remain below pre-crisis levels. Despite a further small drop in the NII margin, an increase in other income, coupled with stable operating expenses, have led to a decrease in the Cost/Income ratio.

Profitability and NII Margin

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

2.00% 1.90% 1.80% 1.70% 1.60% 1.50% 1.40% 1.30% 1.20% 1.10% 1.00%

2007 2008 2009 2010 2011 Q4 Date

Key risk ratios of Banks that are incorporated in Jersey

2011 Commentary

Non performing loans and provisions increased and now exceed end 2010 numbers. The leverage ratio increased due to a combination of a shrinking balance sheet and capital and reserves increases. The improvement in the RAR was smaller, as risk weighted assets increased, despite the decline in the balance sheet total, due mainly to risk weights being increased to reflect credit rating downgrades impacting exposures arising from upstreaming.

Financial Soundness

17% 8% 16% 7% 15% 6% 14% 5% 13% RAR (LHS)  4%

Leverage Ratio (RHS)

12% 3%

2006 2007 2008 2009 2010 2011 Q3 2011 Q4

Date

Investment Business  25 Funds under investment management

Total funds under management (Class B of the Financial

Services (Jersey) Law 1998) = £20.8 billion.

20

The total number of clients of investment managers = 14,381

15

Funds under  Number of

Date

management (£ billions) clients

31 December 2009 19.686 14,765 10

31 December 2010 21.394 14,736

31 December 2011 20.802 14,381 5

0

31 December 31 December 31 December 2009 2010 2011

The Commission remains committed to staff development, education and training, so appropriate funding will be made available annually for this important aspect of the Commission s activities.

FINANCIAL STATEMENTS

INTRODUCTION TO THE FINANCIAL STATEMENTS

Fee income in 2011 was £12.45 million compared to £12.33 million in 2010. Partly as a result of the international economic conditions, levels of income from banking and funds declined during 2011, but this reduction was offset by the first receipt of a full year s fees from designated non financial businesses and professions.

Bank deposit interest received in 2011 was £63,000, which was £26,000 higher than in the previous year. This was due to the conversion of some deposits to longer fixed terms, attracting higher interest rates.

Other income received in 2010 came from the seminars for the finance industry that were held during the year. The cost of these seminars was included in other operating expenses. No such seminars were held in 2011.

The Commission s major item of expenditure is staff costs. As in previous years the Commission has been increasing staff numbers only when absolutely necessary. During 2011 the average number of staff employed increased from 114 to 115. An analysis of this expenditure is contained in note 5 to the financial statements.

Expenditure on computer systems continued, in order to improve administrative efficiency. The amount of spend represents the maintenance costs for all systems (hardware and development costs are capitalised and depreciated over three years) and the software licence fees.

The net amount spent on investigations and litigation during the year decreased to £398,000 from £522,000

a year earlier. The decrease arose mainly because the Commission was able to recover a proportion of costs from the regulated businesses that had been under investigation, something that was not achievable in 2010.

The Commission has continued its efforts to work with regulated businesses to resolve problems before they reach the stage where formal regulatory action needs to be taken.

Expenditure on business travel remained constant during 2011. Visits were made regularly to overseas regulatory authorities and to international standard-setting organisations because it is important to maintain regular liaison and information exchange with these international bodies. This will continue in the coming years.

The Commission remains committed to staff development, education and training, so appropriate funding will be made available annually for this important aspect of the Commission s activities.

Overall, the level of operating expenses increased by only £18,000, from £11.86 million in 2010 to £11.88 million in 2011. The net result for the year was an operational surplus of £637,000 and a consequent rise in reserves to £7.1 million. The Commission has continued its policy in respect of its accumulated reserve in order to build up such a reserve to an amount equal to six months operating expenditure plus the average of the last five years cost of investigations and litigation. This is in order to meet contingencies, particularly the sizeable sums of money that may be required to fund investigations and litigation.

The Commissioners are of the opinion that the Financial Services Commission is a going concern, and the financial statements have been prepared accordingly. The auditors, PKF (UK) LLP, who were appointed in accordance with Article 21 of the Financial Services Commission (Jersey) Law 1998, have indicated their willingness to continue in office.

STATEMENT OF COMMISSIONERS RESPONSIBILITIES

The Commissioners are responsible for preparing the financial statements in accordance with applicable law and regulations.

The Financial Services Commission (Jersey) Law 1998 requires the Commissioners to prepare financial statements for each financial year. Under that law the Commissioners have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (being United Kingdom accounting standards and other accounting principles generally accepted in the United Kingdom).

The financial statements are required to give a true and fair view of the state of affairs of the Commission and of the surplus or deficit of the Commission for that year. In preparing these financial statements the Commissioners are required to:

• select suitable accounting policies and then apply them consistently;  

• make judgements and estimates that are reasonable and prudent; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Commission will continue in business.

The Commissioners are responsible for keeping proper accounts and proper records in relation to the accounts. They are also responsible for safeguarding the assets of the Commission and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Commissioners are responsible for the maintenance and integrity of the financial information included on the Commission s website. Legislation in Jersey governing the preparation and dissemination of the financial statements and other information included in Annual Reports may differ from such legislation in other jurisdictions.  

For and on behalf of the Board of Commissioners C F Renault

Commission Secretary

1 June 2012

PO Box 267 14-18 Castle Street St Helier

Jersey

Channel Islands JE4 8TP

INDEPENDENT AUDITORS REPORT TO THE MINISTER FOR ECONOMIC DEVELOPMENT

We have audited the financial statements of the Jersey Financial Services Commission (the  Commission ) for the year ended 31 December 2011 which comprise the Income and Expenditure Account, the Balance Sheet, the Cash Flow Statement and the related notes. The financial reporting framework that has been applied in their preparation is United Kingdom accounting standards and other accounting principles generally accepted in the United Kingdom (United Kingdom Generally Accepted Accounting Practice).

This report is made solely to the Minister for Economic Development in accordance with Article 21(3) of the Financial Services Commission (Jersey) Law 1998. Our audit work has been undertaken so that we may state to the Minister for Economic Development those matters that we are required to state in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Minister for Economic Development for our audit work, for this report, or for the opinions that we have formed.

Respective responsibilities of Commissioners and Auditors

As explained more fully in the Statement of Commissioners responsibilities, the Commissioners are responsible for the preparation of the financial statements which give a true and fair view. Our responsibility is to audit and to express an opinion on the financial statements and to express an opinion in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Commission s circumstances and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates made by the Commissioners, and the overall presentation of the financial statements.

In addition, we read all the financial and non-financial information in the Annual Report to identify any material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on the financial statements

In our opinion the financial statements

• give a true and fair view of the state of the Commission s affairs as at 31 December 2011 and of its surplus for the year then ended;

• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

• have been prepared in accordance with the Financial Services Commission (Jersey) Law 1998.