Jersey Financial Services Commission: Annual Report 2012.

Contents

The Island of Jersey  2 The Jersey Financial Services Commission  4 Highlights  5 The Commissioners  6 Chairman s Statement  9 Director General s Report  11 Structure Chart  14 International Standards and Policy Development  16 Regulatory Developments  18 Supervision  20 Enforcement  22 Registry  24 Resources  25 Corporate Governance  26 Financial Statements  31 Statistical Annexe  43

The Island of Jersey

Jersey enjoys a reputation as  a well-regulated international  finance centre.

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 is closely connected with the London markets. Not only is it just 45 minutes flying time from London, but there are significant institutions to be found in both locations, and significant flows of business between the two centres.

Jersey is a Dependency of the Crown of the United Kingdom. The Island is not part of the European Union, being neither a separate Member State nor an Associate Member.

Jersey has its own legislative assembly, called the States of Jersey, which comprises 51 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 the Island s unitary financial services regulator.

The Commission is an independent 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 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.

Regulated Businesses Main Activity Areas

• Banking •  Policy

• Fund services  •  International engagement

• General insurance mediation  •  Regulatory standards

• Insurance •  Supervision

• Investment  •  Enforcement

• Trust and company service providers •  Registry

• Designated non-financial businesses and professions, which includes accountants and lawyers, for AML/CFT purposes

Highlights

Principal Themes During 2012 Size of the Finance Industry

• Commencing work on a framework for funds that would  be compatible with the EU s Alternative Investment Fund Managers Directive.

• Gaining membership of MONEYVAL (a body of the Council of Europe), which is an FATF style Regional Body.

• Monitoring the Basel III package of reforms and the proposals advanced by the UK s Independent Commission on Banking.

• Considering the impact of possible changes to the Bank Licensing Policy.

• Working on the Review of Financial Advice project, which aims to raise the professional standards of  investment advisors and eradicate possible conflicts  of interest that can be caused by commission based remuneration arrangements.

• Consulting on a civil penalties regime to give a wider  spread of enforcement sanctions.

• Signing memoranda of understanding with other regulators, including Germany s BaFin and the United States Federal Deposit Insurance Corporation.

• Conducting on-site examinations and following up  any necessary action arising out of those examinations.

The value of the assets under management in the Jersey Finance Industry at the end of 2012 is set out below.

• The total value of banking deposits held in Jersey  was £152.1bn.

• The total number of regulated funds was 1,388, with a net asset value of funds under administration of £192.8bn.

• The value of assets held by trusts is estimated to be in the region of £500bn (statistics are not collected for this sector due to the varied nature of those assets).

• The total number of live companies on the Companies  Register stood at 32,503.

The Commissioners

NON-EXECUTIVE COMMISSIONERS

Clive Jones - Chairman (October 2007)

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 Averty - Deputy Chairman (December 2005)

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.

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

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

Lord Eatwell of Stratton St Margaret (April 2010)

Lord Eatwell is a Professor of Financial Policy at the University of Cambridge, and he also leads a work stream within the Centre for Financial Analysis and Policy on financial regulatory issues.

Lord Eatwell played a pivotal role in the creation of the Financial Stability Forum  (now the Financial Stability Board). He has also 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.

John Mills, CBE (October 2009)

John s background was spent, until his retirement in 2007, in the UK Civil Service. Senior roles included Director of Consumer Affairs at the Office of Fair Trading and as a member of the Prime Minister s Policy Unit. Outside Whitehall, he was Chief Executive  of Cornwall County Council, moving to Jersey in 1999 as Chief Executive for Policy and Resources for the States of Jersey.

John is currently a member of the Shadow Board for the Ports of Jersey and, in the UK,

is Vice-Chairman of the Port of London Authority. He holds several States of Jersey appointments to honorary roles in the Island s governance, including as an independent member of the Public Accounts Committee and as an Income Tax Commissioner of Appeal.

Advocate Debbie Prosser (November 2008)

Debbie qualified as a Jersey Advocate in 1990 and is a member of the Jersey Law Society. Debbie was a partner at Bailhache Labesse (now Appleby) from 1991 to 2005. 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 the chairman of the Jersey Police Complaints Authority and a member of the Jersey Youth Court Panel and holds a number of non-executive directorships.

Crown Advocate Cyril Whelan (June 2010)

Cyril 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. 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.

His background includes 28 years as senior legal adviser in the Law Officers Department in Jersey. As head of the Section responsible for Serious Crime and International Mutual Legal Assistance, Cyril 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.

Sir Nigel Wicks (July 2007 until June 2012)

Sir Nigel was until recently 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.

Sir Nigel now chairs the British Bankers Association.

Markus Ruetimann (September 2010)

Born and educated in Switzerland, Markus has worked in the financial services industry in Zurich, Geneva, New York and London. Markus is currently the Group Chief Operating Officer for Schroder Investment Management Limited, based in London. Markus s global responsibilities encompass portfolio services, fund services, information technology, group change and project management and corporate services. Markus has been a member of Group Management Committee of Schroder plc since June 2005 and was appointed as a director of Schroder & Co. Bank AG, Zurich in September 2009.

Prior to joining Schroders, Markus was global Head of Technology & Portfolio Services  at UBS Global Asset Management from 1999 to late 2004 and COO at Philips & Drew from 1988 to 1998. External non-executive mandates included CRESTCo in London, Omgeo LLP in New York, and ISSA in Zurich.

The Commissioners

NON-EXECUTIVE COMMISSIONERS

Stephan Wilcke (July 2012)

Stephan joined the board of OneSavings Bank Plc, which trades as Kent Reliance, in 2011 and became chairman in February 2012. He was, until recently, Chief Executive Officer of the Asset Protection Agency, an executive arm of HM Treasury. Prior to this he advised various central banks on difficult situations created by the credit crunch. He was previously a partner and Head of European Financial Services at private equity firm Apax Partners Worldwide LLP.

Stephan started his career at management consultancy Oliver Wyman where he progressed to partner level. He graduated from Oxford University with a Masters in Politics, Philosophy and Economics.

Ian Wright (April 2012)

Ian is a Member of the Institute of Chartered Accountants in England and Wales (ICAEW). Since 2007, Ian has served in a number of roles at the Financial Reporting Council (FRC), the UK s independent regulator responsible for promoting confidence in corporate reporting and governance, including Director of Corporate Reporting, he is currently Deputy Chairman of the Financial Reporting Review Panel.

He retired in 2007, having achieved the position of Senior Partner in Price waterhouseCoopers ( PwC ) Global Corporate Reporting Group based in London. Ian joined PwC in 1979, initially based in Jersey and Bahrain, and has also worked as an Audit Partner based in London and Jersey and as a Senior Technical Partner in London.

Ian has previously served as a member of the International Financial Reporting Interpretation Committee (IFRIC), the Financial Reporting Policy Group of the FØdØration des Experts Comptables EuropØens (FEE), and the Technical Strategy Board of the ICAEW and  Chairman of the ICAEW s Financial Reporting Committee.

EXECUTIVE COMMISSIONER

John Harris - Director General (March 2007)

John was appointed the Director General of the Commission on 6 November 2006 and was subsequently appointed to the Board of Commissioners in 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.

Chairman s Statement

Continued low economic growth in the Island s traditional  It continues to be a priority for 2013, along with overseeing markets for financial services, increasing waves of  the development of considerable secondary legislation that international financial services regulation whose effect is  will be required.

often potentially to exclude providers from Jersey and the

As I predicted last year, work on access for our banks to the other Crown Dependencies, and growing pressure on any

UK market grew following publication of the

jurisdiction that can be labelled as a tax haven have all

recommendations of the Independent Commission on

put the finance industry s ( Industry ) business models

banking ( ICB ). Again, this was a joint effort with

under pressure.

Government and the banking sector. By the end of the year This is potentially an inflection point of some significance to  it was too early to tell the extent to which HM Treasury felt the Island and highlights the importance of a coherent  able to accept our views. However, the Board s view is that strategy for financial services. The Commission spent some  even in the worst case our major banks will be able

time thinking about this during 2012 and has embarked on  successfully to adapt to changed circumstances and,

some initiatives outlined in its Business Plan published in  indeed, it might offer us some new opportunities,  

April 2013 to help it play a part. More importantly the  as I explain below.

Commission has engaged with Government and with Jersey

It was with the assistance of HM Treasury that Jersey and Finance, the promotional and technical body for the

the other Crown Dependencies achieved membership of Industry, in trying to co-ordinate actions to ensure a properly

MONEYVAL during 2012, a necessary step in being able to joined-up approach to Industry development and

demonstrate to the IMF that our AML/CFT standards are regulation in the future. This will develop further in 2013.

both appropriate and effective.

That is not to say we resile in the slightest from our  

commitment to meet international standards. Indeed the  

fate of other offshore centres and even EU members in the  It was with the assistance of  

past year has illustrated poignantly the legacy of a neglect of

international standards and how that can return in times of  HM Treasury that Jersey and the  stress to make recovery even more difficult. But we also

believe in a jurisdiction such as Jersey that the Commission  other Crown Dependencies achieved has a proper role as an enabler alongside its more traditional  membership of MONEYVAL.

role as an enforcer, and it has continued to try to play that

role throughout the year.

In a world where politics rather than policy tend to shape  

international regulation, the Commission is required to  In 2012, the Board decided that, given the nature of the engage in order to facilitate that access. We do that by  ICB s proposals, its traditional policy for granting bank ensuring as far as we can that service providers in Jersey  licences would increasingly seem inappropriate. It therefore have equal access to the important markets of the UK and  seemed sensible not merely to consider how that licensing the EU, or at least the nearest equivalent to equal access  policy might change but, moreover, how it could prudently that we can achieve. In our view, there is no sustainable  be changed so as to allow the licensing of a greater number argument for suggesting that our service providers do not  and wider range of banks than hitherto in the expectation deserve equal or equivalent access purely because  that an economic benefit to the Island would arise. regulatory standards in Jersey are in some way deficient.  The Executive developed comprehensive proposals and They are not. these are now being consulted on with the Industry and

with Government.

As I noted last year, in 2012 the Board watched closely as

the Executive worked with Industry, Jersey Finance and the  The Board had also felt for some time that in light of the European Securities and Markets Authority ( ESMA ) on  increase in enforcement activity a regrettable but obtaining access for funds providers to the EU under the  nonetheless foreseeable consequence of the downturn in Alternative Investment Fund Managers Directive ( AIFMD ).  the business cycle that its range of sanctions against

By the end of the year we believe we achieved everything  wrongdoers was too limited. Basically, the position that required to enable us and the other Crown Dependencies to  exists is that the sanctions available to the Commission sign a co-operation agreement with ESMA. However, as  range from a non-public letter of censure to an outright ban ESMA s focus shifted towards signing up with other priority  on working in the Industry, accompanied by a public countries, we had not achieved our aim by the end of  statement. But there is nothing in between.

the year.

Chairman s Statement

Following discussions with the Attorney General, it was agreed that we could develop a range of monetary penalties for infractions of our various Codes of Practice. A survey of Jersey compliance officers by Deloitte in 2011 had indicated that the Industry was prepared for this and might even support it. We also concluded that as far as possible the accumulated penalties should be used to help offset licence fee costs for the Industry sector(s) in respect of which they were levied. This is now being consulted on with the Industry.

 The Commission is its people.  

They bring to us an ability to work hard, to work intelligently, to be dedicated to maintaining regulatory standards and to work constructively with those whom they regulate.

It is important to note here that the proposed civil penalties

regime neither mitigates breaches of the law which remain the prerogative of the Attorney General nor lead to a conclusion that the Board will in future shrink from removing from the Industry any person or firm who has done demonstrable and reckless harm to customers.

Last year I spoke about working towards scaleability  

in relation to our supervisory operations. During 2012,  our project to automate the submission of personal questionnaires for Principal Persons went live. This was one of our first projects in this area and has been well-received by the Industry as well as improving our own turnaround times. The Board also approved significant further technology investment in information management and records management to support the work of the Supervision Divisions. This will continue throughout 2013.

As we note later in this annual report, the Board subscribes to the UK Corporate Governance Code and adheres to the Code s principles. Indeed it is the Board s view that our own corporate governance standards should be equal to or better than those of the Industry we regulate. To that end the Board has regular formal meetings with Government and with the Industry - our stakeholders - as well as frequent informal meetings with the Minister for Economic Development and with Jersey Finance.

The Board conducted a review of its effectiveness in 2012. Commissioners were surveyed anonymously for their views, the results of which were discussed at two subsequent Board meetings.

In general, the Commissioners were satisfied with the Board s effectiveness during 2012. That is not to say that there is no room for improvement and Commissioners felt that further effort needed to be made in relation to stakeholder communication, reflecting on strategy and discussing internal succession planning and talent management. I expect we shall conduct a fresh externally- facilitated review in 2013 to build on this work.

We continue to work closely with the Guernsey Financial Services Commission ( GFSC ), and during the year the Director General had meetings with his counterpart as I did with the GFSC s Chairman. We will continue to find ways to co-operate and share efficiencies. Additionally, we have the annual formal meeting with the GFSC and the Isle of Man Financial Supervision Commission, which was particularly productive in 2012.

In carrying out my duties, I am fortunate to be supported by an enormously talented Board. In 2012, the Board underwent some changes. In June, Sir Nigel Wicks stepped down after reaching the statutory retirement age for Commissioners and following five years of valuable service. The Commission has been fortunate to have Sir Nigel as a Commissioner since 2007. His unparalleled experience and wise advice, coupled with his ability to move seamlessly from the strategic to the tactical have been of huge benefit to us.

During the year, we were joined by two new Commissioners. In April, Ian Wright joined as a local Commissioner following the customary open application and selection process. His considerable experience as an accountant in private practice as well as his work with the Financial Reporting Council in the UK greatly strengthens the Board in the areas of accounting and governance.

Stephan Wilcke joined the Board in July, replacing  

Sir Nigel Wicks as one of our off-Island Commissioners.  His experience as a consultant and then as head of the financial services practice of a major private equity investor have given him a wide perspective on the Industry.  

His more recent role as head of HM Treasury s Asset Protection Agency allows him to bring additional insights  on hard-to-value assets.

I am delighted to have Ian and Stephan join us and I would like to thank the entire Board for its support and effort throughout the year.

The Commission is its people. They bring to us an ability to work hard, to work intelligently, to be dedicated to maintaining regulatory standards and to work constructively with those whom they regulate. The leadership of the Director General exemplifies all of these qualities. On the Board s behalf I thank him and all our Staff for their work and dedication in 2012.

Director General s Report

Overview Also clear are the challenges we face, some six years into

the major financial crisis of modern times, in the areas of

It will be apparent to those who have read the Chairman s  supervision and enforcement. These are our core tasks and Statement that this has been a difficult and challenging  they are ever more exacting, being significantly impacted by environment in which, nonetheless, the Commission was  the crisis and its consequent effects. While Jersey has been able to continue to fulfil its statutory functions, address  able to avoid the worst outcomes seen elsewhere in recent many of the main issues and tasks confronting it and  years such as blows to financial stability from bank failures achieve a significant body of progress both internationally  and other system-wide problems, it would be wrong to

and domestically. pretend that all has been perfect.

This Annual Report demonstrates this to full effect within the subsequent sections, which focus on the work undertaken by the Executive and the Commission s Staff. Amongst the many achievements, I should particularly like to draw attention to the international outreach activity of the Commission, which we see as a vital component of our many responsibilities in helping Jersey to achieve the highest possible measure of understanding with its key international audiences. This understanding is all the more vital in the current uncertain, some might say febrile, environment of low growth and strained major country public finances.

In this context, the Commission provides a vital contribution to Jersey s future as a responsible and co-operative financial centre in taking the initiative in many areas.

Good examples in 2012 can be found in the Commission by:

• resourcing working groups of international  organisations such as the International Organisation  of Securities Commissions (IOSCO);

• representing the Island s case to the European  Securities and Markets Authority (ESMA) for inclusion in the network of co-operation agreements  necessary for participation as a third country within  the EU s Alternative Investment Management  Directive ( AIFMD ); and

• reaching memoranda of understanding with fellow  regulators of significance, such as

- the Federal Deposit Insurance Corporation  

   (FDIC) of the USA,

- the Federal Financial Supervisory Authority

   (BaFin) in Germany, and

- the Reserve Bank of India (RBI).

In particular, Jersey has seen some cases of clients who have suffered losses through impaired fund vehicles, exacerbated by poor administration standards in a minority of registered firms, and where an underlying theme of causation in some, thankfully isolated but nonetheless important, structures has been the unsuitability of the product and its risks relative to some of the clients involved.

A feature of the pre-crisis years everywhere has been the willingness of some investors to buy risky products they did not understand and which were not properly explained to them. However, they nevertheless signed all the relevant contractual documents acknowledging the higher risk without reading them or making further enquiries through the use of independent third party advisers. Such misplaced trust, allied to the reality of contractual commitments made, pose real challenges to a regulator such as the Commission, which does not have the capacity to intervene at the point of sale. Nor does it have ombudsman powers, and is inevitably chasing events rather than being able to be ahead of them.

With this in mind, conscious also of the comprehensive review material provided elsewhere in this Annual Report and the Commission s compliance with the UK Corporate Governance Code issued by the Financial Reporting Council, I thought I would use the remainder of this year s contribution to set out - in abbreviated terms - our view of the Commission s business model . Clearly we are not a standard business and thus this model effectively means the approach we take to our regulatory remit and responsibilities. In the circumstances of recent years this is a good opportunity to state what this is and what it means.

Director General s Report

For the Commission, our philosophy and approach is set out below.

Regulatory model

No system of regulation can guarantee that no loss will be incurred by depositors or investors in financial services businesses.

Our objective is to minimise potential losses arising from fraud and error at reasonable cost, whilst providing Industry with enough freedom of action to support long-term sustainable enterprise, investment and employment.

The legislation and the regulatory framework must be capable of implementation on an efficient and effective basis so as to achieve their objectives and command the respect of depositors, investors and financial services businesses. We consult widely on all proposals to change the legislation and the regulatory framework, and work closely with the Industry to ensure that all of the relevant legislation and the regulatory framework are well understood.

 We seek to ensure that the Island has high standards of financial services regulation so as to comply with all international requirements on a timely basis and for the foreseeable future.

We seek to ensure that the Island has high standards of financial services regulation so as to comply with all international requirements on a timely basis and for the foreseeable future. International requirements are dynamic and are increasingly demanding. As a consequence our legislation and regulatory framework will at times be more demanding than our competitors for a temporary period.

Responsibilities of investors and depositors

Investors and depositors are responsible for their own due diligence. We do not believe that they should rely wholly on the existence of the Commission but should be obliged to satisfy themselves as to the financial standing of financial services businesses and fully understand any product that they intend to invest in. This is particularly relevant with products which are aimed at professional or sophisticated investors.

Financial information and audit

Investors and depositors need access to relevant reliable information to be able to make informed decisions.  We require all financial services businesses to have set minimum levels of capital and liquidity, depending on the nature and size of the business undertaken. We intervene to amend the activities of a registered business where we have concerns about their financial strength or access to liquidity support.

We require all financial services businesses to prepare annual reports and financial statements and make them available to prospective and current depositors and investors, and for these to be audited.

We work with the UK Accountancy Recognised Supervisor Bodies and the UK Audit Quality Review Team to have some of the audit work carried out in the Island inspected and we refer to them issues of potential non-compliance with auditing standards.

Governance and internal control

We believe that the most effective system to minimise loss to depositors or investors is one operated in real time by businesses, which have high standards of corporate governance and internal controls. We set standards of governance and internal control for financial services businesses operating in the Island, including requiring all such businesses to have their own internal compliance officer and compliance function. A great deal of our supervisory programme, including on-site examinations,  in recent years has been focused in this area.

We expect regulated businesses and individuals to  advise us promptly whenever they identify issues of non-compliance with the legislation and the regulatory framework, and use this experience to inform our  risk-based analysis.

We carry out periodic risk-based examinations to ascertain the effectiveness of the internal control systems and the reliability of reports made by compliance functions to their boards and ourselves.

Supervision of individuals

All systems of governance and internal control are  We make regular presentations to Industry daueptheonrditeynatn udp tohno stheer ehsopnoensstyibalen fdo  ri net ne sgurirtyinogf tthhaotsien tienr nal  to help them understand our approach and

controls are operating effectively.  the likely direction of the legislation and the Wunet ilr eplyroovnent hgeu ipltryi,n bciuptl eintvheastt iaglal tien dwivitihduvaiglso uarres hinonuoldcewnte  regulatory framework.

receive information that calls into question the honesty or

integrity of those in authority or in compliance functions.  

We seek to exclude those who do not meet the necessary  Conclusions

standards of honesty and integrity from working in   In summary, 2012 has been another demanding year for

the Industry.  the Executive and the Commission s Staff.

Sources of information about  

non-compliance Touhtemchoarell efunlglye sin a nthde rseusbpsoenqsuese ntot sthecotsioen csh oafl lethnigs eAs n anr ue asle t Early information about possible non-compliance with the  Report, which cover the following areas:

legislation and the regulatory framework is key to our ability

to identify inappropriate products and services, and a failure  •  international standards and policy development,  to comply with necessary standards of honesty and integrity.  particularly in relation to AML/CFT;

• regulatory developments within the Supervision  

Wcoen fiodpeenratitael ac owmhmistulenbicloawtioinngr oteuletephfoornteh olisneectoonpcreorvniedde tah at   Divisions, where the focus has been developing  making a disclosure about possible non-compliance might   an AIFMD compliant fund regime;

have an adverse impact on them individually. We work  •  the supervision of the finance industry in Jersey; closely with the States of Jersey Police, including in relation

to money laundering and terrorist financing. We also  •  the Commission s approach to enforcement where  establish information gateways with overseas regulatory   there have been breaches of regulatory standards;

bodies so as to be able to receive information on suspicious  •  the activities of the Companies Registry;

activity related to Jersey that originates in other locations.

• the application of resources to sustain the above  

Being transparent and accountable  activity; and

We make regular presentations to Industry to help them  •  the Commission s corporate governance framework. understand our approach and the likely direction of the

legislation and the regulatory framework.

The Executive has continued to receive support and

We produce an Annual Report to explain our approach and  encouragement from the Board of Commissioners,

how we performed in a specific year. We also produce a  together with necessary agreement on securing the Business Plan and Budget for the next year to explain how  resources to address the many issues facing the

we see our strategy and costs developing over the  Commission. Finally, I wish to thank the Commission s foreseeable future. Executive and Staff for their hard work, dedication and

We seek to ensure that our Annual Report is well read by  unstinting support in taking on the diverse challenges we sending a copy to all regulated businesses and to overseas  face both within Jersey and on the international stage. regulators, and by publishing it on our website.

Structure Chart

CHIEF FINANCIAL OFFICER BANKING, INSURANCE AND INVESTMENT BUSINESS

Nigel Woodroffe Mark Sumner

Chief Financial Officer Director Banking, Insurance  

and Investment Business

David Hart

Eric Dolan

Deputy Director Deputy Director

Insurance and  Supervisory Operations

Investment Business

REGISTRY TRUST COMPANY BUSINESS

David Oliver

Acting Director

Trust Company Business

Sarah Kittleson

Deputy Director Registry & Non-Supervisory Operations

John Harris Director General

FUNDS OFFICE OF THE DIRECTOR GENERAL

Andrew Le Brun Director, Office of the Director General

HUMAN RESOURCES

Annette Cullen

Director Human Resources and Facilities Management

INTERNAL AUDIT

Steven Gardener

Deputy Director ENFORCEMENT Internal Audit

Barry Faudemer Director Enforcement

International Standards and Policy Development

The Commission seeks to ensure that the Island s framework for regulating and supervising financial services is of a high standard so as to comply with international standards which are dynamic and increasingly demanding.

Main changes in our international relationships during the year

The Commission worked closely through the year with authorities in the UK, Guernsey and the Isle of Man to support an application by the UK for the Crown Dependencies to participate in the mutual evaluation processes and procedures of MONEYVAL - the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism established by the Council of Europe.

The application was agreed by the Committee of Ministers of the Council of Europe in October 2012,  and paves the way for:

• a progress report in 2013 on how Jersey has

  addressed recommendations made by the IMF to    enhance the Island s compliance with the Financial  Action Task Force ( FATF ) Recommendations; and

• a full mutual evaluation in 2014 or later on Jersey s  compliance with the FATF Recommendations.

Historically, whilst Jersey has been an ordinary member of the International Organisation of Securities Commissions

( IOSCO ) for some time, it has not been able to take part

in IOSCO s decision-making process. Instead, the UK s former Financial Services Authority had been able to exercise a single vote, covering ordinary members of IOSCO in the UK, Crown Dependencies and Overseas Territories.  

Following a period of lobbying by the Commission,  IOSCO agreed to the principle of one member one vote  in 2013, except in the case of elections, where Jersey

will share a vote with the other Crown Dependencies  and Gibraltar.

Jersey (along with Guernsey and the Isle of Man) continues to be included in transitional provisions that allow Jersey- based (and some other) firms to audit Jersey companies that have securities traded on a regulated market in the EU. These transitional provisions will eventually fall away, by which time it is hoped that Jersey s auditor oversight regime will have been assessed and recognised as equivalent by EU Member States. The effect of this is that reliance might be placed on Jersey s oversight of auditors, without need for EU Member States in which a company s securities are traded to duplicate registration and oversight requirements under their national regimes.

In support of such an assessment, the Commission provided a detailed description of Jersey s regime for Recognized Auditors to the European Commission (the  EC ) in December 2011, and the EC is now expected to put forward formal proposals to Member States which will recognise the equivalence for a number of jurisdictions, including Jersey. These proposals will be subject to the approval of Member States and comments from the European Parliament, but the current expectation is that an EC Decision the legal instrument that recognises

 equivalence - will be in place by June 2013.

The Commission explored with the EC and European Payments Council (the  EPC ) the future use by Jersey banks of The Single European Payments Area ( SEPA ) payment systems, following the EPC s withdrawal in early 2012 of criteria for third country membership.

Ahead of publication in 2013 of a report by the EC on SEPA governance arrangements, it is not clear:

• who will set new criteria for deciding whether third    country banks might apply to use euro payment  

  systems; and

• who will assess third country payment frameworks    against those criteria.

The Commission negotiates the agreement of memoranda of understanding with domestic and overseas agencies. During 2012, memoranda of understanding were agreed with Germany s BaFin, the National Bank of Slovakia,  the United States Federal Deposit Insurance Corporation and the Reserve Bank of India.

International Regulatory Standards • The Collective Investment Funds (Amendment and Validation) (Jersey) Law 2012 has amended the Collective

In order to contribute to the development of these  Investment Funds (Jersey) Law 1988 to allow fees in standards and to better understand the effect that  respect of certificate holders to be set by notice, and has changes in standards may have on Jersey, the  validated fees paid by certificate holders since April 2008. Commission participates in the work of:

• The Financial Regulation (Disclosure of Information)

• the Assessment Committee of IOSCO; and (Amendments) (Jersey) Regulations 2013 now provide  

• the FATF - through membership of the Group of   the Commission with a clear power to share information    International Finance Centre Supervisors.  with stock exchanges such as the Channel Islands Stock Exchange and London Stock Exchange, and also with the European Supervisory Authorities.

In particular, a member of the Commission has chaired a

working group charged with recommending presentational  • A number of amendments to maintain the Collective

and accessibility improvements to the methodology used to  Investment Funds (Jersey) Law 1988, the Banking

assess compliance with IOSCO s standards. The group  Business (Jersey) Law 1991, the Insurance Business reported to the Assessment Committee in January 2013. (Jersey) Law 1996, the Financial Services (Jersey) Law

1998, and secondary legislation made under these laws, and also the Proceeds of Crime (Supervisory Bodies)  

 Laws and regulations must be  (Jersey) Law 2008 were proposed, and a summary capable of implementation on an  of consultation responses is under preparation.

efficient and effective basis so as to  • Idnralifntien gwliethgi sGlaotvioenrntmo eimntppleomliceyn, twreolrekvahnats pcaorntsti nouf ethdeon achieve their objectives and   Payment Services Directive of the European Union  

(the  EU ) - in order to support future access to the SEPA.  command the respect of stakeholders.  The effect of this legislation would be to regulate direct  

debits and direct credits made in euro using SEPA s  

payment systems.

Prompted in part by recommendations made in 2009 by  • A large amount of time was spent in 2012 co-ordinating

the International Monetary Fund (the  IMF ), the  changes proposed to the seven of the eight published Commission prepared and delivered instructions to update  Codes. Changes were proposed to bring the wording of  and amalgamate the money laundering provisions of the  the seven sets of Codes closer together and also to deal Drug Trafficking Offences (Jersey) Law 1988, the Proceeds  with matters specific to a particular set of Codes.  

of Crime (Jersey) Law 1999, and the Terrorism (Jersey)  The consultation period has closed and it is intended to Law 2002.  publish a package of documents in the second quarter of

Work also started in 2012 on considering what changes  2013 that includes a feedback paper and seven sets of

may be required to the Money Laundering (Jersey) Order  revised Codes.

2008 in order to address other recommendations made by  • A number of provisions dealing with customer due diligence the IMF. Proposed changes will be explained in a  ( CDD ) measures have been updated in Sections 3 and 4 consultation paper that will be published in the second  of the AML/CFT Handbook for Regulated Financial Services quarter of 2013. Business. In particular, additional guidance has been

Laws and regulations must be capable of implementation  provided on assessing country risk and the CDD measures  on an efficient and effective basis so as to achieve their  to be applied in the case of a higher risk customer.

objectives and command the respect of stakeholders.

To this end, the Commission conducts a consultation  Work has also continued on revising the Commission s process on changes to legislation and the Codes of Practice  Sensitive Activities Policy for applications that are made under (the  Codes ). the Control of Borrowing (Jersey) Order 1958. A draft of the

Policy is shortly to be discussed with the Companies Registry Users Group.

Regulatory Developments

2012 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.

Banking

The key themes for Banking during 2012 have been the need to monitor and respond to external regulatory developments coupled with more in depth supervision of local banking operations.

The structure and form of banking regulation is being recast internationally. Banking has closely monitored key developments and has worked with relevant stakeholders to properly understand the potential impacts on the banking sector in Jersey. The key external developments at this time remain the Basel III package of reforms and the proposals advanced by the UK s Independent Commission on Banking ( ICB ). In both cases, the Commission has worked with its counterparts in the other Crown Dependencies to identify a consistent approach.

Structural reform has also involved the reallocation of responsibilities between overseas regulators. In the UK, the former FSA s responsibilities have now been shared between the newly formed Prudential Regulatory Authority and Financial Conduct Authority. Banking will need to maintain its supervisory relationships with both authorities and will also need to closely monitor the planned reallocation of responsibilities between Eurozone national supervisory authorities and the European Central Bank.

The level of information sharing and coordination between supervisory authorities has increased substantially since the financial crisis began and Banking fully participates in this as a member of the supervisory colleges and crisis management groups that have been formed for individual banks. This has provided a valuable insight into challenges faced by banking groups represented in the Island and has helped to identify potential risks at an earlier stage.

At a local level, Banking s supervision of Jersey banking operations has become considerably more intensive in recent years, with the most noteworthy development in 2012 being the introduction of Concession Limits, under which subsidiary banks must seek approval from the Commission for Large Exposures to sovereigns or other banks, including their parent group, all of which had previously been exempted from the need for such approval. This has caused local banks to better assess and monitor the concentration and credit risk they face in relation to upstreaming their deposits to parent banks.

Funds

A Funds Consultation Seminar on the Alternative Investment Fund Managers Directive ( AIFMD ) was held with Industry in September 2012 to consider some key legislative developments in relation to Jersey s response to the AIFMD. Subsequently, the States of Jersey approved the legislation on 4 December 2012. Internationally the Commission s discussions continue with the European Securities and Markets Authority ( ESMA ), the European Commission and fellow International Regulators. There remains a large amount of work to be undertaken in relation to the AIFMD, a key requirement of which is signing a co-operation agreement with EU supervisory bodies being co-ordinated by ESMA. The aforementioned consultation and legislative drafting should ensure the Island is very well placed to do so.

In addition, a number of other policy initiatives were progressed during 2012. A new Private Placement Fund ( PPF ) product was launched in January, Codes of Practice for Certified Funds were introduced in April,  and a new Collective Investment Funds (Certified Funds Prospectus) (Jersey) Order 2012 became effective in November 2012. Funds also conducted an IOSCO self-assessment on Principles 6 (systemic risk) and 7 (regulating the perimeter).

The Commission continually looks at ways of improving  Trust Company Business ( TCB )

efficiency and is currently focussing its attention on the way

In terms of local developments, the trust company business it collects information from Industry and how it processes

sector has continued its trend of consolidation. The reasons this information. The first project on this theme, related to

are varied. The primary cause is the challenge of securing Personal Questionnaires ( PQs ) and the Commission s

organic growth during times of global austerity. In addition, new Web portal, designed to facilitate the electronic

the previous UK centric business model is no longer viable submission of PQs, was launched on 1 November 2012.

to a large extent, which has reduced the source of what was The new process has been designed to reduce the

considered traditional business opportunities. Although administrative burden on Principal and Key Persons and the

there has been a fair degree of consolidation, the total Commission, and, in the majority of cases, this reduction

employment numbers in the trust company business sector will lessen the time taken to process applications

have remained stable.

Funds successfully negotiated an increase in Fund Services

Continuing the above theme, TCB has observed an influx of Business and fund fees payable by the sector to secure its

business from jurisdictions that many observers consider medium term inflation based funding. The fee increases

high risk. This has resulted in a rise in the general risk

were from effective 1 July 2012.

profile of the sector. The Commission would comment that Investment Business ( IB ) a number of registered persons would need to enhance their

risk management capability in order to administer such

IB has continued to participate in the Review of Financial  client structures successfully.

Advice ( RFA ) project, which included attending meetings

of the RFA working party and contributing to the publication  The extensive publicity surrounding tax planning structures of a feedback paper on the RFA. The aim of the RFA is to  caused Jersey, and specifically local service providers, to raise the professional standards of investment advisors and  come under the spotlight from commentators in the UK as a eradicate possible conflicts of interest that can be caused by  number of high profile individuals were named and shamed commission based remuneration arrangements.  in the press. Predictably, the UK press focused on the

 offshore element of the structuring rather than the advice itself which is provided by tax counsel based in the UK.

 There remains a large amount of work to be undertaken in relation to the AIFMD, a key requirement of which is signing a co-operation agreement with EU supervisory bodies being co-ordinated by ESMA.

Supervision

Authorisations and revocations

Registered businesses comprise: banking; fund services business ( FSB ); general insurance mediation business

( GIMB ); insurance; investment business ( IB ); trust company business ( TCB ); and designated non financial businesses and professions ( DNFBP ) that carry on a business specified in Schedule 2 of the Proceeds of Crime (Jersey) Law 1999.

During 2012, the number of registered businesses in each sector, together with any authorisations and revocations, was as follows.

The Supervision 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.

The Supervision Package

Approach

• A pro-active risk-based approach aimed at achieving    complementary goals of discovery and deterrence,    and which seeks to maintain or, where appropriate,

  to raise, regulatory standards.

Off-site

• Authorisation of regulated entities and principal    persons.

• Review of financial information and regulatory/  prudential returns.

• Review of intelligence, including whistle blowing,    complaints and Suspicious Activity Reports.

On-site

• Various types of on-site examination as detailed below.

• Mystery shopping, particularly in relation to the    provision of financial advice.

Post on-site

• Follow up and remediation.

• Heightened supervision, including the use of    enforcement powers.

Registered businesses in each sector

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 187 examinations during 2012.

 A pro-active risk-based approach aimed  at achieving complementary goals of discovery and deterrence, and which seeks to maintain or, where appropriate,  to raise, regulatory standards.

Total Examinations 2012 IB

Despite a reduced headcount, six on-site examinations were conducted during the year and a number of common themes were identified. There were a number of inadequacies in procedures relating to client AML risk ratings and the way that registered persons placed reliance upon intermediaries for AML/CFT purposes. A number of registered persons appeared to have inadequately resourced compliance functions and, as a result, the compliance monitoring performed was often insufficiently detailed or infrequent, and some compliance manuals required significant revision to bring them in line with current Jersey regulations. Finally, the examinations identified that many registered persons did not adequately maintain a conflicts of interest register and that conflicts, actual or possible, were not given appropriate consideration by senior management.

Examination activity was a significant feature of 2012.  

The main issues that have arisen from the on-site

examination programme during 2012 are summarised  TCB

below by each Industry sector. Remediation plans are  The key examination theme for TCB during 2012 was the agreed where necessary with the entities and such plans  testing of registered persons management of AML/CFT are monitored to ensure that the remedial work is

undertaken within the prescribed timescales. rairsekass. Asudcdhit iaosn  ac lo bmepspliaonkec e e  xmaomn ii ntoar ti inogn, s f uwnedre a cd omni dn uisct tr ea dti oinn Banking undertaken by TCBs and Class N registrations (acting as a

Banking has continued to undertake thematic examinations  manager of a managed trust company).

of banks in relation to both information security and  The AML/CFT themed on-site examinations identified prudential reporting during 2012. The prudential reporting  deficiencies in terms of risk awareness, risk rating allocation theme has highlighted a number of areas in which the  and insufficient rigour in respect of challenging the purpose Commission s guidance has been misinterpreted and where  and rationale behind structures and/or transactions.

banks internal procedures for the production and oversight of  TCB will continue to look at this area during 2013,  prudential reporting could be improved. This has resulted in  and will also be adding the theme of conflict of interest specific feedback to individual banks together with the  management to the examination schedule.

publication of consolidated findings. The Commission has

extended this series of examinations so as to include all  AML Unit

banks during 2013. The majority of DNFBPs have now received at least one

supervisory examination. The examinations have uncovered Funds a range of findings, including deficient business risk

In July 2012, the Funds Supervision resource was split into  assessments and insufficient policies and procedures to

two teams and a senior manager appointed to head up  mitigate the threat of money laundering and the financing of each team. This proved to be a more effective and focused  terrorism. The AML Unit continues to provide appropriate management model and allowed Funds to increase the  guidance to assist businesses in achieving and maintaining number of on-site examinations in the second half of the  the standards required in Jersey.

year resulting in 48 being conducted against a target of 28.

A number of joint examinations with TCB and IB were also  In addition, the AML Unit has responsibility for the conducted during 2012. regulation of money service businesses ( MSB ) in the

Island. There are currently five registered MSBs, which The findings from the Funds on-site examinations  provide a range of financial services, such as bureau de

highlighted weaknesses in the following areas: corporate  change and money transmission.

governance oversight; systems and control failures; and the

management of conflicts of interests. The AML Unit is also responsible for registering non-profit

organizations (NPOs), which now total 759, and for Insurance monitoring this sector in respect of vulnerabilities to  

The findings from the on-site examinations carried out  terrorist financing.

during 2012 included issues in relation to compliance

monitoring, conduct of business and the monitoring of client

files. However, there is continuing improvement in relation

to those issues following feedback from the Commission.

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 .

The increase in enforcement cases in 2011 carried on into 2012, with 103 new cases during the year, compared against a five year average of 89 new cases per annum. Such an increase continued to place a strain on resources and resulted in the recruitment of two additional staff to deal with the workload.

As a general trend, the Enforcement Division has seen an increase in more complex and demanding cases, including significant issues in the larger local financial institutions.

Working with a registered person to achieve compliance and safeguarding investors interests continues to be a major part of Enforcement s work. Much of this is achieved through working cooperatively with the registered person.

In the most serious cases, Enforcement undertakes culpability reviews of individual conduct to determine if the misconduct warrants the issue of a public statement and any consequent directions restricting or preventing an individual from working in the Industry.

The Commission recognises the importance of applying sufficient checks and balances when considering the use of such powers and has developed a robust process which is published in the document entitled a Guidance Note to the Decision-Making Process . Any affected person who feels that the Commission has acted unreasonably in the use of such powers is entitled to appeal to the Royal Court.  

No appeals to the Royal Court were made in 2012.

Those that seek to evade regulatory oversight of their activities by conducting financial services business whilst not registered with the Commission often pose a significant threat to investors. Due to the very real risks associated with those that conduct unauthorised financial services business, the Commission will continue to give priority to investigating such cases.

Receiving good quality intelligence to identify misconduct helps direct the Commission to a specific problem often resulting in swift and focused intervention. In 2012, the Commission received approaches from 14 whistle blowers either through the use of the Commission s whistle blowing line or through direct personal contact.

 Settlement agreements have proved to be an effective and cost efficient method of dealing with serious regulatory misconduct...

Settlement agreements have proved to be an effective and cost efficient method of dealing with serious regulatory misconduct and 10 agreements were concluded during the year. Such agreements are subject to strict parameters issued by the Board of Commissioners and are also subject to an annual audit.

A consultation paper on the introduction of a civil penalty regime was published in April 2012. The feedback proved to be fundamental in shaping the Commission s thoughts on the structure of a civil penalty regime. The feedback provoked a great deal of discussion by both the Executive and the Board of Commissioners, culminating in the publication of a feedback paper. It is anticipated that a further round of consultation will take place once a draft  law is available.

Giving feedback to the Industry on trends and developments is regarded as an important part of Enforcement s role. During the course of the year, Enforcement participated in several seminars organised by the Industry and hosted its own lunchtime seminar. A similar seminar will be held  

in 2013.

Enforcement case statistics

Percentage breakdown of Enforcement Division activity during the year ended 2012  

Financial Services (J) Law - Investment Business - Non Regulated 16.4% Financial Services (J) Law - Investment Business - Regulated 6.6%

Financial Services (J) Law - Trust Company Business - Non Regulated 11.5% Financial Services (J) Law - Trust Company Business - Regulated 14.8% Financial Services (J) Law - Fund Services Business - Regulated 4.1% Financial Services (J) Law - GIMB - Regulated 0.8%

Financial Services (J) Law - Insider Dealing 9.8%

Financial Services (J) Law - Market Manipulation 2.5%

Financial Services (J) Law - Misleading Statements and Practices 2.5% Banking Business (J) Law - Non Regulated 1.6%

Banking Business (J) Law - Regulated 1.6%

Companies (Jersey) Law 3.3%

Proceeds of Crime (Jersey) Law 18.9%

Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 0.8%

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 2012 to 31 December 2012

Registry

All systems continue to be embedded in the online environment known as Easy Company Registry ( ECR ).  In particular a new facility was created to allow multiple filings of companies annual returns with only one payment.

Work on developing an automated Security Interests Register reached user acceptance testing stage with a number of progress demonstrations of the test system being given to Industry during its development.

In partnership with ICT, the Registry continued to enhance and extend its website with the introduction of new features

which allow users to verify the authenticity of documents The Commission operates Jersey s  that have been issued by the Registry. A number of online

Companies Registry (the  Registry ),  forms have been evolved within the ECR website to achieve

further efficiencies from the back office application. A new which registers Jersey statutory bodies. Registry e-zine was also launched during 2012 to keep

users abreast of Registry issues and developments.

The Registry is committed to constructively responding to the

needs and requirements of its users. Its Focus Group meets  International Development of the Registry annually to discuss issues such as the quality of service

provided by the Registry, online services, the volume of  The Registry has continued to enhance its profile

business through the Registry, and new products and fees.  internationally, participating at events such as the European

Commerce Registries Forum ( ECRF ) in Macedonia. During 2012, the Registry initiated a root and branch review.  According to the ECRF s global benchmarking survey

The objects of the review are to: 2012, Jersey processes the highest number of cross-border

corporate migrations of all jurisdictions surveyed. Given this

• clearly define the requirements of a replacement   statistic, Jersey considers it important to be aware of

  Registry system; international registry developments in this area. As part of

this programme, the Jersey Registry was elected to the

• ensure that any new system removes the burden of  ECRF Working Group set up to progress the requirements of   redundant administrative requirements and takes into  the Directive on the Interconnectivity of European Union

  account any legislative drivers; and ( EU ) and non EU (third countries) business registries.

• ensure international standards are met where required. The implications for Jersey and other non EU countries of the introduction of this Directive and, consequently, any EU

In order for all Registry stakeholders to participate in this  mechanism set up to deliver the requirements of this significant review, a number of presentations were made  Directive, remain to be determined.

during the year to Registry employees, the Registry Focus  As part of its programme to match international standards on Group and Government. Reviews have begun of legislation,  the supply of registry data, an information sharing agreement the current Registry ICT systems and processes, and the  was signed with the European Business Register ( EBR ). bench marking to international registries. This has enabled information on Jersey companies to be

Overall, the number of Registry transactions continued to  available through the EBR for the last six years.

grow with registrations and processing, such as special  The International Association of Commercial Administrators resolutions and searches, having significantly increased  ( IACA ) represents the company registries of the United when supplied online. This demonstrates that users of the  States ( US ) and Canada. Jersey was jointly awarded, Registry s services are now availing themselves of the  with Germany, an IACA Merit award for Outstanding improved online environment as their main point of contact. Innovation in Registry Interoperability . Canada and the US

are regarded as the leading jurisdictions for the

The Registry adheres to published response time-scales, all of

administration of secure transactions and, with Jersey s new which were met in 2012, as shown in the table on page 43.

Security Interests Law being further developed in 2012, Automation and e-commerce projects access to expert support from some of the North American

registries has been beneficial in developing the underlying The online search facility, the online monitoring and the  Security Interests Register.

online filing system were enhanced.

Resources

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.

Information and Communications  Human Resources

Technology ( ICT )  We were delighted to maintain our Investors in People

The key requirements for the Commission are systems that  accreditation in 2012. This required significant sustained are highly protected and secure from attack by third parties,  effort and was not just a matter of maintaining the  

whilst ensuring that they are up-to-date and so facilitate  status quo.

effective and efficient working practices within the  The Commission is fully committed to the development of Commission and with regulated entities.  its Staff. This is to ensure that its Staff remain up-to-date

During the year, ICT continued to focus on serving the  technically and professionally, and fulfil their continuing needs of the Commission through the delivery of high  professional development obligations. The Commission quality systems. 2012 saw a major replacement of its core  continues to enhance the performance management systems infrastructure. This signals a commitment to both  process by providing consistent learning tools and education internal and external users of the Commission s technology  in relevant areas. For example, new training was introduced systems. The new extended infrastructure has provided   in 2012 to ensure managers are able to have more effective a significant increase in both the flexibility and capacity   performance management conversations with their

with which current and future mission critical systems   employees. The programme was written internally and all can be delivered.  line managers were trained in-house during 2012.

ICT was committed to attaining compliance with the  Where possible, the Commission aims to hold training findings of the 2011 external ICT audit. This included  courses in the Island, but is always prepared to find training substantial investment in the areas of network security,  opportunities elsewhere (including with other regulators) information governance and contract management. where such learning is evidently important and of significant

benefit to the Commission.

ICT also carried out a major upgrade to both the

Commission internal and external collaboration tools to   Identifying high quality recruits is always a challenge

the latest 2010 versions. These updated technology  although we are seeing significant new interest through products are already providing benefit to the Commission   increased visits to the vacancies posted on our Website. by providing the basis on which the Commission s new  A focus of our recruitment efforts during the year was in Supervision Platform and Portal were delivered, along with  rebuilding our Investment Business resource as a result of a number of new internal management systems. reallocation of Staff within the Commission and, after a

successful recruitment campaign, the Team ended the year well prepared for the challenges ahead.

 The Commission is fully committed to the development of its Staff.

Corporate Governance

Introduction

The Commission is committed to high standards of governance and believes that the UK Corporate Governance Code (the  Code ) issued by the Financial Reporting Council is the appropriate benchmark for financial services businesses and their regulators. The Code operates on a comply or explain basis where an explanation should be given about how the underlying principles in the Code are met where this is not automatic.

The Commission complies in full with the Code. Although the Commission does not have shareholders, it has instead a wide range of stakeholders and seeks to have an effective dialogue with them by way of the annual Business Plan and Budget, the Annual Report and the wide range of consultation documents about major legislative and policy proposals that it publishes. It also operates a whistle blowing help line to facilitate complaints and has a physical office in a central location to enable the public to make contact. The Board of Commissioners also meets regularly with Ministers and with representatives of the Industry to seek feedback.

The Commission publishes a section on Corporate Governance on its Website, which can be accessed at www.jerseyfsc.org/corporate_governance.asp

 The Board of Commissioners also meets regularly with Ministers and  with representatives of the Industry  to seek feedback.

Constitution of the Commission

The Commission is a statutory body corporate established under Article 2 of the Financial Services Commission (Jersey) Law 1998 (the  Commission Law ). The governing body comprises a Board of Commissioners. The Board of Commissioners is responsible, in particular, for setting the strategy of the Commission and ensuring that the necessary financial and human resources are in place for the Commission to meet its objectives.

Functions of the Commission

The functions of the Commission are set out in Article 5 of the Commission Law which states that the Commission shall be responsible for:

1. the supervision and development of financial services  provided in or from within Jersey;
2. providing the States of Jersey (the  States ), any Minister of the States or any other public body with  reports, advice, assistance and information in relation  to any matter connected with financial services;
3. preparing and submitting to the Minister for Economic  Development (the  Minister ) recommendations for the  introduction, amendment or replacement of legislation  appertaining to financial services, companies and other forms of business structure; and
4. such functions in relation to financial services or such  incidental or ancillary matters -

1. as are required or authorised by or under any  enactment; or
2. as the Government may, by Regulations, transfer.

Constitution of the Board

Article 3(1) of the Commission Law requires the Board  to consist of a Chairman and not less than six other Commissioners.

Currently, the Board consists of a Chairman,  

a Deputy Chairman and eight other Commissioners.  One Commissioner is the Director General of the Commission; all other Commissioners are considered to  be independent non-executive members of the Board. Seven of the Commissioners live in Jersey, and three in  the United Kingdom.

Article 3(3) of the Commission Law requires the Commissioners to include:

1. persons with experience of the type of financial services  supervised by the Commission;
2. regular users on their own account or on behalf of other,  or representatives of those users, of financial services of  any kind supervised by the Commission; and
3. individuals representing the public interest.

The Board is satisfied that its composition provides a proper  Operation of the Board

balance between the interests of persons carrying on the

During 2012, the Commission held ten Board meetings business of financial services, the users of such services

and made two resolutions that were passed by way of

and the interests of the public at large. The current

transactions of business without meeting. In advance of membership of the Board, together with a brief description

each meeting, Commissioners are provided with

of their experience, is shown in the chapter entitled  

comprehensive briefing papers on the items under

 The Commissioners .

consideration. The Board is supported by the Commission The roles of the Chairman and Chief Executive (Director  Secretary who attends and minutes all meetings of  General) are split and their respective responsibilities are  the Board.

distinct. The Chairman is responsible for the running of the

Article 11 of the Commission Law empowers the Board of Board s business and the Director General has executive

Commissioners to delegate any of its powers to the responsibility for the running of the Commission s day-to-

Chairman, one or more Commissioners, or an officer of the day business.

Commission. However, the Board has decided to retain to The Deputy Chairman of the Board is considered by the  itself those powers that could have a highly significant effect Board to be its Senior Independent Director as described  on the achievement of its key purposes or on the finances

in the Code. or reputation of the Commission.

Under the provisions of the Commission Law, the appointment of Commissioners is a matter reserved for decision by the States. When seeking to fill vacancies that arise, the Board follows the procedures recommended by the Jersey Appointments Commission ( JAC ) - a body set up by the States to overview all public sector appointments

- and a member of the JAC sits on the Selection Panel. The Selection Panel reports to the Nomination Committee, which considers and, where appropriate, recommends a candidate to the Board. The Board determines whether an appointment should be made and recommends such appointment to the Minister. If the Minister is satisfied with the Commission s recommendation, the Minister will take an appropriate proposition to the States for debate.

On appointment, a Commissioner will receive an induction to the work of the Board and each Division of the Commission. This includes an opportunity to meet senior staff in each Division at the earliest stage. Commissioners receive a standing invitation to attend in-house seminars,

as well as receiving lunchtime presentations at strategic level from local and overseas speakers of recognized stature. This is in addition to ad hoc continuous development training events.

Under the provisions of the Commission Law, Commissioners are appointed for terms not exceeding five years and, upon expiry of their term of office, are eligible  for reappointment.

In particular, in relation to licensing decisions, the Board has retained those powers which relate to:

• the authorisation of all new business applicants under  the Banking Business (Jersey) Law 1991; and

• the refusal of an application or the revocation of a    permit, registration, etc., under the four Regulatory    Laws (except in certain limited circumstances,  

  for example where the revocation of a permit,  

  registration or similar is at the request of the  

  registered person).

The Board has adopted a policy statement that sets out in detail which powers the Board has retained to itself and a policy statement on those powers that it has delegated to the Executive of the Commission. The full text of these policy statements can be viewed on the Commission s website at: www.jerseyfsc.org/corporate_governance.asp

On an annual basis, the Board holds an Away Day, which is also attended by the Director General and Divisional Directors, that provides an opportunity to discuss strategic issues for the year ahead. Additional meetings to discuss strategic issues and to review the performance of the Board, the Chairman, and the Director General are also held. Annual meetings are held with the financial services regulators in the other Crown Dependencies (Guernsey and the Isle of Man).

Corporate Governance

The Board conducted a self-evaluation of its performance during 2012. Whilst the conclusions reached were generally satisfactory, the Board concluded that further effort needed to be made in relation to stakeholder communication.  

The first evidence of this can be seen in the revised content and format of the Commission s Business Plan and Budget.

It is anticipated that a further independent evaluation will  be conducted in 2013.

The Board maintains a rolling three-year Business Plan and an Annual Budget. In the last quarter of each year, the Executive of the Commission prepares a draft Business Plan and Budget incorporating, amongst other things, any strategic issues raised by the Board at its annual Away Day. The draft Business Plan and Budget is considered by the Board in December of each year.

The Commission publishes an abridged version of the detailed internal Business Plan used by the Commission s staff for comprehensive planning and monitoring purposes.

The Board monitors performance against the objectives set in the Business Plan by reviewing regular reports from each Divisional Director. These reports are considered at the Board s regular meetings at which the relevant Director is present and available to the Board to answer questions and provide any additional information that may be required. Performance against budget is monitored by the presentation of quarterly management accounts to the Board and financial presentations as and when appropriate.

The Commission s financial control processes have been in place throughout the year and have been kept under regular review. The Board concluded that the system of financial control in relation to key items was effective throughout  the year.

Principal risks and uncertainties

The Board discusses the risks and uncertainties facing the Commission on a regular basis. Discussions and decisions are influenced by global political, economic, legal and regulatory factors, as well as local considerations and the operation of the Commission itself.

Strategic and operational risks arising from its legal remit have been captured in a risk register, which is regularly reviewed by the Executive, Audit Committee and Board.  Of the risks identified, the Commission currently considers the following to be the principal risks and has allocated significant resources to managing them.

International Standards Alignment

This is the risk that the reputation of Jersey and compliance with international standards falls below the level necessary to secure sufficient high quality and profitable financial services business and /or results in international disapproval/sanctions.

The Commission considers this risk to be increasing as a result of the current global political, economic and regulatory environment.

Regulatory Strategy and Execution

This is the risk that the Commission does not choose effective regulatory strategies or is unable to achieve its objectives resulting in public financial loss and/or reputation damage to the Commission and Jersey.

The Commission also considers this risk to be increasing as a result of the current political, economic and regulatory environment.

The Commission is currently integrating risk management aspects within its evolving key performance indicator

( KPI ) framework to improve its ability to manage potential deviation from desired regulatory outcomes. The current KPIs highlight the Executive s performance in delivering the Supervision Package across the Industry sectors and are used to identify any emerging strains. The KPIs can also, to a limited extent, highlight emerging trends from Industry.

Committees of the Board

The Board has established three Committees; an Audit Committee, a Nomination Committee and a Remuneration Committee. The Board appoints the members of those Committees. The terms of reference of each Committee are published on the Commission s website at:  www.jerseyfsc.org/committeesoftheboard.asp

Audit Committee

Whilst the Audit Committee s terms of reference include the consideration of the annual appointment of the external auditor, the actual appointment of the auditor is a matter reserved to the Minister under Article 21(3) of the Commission Law.

The members of the Audit Committee during 2012 were  On 5 February 2012, Philip Taylor resigned as a

John Averty (Chairman), Sir Nigel Wicks (until June 2012),  Commissioner and, on 17 April 2012, Ian Wright was

Ian Wright (from July 2012) and Stephan Wilcke (from  appointed to fill that vacancy. Sir Nigel Wicks retired on 16 December 2012).  June 2012, having reached the maximum age for a

Commissioner and having served as a Commissioner for The Audit Committee met four times during the year and  five years. Stephan Wilcke was appointed on 17 July 2012

spent significant time on the statutory audit, risk, internal  to fill the international vacancy. The process for the  controls and KPIs. re-appointment of John Harris to serve a further term as  

a Commissioner was commenced in December 2012,

Tnhone-AfinuadnitcCiaolm comnittrtoeles riet cboenliseivdeedre adr ewkheiyc hc ofinntaronlcsi aalnadnddr ew  with the re-appointment being made by the States with

up a short list of essential controls covering cash payments,  effect from 1 March 2013.

contracting and physical security. It then commissioned  Remuneration Committee

specific work from internal and external audit to provide it

with evidence of their effectiveness.  The members of the Remuneration Committee during  

2012 were, Debbie Prosser (Chairman), Clive Jones,

The Audit Committee concluded that the system of financial  and John Mills. The Remuneration Committee met five control in relation to these key items was effective  times during 2012.

throughout the year and reported this to the Board.

However, it did identify that the back up site and equipment  The Remuneration Committee spent a considerable time  therein listed in the disaster recovery plan was no longer fit  at the beginning of the year reviewing with the Executive  for purpose. An alternative site has since been found and  the Commission s performance review and appraisal system the equipment has been updated.  for all Commission Staff. This review and the

recommendations which flowed resulted in a change of The Audit Committee took a significant interest in the work  approach to the organisation s appraisal process during

being conducted by the Board defining the principal risks  2012. The review also led to a recommendation to move that the Commission faces and the KPIs that could be  towards the introduction of a competency framework to generated to enable the Board to monitor how those risks  assess behavioural as well as technical competencies.

are developing. The Committee plans to devote significant  When completed, it will assist with Staff recruitment,

time and resources during 2013 to ensuring that the KPIs  performance management, learning and personal

are well controlled and meaningful. development and with the creation of better developed

promotion criteria throughout the Commission.

The Audit Committee met with the external auditor during

the year. The auditor raised concerns that the depreciation  The Remuneration Committee received and considered period for equipment may be too short and the Audit  recommendations from the Executive for the annual pay Committee agreed to keep this under review in relation   review and bonus awards and agreed the remuneration

to future major acquisitions. The Audit Committee also  levels for the Executive and Staff.

reconfirmed that the auditor had no conflicts of interest that

might impair their independence. The Audit Committee  No increase in Commissioners remuneration was proposed considered that using a firm with no presence in the Island  in 2012. The procedures followed by the Commission avoided the potential for the auditor to also work for a  ensure that the setting of remuneration packages for regulated entity which might give rise to certain conflicts. Commissioners is formal and transparent and no  

individual Commissioner is responsible for determining  Nomination Committee his or her remuneration.

The purpose of the Nomination Committee is to ensure an  The Remuneration Committee reviewed and made adequate diversity within the Board of Commissioners and  amendments to its terms of reference.

to undertake succession planning for the Board and the

Executive. The Remuneration Committee reviewed and reported to  

the Board on its performance during the year. The Board All members of the Board of Commissioners are members  noted that a challenging but welcome contribution had

of the Nomination Committee. The Nomination Committee  been made by the Remuneration Committee to the

met three times during 2012 to consider two vacancies  Commission s remuneration and performance review and one re-appointment to the Board, as detailed in the  strategy during 2012.

following paragraph.

Corporate Governance

Attendance at meetings

During 2012, attendance at meetings of the Board and its Committees was as follows:

Accountability arrangements

Whilst the Commission is an independent body, it is accountable for its overall performance to the States  through the Minister.

As part of its accountability arrangements, the Commission s Business Plan, Budget and Annual Report are presented to, and discussed with, the Minister. Under Article 21(2) of the Commission Law, the Minister is required to lay a copy of the Annual Report before the States not later than seven months after the close of each financial year.

Under powers granted by Article 12 of the Commission Law, the Minister may, after consulting the Commission  and where the Minister considers that it is necessary in the public interest to do so, give to the Commission guidance or give in writing general directions in respect of the policies to be followed by the Commission. The Commission has a duty in carrying out its functions to have regard to any guidance and to act in accordance with any directions

given to it by the Minister.

The Minister and the Commission have entered into a Memorandum of Understanding to clarify the circumstances and the manner in which the powers granted under Article 12 of the Commission Law will be exercised. The text of the Memorandum can be obtained from the Commission s Website.

Whilst the Commission does not have any shareholders,  the Board has taken steps to understand the views of the Commission s major stakeholders by holding annual meetings with senior Government Ministers and bi-annual meetings with Jersey Finance Limited and representatives of other Industry bodies. The Executive also meets with Government Ministers and Officers, and representatives of Jersey Finance Limited and other Industry bodies, on a regular basis. The Commission held a second Industry Survey in March 2012, the results of which were published in full on the Commission s website.

 The Board discusses the risks and uncertainties facing the Commission on a regular basis. Discussions and decisions are influenced by global political, economic, legal and regulatory factors, as well as local considerations and the operation of the Commission itself.

Financial Statements

Introduction

Fee income in 2012 was £13.00 million compared to £12.45 million in 2011. The main reason for the additional income was the increase in funds fees that took effect from 1 July 2012. This was the first increase in such fees for more than ten years.

Bank deposit interest received amounted to £87,000, which was £24,000 higher than in the previous year. This was due to the conversion of some deposits to longer fixed terms, attracting higher interest rates.

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 2012 the average number of staff employed increased from 115 to 117, and the annual pay review averaged 2.8%. 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.

During 2012, the Commission employed a firm of professional consultants to provide advice and assistance to review the current state of filing, archiving and document retention. Expenditure on legal and professional services therefore increased to £480,000.

The net amount spent on investigations and litigation was £745,000, compared to £398,000 a year earlier.

The increase arose mainly because of the costs associated with two major cases that involved considerable time and effort, and which will continue into 2013. Despite this, 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.

Visits continued to be made regularly to overseas regulatory authorities and to international standard-setting organisations. 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 £1.09 million, from £11.88 million in 2011 to £12.97 million in 2012. The net result for the year was an operational surplus of £114,000 and a consequent rise in reserves to £7.25 million. The Commission s 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 merged their business with BDO LLP, who 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

3 June 2013

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 2012 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 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 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 2012 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.

PKF (UK) LLP Norwich, United Kingdom

3 June 2013

INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2012

2012  2011 Note  £ooo  £ooo  £ooo   £ooo

Regulatory Income:

Regulatory fees  4 (a)  10,487  9,953 Registry fees  4 (b)   2,509   2,497

Total regulatory income  12,996  12,450

Other income:

Bank deposit interest received   87   63 Total income  13,083  12,513

Operating expenses:

Salaries, fees, social security and pension contributions  5  9,214  8,612 Operating lease expenditure  471  469 Other premises costs  296  300 Computer systems costs  613  623 Legal and professional services  480  174 Investigations and litigation  6  745  398 Public relations costs  18  12 Travel costs  155  223 Staff learning and development  207  199 Recruitment costs  79  79 Other operating expenses  280  292 Auditors remuneration  15  15 Depreciation of tangible fixed assets  7  396  472 Loss on disposal of tangible fixed assets   -   8

Total operating expenses   12,969   11,876 Excess of income over expenditure  114  637 Accumulated reserve brought forward   7,133   6,496 Accumulated reserve carried forward   7,247   7,133

Statement of total recognised gains and losses

There were no recognised gains or losses other than those detailed above.

Historical cost equivalent

There is no difference between the net surplus for the year stated above and its historical cost equivalent.

Continuing operations

All the items dealt with in arriving at the net surplus in the income and expenditure account relate to continuing operations.

The notes on pages 37 to 42 form an integral part of these financial statements.

BALANCE SHEET AS AT 31 DECEMBER 2012

2012  2011 Note  £ooo  £ooo  £ooo  £ooo

Fixed Assets:

Tangible assets  7  753  542

Current Assets:

Fee income receivable  25  23 Sundry debtors  29  91 Prepayments  318  317 Cash at bank and in hand  8   11,610    10,897

11,982   11,328

Creditors - amounts falling due within one year:

Fee income received in advance  4 (c)  4,531  3,825 Sundry creditors  9   957   912

5,488   4,737

Net Current Assets   6,494   6,591 Total Assets less Current Liabilities   7,247   7,133

Represented by:

Accumulated reserve   7,247   7,133

The notes on pages 37 to 42 form an integral part of these financial statements.

The financial statements on pages 34 to 42 were approved by the Board of Commissioners, and signed on their behalf on 3 June 2013 by:

C S Jones  J R Harris Chairman  Director General

CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2012

2012  2011

£ooo  £ooo

Reconciliation of net income to net cash inflow  from operating activities

Net income for the year  114  637 Interest received  (87)  (63) Depreciation charges  396  472 Loss on sale of tangible fixed assets  -  8 Decrease in debtors and prepayments  59  82 Increase in creditors   751   183

Net cash inflow from operating activities   1,233   1,319 Cash Flow Statement

Net cash inflow from operating activities  1,233  1,319 Returns on investments and servicing of finance

Interest received  87  63 Capital expenditure

Payments to acquire tangible fixed assets   (607)   (237) Increase in cash   713   1,145

Reconciliation of net cash flow to movement in net funds

Increase in cash in the year  713  1,145 Net funds at 1 January   10,897   9,752 Net funds at 31 December   11,610   10,897

1. Accounting policies

The financial statements have been prepared under the historical cost convention, and in accordance with generally accepted accounting practice in the United Kingdom.

A summary of the more important accounting policies is set out below.

1. Income and expenditure is accounted for on an accruals basis. Regulatory and Registry fees are recognised over the period to which they relate.
2. Registry fees include only the share of fees attributable to the Commission. The Commission acts as agent in collecting the proportion of annual return fees attributable to the States of Jersey (see note 4b).
3. Fixed assets are stated at cost less depreciation.

Depreciation on tangible fixed assets is calculated to write down their cost on a straight line basis to their estimated residual values over their expected useful lives.

Computer equipment is depreciated over three years.  

Computer software costs are written off as incurred to the Income and Expenditure Account, except for purchases in respect of major systems. In such cases, the costs are depreciated over three years. Computer systems under construction are not depreciated. Depreciation is charged when a system has been completed and is in operation.

Office furniture, fittings and equipment are depreciated over five years.

4. Foreign currency transactions during the year have been translated at the rates of exchange ruling at the dates of the transactions. Any profits or losses arising from such translations into Sterling are accounted for in the Income and Expenditure Account.
5. Costs incurred as the result of investigations and litigation are accounted for as they are incurred. Recoveries are accounted for when they have been awarded and it has become virtually certain that they will be received.
6. All leases are operating leases, and the annual rentals are charged to operating expenses on a straight line basis over the term of the lease. The value of the rent free period that was granted upon the Commission s occupation of its current premises has been accounted for over the term of the lease.
7. The costs of defined contribution pension schemes are accounted for on an accruals basis. The costs of annual contributions payable to defined benefit schemes operated by the States of Jersey are accounted for on an accruals basis because the Commission is unable to obtain the information necessary to apply defined benefit scheme accounting (see note 14).
8. The financial statements contain information about the Commission as an individual entity, and do not include consolidated financial information as the parent of a group. The Commission is exempt from the requirement to prepare consolidated financial statements because the inclusion of its subsidiaries is not material for the purpose of giving a true and fair view.  

2. Related party transactions

The Commission has been established as an independent financial services regulator and as such the States of Jersey is not considered to be a related party.

3. Taxation

The Commission is exempt from the provisions of the Income Tax (Jersey) Law 1961, as amended.

4. Income 2012  2011 £ooo  £ooo

1. Regulatory fees

Banking  1,328  1,303 Funds  4,041  3,428 Insurance companies  759  784 General insurance mediation  98  95 Investment business  1,239  1,288 Trust companies  2,492  2,528 Designated non-financial businesses and professions  498  497 Recognised auditors  23  20 Money services business   9   10

10,487   9,953

2. Registry fees

Registry fees comprise income derived from the operation of the Companies Registry, the Business Names Registry, the Registry of Limited Partnerships and the Registry of Limited Liability Partnerships.

Registry fees include annual return fees.

The amount of the annual return fee payable to the Registry comprises two elements - an amount (£35) payable to the Registry to cover its administration costs and an additional amount (£115) set by, collected on behalf of, and payable to, the States of Jersey. The number of annual returns received during the year was 32,047 (2011 - 31,919).

2012  2011 £ooo  £ooo

Total annual return fee income  4,807  4,788 Less collected on behalf of, and payable to, the States of Jersey   3,685   3,671

Retained by the Registry  1,122  1,117 Other Registry income   1,387   1,380

Total Registry income   2,509   2,497

3. Regulatory fees received in advance  2012  2011 £ooo  £ooo Banking  1,377  1,354 Funds  2,169  1,483 Insurance companies  534  554 General insurance mediation  -  10 Investment business  406  420 Trust companies  45  - Designated non-financial businesses and professions  -  2 Money services business   -   2

4,531   3,825

5. Salaries, fees, social security and pension contributions

Staff salaries

Commissioners fees (note 13)

Social security payments

Pension contributions

Permanent health and medical insurance Other staff-related costs

2012  2011 £ooo  £ooo

7,660  7,116 239  245 356  298 614  610 171  167

174   176

9,214   8,612

The average number of staff employed during the year was 117 (2011 - 115)

6. Investigation and litigation costs

As part of its regulatory responsibilities the Commission carries out investigations and enters into legal actions from time to time, the costs of which may be significant. The costs of each investigation or legal action are accounted

for as they are incurred.

In a few cases, some or all of the Commission s costs may be recoverable. Such recoveries are accounted for when they have been awarded and it has become virtually certain that they will be received.

Costs incurred in 2012 amounted to £821,000 (2011 - £477,000), against which there were recoveries of £76,000 (2011 - £79,000). Net costs incurred during 2012 therefore amounted to £745,000

(2011 - £398,000).

7. Tangible assets

Cost of assets at 1 January 2012 Additions during year

Systems completed during year Disposals during year

Cost at 31 December 2012

Depreciation at 1 January 2012 Charged during year

Eliminated on disposals Depreciation at 31 December 2012

Net book value at 31 December 2012 Net book value at 31 December 2011

Office  Computer Furniture  Equipment Fittings &

Equipment

£ooo  £ooo 595  2,462

43  34

- 590

- (274) 638   2,812

493  2,100

63  333

- (274)

556   2,159

82   653 102   362

Computer  Total

Systems

under

construction

£ooo  £ooo 78  3,135

530  607 (590)  -

- (274)

18   3,468

- 2,593

- 396

- (274)

- 2,715

18   753 78   542

Computer systems under construction have not been depreciated. Depreciation is charged when a system has been completed and is in operation.

8. Financial instruments

The Commission s accumulated financial reserves are invested in bank deposit accounts. In order to mitigate the credit risk and the market risk, these deposit accounts are maintained with six different banks.

9. Sundry creditors 2012  2011 £ooo  £ooo

General expense creditors  470  522 Accruals   487   390 957   912

General expense creditors include pension contributions of £87,000 (2011 - £82,000) still to be remitted to the schemes at the balance sheet date.

Accruals contain an amount of £137,000 (2011 - £152,000) relating to the unexpired portion of the rent free period granted at the time when the Commission took out the lease on its premises.

10. Contingent liabilities

At the balance sheet date the Commission had no material contingent liabilities.

11. Financial commitments

The Commission has entered into an agreement through JFSC Property Holdings No.1 Limited (note 12) to lease premises for the Commission s occupation.

2012  2011

£ooo  £ooo

The annual rentals payable under this operating lease are:

For a period of more than five years   490   490 The rentals payable under this operating lease are subject to periodic review, rebased to market rates.

12. Interest in wholly-owned companies

The Jersey Financial Services Commission has two wholly owned companies, JFSC Property Holdings No.1 Limited and JFSC Pension Trustees Limited.

JFSC Property Holdings No.1 Limited entered into an agreement on behalf of the Commission to lease premises for the Commission s occupation. Consequently, the Commission entered into an agreement with JFSC Property Holdings No.1 Limited whereby the Commission will be responsible for all expenditure associated with the lease. The company holds no assets or liabilities and therefore has not been consolidated in the financial statements.

JFSC Pension Trustees Limited acted as the corporate trustee of the Jersey Financial Services Commission Staff Pension Scheme. The company has no assets or liabilities and therefore has not been consolidated in the financial statements.

13. Commissioners remuneration  2012  2011

£  £

Fees paid to Commissioners were as follows:

Clive Jones  (Chairman)  48,000  48,000 John Averty  ( Deputy Chairman)  27,000  27,000

Lord Eatwell of

Stratton St. Margaret  30,000  30,000 John Harris  nil  nil John Mills  20,000  20,000 Deborah Prosser  20,000  20,000 Markus Ruetimann  30,000  30,000 Philip Taylor  (resigned 2 February 2012)  3,333  20,000 Cyril Whelan  20,000  20,000 Sir Nigel Wicks  (retired 16 June 2012)  15,000  30,000 Stephan Wilcke  (appointed 17 July 2012)  12,500  n/a Ian Wright  (appointed 17 April 2012)  13,333  n/a

John Harris is the Director General of the Commission. During the year he was paid no fees as a Commissioner, but received total remuneration of £293,000 for the year (2011 - £274,000) in his capacity as Director General.

14. Pension costs

1. Staff initially employed by the Commission before 1 January 1999 are members of the Public Employees Contributory Retirement Scheme ( PECRS ) which, whilst a final salary scheme, is not a conventional defined benefit scheme because the employer is not necessarily responsible for meeting any ongoing deficit in the scheme. The assets are held separately from those of the States of Jersey. Contribution rates are determined by an independent qualified actuary so as to spread the costs of providing benefits over the members expected service lives.

Salaries and emoluments include pension contributions for staff to this scheme amounting to £52,000 (2011 - £67,000). The decrease is due to staff retirement.

The Commission has adopted Financial Reporting Standard 17 Retirement Benefits ( FRS17 ).

Because the Commission is unable to readily identify its share of the underlying assets and liabilities of PECRS under FRS 17, contributions to the scheme have been accounted for as if they are contributions to a defined contribution scheme.

The contribution rate paid by the Commission during the year was 13.6% of salary, and this rate is expected to continue to be payable during 2013.

Actuarial valuations are performed on a triennial basis, the most recent published valuation being as at 31 December 2010. The main purposes of the valuation are to review the operation of the scheme, to report on its financial condition, and to confirm the adequacy of the contributions to support the scheme benefits.

The conclusion of the latest published valuation is that there is a surplus in the scheme assets at the valuation date of £40.6 million. Because the scheme is accounted for as if it is a defined contribution scheme, no account has been taken of the Commission s potential share of this surplus.

In addition to this, as at the date of the valuation, there was a debt due to the scheme from the States of Jersey that relates to the period pre-1987. The Commission settled its share of this liability during 2005.

Copies of the latest Annual Accounts of the scheme, and of the States of Jersey, may be obtained from the States Treasury, Cyril Le Marquand House, The Parade, St Helier JE4 8UL.

2. Staff initially employed by the Commission after 1 January 1999 are members of the Jersey Financial Services Commission Staff Pension Scheme, which is a defined contribution scheme whose assets are held separately from those of the Commission. The administration of the scheme is carried out by independent administrators, and the Commission has appointed independent managers for the management of the investments.

Salaries and emoluments include pension contributions for staff to this scheme amounting to £562,000 (2011 - £543,000). The increase is due to rising membership numbers.

Particulars of the scheme may be obtained from The Secretary, Jersey Financial Services Commission, PO Box 267, 14-18 Castle Street, St Helier JE4 8TP.

Statistical Annexe

Companies

Registry Processing - performance against target

All Companies % Partnerships % Searches % Certification % Business names % Achieved 98.4 96.7 100 100 99.8

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

2010 57,645 4,518 823 102 2,258 2011 60,801 3,230 837 122 2,286 2012 68,157 7,950 845 133 2,295

Quarterly Company Incorporations

Year 31 March 30 June 30 September 31 December Annual Total 2010 709 586 605 584 2,484 2011 629 576 640 675 2,520 2012 646 558 526 643 2,373

Live Companies on the Register

Live Companies on the Register

At 31 December 2012 (2011) there were 32,503 (32,508) live companies registered in Jersey.

31  30  30  31 Year

March June  September December

2010 33,379 33,570 33,634 32,722 2011 32,998 33,116 33,194 32,508 2012 32,816 32,938 32,628 32,503

35.0

32.5

30.0 31 March 30 June 30 September 31 December

2010 2011 2012

Funds

Collective Investment Funds (Jersey) Law 1988 (the Law ) Control of Borrowing (Jersey) Order 1958 (The Order )

Summary of Statistical Survey of Funds Serviced in Jersey as at 31 December 2012

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 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 Law, require consent under the Order (such funds are termed  COBO Funds ). Funds regulated under the Law are referred to herein as  CIFs .

Date Net asset value (£ billions) Number of funds Number of separate pools 31 December 2010 184.703 1,324 2,522

31 December 2011 189.424 1,392 2,454

31 December 2012 192.761 1,388 2,322

Analysis of CIFs and COBO Funds

Analysis by Class - 31 December 2012

Analysis of funds by classification

160 140 120 100 80 60 40 20 0

Unclassified Recognised Listed Expert COBO

CIFs  CIFs  Funds CIFs Funds

2010 2011 2012

Funds

CIFs & COBO Funds - Analysis by Investment Policy Codes

Funds - Analysis by Investment Code Policies

160  

140  

120  

100  

Specialist Equity

80

Bond

Mixed

60

Money Market 40

20

0

2010 2011 2012

Breakdown of Trust Company Businesses by size

Super Large (50+ employees) 8.6% Large (31-50 employees) 7.0% Medium (11-30 employees) 21.1% Small (0-10 employees) 20.5% Single class registration 26.0% Class O 5.4%

Managed trust companies 11.4%

Banking  

Banks and Bank Deposits - £ billions

Bank Deposits

180

160

140

120

100

80

60

40

20

0

31 December 31 December 31 December 2010 2011 2012

Sterling Currency

Analysis of Bank Deposits - 31 December 2012 (£ billions; currency stated in sterling equivalent)

Geographical analysis of deposit-taking licence holders at 31 December 2012

UK (16)

Other EU (10) Switzerland (3) North America (6) Middle East (3) Africa (3)

Asia (1)

Assets 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.