Jersey Financial Services Commission: Annual Report 2013.

Annual Report 2013

TBC

R.78/2014

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 Regulatory Developments  16 Supervision  21 Enforcement  24 Registry  26 Resources  27 Corporate Governance  28 Financial Statements  36 Statistical Annexe  50

The Island of Jersey

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

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

Jersey 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 of the Assembly. 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.

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

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 Chief Minister.

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 2013

• The operating environment for Jersey is changing (e.g. the growth in international regulation, public opinion about tax havens , competition from emerging competitor jurisdictions and volatile investor confidence).

• The Commission has sought to maintain a robust and transparent regulatory framework which strengthens the Island s ability to compete internationally.

• The Commission allocated key resources in order to have a fully compliant AIFMD regime in place from July 2013 and to address the UK banking reforms (ICB/Vickers).

• The Commission also allocated resources to ensure appropriate compliance with IMF, MONEYVAL and IOSCO requirements.

• Following the UK s successful implementation of its Retail Distribution Review (RDR), the Commission s Review of Financial Advice was introduced at the end of 2013. It aims to raise the professional standards of investment advisors and eradicate possible conflicts of interest that can be caused by commission based remuneration arrangements.

• In recognition of the above, the Commission is in the process of strengthening its Executive Team. This process commenced in 2013 and is hoped to be completed during the first half of 2014.

Size of the Finance Industry

The value of the assets under management in the Jersey Finance Industry at the end of 2013 is set out below.

• The total value of banking deposits held in Jersey was £139.9bn.

• The total number of regulated funds was 1,334, with a net asset value of funds under administration of £192.2bn.

• 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 Register stood at 32,479.

The Commissioners

NON-EXECUTIVE COMMISSIONERS

Clive Jones Chairman (October 2007 to October 2013)

Clive took the decision not to seek re-appointment on the recent expiry of his term as a Commissioner on 22 October 2013. Clive Jones was first appointed a Commissioner on 23 October 2007 and was subsequently appointed Chairman on 18 September 2009.

Clive retired in June 2007 from an international career with Citigroup 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,  a Chartered Director and is Chairman of the Jersey Heritage Trust.

John Averty Deputy Chairman (December 2005)

John is the Chairman of the Guiton Group Limited. The Group publishes daily and weekly newspapers in the Channel Islands.

He is also a non-executive director of Nedbank Private Wealth Limited, 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 currently 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 in the UK Civil Service until his retirement in 2007.

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.

The Commissioners

NON-EXECUTIVE COMMISSIONERS

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.

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 and managing director of Baihache Labesse Trustees Limited from 1999 to 2004. 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.

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 Master in Politics, Philosophy and Economics.

The Commissioners

NON-EXECUTIVE COMMISSIONERS

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

2013 was an eventful year for the Jersey Financial Services  The report led to a change in Ministerial responsibility  Commission. for the Commission from the Minister for Economic

Development to the Chief Minister. Although it is vital that Regulation over several years of economic downturn has

the Commission retains its regulatory independence,  presented its challenges. There has been a change in the

the Government has a significant part to play, including global view of required standards, but as Jersey has always

providing guidance in relation to setting the Island s appetite committed to high standards of conduct since the inception

for risk, and we look forward to working constructively with of its finance industry, this has had less impact than for

the Chief Minister and the Minister for Treasury and

many jurisdictions.

Resources, in his new role as Assistant Chief Minister However, it has to be noted that we have dealt with more  responsible for the finance industry.

breaches during the downturn than hitherto. There will be

The Commission willingly plays a part in Jersey s efforts to a number of reasons for this, but the main one appears to

attract new business from around the globe, both to explain be an increase in reporting awareness rather than a

the regulatory regime and to ensure business sought will deterioration in behaviour or taking on riskier business.

meet the standards set.

Where possible, the Commission believes remediation is the

best first step, but takes firm action in serious misconduct  

cases, of which there have regrettably been a few instances.

At present the Commission only has the blunt instrument of  Regulation over several years of banning individuals or closing firms down but I am pleased  economic downturn has presented

tSot arteepsoart ntheawt tLhaewCahlileofwMinign ifistnear nhcaias l acgivreile pde tnoapltrieosp otos eb eto the  its challenges.

imposed in cases where remediation is not possible,

an inadequate response to the circumstances, or has failed.

This will not only enable us to meet international

In July 2013, a proposition was lodged by a member of the expectations, but also place the not inconsiderable financial

States of Jersey seeking ex-gratia payments for investors in cost of inspections and enforcement more on those that

two failed unregulated property companies. The Chief behave inappropriately rather than, as at present, on the

Minister has appointed an independent person to undertake finance industry as a whole.

an inquiry with appropriate access to the Commission s

The Commission was delighted that its considerable   records and to produce findings. Investors have also been efforts, in conjunction with Government, to secure  given the opportunity to make representations to the acknowledgement of Jersey s compliance with the AIFMD  independent person. The findings have yet to be published. and MONEYVAL regimes was successful. The Island faces

Given the significant challenges, the Commission has

a full scale MONEYVAL evaluation later in 2014 to check

looked carefully at its staffing and structure and plans are on its implementation of international standards.  

close to fruition to add senior level resource which it is Much important work was also done in respect of the

believed will strengthen the organisation under the

Vickers report on UK bank ring-fencing. There are still

continued skillful leadership of the Director General, John hurdles to overcome, but outcomes to date in all three of

Harris . To him, his Directors and all the Staff, the Board these crucial matters leave the Island well placed as an

pays tribute to their excellent work and loyalty, which is international finance centre.

central to the Commission s success.

The Commission was represented on the steering group

It is with considerable regret that Commissioners learned of overseeing McKinsey s review into the Island s finance

the decision of Clive Jones not to seek a re-election when industry and is looking forward to working with Government

his term of office as Chairman expired in October 2013.  and Industry to further the future of this important pillar of

Clive has led the Commission very ably for the past four the local economy.

years and his sound judgment, dedication and leadership was much appreciated by his fellow Commissioners.

John Averty Deputy Chairman

 The year saw us make progress in a number of other key policy areas.

Director General s Report

Overview As in the UK, the underlying objective is to ensure advice

and risk taken is ever more closely correlated to the

As the Chairman states in his report, 2013 was an eventful  appropriate degree of knowledge, understanding and risk year for the Commission yet also one during which  appetite of the customer at a cost that the latter can clearly considerable progress was made in financial services  understand. The project has been complex and widely development at both the level of the regulatory authority   consulted upon with the relevant stakeholders in Jersey, and for Jersey as a whole. I suspect that, looking back,  and should prove its merit over time in driving better

2013 will come to be seen as a year of important transition.  customer outcomes than, in certain cases, have been Despite the progress made, the environment remained  experienced in recent years. It was pleasing to get to a level difficult and challenging. The lingering effects of the  of agreement and implementation, and further changes in financial crisis, with worldwide retrenchment by financial  the future should not be discounted once a proper

services firms finding an echo in the Island, meant growth  evaluation of what has now been introduced can be

was generally subdued both domestically and  undertaken. At the root of the exercise is the fact that Jersey, internationally. Against this background, the Commission  like all financial centres, has seen a number of instances was able to continue to fulfil its statutory functions, address  where advice and product choice have taken insufficient many difficult issues with which it was faced, and still  account of the suitability of the product and its risks relative achieve a great deal both internationally and domestically. to some of the clients involved.

This is demonstrated to full effect within the subsequent sections of this Annual Report, which focus on the work undertaken by the Executive and the Commission s Staff.  I should particularly like to draw attention to the successful navigation of the challenges posed by the EU s Alternative Investment Fund Manager Directive ( AIFMD ) during the past 12 months as well as Jersey s success under its first examination within the MONEYVAL process looking at progress made in the anti-money laundering / countering

the financing of terrorism ( AML/CFT ) field since the last International Monetary Fund evaluation in 2009. In both of these key objectives the Commission played a major part. Both have considerable significance for the future well-being of the finance sector in the Island, since without the external international recognition of Jersey s regulatory standards that both ultimately bring, future market access for Jersey practitioners in funds and more general financial services, particularly across EU member states, would be compromised.

Policy Matters

The year saw us make progress in a number of other key policy areas. These were wide ranging, covering matters as diverse as the Island s interface with structural banking reform in the UK, the putting in place of a Securities Interests Register within the Companies Registry, and an overhaul of the Codes of Practice issued by the Commission that set regulatory expectations and requirements for each sector of the finance industry in the Island. The Review of Financial Advice ( RFA ), Jersey s version of the UK s Retail Distribution Review (RDR), was also brought to fruition and came into force on 1 January 2014. This is a major development aimed at creating additional pricing transparency and higher standards of investment advice amongst those practitioners servicing both retail and professional investors in a range of widely used financial products and services.

Another major policy development that was substantially progressed over the past 12 months was that relating to

civil penalties. As is mentioned elsewhere, this is a power the Commission has been seeking for some time to complement its existing range of enforcement sanctions and obtaining those powers will put it on a par with most other financial regulatory bodies around the world. It is intended that it will be implemented in a proportionate and progressive fashion, initially focusing on registered businesses rather than on individuals, which will be considered in a second phase, and calibrated against infractions seen in those businesses observance of the requirements established by the Codes of Practice in each industry sector. Its other key feature in this initial implementation phase is that the civil penalties involved will in most cases only come into play when the remediation of an identified problem agreed between the registered business and the Commission has manifestly not been implemented rather than action being taken on first identification of the problem. This accent on remedy of a problem, rather than immediate sanction upon identification, is a core feature of the supervisory and enforcement approach the Commission aims to follow and I shall return to it later.

Director General s Report

International

On the international front, as will be seen in the following sections, the Commission has had another very full year of developing and maintaining its increasingly wide range of interactions with fellow supervisory bodies, and with international organisations and standard setters. In pure relationship terms, we have been able to build an excellent working understanding with both the UK s Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), the successor bodies to the Financial Services Authority (FSA), which was clearly a priority in the wake of the new institutional arrangements now in place in the UK.

In addition, we are very proud of the constructive role we play in a number of international fora, all the more so given our relatively small size as a jurisdiction. I would single out our membership of the International Organisation of Securities Commissions Assessment Committee as an excellent example of this, but it is by no means limited to that activity. Our full participation in MONEYVAL s mutual evaluation processes and procedures, soon after our becoming involved in this key international body in 2012,

is another indication of the constructive role Jersey wishes to play internationally. Such involvement, either individually or working through multi-member bodies such as the Group of International Finance Centre Supervisors (as we are doing in seeking to update the international standard for the regulation and supervision of trust and company service providers (TCSPs) - a Jersey specialism) is a good example.

In the Registry field, this is even more pronounced where the wide number of international bodies with which Jersey is involved attests to its co-operative stance. This is again demonstrated through our experience of operating over many years a central registry of beneficial ownership of Jersey companies, which in turn allowed Jersey to participate in and inform the international debate on the beneficial ownership issue that took place under the aegis of the G8 and G20.

Jurisdictional Review

The years following the financial crisis have been difficult for all jurisdictions where financial services represent a major share of national output. Unsurprisingly the fall seen in demand worldwide for structures and services has affected Jersey s principal industry and in 2013 the Government, through Jersey Finance Limited, commissioned a major jurisdictional review, with the assistance of the consultants McKinsey, to consider responses to the effects generated by the crisis and the future of financial services in the Island. This was all-encompassing, looking at the role of Government, the balance between commerciality and regulation, future drivers of demand, emerging overseas markets with the right degree of affinity with Jersey and its offering, product development and also what needed to be done to preserve Jersey s existing strengths, particularly in its traditional markets of the UK and Europe.

As would be expected, the outcome and recommendations of the review are important proprietary information for Jersey and so cannot be shared in any detail. However, for the Commission a number of things can be said. First, the review recommended actions to strengthen significantly the relationship between Government and the Commission aimed at greater and more effective alignment on a number of future financial services issues and policy approaches. Second, various prescriptions were aired on risk appetite in general being generated more clearly by Government to underpin future decision making. A consensus was forged on identifying true priority markets and greater common understanding achieved around potential reforms to certain product lines in which the Commission is to play a key role alongside both Industry and Government.

The Commission was pleased to be able to play a full part in the review and is committed to implementing the proposals, particularly where it can play a constructive and influential role, alongside the other key stakeholders.

Supervision and Enforcement

As will be seen from the sections on Supervision and Enforcement, 2013 was another very busy year for everyone concerned with proper focus on the wide range of regulated financial services entities that operate in the Island. Our on-site examination programme was maintained at a high rate with differentiated focus driven by risk assessment remaining at the heart of this key part of the Commission s endeavours, leading to themed visits as an important part of the overall programme. Accordingly, 2013 saw a focus on mis-selling within investment businesses (IBs), which can be contrasted with attention to AML/CFT capability within the banking sector, Code of Practice compliance within funds service businesses, and a wider range of potential issues within trust company businesses.

Also worthy of note is a more intensive style of discovery  Once implemented, the Commission will step back from the visit aimed at achieving a better understanding of the  regulated business in order for a more normal relationship to business model and operation of certain entities that the  resume. In short, whenever appropriate, the emphasis is on Commission, from its off-site analysis, sees as domestically  remediation and that is a yardstick by which success in this significant, substantially interconnected with other local  difficult area is measured. Naturally there are occasions firms, and potentially high in impact in terms of any or all of  when more direct and punitive action is needed - subject to reputational, prudential or conduct risks. This in turn follows  the DMP and its well-developed mechanisms of checks and the prevailing new approach worldwide where supervisors  balances. But these are the relatively few egregious cases are striving for a greater understanding of culture within  that arise - or where a registered person simply will not regulated businesses, enhancing their scrutiny of key office  adopt a constructive approach. The Commission does holders and potential outcomes for the business. To this  believe in a reasonable and proportionate approach and will end, the Commission embarked on a project of supervisory  continue to invest strongly in that notion and demonstrate it review, which aims to deliver conclusions and  in the way it operates.

recommendations for change in the first half of 2014 to set

new parameters for what we are trying to achieve in our  Conclusions

supervisory activities, including key areas such as trend  In summary, 2013 has been another demanding year analysis, greater use of intelligence sources such as  for the Executive and the Commission s Staff.  

complaints and whistle-blowers, and better knowledge   The challenges and responses are set out more fully in the of our regulated businesses, their business models and  subsequent sections of this Annual Report, which cover  their culture.  the following areas:

Although below the intensity of 2012, the Enforcement  

Division experienced another busy and demanding year  •international standards and policy development,

with significant achievements in the further use of  particularly in relation to AML/CFT and the AIFMD; settlement agreements, identifying and deterring  •the supervision of the finance industry in Jersey;

unauthorised business problems and in the management

•the Commission s approach to enforcement where

of a number of both new and on-going major cases.

there have been breaches of regulatory standards; Trends towards the greater use of intelligence and a rise  

in matters brought to the Division s attention through  •the activities of the Companies Registry; whistle-blowers were very noticeable.

•the application of resources to sustain the above

The Commission s Enforcement Division has been together  activity; and

for a number of years now and has accumulated

•the Commission s corporate governance framework. considerable experience and know-how in dealing with  

the many different demands placed upon it. By definition,  I should like to extend my thanks, together with those  

the environment in which the Division operates can be  of the Executive more generally, for the support and adversarial and stressful, and it is a tribute to their  encouragement we receive from the Board of

committed approach to identifying reasonable and  Commissioners, together with necessary agreement on proportionate approaches to a variety of problem behaviours  securing the resources to take on the many issues facing amongst a minority of registered persons and individuals  the Commission. I should also particularly like to express that appropriate outcomes have been achieved in nearly all  my personal thanks to Clive Jones for the support and

cases. Behind this success is the Commission s well tested  insight with which he provided me during his tenure as Decision Making Process ( DMP ) but also, in addition to  Commission Chairman. I look forward to working with appropriate mechanisms, the philosophy and approach  Clive s successor in due course. Finally, I wish, as every adopted by the Division and the Commission as a whole  year, to thank the Commission s Executive and Staff for their lies at the heart of the progress that has been made. I have  hard work, dedication and ever present commitment in heard it said by some in Industry that Enforcement is  addressing the diverse challenges we face both domestically focused only on catching people out and then exacting  and internationally. The Commission is a rich if demanding retribution. Nothing could be more wrong. The prevailing  environment but one in which I believe our individual and philosophy is about identifying and understanding the root  collective contributions make a significant contribution to cause of problems, encouraging the registered person to  Jersey s finance sector success and more broadly to Island share those problems openly and candidly with the  life. We are all proud of this contribution and are committed Commission and agreeing on a course of action.  to continuing in the same vein.

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 Regulatory Developments

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.

European and other International engagement

The Commission proactively engages with international and European institutions and bodies.

Following an application made in 2012, the Commission now actively participates in the mutual evaluation processes and procedures of MONEYVAL - a body of the Council of Europe for the evaluation of anti-money laundering measures and the financing of terrorism ( AML/CFT ).  In particular:

• In July, the Commission hosted a fact-finding visit to Jersey by members of MONEYVAL s Secretariat.

• In September, the Commission took part in an ad hoc review group charged with offering comments on a mutual evaluation report of a Balkan state.

• In October, the Commission took part in a workshop in Liechtenstein to consider the practicalities of conducting a national AML/CFT risk assessment in smaller territories.

• In November, the Commission attended a MONEYVAL evaluator training seminar in Strasbourg.

• In November, the Commission took part in the on-site review of a Baltic state s compliance with the Financial Action Task Force (the  FATF ) Recommendations.

• In December, Jersey reported back to the MONEYVAL Plenary on progress that it has made to address recommendations made by

the International Monetary Fund (the  IMF ) in its 2009 assessment of Jersey s compliance with the FATF Recommendations.

The MONEYVAL Plenary was satisfied with the information provided by the Jersey authorities and progress being taken

to address IMF recommendations. Jersey s progress report has since been published. This is to be followed in

September 2014 by a further (fourth round) assessment of Jersey s compliance with the FATF Recommendations (as

in force before the most recent revision).

In order to contribute to the development of international standards and to better understand the effect that changes in standards may have on Jersey, the Commission also participates in the work of:

• the Assessment Committee of the International Organisation of Securities Commissions ( IOSCO );

• the FATF - through membership of the Group of International Finance Centre Supervisors ( GIFCS ); and

• the GIFCS - working to update the Statement of Best practice for trust and company service providers.

In particular, the Commission actively participates in the work of IOSCO s Assessment Committee which seeks to encourage full, effective and consistent implementation of principles and standards across IOSCO s wide membership.

The Commission also continues to engage with European institutions and bodies.

In June 2013, the auditor oversight regime in place in Jersey covering companies that have securities traded on a regulated market in the European Union ( EU ) was assessed and recognised as equivalent by Member States to the Statutory Audit Directive. The effect of this is that reliance can be placed on Jersey s oversight of auditors, without need for Member States in which a company s securities are traded to duplicate registration and oversight requirements under their national regimes. The legal instrument that recognises equivalence - a European Commission Decision - was made in June 2013.

Information is now being compiled to support an adequacy  The Commission s Handbook on International Co-operation assessment under Article 47 of the Statutory Audit  and Information Exchange was published in Arabic during Directive. This assessment will consider what statutory  the year (in addition to versions already published in the provisions are in place in Jersey to facilitate the confidential  English and French languages).

exchange of relevant information between EU auditor

The Commission worked with its counterparts in the Isle of oversight bodies and the Commission. A successful

Man and Guernsey to respond to the package of Basel adequacy assessment would result in Jersey achieving the

Committee papers issued on Basel III, comprising standards maximum equivalence available under the Statutory Audit

on capital adequacy and liquidity. This work built on Directive for third countries.

feedback received to an initial discussion paper shared with In 2012, it was reported that the Commission had explored  Industry in late 2012.

with the European Commission and European Payments

A further discussion paper was issued to local banks in Council (the  EPC ) the future use by Jersey banks of

December 2013, setting out a proposed approach on European payment systems, following the EPC s withdrawal

capital adequacy elements of Basel III. This will be followed in early 2012 of criteria for third country membership.  

with further discussion papers on other aspects of Basel III It was reported that it was not clear:

(addressing liquidity and leverage ratio proposals, amongst other matters). In due course, this will be followed by

• who would set new criteria for deciding whether   consultation on plans for the implementation of Basel III. third country banks might apply to use euro  

payment systems; and The same collegiate approach has been adopted in

considering recovery and resolution issues, with a focus on

• who would assess third country payment   the Financial Stability Board s paper on Key Attributes of frameworks against those criteria. effective resolution regimes. This covers many aspects, with

perhaps the most prominent being the need to replace a reliance on government bail-outs with a more nuanced

Since then, it has been established that assessment criteria  approach that places a greater emphasis on contributions

are to be published again by the EPC, and, in conjunction  from creditors (commonly referred to as bail-ins ).

with others, the Commission will seek to first offer

comments on those criteria (before they are agreed) and

then to facilitate possible future applications by Jersey banks

under those criteria. It is expected that this will require new

legislation to be introduced regulating euro payments.

The Commission negotiates memoranda of understanding with domestic and overseas agencies and promotes cooperation more generally. During the year, the Commission concluded a memorandum of understanding with the Icelandic Financial Supervisory Authority

(FjÆrmÆlaeftirlitio,).

 The Commission now actively participates in the mutual evaluation processes and procedures of MONEYVAL.

International Standards and Regulatory Developments

Money laundering and terrorist financing

The Commission plays a key role in the Island s efforts to prevent and detect money laundering and terrorist financing.

A number of changes have been made to Jersey s AML/CFT framework during the period.

In August 2013, the Money Laundering (Amendment No. 5) (Jersey) Law 2013 came into force and made a small number of discrete amendments to the Money Laundering (Jersey) Order 2008 (the  Money Laundering Order ).

In December 2013, the Money Laundering (Amendment No. 6) (Jersey) Order 2013 came into force in order to address some outstanding recommendations made by the IMF. In particular, the amendment:

• changes the circumstances in which a financial institution may place reliance on identification measures (collection of information on a person s identity and also evidence to verify that identity) already applied by another institution, and apply simplified identification measures to a customer;

• requires senior management to collect additional information in cases where verification of the identity of a customer has been delayed;

• sets an end-date for the collection of missing information on identity for customer relationships established before February 2008 (in most cases by December 2014);

• allows evidence of a customer s identity held by one financial institution to be passed to another in certain circumstances.

• requires policies and procedures to identify and assess risks that may arise in relation to the development of new products, services, business practices and technology; and

• brings the treatment of secondary market trades of shares or units in collective investment schemes into line with other jurisdictions.

Also in December 2013, the draft Proceeds of Crime and Terrorism (Miscellaneous Provisions) (Jersey) Law 201- was lodged au Greffe. This draft law was adopted by  the States of Jersey in February 2014 and will bring all anti-money laundering legislation into one single law  (rather than three as is currently the case).

Other changes will be considered in the coming months.

This is because the FATF published a revised methodology

in February 2013 for assessing compliance with the FATF Recommendations and the effectiveness of AML/CFT systems. Whilst this revised methodology will not be used

by MONEYVAL to assess Jersey s compliance with the FATF Recommendations under its fourth round assessment, the Commission has already started to consider what it and

other agencies in Jersey will need to do differently in future.

In particular:

• Work has started on preparing for a national  AML/CFT risk assessment, which it is intended will start before the end of 2014. This will consider  how financial institutions in Jersey may be targeted  by criminals and how well existing defences against money laundering and terrorist financing are operating.

• Developments in the EU are being followed, where there are proposals for a fourth Money Laundering Directive, which may help to inform Jersey s implementation of the revised FATF Recommendations.

Changes have also been made to AML/CFT Handbooks at various points during the year. Additional guidance has been published on assessing country risk and the measures to be applied in the case of a higher risk customer, and on the application of identification measures to partnerships. Other changes have been to the rules surrounding the application of identification measures by lawyers.

 Laws and regulations must be capable of implementation on an efficient and effective basis.

Other changes to legislation, requirements  Regulatory Developments and guidance Banking

Laws and regulations must be capable of implementation  The need to monitor and respond to external regulatory

on an efficient and effective basis so as to achieve their  developments has continued, with an on-going tendency for objectives and command the respect of stakeholders.  this to add to the complexity of supervising local banking To this end: operations. The structure and form of banking regulation is

being recast internationally. The Banking Division has

• A large amount of time was spent in 2013   closely monitored key developments and has worked with co-ordinating changes proposed to seven of the nine  relevant stakeholders to properly understand the potential published Codes of Practice (the  Codes ), which set  impacts on the banking sector in Jersey.

regulatory requirements. Changes were proposed to  The key external developments at this time are: (1) the bring the wording of the seven sets of Codes closer  Basel III package of reforms; and (2) effective recovery and together and also to deal with matters specific to a  resolution. In particular, the proposals advanced by the UK s particular set of Codes. Revised Codes of Practice,  Independent Commission on Banking ( ICB ) for ring- guidance notes and subordinated loan agreements,  fencing and resolution measures have the potential to

along with an associated Feedback Paper, were  significantly affect local operations. The Commission has published in January 2014. All will have effect from  worked with its counterparts in the other Crown

1 July 2014. Meanwhile, the Codes for investment  Dependencies, all three governments and the affected business were updated on 1 January 2014, following  banks to identify a workable approach to these. This work is completion of the Commission s Review of Financial  likely to overlap with other recovery and resolution related Advice ( RFA ).  developments, such as the proposed EU Bank Recovery

• The Chief Minister is to be asked to lodge a number   and Resolution Directive.

of maintenance amendments to the Collective  The level of information sharing and co-ordination between Investment Funds (Jersey) Law 1988, the Banking  supervisory authorities has increased substantially since the Business (Jersey) Law 1991, the Insurance Business  global financial crisis began and the Commission fully (Jersey) Law 1996, the Financial Services (Jersey)  participates in this as a member of the supervisory colleges Law 1998, and secondary legislation made under  and crisis management groups that have been formed for these laws, and also the Proceeds of Crime  individual banking groups. The latter, involving home (Supervisory Bodies) (Jersey) Law 2008. In support  resolution authorities, have enabled consideration of

of these changes, a summary of consultation  recovery and resolution issues across banking groups, responses was published in February 2014.  which has provided a valuable insight into challenges faced

• Law drafting instructions have been prepared to  by banks represented in the Island and helped to identify change legislation in a way that would allow the  potential risks at an earlier stage.

Commission to impose civil financial penalties on  The Commission has continued to monitor the planned regulated businesses for breaches of Codes of Practice. reallocation of responsibilities between Eurozone national

supervisory authorities and the European Central Bank,  as a result of the proposed establishment of a Single

Work has also continued on revising the Commission s  Supervisory Mechanism and Single Resolution Regime  sensitive activities policy for applications that are made  for Eurozone banks.

under the Control of Borrowing (Jersey) Order 1958,  

and with the Economic Development Department on   In July 2013, the Commission issued a paper on Pillar 2 how the Commission and the proposed financial services  of Basel II, which developed previously issued guidance  ombudsman would co-operate with each other. on the requirement for each locally incorporated bank to

submit to the Commission a document that sets out a

In September 2013, the Commission requested data from  comprehensive assessment of its risks and capital needs. auditors to allow it to consider how Jersey might best  The paper reflected changes in international standards, approach improving its level of compliance with the IOSCO  as well as good practice identified locally. In particular,  Principles on auditor oversight. Most of this information has  it was intended to highlight the need for local banks to

now been received and will allow the Commission to put  consider the potential impact for them of bail-ins and other forward a number of options for improving compliance.   developments regarding resolution. This subject was also

covered in changes made to guidance on Concession Limits, published in April 2013.

International Standards and Regulatory Developments

Funds

The work of the Securities Policy Team in 2013 was dominated by the response to the EU s Alternative Investment Fund Managers Directive ( AIFMD ). As the final requirements of the AIFMD became clear, and Industry s requests for the Island s response were finalised at the turn of the year, it became evident that a significant injection of resources was required for the Commission to meet the numerous demands. To this end, a senior internal resource was appointed as Lead Adviser in late February 2013 and an Industry secondee was brought in to assist the existing members of the Team.

In the months that followed, intensive work and consultation was undertaken with Industry, Government, and other key stakeholders to produce the Commission s response. This required the creation of a new regulatory regime through:

• new Legislation;

• amendments to existing Legislation;

• creation of a new fund product;

• issuance of Codes of Practice;

• Guidance Notes; and

• an authorisation regime with associated application    and notification forms.

Further, detailed negotiations were held with the European Securities and Markets Authority and numerous key EU Member States to sign up to the required AIFMD co-operation agreements. The aforementioned response ensured the Commission was able to do so in good faith. To date, 27 co-operation agreements have been signed with EU Member States.

The final outcome is that Jersey is in the enviable position compared to most third countries, and indeed many European states, of having a fully compliant AIFMD regime in place from July 2013. Considering the timeframes involved, the level of importance to the local funds sector of continued access to the European market and the fact that this was one of the most technically challenging and politically sensitive projects the Commission has faced,  the Commission is delighted with the outcome and grateful to Industry for its support in this regard. The initiative  proved to be a very successful partnership between the Commission and Industry.

The Securities Policy Team also progressed a number of other initiatives; the RFA, consumer education, managed accounts, a number of European legislative response dossiers,  

and IOSCO self-assessments, amongst other things.

Investment Business ( IB )

2013 saw the completion of the RFA project. The aims of RFA are to raise the professional standards of investment advisors and eradicate possible conflicts of interest that can be caused by commission based remuneration arrangements. Updated Codes of Practice for Investment Business, reflecting RFA, came into effect on 1 January 2014; alongside an updated Guidance Note on Investment Business qualifications.

Trust Company Business ( TCB )

The Commission has observed an element of upturn  

in client transactions within the TCB sector in 2013.

The previous UK centric business model is no longer viable to a large extent, which has reduced the source of what was considered traditional business opportunities. The TCB sector has looked further afield for business opportunities.

Although the TCB sector has continued its trend of consolidation, the total employment numbers in the  sector have remained stable.

During 2013, the Division published a number of Guidance Notes and/or Dear CEO letters on the following matters: compliance monitoring; the regulatory requirements for natural persons acting as directors; the administration of aggressive tax schemes; and managed trust companies.

Supervision

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.

Approach

• A pro-active risk-based approach aimed at achieving   Registered businesses in each sector   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. The IB Team expects a further reduction in IB registrations Post on-site during 2014 as the sector continues to consolidate.

• Follow up and remediation. The Jersey Mutual Insurance Society (the  Society ) was

• Heightened supervision, including the use of   granted a permit under the Insurance Business (Jersey)

  enforcement powers. Law (the  Insurance Law ) in 2013. This followed a voluntary application by the Society to give up its exemption

under the Insurance Law and become a permit holder Authorisations and revocations under the Insurance Law.

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

( GIMB ); insurance; investment business ( IB ); trust  A pro-active risk-based approach aimed company business ( TCB ); and designated non financial

businesses and professions ( DNFBP ) that carry on a  at achieving complementary goals of business specified in Schedule 2 of the Proceeds of Crime

(Jersey) Law 1999.  discovery and deterrence.

During 2013, the number of registered businesses in each  sector, together with any authorisations and revocations,  was as follows.

Supervision

Banking

Banking continued to undertake thematic examinations  in relation to prudential reporting during the first half of 2013, which highlighted a number of areas in which

the Commission s guidance had been misinterpreted.

The Commission has already published consolidated findings and provided specific feedback to individual firms and will now revisit its published guidance in order to provide greater clarification, where necessary.

During the second half of the year, Banking undertook examinations on the theme of AML and financial sanctions

Examinations screening. These examinations have enabled the Commission to benchmark AML and sanctions defences  

The Commission has continued its focus on risk-based  in place across the banking sector in Jersey and allowed it supervision through on-site examinations and following up  to highlight best practice and target areas for improvement. any necessary action arising out of those examinations.   This theme will continue during the first half of 2014 and The themes arising from the examinations have also been  will culminate in a consolidated findings report.

fed back to Industry in various ways - through seminars,

presentations, dialogue with Industry associations, letters   Funds

to chief executive officers, the eNewsletter and the Website.  In 2013, Funds Supervision undertook 27 on-site

The Commission completed 231 examinations during  examinations resulting in the review of 91 fund entities. 2013 (187 during 2012).

The examination findings identified areas for improvement Total examinations 2013 in relation to corporate governance, management of

conflicts of interest, compliance monitoring and oversight  

of outsourced services, as well as AML/CFT controls.

A thematic review was conducted in relation to the application of the Collective Investment Funds Codes of Practice (the  CIF Codes ), issued in April 2012. A key finding was failure by registered persons to incorporate the CIF Codes into their policies, procedures and compliance monitoring programme.

Insurance

Findings from the on-site examinations highlighted weaknesses in corporate governance, risk management framework and documented procedures. However, there was evidence of continuing improvement in the conduct  of business undertaken on behalf of policyholders.

Examination activity was a significant feature of 2013.  The main issues that have arisen from the on-site examination programme during 2013 are summarised below by each Industry sector. Remediation plans are agreed, where necessary, with the entities and such plans are monitored to ensure that the remedial work

is undertaken within the prescribed timescales.

 Examination activity was a significant feature of 2013.

IB AML Unit

The IB Team completed a full programme of 25 on-site  The AML Unit has three principal areas of responsibility: examinations during 2013. Whilst these visits did not have

a specific theme, there was a focus on identifying potential  •  supervising persons undertaking money service  cases of mis-selling or weaknesses in procedures and   business;

controls that could lead to mis-selling of investments.  

The on-site examinations identified some common   •  registering and overseeing designated non-financial  themes including:   businesses and professions ( DNFBPs ) for  

  compliance with Jersey s AML/CFT regime; and

• weaknesses in procedures and documentation  •  registering non-profit organisations ( NPOs ) and  

  required to effectively demonstrate on-going    monitoring this sector for vulnerabilities against the    suitability of investments;  financing of terrorism.

• insufficient focus on conflicts of interest by those  

  charged with governance and ineffective procedures   During 2013, the AML Unit carried out 29 on-site

  to identify and address potential conflicts; examinations across the sectors that it supervises and

• weaknesses in policies and procedures relating to   provided support to other Divisions on a further seven AML   AML and associated deficiencies in customer due   related examinations.

  diligence;

• inadequate compliance monitoring programmes  

  and/or lack of resources to conduct effective   The IB Team has engaged with

  monitoring; and Industry in relation to historic sales

• dofe firicsikesnfcaiecse dinbtyh ereigdisetnetriefidc aptieornsoannsd. documentation   of Interest Rate Hedging Products.

The IB Team has engaged with Industry in relation to  

historic sales of Interest Rate Hedging Products and  

The focus of the AML Unit s work to date has been on continues to monitor developments in this respect.

ensuring that newly registered businesses have received an TCB initial examination from the Commission so as to establish The TCB Division focused most attention and resource on  that they have undertaken the necessary AML/CFT

specific themes when undertaking its on-site examination  business risk assessment and formulated a strategy and programme for the year. The 2013 themes, arising from the  associated polices and procedures to counter money

on-site examination findings in 2012, included compliance  laundering and the financing of terrorism. With the majority monitoring, conflicts of interest, the compliance and  of businesses now having received an initial on-site anti-money laundering reporting functions. examination, the AML Unit now intends to concentrate on

conducting more in depth examinations of higher risk

The Division found that in a large number of cases the  businesses. To this end, the AML Unit intends to overhaul compliance monitoring programme was not based on risk,  its risk model for DNFBPs during 2014 in order to better not sufficiently wide in scope and not conducted by an  target its resources to higher risk businesses. The AML Unit independent resource. As a result of these findings,   will also seek to gather information from the NPO sector in the Commission produced a Guidance Note for Industry   order to refresh its assessment of this sector s vulnerability to in December 2013. terrorist financing.

In May 2013, the Division held a one day conference that provided feedback from on on-site examinations,  which included guidance on risk management,  corporate governance, transaction monitoring,  

and client review effectiveness.

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 .

As a general trend, the Enforcement Division has seen an increase in more complex and demanding cases across nearly all regulated sectors.

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 co-operatively with the registered person. In the most serious cases, Enforcement undertakes culpability reviews of individual conduct with reference  to integrity and competence. Serious cases result in the issuance of directions restricting an individual working in  the financial services industry and are accompanied by public statements.

The Commission recognises the importance of applying sufficient checks and balances when considering the use of such powers and has developed a robust, publicised, process: 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 2013. Only one appeal has been lodged in the last six years.

Settlement agreements have continued to be an effective and cost efficient method of dealing with serious regulatory misconduct, and six agreements were concluded during the year. Such agreements are subject to strict parameters issued by the Board of Commissioners (the  Board ) and are also subject to an annual retrospective review by a Commissioner.

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 risk to investors. Due to the very real threat associated with those that seek to covertly conduct unauthorised financial services business, the Commission will continue to give priority to investigating such cases. In 2013, the Commission conducted 18 such investigations which was a marked decrease on the previous year s figure of 33.

The Commission published 12 public statements during the year, relating to both regulated businesses and those conducting unauthorised financial services businesses. The full public statements can be viewed on the Commission s website.

Receiving good quality intelligence to identify misconduct helps direct the Commission to a specific problem,  

often resulting in swift and focused intervention. In 2013, the Commission received approaches from 20 whistle blowers either through the use of the Commission s whistle blowing line or through direct personal contact.

 Receiving good quality intelligence to identify misconduct helps direct the Commission to a specific problem.

A consultation paper on the introduction of a civil penalty regime was published in April 2012. The feedback was instrumental 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, culminating in the publication of a feedback paper and the preparation of law drafting instructions at the end of 2013. 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 Industry seminars. Enforcement hosted its own lunchtime seminar in December, which was aimed at providing practical and useful information to the industry based on lessons learned from Enforcement cases.

Enforcement case statistics

Percentage breakdown of Enforcement Division activity during the year ended 2013  

Financial Services (J) Law - Investment Business - Non Regulated 6.8% Financial Services (J) Law - Investment Business - Regulated 8.2%

Financial Services (J) Law - Trust Company Business - Non Regulated 17.0% Financial Services (J) Law - Trust Company Business - Regulated 25.9% Financial Services (J) Law - Fund Services Business - Regulated 4.8% Financial Services (J) Law - Insider Dealing 5.4%

Financial Services (J) Law - Market Manipulation 7.5%

Financial Services (J) Law - Misleading Statements and Practices 1.4% Banking Business (J) Law - Non Regulated 4.1%

Banking Business (J) Law - Regulated 2.0%

Companies (Jersey) Law 2.0%

Proceeds of Crime (Jersey) Law 10.9%

Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 0.7%

Insurance Business (J) Law - Non Regulated 0.7%

No Specific Law 2.0%

Investigation of Fraud Law 0.7%

Total Enforcement Cases during the period from 1 January 2013 to 31 December 2013

Registry

In particular a new facility was created to allow search documents to be downloaded rather than attached to an email. The method of attaching a document to an email prevented some very large documents being retrieved;  the new method now allows all publicly filed documents  to be searched online.

Work on developing an automated Security Interests Register ( SIR ) reached go live on 1 October 2013 for the filing of assignments of receivables, while security interest filings  were enabled from 2 January 2014.

The Commission operates Jersey s Companies Registry (the  Registry ), which registers Jersey statutory bodies.

The Registry is committed to constructively respond to the needs and requirements of its users. Its Focus Group meets annually to discuss issues such as the quality of service provided by the Registry, online services, the volume of business through the Registry, and new products and fees.

During 2013, the Registry continued to progress its root and branch review. The objects of the review are to:

• clearly define the requirements of a replacement    Registry system;

• ensure that any new system removes the burden of

  redundant administrative requirements and takes into  account any legislative drivers; and

• ensure international standards are met where required.

The focus for 2013 was to actively engage with stakeholders, in particular other local registries and Government agencies. Registry ICT business process modelling as is and Registry best practices reviews were completed during the year.

Overall, the number of Registry transactions continued to grow with registrations and processing, such as special resolutions and searches, having significantly increased.

The Registry adheres to published response time-scales, all of which were met in 2013, as shown in the table on page 50.

Automation and e-commerce projects

The online search facility, the online monitoring and the online filing system were all enhanced.

All systems continue to be embedded in the online environment known as Easy Company Registry ( ECR ).  

In partnership with ICT, the Registry continued to enhance and extend its website with the introduction a number of online forms, in particular forms for the collection of the new partnership fees, which were designed to achieve further efficiencies. A number of Registry e-zines were published during 2013 to keep users abreast of Registry issues and developments.

International Development of the Registry

The Registry has continued to enhance its profile internationally, participating at events such as the European Commerce Registries Forum ( ECRF ) in Romania. According to the ECRF s global benchmarking survey 2013, Jersey was one of nine jurisdictions to achieve a positive inflow from cross-border mergers of all jurisdictions surveyed. Given this statistic, Jersey considers it important to be aware of international registry developments in this area. As part of this programme, the Registry was elected to the ECRF Working Group set up to progress harmonization of registry definitions and the Registry continued to work with the group set up to consider the requirements of the Directive on the Interconnectivity of European Union ( EU ) and non EU (third countries) business registries.

The implications for Jersey and other non EU countries of the introduction of this Directive and, consequently, any EU mechanism set up to deliver the requirements of this Directive, still remain to be determined.

As part of its programme to match international standards on the supply and transparency of registry data, an information sharing agreement was signed with the European Business Register

( EBR ). This has enabled information on Jersey companies to be available through the EBR for the last seven years.

The International Association of Commercial Administrators ( IACA ) represents the company registries of the United States and Canada. IACA registries are regarded as the leading jurisdictions for the administration of secure transactions and, with Jersey s new SIR going live in 2013 and being further developed in 2014 with regard to tangible moveable assets, access to expert support from some of the North American registries has been, and continues to be, beneficial in developing the SIR.

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 )  The Commission has a policy on equality and diversity,  The ICT Division has successfully completed a number   but does not currently have any specific objectives.

of major technology projects, including the relocation of   2013 was a challenging year, characterised in the main

its primary data centre in order to ensure the continued  by high volumes of recruitment, and some new Learning high availability of the Commission s internal and public  and Development initiatives. The Commission aims to be facing systems. Taking advantage of this relocation,   an employer of choice attracting quality local and global

the Commission s aging network security infrastructure   applications. During 2013, the Commission successfully was replaced with a new suite of advanced appliances  recruited 19 new and replacement members of Staff.

and monitoring systems. Regretted employee turnover reduced in 2013 to 7.38% Work commenced on the replacement of the Commission s  of the workforce, this was down from the 2012 figure of

desktop computing infrastructure, brought about by the  9.26%. Employee stability has also increased with average impending retirement of Microsoft Windows XP in 2014.  employee length of service now standing at 6.22 years.

The Commission has chosen to move to a new generation  Learning and development has always been given very  of thin client technologies which will provide a significant  high priority at the Commission. It is essential that Staff are increase in the flexibility and accessibility of its systems.   professionally qualified, technically competent and have the The Division procured a new ITIL[1] aligned service  opportunity to receive continuous professional development. management system to replace the aging helpdesk solution.  The Commission utilises a variety of development methods This further reinforces its commitment to achieving a high  which include: secondments; breakfast briefings;

level of quality, service and change control.  professional training; in-house learning; conferences;  

A number of new business applications have been  and training alongside other regulators.

developed on the Commission s SharePoint platform,  

together with enhancements to existing systems.

Work continued with the Companies Registry to extend  

the online services that are available, including the delivery  The ICT Division has successfully of the new, entirely electronic, Security Interests Register.  

This went live in October 2013. completed a number of major

2013 also saw the completion of a Divisional resource  technology projects.

review resulting in the creation of two new positions to

further underpin the increasing investment being made

in new and evolving systems.

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 assist in the collection of information to identify regulatory misconduct and has a physical office in  a central location to enable the public to make contact.

The Commission meets regularly with Government Ministers and Officers, and with the leaders of the businesses that it regulates.

The Commission publishes a section on Corporate Governance on its Website covering the following areas: Matters Reserved for the Board; Delegation of Powers;  and Conflicts of Interest. This can be accessed at  www.jerseyfsc.org/corporate_governance.asp

 The Board is responsible,  

in particular, for agreeing the strategy  of the Commission and ensuring that the necessary financial and human resources are in place for the Commission to meet its objectives.

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 ).  

The Board is responsible, in particular, for agreeing 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 that 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[1] 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.

The Board consists of a Chairman, 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  Following the retirement of Clive Jones, John Averty,  balance between the interests of persons carrying on the  the Deputy Chairman, has presided at Board meetings and business of financial services, the users of such services  Commissioner Eatwell has acted as Senior Independent and the interests of the public at large. The current  Director since that event.

membership of the Board, together with a brief description

On 1 March 2013, John Harris was re-appointed by

of their experience, is shown in the chapter entitled  

the States to serve a further term of five years as a

 The Commissioners .

Commissioner. On 30 November 2013, Advocate Deborah The roles of the Chairman and Chief Executive (Director  Prosser was re-appointed by the States to serve a second General) are split and their respective responsibilities are  term of five years as a Commissioner.

distinct. The Chairman is responsible for the running of the

Board s business and the Director General has executive  Operation of the Board

responsibility for the running of the Commission s day-to- During 2013, the Commission held nine Board meetings day business.  and made five resolutions that were passed by way of

The Deputy Chairman of the Board is considered by the  transactions of business without meeting. In advance of Board to be its de facto Senior Independent Director as  each meeting, Commissioners are provided with

described in the Code. comprehensive briefing papers on the items under

consideration. The Board is supported by the Commission Under the provisions of the Commission Law,   Secretary who attends and minutes all meetings of the

the appointment of Commissioners is a matter reserved for  Board. Since April 2013, the Commission has taken decision by the States. When seeking to fill vacancies that  advantage of the efficiencies, costs savings and

arise, the Board follows the procedures recommended by  environmental benefits that are provided through the use the Jersey Appointment Commission ( JAC ) - a body set  of electronic Board Packs.

up by the States to overview all public sector appointments

- and a member of the JAC sits on the Selection Panel that  Article 11 of the Commission Law empowers the Board  will include at least one local Commissioner and one  of Commissioners to delegate any of its powers to the off-Island Commissioner. The Selection Panel reports to   Chairman, one or more Commissioners, or an officer of the the Board. The Board determines whether an appointment  Commission. However, the Board has decided to retain to should be made and recommends such appointment to the  itself those powers that could have a highly significant effect Chief Minister. If the Chief Minister is satisfied with the  on the achievement of its key purposes or on the finances Commission s recommendation, the Chief Minister will   or reputation of the Commission.

take an appropriate proposition to the States for debate.  In particular, in relation to licensing decisions, the Board has On appointment, a Commissioner will receive an induction  retained those powers, which relate to:

to the work of the Board and each Division of the

Commission. This includes an opportunity to meet senior  •  the authorisation of all new business applicants under staff in each Division at the earliest stage. Commissioners   the Banking Business (Jersey) Law 1991; and

receive a standing invitation to attend in-house seminars,  •  the refusal of an application or the revocation of a  

as well as receiving lunchtime presentations at strategic   permit, registration, etc., under the four Regulatory  level from local and overseas speakers of recognized stature.   Laws (except in certain limited circumstances, for  This is in addition to ad hoc continuous development   example where the revocation of a permit,  

training events.  registration or similar is at the request of the  

Under the provisions of the Commission Law,   registered person).

Commissioners are appointed for terms not exceeding five

years and, upon expiry of their first term of office, are eligible

for reappointment. The Board has adopted a policy statement that sets out in

detail which powers the Board has retained to itself and a Clive Jones, the Chairman of the Commission since   policy statement on those powers that it has delegated to

18 September 2009, took the decision not to seek  the Executive of the Commission. The full text of these re-appointment on the expiry of his second term as a  policy statements can be viewed on the Commission s Commissioner on 22 October 2013. Clive Jones was  website at: www.jerseyfsc.org/corporate_governance.asp first appointed a Commissioner on 23 October 2007.

A selection process for a new Chairman was commenced  

in December 2013 and will continue into the early part

of 2014.

Corporate Governance

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

The Board conducted a self-evaluation of its performance during 2013. Whilst the conclusions reached were generally satisfactory, the Board concluded that it should improve its internal processes, which included changes to the structure of the agenda for Meetings, putting questions to the Executive in advance of Meetings, and giving consideration to the Commission s philosophy in relation to its various roles by having regular discussions about topics such as its risk appetite.

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 the fourth quarter 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 and critical non-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.

During 2013, the Executive developed a strategic framework to improve clarity over the Commission s key aims, strategies and operational activities. Through the use of Key Performance Indicators ( KPIs ), strategic analysis and risk assessments the Commission will be able to assess progress towards achieving its required outcomes and to enable insightful strategic responses. The Commission s stated aims have been developed further and now comprise:

1. Have the right scope and mandate to discharge  regulatory objectives effectively.
2. Match international standards for business lines &    AML/CFT proportionately and in line with the  Commission s Guiding Principles.
3. All providers, products & persons meet licencing    requirements.
4. All regulated entities operate within accepted    standards of good regulatory practice.
5. Improve regulatory standards through credible    deterrence.
6. Enhance the reputation of the Commission and    Jersey through the development of mutually    beneficial relationships.
7. Provide registration, regulatory challenge and search    facilities in accordance with statutory and    regulatory requirements.
8. Promote, develop and maintain effective and    efficient support operations.
9. Recruit & retain the right number of highly  

  motivated & talented staff who are able to deliver    world class regulation.

Although the framework is in its infancy, the Executive and the Board have already found it useful in focussing on certain key areas such as the potential stakeholder expectation gaps in respect of the Commission s scope and mandate and emerging issues relating to virtual currencies such as Bitcoins.

Principal risks and uncertainties The Commission will continue to monitor these risks and

the effectiveness of its response to them through its

The Board discusses the risks and uncertainties facing the

corporate governance processes.

Commission on a regular basis. Discussions and decisions

are influenced by global political, economic, legal and  Committees of the Board

regulatory factors, as well as local considerations and the

operation of the Commission itself.  The Board had established three Committees; an Audit

Committee, a Remuneration Committee and a Nomination Strategic and operational risks arising from its legal remit  Committee. However, in May 2013, the Board decided

have been captured in a risk register, which is regularly  that, in light of the fact that nine of its ten members were reviewed by the Executive, Audit Committee and Board.   non-executive, it would be consistent with good practice to Of the risks identified, the Commission currently considers  dispense with the Nomination Committee and deal with the the following to be the principal risks and has allocated  business in the full Board.

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. In addition to its existing activities, the Commission responded by:

• engaging fully with government to implement  McKinsey recommendations;

• improving its policy prioritisation processes;

• recruiting additional policy resources; and

• creating a new Director of Policy and Strategy role to  be filled in early 2014.

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. In addition to its existing activities,  

the Commission responded by:

• improving clarity over key aims, strategies and    operational activities;

• developing strategic reporting (including KPIs);

• reviewing the effectiveness of its change    implementation process; and

• creating a new Chief Operations Officer role to    be filled in early 2014.

The Board appoints the members of the Committees.  The terms of reference of the two remaining Committees  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 2013 were John Averty (Chairman) (until October 2013), Ian Wright  (a member during 2013 and subsequently appointed as Chairman from October 2013), Stephan Wilcke and  Cyril Whelan (from October 2013).

The Audit Committee met twice during the year and spent significant time on the statutory audit, risk, internal controls and KPIs. In addition, one resolution was passed by way of the transaction of business without meeting.

The Audit Committee considered which financial and non-financial controls it believed are key controls and drew up a short list of essential controls covering cash payments, contracting and physical security. It then commissioned specific work from internal and external audit to provide it with evidence of their effectiveness.

The Audit Committee concluded that the system of financial control in relation to these key items was effective throughout the year and reported this to the Board.

The Audit Committee took a significant interest in the development of the Commission s key risk register and KPIs to enable the Board to monitor progress towards achieving key regulatory outcomes.

Internal Audit focussed its activities Supervisory effectiveness, looking at the on-site examination process and the way in which information and intelligence is used. Advice was provided on the Commission s project governance and KPI frameworks.

Corporate Governance

The Audit Committee met with PKF (UK) LLP ( PKF ), the external auditor, during the year. The Audit Committee reviewed the audit plan and considered whether there were any material exposures omitted. It discussed the work proposed and the level of materiality for potential errors and omissions and concluded that the plan was appropriate

and that the audit should be effective. During that meeting, PKF advised that it would be merging with BDO LLP and continuing to trade as BDO LLP. Whereas there were no conflicts of interest in relation to the audit undertaken by PKF for the financial year ended 31 December 2012, as it did not undertake any financial services business in Jersey, BDO Limited, a limited liability company incorporated in Jersey and part of the international BDO network of independent member firms is a recognized auditor in Jersey, and this required further consideration in relation to the audit for the financial year ended 31 December 2013. The Audit Committee took comfort from the assurance that BDO LLP would continue to carry out the audit from a BDO LLP office in the UK, with the work being overseen by a UK based partner. The Audit Committee later met with BDO LLP and discussed the results of their work and any potential threats to their independence. It was noted that the audit partner would now have completed seven years and concluded that it would be appropriate for the partner to be rotated for 2014. BDO LLP did not provide any non-audit services to the Commission.

Remuneration Committee

The members of the Remuneration Committee during 2013 were, Debbie Prosser (Chairman), Clive Jones (until October 2013), John Mills and Markus Ruetimann (from October 2013). The Remuneration Committee met three times during 2013 and one resolution was passed by way of the transaction of business without meeting.

The Remuneration Committee gave further consideration  to the introduction of a competency framework to assess behavioural as well as technical competencies. Workshops were held for the Board and the Executive to consider the major issues facing the Commission. Following those workshops, the Board decided that other work and projects would take priority over the introduction of a competency framework.

The Remuneration Committee received and considered recommendations from the Executive for the annual pay review and bonus awards and agreed the remuneration levels for the Executive and staff. The Remuneration Committee decided to undertake a review of the Commission s remuneration strategy in 2014, and requested that the Executive undertake preliminary work  in preparation for the Committee s review.

Nomination Committee

The Board concluded that it was not necessary to have a standing nomination committee and instead the full Board carries out the functions of a nomination committee as and when the need arises.

During the year, the decision of the Chairman not to seek a further term of office led to the creation of an ad hoc committee of the Board. It gave extensive consideration to the needs of the Commission and how that individual may best serve the needs of the organisation and the Island. This led to the preparation of a detailed role specification for a future Chairman which was discussed with key stakeholders.

Certain Commissioners considered that they might have potential conflicts of interest and as soon as identified they excused themselves from further participation in the work of the committee.

The committee invited tenders from both Jersey and London based recruitment consultants and selected MWM Consulting. There are no other connections between the Commission and MWM Consulting. The role of Chairman was then advertised in Jersey and UK media and on the Commission s website.

Subsequent to the year end, a smaller sub committee was formed to evaluate the high quality candidates identified by this process and make a recommendation to the full Board. The sub committee was joined by a representative of the Jersey Appointments Commission to help ensure that we complied in full with the Procedures for Appointments made by the States of Jersey.

 The Audit Committee took a significant interest in the development of the Commission s key risk register and KPIs to enable the Board to monitor progress towards achieving key regulatory outcomes.

Attendance at Meetings

During 2013, attendance at meetings of the Board and its  Under powers granted by Article 12 of the Commission Committees was as follows: 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.

 the Board has taken steps to understand the views of the Commission s major stakeholders.

Whilst the Commission does not have any shareholders,  Accountability arrangements the Board has taken steps to understand the views of the

Whilst the Commission is an independent body, it is  Commission s major stakeholders by holding meetings with accountable for its overall performance to the States through  senior Government Ministers, Jersey Finance Limited and the Minister.  representatives of other Industry bodies. The Executive also

meets with Government Ministers and Officers, and Pursuant to the States of Jersey (Transfer of Functions No.6)  representatives of Jersey Finance Limited and other Industry (Economic Development and Treasury and Resources to  bodies, on a regular basis.

Chief Minister) (Jersey) Regulations 2013, the Minister

responsible for the Commission changed from the  

Minister for Economic Development to the Chief Minister

on 19 July 2013.

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.

FINANCIAL STATEMENTS

Financial Statements

Introduction

Fee income increased to £13.62 million in 2013 from £13.00 million in 2012. The main reason was the effect of the first increase to funds fees in 10 years on 1 July 2012 (in 2012, only six months were at these higher rates compared to the full year in 2013).

Bank deposit interest received amounted to £64,000, which was less than in the previous year, reflecting lower interest rates available in the market. Other income came from seminars for the finance industry that were held during the year. The cost of these seminars was included in other operating expenses. No similar seminars were held in 2012.

The Commission s major item of expenditure remains staff costs. As in previous years, the Commission has only been increasing staff numbers when absolutely necessary. During 2013, the average number of staff employed increased from 117 to 124. Despite the increase in the number of staff however, the overall related costs remained at a similar level to 2012. This was in part because several senior positions fell vacant in the year without immediate like-for-like appointments being made. An analysis of this expenditure is contained in note 5 to the financial statements. Action taken in the year to recruit 19 staff including three directors and a Chairman contributed to an overall increase in recruitment costs to £291,000.

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.

Expenditure on legal and professional services principally comprised the continued cost of consultants assisting with document management and Registry workflow review projects, the costs associated with the States of Jersey s review of a significant investigation and a share of the cost of an additional law draftsman. Despite the number of activities increasing, legal and professional services costs fell overall to £457,000 in 2013.

The net amount spent on investigations and litigation fell to £701,000 compared to £745,000 a year earlier.

As in 2012, the majority of expenditure in 2013 related to just two major ongoing cases, reflecting the Commission s 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 is made available annually for this important aspect of the Commission s activities.

Overall, the level of operating expenses increased from £12.97 million in 2012 to £13.64 million in 2013.

The net result for the year was an operational surplus of £93,000 and a consequent rise in reserves to £7.34 million. The Commission has continued its policy in respect of its accumulated reserve in order to build up such a reserve

to an amount equal to six months operating expenditure plus the average of the last five years cost of investigations and litigation. This is in order to meet contingencies, particularly the sizeable sums of money that may be required to fund investigations and litigation.

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

The Commissioners have considered in detail the whole of the annual report and financial statements and concluded that it is, taken as a whole, balanced, fair and understandable and provides the information necessary for stakeholders to assess our performance as a regulator, our regulatory model ensuring effective supervision and enforcement, and our longer term strategy.

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 2 April 2014

PO Box 267 14-18 Castle Street St Helier

Jersey

Channel Islands JE4 8TP

INDEPENDENT AUDITOR S REPORT TO THE CHIEF MINISTER

OF THE STATES OF JERSEY

Opinion on 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 2013 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 requirements of the Financial Services Commission (Jersey) Law 1998.

The financial statements 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 the Financial Services Commission (Jersey) Law 1998 and United Kingdom Generally Accepted Accounting Practice.

Our assessment of risks of material misstatement and our audit approach to these risks

The following risks had the greatest impact on our audit strategy and scope:

• ISAs (UK & Ireland) presume there is a risk of fraud in revenue recognition.

For regulatory fees, we tested on a sample basis that fees for regulated entities had been calculated in accordance with fee notices published by the Commission. We also recalculated deferred income to ensure it had been correctly accounted for in accordance with the Commission s accounting policies.

For registry fees, we tested on a sample basis that fees had been calculated in accordance with fee notices published by the Commission. We recalculated annual return income based on the number of returns submitted to the registry.

• Management override of internal controls is a risk that we are required to consider under ISAs (UK & Ireland).

We tested the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements.

Our application of materiality and an overview of the scope of our audit

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence,

when evaluating their effect on the financial statements.

We determined planning materiality for the financial statements as a whole to be £200,000. In determining this,

we based our assessment on a level of 1.5% of income. On the basis of our risk assessment, together with our assessment of the Commission s control environment, our judgment is that performance materiality for the financial statements should be 75% of planning materiality, namely £150,000. Our objective in adopting this approach is

to ensure that total detected and undetected audit differences do not exceed our planning materiality of £200,000 for the financial statements as a whole.

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £4,000, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

Our audit of the Commission was undertaken to the materiality level specified above and was all performed at the Commission s office in Jersey.

INDEPENDENT AUDITOR S REPORT TO THE CHIEF MINISTER OF THE STATES OF JERSEY

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 material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

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 and for being satisfied that they give a true and fair view.

Our responsibility is to audit and 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 Financial Reporting Council s Ethical Standards for Auditors.

This report is made solely to the Chief Minister in accordance with Article 21(3) of the Financial Services Commission (Jersey) Law 1998. Our audit work has been undertaken so that we might state to the Chief Minister those matters we are required to state to the Chief Minister in an Auditor s 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 Chief Minister for our audit work, for this report, or for the opinions we have formed.

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Report is:

• materially inconsistent with the information in the audited financial statements; or

• apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Commission acquired during the course of performing our audit; or

• is otherwise misleading.

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the Commissioners statement that they consider the Annual Report to be fair, balanced and understandable and whether the Annual Report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed.

BDO LLP

Chartered Accountants Norwich

United Kingdom

17 April 2014

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2013

2013  2012 Note  £ooo  £ooo  £ooo   £ooo

Regulatory Income:

Regulatory fees  4 (a)  11,002  10,487 Registry fees  4 (b)   2,616   2,509

Total regulatory income  13,618  12,996

Other income:

Bank deposit interest received  64  87 Other income   46   -

Total income  13,728  13,083

Operating expenses:

Salaries, fees, social security and pension contributions  5  9,250  9,214 Operating lease expenditure  463  471 Other premises costs  318  296 Computer systems costs  1,026  613 Legal and professional services  457  480 Investigations and litigation  6  701  745 Public relations costs  19  18 Travel costs  219  155 Staff learning and development  204  207 Recruitment costs  291  79 Other operating expenses  266  280 Auditors remuneration  16  15 Depreciation of tangible fixed assets  7  405   396

Total operating expenses  13,635   12,969 Excess of income over expenditure  93  114 Accumulated reserve brought forward   7,247   7,133 Accumulated reserve carried forward   7,340   7,247

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 44 to 49 form an integral part of these financial statements.

BALANCE SHEET AS AT 31 DECEMBER 2013

2013  2012 Note  £ooo  £ooo  £ooo  £ooo

Fixed Assets:

Tangible assets  7  852  753

Current Assets:

Fee income receivable  2  25 Sundry debtors  60  29 Prepayments  606  318 Cash at bank and in hand  8   11,330    11,610

11,998   11,982

Creditors - amounts falling due within one year:

Fee income received in advance  4 (c)  4,381  4,531 Sundry creditors  9   1,129   957

5,510   5,488

Net Current Assets   6,488   6,494 Total Assets less Current Liabilities   7,340   7,247

Represented by:

Accumulated reserve   7,340   7,247

The notes on pages 44 to 49 form an integral part of these financial statements.

The financial statements on pages 41 to 49 were approved by the Board of Commissioners on 2 April 2014, and signed on their behalf by:

J C Averty  J R Harris Deputy Chairman  Director General

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2013

2013  2012

£ooo  £ooo

Reconciliation of net income to net cash inflow  from operating activities

Net income for the year  93  114 Interest received  (64)  (87) Depreciation charges  405  396 (Increase) / decrease in debtors and prepayments  (296)  59 (Decrease) / increase in creditors   (104)   751

Net cash inflow from operating activities Cash Flow Statement

Net cash inflow from operating activities Returns on investments and servicing of finance

Interest received

Capital expenditure

Payments to acquire tangible fixed assets

(Decrease) / increase in cash

Reconciliation of net cash flow to movement in net funds (Decrease) / increase in cash in the year

Net funds at 1 January Net funds at 31 December

34   1,233

34  1,233 64  87

(378)   (607)   (280)   713

(280)  713 11,610   10,897   11,330   11,610

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.

Motor vehicles are depreciated over three years.

4. Foreign currency transactions during the year have been translated at the rates of exchange ruling at the dates of the transactions and any closing balances translated at the rates prevailing at the Balance Sheet date. 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 is 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 in Law 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

1. Regulatory fees

Banking

Funds

Insurance companies

General insurance mediation

Investment business

Trust companies

Designated non-financial businesses and professions Recognised auditors

Money services business

2013  2012

£ooo  £ooo

1,277  1,328 4,685  4,041

745  759 107  98

1,192  1,239 2,446  2,492

518  498 22  23

10   9 11,002   10,487

2. Registry fees

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

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 32,988 (2012 - 32,047).

2013  2012 £ooo  £ooo

Total annual return fee income  4,948  4,807 Less collected on behalf of, and payable to, the States of Jersey   3,794   3,685

Retained by the Registry  1,154  1,122 Other Registry income   1,462   1,387

Total Registry income   2,616   2,509

3. Regulatory fees received in advance  2013  2012 £ooo  £ooo Banking  1,356  1,377 Funds  2,086  2,169 Insurance companies  531  534 General insurance mediation  2  - Investment business  391  406 Trust companies  14  45 Designated non-financial businesses and professions   1   -

4,381   4,531

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

2013  2012 £ooo  £ooo

7,670  7,660 249  239 375  356 645  614 218  171

93   174

9,250   9,214

The average number of staff employed during the year was 124 (2012 - 117)

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 2013 amounted to £737,000 (2012 - £821,000), against which there were recoveries of £36,000 (2012 - £76,000). Net costs incurred during 2013 therefore amounted to £701,000 (2012 - £745,000).

7. Tangible assets Office  Computer  Computer  Motor  Total Furniture  Equipment  Systems  Vehicles

Fittings &  under

Equipment  construction

£ooo Cost of assets at 1 January 2013  638 Additions during year  30 Systems completed during year  - Disposals during year   - Cost at 31 December 2013   668

Depreciation at 1 January 2013  556 Charged during year  34 Eliminated on disposals   - Depreciation at 31 December 2013   590

Net book value at 31 December 2013   78 Net book value at 31 December 2012   82

£ooo  £ooo  £ooo  £ooo 2,812  18  -  3,468

232  232  10  504 202  (202)  -  - (25)   -   -   (25)

3,221   48   10   3,947

2,159  -  -  2,715 370  -  1  405

(25)   -   -   (25) 2,504   -   1   3,095

717   48   9   852 653   18   -   753

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 five different banks.

9. Sundry creditors 2013  2012 £ooo  £ooo

General expense creditors  839  470 Accruals   290   487 1,129   957

General expense creditors include pension contributions of £90,000 (2012 - £87,000) still to be remitted to the schemes at the balance sheet date.

Accruals contain an amount of £122,000 (2012 - £137,000) 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.

2013  2012

£ooo  £ooo

For a period of more than five years, the annual rentals

payable under this operating lease are:   490   490 The rentals payable under this operating lease are subject to periodic review, rebased to market rates.

12. Interest in wholly-owned companies

At 31 December 2013, the Jersey Financial Services Commission had one wholly owned company, JFSC Property Holdings No.1 Limited (2012 - two wholly owned companies).

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 became 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.

Following the closure of the Jersey Financial Services Commission Staff Pension Scheme (and its replacement by the JFSC 2012 Staff Pension Scheme) in 2012 (note 14b), the Commission dissolved JFSC Pension Trustees Limited in 2013. (The Company s sole purpose had been to serve as the Corporate Trustee to the Jersey Financial Services Commission Staff Pension Scheme).

13. Commissioners remuneration  2013  2012

£  £

Fees paid to Commissioners were as follows:

Clive Jones  (Chairman - retired 22 October 2013)  42,000  48,000 John Averty  ( Deputy Chairman)  28,350  27,000

Lord Eatwell of Stratton St. Margaret

John Harris

John Mills Deborah Prosser Markus Ruetimann Philip Taylor

Cyril Whelan

Sir Nigel Wicks Stephan Wilcke Ian Wright

31,500  30,000 nil  nil

21,000  20,000 21,000  20,000 31,500  30,000

(resigned 2 February 2012)  n/a  3,333

21,000  20,000 (retired 16 June 2012)  n/a  15,000 (appointed 17 July 2012)  31,500  12,500 (appointed 17 April 2012)  21,000  13,333

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 (2012 - £293,000) in his capacity as Director General.

Commissioners remuneration was increased by five per cent at the start of 2013, which took into account the increase received by staff at the Commission over the two year period since the Commissioners fees were last increased. The procedures followed by the Commission ensure that the setting of remuneration packages for Commissioners is formal and transparent and no individual Commissioner is responsible for determining

his or her remuneration.

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 £41,000 (2012 - £52,000). 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 2014.

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 related 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. In 2012, the Commission closed the Jersey Financial Services Commission Staff Pension Scheme. It was replaced at that time by a new scheme, the JFSC 2012 Staff Pension Scheme, which is a defined contribution scheme open to staff whose initial employment by the Commission occurred after 1 January 1999. At the time of closure, the majority of members interests were automatically transferred to the JFSC 2012 Staff Pension Scheme. A small number of instructions to commute interests or transfer interests to other schemes remained outstanding at 31 December 2012 and these were all completed in 2013.

No assets or liabilities remain in the closed scheme.

The JFSC 2012 Staff Pension Scheme s assets are held separately from those of the Commission under the care of an independent trustee.

Salaries and emoluments include pension contributions for staff to the schemes of £604,000 (2012 - £562,000). Contribution rates have remained the same though contribution totals have increased due to changes in membership numbers, ages and employment grades.

Particulars of the scheme may be obtained from: the Director, Human Resources,

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 98.7 96.3 100 100 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

2011 60,801 3,230 837 122 2,286 2012 68,157 7,950 845 133 2,295 2013 71,300 11,000 845 170  2,452

Quarterly Company Incorporations

Year 31 March 30 June 30 September 31 December Annual Total 2011 629 576 640 675 2,520 2012 646 558 526 643 2,373 2013 557 658 667 635 2,517

Live Companies on the Register

At 31 December 2013 (2012) there were 32,479 (32,503) live companies registered in Jersey.

31  30  30  31 Year

March June  September December

2011 32,998 33,116 33,194 32,508 2012 32,816 32,938 32,628 32,503 2013 32,790 33,037 33,272 32,479

Live Companies on the Register

35.0

32.5

30.0 31 March 30 June 30 September 31 December

2011 2012 2013

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 2013

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 2011 189.424 1,392 2,454

31 December 2012 192.761 1,388 2,322

31 December 2013 192.152 1,334 2,149

Analysis of CIFs and COBO Funds

Analysis by Class - 31 December 2013

Analysis of funds by classification

160 140 120 100 80 60 40

20 0

Unclassified Recognised Listed Expert COBO

CIFs  CIFs  Funds CIFs Funds

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

2011 2012 2013

Breakdown of Trust Company Businesses by size

Super Large (50+ employees) 9.0% Large (31-50 employees) 7.0% Medium (11-30 employees) 21.0% Small (0-10 employees) 20.0% Single class registration 27.0% Class O 5.0%

Managed trust companies 11.0%

Banking

Banks and Bank Deposits - £ billions

Bank Deposits

180

160

140

120

100

80

60

40

20

0

31 December 31 December 31 December 2011 2012 2013

Sterling Currency

Analysis of Bank Deposits - 31 December 2013 (£ billions; currency stated in sterling equivalent)

Geographical analysis of deposit-taking licence holders at 31 December 2013

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.