During the course of 2016, regulated businesses on the Isle of Man are likely to face many challenges from a range of new regulatory measures and legislation. In this article, I review some of the key issues facing regulated businesses and provide some suggestions to ensure that such businesses are best prepared for the changes expected in the coming months.
National Risk Assessment and MONEYVAL Visit 2016
The Cabinet Office has now concluded its National Risk Assessment (“NRA”) in respect of the money laundering and terrorist financing risks faced by the Isle of Man. The results are due to be made publically available early this year and presentations are ongoing to the various industry bodies to provide details of the process that has been undertaken and highlight some of the key findings.
The NRA and the actions taken as a result of it will be subject to close scrutiny when the MONEYVAL assessment of the Isle of Man takes place in April/May 2016. The assessment will focus on the effectiveness of AML/CFT procedures and it is expected that the assessors will conduct meetings with financial services businesses of their choice as to how the Island’s AML/CFT regime is implemented in practice.
Civil penalties, enforcement and prohibitions
With the enhanced civil penalties regime having come into force in August 2015, the Financial Services Authority (“FSA”) now has additional powers to deal with serious regulatory failings. The FSA is increasingly taking a more robust approach to dealing with issues identified during supervisory visits including:-
– issuing a “do not accept new business” direction to a licenceholder (effectively prohibiting the licenceholder from engaging new clients until the matters arising from a supervisory visit report were resolved);
– issuing the first prohibition pursuant to section 10A of the Financial Services Act 2008. This is a severe sanction which prohibits an individual from working in the regulated sector;
– more frequent consideration of the use of powers to appoint managers; and
– an expectation that licenceholders will take any necessary remedial action at the draft visit report stage, rather than waiting for the final visit report to be published.
The FSA is also prepared to exercise an interventionist approach if necessary in order to protect the reputation of the Isle of Man (for example the successful court application by the FSC (as it then was) in summer 2015 for the appointment of managers to UK Secured Finance Fund plc, an Isle of Man collective investment scheme – link here).
Merger of the FSC and the Insurance & Pensions Authority (“IPA”) to create the FSA on 1 November 2015
The merger between the FSC and the IPA took place on 1 November 2015, together with the appointment of a new board of commissioners and a new chief executive for the FSA. It remains to be seen how the unification of the former FSC and the IPA and their respective cultures will impact upon the financial services industry, but in the short term at least, DQ expects to see a continuation of the robust approach previously taken by the FSC, particularly with the MONEYVAL visit on the horizon later this year. Longer-term, we expect to see the FSA harnessing the experience of its FSC and IPA staff to create a regulatory body which maintains a tough stance on areas of concern but which engages with the industry in a pro-active manner to implement “best practice” guidance and recommendations. It is encouraging to see the FSA recruiting further senior staff (including several from regulators in other jurisdictions) to ensure that our new regulator has adequate resource to deal with not just enforcement matters but also new business.
Initial industry feedback on the appointment of the new CEO of the FSA, Karen Badgerow, has been universally positive and we in DQ wish her well in her new role.
We also welcome the newly appointed members of the FSA. It is a really positive development to have so many members with extensive private sector experience including some who continue to work in the private sector. It is crucial to have a balanced and pragmatic FSA as the Island navigates its way through the global regulatory and economic minefield that lies ahead.
The FSC issued an initial consultation in April 2015 seeking the industry’s views on a possible new regulated activity of facilitating loan and investment crowdfunding. A large number of respondents submitted comments on the initial consultation, which resulted in the circulation of a second consultation document at the end of September 2015. The FSC set out detailed proposals regarding the definition of the regulated activity of ‘crowdfunding’ and how the Financial Services Rulebook would apply to it.
On 21 December 2015, the FSA published a summary of the comments it received in response to the second consultation document, together with details of the legislative changes it proposes to make in order to introduce crowdfunding as a regulated activity and draft crowdfunding licence conditions.
In broad terms, the FSA proposes that ‘crowdfunding’ be introduced as a new class 6 regulated activity pursuant to the Regulated Activities Order. The activity is split into two components – ‘loan-based’ crowdfunding and ‘investment-based’ crowdfunding. Loan-based crowdfunding will encompass: “the operation of an electronic platform in relation to lending in which the operator of the electronic platform facilitates persons to become lenders and borrowers” and “the administration of crowdfunded lending, including the transfer of repayment funds from borrower to lender and debt collection in relation thereto”. By contrast, investment-based crowdfunding is proposed to be defined as: “the operation of an electronic platform in relation to arranging deals in investments in which the operator of the electronic platform facilitates persons to become issuers of investments or direct investors”.
There is therefore a clear distinction between providing services which facilitate loans between a lender and borrower and services which facilitate investment (whether by equity, debt securities or other means). The regulated activity is only intended to catch the provision of online platforms, so any entities which offer investment advice or discretionary asset management would need to seek separate class 2 approval. The FSA proposes a minimum share capital of £25,000 for class 6 licenceholders, coupled with a minimum net tangible asset requirement of £50,000.
The deadline for any final responses to the second consultation document is 31 January 2016 (the link to which is here).
Depositors’ Compensation Scheme
The Department of Economic Development issued a consultation asking for feedback on its proposal to give preferred creditor status to domestic eligible deposits under the Isle of Man Depositors’ Compensation Scheme (“DCS”). The proposed amendment would mean that eligible depositors under the DCS would move up the hierarchy of payment from their present status as unsecured creditors and would rank behind only liquidation expenses and secured creditors during the winding-up of a local bank. Presently, if a bank failure occurs, the Isle of Man Government will reimburse eligible depositors under the DCS but must then recover this money either in the liquidation of the failed bank or from the levies charged in the banking industry generally.
The amendments are designed to accelerate the repayment process, particularly in light of recent changes to EU law (now implemented in the UK) which have already had this effect. The consultation has closed and we await a summary of responses.
Possible amendments to the Financial Services Rulebook in 2016
Licenceholders will be aware that the FSA intends to consult on possible changes to the Financial Services Rulebook during the early part of 2016. To this end, the FSC circulated a ‘tabular’ format of the current Rulebook during the summer of 2015 which is designed to make it easier for licenceholders to identify which rules apply to them depending upon the classes of regulated activity they conduct. The FSA intends to introduce the ‘tabular’ format of the Rulebook simultaneously with the publication of the consultation on the new edition of the Rulebook early this year.
Although the FSA has not yet set a date for the 2016 consultation, we understand that it should be released by May 2016. It may be a useful exercise for licenceholders to keep an eye on regulatory updates in the forthcoming weeks so that they have plenty of time to review and comment upon the proposed Rulebook amendments once the consultation becomes publically available.
Common Reporting Standard (“CRS”)
As of 1 January 2016, Isle of Man regulated businesses which are subject to the CRS will need to apply the new account opening procedures referred to in the Income Tax (Common Reporting Standard) Regulations 2015, which were given Tynwald approval in October 2015. The Assessor of Income Tax published an industry update on 23 December 2015 (the link to which is here) which stated that the Assessor will shortly issue a guidance note on the implementation of the CRS in the Isle of Man.
Now that most regulated businesses are FATCA experts, it is time to turn their attention to the CRS! Unsurprisingly, the United States continues to play by its own rules outside the CRS regime and so, for the time being, businesses need to be aware of the distinctions between the FATCA and CRS regimes.
Well there you have it, that’s our regulatory update for Q1 2016. In this fast changing area of law, it is important to remain on top of the latest rules and best practices, so keep an eye on our website www.dq.im for regular updates.