Financial Supervision Commission: History
The remit given to the Financial Supervision Commission when it was established by the Isle of Man Government in 1983 was to 'take such steps as appear to it to be necessary or expedient for the effective supervision of the private financial and commercial sector in the Island' but with the exception of the insurance industry, which is supervised by the Insurance and Pensions Authority.
Remit
The FSC has interpreted its remit as follows:
(a) The purpose of having a banking and financial centre is to provide measurable economic benefits to the Island;
(b) The Isle of Man has nothing to gain from permitting activities or institutions which provide shelter for or facilitate the activities of criminals; and
(c) Institutions established on the Isle of Man and their customers will benefit from standards of licensing and supervision which reflect best practice and are acceptable to supervisory authorities in other jurisdictions.
Generally speaking, therefore, institutions and businesses wishing to operate from the Isle of Man must establish a real presence with offices and staff and conduct real business.
However, the FSC has modified its requirement for a real presence so as to encourage the development of managed banks and specialist fund administrators in the island. Real business is never easy to define precisely, but it excludes artificial or contrived financial operations. The FSC also needs to be satisfied that the proposed business will be profitable and will not damage the reputation of the Isle of Man.
International Profile
As a reputable international financial centre with full access to global markets, it is essential that the Island retains the confidence of its counter parties through the adoption and implementation of high regulatory standards. The Commission therefore attaches great importance to making sure that its policies and procedures conform to internationally accepted best practice.
The Island is a member of the Offshore Group of Banking Supervisors and of the International Organisation of Securities Commissions (IOSCO). These two organisations are the main bodies responsible for the setting of international standards in the banking and securities sectors respectively.
A number of other, official international organisations have devoted much time to the assessment of offshore centres generally. This has been mainly to assess their practices against global standards to ensure that they do not present a weak link in the financial system generally. The Island welcomes this scrutiny, and indeed has benefited from the subsequent findings.
Following the independent report prepared in 1998 by Mr Andrew Edwards on the three Crown Dependencies, which commented favourably on regulatory practices in the Island, the Financial Action Task Force (FATF) completed its own review of the Island's defences against money-laundering. Its positive report concluded that the Island is a co-operating jurisdiction with measures in place, which are close to complete adherence with FATF recommendations. The Island has in place Memoranda of Understanding with a number of jurisdictions to underpin this, and wider, issues of co-operation.
Meanwhile, the Financial Stability Forum has also considered the effect, which offshore centres generally can have on global financial stability. It canvassed opinion among major countries on the strength of regulatory practice in the different centres, and it was very pleasing to note that the Isle of Man was placed in the top group of centres reviewed. This type of independent confirmation of how the Island's regulatory system is perceived to be working in practice, is an important test of effectiveness and compliance.
The Island has also worked closely with the United Nations Office for Drug Control and Crime Prevention, particularly in support of its offshore initiative.
More recently, the Island has been conducting discussions with the Organisation for Economic Cooperation and Development (OECD) about its tax practices, in particular to ensure that the Island is not regarded as a tax haven with harmful tax practices. Those discussions have now been completed and it is very pleasing to note that the Island will not appear on the OECD's blacklist of tax havens. A far-reaching, 5 year fiscal strategy for the Island was announced in the summer of 2000 and played a major part in addressing many of the concerns raised by the OECD and in achieving such a positive outcome.
The Island has received confirmation that it has been moved to a list of countries approved by the US Internal Revenue Service under its new Withholding Tax legislation. Broadly, the legislation requires local financial institutions to apply for Qualified Intermediary Status if they wish to invest in US securities and claim exemption from US Withholding Tax for their clients.
Applications
The Financial Supervision Commission is thus looking for applications from established institutions of quality, which will normally already be licensed in another jurisdiction (e.g. the UK), which exercises proper licensing and supervision. In the case of banks, for example, that jurisdiction must also subscribe to the principles of the international Concordat on banking supervision. The FSC will seek the consent of the licensing and supervisory authority of the jurisdiction from which the institution comes and, where appropriate, would expect to co-operate with that jurisdiction in monitoring the soundness and financial well-being of the institution concerned.
Supervision
While the soundness and reputation of any financial institution rests with the management, the need for supervision is now widely accepted as being in the interest of depositors and investors. The FSC thus has a system of off-site supervision based on quarterly or half-yearly financial returns. These are reinforced by annual audited accounts and can be supplemented at any time by special requests for information and the use of inspection powers. Normally, however, officials of the FSC meet regularly with the management to discuss the financial results and seek further information about various aspects of business.
On-site supervision is also undertaken in the form of focus visits to licence holders. A focus visit consists of the Commission's officers visiting a licence holder's premises and undertaking checks to identify whether or not the terms under, which the licence has been issued are being met by the licence holder.
Each focus visit normally concentrates on one area. Examples of such areas are 'know your customer' procedures, asset quality, management structure and procedures for dealing with customer complaints. These discussions are held against a background of prudential standards set by the FSC and known to the management. While for obvious reasons, these differ in detail between banks and non-banks, the general principles are sufficiently similar to be described.
Capital and Commitment
In common with many other supervisory authorities the FSC places great importance on capital as the cornerstone of any financial business and a sound basis for the confidence of its customers. The FSC therefore requires a minimum capitalisation which varies according to the nature of the business and also that the capital and other financial resources available to the business should always be commensurate with the scale of the business and the risks involved, and adequately liquid to provide a buffer against the unexpected.
The FSC also regards capital employed as an important indicator of the commitment of the owners to the business. Moreover, capital assists in providing the infrastructure of the business as well as a source of income to meet the running costs.
The FSC pays great attention to the ownership and directors of licensed institutions. As has been indicated already, the FSC strongly prefers institutional ownership of licence holders. All licence holders must be under the direction of fit and proper persons and the Commission will attempt to satisfy itself as to their integrity, solvency and competence. The FSC's consent is required before directors and senior managers are appointed, particularly if the managers concerned are proposed in order to satisfy the 'four eyes criterion.'
Fit and Proper
As already stated, the decisions and actions of management are the key to the soundness and reputation of any business and it is failures in this area and in direction from the Board that lead to insolvency with possible consequent losses to depositors and investors. It is widely recognised that acceptance from the public of money for investment or management should not be under the control of a single individual. At least two people of competence, experience and integrity should thus be involved in the day-to-day management of all licensed financial institutions.
Dual Control
The FSC also requires that internal procedures are set up which embody the concepts of dual control and, where appropriate, separation of function and segregation of customers funds from those of the business. Audited accounts must be prepared by each licence holder in accordance with approved accounting standards and providing such information as the Commission may determine. These accounts must be audited by qualified accountants who have effected Professional Indemnity Insurance of an amount determined by the FSC. (For banks, the amount is currently £20 million, whilst for investment businesses and managers of authorised collective investment schemes it is currently £10 million).
Prevention Of Money Laundering
On 1 July 1998 The Criminal Justice (Money Laundering Offences) Act 1998 came into operation. This was followed by the Anti-Money Laundering Code, which came into operation on the 1 December 1998 and set out key provisions to be observed in 'Knowing Your Customer' and reporting suspicious transactions. The Code was subsequently amended by further Codes in 1999, 2001, 2005, 2007 and 2008. The Codes were replaced by the Criminal Justice (Money Laundering) Code 2007. The Anti-Money Laundering (Money Service Businesses) Regulations 2002 and the Anti-Money Laundering (Online Gambling) Code 2002 strengthen the existing legislation.
The Isle of Man was the first jurisdiction to introduce the 'Know Your Customer' principle, in 1985, but more detailed provisions are now in place to determine how customers and clients are adequately identified and their identification verified. Every licence holder must have a Money Laundering Reporting Officer (and appointed deputy), keep adequate records and have effective staff training in this area. The definition of business caught by the new standards goes much wider than financial services and includes Estate Agents, Bookmakers, Casinos and Local Authorities amongst others.
In order to assist licence holders to fulfil their training obligations under the Code the Commission arranges, from time to time, Anti-Money Laundering seminars, which include an extensive programme of workshop-based training.