Financial Supervision Commission: Regulating Investment Business
Those persons carrying on investment business in or from the Isle of Man are required to hold a Class 2 licence under the Financial Services Act 2008.
The types of organisation licenced range from discretionary portfolio managers (including managers of captive insurance funds )to brokers selling life and pension products. Businesses that provide services to Collective Investment Schemes are required to hold a Class 3 licence. Banks that conduct investment business are required to hold a Class 2 licence.
Such investment businesses provide their services not only to residents of the Isle of Man, but also to the expatriate and international community. Licenceholders are required to follow all anti-money laundering regulations.
Details of the regulatory framework for investment businesses ,including the Commission’s licensing criteria and ongoing regulatory requirements may be obtained by contacting the Commission or by going to
www.fsc.gov.im
The definition of what activities constitute investment business is contained in the Regulated Activities Order 2008.These Include:
1) Dealing in investments by a professional dealer as principal. Private investment companies do not need a licence
2) Dealing in investments by any person as agent for another person
3) Arranging deals in investments. This includes any activity which directly brings about an investment transaction
4) Managing investments. This includes managing under a power of attorney and safeguarding bearer instruments of title to investments.
5) Advising the trustee or manager of a retirement benefits scheme
6) Advising any person in his capacity as an investor or potential investor on the suitability of buying ,selling or subscribing for investments.
The term ‘investment’ includes traditional investment instruments as well as derivatives. The definition of investment business is wide but some activities are exempt and these may be found in the Investment Business Handbook and the Financial Services (Exemptions ) Regulations 2008. For example, activity in employee share schemes or business carried on in a trustee capacity or as a personal representative.
A licence can be granted only to those who have satisfied the Commission that they are ‘fit and proper’ to conduct investment business. Stringent criteria are applied when considering applications and licences are issued specifying the permitted scope of activity. Thereafter, the licenceholder is subject to the Financial Services Rule Book 2008. The General Licensing Policy considers the integrity, competence, financial standing, structure and organisation of the licence applicant, together with the integrity, competence and financial standing of any controller or director of the licence applicant.
The Financial Services Rule Book 2008 covers the following:
- Financial Resources and Reporting: these requirements are related to the scope of the investment business conducted by the licenceholder, for example, a discretionary portfolio manager must have a minimum share capital requirement of £25,000 and minimum net tangible assets requirement of £175,000. Licenceholders are required to submit regular financial statements to the Commission and are required to maintain professional indemnity cover.
- Clients' Money
The Rule Book requires clients' money to be held in segregated and properly designated accounts with an approved bank on trust for investors. It also aims to ensure that clients' monies are properly recorded, reconciled and controlled.
- Clients' Investments
The principal objective of the Rule Book is to ensure that adequate arrangements are maintained to ensure that clients' title documents are kept safely, are properly recorded, identified, segregated and controlled. A licence holder can place clients' title documents only with eligible custodians and such title documents should be reconciled at least half yearly.
- Conduct of Business
The Rule Book describes the general principles and standards of conduct, which the Commission expects licence holders to adopt in their dealings with clients and others. A distinction is drawn between the private investor (ie. the man in the street) and the experienced or professional investor. All clients will be deemed to be private investors unless they have requested otherwise in writing.
- Audit Requirements
Auditors of Investment Businesses (other than those businesses which do not control clients' money or assets) are restricted to those firms of appropriate experience, which are covered by professional indemnity insurance of not less than £10 million. The Rule Book requires the auditor to make specific reports to the Commission in relation to the Regulatory Codes. The auditor's report plays an important part in the effective enforcement of the Commission's regulatory requirements.
- General Requirements
The Rule Book lays down several fundamental requirements, perhaps the most important of which is that licence holders who handle clients' money must be conducted on a day-to-day basis by at least two individuals (known as the 'dual control'). Its also lays down certain notification requirements.
- Advertising
Whilst the Commission does not, as a general rule, require licence holders to submit draft advertisements for approval prior to publication, the Rule Book lays down general principles relating to advertisements to which licence holders must adhere.
Customer due diligence procedures must be followed, as must adherence to anti-money laundering regulations. A business must have a Compliance Officer and a Money Laundering Reporting Officer (and appointed deputy). Licenceholders must make an annual compliance return to the Commission within 4 months of the annual reporting date.