The Guernsey Financial Services Commission is tightening up supervision of trustees. Michael Betley outlines the proposals. Michael Betley is a partner at Wedlake Bell McKean in Guernsey.
Trustee and corporate service providers are the only professionals in Guernsey who are not directly regulated by the Guernsey Financial Services Commission (GFSC). However, that situation is set to change.
The GFSC is the island's regulatory body. It was set up in 1988 to provide “effective supervision of finance business in the bailiwick”. It believes that the introduction of regulation in the form of legislation backed up by rules and codes of conduct will give greater comfort to existing and potential users of such services in Guernsey.
The GFSC feels that it is in the long-term interests of the island to introduce measures to allow the body to have supervisory and regulatory powers so that it can properly fulfil its mandate. It should also provide greater equality across each of the financial service sectors.
To this extent the proposed fiduciary business legislation will be pioneering. Although other jurisdictions have imposed a form of licensing or regulation on fiduciaries, there is no legislation in place which provides statutory powers to government-appointed regulators. With this in mind, it is hoped that the new law will have a broad approach and that the GFSC will be pragmatic in applying it so that a workable piece of legislation can evolve.
In fact, most trustees are already regulated by professional bodies or provide other services which are regulated. As such, the standard of care which is applied to the fiduciary services industry in Guernsey is already very high.
The Trust (Guernsey) Law 1989 gives the Royal Court of Guernsey jurisdiction over all Guernsey trust matters and over foreign trusts where the trustee is resident in Guernsey, where there are trust assets in the island, or where the trust deed allows for it. It imposes high standards on trustees who must “observe the utmost good faith and act en bon pere de famille”. Trustees who commit a breach of trust can be held liable with aggrieved parties having recourse through the Royal Court of Guernsey.
The proposed fiduciary business law will cover areas such as the provision of trust and executorship services, either by an individual or a corporate trustee, and businesses carrying out company incorporation and administration. It was due to the large increase in the number of trust companies being incorporated in the early 1980s that an embargo was put on the creation of any new trust companies incorporated within the island. This therefore allows the GFSC to vet all new corporate fiduciary service providers.
The proposals put forward in the consultation document state: “The primary reasons for proposing new legislation for the supervision of fiduciaries are:
to protect the reputation of the bailiwick;
to deter unscrupulous or criminal abuse of the islands;
to deter malpractice and fraud against clients; and
to encourage high standards of business conduct.”
Most practitioners in the fiduciary business welcome the proposed law, but there are areas which have not been sufficiently clarified to enable a workable system to be established. It will embody rules with the force of law and guidance notes in the form of codes of practice.
One of the main features of the law will be to set out minimum criteria to be satisfied by fiduciaries in order for them to be allowed to carry on business. The consultation document suggests that these minimum criteria could include:
that the business is, and continues to be, conducted with prudence, professional skill and integrity appropriate to the nature and scale of its activities and in a manner which will not bring Guernsey into disrepute as an international finance centre;
that Guernsey derives (or will derive) economic benefit from the institution's operation;
that all directors, controllers or managers are fit and proper to hold their positions;
that at least two individuals effectively direct (or will direct) all aspects of the business (“the “Four Eyes' principle”); and
that the business is conducted in a prudent manner, including financial resources and insurance cover commensurate with the nature and scale of the institution's operations, strict separation of client funds and assets from those of the fiduciary, adequate accounting and other records, and satisfactory internal controls.
The GFSC has stated that it prefers a system of registration as opposed to formal licensing. Although the GFSC feels that a licensing system would endorse the trustees operation, there seems to be little difference in practice between a system of notification and one of licensing. It is thought that the GFSC wants supervisory powers so it can intervene where appropriate but that it does not want to have to deal with the grievances of beneficiaries. The aim seems to be to find a solution which is workable and which can evolve so that in due course the form of registration may ultimately become one of licensing. The introduction of the law is a priority for the GFSC. But it is unlikely to come into force this year because the consultative process has unearthed practical problems which have not yet been fully addressed.