Guernsey: A Sophisticated And Innovative Financial Centre

IFC: What have been the biggest achievements of the Guernsey Financial Services Commission since its formation 35 years ago?

WM: There have been a number of milestones to which it is not possible to do justice here.  It was established back in the late 1980s as only the second fully integrated regulator in the world – covering conduct, prudential and financial crime matters.  Its establishment helped improve Guernsey’s reputation as a place in which good business was done.  Another milestone occurred in the late 1990s when the law was changed to provide the Commission with an independent chairman and to remove promotional duties from it.  This allowed it to be seen to apply the law in a way which could not be construed as being inappropriately influenced.  The reliance which can be placed on it impartially administering the law, free from inappropriate influence in a small jurisdiction in which close to 50 per cent of GDP is derived from financial services and where industry practitioners sometimes become senior politicians, is really important.  Our independent structure and activities help maintain confidence in the jurisdiction as all major financial centres are compelled to maintain even higher standards in order to retain access to global financial markets.

Innovation has been another key feature of the Commission.  It famously helped establish Protected Cell Companies in the Bailiwick.  Latterly, this tradition has continued with the successful Private Investment Fund regime for professional investors in 2016, the world leading Guernsey Green Fund regime in 2018, the world’s first environmentally sensitive capital rules for insurance companies in 2020, the family office friendly variations of the Private Investment Fund launched in 2021, with further plans for a natural capital funds regime in 2022 recently published for consultation.

IFC: The jurisdiction is well-known for its thriving fund industry, with the net asset value of Guernsey funds surpassing £300 billion for the first time at the end of 2021. How is the FSC promoting regulation and transparency in this sector?

WM: In 2021 we enhanced our Code of Corporate Governance to ask firms and funds to consider their environmental preparedness and disclosure in the light of the COP 26 commitments.  We are currently consulting on modifications to our rules to ensure that there can be no inadvertent greenwashing within the Bailiwick.  Environmental consciousness is growing rapidly across the financial services sector and we are trying to promote green sense - encouraging funds to think about what a net zero future means for them and their investors rather than covering them with expensive bureaucracy.

IFC: Russia’s invasion of the Ukraine in February 2022 has led to geopolitical tension within Europe, with Western countries increasingly introducing widespread sanctions on Russia. How has the FSC responded to the ongoing conflict?

WM: We have reached out to our counterparts at the National Bank of the Ukraine who are working incredibly hard to keep the Ukrainian economy functioning in the most difficult circumstances imaginable.  We have also worked with firms which have had Russian exposure to make sure that the assets they hold are managed appropriately to both protect investors and enforce British policy.  We have overseen their execution of the sanctions imposed by the Bailiwick's government, taking action to inhibit inappropriate involvement by those based in Russia in the operation of Guernsey entities.  We have worked with colleagues in other agencies to ensure that money in Guernsey cannot help finance Russia's war against Ukraine.   

IFC: A recent report by Moneyval stated that Governments need to improve efforts in combatting money laundering and terrorist financing by adopting stricter regulation and supervision of assets. What recent strategies has the Commission employed to address AML/CFT? 

WM: Guernsey has had a strict AML/CFT regime for over twenty years since we started fully regulating the fiduciary sector.  We undertook a sanctions screening thematic in 2021 to check that firms across all sectors had the ability to quickly identify and shut down transactions by sanctioned clients.  This thematic attracted positive comment at the May 2022 Moneyval plenary as well as giving us some confidence in the abilities of our regulated firms to implement sanctions against Russia quickly in early 2022.

IFC: As a Crown Dependency, what has been the impact of UK’s exit from the EU on trade and financial services in Guernsey thus far?  

WM: The vast preponderance of the business which comes to Guernsey does not come from the EU and thus was not directly affected by Brexit.  Further, Guernsey was never in the EU and was never part of the EU’s Single Market. Thus we have been able to provide stability at a time when other jurisdictions have been having to adapt to Brexit changes.  We strive to maintain constructive relationships with both our EU and UK counterparts.

IFC: Guernsey launched its first cryptocurrency fund and the world’s first Tier 1 Bitcoin exchange-traded fund (ETF) in October 2021. With this in mind, what is your regulatory approach for creating a successful digital jurisdiction? 

WM: The States of Guernsey is currently taking forward legislation to regulate Virtual Asset Service Providers (VASPs).  Under that draft legislation we would become the regulator of VASPs.  We intend to consult on our VASP regime later in the year as the Government provides us with the appropriate legal authority to regulate.

IFC: The Guernsey Green Fund was launched in 2018 to boost investor access to the green investment space while mitigating environmental risks. How successful has the fund been since its inception; and what new strategies are being employed to enhance Guernsey’s position as a sustainable finance hub?  

WM: The fund regime has been successful.  We continue to work on a number of sustainability initiatives as discussed above.  We made our first sustainability disclosures in our annual report this year.  In addition we planted 53,000 trees earlier this year which, as they grow, should offset many of our own carbon emissions.  Our diverse planting programme followed best ecological practice and should provide a rich ecosystem, encouraging a range of wildlife.

IFC: What challenges and opportunities lie ahead for Guernsey’s financial services industry; and where can we expect the Commission to focus its efforts for the remainder of 2022 and into 2023?

WM: In a full employment society, sensible automation of processes whilst continuing to invest in high quality staff who are able to meet the needs of sophisticated and geographically mobile clients are likely to be key concerns for Guernsey’s financial services industry.   We set out our key plans for 2021-24 in our annual report published in May[i].  We continue to invest in AI technologies to improve our authorisation and supervisory processes as well as developing new policy in conjunction with counterparts in industry and government.  Then there is the day job of protecting consumers, supervising for financial stability and combatting financial crime.

Looking forward a bit, wearing a macro-economic hat, global central banks are going to need to continue to raise interest rates to combat inflation.  This is likely to provoke an economic downturn so our firms need to be prudentially aware as the "free money" the central banks dished out over the last two years disappears as surely as Cinderella's coach at midnight.

Footnotes:

[i] https://www.gfsc.gg/news/2021-annual-report

William Mason
William Mason has been the Director General of the Guernsey Financial Services Commission since 2013. He is also a member of the Executive Committee of the International Association of Insurance Supervisors where he has previously chaired both the Audit and Risk Committee and the Standards Assessment Working Group. He has a strong interest in Supervisory Technology and Green Finance. Under his leadership the Guernsey Financial Services Commission has developed: The Guernsey Green Fund – possibly the world’s first regulated green fund structure; brought into force environmentally sensitive green capital rules for life insurance individuals – possibly another world first in insurance regulation; and made moves, including planting 53,000 trees this year in an ecologically advantageous fashion, towards becoming a net zero regulator. Prior to becoming a financial regulator, William worked at the UK Cabinet Office where he helped write “Regulation - Less is More, a report to the Prime Minister.” His other publications include: “Freedom for Public Services; The Costs of Regulation and PRISM Explained – Implementing Risk Based Supervision.” Earlier in his career William gained private sector experience working for an international energy firm on three continents and a US strategy house, Monitor Group.