The migration of fund functionaries to the Financial Services (Jersey) Law 1998
19 March 2009
Since 2003, the Jersey Financial Services Commission (the "Commission"), has been implementing an initiative to integrate a number of pre-existing regulatory laws into the Financial Services (Jersey) Law 1998 (the "FSJ Law"). By providing a "one-stop shop" for the legislation within which it operates, the Commission hopes that its administrative and communication roles will be simplified and that it will be easier for the finance industry to understand and comply with the legal framework.
As of 14 November 2007, the regulation of fund functionaries "migrated" from the Collective Investment Funds (Jersey) Law 1988 (the "CIF Law") to the FSJ Law pursuant to the Financial Services (Amendment of Law) (No.2) (Jersey) Regulations 2007 (the "Regulations").
This change affected all persons or entities holding permits under the CIF Law to act as a functionary of an unclassified collective investment fund. The Regulations extended the definition of "financial service business" in the FSJ Law with the result that all fund service providers (other than a company issuing units) are now required to be registered under the FSJ Law for a new class of financial service business created by the Regulations, namely, "fund services business".
Under the FSJ Law (as amended by the Regulations) a person carries on fund services business if by way of business the person is, in relation to an unclassified fund, any of the following:
- a manager, manager of a managed entity, administrator, registrar, investment manager or investment adviser;
- a distributor, subscription agent, redemption agent, premium receiving agent, policy proceeds paying agent, purchase agent or repurchase agent;
- a trustee, custodian or depositary; or
- a member (except a limited partner) of a partnership, including a partnership constituted under the law of a country or territory outside Jersey.
Unclassified funds are simply collective investment funds (as defined by Article 3 of the CIF Law) that are not recognised funds. All functionary permits issued in respect of recognised funds were unaffected by the changes.
In addition to extending the definition of financial service business, the Regulations provided for the automatic registration under the FSJ Law of all persons who held a relevant permit under the CIF Law at the time of the coming into force of the Regulations. This was referred to as a "grandfathering" process and has been followed by a verification exercise whereby the Commission has sought to verify that the information held by it in respect of each person's registration is accurate. As it completes this exercise, the Commission has been issuing licence certificates under the FSJ Law for the relevant class or classes of fund services business.
Managed entities and their MoMEs
The Regulations introduced a new class of registration, a 'manager of a managed entity' (or "MoME"). A MoME is a Jersey-based business providing corporate management or administration services to Jersey domiciled fund services businesses. Such businesses are referred to as "managed entities". The extent of what would constitute "management" is not defined in the FSJ Law but the Commission has indicated that the services ordinarily provided under such an arrangement would include the provision of directors, a compliance officer, a money laundering reporting/compliance officer, administrative support and the maintenance of statutory books and records.
Conditions of registration
The registration of each fund services business under the FSJ Law is subject to conditions imposed by the Commission. The Commission takes into account any existing permit conditions applicable to a particular functionary, and the type of funds or asset classes of the fund with which the person is or will be engaged. As such, the conditions attaching to registration under the FSJ Law vary according to the entity concerned.
The most common of the permit conditions have been incorporated into the Fund Services Business Codes of Practice issued by the Commission (the "FSB Codes") with the result that those conditions do not need to be repeated in the registration conditions. The vast majority of registrations do not, therefore, have any conditions attached.
The exception to this relates to those managed entities established for the purpose of acting for an expert fund, a related expert fund or a materially equivalent fund. In those cases the managed entity may follow only the fundamental principles of the FSB Codes (see below) but will be subject to certain standard conditions.
Main effects of the change
The principal effect of the change is that the regulation of funds has been separated from the regulation of fund service providers. This means that service providers registered under the FSJ Law no longer need to apply to the Commission for a permit for each unclassified fund for which they intend to act.
Another effect of the change is that all persons registered under the FSJ Law for fund services business will have to comply with the newly-published FSB Codes. Managed entities that have been established for the purpose of acting for an expert fund, related expert funds or materially equivalent funds are subject only to the core principles of the FSB Codes, unless they elect to follow them in full. Such election may be made in writing to the Commission.
Codes of practice
The FSB Codes have been issued by the Commission to establish sound principles for the conduct of fund services business and they came into effect on the same day as the automatic registration referred to above (i.e. 14 November 2007). They were revised on 4 July 2008.
The FSB Codes are arranged into seven "fundamental principles", as follows:
- A registered person must conduct its business with integrity.
- A registered person must have due regard for the interests of the fund.
- A registered person must organise and control its affairs effectively for the proper performance of its business activities and be able to demonstrate the existence of adequate risk management systems.
- A registered person must be transparent in its business arrangements with the fund.
- A registered person must maintain, and be able to demonstrate the existence of, both adequate financial resources and adequate insurance.
- A registered person must deal with the Commission and other authorities in the Bailiwick in an open and co-operative manner.
- A registered person must not make statements that are misleading, false or deceptive.
The FSB Codes are similar, in many respects, to the codes of practice issued by the Commission for trust company businesses and, as with those codes, the relevant registered persons are responsible for complying with them. Failure to do so represents grounds for the Commission to take enforcement action which could include, in serious cases, the revocation of a registered person's licence to conduct the relevant financial service business.
At the same time as the coming into force of the Regulations, two new orders came into force to provide an exemption for persons registered under the FSJ Law for fund services business from the requirement to register under the FSJ Law for investment business or trust company business. These orders were the Financial Services (Investment Business (Fund Services Business Exemption)) (Jersey) Order 2007 and the Financial Services (Trust Company Business (Exemption)) (Amendment No.2) (Jersey) Order 2007.
The Financial Services (Amendment of Law) (No. 3) (Jersey) Regulations 2008, which came into force on 6 May 2008, made an amendment to the FSJ Law such that Jersey-based functionaries of an unregulated fund also require registration under the FSJ Law for fund services businesses. In certain circumstances, however, a company that acts as a general partner or trustee to an unregulated fund is exempted from the requirement to register under the FSJ Law for investment business, trust company business or fund services business.
For more information on unregulated funds, please see our briefing titled "Jersey unregulated funds" which is available on our website.