Perception is in the Eye of the Beholder

step-offshore-perceptions

STEP have today issued their joint research report with First Names Group compiling the results of their surveys into the perceptions relating to doing business with offshore financial centres.

It is an interesting read, in particular, because, in some cases, it compares the offshore and onshore perception of the same issues.  For example, when comparing the perception of the impact of the Panama Papers, nearly twice as many onshore (85%) thought the leak would adversely effect offshore business than those actually offshore (44%).

The report combines the results of two surveys: ‘Offshore Perceptions’ (for offshore practitioners) and ‘Onshore Perceptions of Offshore’ (for onshore practitioners).  The surveys together received 1,041 responses: 538 offshore and 503 onshore.  Many onshore respondents were accountancy and legal firms whilst the trust companies were in the majority of those who participated offshore.

The surveys covered four broad sections but I am concentrating on the regulation and compliance part.  The first question on compliance was to do with its burden.  Offshore were asked to what extent compliance had become a burden whilst those onshore were asked to compare their perception of the burden and whether they thought the burden offshore was greater.

Both surveys showed that respondents thought compliance has become a burden.  Well, that is no surprise.  Perhaps the question should have been whether compliance had become an even bigger burden than last year.  Also as expected, the burden is perceived to be greater offshore at least to a moderate extent.

The next question was whether onshore understood their obligations whereas offshore were asked whether they could satisfy their compliance obligations.  99% said yes to both but “confidence was highest in the Crown Dependencies”.  Again, that’s no surprise.

Training was the topic of the third question and, again, there was a slight difference between the questions to those answering the Onshore survey to those answering the Offshore survey.  Onshore were asked whether they were increasing compliance training whereas offshore were asked about their investment in technology for such training.  The answer was yes to both.

The next, and probably the most important from an economic perspective, is whether the reporting obligations are deterring clients, in particular, in relation to the extra cost.

Unsurprisingly, everyone believes that “compliance is having a big impact on clients”. Some say clients are restructuring and many are relocating onshore.  The final question asked who were the clients most effected and, generally, it was the small, low value clients together with those who could not prove they were tax compliant.

On a non-compliance note, it was good to see that “the role of the ‘Trusted Advisor’ is widely seen as the main growth area in future (66% onshore and 77% offshore), with compliance (47/50) and tax advice (60/42) also seen as important.”  On the other hand, de-risking by large banks is having a big impact offshore. I think this highlights that there are still good opportunities for Guernsey.

I do recommend you take a look at the report –

http://www.step.org/sites/default/files/Comms/reports/Offshore_Perceptions_2016.pdf?

The Regulator’s Regulator?

tindalldawn-1-e1454075780950Next week, the States of Guernsey will be asked to note the annual report and accounts of the Guernsey Financial Services Commission for the year ended 31st December, 2015.  Under Rule 3(24) of the Rules of Procedure this means I will not be asked to agree or disagree with the contents of the Report as “to note” is construed as a neutral motion neither approving or disapproving.  So, having read the Report and wanting to make a few comments on its contents, I thought I’d put some thoughts down in my blog as the role of Regulator is such an important function for our industry.

What struck me initially was not their stated objectives; it was what was not  – the Commission does not seek to run a zero-failure regime. To quote the Director General, William Mason,

“Were we to set ourselves up to run a zero failure regime we would unduly constrain innovation, limit growth and seek to act in a risk averse fashion which would ultimately ensure little other than the impoverishment of the people of the Bailiwick as the financial services sector became a shadow of its former self.”

From an AML perspective, this means that, with the Commission using PRISM’s risk based approach to supervision, there will still be attempts by criminals to misuse the financial system.  Naturally, therefore, it is for businesses to follow the requirements of the legislation and the Handbooks to ensure those attempts fail.

It is good to hear that innovation is very much being encouraged by the GFSC and their open-door policy is often complimented especially when talking FinTech.  However, there is still the grumble in the AML world that there is insufficient consistency in the application of CDD requirements.  So, whilst there is a focus on providing data management to collate a customer’s identification information for KYC and CRS purposes, there is still a lack of clarity of how to get the documents which verify the customer’s identity such that they satisfy not only the different country regimes but the requirements of different institutions within each country.

Some companies seek to comply with the standard which satisfies the most respected country regimes which is a good starting point.  However, I found that, when submitting the documents, the approaches of institutions varied so much that the easiest way was to deal with each institution and get agreement on what they will accept.  Quite often they asked for more than their own country’s requirements resulting in me firmly pointing out that they were not complying with their own country’s legislation, that their policies were not based on that legislation and that they should vary their requirements to accept a consistent standard in line with FATF requirements.  I am pleased to say that this proved successful on all but one occasion and that failure was with a London branch of a Swiss bank with whom I had already had success.  The branch was not for seeing the light!

You might well say – and I would agree with you – that this was a time consuming method of getting a customer’s verification documents accepted.  However, the main theme with the client facing teams I dealt with was they wanted to ask their customers to provide only one set of documents and not to have to keep going back to the client for more information just because each different institution wanted something else.  So whilst you can collate in accordance with the main countries’ requirements, there will always be differences in interpretation until we have common standards for AML.

To compliment my approach, I always thought it best to advise our clients on the expense of certain relationships before willingly embarking on a painful account opening process.  Instead, client relationship managers should recommend going with those institutions which take a pragmatic approach with whom the firm has had a good relationship and saving their client’s money (and your time!).  I also believe a comprehensive checklist covering all the information and verification required which is fully complied with, checked for accuracy and, most importantly, not signed-off until it is complete in all respects should do the trick.

Some also say that the GFSC does not adhere to such common standards quoting other countries’ different rules as being more lenient.  My response is always that, in my experience, other countries apply the FATF common standards (almost) but do not enforce those standards to the same extent the GFSC does.  So results this misunderstanding. People believe the GFSC requires higher standards than others, higher than required by FATF but actually I believe it just has the right standards (well almost) but the difference is that they are fully enforced.  As such enforcement means we received a superb MoneyVal evaluation which brings in business, the argument that we should be more lax with those requirements is, in my mind, counter-productive.

The review of the Handbooks should iron out some of those annoying differences and should bring clarity to ambiguities that exist but leniency in respect of the requirements I do not agree with as, after all, getting it right is not that difficult if you are conversant with all the legislation and guidance and take advice as appropriate.

 

Link to the annual report and accounts of the Guernsey Financial Services Commission for the year ended 31st December, 2015 is   https://www.gov.gg/CHttpHandler.ashx?id=102816&p=0