Number 1 Year 2007

On the 24th May 2007 the Government of Gibraltar gave effect to the Financial Services Commission Act 2007 (FSCA). This act repeals and replaces the Financial Services Commission Act of 1989. With this new piece of legislation the FSC has been modernised and restructured. This newsletter highlights the major changes and effects that will result from the FSCA coming into force.

The changes to the composition and structure of the FSC made by the FSCA are not only welcomed by the FSC but were also driven by the FSC itself, wishing to modernise the organisation.

In the main, stakeholders should not notice any difference in how they interface with the FSC or the day-to-day contact between front line supervisors and firms.

Appointments

One of the most significant changes arising from the FSCA is in respect of the appointment of Members of the Commission. Under the previous legislation four Members had to have UK experience and three came from within the local community. This has now been replaced by a requirement that at least two members of the Commission should have significant experience of regulation and supervision of financial services business in another jurisdiction. This not only permits for a more flexible appointment process but also ensures that the Commission is able to identify people with a much larger skill base than just a UK bias.

Appointments of Members of the Commission will now be made by the Minister with responsibility for financial services (presently the Chief Minister) from a shortlist of three suitable persons provided to him by existing Members.

The legislation provides for a further shortlist of an additional three persons if the original list does not produce a suitable candidate. If after this second shortlist a suitable candidate has still not been identified, the Minister may appoint such person as he thinks fit, although in these extreme circumstances the appointment would need to be ratified by Parliament.

Another change to the appointment process has been the change to the composition of the ’board’ of Commission Members itself.

Corporate Governance

The FSCA considerably updates the FSC in relation to its corporate governance and brings this much in line with expectations of any publicly listed corporation. This includes the following:

Chairman

The FSCA provides for the appointment of a separate Chairman and Chief Executive. Brian Hilton CB a current Commission member was appointed Chairman at the Commission meeting on 24th May.

Chief Executive Officer

The previous title of Commissioner has been replaced with the title of Chief Executive Officer (CEO). This is also a reflection of the revised corporate approach of the FSC. The functions and responsibilities of the CEO remain largely unchanged from those of Commissioner except to the extent that where previously all executive functions were conducted by the Commissioner as “the Authority”, these have reverted to the Commission with the CEO having formal delegated authority on a large number of items. See below for a more detailed explanation of how this works in practice.

Audit Committee

The FSCA also formally introduces what has already been established practice within the FSC - the establishment and operation of an audit committee. This additional oversight over the finances of the FSC provides a safeguard over financial control aspects on the day to day running of the Commission.

Functions of the FSC

The FSC’s statutory functions have also been expanded and updated giving the FSC formal licensing, supervisory and regulatory powers, over all firms authorised under the Supervisory Acts, for compliance against relevant legislation, rules or guidance notes as well as financial crime.

Overriding the statutory functions is an obligation placed upon the Commission to inform the Minister if it lacks the resources or powers to carry out these functions to internationally accepted standards or, in the case of European requirements, if these do not match those of the UK.

Regulatory Objectives

In carrying out the statutory functions the FSC is now obliged by the FSCA to act in a way, in so far as is practicable,

• which is compatible with the regulatory objectives, namely;

o the promotion of market confidence;
o the reduction of systemic risk;
o the promotion of public awareness;
o the protection of the reputation of Gibraltar
o the protection of consumers; and
o the reduction of financial crime.

• which has regard to generally accepted principles of good corporate governance, and

• which the Commission considers most appropriate for the purposes of meeting those objectives; and

• that shall have regard to;

o the need to use resources in the most efficient and effective way;
o the principle that the duty to manage a business falls upon the senior management of that business;
o the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction;
o the desirability of facilitating innovation in connection with financial services business;
o the international character of financial services and markets and the desirability of maintaining the competitive position of Gibraltar;
o the desirability of minimising, as far as reasonably practicable, the adverse effects of regulation on competition and consumer choice;
o the need to maintain the good international reputation of Gibraltar generally and as a jurisdiction for the conduct of financial services business;
o the policy of the Government, as advised to the Commission by the Minister, where it relates to matters of general application regarding the authorisation, licensing, recognition and registration of financial services business which, in the judgement of the Minister, affects or relates to the macro economic or other public interest of Gibraltar.

Delegated Authority

The FSCA vests all powers and authority in the FSC as a body corporate. Like any other statutory body or body corporate its functions are performed by individuals.

The composition of the ‘board’ of Commission Members, many with local interests, makes it difficult for Members to exercise executive responsibilities such as adjudicating on licensing or enforcement decisions. As such, the Commission Members sit as non-executive directors providing oversight to the general functioning of the FSC. However, in order for the FSC to continue to function, most of the powers of the FSC have been delegated formally to the Chief Executive. The Chief Executive will be accountable to the Commission Members in the exercise of those delegated powers.

The Commission Members therefore, play no direct role in the granting of licence applications, enforcement or other regulatory action that would otherwise entail disclosure of market sensitive or confidential information of an existing or applicant firm.

Powers to issue Rules and Guidance

The FSC is now also able to issue Rules and Guidance. This is a significant development as it enables the FSC to draw up practical guidance to comply with legislative measures and regulatory expectations to supplement legislative provisions.

As a safeguard against over, or inappropriate, regulation, these rules and guidance are required to undergo a public consultation process and have final veto of the Minister.

Fee raising powers

A significant change in the functioning of the Commission is that the fee raising powers have been moved away from the Government (via secondary legislation) directly to the Commission who can, by notice in the Gazette, publish the fees payable under any of the Supervisory Acts.

There are two controls built into the Act which would prevent the FSC from charging firms excessive amounts, or incurring expenditure that would require a high level of fees. The first of these controls is that Ministerial consent is required to vary the fees payable under the Acts and the second is the introduction of value-for-money audits, commissioned by the Government, over the expenditure budget.

The FSC continues to be required under statute to provide the Government with annual estimates of expenditure with three months notice from the start of each financial year.

Power to petition for winding up and deregistration of branches

In order to fulfil its regulatory objectives the FSC felt it necessary to have powers to petition the courts to wind up a company or seek the deregistration of a branch that was thought to be conducting financial services in Gibraltar without the necessary authorisation. This provides the FSC with a much needed weapon against persons conducting unauthorised financial services business in or from within Gibraltar.