Thursday, January 20, 2005

Gibraltar Financial Services Review yields positive results

Pratt report

by Peter Schirmer

Gibraltar’s Financial Services Commission (FSC) and its Commissioner Marcus Killick have been handed a string of bouquets by a review panel appointed by the Governor Sir Francis Richards.

The review, the results of which were released in London and Gibraltar early this morning - more than a month later than originally anticipated – praises the FSC’s “clear commitment to meeting international standards” and lauds the “good standard” of financial services regulation on the Rock which the FSC has achieved.

However it also makes a series of recommendations intended to bring the FSC into line with British practice and which, if accepted by Government, could radically alter the Commission’s status. The changes would also necessitate a substantial increase in the numbers of Commission staff, the report’s author former UK Treasury mandarin Richard Pratt admitted in an interview yesterday.

“There’s no point in beating about the bush, if the FSC is to keep abreast of the continuous changes in terms of international, EU and British requirements relating to financial services, more staff will be needed,”
Pratt told me.

The review of the FSC’s supervisory activities in areas covered by EU Directives – particularly in the spheres of banking, insurance and investment services – was set in motion by the Governor in February last year. And yesterday he welcomed the conclusions of the report that the FSC had “achieved a good standard of financial services regulation in Gibraltar”, and that it had “a clear commitment to meeting international standards”.

A press release issued by the Governor’s Office also stresses that the FSC has worked hard to ensure that supervision in Gibraltar “complies with European Union obligations and, where these apply, establishes and implements standards that match those required by legislation and practice in the United Kingdom”.

The report includes recommendations which build on the good practice already in place, and which will help keep the FSC at the top level of sound financial supervision. The Governor has welcomed the recognition given in the report to efforts already made by the FSC to achieve or exceed the international standards of regulation to which it is committed,” the release adds.

But some of the report’s recommendations are likely to provoke a chilly reaction from the Caruana Government. It will feel, with some justification, that the panel headed by Pratt – who followed his Treasury career with a spell as Jersey’s financial services regulator - has gone considerably beyond the scope of its remit.

There is no doubt that the FSC is determined to tackle the risks it faces and is seeking to implement a high quality regulatory regime that is appropriate for the Gibraltar market,” the introductory overview of the report says.

Part of the team’s remit was to put forward recommendations for change and that each of these should be given a level of priority – ‘high’, ‘medium’ or ‘low’. The report also stresses that where its recommendations suggest change, “this should be seen in the context of a regulatory regime developed to a good standard and staffed by competent regulators with a manifest determination to improve performance further”.

Welcoming the report, a statement from the FSC points to the fact that this was the third review commissioned under the Ordinance and had been requested by the
Commission in light of the rapidly changing regulatory environment in the United
Kingdom. (“The Commission is obliged by its founding Ordinance to match UK standards of supervision,” the statement adds. “The FSC considers it important for it to seek independent verification that it continues to keep pace with these developments.)

We are naturally pleased that the Commission’s hard work to maintain a robust regulatory regime has been independently validated,”
FSC Commissioner Marcus Killick added last night.

We particularly welcome the commendations over our recent enhancements of that regime as well as the support given to our proposals for the future. The report makes a number of recommendations which will be considered. Many concern matters on which we were already taking action. Others will no doubt help us in our future development.

The FSC, coincidentally, is the only regulator that is judged, not only against international standards, but also on how it matches the policies and practices of another vastly larger authority, which supervises one of the biggest financial sectors in the world.

One is dealing with two financial centres which are as different as a small heap of chalk and a mountain of cheese. Yet the prime focus of our report was to look at the way the FSC matches British criteria. In banking they more than match the EU regulations and UK standards, while in other areas such as insurance, money laundering measures and investment services the FSC comes close to matching standards.

Pratt stresses that the recommendations which his report makes are intended not only to bring the FSC to parity with UK standards but also to ensure that the Commission will be able to maintain that position “well into the future.

Reviewing the over all operations of the FSC the report points out that the Commission’s position is unusual in that it has virtually no specific regulatory powers or responsibilities “beyond a general duty to protect the public against financial loss as a result of action by financial services businesses” and monitor the extent to which Gibraltar’s supervisory regimes comply with EU obligations and match UK standards.

Moreover, it does not have specific powers to license financial services, businesses, monitor their compliance with regulation, or take enforcement action…powers [which] have been given to the Commissioner.” And - although “no problems have arisen with these arrangements so far” - the report recommends four ‘high’ priority steps involving legislative changes and what would amount to a shift of powers from the Commissioner to the Commission.

While lauding the FSC’s independence, the report argues that because the Commission does not set fees, nor is it financially ‘independent’, there would be advantages in adopting a new budgetary model.

Both the Government and the financial services industry recognise that the FSC “acts in an independent manner and while this is ‘commendable’ and the actual operation of the Commission conforms with best practice, “the present budget process could potentially undermine this independence, since fees are not set by the Commission.

The report points out that the Government is consulted over the FSC’s annual budget which is supported by regular Government funding, while the House of assembly votes the level of funding that appears in the estimates. “While this appears not to have compromised independence in practice hitherto, this outcome has depended largely on the personalities of those currently operating the process and the choices they have made,” the report says.

In its chapter devoted to banking on the Rock and the FSC’s relationship to the local banking industry, the report suggests that most risks faced by Gibraltar banks are lower than for those in the UK, but also points to the possible migration of offshore business which has only tenuous links with the Rock. “Gibraltar’s small size also means that it may be more vulnerable to one-off exogenous shocks, such as a change in EU tax arrangements,” the Pratt report warns.

“The FSC approach [to banking] is effective,” it continues. “It has kept out weak banks and focused on banks of high reputation and strong parents.”

In the sphere of investment services, the FSC’s supervisory activities have established and implemented standards that substantially match legislation and practice in the United Kingdom, the report acknowledges. However, though the Rock’s investor compensation scheme is in line with EU requirements, it is less generous than that of the UK.

"The FSC argues that the matching requirement does not apply to investor compensation because investors compensation is not encompassed within the term ‘supervision’ [in terms of the Ordinance],” the report points out. “However, the danger is that UK or UK expatriate customers (who are likely to be assured by their intermediary that Gibraltar regulation matches UK standards) are unlikely to interpret that assurance as excluding what, to them, is one of the most visible elements of regulatory protection – namely the level of investor compensation. So long as the level of compensation remains below that of the UK, clear and prominent disclosure of the more limited compensation arrangements is essential.”

The report suggests that one way of overcoming the problem would be for Gibraltar firms to ‘top up’ into the UK Financial Services Compensation Scheme when selling to UK customers.

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