Introducer Certificates the Pro’s and Con’s

Does anyone else find it so frustrating to constantly provide client due diligence when accessing financial services products or even when accessing legal services?  Is this constant due diligence treadmill stopping us and potentially our clients from accessing products and services?  I personally feel that this is unfortunately the case and in some cases I am aware that this has caused clients to utilise other jurisdictions or miss out on investment or business opportunities.  I believe that there is a solution to this which could add to the attraction of Guernsey as a place to do business as well as allowing clients greater access to the products and services that can be offered.

The current solution is that the regulated or registered business can if the introducer meets the requirements of an Appendix C business, utilise the introducer regime as stipulated by the Guernsey Financial Services Commissions (GFSC).  This allows the registered or regulated business to rely on a certificate confirming identity while promising that the due diligence they hold and maintain meets the Guernsey requirements and will be provided when requested from the regulated or registered business.  The regulated or registered business then has to test the introducer throughout the life of the business relationship, to ensure that the introducer can meet the obligations of the introducer certificate and that the due diligence does meets the Guernsey standards. The unfortunate downfall of this system is that sometimes an introducer won’t adhere to the obligations of the introducer certificate or requirements of the rules governing due diligence in Guernsey leaving the regulated or registered business with quite a headache, and remedial work to undertake.

Where an introducer provides clients to regulated or registered business by the use of introducer certificate, for example an IFA providing 300 clients to invest in various Funds at a Guernsey Fund provider, the introducer can become disillusioned with Guernsey and the regulated or registered business when year on year they receive requests to provide the copies of due diligence for a selection of these clients introduced by them.  This is a burdensome process for the introducer, taking them away from their business, only to provide documentation for which they can not necessarily recover the cost from their client.  Unfortunately some will not want to or be willing to keep their obligations, leading to problems for the regulated or registered business.  The solution to this problem is to undertake a 100% testing programme where copies are provided to the receiving regulated or registered business with the introducer form.  There is only the need to periodically on a risk based approach go back to the introducer to confirm that the clients details have not changed during the life of the business relationship, such as the address, and if the details have changed that the copies of the updated due diligence are provided.  Undertaking this approach allows the regulated or registered business potentially less risk as the due diligence will already have been assessed and deemed suitable at the start of the business relationship and less risk of the introducer not subsequently meeting or adhering to their obligations by not providing the required due diligence. This allows for beneficial relationships to develop between the regulated or registered business and the enhancement of Guernsey as a place to do business.

Where clients have a business relationship with a regulated or registered business that is over a period of years, rather than a one off legal transaction where the business relationship is only for a matter of days or weeks.  If the introducer sells these clients during the course of the business relationship to another provider or is taken over, new introducer certificates will have to be obtained by the registered or regulated business or the clients will need to provide due diligence in order that the rules of the GFSC can be met.  Therefore I would always recommend for these longer term business relationships that due diligence is obtained rather than relying on the introducer certificate.

The rules issued by the GFSC state that clients who are introduced cannot then be introduced again by the regulated or registered business e.g. no introducer chains.  This can lead to the issues of a regulated or registered business unknowingly becoming involved in an introducer chain and having then to obtain the client due diligence, which can have an adverse effect on the business relationship with the client and the relationship with the introducer.  This also has the potential for higher cost to the client or loss of earnings by not being able to access an investment product to take advantage of price and in the worst case scenario the client may miss the investment opportunity altogether.

But what if Guernsey could offer a due diligence depository overseen by a regulating authority subject to stringent audits? Just think if clients provided their due diligence to this depository who then ensured that it met the regulatory standards, could this avoid altogether the need to obtain copies of due diligence or have a testing programme?  This depository could then provide registered or regulated businesses with an introducer certificate which would be more reliable and there would be less potential of unknowingly becoming part of an introducer chain or finding out the introducer was unable to meet its obligations. Could this reduce compliance cost to a regulated business and make Guernsey more competitive, the Jurisdiction of choice? Clients would be able to access products and services offered by other regulated or registered business with ease and certainty without suffering from the due diligence treadmill. Why stop at just offering this service to local registered and regulated businesses why not take an international approach and service other jurisdictions.  This could then lead to an enhancing of our economy while diversifying it at the same time.  We have all the right ingredients in Guernsey to undertake this opportunity we just need the political want to do this. But until my utopia happens please think carefully about the use of introducer certificates, sometimes it is actually easier and more beneficial for a registered or regulated business to get original due diligence and can save time money and cost in man hours to undertake the monitoring and any remedial work.

The Compliance Conundrum

A topic of conversation that often comes up is about “how compliance has become a monster”, sapping the dynamism of a business while slowly choking the new business streams by making the business over compliant. Has the compliance function gone too far and are they now holding Boards and Directors to a compliance and regulatory ransom leading to a loss in commerciality of the Guernsey Finance Sector?

Directors constantly berate me about having board packs that have compliance reports running to some 40 pages or more, how they spend more resources on compliance matters then on the direction of the business and that the compliance function does not assist them in achieving their business objectives. To my mind there is a balance that needs redressing in order that businesses can achieve high standards of compliance, while also achieving the businesses purpose and providing products and services to their clients that are competitive in cost with other jurisdictions.

The relationship between the Board and the compliance function must be one that is symbiotic, both assisting and nurturing one another. The compliance function must undertake suitable and sufficient monitoring of its business and report its findings effectively and efficiently to the Board. This is normally done by either an exception report or in a traditional report style over 40 pages and both have their own benefits and problems.

While using an exception reporting format this allows for immediate notifications of compliance and regulatory issues to the Board. The exception report though can fail to provide the assurance to the Board that the compliance function is suitable or sufficient due to its lack of content and oversight of the business.

The traditional compliance report of 40 pages or more will ensure that the Board can assess the suitability of its monitoring programme and compliance function. The problem with the traditional Compliance report is that its size may lead to regulatory or compliance issues being lost in the pages of the document. I am also aware that in some cases the traditional report format provided so much content but actually lacked the substance required to be provided to the Board in assessing the compliance status and function, a failing for the compliance function and a regulatory failing for the Board.

The compliance function must ensure that it has a suitable and sufficient Compliance Monitoring Programme and the Board must review this document annually to ensure that they are satisfied that it meets the Business and the regulatory requirements for the risks of the business being undertaken. The Compliance Monitoring Programme is the working paper of the compliance function, it shows the testing and findings of the compliance function and allows for suitable and informative compliance reports to be generated for the Board. The compliance report’s to the Board need to be a hybrid version of the traditional report and the exception report becoming more a précis of the Compliance Monitoring Programme, allowing the Board to see the matters of concern while also being assured of the compliance status of the Business.

The compliance function is the adviser to the Board in respect of the regulatory framework, providing advice and solutions to the Board in order that they can achieve the chosen business direction. This is where the business can become choked and the dynamism and competitiveness lost due to the gold plating of a business’s policies and procedures. The compliance function must always remember that it is the Board who decide the level of risk that they are satisfied to work with and that the compliance function is there to mitigate the risk by insuring that suitable and sufficient policies are in place. The compliance function must assess the regulatory requirements applicable to the business being undertaken and ensure that the Business is meeting these minimum requirements. The compliance function must never seek to direct the Board or the Business but to inform the Board what is required and expected of them in respect of the risks that the Board have deemed as acceptable.

I do believe that in some cases the compliance function has gone too far and seeks to control the business due to their own personal views or prejudices. It must always be remembered by all stakeholders in the finance industry in Guernsey that without the business there is no compliance function and without a compliance function there can be no business. It is vital that the compliance function is able to provide the required regulatory information to the Board in a succinct and effective manner in order that the Board can discharge their regulatory duties effectively and efficiently.

It is important that the compliance function provide the Board with first class regulatory advice that is free from their own personal prejudices. This is required in order that the Board can ascertain what the minimum regulatory requirements are and how best they can meet these requirements and make business decisions that will not endanger the Business or its clients. The Board must assess on an annual basis the suitability of its compliance function, if it is not providing the Board with the required information or are making the business lack commerciality by over compliance of the policies and procedures the Board must address these matters as they are ultimately responsible for the compliance function and its suitability and effectiveness.