Feedback on Consultation Paper No. 6 2016

Consultation Paper Feedback Proposed Amended Outsourcing Policy No. 6 2016 Feedback to a consultation on the Proposed Amended Outsourcing Policy

Issued: 1 March 2017

Consultation Feedback

Consultation Feedback This paper reports on responses received by the JFSC on Consultation Paper No. 6 2016 – Proposed Amended Outsourcing Policy. Further enquiries regarding this paper may be directed to: Kate Berry Senior Adviser, Policy Jersey Financial Services Commission PO Box 267 14-18 Castle Street St Helier Jersey JE4 8TP Telephone:

+44 (0)1534 822162

Email:

[email protected]

Page 2 of 24


Glossary of Terms

Glossary of Terms 2011 Policy

means the JFSC’s Policy Statement and Guidance Notes on: (1) Outsourcing; And (2) Delegation by Jersey Certified Funds and Fund Services Businesses published by the JFSC in May 2011.

Amended Outsourcing Policy/ this Policy/ the Policy

means the proposed Amended Outsourcing Policy And Guidance Notes attached at Appendix D of this feedback paper

AML/ CFT

means anti-money laundering and countering the financing of terrorism

AML/ CFT Handbook

means the Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism for Regulated Financial Services Business (as may be amended by the JFSC, from time to time)1

Banking Code

means the Code of Practice for Deposit-taking Business

Banking Law

means the Banking Business (Jersey) Law, 1991

Certified Fund

means a fund issued with a certificate pursuant to the Collective Investment Funds Law

Certified Funds Code

means the Code of Practice for Certified Funds

Client

means a customer, investor or other Person in respect of whom a Registered Person is Licensed to provide products or services

COBO Conditions

means any conditions imposed by the JFSC pursuant to its granting of a COBO Consent

COBO Consent

means a consent issued by the JFSC pursuant to the Control of Borrowing (Jersey) Order, 1958

Codes of Practice (or Codes)2

means, collectively, the › Banking Code; › Certified Funds Code; › FSB Code; › GIMB Code; › IB Code; › Insurance Code; › MSB Code; › TCB Code

Collective Investment Funds Law

means the Collective Investment Funds (Jersey) Law, 1988

Commission Law

means the Financial Services Commission (Jersey) Law 1998

Companies Law

means the Companies (Jersey) Law, 1991

1

http://www.jerseyfsc.org/anti-money_laundering/Regulated_financial_services_businesses/aml_cft_handbook.asp

2

Codes of Practice may be prepared and issued; or revised by the JFSC pursuant to, the Regulatory Laws, and the Proceeds of Crime (Supervisory Bodies) (Jersey) Law, 2008 (in respect of AML/ CFT requirements).


Page 3 of 24

Glossary of Terms

3

EU

means European Union

FAQs

means frequently asked questions

Fit and Proper

means that a Person would meet the standards required to be fit and proper to be Licensed or, continue to be Licensed (as applicable) pursuant to the requirements of the relevant Regulatory Law3

FSB Code

means the Code of Practice for Fund Services Business

FSJL

means the Financial Services (Jersey) Law, 1998

Fund Services Business

means the Regulated Activity, involving the provision of services in relation to certain types of funds, which is described in Article 2(10) of the FSJL

GIMB Code

means the Code of Practice for General Insurance Mediation Business

Governing Body

means the body within a Registered Person that is considered to exercise ultimate control over it. Generally, this will be (i) the directors of a company, protected cell company or the relevant cells of an incorporated cell company; (ii) the trustee of a unit trust; (iii) the general partner of a limited partnership, separate limited partnership or incorporated limited partnership; or the partners of a limited liability partnership. In the case of a sole trader, the Governing Body will be the sole trader

Group

means a body corporate that would be defined as a “subsidiary”, “wholly-owned subsidiary” or “holding body” of another body corporate, under the Companies Law irrespective of the jurisdiction of the company

IB Code

means the Code of Practice for Investment Business

Insurance Code

means the Code of Practice for Insurance Business

Insurance Law

means the Insurance Business (Jersey) Law, 1996

Jersey Finance

means Jersey Finance Limited

JFSC

means the Jersey Financial Services Commission

Licence

means the authorisation by the JFSC to conduct Regulated Activity4

Managed Entity

means, in the context of MoME Arrangements, an entity that is managed by a MoME

MoME

means, in the context of MoME Arrangements, a manager of a Managed Entity

See for example Article 9 of the FSJL. Note also that the JFSC provides guidance as to, amongst other things, the criteria upon which it bases decisions as to whether such requirements are satisfied in the relevant Licensing Policy. http://www.jerseyfsc.org/the_commission/general_information/policy_statements_and_guidance_notes/index.asp

4

Such authorisation being: (i) registration under the Banking Law; (ii) grant of a permit or certificate under the Collective Investment Funds Law; (iii) registration under the FSJL or (iv) grant of a permit under the Insurance Law

Page 4 of 24


Glossary of Terms

MoME Arrangements

means arrangements described in the MoMe Guidance Note and pursuant to which a MoME falls within class ZK of Fund Services Business by providing certain services to a Managed Entity

MoMe Guidance Note

means the guidance issued by the JFSC and contained in the document entitled: Guidance Note For a Manager of a Managed Entity (a MoME) and Certain Managed Entities (as may be amended by the JFSC, from time to time)5

Money Laundering Order

means the Money Laundering (Jersey) Order, 2008

MSB Code

means the Code of Practice for Money Service Business

Offer Document

means a prospectus or other offering document inviting a Person to become an investor of a fund

Outsourcing

means an arrangement of any form between a Registered Person and a Service Provider by which the Service Provider performs any activity, that would otherwise be undertaken by the Registered Person, where a Service Provider’s failure to perform or inadequate performance of such activity would materially impair the continuing compliance of the Registered Person’s Regulated Activity, with the requirements of the Regulatory Laws6.

Outsourcing Notification

means a notification as detailed in paragraph 4.6.4 of the Amended Outsourcing Policy

Person

means any natural or legal person (including a body of persons corporate or unincorporated)

Registered Person

means a Person that is Licensed or holds a permit or certificate, as applicable, under one or more of the Regulatory Laws

Regulated Activity

means activity conducted pursuant to the Regulatory Laws, in respect of which a Person is Licensed

Regulatory Laws

means the Banking Law, the Collective Investment Funds Law, the FSJL, and the Insurance Law

Service Provider

means a Person to whom a Registered Person Outsources activities

Sub-contractor

means a Person to whom a Service Provider transfers the carrying out of any Outsourced activity to the Service Provider

Sub-Outsourcing

means an arrangement of any form between a Service Provider and Sub-contractor pursuant to which the Sub-contractor performs any Outsourced activity that would otherwise be undertaken by the Service Provider

TCB Code

means the Code of Practice for Trust Company Business

5

http://www.jerseyfsc.org/the_commission/general_information/policy_statements_and_guidance_notes/index.asp

6

For the avoidance of doubt “requirements of the Regulatory Laws” includes compliance with all secondary legislation, Notices, and Codes of Practice made pursuant to the Regulatory Laws.


Page 5 of 24

Contents

Contents Consultation Feedback ................................................................................... 2 Contents ........................................................................................................ 6 Executive Summary ........................................................................................ 7 1.

Overview................................................................................................................................. 7

2.

Feedback received .................................................................................................................. 7

3.

Next steps ............................................................................................................................... 7

Summary of Responses .................................................................................. 8 1.

Structure of this section ......................................................................................................... 8

2.

Responses to Questions ......................................................................................................... 8

Question 1 ...................................................................................................................................... 8 Question 2 ...................................................................................................................................... 9 Question 3 .................................................................................................................................... 11 Question 4 .................................................................................................................................... 11 Question 5 .................................................................................................................................... 12 Question 6 .................................................................................................................................... 13 Question 7 .................................................................................................................................... 13 Question 8 .................................................................................................................................... 14 3.

Relocation of Funds Corporate Governance Guidance ........................................................ 15

Appendix A ...................................................................................................16 List of Respondents ...................................................................................................................... 16

Appendix B....................................................................................................17 Outsourcing Notification: ............................................................................................................. 17

Appendix C ....................................................................................................21 General Fund FAQs ....................................................................................................................... 21

Appendix D ...................................................................................................24 Outsourcing Policy and Guidance Notes ...................................................................................... 24

Page 6 of 24


Executive Summary

Executive Summary 1. Overview 1.1 In July 2016 the JFSC issued Consultation Paper No. 6 2016. The purpose of the Consultation Paper was to seek views on proposals to amend the JFSC’s Policy Statement and Guidance Notes on: (1) Outsourcing; And (2) Delegation by Jersey Certified Funds and Fund Services Businesses published by the JFSC in May 2011 (the 2011 Policy). 1.2 The purpose of this paper is to provide feedback on the responses received regarding the Consultation Paper.

2. Feedback received 2.1. The consultation period closed on 30 September 2016. Respondents provided comments either directly to the JFSC or indirectly to Jersey Finance. The JFSC received 5 responses directly. Jersey Finance provided the JFSC with comments it had received from 13 respondents: 5 Banks, 4 administrators, 2 law firms (JFSC also received both these responses), a consultant and a group of compliance officers. A full list of respondents appears at Appendix A. 2.2. This Feedback Paper presents a summary of the substantive comments received and the JFSC’s responses. 2.3. The JFSC is grateful to respondents for taking the time to consider and comment on the proposals.

3. Next steps 3.1. The following documents are published today (1 March 2017): › › ›

Appendix B: An Outsourcing Notification form Appendix C: Two Fund General FAQs (extracted from the 2011 Policy and updated) Appendix D: The final Amended Outsourcing Policy.

3.2. The Amended Outsourcing Policy (in the form consulted on, save for the changes described later in this paper) will come into force in accordance with the Effective Dates set out in the Policy.


Page 7 of 24

Summary of Responses

Summary of Responses 1. Structure of this section 1.1. This section summarises the responses to the Consultation Paper. While not every comment received is individually listed, this section contains summaries of the most substantive and pertinent comments in relation to the questions posed and, as appropriate, the JFSC’s responses to those comments. 1.2. There were a number of common themes that appeared in responses. Where comments made relate to an answer to more than one question or were felt to be more appropriately dealt with in another response they have been consolidated accordingly.

2. Responses to Questions Question 1 Para 4.1.5 of the CP

Question: Do you consider a lead-in period of two months to be adequate? If you do not, please explain why and suggest an alternative time period.

The majority of respondents did not object to the lead in period of two months. Some respondents viewed two months as sufficient to update internal controls and consider the new Policy and amend arrangements while others did not. Reasons given for needing a longer lead in period were: that there was not enough time to review policies and procedures, particularly where the entity was part of a larger group; the entity only holds quarterly board meetings and agreements particularly in relation to non-regulated activities would need to be renegotiated. Three respondents suggested that a lead in period of 6 months would be preferable. One observation was that there was no specific deadline for the implementation of this Policy. Another respondent observed that 12 months had been allowed for the implementation of the Collective Investment Funds (Certified Funds -Prospectuses) (Jersey) Order 2012 (the CFPO). In addition clarification was requested on how the Policy applies to existing arrangements and for more detail surrounding the JFSC’s expectations.

JFSC Response Effective Dates and Transitional Provisions A final deadline by which all Registered Persons are expected to have arrangements compliant with the Policy has now been included. The rationale behind this being that all Outsourcing arrangements as defined in the Amended Outsourcing Policy (regulated and non regulated) need to be subject to the Policy. The Effective Date is 3 months from the date of publication for new Outsourcing arrangements. For existing arrangements Registered Persons may adopt this Policy 3 months from the date of publication of this Policy but must comply with this Policy 15 months from the date of its publication (the “OSP Deadline”). For the avoidance of doubt existing arrangements means Outsourcing arrangements that were either previously subject to the 2011 Policy or are now caught by this Policy when previously they may not have been. This longer lead in time takes into consideration the annual review process referred to in the 2011 Policy.

Page 8 of 24



Question 2 Para 4.2.8 of the CP

Question: Do you have any observations or concerns on the scope of the Amended Outsourcing Policy? If you do, please state in detail what your observation or concern is and explain the reason for it.

The majority of Respondents raised no objections. Views provided seem to be at both ends of the spectrum, for example the scope of the Policy is too wide now that non regulated activities are caught as opposed to the Policy is not wide enough to capture services provided for the fund but not contracted by the fund directly i.e. via another fund service provider. There were requests that further activities be carved out from the scope including Sub-Outsourcing. It was also commented that the Policy does not include Alternative Investment Funds or AIF Services Business. A few of the respondents raised concerns that the Policy is onerous and non-competitive with other jurisdictions. One respondent felt that the expectation that Outsourced regulated services should be undertaken by regulated Service Providers was unrealistic where Service Providers are not regulated for this activity in their home jurisdiction. Another respondent commented in relation to Certified Funds that the CFPO already provides for adequate disclosure. The legislative basis and the structure of the Policy was also challenged.

JFSC Response The change to the scope of the activity of the Policy was intended to ensure oversight extends to all activities that could cause a Registered Person to breach their legal and regulatory obligations (such as a Codes breach). As one respondent observed this is a more holistic approach that considers the global risk. The GFSC, IOM FSA and UK FCA all include similar provisions regarding Outsourcing which would include non regulated activity which impacts on the provision of the regulated function and services. Outsourcing by a fund or Service Provider providing services in relation to a fund will be outside of the scope, subject to adherence with paragraph 3.2.2.5 (i.e. clear disclosure), of the Policy. For example if the fund manager Outsources to a sub investment manager then this will need to clearly be disclosed including the parties to the arrangement. The Policy has been amended to make this clear. The Policy cannot be applied on a tick box basis. What is material will depend on the respective circumstances of each Registered Person and its activity. The definition of Outsourcing has been amended to provide further clarity and amalgamate the “Outsourcing” and “Material” definitions. Please see the new Appendix 1 to the Policy which provides guidance on how the JFSC would anticipate a Registered Person considers whether activity/activities need to be compliant with the Policy. The Codes of Practice for Alternative Investment Funds and AIF Services Business (the “AIF Codes”) and AIF Regulations (Jersey) 2012 are not included in the definitions of “Codes” or “Regulatory Laws” in the Policy because specific provisions apply to delegation by an AIF Manager. See Paragraph 14 of the AIF Codes. The AIF Codes are referred to in the Policy as imposing additional requirements in paragraph 5.3.2. In relation to Certified Funds the CFPO does provide for disclosure of delegation arrangements in fund prospectuses and paragraph 3.2.2.5 of the Policy repeats this. The 2011 Policy states “The Commission will normally require an Outsourced activity to be Outsourced to a Service Provider which is itself regulated in its jurisdiction of domicile for that activity”. The Amended Outsourcing Policy changes “will normally require” to “expects”. There is


Page 9 of 24


no significant change in this requirement. Under the 2011 Policy Registered Persons already deal with scenarios where the delegate is not regulated in its home jurisdiction. The use of the term “Letterbox” is intended to demonstrate, to international standard setting bodies, that the Island does not wish to be used for such business. We consider this term reflects language used more currently by bodies such as within the EU but view inserting a definition would introduce unnecessary complications. The Structure of the Policy has been amended to take into consideration comments received. For clarification purposes the Legislative basis of the Policy is: i. ii. iii.

the JFSC has the power under the Commission Law to make policy; The JFSC has the power under each of the Regulatory Laws to prepare and issue codes of practice; and The Codes require compliance with the Policy.

Exemptions/Carve Outs The only additional “carve outs” that will be included are: In relation to Trust Company Business activity to reflect the current practice within the JFSC , which under the 2011 Policy is applied to Trust Company Business (TCB) globally but not to each individual trust (unless it is a Certified Fund). Terminology in relation to “advisory services” has been further expanded to provide clarification particularly in relation to investment advisory services. See paragraph 3.2.2.1, bullet 2 of the Policy. A provision is included which permits an application for a variance to be made to the JFSC where anomalous results would occur where the Policy is applied.

Sub-Outsourcing Save as provided in the paragraph below, the JFSC comments that as a matter of good practice every regulated Service Provider should know if an activity (regulated or not) that they are Outsourcing is being Sub-Outsourced. The JFSC expects as a part of good corporate governance that provisions regarding Sub-Outsourcing should already be included in agreements. Requirements regarding the Registered Person to be aware of Sub-Outsourcing were already included in Part III, paragraph 2.3 of the 2011 Policy. In light of the comments regarding a Registered Person being unaware that Sub-Outsourcing may be taking place the wording in Part III, paragraph 2.3 of the 2011 Policy has been re-inserted by way of further guidance on Core Principle 2 (paragraph 4.3.3). The Outsourcing Notification includes a requirement to confirm whether Sub-Outsourcing is permitted and provide relevant details of the Sub-Outsourcing. An exemption is provided for where a fund custodian (including a prime broker) is a member of an international corporate Group, and the sub custodians engaged by the custodian are also members of the same Group. This is on the same basis as the JFSC’s guidance on the CFPO (letter 31 May 2012). References in the Offer Document should be made to the Outsourced custodian and its use of members of the same corporate Group to act as sub-custodians rather than describing each sub-custodian separately.

Page 10 of 24




Question: Do you have any observations or concerns on the removal of the distinction between delegation and Outsourcing as set out in the Amended Outsourcing Policy? If you do, please state in detail what your observation or concern is and explain the reason for it.

The removal of the distinction was welcomed. Out of 16 Respondents only 2 raised objections and these objections were not based on the removal of the distinction but on other proposals in this Policy and are considered elsewhere. A view was expressed that the Policy will result in a Registered Person taking previously outsourced functions in house. It was also suggested that there should be separate policies for trust company business and funds (including Fund Services Business and collective investment funds).

JFSC Response The JFSC does not expect in practice that functions that are not currently provided in house will need to be in response to the Policy. The Policy has wider scope than just TCB and Fund Services Business/ Funds. The Policy also applies to Insurance, Banking and other types of business under the FSJL and it is not efficient or consistent to have a different policy for different sectors. Moreover JFSC supervision is now entity rather than sector based.


Question: Do you have any observations or concerns on the definitions of “Outsourcing” and “Material Activity” as set out in the Amended Outsourcing Policy? If you do, please state in detail what your observation or concern is and explain the reason for it.

The majority of respondents did not raise any observations or concerns. Of those respondents who did comment the main views related to how the Registered Persons and the JFSC would assess what amounts to Material Activity.

JFSC Response It will be for the Registered Person to undertake an analysis of the regulated or non regulated activity Outsourced and document why such activity is considered to be “Material”(i.e. impairs the performance of Regulated Activity) or not. The JFSC has amended the Outsourcing definition and added further wording in the scope section of the Policy which is consistent with the requirements of IOSCO and other regulators which will assist Registered Persons and the JFSC in their determination as to what is material. A flow chart is now also included at Appendix 1 of the Policy to assist Registered Persons to assess the applicability of the Policy.


Page 11 of 24



Question: Noting paragraph 4.4 and the meaning of Material Activity do you have any observations or concerns on the wording of the New Core Principles in the Amended Outsourcing Policy? If you do, please indicate the number of the Core Principle you are commenting on and state in detail what your observation or concern is and explain the reason for it.

The majority of Respondents expressed no concerns about the wording of the New Core Principles. Some comments raised related to the logistics of implementing the Policy. Such as the need for the Registered Person to have its own policy on how it manages outsourced activity including documenting and testing contingency plans. Concern was raised about the need to negotiate further warranties/indemnities with Service Providers. There were also questions about: I. II. III. IV.

What is the application process where material changes are made to existing arrangements? What level of due diligence is required? What is required regarding the JFSC’s right of access to premises and records of Jersey and overseas Service Providers? How can Registered Persons determine what are concentration risks?

Also questioned was the role of the JFSC in the termination process and whether the JFSC has the resources to deal with additional Outsourcing Notifications?

JFSC Response The consultation was in relation to an amendment of an 2011 Policy and it was therefore surprising that a number of matters raised related to the existing requirements rather than the proposed amendments. Outsourcing poses risks which the JFSC expects to be appropriately managed. As a matter of good practice as part of corporate governance the JFSC expects that the Registered Person would (and this list is not exhaustive) in relation to any existing Outsourcing arrangement (including contingency plans) : i. ii. iii.

iv.

Ensure policies and procedures exist regarding the Outsourcing arrangements; Obtain sufficient information and due diligence on the proposed delegate, for example it may be necessary to visit the proposed Service Provider as part of this process; Consider the scope and extent of the services to be Outsourced, the terms of the Outsourcing agreement (which under the 2011 Policy may have entailed the inclusion of warranties and indemnities) and what will happen on termination, for example issues have arisen regarding the ownership of CDD documentation; and Conduct a risk assessment in relation to the proposed Outsourcing arrangement which will determine how the risks should be managed including for example an assessment of the frequency of monitoring of the arrangements; Etc….

As part of contingency plans the practicalities of trying to test the transfer of activities from one Service Provider to another need to be considered. If the logistics of testing are difficult this may indicate that the contingency plan is not achievable. Concentration risk is a factor which may become apparent from the Registered Person’s due diligence on the Service Provider. The Registered Person would need to consider whether the Service Provider has sufficient resources to perform its role. A “no objection” is required from the JFSC upon entering into new Outsourcing arrangements, materially changing existing Outsourcing arrangements or replacing existing arrangements.

Page 12 of 24



Reference to the contingency arrangements being invoked in exceptional circumstances is now included in paragraph 4.5.1. The notification requirement existed as part of the 2011 Policy. While this Policy may have wider scope due to the inclusion of non regulated activity that would materially impair Regulated Activity, it also provides a carve out for funds and fund Service Providers and reflects current practices of Trust Company Businesses. The JFSC does not believe that its resources will be insufficient to process these notifications but will keep this under review. The JFSC has prepared a notification form, as attached at Appendix B, to be used in relation to material changes to existing arrangements and new arrangements. As per a comment received the JFSC has now included a requirement for the Registered Person to disclose what if any relationship it has with the Service Provider, i.e. group company etc…. Core Principle 6 does not materially differ to the existing Core Principle 6. Outsourcing Arrangements should ensure that the JFSC has a right of access where necessary and such rights will need to endure post termination. How long this right of access needs to endure will depend on the circumstances of the case and the provisions made for the retention or return of records and access to premises post termination. Outsourcing to an overseas Person should factor in any additional risks posed by the fact the delegate is not resident in Jersey. While the JFSC normally expects a right of access at the premises as a term of the Outsourcing agreement, arrangements should be in place to provide sufficient information and documentation in Jersey for the JFSC to exercise its statutory function.


Question: Do you have any observations or concerns on the proposed FAQs as set out in the Amended Outsourcing Policy? If you do, please indicate the number of the FAQ you are commenting on and state in detail what your observation or concern is and explain the reason for it.

The Majority of the respondents raised no concerns. Some respondents welcomed the inclusion of FAQs, stating that they were both helpful and informative. There were some concerns raised regarding: i. ii.

clarification of the regulatory status of the FAQs; and requesting further FAQs particularly in respect of what is not covered within the scope of the Policy.

JFSC Response The FAQs remain as guidance. The FAQs which related to the scope of the Policy have now been included in the restructured “policy” section of the document. The JFSC has now included in the “policy” section the definition, scope and core principles. See paragraph 3.2 regarding the scope of the Policy.


Question: Do you have any observations or concerns on the approach to Intra-Group Outsourcing as set out in the Amended Outsourcing Policy? If you do, please state in detail what your observation or concern is and explain the reason for it.

All the banks that provided responses to this question had no concerns. One bank did seek guidance on functional groups such as global on boarding and product development teams.


Page 13 of 24


Of all the respondents only one raised concerns but this appeared to reflect the desire to extend the carve out for arrangements between different elements of one legal person to intra-Group Outsourcing.

JFSC Response Intra Group Outsourcing is not the same as arrangements between different elements of one legal entity i.e. i) head office and branch; ii) branch and branch, in both cases all elements are of the same legal person. The difference in simple terms is whether the arrangements are between two legal persons or internal arrangements of one legal person. References to “parent” in the context of branches have been removed to avoid confusion between intra Group Outsourcing. Group entities need to ensure a proper framework is in place surrounding Outsourcing. The obligations imposed in paragraph 7.2.3.3 of the Policy are not isolated to the Policy, they are basic principles of corporate governance pursuant to Principle 3 of the Codes which all Registered Persons have to comply with. Although the Policy may not apply to those Registered Persons operating in Jersey as part of a branch (where elements of a legal person rely on each other) that does not mean there are no other requirements that the Registered Person needs to comply with, see FAQ 5.3.


Question: Do you have any observations or concerns on the Outsourcing Notification information requirements, timeframe and the confirmation that a Registered Person cannot proceed until a “no objection” is received in writing from the JFSC as set out in the Amended Outsourcing Policy? If you do, please state in detail what your observation or concern is and explain the reason for it.

The majority of respondents raised no concerns. Of the comments received views were split between those in favour and those against the formal process and proposed timeframes. A couple of Respondents raised concerns about the cost of compliance with the Policy.

JFSC Response The 2011 Policy requires “a Registered Person to inform the JFSC in writing of its intention to outsource…”no time frame is given for the JFSC to consider the proposal and raise concerns, save that the JFSC will endeavour to raise concerns within 10 working days in respect of Fund Services Businesses. The prior notification requirement is not new. As no response was prescribed under the 2011 Policy members of the JFSC’s supervision teams often received requests for confirmation that the JFSC had finalised its review and would not be raising any concerns. The inevitable concern was created that the Registered Person would enter into an arrangement that the JFSC would later object to. To avoid such uncertainty, the JFSC’s Executive has determined that a formal “no objection” is required. The timeframe and the “no objection” notification provide clarity and consistency across all the divisions of the JFSC in relation to which this Policy applies. Twenty working days was decided upon as the appropriate timeframe after discussion with all the divisions, most of which had not been subject to published timeframes. The timeframe for funds and Fund Services Business (where the Outsourcing arrangements are not exempt) will continue to be in line with 10 working days as per Part III, paragraph 5.7 of the 2011 Policy. In relation to Outsourcing arrangements that are proposed as part of a fund’s authorisation

Page 14 of 24



application these will continue to be dealt with in accordance with the existing published funds authorisation application timeframes. The current timeframe for all other Registered Persons will be 20 working days. This is subject to review, with the aim being to reduce the timeframe for all Registered Persons to 10 working days. Previously, notifications have been made with excessive amounts of documentation or insufficient information. Providing detail as to what is needed to consider the notification and a standard notification form should streamline and make the process more efficient and cost effective. This should be of benefit to both Registered Persons and the JFSC. The information requested has been collated after discussions with JFSC supervision colleagues to try and reduce the necessity of reverting to the Registered Person with additional requests for information. The JFSC’s expectation is that this level of information and analysis should already have been undertaken by the Registered Person in relation to proposed Outsourcing arrangements under the 2011 Policy. Therefore by requesting this information from Registered Persons it avoids a duplication of effort by both the Registered Person and the JFSC. If the Registered Person has properly considered the proposed Outsourcing arrangement and provided the information within the Outsourcing Notification form this should mean that the timeframes are achievable. The notification should be made as soon as the Registered Person is able to complete the Outsourcing Notification form and there is an intention to finalise the arrangement. If the Outsourcing arrangement is unusual or the extent of the Outsourcing of functions is wide-ranging the JFSC would suggest that the Registered Person speaks to its Supervision Manager at an early stage.

3. Relocation of Funds Corporate Governance Guidance 3.1. During the review of the 2011 Policy it was identified that the guidance in Part VI of the 2011 Policy needed to be relocated. This was because Outsourcing that meets certain requirements such as being disclosed in the Fund prospectus is not within the scope of the Amended Outsourcing Policy. 3.2. The guidance in Part VI of the 2011 Policy related to good corporate governance practices for funds and Fund Service Businesses and therefore it is now included in two General Fund FAQs at Appendix C of this paper. The intention is to publish both of these FAQs on the JFSC website at the same time the Amended Outsourcing Policy is published, these FAQs however, will not be part of the Policy.


Page 15 of 24

Appendix A – List of Respondents

Appendix A List of Respondents A total of 16 responses were received of which five responses were direct to the JFSC › › › › ›

Barclays HSBC Bank International Limited Ogier Mourant Ozannes 1 Bank

11 responses from Jersey Finance › › › ›

5 Banks, 4 Fund Administrators, 1 Consultant 1 Group of Compliance Officers

Page 16 of 24


Appendix B – Outsourcing Notification

Appendix B

Outsourcing Notification: Notification regarding a proposed outsourcing arrangement or a material change to an existing outsourcing arrangement as required by Core Principle 5 of the JFSC’s Outsourcing Policy and Guidance Notes. 7

Note: Please send the Outsourcing Notification to the relevant JFSC supervisor/unit and await receipt of a “no objection” from the JFSC before entering into an Outsourcing arrangement that is subject to the JFSC’s Outsourcing Policy. 1. (a) Name of Registered Person: (b) Name of JFSC Unit/Supervisor: 2. Contact– this should be an individual8 that the JFSC can contact should there be a need for clarification of any responses or any additional information from the Registered Person. (a) Contact Name: (b) Telephone Number: (c) Email Address: 3. Name, Address and Regulatory Status of the Service Provider providing the Outsourced activity (the “Service Provider”): (a) Service Provider’s Name: (b) Service Provider’s address: If applicable, name of Service Provider’s Regulator and Service Provider’s Regulatory status:

7

Click here to access the JFSC’s Outsourcing Policy and Guidance Notes.

8

The JFSC is a data controller as defined in the Data Protection (Jersey) Law 2005. The JFSC will process the personal data you send us together with other information, which comes from or relates to you, to discharge its functions effectively. The JFSC may process personal data in order to verify the information in this notification. Processing includes obtaining, keeping, altering, disclosing and deleting personal data. You have the right to ask for a copy of the personal data the JFSC holds on you, for which the JFSC will charge a fee. You also have the right to have inaccuracies corrected. Please contact the Information Compliance Officer, Jersey Financial Services Commission, PO Box 267, 14-18 Castle Street, St Helier, Jersey, JE4 8TP if you require assistance.


Page 17 of 24


4. If this notification relates to material amendments to an existing Outsourcing Notification in relation to which a Notification in this format has been submitted within the last 12 months, please provide the confirmation below. If no notification has been submitted within the last 12 months using a Notification in this format or the confirmation cannot be given move on to question 5 and complete the entire notification form. ›

I confirm the information provided in the original Outsourcing Notification relating to the provision of Outsourced activity by the Service Provider (copy attached) has been reviewed and remains accurate with the exception of the amendments being notified in this submission.

›

Outline the amendments in Question 5 and then complete those Questions where the information has changed.

5. Summary of the Outsourced activity

6. Is the Service Provider related to the Registered Person (i.e. subsidiary of the same group or other connection)? Yes please describe relationship below

No

7. Reason(s) for the Outsourcing

8. Summary of how the Outsourcing will impact on Regulated Activities including a summary of the risk assessment?

9. Has due diligence been performed on the proposed Service Provider in connection with the Fit and Proper test required by Core Principle No. 1 (there is no need to provide all the information collated unless it is requested)? Yes

No please give details below

10.Please confirm that:

Yes

No

(a) there are no barriers to accessing records held by the Service Provider by either the Registered Person or the JFSC; and (b) data protection requirements have been considered by the Registered Person.

Page 18 of 24



If (a) or (b) are “No”, please provide details below.

11.Please provide a summary of how the Registered Person will monitor the Outsourced activity on an ongoing basis (do not provide a copy of your policy and procedures unless they are requested)

12.Please provide details of the contingency plans in the event the Service Provider fails to perform the Outsourced activity.

13.Is Sub-Outsourcing permitted and if so please provide relevant details of the SubOutsourcing. Yes please provide relevant details below

No

14.Please confirm that the Registered Person has undertaken an analysis of the proposed Outsourcing arrangement against the 6 Outsourcing Core Principles (“Core Principles”) and confirm the proposed Outsourcing arrangement complies with the Core Principles. Yes

No describe any areas of non-compliance.

15.If the Outsourced activity is Regulated Activity please confirm a copy of the proposed outsourcing agreement has been provided with this notification ›

Yes, I confirm the proposed Outsourced activity is Regulated Activity and a copy of the proposed/draft outsourcing agreement is included with the notification.9

›

No, I confirm the proposed, Outsourced activity is not Regulated Activity and I have not included the proposed outsourcing agreement but that it is available on request.

16.Please provide any other relevant information to the notification.

9

Please note a final executed copy of the Outsourcing Agreement is not required. However the JFSC reserve the right to request it and may review it when a site visit is undertaken.


Page 19 of 24


Declaration The attention of signatories is drawn to the Financial Services (Jersey) Law 1998, the Banking Business (Jersey) Law 1991 , the Insurance Business (Jersey) Law 1996 and the Collective Investment Funds (Jersey) Law, 1988 (together, the “Regulatory Laws”) and their subordinate legislation. The information contained within this notification form is restricted information within the meaning of the Regulatory Laws. I/we are aware that it is a criminal offence under the Regulatory Laws to knowingly or recklessly provide any information to the JFSC that is false or misleading in a material particular or to withhold relevant information. Principle 6 of the Codes (as defined in the Outsourcing Policy) requires a Registered Person to deal with the JFSC in an open and co-operative manner. Failure by a Registered Person to comply with the Codes represents grounds for the JFSC to take regulatory action. I/we are authorised to make this notification on behalf of the Registered Person. I/we authorise the JFSC to make such enquiries and to seek such further information as it thinks appropriate to verify the information given in this form. I/we declare that the information given in this notification (including on separate sheets) is complete and correct to the best of my/our knowledge at the time of the notification and that there are no other material facts of which the JFSC should be made aware. I/we understand that the JFSC may require me/us to provide further information or documents prior to providing a no objection. I/we understand and accept the JFSC may wish to make enquiries on a continuing basis regarding this outsourcing arrangement as it thinks fit under its general powers. Signed by a Principal Person on behalf of the Registered Person: Signature: Capacity: Print Name: Date:

FOR JFSC USE ONLY: Date of Receipt Date Acknowledgement Sent. Date 20/10 working days from Date of Receipt.

Page 20 of 24


Appendix C – General Fund FAQs

Appendix C General Fund FAQs Q.16: What fund administration activities are required to be conducted in Jersey? 1. History This information was previously included as section 2 of part VI of the Commission’s Outsourcing Policy issued May 2011 which is superseded by the March 2017 Outsourcing Policy and Guidance Notes. However, as it generally refers to what activities can be conducted in and outside Jersey it relates more to corporate governance than outsourcing. Moreover, the existing Outsourcing Policy exempts certain funds and fund services businesses of funds from the Outsourcing Policy and these requirements exist whether the exemption is applicable or not. 2. Subscription Monies Investors’ subscription monies may be received outside Jersey as long as the money is transferred to the account of the fund within a reasonable period. Anyone receiving monies in this way would normally be a distributor or subscription agent and hold the monies in client accounts. The Commission would need to be satisfied as to the quality of the firm before allowing such a structure. 3. Accounting Records Accounting records of a fund may be maintained outside Jersey provided the Registered Person always has access to the records e.g. by computer link, and that a backup copy of the records is retained in Jersey. The backup may be in printed form or in computer readable form. Periodic checks should be carried out in Jersey to ensure that entries are being made on an accurate and timely basis. 4. Queries The Jersey office of the Registered Person should always be capable of answering any routine queries and resolving all others. 5. Valuations and Monitoring The Commission would normally expect valuations of the fund’s net asset value to be carried out in the Island. However, valuations of the fund’s assets may be prepared outside Jersey where there is a reasonable rationale (e.g. where the assets are based in another jurisdiction). Depending on the frequency of the valuations, type of asset and value of the asset(s) (as a proportion of the fund’s portfolio) valuations must either always be checked (e.g. large value property asset) or sample checked by the Registered Person in Jersey. Evidence of the Registered Person’s valuation checks should always be available in the Island. It will be satisfactory for the Registered Person to receive confirmation at each valuation point from the service provider that all necessary valuation procedures have been carried out and evidenced by a sign off in accordance with the service provider’s internal signatory arrangements, provided the Registered Person is entirely satisfied with the service provider’s control environment. It is acknowledged that it will not always be possible to complete such procedures prior to the valuation being issued but there is an expectation that such procedures would be completed within 24 hours of issuing the valuation so that any issues can be identified quickly. This must be supplemented by a detailed review of the fund valuation at a certain date and relevant reconciliation procedures and results involving the local functions once a month for each sub-fund. The Commission would normally expect the checks undertaken by the Custodian/Trustee or other monitoring fund service provider to verify the accuracy of the valuation of the fund’s assets, the


Page 21 of 24


fund’s net asset value and compliance with investment restrictions to be carried out in Jersey. However the day-to day- work may be carried on outside Jersey provided the management and control of those tasks remains in Jersey. 6. Instructions Creation and cancellation instructions to the banks and the Custodian should at least be authorised in Jersey on the day of delivery unless such instructions are for the payments of amounts which are not material and within parameters set by the Registered Person. Where the Registered Person is not a signatory on bank accounts it should ensure that appropriate systems and controls exist commensurate with its business activities and that payments above set parameters and are duly authorised by the Registered Person. 7. Share Register The share register (or equivalent) of the fund, whether the fund is a Jersey company, Jersey limited partnership or Jersey unit trust, should be available in the Island. 8. Communication There should be no non-routine communication between any local fund service provider (e.g. a Custodian) and the non-Jersey fund service provider without the Jersey resident manager or fund’s Governing Body being involved. The local fund service providers should always notify the Jersey resident manager or the fund’s Governing Body if there is a problem. 9. Reconciliations As a minimum, all reconciliations should be reviewed, held and signed off in Jersey (e.g. cash, stock and dividends). Q.17: What are some of the considerations when a Certified Fund or a Registered Person licensed to conduct Fund Services Business under FS(J)L outsource the investment management function? 1. History This information was previously included as section 2 of part VI of the Commission’s Outsourcing Policy issued May 2011 which is superseded by the March 2017 Outsourcing Policy and Guidance Notes. However, it generally relates more to corporate governance than outsourcing. Moreover, the existing Outsourcing Policy exempts certain funds and fund services businesses of funds from the Outsourcing Policy and these requirements exist whether the exemption is applicable or not. 2. Monitoring Prior to the appointment of a service provider, undertake a full due diligence exercise, focussing in particular, on the service provider’s ability to carry out the outsourced activity and the control environment in which it operates. Monitor the performance of the service provider on an ongoing basis by, for example, considering at board level: a) the investment performance of the service provider against relevant benchmarks; b) the compliance of the portfolio against its investment guidelines; and c) receiving periodic reports from the service provider concerning the performance of the fund. In some cases investment committees may be established who will meet periodically (independent of the fund’s board or management) to discuss investment performance and report back to the full board.

Page 22 of 24



3. Control and Oversight In determining the level of control and oversight needed in any particular outsourcing proposal, the following factors can be taken into account: a) the substance and reputation of the service provider; b) the strength of the service provider’s control environment; c) the availability of information from the service provider; d) whether outsourcing is in-house or external; and e) the number and sophistication of shareholders/unitholders in the fund(s) affected by the outsourcing. 4. Code of Practice Even taking these factors into account, monitoring and oversight of outsourcing of the investment management function will always be required in accordance with principle 3 of the relevant code of practice.


Page 23 of 24

Appendix D – Outsourcing Policy and Guidance Notes

Appendix D

Outsourcing Policy and Guidance Notes


Page 24 of 24


Effective Dates

Effective Dates › ›

New Outsourcing arrangements 1 June 2017 Deadline for all Outsourcing arrangements 1 June 2018

This Policy applies to all new Outsourcing arrangements between a Registered Person and a Service Provider three months from the date of publication of this Policy, being 1 June 2017. Registered Persons with existing Outsourcing arrangements may adopt this Policy three months from the date of publication of this Policy, being 1 June 2017. Please note the JFSC’s expectations in paragraph 3.3.5 below. Registered Persons with existing Outsourcing arrangements must adhere to this Policy fifteen months from the date of publication of this Policy (the “OSP Deadline”), being 1 June 2018. For the avoidance of doubt Registered Persons with existing Outsourcing arrangements means all existing Outsourcing arrangements entered into before 1 June 2017 and includes any arrangements which under the 2011 Policy may not have been considered as an Outsourcing arrangement but are under this Policy. Registered Persons may opt to adhere to this Policy and file the Outsourcing Notification form after publication of this Policy and prior to three month transition period expiring on 1 June 2017, providing that the Registered Person: (i) confirms in writing that it will adhere to this Policy; and (ii) agrees to be supervised by the JFSC as if this Policy applies to the proposed Outsourcing arrangement.

Page 2 of 33

Contents

Contents Glossary of terms ............................................................................................4 Interpretation .................................................................................................7 Part I ...............................................................................................................8 1.

Introduction ............................................................................................8 Purpose .......................................................................................................................... 8 Structure ........................................................................................................................ 8 Key regulatory implications ........................................................................................... 8

Part II ............................................................................................................10 2.

Basic premises underlying the Outsourcing Policy .................................10

Part III ...........................................................................................................11 3.

The Outsourcing Policy ..........................................................................11 Definition of Outsourcing ............................................................................................ 11 Scope............................................................................................................................ 11 Effective Dates and Transitional Provisions ................................................................. 13 Effective Dates ............................................................................................................. 13 Transitional Provisions ................................................................................................. 13 Core Principles ............................................................................................................. 14

Part IV ...........................................................................................................16 4.

Guidance notes......................................................................................16 Guidance notes on Scope ............................................................................................ 16 Guidance on Core Principle No. 1 ................................................................................ 16 Guidance on Core Principle No. 2 ................................................................................ 17 Guidance on Core Principle No. 3 ................................................................................ 19 Guidance on Core Principle No. 4 ................................................................................ 19 Guidance on Core Principle No. 5 ................................................................................ 19 Guidance on Core Principle No. 6 ................................................................................ 21

Part V: FAQs ..................................................................................................23 5.

FAQs relating to general issues ..............................................................23

6.

FAQs relating to particular core principles .............................................27

7.

FAQs relating to particular types of activity ...........................................31

Appendix 1 ....................................................................................................33

Page 3 of 33

Glossary

Glossary of terms 2011 Policy

means the JFSC’s Policy Statement and Guidance Notes on: (1) Outsourcing; And (2) Delegation by Jersey Certified Funds and Fund Services Businesses Published by the JFSC in May 2011

AML/CFT

means anti-money laundering and countering the financing of terrorism

AML/CFT Handbook

means the Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism for Regulated Financial Services Business (as may be amended by the JFSC, from time to time)1

Banking Code

means the Code of Practice for Deposit-taking Business

Banking Law

means the Banking Business (Jersey) Law, 1991

Certified Fund

means a fund issued with a certificate pursuant to the Collective Investment Funds (Jersey) Law 1988

Certified Funds Code

means the Code of Practice for Certified Funds

Client

means a customer, investor or other Person in respect of whom a Registered Person is Licensed to provide products or services

COBO Conditions

means any conditions imposed by the JFSC pursuant to its granting of a COBO Consent

COBO Consent

means a consent issued by the JFSC pursuant to the Control of Borrowing (Jersey) Order, 1958

Codes of Practice (or Codes)2

means, collectively, the › Banking Code; › Certified Funds Code; › FSB Code; › GIMB Code; › IB Code; › Insurance Code; › MSB Code; › TCB Code

Collective Investment Funds Law

means the Collective Investment Funds (Jersey) Law, 1988

JFSC

means the Jersey Financial Services Commission

Companies Law

means the Companies (Jersey) Law, 1991

FAQs

means frequently asked questions

1

http://www.jerseyfsc.org/anti-money_laundering/Regulated_financial_services_businesses/aml_cft_handbook.asp

2

Codes of Practice may be prepared and issued; or revised by the JFSC pursuant to, the Regulatory Laws, and the Proceeds of Crime (Supervisory Bodies) (Jersey) Law, 2008 (in respect of AML/CFT requirements).

Page 4 of 33

Glossary

3

Fit and Proper

means that a Person would meet the standards required to be fit and proper to be Licensed or, continue to be Licensed (as applicable) pursuant to the requirements of the relevant Regulatory Law3

FSB Code

means the Code of Practice for Fund Services Business

FSJL

means the Financial Services (Jersey) Law, 1998

Fund Services Business

means the Regulated Activity, involving the provision of services in relation to certain types of funds, which is described in Article 2(10) of the FSJL

GIMB Code

means the Code of Practice for General Insurance Mediation Business

Governing Body

means the body within a Registered Person that is considered to exercise ultimate control over it. Generally, this will be (i) the directors of a company, protected cell company or the relevant cells of an incorporated cell company; (ii) the trustee of a unit trust; (iii) the general partner of a limited partnership, separate limited partnership or incorporated limited partnership; or the partners of a limited liability partnership. In the case of a sole trader, the Governing Body will be the sole trader

Group

means a body corporate that would be defined as a “subsidiary”, “wholly-owned subsidiary” or “holding body” of another body corporate, under the Companies Law irrespective of the jurisdiction of the company

IB Code

means the Code of Practice for Investment Business

Insurance Code

means the Code of Practice for Insurance Business

Insurance Law

means the Insurance Business (Jersey) Law, 1996

Licence

means the authorisation by the JFSC to conduct Regulated Activity4

Managed Entity

means, in the context of MoME Arrangements, an entity that is managed by a MoME

MoME

means, in the context of MoME Arrangements, a manager of a Managed Entity

MoME Arrangements

means arrangements described in the MoME Guidance Note and pursuant to which a MoME falls within class ZK of Fund Services Business by providing certain services to a Managed Entity

See for example Article 9 of the FSJL. Note also that the JFSC provides guidance as to, amongst other things, the criteria upon which it bases decisions as to whether such requirements are satisfied in the relevant Licensing Policy. http://www.jerseyfsc.org/the_commission/general_information/policy_statements_and_guidance_notes/index.asp

4

Such authorisation being: (i) registration under the Banking Law; (ii) grant of a permit or certificate under the Collective Investment Funds Law; (iii) registration under the FSJL or (iv) grant of a permit under the Insurance Law.

Page 5 of 33

Glossary

MoME Guidance Note

means the guidance issued by the JFSC and contained in the document entitled: Guidance Note For a Manager of a Managed Entity (a “MoME”) and Certain Managed Entities (as may be amended by the JFSC, from time to time)5

Money Laundering Order

means the Money Laundering (Jersey) Order, 2008

MSB Code

means the Code of Practice for Money Service Business

OCIF Guide

means the guide which is Schedule 4 to the Certified Funds Code called the Guide to Jersey Open-Ended Unclassified Collective Investment Funds Offered to the General Public (as amended by the JFSC, from time to time)6

Offer Document

means a prospectus or other offering document inviting a Person to become an investor of a fund

Outsourcing

means an arrangement of any form between a Registered Person and a Service Provider by which the Service Provider performs any activity, that would otherwise be undertaken by the Registered Person, where a Service Provider’s failure to perform or inadequate performance of such activity would materially impair the continuing compliance of the Registered Person’s Regulated Activity, with the requirements of the Regulatory Laws7

Outsourcing Notification

means a notification as detailed in paragraph 4.6.4

Outsourcing Policy/this Policy/the Policy

means this document

Person

means any natural or legal person (including a body of persons corporate or unincorporated)

Registered Person

means a Person that is Licensed or holds a permit or certificate, as applicable, under one or more of the Regulatory Laws

Regulated Activity

means activity conducted pursuant to the Regulatory Laws, in respect of which a Person is Licensed

Regulatory Laws

means the Banking Law, the Collective Investment Funds Law, the FSJL, and the Insurance Law

Service Provider

means a Person to whom a Registered Person Outsources activities

Sub-contractor

means a Person to whom a Service Provider transfers the carrying out of any Outsourced activity to the Service Provider

Sub-Outsourcing

means an arrangement of any form between a Service Provider and Sub-contractor pursuant to which the Sub-contractor performs any Outsourced activity that would otherwise be undertaken by the Service Provider

TCB Code

means the Code of Practice for Trust Company Business

5

http://www.jerseyfsc.org/the_commission/general_information/policy_statements_and_guidance_notes/index.asp

6

http://www.jerseyfsc.org/the_commission/codes_of_practice/index.asp

7


Page 6 of 33

Interpretation

Interpretation In the Outsourcing Policy and Guidance Notes, unless the contrary intention appears: a. Words in the singular shall include the plural and words in the plural shall include the singular. b. The word “include” indicates a non-exhaustive list. c. Grammatical variations of words to which definitions are assigned shall be construed in accordance with the definitions. d. References to legal or regulatory requirements shall, unless the context provides otherwise, refer to such legal or regulatory requirements as may be amended from time to time.

Page 7 of 33

Introduction

Part I 1.

Introduction Purpose The purpose of the Outsourcing Policy and Guidance Notes (“Outsourcing Policy”) is to assist Registered Persons in understanding what the JFSC expects of them if they Outsource activities.

Structure The Outsourcing Policy and Guidance Notes are divided into five parts: Part I explains the purpose, structure, and key regulatory implications of the Outsourcing Policy; Part II sets out the basic premises underlying the JFSC’s Outsourcing Policy; Part III sets out the Scope, Effective Dates and Transitional Provisions as well as the Core Principles the JFSC expects Registered Persons to satisfy in complying with the Outsourcing Policy; Part IV provides guidance, in general terms, as to how Registered Persons may satisfy these requirements; and Part V provides further general assistance to Registered Persons seeking to understand the JFSC’s expectations of them by providing responses to various FAQs.

Key regulatory implications The JFSC is responsible for the supervision of Regulated Activity conducted in or from within Jersey. That responsibility is discharged pursuant to, amongst other things, the Regulatory Laws. Under the Regulatory Laws, Persons that conduct Regulated Activity must be Licensed. Upon Licensing, such Persons will be Registered Persons. Compliance with the Outsourcing Policy and Guidance Notes may be taken into account by the JFSC when considering whether a Person is deemed Fit and Proper in terms of its structure and organisation. The JFSC is empowered by the Regulatory Laws to “… prepare and issue a Code of Practice setting out the principles and detailed requirements that must be complied with in the conduct of financial services business”. The Codes require Registered Persons to comply with the Outsourcing Policy, the requirements of which are therefore incorporated by reference as Codes requirements.

Page 8 of 33

Introduction

The appropriate measures to be taken by a Registered Person that is considering Outsourcing will depend upon the particular facts of each case. The guidance contained in this document presents examples of when the Outsourcing Policy may apply and ways of complying with the Outsourcing Policy but is not exhaustive. The Outsourcing Policy should always be considered in conjunction with all relevant legal or regulatory requirements and anyone who is uncertain of these requirements should seek appropriate professional advice. The Outsourcing Policy and Guidance Notes are not intended to provide legal advice.

Page 9 of 33

Basic premises

Part II 2.

Basic premises underlying the Outsourcing Policy

2.1

The Outsourcing Policy is based on the basic premises that: a)

b)

2.2

A Registered Person remains fully responsible and accountable to the JFSC for (and the JFSC’s powers in relation to the Registered Person may, if appropriate, be exercised in respect of) any Outsourced activity to the same extent as if the Outsourced activities were not Outsourced. A Registered Person must not, as a consequence of any Outsourcing arrangements, become devoid of functions to the extent that it becomes a “letter box” entity.

A Registered Person should therefore ensure that it takes reasonable steps to avoid its Outsourcing arrangements giving rise to any undue risks and the JFSC expects adherence to the Core Principles of its Outsourcing Policy will be essential in this regard. The relevant Codes of Practice require adherence with this policy.

Page 10 of 33

The Outsourcing Policy

Part III 3.

The Outsourcing Policy Definition of Outsourcing Outsourcing means an arrangement of any form between a Registered Person and a Service Provider by which the Service Provider performs any activity, that would otherwise be undertaken by the Registered Person, where a Service Provider’s failure to perform or inadequate performance of such activity would materially impair the continuing compliance of the Registered Person’s Regulated Activity, with the requirements of the Regulatory Laws8.

Scope The Outsourcing Policy applies to all Registered Persons, in respect of Outsourcing; irrespective of whether it is Outsourced to Persons within the same Group9, or to third parties. Registered Persons should ensure that the same requirements are met in respect of any Sub-Outsourcing arrangements as would apply in respect of any Outsourcing arrangements. The following activities are not deemed to amount to Outsourcing for the purposes of this Outsourcing Policy: The provision, to a Registered Person, of advisory services and other services which do not form part of the Regulated Activity in respect of which it is Licensed, including: › the provision of legal advice to the Registered Person; › the purchase of investment advisory services where investment advice is not part of the Registered Person’s Regulated Activity; › the training of personnel of the Registered Person; › the provision of billing services; › the security of the Registered Person’s premises and personnel; or › the purchase of standardised services including market information services and the provision of price feeds. The performance of activity that would otherwise be Outsourcing by different elements of the same legal person , i.e. (i) a branch on behalf of its head office; or (ii) a branch on behalf of another branch, in both scenarios where all elements are parts of the same legal person.10

8


9

Refer to paragraph 3.2.2.2. regarding a branch.

10

Refer to FAQ 7.2, in Part V.

Page 11 of 33


Where a custodian (including a prime broker) acting in relation to a Certified Fund is a member of an international corporate Group, and the sub-custodians engaged by the custodian are also members of the same Group. This is on the basis of the JFSC’s guidance on the Certified Funds Prospectus Order (letter 31 May 2012)11 and the JFSC would not expect the fund prospectus to list or describe each sub-custodian separately. References can simply be made in the fund prospectus to the use of members of the same corporate Group to act as subcustodians. Based on the JFSC’s existing working practice in relation to the Trust Company Business where a Trustee regulated for Trust Company Business appoints a third party to act in relation to an individual Trust (save for where the Trust is a Certified Fund or Recognized Fund where the provisions of paragraph 3.2.2.5 below apply) this Policy does not apply. Where a regulated Trustee appoints a Service Provider to generally act in relation to its Clients, rather than acting in relation to an individual Trust such proposed appointment and ongoing Outsourcing needs to be considered in accordance with the Policy. For example the global Outsourcing of accountancy services or IT Services may be caught. The JFSC does not expect a Registered Person which is a fund12 or a Service Provider that provides services in relation to a fund to comply with the Outsourcing Policy; provided that certain conditions are met. The conditions that should be met are that: › The Service Providers who will provide services to the fund are clearly disclosed to the JFSC and the fund’s investors’ in an Offer Document prior to these arrangements being implemented.13 › A change of Service Providers post authorisation of the fund where the Offer Document is not to be updated and where the consent of the investor to the change in Service Provider is not required should be notified to the investors (the “Investor Notification”).13 › The Offer Document/Investor Notification or other documents seeking the consent of the investor to a change in Service Provider makes clear and unequivocal, in a manner that is suitable to the level of the fund’s investors’ financial sophistication:14

11

Available from the Policy Statements and Guidance Notes page of the JFSC website: http://www.jerseyfsc.org/the_commission/general_information/policy_statements_and_guidance_notes/index.asp

12

This is the case whether or not the fund is a company, trust or form of partnership. Note also that, in all cases, it is the Governing Body which is ultimately responsible for the selection, appointment and monitoring of its fund service providers.

13

In some cases alternative documentation may be acceptable to the JFSC, but the Registered Person should seek the JFSC’s confirmation of this on a case by case basis.

14

For example, if investors are retail investors the expectation is that more explanation is needed than would be required in the case of professional investors.

Page 12 of 33


› The nature of any activity to be undertaken by such Service Providers; › Any material risks connected with the activity (including any conflicts of interest); and › Where the fund’s investors should deal directly with those Service Providers in respect of the activities they carry out. The JFSC deems that MoME Arrangements, which are consistent with the standards set out in its MoME Guidance Note, are not subject to the Outsourcing Policy. For the avoidance of doubt, in relation to a fund: if such Service Providers appointed in compliance with the conditions in paragraph 3.2.2.5 above should then propose to Outsource activity; and/or the conditions outlined in paragraph 3.2.2.5 above are not met, such Outsourcing will be subject to the Outsourcing Policy. In exceptional circumstances, where strict adherence with the Outsourcing Policy would produce an anomalous result, Registered Persons may apply to the JFSC for a variance to the requirements of the Outsourcing Policy.

Effective Dates and Transitional Provisions Effective Dates This Policy applies to all new Outsourcing arrangements between a Registered Person and a Service Provider three months from the date of publication of this Policy, being 1 June 2017. Registered Persons with existing Outsourcing arrangements may adopt this Policy three months from the date of publication of this Policy, being 1 June 2017. Please note the JFSC’s expectations in paragraph 3.3.5 below. Registered Persons with existing Outsourcing arrangements must adhere to this Policy fifteen months from the date of publication of this Policy (the “OSP Deadline”), being 1 June 2018. For the avoidance of doubt Registered Persons with existing Outsourcing arrangements means all existing Outsourcing arrangements entered into before 1 June 2017 and includes any arrangements which under the 2011 Policy may not have been considered as an Outsourcing arrangement but are under this Policy.

Transitional Provisions Any new arrangements entered into after the Policy is published and until the three months transition period has expired, on 1 June 2017, are subject to the 2011 Policy (the “Interim Period”). However, these arrangements will need to be updated before the expiry of the fifteen months period on 1 June 2018 referred to in paragraph 3.3.2 so that they comply with this Policy. Therefore, any Service Provider may wish to ensure that any Outsourcing arrangements entered into during the Interim Period are compliant with this Policy. Page 13 of 33


Registered Persons may opt to adhere to this Policy and file the Outsourcing Notification form after publication of this Policy and prior to three month transition period expiring on 1 June 2017, providing that the Registered Person: (i) confirms in writing that it will adhere to this Policy; and (ii) agrees to be supervised by the JFSC as if this Policy applies to the proposed Outsourcing arrangement. Insofar as existing Outsourcing arrangements are concerned, including those arrangements that may not have previously been considered Outsourcing under the 2011 Policy, Registered Persons are expected to review and update these arrangements after 1 June 2017 in accordance with paragraphs 3.3.5.1 or 3.3.5.2 and in both cases before the OSP Deadline: in the ordinary course of their business when the existing arrangements are reviewed or updated; or upon the annual review of the Outsourcing Arrangement in accordance with the 2011 Policy. For consistency and continuity at the time the Outsourcing Arrangement is conformed to the Policy an Outsourcing Notification should be made to the JFSC in relation to those existing arrangements that are now subject to this Policy which have never previously been notified to the JFSC.

Core Principles Core Principle No. 1 A Registered Person must satisfy itself at the outset, and on a continuing basis thereafter, that any Service Provider to whom it Outsources activities is Fit and Proper and will perform the Outsourced activities in a responsible, professional and suitable manner.

Core Principle No. 2 A Registered Person must have in place appropriate written agreements, with any Service Providers to whom it Outsources activities that clearly specify the terms of engagement and the level of services to be provided by the Service Provider.

Core Principle No. 3 A Registered Person must maintain the (i) capacity; (ii) resources; and (iii) policies and procedures to monitor, assess and ensure that any Outsourced activities are being performed adequately and the Service Provider remains Fit and Proper.

Core Principle No. 4 A Registered Person must put in place arrangements that allow it to terminate its Outsourcing arrangements without undue delay and manage the consequences of any such termination appropriately.

Page 14 of 33


Core Principle No. 5 A Registered Person must provide the JFSC with adequate prior written notice of its intention to Outsource activities or make material changes to any existing Outsourcing arrangements. A Registered Person must not enter into any Outsourcing arrangement (save for contingency arrangements) until it has received prior written confirmation from an officer of the JFSC that the JFSC has no objection to such Outsourcing arrangements.

Core Principle No. 6 A Registered Person must ensure that nothing in any Outsourcing arrangements prevents or restricts the JFSC’s ability to exercise the legal or regulatory powers it would otherwise have been able to exercise, in respect of any Registered Persons or Outsourced activity, had the Outsourcing not taken place.

Page 15 of 33

Guidance Notes

Part IV 4.

Guidance notes Guidance notes on Scope Please see in Appendix 1 a flow chart to assist Registered Persons in determining whether an activity is subject to this Policy. This flow chart is for guidance only and is not intended to provide legal advice.

Guidance on Core Principle No. 1 A Registered Person should conduct suitable due diligence itself or, where appropriate through another member of the same Group, in order to satisfy itself that: adequate measures have been taken to counter any material risks relating to the Outsourcing arrangements; and its Service Providers are Fit and Proper; and possess adequate capacity and resources to perform the Outsourced activity. Determining what amount to “adequate measures”, “material risks” or “adequate capacity and resources”, for the purposes of Core Principle No. 1, will depend on the particular facts of each case. A Registered Person should consider, amongst other things, any factors that may adversely impact upon the finances, reputation or operations of the Registered Person and its Clients. Factors to consider when determining what amount to “material risks” may include any relevant: conflicts of interest;15 concentration risks (i.e. risks which might arise if multiple Registered Persons use a common Service Provider which results in the Service Provider lacking the capacity and resources to service them all properly); and jurisdictional risks. Factors to consider, when determining whether a Service Provider has adequate capacity and resources to perform Outsourced activities, may include the level of the Service Provider’s: Human resources (e.g. the substance and reputation of the Service Provider and whether staff are suitably qualified; experienced; welltrained; and are employed in sufficient numbers);

15

For example, conflicts of interest might arise in respect of undisclosed fee arrangements; transactions involving third parties; where companies have common directors and in other circumstances which benefit the Registered Person, but are prejudicial to its Clients’ best interests.

Page 16 of 33

Guidance Notes

Technical resources (e.g. whether effective, reliable and robust systems and controls are in place that can, amongst other things, monitor and control the volume of anticipated activity and handle the complexity and nature of the Outsourced activity without prejudice to the Client’s interests); and Financial resources (e.g. whether the Service Provider is solvent and in good standing; has appropriate insurance; and has sufficient access to capital or credit). The JFSC expects that any Regulated Activity which is Outsourced will be Outsourced to a Service Provider that is itself regulated for the conduct of such activity and acting in accordance with any applicable legal or regulatory requirements. This assessment should also form part of the Registered Person’s due diligence. It is possible that activity which is Outsourced may materially impair the continuing compliance of the Registered Person’s Regulated Activity, with the requirements of the Regulatory Laws whilst not amounting to Regulated Activity. This will always turn on the particular facts of each case. However, where Outsourced activity does not amount to Regulated Activity, the expectation that the Service Provider should itself be regulated for the conduct of the Outsourced activity would not apply. A Registered Person should be able to provide the JFSC with clear evidence that suitable due diligence has been conducted on their Service Providers, upon request.

Guidance on Core Principle No. 2 Subject to paragraph 4.3.4 (below), the JFSC expects a Registered Person to enter into written, legally binding agreements with its Service Providers that reflect the risks; size; and complexity of the Outsourcing arrangements. Subject to paragraph 4.3.4 (below), the JFSC would normally expect such agreements to include enforceable and clearly defined provisions covering: The function(s) to be Outsourced; The rights, obligations and liabilities of all relevant parties to the agreement; Whether any Sub-Outsourcing is allowed and if so, in what circumstances; The performance standards to be met by the Service Provider; The reporting requirements of the Service Provider to the Registered Person in respect of: › Its obligations under the agreement; › Any breaches, errors or other events that undermine its performance; and

Page 17 of 33

Guidance Notes

› Any other relevant information concerning its conduct of the Outsourced activities. An annual review (at a minimum) of the relationship; Termination provisions; Access rights for the JFSC, Registered Person and any other relevant third parties (e.g. auditors) to information (including records) relating to the Outsourced16 activity; Data protection standards that comply with any applicable legal or regulatory requirements; and Protection of the Registered Person’s confidential and other proprietary information or materials and, where relevant, that of its Clients. Where appropriate, such provisions should cover, amongst other things, the destruction or return of any such information or materials upon termination of the Outsourcing arrangements. The practice of Sub-Outsourcing should be considered carefully by Outsourcing parties. The Registered Person should ensure that the Service Provider cannot in turn Outsource the functions Outsourced unless the Sub-contractor has been approved by the Registered Person. Sub-Outsourcing must not undermine the ability of the Registered Person or the JFSC properly to monitor compliance with regulatory requirements. Where the Service Provider is an entity within the same Group as the Registered Person, which provides specialised central support functions to entities within the same Group of companies, the JFSC’s expectation of “appropriate written agreements” may not amount to a written, legally binding agreement that covers the specific nature of the Outsourcing in as much detail as would otherwise be required. Provided that (in all such exceptional circumstances): › the Registered Person is still able to provide the JFSC with evidence of sufficiently robust and clearly documented procedures which properly protect its Clients’ interests; › the other Core Principles can still be satisfied; › there is no question of such arrangements having been implemented to circumvent the requirements of the Outsourcing Policy; and › It meets all other regulatory and legal requirements.

16

In cases where Registered Persons may be unable to secure access for the JFSC to information about Service Providers’ “Outsourced activities” Registered Persons should seek the JFSC’s confirmation as to whether alternative arrangements may be acceptable, on a case by case basis.

Page 18 of 33

Guidance Notes

Guidance on Core Principle No. 3 A Registered Person should be able to provide the JFSC, upon request, with evidence that it has itself or, where appropriate through another member of the same Group: Effective policies and procedures to monitor and assess its Service Providers’ performance of any Outsourced activities. The JFSC may request or review on a supervisory examination the results of such monitoring and assessment; and Adequate capacity and resources17 to implement any such policies and procedures.

Guidance on Core Principle No. 4 A Registered Person should be able to terminate an Outsourcing arrangement and the existing Outsourcing arrangements should not be terminated (save in exceptional circumstances as described in paragraph 4.6.7.) until the JFSC is notified either: that the Registered Person intends to undertake the Outsourced activity itself; or of the new Outsourcing arrangements in accordance with this policy and a written no objection has been received from an officer of the JFSC. A Registered Person should either itself or, where appropriate through another member of the same Group, establish and maintain appropriate contingency plans that enable alternative arrangements to be set up without undue delay and with minimum disruption to its business; if the Outsourcing ends suddenly or unexpectedly or, there is a significant interruption. Contingency plans should be documented and, where appropriate, include provisions that allow the Registered Person or another member of the same Group to (i) take over day-to-day control of any Outsourced activity; or (ii) transfer its conduct to another suitable Service Provider. The JFSC’s expectation is that the contingency plans will be periodically tested. The JFSC may request or review on a supervisory examination the results of such testing.

Guidance on Core Principle No. 5 The Registered Person should communicate with the JFSC in respect of any proposals to Outsource or make material changes to existing Outsourcing arrangements. It is necessary to seek the JFSC’s prior confirmation that it has “no objection” to such proposals. However, the JFSC may, if it sees fit, object to proposals or require further action to be taken where it has regulatory concerns.

17

Note the guidance in respect of Core Principle 1 on the meaning of “adequate capacity and resources”.

Page 19 of 33

Guidance Notes

Registered Persons should provide the JFSC with sufficient time to review and assess the possible regulatory implications of any Outsourcing proposals. The JFSC’s general expectation is that proposals to Outsource activity will be communicated to it at an early stage. Determining what amounts to “sufficient time” or, an “early stage”, for the purposes of Core Principle No. 5, will depend upon the particular facts of each case. Factors that may be relevant include: (i) the size, risk and complexity of the proposed Outsourcing; (ii) the Service Providers and jurisdictions to which it is proposed to Outsource; and (iii) the ability of the Registered Person to comply with the Outsourcing Policy should the proposals be implemented. The JFSC would expect the notification of proposed Outsourcing to include the following information (for ease the JFSC provides an Outsourcing Notification form on the JFSC website): Name and address of the proposed Service Provider Regulatory status of the proposed Service Provider Summary of the Outsourced activity Whether the Service Provider is related to the Registered Person (i.e. subsidiary, part of the same Group or other connection) Reasons for the Outsourcing Summary of how the Outsourcing impacts on Regulated Activities including a summary of the risk assessment Confirmation due diligence has been performed on the proposed Service Provider in connection with the Fit and Proper test as required by Core Principle No.1 Confirmation that there are no barriers to accessing records and data protection requirements have been considered Summary of how the Outsourced activity will be monitored on an ongoing basis Details of contingency plans that exist in the event the Service Provider fails to perform Whether Sub-Outsourcing is permitted and provide relevant details of the Sub-Outsourcing Confirmation that the Registered Person will comply with each of the six Outsourcing Core Principles A copy of the agreement should be provided if the Outsourced activity is a Regulated Activity Any other relevant information The JFSC may request further information, including the Outsourcing agreement in relation to unregulated activity.

Page 20 of 33

Guidance Notes

Upon receipt of the Outsourcing Notification the JFSC will acknowledge receipt confirming the date of receipt and indicate that the JFSC will use its best endeavours to respond within 20 business days of the date of receipt. Where the Outsourcing Notification is part of an application to authorise a Certified Fund or a Fund Services Business (where the Outsourcing arrangement is not exempt) no acknowledgement will be sent and the JFSC will endeavour to process the Outsourcing Notification in accordance with the published timeframes for the relevant Certified Fund or Fund Services Business. Where the Outsourcing arrangement is not exempt and concerns a Certified Fund or a Fund Services Business, the JFSC will endeavour to respond within 10 business days of receipt of the Outsourcing Notification. The JFSC response may be: a request for further action to be taken such as: › the provision of further information and/or documentation; and/or › confirmation that additional time is required to consider the Outsourcing Notification; or a “no objection”. The Registered Person should not enter into an Outsourcing arrangement until a “no objection” is received in writing from the JFSC. In exceptional circumstances where the Registered Person has to invoke its Outsourcing contingency plans and prior notice to the JFSC is not possible, the JFSC should be notified as soon as practicably possible afterwards. Such notification should also include: an explanation as to why the Outsourcing arrangements have ended unexpectedly/been significantly interrupted; provide details of the Outsourcing contingency plan implemented together with confirmation that its existing Outsourcing contingency plan was and remains adequate; and confirm the time period that the Outsourcing contingency plan will be in place and when it is anticipated the replacement Outsourcing arrangements will be put in place.

Guidance on Core Principle No. 6 A Registered Person should ensure that its Outsourcing proposals do not defeat the purpose of regulation. Whatever the nature of any Outsourcing arrangements, the Registered Person should ensure that: The provisions of any Regulatory Laws or other regulatory requirements (e.g. Licence conditions, COBO Conditions or Code(s) requirements) which apply to a Registered Person, prior to any Outsourcing, shall continue to apply upon such Outsourcing arrangements taking effect; and

Page 21 of 33

Guidance Notes

The JFSC is able to exercise its supervisory and other regulatory functions effectively. In order to facilitate this requirement the Registered Person should procure that the JFSC is able to access, promptly upon request, any books, records or other sources of information relevant to its regulatory oversight.

Page 22 of 33

FAQs relating to general issues

Part V: FAQs 5.

FAQs relating to general issues Where terms such as “appropriate”, “adequate”, “suitable”, “effective” or other similar qualitative terms are used how should these be interpreted by a Registered Person? A Registered Person is expected to apply its own judgement to the particular facts of each case in order to determine what might be “appropriate”, “adequate”, “suitable”, “effective” etc. In applying its judgement, the Registered Person is expected to be mindful of its obligations to comply with any applicable legal or regulatory requirements. Where the JFSC provides specific guidance as to what it would normally consider “appropriate”, “adequate”, “suitable”, “effective” etc. then, in the absence of such steps being taken, the JFSC would expect a Registered Person to either take equivalent alternative steps or, be able to provide evidence to the JFSC explaining why it did not deem such steps to be necessary. Similarly, where these FAQs provide further explanations of the JFSC’s general understanding of certain aspects of the Outsourcing Policy and Guidance Notes; the JFSC’s expectation is that Registered Persons will adopt an approach that is consistent with these FAQs where relevant to the particular circumstances of any Outsourcing arrangements they may become involved in. It should also be noted that where reference is made to policies and procedures being “effective”18 or to plans being “appropriate”19; the JFSC expects that a Registered Person will, as part of the ongoing monitoring of its Outsourcing arrangements, periodically test whether such policies, procedures or plans comply with the Core Principles of the Outsourcing Policy. The frequency of such testing will depend on the particular facts of each case and should reflect the size, risk and complexity of the Outsourcing arrangements.

Why does the JFSC include, within the definition of “Outsourcing”, activity that may not actually be regulated by the JFSC? Activity which the JFSC does not regulate may materially impair the continuing compliance of the Registered Persons’s activity that is regulated by the JFSC. The JFSC takes such activity into account when deciding whether to grant or revoke Licences and similarly, such activity may be a relevant consideration in respect of any Outsourcing arrangements.

18

See for example, the Guidance on Core Principle No. 3, paragraph 4.4., in Part IV.

19

This is relevant to the discussion of “contingency plans” in the Guidance on Core Principle No. 4 paragraph 4.5., in Part IV.

Page 23 of 33


Two examples are provided below, to illustrate how this approach might be applied: By way of example, if a Registered Person (e.g. a trust company business or a Fund Services Business), Outsources accounting functions to a Service Provider that are critical in supporting the performance of the Regulated Activity for which it is Licensed (e.g. the valuation of its assets); a failure to perform those accounting functions properly could result in the Registered Person failing to properly conduct the Regulated Activity for which it is Licensed. By way of further example, if a money service business Outsources IT functions that are critical in facilitating the transmission of funds by electronic means, a failure in the IT system could result in the Registered Person failing to properly conduct the money service business for which it is Licensed20. However, the Outsourcing Policy is not intended to increase the amount of activity that is regulated. In other words, activity that is not relevant in determining whether a Regulated Activity is being performed properly does not fall within the scope of the Outsourcing Policy. The JFSC has also expressly excluded certain types of activity from the scope of the Outsourcing Policy and Guidance Notes at paragraph 3.2.2 of Part III (i.e. the provision of advisory services and standardised services etc.).

What does the JFSC mean when it uses phrases such as “any applicable legal or regulatory requirements” without explaining what these might be? It is the responsibility of a Registered Person to determine the legal or regulatory requirements which apply to it. The JFSC’s intention in using such phrasing is to emphasise that compliance with the Outsourcing Policy is in addition to any other legal or regulatory requirements which might apply to a Registered Person. The application of the Outsourcing Policy does not remove any such obligations. By way of example, additional legal or regulatory requirements (outside of the Outsourcing Policy) might include requirements such as those contained in: the OCIF Guide (e.g. in respect of the independence of the manager and trustee/ custodian); the Codes of Practice for Alternative Investment Funds and AIF Services Business (e.g. in respect of “delegation”); Other requirements of the Codes of Practice, such as requirements relating to Corporate Governance; and

20

Under Article 2(9)(c) of the FSJL, transmitting or receiving funds by wire or other electronic means is deemed to be money service business, which means you must be Licensed to carry out this activity in or from within Jersey.

Page 24 of 33


The Money Laundering Order (e.g. requiring the appointment of a Money Laundering Compliance Officer and Money Laundering Reporting Officer of “appropriate level of seniority”). For the avoidance of doubt, in cases where a Registered Person places reliance on a “relevant person” or a Person carrying on “equivalent business” pursuant to Article 16 or 16A of the Money Laundering Order,21 the JFSC does not deem this to be Outsourcing22. Accordingly, the Outsourcing Policy and Guidance Notes do not apply to such circumstances. However, Registered Persons must still comply with any applicable provisions of the Money Laundering Order and any other relevant legal or statutory requirements23. Finally, it should be noted that, a Registered Person may have made contractual agreements, representations or other binding commitments to Clients’. The JFSC expects Registered Persons to honour such commitments. Depending on the facts, Outsourcing arrangements that breach such commitments may also breach applicable regulatory requirements, such as the requirements under the Codes of Practice for a Registered Person to conduct its business with integrity and where applicable act in the best interests of its Client.

Should the Governing Body formally consider and document its consideration of any Outsourcing arrangements through board minutes (or, where appropriate, other similar documents formally recording its decision)? The Outsourcing Policy is premised on an understanding that, amongst other things, Registered Persons remain fully responsible and accountable to the JFSC for any Outsourced activity. Since the Governing Body is ultimately responsible for the management and conduct of a Registered Person’s affairs; the JFSC would expect to see, upon request, board meeting minutes of the Governing Body evidencing that it had carefully considered any Outsourcing arrangements it implemented. In certain circumstances, it may be sufficient for a Governing Body to approve a general Outsourcing Policy and delegate the handling of specific Outsourcing arrangements to particular individuals or committees. However, the JFSC would still expect to see, upon request, board meeting minutes of the Governing Body evidencing that it had carefully considered the activities of the particular individuals or committees in respect of the particular Outsourcing arrangements. In all cases, Registered Persons must be able to demonstrate to the JFSC that any Outsourcing arrangements are effective, reliable and robust and comply with the Core Principles of the Outsourcing Policy.

21

As such terminology is understood within the context of the Money Laundering Order.

22

See paragraph 12 of section 5.1 of the AML/CFT Handbook.

23

Of particular importance are AML/CFT Handbook: (i) section 2.4.4 which addresses outsourcing and (ii) paragraph 5 of section 9 which clarifies that for the purpose of screening, awareness and training of employees, the term “employees” will include temporary and contract employees, and the employee of any external party fulfilling a function in relation to a relevant person under an outsourcing agreement.

Page 25 of 33


For the avoidance of doubt, the JFSC would expect the Governing Body to adopt the approach, outlined above, in cases where it was Outsourcing within its Group to a “specialised central support function” (as described at paragraph 6.3 of Part V).

What are the JFSC’s expectations in the event that Outsourced Activities are Sub-Outsourced? The JFSC expects Registered Persons to ensure that the same requirements are met in respect of any Sub-Outsourcing arrangements as would apply in respect of any Outsourcing arrangements. Registered Persons contractual arrangements with their Service Providers should cover possible Sub-Outsourcing arrangements (including where they are prohibited). For the avoidance of doubt, Sub-Outsourcing includes arrangements with a Sub-contractor that is within the same Group or is a third party which is not in the same Group as the Service Provider. Again, in such cases, the same principles should be applied as would be applied if the Sub-Outsourcing arrangements were Outsourcing arrangements. the premise underlying the Outsourcing Policy and Guidance Notes that Registered Persons remain fully responsible and accountable to the JFSC for any Outsourced activity which they may Outsource continues to apply (to the Registered Person) in circumstances where Outsourced activity has been Sub-Outsourced.

Page 26 of 33

FAQs relating to particular core principles

6.

FAQs relating to particular core principles Why does the JFSC provide that a Registered Person should conduct due diligence; have effective policies and procedures; or maintain appropriate contingency plans either itself or “where appropriate through another member of the same Group” (Core Principle No.’s 1, 3 and 4 Guidance in paragraphs 4.2, 4.4, and 4.5, respectively of Part IV)? The JFSC recognises that, in certain circumstances, Registered Persons may enter into Outsourcing arrangements, pursuant to which monitoring or due diligence is conducted; policies, and procedures are implemented and contingency plans are maintained by other Group members. In such circumstances, Registered Persons may rely upon such activities being carried out by other Group members provided that they can demonstrate that the Outsourcing arrangements24: Comply with any applicable legal or regulatory requirements; Are in their Clients’ best interests25; and Do not give rise to any undue risks having regard to, amongst other things, the Service Provider and its jurisdiction. The ability to rely on members of a Group, as described above, only applies to structures involving bodies corporate.26 Should a Registered Person consider another structure, involving different entities (i.e. not bodies corporate), that does not fall within these parameters is equivalent to a Group structure, it may approach the JFSC to determine whether it is able to place reliance on other members of such a “group” in the same way. For the avoidance of doubt, Registered Persons remain fully responsible and accountable to the JFSC in respect of any Outsourced activity irrespective of whether they rely on a third party to conduct due diligence on their behalf. The Registered Person has to be able to demonstrate its oversight of these Outsourced arrangements.

24

Registered Persons should be able to provide the JFSC with documentary evidence demonstrating the rationale and procedures pursuant to which they satisfied themselves that the Outsourcing arrangements were appropriate.

25

By way of example, where a Registered Person relies on another Group member to monitor Outsourcing arrangements, the Registered Person should still satisfy itself that effective monitoring is in fact taking place (e.g. by appropriate internal auditing).

26

The definition of “Group” in the Glossary is based on the Companies Law definition which relates to body corporates.

Page 27 of 33


What does the JFSC mean when it suggests that, in cases where the Service Provider is an entity within the same Group as the Registered Person, “the JFSC’s expectation of appropriate written agreements may not amount to a written, legally binding agreement that covers the specific nature of the Outsourcing in as much detail as would otherwise be required” (Core Principle No. 2 Guidance in paragraph 4.3.4 of Part IV)? The specific nature of such agreements will always depend on the particular facts of each case. By way of example, such less detailed agreements may be appropriate in circumstances where there is some form of overarching framework agreement between the Registered Person and the Service Providers which provides robust and enforceable procedures pursuant to which particular Outsourcing arrangements may be entered into pursuant to service level agreements. The Registered Person does however need to consider whether the documentation relating to the arrangements adequately protect its Client’s interests and meet all other relevant legal and regulatory requirements.

What is meant by “specialised central support functions” (Core Principle No. 2 – Guidance in paragraph 4.3.4 of Part IV)? What the JFSC has in mind are so-called “centres of excellence” and other similar entities or arrangements which are normally used by large banking and other financial institutions. These are specific entities within a large Group of companies to which all entities in that Group Outsource specific activities (e.g. IT, finance-related or other functions). It should be noted that use of such “centres of excellence” may not always be appropriate because the legal, tax or regulatory framework in their jurisdiction prevents this or presents a significant impediment to such Outsourcing. Where a Registered Person intends to use such a specialised central support function as its Service Provider, the guidance at paragraph 6.2.1 applies. Registered Persons seeking to use such specialised central support functions are reminded that they remain fully responsible and accountable to the JFSC for any activity which is Outsourced and they should also be able to satisfy themselves that the other Core Principles are still satisfied and all other relevant legal and regulatory requirements.

What is the timeframe in which a Registered Person should be able to implement its contingency plans if its Outsourcing arrangements are terminated or suffer a significant interruption (Core Principle No. 4 – Guidance in paragraph 4.5 of Part IV)? The specific timeframe will depend on the facts of each case, but, in all cases, the JFSC expects Registered Persons to implement any such contingency plans as quickly as is reasonably possible having regard to those particular facts.

Page 28 of 33


What constitutes a “significant interruption” (Core Principle No. 4 – Guidance in paragraph 4.5 of Part IV)? The JFSC considers a “significant interruption” to be any interruption that has a serious and adverse impact on the performance of any Outsourced activity (e.g. a natural disaster or, major failure of the IT network).

When the JFSC responds that it has “no objection”, to an Outsourcing Notification by the Registered Person of its proposed Outsourcing arrangements does this mean that the JFSC has implicitly approved the proposals (Core Principle No. 5 – Guidance on paragraph 4.6 of Part IV)? No. Unless the JFSC provides express written confirmation that it has approved any proposed Outsourcing arrangements, then no such approval should be implied. A Registered Person should however await a “no objection” in writing from an officer of the JFSC before entering into an Outsourcing arrangement.

What “further action” might the JFSC require a Registered Person to take in respect of its Outsourcing proposals (Core Principle No. 5 – Guidance in paragraph 4.6 of Part IV)? Any required further action will depend on the particular facts of each case. For example, the JFSC may require the Registered Person to provide its Clients’ or the JFSC with further information about the nature of the Outsourced activity; the Service Provider; or other relevant aspects of the proposed Outsourcing arrangements.

What might prevent the JFSC from exercising its supervisory functions effectively (Core Principle No. 6 – Guidance in paragraph 4.7 of Part IV)? Again, this will depend on the particular facts of each case. For example, where Outsourcing arrangements involve foreign jurisdictions, the JFSC will need to be able to continue to effectively supervise the arrangements. This ability might be impaired by factors such as increased supervision costs; data protection, secrecy or other laws in the foreign jurisdiction that might prevent the JFSC from obtaining information; or a lack of mutual co-operation arrangements between the JFSC and regulatory authorities in the Service Provider’s jurisdiction. Registered Persons should be able to demonstrate to the JFSC that, where relevant, adequate measures are in place to address any such risks. By way of example, where financial records or other information which the JFSC might need to obtain in order to exercise its supervisory or enforcement powers is transferred to a jurisdiction which has secrecy laws the Registered Person should take adequate steps to ensure that such laws will not be used to prevent the JFSC accessing such information and should periodically test whether these measures are effective.

Page 29 of 33


Registered Persons should also be mindful of the fact that they are always accountable to the JFSC for any regulatory breaches in respect of their Regulated Activity.

Page 30 of 33

FAQs relating to particular types of activity

7.

FAQs relating to particular types of activity Funds: where an entity is Licensed as a fund, and the appointment of a Service Provider is exempt from this policy by virtue of compliance with the conditions set out in paragraph 3.2.2.5 what responsibility does the fund have regarding the Service Providers? It should be noted that the fund’s Governing Body is ultimately responsible for the selection, appointment and monitoring of its Service Providers. This means that the fund should, amongst other things, monitor, conduct due diligence and implement policies and procedures in respect of the Service Providers.. The provisions of any Regulatory Laws (which includes the Codes) or any other regulatory requirements (e.g. such as Licence conditions or COBO Conditions) which apply to a Registered Person shall continue to apply notwithstanding whether such activity is caught by this Policy or not.

Branches: How does the Outsourcing Policy apply between elements of the same legal person (i.e. where a head office conducts activity for its branch or a branch conducts activity for another branch)? Where activity the performance of which would materially impair the continuing compliance of the Registered Person’s Regulated Activity with the requirements of the Regulatory Laws is performed by a head office on behalf of its branch or a branch for another branch (or vice-versa) (“elements of a legal person”), this falls outside the scope of the Outsourcing Policy. This is because the branch and the head office, or both branches, are the same legal person. However, it is important that Registered Persons recognise that they are still bound by other legal and regulatory requirements, including the Codes of Practice and the AML/CFT Handbook.27 For the avoidance of any further doubt, if the Registered Person’s legal person Outsources activity of the Registered Person to another legal person (i.e. a Service Provider), all such Outsourced activity will be caught by the Outsourcing Policy. Pursuant to Principle 3 of the Codes of Practice: The Registered Person is required, amongst other things, to adequately monitor and control its business. Accordingly, in cases where a Registered Person conducts its business in such a way that one element of a legal person carries out activity (that save for the exemption referred to in paragraph 3.2.2.2 would be Outsourced activity), on behalf of another, proper corporate governance

27

Note, for example, that the AML/CFT Handbook makes reference to the requirement under the Money Laundering Order for a Jersey body corporate or other legal person registered in Jersey that carries on Financial Services Business through an overseas branch to comply with the Money Laundering Order.

Page 31 of 33

FAQs relating to particular types of activity

mechanisms must be implemented by the Registered Person to ensure that such business is adequately monitored and controlled.28 The JFSC does not expect elements of a legal person to conduct due diligence on each other or to enter into binding legal agreements. Further, the JFSC recognises that elements of a legal person may rely upon each other to conduct compliance monitoring and due diligence; implement policies and procedures; and carry out other activity (that save for the exemption referred to in paragraph 3.2.2.2 would be Outsourced activity). Where elements of a legal person rely on each other to carry out activity (that save for the exemption referred to in paragraph 3.2.2.2 would be Outsourcing activity), the branch or head office (as applicable) should be able to demonstrate to the JFSC that its senior management29 or, Governing Body30 has adequate capacity, resources and systems and controls in place to ensure that the conduct of any such activity(that save for the exemption referred to in paragraph 3.2.2.2 would be Outsourced activity) being relied upon: › Complies with any applicable legal or regulatory requirements; › Is in the interests of any Clients’ of the Jersey branch or head office (as applicable)31; and › have properly identified the risks including, the effect that such arrangements might have on AML/CFT risks, and is properly mitigating such risks.

28

For the avoidance of doubt, it should be remembered that this is the activity conducted in or from within Jersey in respect of which the Registered Person is Licensed (by the JFSC) i.e. the carrying out, by the head office or other branch, of other functions which do not affect the activity which is regulated by the JFSC will not be relevant.

29

Where the branch is relying on the head office or another branch of the same legal person.

30

Where the head office is relying on the branch.

31

Regard should be had to Principle 2 of the relevant Code of Practice.

Page 32 of 33

Appendix 1: Flow Chart

Appendix 1 Guidance on whether an activity is within the scope of the Outsourcing Policy (“OSP”).32 No

Is the Registered Person subject to one of the Regulatory Laws?

Yes

Yes

Review the exemptions in the OSP. Is the Outsourced activity excluded from the scope of the OSP?

No

Carry out a risk assessment regarding the Outsourced activity and ask the question - If the Service Provider was to fail to or inadequately perform the Outsourced activity could this materially impair the Registered Person being able to continue: i) to carry out its Regulated Activity in compliance with regulatory requirements (for the avoidance of doubt includes compliance with all secondary legislation, Notices and Codes of practice made pursuant to the Regulatory Laws)? and/or Ii) to provide services for which it is regulated to its customer(s)?

No

Then not covered by the OSP But consider other regulatory or legal requirements i.e. Anti-Money Laundering Legislation and Corporate Governance requirements in the Codes.

Yes

Then subject to the OSP. Also consider Corporate Governance requirements in the Codes and other regulatory or legal requirements i.e. Anti-Money Laundering Legislation.

Complete and submit the Outsourcing Notification.

Wait to receive a “no objection” from the JFSC.

32

This flow chart is for guidance only and is not intended to provide legal advice.

Page 33 of 33