Comment: Time to change the way finance is regulated?

Wednesday 28 February 2018

As the main source of the island's wealth comes under even more intense global scrutiny, the role played by regulation becomes pivotal.

Tighten controls too far and you potentially driving the value out of the sector which pays the island's bills; but being too lax leaves the island wide open to new scandals.

Today, Express columnist, The Insider, who works within the financial services sector, argues for a new approach to address what he describes as a "them and us" relationship with the regulator.

"Nobody in the finance industry thinks regulation is a bad thing, but I suspect that many believe it is ineffectually applied. Certainly, in my view, the outcomes do not reflect well on the system. 

Scandals keep on coming, and they demonstrate insufficient improvement in a system which is largely focused on process, rather than outcomes. 

Contrast this with the approach taken in the airline industry, where the overall objective of the system is to prevent accidents, by reviewing what went wrong in an open and collaborative way, with a view to continuous improvement - the result has been substantial improvement, and record levels of safety. 

The success of an effective process comes from collaboration between the parties in that process - in daily life it is called 'team work'.  The problem with the regulatory process as it stands is that I think it has increasingly become perceived as ‘them and us'.

My own view is that many within the financial services industry would argue that it is time for a 'root-and branch' change, but in many cases, they are too scared to pop their heads over the parapet for fear of repercussions (real or perceived) from the JFSC.

The JFSC would argue that the current regulatory system is ‘risk based’, but if those operating within it have a sense that they are ‘out to get you’ then they stop making common-sense, risk-based decisions, and focus instead on the blind application of the process - they manage their own risk at the expense of the customer because the consequences of getting it wrong are catastrophic.

This is why we are all blindly harassing our clients for ‘Know Your Customer’ documentation when we have actually known them for 10 years, and already know they are not a global money launderer. 

There is an unhealthy sense amongst practitioners that that they are guilty until they prove themselves innocent, which is a fundamental reversal of the basic principle of common law - they don't believe there is now any such thing as an honest mistake. Under this analysis, the JFSC becomes a body which answers only to itself with insufficient independent external supervision.

I have no doubt that the JFSC would take issue with this characterisation so let me back it up with a practical example of what I see as inconsistent behaviour: let’s contrast the actions of the JFSC in relation to HSBC (Middle East), and Michelle Jardine, who both received public censure in 2015.

For HSBC (Middle East), which was registered here, the JFSC publicly noted that while controls were "largely appropriate", there was a “apparent lack of operational effectiveness” – partly in terms of Suspicious Activity Reports, which was also the issue at the heart of the Jardine case. On ‘KYC’, the public statement noted: “CDD was assessed as not entirely adequate in 83 of the 100 customer relationships reviewed, with the most common issues being lack of address verification, inadequate certification of documents, and insufficient ownership and control information.” But there was no prosecution, and nobody was banned from working within the industry. In fact, the JFSC said clearly: “…there was no indication that the Bank or its staff acted dishonestly, without integrity or in bad faith at any stage.”

The case fitted into negative publicity around HSBC globally, who needed to pay a number of money laundering penalties, including a massive $1.9bn fine for facilitating a river of drug money flowing out of Mexico in to its global operations; the wider repercussions of those cases put the island front and centre in the global media.

By contrast, the JFSC unsuccessfully brought a criminal case against Michelle Jardine, who worked for a small business, where no actual money laundering appears to have taken place at all - but where certain controls were lax. Remember, the potential sanctions resulting from a criminal case involve being sent to prison. 

Having lost the criminal case against Michelle Jardine, the JFSC immediately made a public statement and banned her from the industry. She did, of course, have the right of appeal, but, after the stress of a criminal case, she perhaps had no desire to continue to work in the industry and/or had insufficient money left to fight the case.

Part of the prosecution’s case was the argument that the former Soviet Bloc is notoriously corrupt, and that Michelle Jardine should have been automatically suspicious of business from that area. That does not really chime with previous trips to these areas led by the Jersey establishment to encourage business, or the fact that we have just welcomed a very high profile and wealthy new Russian resident.

I think the JFSC was motivated to ‘get tough and send a message to the industry’, but not so motivated that it would tackle a large global institution with the resources to fight back, and the risk that, as one of the island's leading employers, they might pull out. 

You can read the two public statements here and here.

Let’s all agree that regulation is good, but stop the pretence that the current system is effective and seek to rebuild it around a collaborative approach focused on outcomes not process.

In the meantime, my advice is to only work for a large institution if you want to manage your own personal risk!"

The views expressed in this piece are those of the author and not those of the Bailiwick Express.