Isle of Man: Sunshine On A Rainy Day

The long term weather forecast for the international finance centre of the Isle of Man is looking bright at the end of a year of legislative and regulatory change designed to ensure that the Island remains commercially friendly with a governmental and business infrastructure geared up to allow new and existing businesses the ‘freedom to flourish’.

So what has happened in the last 12 months and what can we look forward to in the year ahead?

Integration and Standardisation

In November 2014 the Treasury Minister, Eddie Teare MHK, announced the planned integration of the Insurance and Pensions Authority (IPA) and Financial Supervision Commission (FSC). Once completed, later in 2015, this will provide a single, consistent and forward thinking regulatory body for all aspects of the financial services industry.

One of the intended benefits of the merger is to provide more concentrated, strategic and operational work in the area of anti-money laundering and countering the financing of terrorism. Alongside this, and conscious of international pressures being applied to the modern finance sector, the Isle of Man is committed to adopt the most recent Financial Action Task Force (FATF) recommendations ahead of its upcoming visit from MoneyVal in early 2016.

There is a co-ordinated effort by the Island’s regulators to operate a strong compliance culture whilst ensuring the associated costs for government and businesses are controlled and regulations remain as business friendly as possible.

Anti-Money Laundering and Countering the Financing of Terrorism Code 2015 (the Code)

The Isle of Man legislative framework for anti-money laundering and countering the financing of terrorism (AML/CFT) has been in place and effective since 1990. This legislation has been regularly updated to deal with new threats that have emerged and has strengthened the Isle of Man’s defences against all crimes of money laundering and international terrorism.

In addition, other designated businesses are now being brought into the fold of AML/CFT legislation including advocates, accountants and estate agents. This requires all such businesses to be registered with the FSC though importantly the regulatory aspects of these firms and persons will remain with their respective professional bodies.

In the Code, the FSC have sought, where possible, to provide greater clarity for licence holders to determine the risks they face from clients and the services being provided to them. Where the licence holder can evidence that the business poses a low level of risk, the FSC’s Simplified Customer Due Diligence process allows, for example, an ‘Eligible Introducer’ concession. Such a concession aims to facilitate the introduction of business between licence holders in the Isle of Man and in equivalent jurisdictions without the burden of independently verifying a customer’s identity. Providing certain criteria are met, reliance on verification can be placed on the Eligible Introducer. The ultimate responsibility for ensuring Client Due Diligence (CDD) is carried out, and AML/CFT requirements are met, remains with the licence holder. In this regard a risk based approach needs to be applied to such relationships, necessitating regular ‘health’ checks on the business introduced as well as the undertaking of annual visits to the introducer.

This simplified process to meet CDD requirements for low risk business encourages licence holders to focus their attention on fully understanding those clients who pose higher and ‘enhanced risk’ and concentrating on how such risks can be managed and mitigated.

The FSC have completed a rewrite of the AML/CFT Handbook to provide a more business and commercially focused platform for users. This includes sector specific guidance for all financial sectors including Trust and Corporate Service Providers. This proactive approach aims to ensure that all licence holders have a clear understanding of how the FSC will interpret and test compliance with the Code. By providing such clarity, businesses and clients alike should look forward to a more efficient client on-boarding process and faster turnaround times.

Encouraging the Use of Technology

With the introduction of the new AML/CFT code the FSC has now aligned itself with other regulators to create a platform whereby a common risk based approach to business can be adopted by its licence holders.

Part of such an approach is the encouragement of licence holders to build into future planning the positive aspects of using technological advancements, whilst ensuring they protect themselves and their clients against the increased threat from sophisticated cyber attacks. Such measures aim to ensure that robustness is maintained whilst at the same time reducing the compliance costs of doing business.

Planning for the Future

In the coming months and years we anticipate a continuing and thorough proactive review of existing legislation to ensure it remains business friendly whilst at the same time future proofing against on-going international pressures. It is vital that an appropriate regulatory framework continues to support and help grow new and emerging markets of which the Isle of Man is well placed to explore and serve.

As examples of this, the Government has recently announced that consultations will take place on the concept of an alternative banking regime in the Isle of Man and on the emerging concept of equity or loan based crowdfunding. Crowdfunding is an increasingly popular way for small and medium sized enterprises to raise finance using online platforms where lenders, usually in the form of the general public, can offer funding in respect of a particular business or activity alongside other investors. This is an alternative to the more traditional models available for co-investment. For such concepts to see the light of day in the Isle of Man, it is recognised that there is a need to create a regulatory framework to effectively manage a high risk activity.

Consulting with businesses on such ideas promotes and encourages the public/private sector initiative that has produced great success for the Isle of Man. With enhanced regulation we seek to nurture a well regulated jurisdiction proactively taking appropriate risk based steps to protect clients as well as our own reputation.

International Tax Co-operation

According to a number of published surveys it would seem that to date most businesses have endured the challenges originally introduced by the US Foreign Account Tax Compliance Act (FATCA). As at 1 March 2015 there were 160,010 Foreign Financial Institutions (FFIs) registered with the IRS. Notably, 41 per cent of these were from the UK and its Crown Dependencies, including over 1,000 from the Isle of Man. Although this number is lower than our Jersey and Guernsey counterparts, it is clear evidence of firms taking their FATCA responsibilities seriously and committing resources to ensure compliance with its requirements.

For Isle of Man reporting under the terms of its FATCA agreement with the US, the first deadline of 30 June 2015 is fast approaching. Whilst this is still a busy time for us and others in our sector, we recognise that for most firms in the Isle of Man a much bigger challenge awaits in the future in the form of UK FATCA reporting and Common Reporting Standards (CRS). The former is likely to have a more significant impact on businesses due to a larger client base residing in the UK due to its physical, geographical proximity to the Isle of Man and our links with the City of London and the Regional Centres. With CRS also on the horizon for 2016, the tax landscape has probably never felt quite so challenging.

What lessons have we learned from this so far? We need to ‘know our clients’ and not just from a regulatory perspective but in a more literal sense of really getting to understand what our clients want from us, how we can better serve them and help them plan more effectively for their future. We recognise there is an increasing amount of work to undertake to successfully adapt to the many changes and challenges we now face and of course this comes with an associated cost. However, at the same time such challenges bring opportunities for businesses to provide improved, tailored services and solutions for clients which will create greater value for them and ensure longevity for those firms who choose to embrace change and diversify. As Winston Churchill once said … “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty”. The Isle of Man is renowned for adopting such an attitude and facing down the numerous challenges it has faced over the years. With that in mind, and 30 continuous years of economic growth behind us, we now look forward to writing the next chapter in our history with such stoicism.