Matters of Substance

Jersey’s Future-Proof Model of Regulation and Economic Substance

In early 2019, the EU Council adopted a resolution on a Code of Conduct for business taxation, and Jersey subsequently introduced the Taxation (Companies – Economic Substance) (Jersey) Law 2019. These measures have placed a certain amount of pressure on the island’s firms, but have perhaps provided equal reward.

Investing in credibility

Discussing how the substance measures have affected where clients are choosing to do business, Ed Shorrock, a Director in the compliance and regulatory consulting business of Duff & Phelps, says that they have been largely positive for the island: ‘In broad terms, regulatory trends are leading to a “flight to quality”, and the move towards increasingly robust legislative and regulatory frameworks has largely, but not exclusively, been driven by the response to the financial crisis.’

To illustrate this, Jersey has associated itself with a plethora of familiar acronyms – FATCA, AIFMD, CRS, 4AMLD, 5AMLD and BEPS, to name but a few – all with the same purpose, namely transparency, substance and accountability.

Are evolving regulatory measures burdensome? Mirek Gruna, Managing Director at Dominion, an independent trust and corporate administration firm, underlines the importance of sound business acumen:Clients who have regular contact with their service provider and are kept engaged usually have a better understanding and appreciation of what is involved and what potential or actual impact any new regulation will have on their business interests, investments and structures.’

Many measures that would once have been considered a burden – such as automatic exchange of information in relation to tax matters – are now widely accepted. But despite this, Shorrock senses an element of regulatory fatigue in some quarters, with additional requirements and associated costs tempering some clients’ attitudes.

The digital toolbox

The digital revolution, including fintech, regtech and artificial intelligence (AI), is shaking up the finance sector and creating challenges and opportunities in equal measure. ‘Most of the larger multinational service providers with an office in Jersey are already heavily investing in technologies in order to streamline administrative processes to improve their competitiveness,’ Gruna says.

Jersey is well prepared for this transition; 2013 saw the establishment of Digital Jersey, which acts as a bridging point between industry and government, while the island’s Innovation Hub was created in response to a growing interest in fintech and crowdfunding, allowing firms to engage with the regulator in response to the digital evolution.

‘One key area many firms are looking at is how the reliance on paper can be reduced when identifying and verifying individuals’ identities as part of customer due-diligence processes,’ Shorrock says. This may elicit mixed feelings within the sector. However, Gruna believes it is important to adapt and work with AI, rather than against it: ‘Compliance and risk management activities that involve interrogation of data and sample testing have certainly become more automated. However, areas that are not totally “black and white” will still require subjective assessment by an experienced compliance professional, and this won’t change for some time.’

A proportionate response

Jersey has taken economic substance measures and used them to its advantage. It has strengthened its offering and made an already stable and highly valued jurisdiction more credible than ever.

As Shorrock explains: ‘In a small community there is always going to be a risk of what is termed “regulatory capture”, i.e. the regulator acts in the interests of the financial services industry rather than carrying out its wider remit of countering financial crime – but this is certainly not the case in Jersey. The Jersey Financial Services Commission has a board comprised largely of individuals who are external to the island and who bring a high degree of independence.’

With its high-calibre client base and appreciation of, and cooperation with, global efforts needed to regulate the finance sector, Jersey is set to remain a leading international finance centre now and in the future.

Contributions by Mirek Gruna and Ed Shorrock, Duff & Phelps (For the STEP Journal Jersey Supplement 2020)