GFSC satisfied by two thematic reports on client money arrangements

The Guernsey Financial Services Commission recently released two thematic reports on how client money is handled in the investment and fiduciary sectors.

These reports aim to ensure that client funds are protected and managed appropriately by licensees operating under the Regulation of Fiduciaries, Administrative Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2020 (the Fiduciaries Law) or the Protection of Investors (Bailiwick of Guernsey) Law, 2020 (POI Law).

The Commission (GFSC) was generally satisfied with the strong focus on safeguarding client money for both sectors, with a range of good practice observed. The reviews provide valuable insights and guidance for licensees to improve their client money management practices, ensuring compliance and enhancing financial stability.

The requirements relating to the treatment of client monies on licensees differ depending on whether they are licensed under the POI Law (a POI Law Licensee) and operate in accordance with the Licensees (Conduct of Business) Rules and Guidance, 2021 (the COB Rules) or under the Fiduciaries Law (a Fiduciary Licensee) and operate under the Fiduciary Rules and Guidance, 2021 (the Fid Rules).

The full thematic reviews can both be found on the GFSC's website:

GFSC investment licensees thematic review
GFSC fiduciary licensees thematic review

In this briefing, Guernsey partner Tim Clipstone gives an overview of the key points from each review and sets out the different requirements applying to each and the findings of the Commission coming out of their thematic reviews.

Protection of Investors Law licensees

For POI Law licensees, client money must be kept separate from the company's own funds and stored in dedicated accounts at approved banks. This separation ensures that clients' funds are protected even if the licensee faces financial difficulties. Additionally, any client money received by a licensee must be deposited into these accounts promptly, typically by the next business day. The rules also specify how licensees should handle funds received via checks or electronic transfers, ensuring that they are either deposited into client accounts or as directed per the client's instructions.

It should be noted that the COB Rules applicable to licensees administering or managing collective investment schemes anticipate that client money is recorded in the name of the POI licensee and apply whether client money is recorded in the name of the designated administrator or principal manager.

The review highlighted some concerns for POI Law licensees, such as the risk of over-reliance on the knowledge of experienced staff. If the policies and procedures for handling client money aren't well-documented and accessible, it poses a risk if key personnel leave the licensee. Additionally, licensees that are part of larger groups operating in multiple jurisdictions need to ensure that their policies comply with specific local regulations as well as generic group policies to avoid regulatory issues.

Fiduciary licensees

For Fiduciary licensees the requirements differ slightly. Under the Fid Rules licensees must also segregate client funds, keeping them in distinct accounts separate from their own and from other clients' money at an approved bank. While the same terms are used, the it should be noted that the criteria for a bank to meet to be approved under the Fid Rules are broader than under the COB Rules and include any bank where the licensee is satisfied with its capital adequacy and that the applicable laws and regulations governing such bank provides a similar level of protection of client money to institutions expressly listed in the Fid Rules. An annual independent review is mandatory to ensure that the controls over client funds are effective and to prevent misuse or loss. The Fid Rules also emphasise the importance of clear account titles to distinguish client funds from those of the fiduciary licensee.

The review for Fiduciary licensees also noted risks similar to those in the investment sector, such as the over-reliance on the knowledge of experienced staff for managing client funds. It stressed the need for detailed and accessible procedures to mitigate this risk. Additionally, the review pointed out the higher risks associated with pooled client accounts, where funds from multiple clients are mixed, underscoring the importance of understanding different types of client accounts.

Conclusion

These latest thematic reviews are further evidence of Guernsey's status as a well-regulated international finance centre with a robust anti-money laundering and counter terrorist financing regime, which was confirmed in its recent MONEYVAL evaluation.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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