The Licensees (Conduct of Business) Rules 2009 and the Licensees (Capital Adequacy) Rules 2010 – The Licensees (Conduct of Business) Rules 2009 (the “COB Rules”) came into force on 1 January 2010 and apply to all entities licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended) (“POI Law”) (subject to certain derogations agreed between individual licensees and the Guernsey Financial Services Commission (the “Commission”)).

Key facts

1. The COB Rules are set to replace the existing Licensees (Financial Resources Notification, Conduct of Business and Compliance) Rules 1998 (“the “FNCC Rules”) and the Collective Investment Schemes (Designated Persons) Rules 1988 (the “DP Rules”).
2. The FNCC Rules and the DP Rules have not (as at the date hereof) been repealed because the new rules relating to capital adequacy of licensees have not yet been implemented.
3. The Licensees (Capital Adequacy) Rules, 2010 (the “Capital Adequacy Rules”) have been drafted and industry consultation on the draft rules was completed in January 2010.
4. The Commission have indicated that the Capital Adequacy Rules will come into force in 2010 and, upon implementation, the FNCC Rules and the DP Rules will be repealed.

The Licensees (Conduct of Business) Rules 2009

The COB Rules set out overriding principles which all POI licensees are expected to observe in carrying out their investment business. These are

1. integrity,
2. skill, care and diligence,
3. conflicts of interest,
4. information about customers,
5. information for customers,
6. customer assets,
7. market practice,
8. financial resources,
9. internal organisation, and
10. relations with the Commission.

Corporate governance

There are specific rules relating to corporate governance and senior management responsibility. The board of a licensee must ensure that there are effective policies, procedures and controls in place to enable the board to meet its obligations under the POI Law and the COB Rules. This includes evaluating and recording the assessment of its compliance with “Guidance on Corporate Governance in the Finance Sector in Guernsey” and retaining responsibility for outsourcing any of its functions.

COB requirements

the COB Rules set out various requirements relating to:

1. compliance procedures (which are to be reviewed at least annually), including
   • a log of non-compliance not only with the POI Law and the COB Rules but any other legislation,
   • regulation and rules (as set out in Rule 3.1.2 of the COB Rules),
   • filing a compliance return with the GFSC annually and establishing a compliance programme;
2. accounting records and financial statements, including audit requirements;
3. conduct of business, including
   • requirements relating to client agreements,
   • suitability,
   • provision of information,
   • dealing and promotion;
4. maintaining records, including
   • scheme property records,
   • records relating to transactions and in respect of controlled investments held on behalf of a client;
5. categorising clients, as either a
   • “retail client”,
   • “professional client” or an
   • “eligible counterparty” and
   • requirements to notify clients of their categorisation;
6. complaints, including
   • the requirement to have a written complaints procedure,
   • notifications to the GFSC and
   • record keeping in relation to complaints;
7. employee screening and training, denoting the responsibility of the Board of the licensee for the appropriate screening and training of any employees;.
8. client assets, which includes
   • the safekeeping of client assets,
   • client money and requirements relating to client money accounts;
9. contract notes, requiring licensees to deliver same after the conclusion of a transaction and contents and other requirements in relation to contract notes;
10. conflicts of interest, including
    • the requirement to establish a written conflicts of interest policy,
    • the required contents of that policy and the requirement to keep records of services/activities giving rise to a detrimental conflict of interest.

Notifications

The COB Rules also provide for certain immediate notifications to the Commission by licensees.

1. Such notifications include (amongst others) notifications required pursuant to the POI Law (such as where a person becomes a director or controller of the licensee),
2. a change in the name and address of the licensee,
3. changes in key employees,
4. the institution of insolvency proceedings,
5. the imposition of disciplinary measures or sanctions against the licensee by a regulatory authority,
6. if a licensee becomes or ceases to be a subsidiary of another company or entity or of the formation,
7. acquisition,
8. disposal or dissolution of a subsidiary,
9. any significant change in the business plan of a licensee,
10. irrespective of whether it requires any change to its licence and any change in the accounting reference date of a licensee together with a statement of reasons for the change.

The Commission has indicated that there is a requirement on licensees to have any existing derogations (pursuant to the FNCC Rules), particularly in relation to contract notes, to be re-approved by the Commission following implementation of the COB Rules.

Capital Adequacy

As noted above, the Capital Adequacy Rules are (as at the date hereof) not yet in force. Until such time as the Capital Adequacy Rules are in force licensees should refer to capital adequacy provisions in the FNCC Rules.

In summary, the Capital Adequacy Rules contain provisions relating to financial resources requirements (which refer to minimum net assets of a licensee and minimum professional indemnity insurance cover), a liquidity requirement and financial notifications. Although the Capital Adequacy Rules have not been published in final form, the consultation draft is available from the GFSC’s website (www.gfsc.gg).

It is understood that there will be a transitional period to allow licensees that require further capitalisation to arrange this (although no transitional provisions have been issued in draft to date).