Guernsey FSC Reviews Banking Supervision

by Jason Gorringe, Tax-News.com, London

08 August 2008

The Guernsey Financial Services Commission (GFSC) has issued a consultation paper to members of the Association of Guernsey Banks to seek their views on proposals to amend several key areas of regulatory policy and to introduce a range of measures aimed at safeguarding retail depositors.

The proposals, contained in the paper 'Consultation on Parental Upstreaming and the Introduction of Depositor Protection and Ombudsman Schemes,' aim to reinforce Guernsey’s reputation as a mature and well regulated finance centre. The Commission is seeking comment from the banking industry by the close of business on 15 September.

Peter Neville, Director General of the Commission explained:

“The review has its origins in the 'credit crunch' and more specifically in the problems experienced by the Guernsey subsidiary of Northern Rock plc prior to its transfer into public ownership.

"That episode led us to consider the vulnerabilities inherent in a banking model that is widely used in Guernsey, which involves gathering retail deposits and then lending a large proportion of those funds to the parent bank – what we call 'upstreaming'. The Northern Rock case also highlighted the fact that we do not have a deposit protection scheme to protect people who put their money with banks based here.

"There is a need both to protect members of the public and to safeguard Guernsey’s reputation. We have received a lot of questions from the press and individuals asking why we do not have such a scheme. Introducing one will demonstrate that Guernsey not only has banks that provide excellent service but also that we look after people who do business here. Initial informal soundings suggest that banks in Guernsey recognise the benefits of introducing a scheme.

"As I explained in our Annual Report earlier this year, the credit crunch made it clear that we needed to review how we regulate banks. Now is the time for us to consult on those aspects of the changes that affect banks and the public directly."

In order to provide greater protection for retail depositors the GSFC proposes to reduce parental upstreaming to a maximum of 85% of total assets. The Commission may also impose further restrictions based on the level of perceived risk associated with the parent bank.

The regulator also wants to discourage the use of branch structures for new licensed banks, unless they are perceived to be systemically important at least in their home jurisdiction or are highly specialised in nature, and introduce a deposit protection scheme limited to a maximum of GBP35,000 per individual depositor and to retail depositors only.

The GFSC says its proposals would strengthen the banking sector by requiring greater transparency through disclosure by individual banks to their depositors of: the existence (or otherwise) in the jurisdiction of a deposit protection scheme; the existence or possibility of parental upstreaming; and the status and nature of support extended by the parent to the local bank.

Other proposals would:

• require banks to monitor the liquidity and solvency of the parent entity when they place funds with it;
• require banks to have in place a contingency plan to withdraw some or all upstreaming without destabilising the parent;
• impose stronger corporate governance arrangements through the requirement for at least one independent non-group non-executive director on the Boards of local banks; and
• introduce an ombudsman scheme. Such a scheme would not be limited to the customers of banks and therefore this proposal will require further consultation with other regulated financial services sectors in Guernsey. The Commission believes that the introduction of such a scheme will afford further safeguards to depositors and customers generally.

The consultation paper sets out the benefits that would flow to Guernsey from having a deposit protection scheme and addresses the costs associated with a scheme which would be funded by the banking sector.

The views of the banking sector are also being sought on the possible establishment of an ombudsman scheme to resolve complaints from members of the public who have suffered losses or have other grievances.

"The way forward which is being suggested would involve limiting the costs by having the Commission provide resources to support an ombudsman in a way which did not conflict with our supervisory and regulatory responsibilities," Neville added.

"Once we have received the responses to the paper on the proposed ombudsman scheme, we will consider extending the consultation process to the other parts of the finance sector," he concluded.

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