31 July 2012

Success of the Fittest: A Swift Survey of Shifts in Asset Management


This report has been written at a time of uncertain outlook for the global economy and financial sector as a whole. This uncertainly will continue for the foreseeable future. The sovereign debt crisis in Europe has expanded into a Euro-zone crisis,which has impacted financial confidence throughout the world. The sovereign debt crisis and the Euro-zone crisis illustrate how cross-border investment can produce major systemic risk for national and international financial systems, financial market participants and end investors. The crisis highlights the competing political and national interests both inside and outside the Euro-zone. Euro-zone politicians are trying to resolve both crises in a way which will minimise systemic risk and consequent disruption to the financial markets. The routes to long-term resolution of the crises are protracted. The financial and economic uncertainty affects the asset management industry as much as any other segment of the financial services sector. The overriding uncertainties are reflected in this report.


This report is set out in five major sections:

  • Section I explores the macro-economic climate.
  • Section II examines the current industry environment.
  • Section III examines “the moral issues" which the asset management sector is facing. Most of “the moral issues” are common to other sectors of the financial services industry.
  • Section IV looks at key trends in asset management.
  • Section V analyses the current fitness of the asset management industry, challenges to its fitness and how to address these challenges. It includes a review on the importance of the fitness of the asset management sector in a geographical and regional context.

The conclusions are followed by some brief predictions for the industry over the next three to five years.

30 July 2012

Mauritius: Speech of Honourable Attorney General - Launching of Institute of Judicial and Legal Studies


His Excellency, the President of the Republic, 
His Lordship, the Chief Justice, 
Excellencies of the Diplomatic Corps, 
His Lordship, the Senior Puisne Judge, 
Honourable Judges, 
The Chairperson and Members of the Institute for Judicial and Legal Studies Board, 
The Ag Director, Institute for Judicial and Legal Studies, 
Learned Magistrates, 
Colleagues from the legal profession, 
Ladies and Gentlemen, 

May I at the very outset present the apologies of Dr the Hon. Prime Minister who is unable to attend this function in view of a special sitting of the National Assembly. 

We are about to witness the materialisation of yet another major reform in our judicial and legal system which Government introduced last year with the passing of two pieces of legislation, that is, the Institute for Judicial and Legal Studies Act 2011 and the Law Practitioners (Amendment) Act 2011. As you will be aware, the Hon. Prime Minister set up a Presidential Commission under the chair of Lord Mackay of Clashfern was set up in July 1997, to examine and report upon the structure and operation of the judicial system and legal professions of Mauritius. Government has embarked on a series of reforms to implement the recommendations made in the said Report in order to modernise our judicial and legal systems and ensure that they meet the required standards expected of any country which genuinely attaches fundamental importance to the upholding of the rule of law. 

Two major recommendations of the Presidential Commission were to the effect that:

  • Courses should be organised for the continuing education of lawyers in legal developments; and
  • A Judicial Studies Board should be set up to have the responsibility of organising suitable induction training and continuing training for Judges and Magistrates at their various levels.

Ladies and Gentlemen, 

Occupation of a judicial office does indeed require a number of skills and it is essential that prospective judicial officers receive proper training prior to their appointment. In fact, numerous are those who have time and again expressed the opinion that an institute along the lines of the “Ecole Nationale de la Magistrature” in France or the Judicial Studies Board in the UK should be set up in Mauritius. 

Following consultations with stakeholders, the Institute for Judicial and Legal Studies Act 2011 and the Law Practitioners (Amendment) Act 2011 were therefore passed by the National Assembly to give effect to the recommendations of the Presidential Commission. These laws are in fact complementary to each other. 

The Law Practitioners (Amendment) Act 2011 makes it compulsory as from 03 September this year for every law practitioner and legal officer to participate every year in a Continuing Professional Development Programme for the prescribed number of hours (unless he is excused by the Chief Justice for reasons such as age or ill health). 

The Act makes provision for persons who wish to be considered for appointment as a judicial or legal officer as from the same date to follow an appropriate course. 

The Institute for Judicial and Legal Studies Act 2011, for its part, establishes the Institute for Judicial and Legal Studies which is entrusted with the responsibility to, inter alia –

  • Conduct or supervise courses, seminars or workshops for the continuing training of judicial and legal officers;
  • Devise, organise and conduct Continuing Professional Development Programmes for law practitioners, including legal officers, and courses for prospective judicial and legal officers and law practitioners who qualified as such in a State other than Mauritius;
  • Promote and coordinate research and development in the judicial and legal sectors;
  • Where appropriate, organise and conduct courses for police and public officers, Court staff and persons employed by law practitioners, with a view to improving the administration of justice – the key words here being “administration of justice”.

Ladies and Gentlemen, 

It is a fact that, until the passing of the above laws, our legal system did not have the appropriate legal structure and institutional framework to enable members of our legal profession to undergo continuous training in order to improve their skills and to meet the changing needs of their profession. The Institute for Judicial and Legal Studies Act 2011 therefore, with the establishment of the Institute, fills the above vacuum in our law in order to increase efficiency, effectiveness and professionalism in the legal profession. 

Indeed, whilst academic education and professional qualification enable a person to acquire the minimum knowledge and skills to practise a profession, such education and training undergone at a particular point in time in a person’s life are certainly not enough over the years to maintain the level of knowledge and efficiency which is required in an ever-changing global and legal environment. This is precisely why continuing education and training are vital throughout the career of any professional to meet the changing needs and demands of their profession, their clients and society at large. 

In an era where the world has become a global village and there is increasing competition as regards the provision of legal services, members of the legal profession cannot do otherwise than be aware of developments in different areas of law and improve and increase their knowledge and skills in order to enhance the quality of legal services. This is why continuing professional development has been made compulsory under the Law Practitioners (Amendment) Act 2011. 

Ladies and Gentlemen, 

In many countries, members of the legal profession are either encouraged or required to complete a certain number of hours of Continuing Professional Development or Continuing Legal Education. 

In England and Wales, all solicitors and legal executives who are in legal practice or employment, for instance, are required to complete a minimum number of hours of Continuing Professional Development per year. The same applies to Scotland where all solicitors who are in full-time employment and wish to retain their Practising Certificate are required to undertake a minimum number of hours of Continuing Professional Development per year.

In Queensland, Australia, each legal practitioner is required to undertake a number of hours of Continuing Professional Development (CPD) each year in order to acquire a certain number of CPD points. And core areas for the CPD programme are Professional Skills, Practical Legal Ethics and Practice Management and Business Skills. In many States in the United States too, Continuing Legal Education participation is required of attorneys to maintain their license to practise law. 

The importance of continuing professional development, therefore, cannot be denied or ignored. Continuing professional development, as the term itself suggests, is nothing else than the systematic maintenance, improvement and broadening of relevant knowledge and skills to enable a professional to successfully carry out his or her professional duties and responsibilities throughout his or her career. 

The updating of knowledge and skills will not only improve the efficiency and effectiveness of members of the profession, but also give the opportunity to practitioners themselves to redefine their careers by learning new professional skills and areas of practice. 

A Continuing Professional Development Programme, under the Law Practitioners (Amendment) Act 2011, may include attendance at such lectures, workshops or seminars as may be approved by the Institute and that the Judicial and Legal Studies Board is already working towards putting in place the Continuing Professional Development Programme “system”. 

I have no doubt that the Institute, which has been entrusted with the responsibility of ensuring the maintenance of standards in the Judiciary, among law practitioners and legal officers, and generally in the delivery of Court services will, for its part, fulfill its duties by ensuring that members of the Judiciary, the legal profession and other persons concerned benefit from relevant, worthwhile and affordable continuing professional development. 

Ladies and Gentlemen, 

We should be thankful to the Hon. Prime Minister for his vision for a modern judicial and legal system and also for his support and guidance in the implementation of this project. A special thanks goes to the Hon. Chief Justice and all the stakeholders for their invaluable support. We are also grateful to the French Embassy for its help in getting experts from the “Ecole Nationale de la Magistrature” to help us in the setting up the institute. 

At the Judicial Studies Board Lecture in 2010, the Lord Chief Justice of England and Wales stated the following, and I quote, “The Judicial Studies Board has been the judiciary’s great success story …. It is the jewel in the judicial crown” unquote. I sincerely hope that the Institute will soon become the jewel of our judicial and legal crown. 

I wish the Institute all the best in the honourable and challenging task which awaits it. 

With these words, Ladies and Gentlemen, I thank you for your kind attention.

Mauritius: President launches the Institute for Judicial and Legal Studies


The President of the Republic, Mr R. Purryag, GCSK, GOSK, proceeded with the official launching of the Institute for Judicial and Legal Studies on Friday 27 July at the Grand Baie International Conference Centre in the presence of the Attorney-General, Mr Y. Varma and Chief Justice Sik Yuen.

Occupation of a judicial office does indeed require a number of skills and it is essential that prospective judicial officers receive proper training prior to their appointment, stated the Attorney-General, Mr Y. Varma in his address. In fact, numerous are those who have time and again expressed the opinion that an institute along the lines of the “Ecole Nationale de la Magistrature” in France or the Judicial Studies Board in the UK should be set up in Mauritius, he added.

The Institute for Judicial and Legal Studies Act 2011 establishes the Institute for Judicial and Legal Studies which is entrusted with the responsibility to:

(i) conduct or supervise courses, seminars or workshops for the continuous training of judicial and legal officers;

(ii) devise, organise and conduct Continuing Professional Development Programmes for law practitioners and legal officers, and courses for prospective judicial and legal officers and law practitioners who qualified as such in a State other than Mauritius;

(iii) organise and conduct courses for police and public officers, court staff and persons employed by law practitioners, with a view to improving the administration of justice;

(iv) promote proficiency and ensure the maintenance of standards in the Judiciary and among law practitioners and legal officers, and in the delivery of court services in general; and

(v) establish areas of cooperation and linkages with local, regional and international bodies in the judicial and legal sectors.

The Law Practitioners (Amendment) Act 2011 makes it compulsory as from 03 September this year for every law practitioner and legal officer to participate every year in a Continuing Professional Development Programme for the prescribed number of hours.

The Institute for Judicial and Legal Studies is in the process of finalising the details of the first courses to be dispensed during the first quarter of its first academic year.

The Institute is currently based in the premises of the Mediation Division of the Supreme Court at the Happy World House in Port Louis.

Maitland acquires Mauritian Management Company


Maitland, the international wealth and fund services firm, has acquired 100% of Inter-Ocean Management Limited, a respected corporate services and trust company based in Mauritius. The deal takes effect from 1 July 2012.

Over the past five years, Mauritius has transformed itself into a springboard for trade and investment into Asia and the fast-growing markets of Africa. Mauritius’ favourable tax regime and wide international double tax and bilateral investment treaty network makes it a sought after jurisdiction for the establishment of international holding companies and trusts for international corporations and individuals. It is also a suitable jurisdiction for the establishment of investment funds. 

Commenting on the acquisition, Maitland CEO Steve Georgala said: “This is in line with Maitland’s strategy to expand into jurisdictions offering sophisticated international tax planning opportunities. The business and client base of Inter-Ocean Management Limited is complementary to our own and we expect to expand the business significantly in the years to come.”

Like Maitland, Inter-Ocean Management Limited serves corporate, private and investment fund clients. It provides a range of structuring, company secretarial, corporate trustee, accounting and private equity fund administration services.

Brendon Jones, MD of Inter-Ocean Management Limited said: “With Maitland’s support we will be able to expand our service offering to include a full range of fund services from Mauritius and also to access a wider client base. Our clients will have access to Maitland’s strong international tax services and combined we will be able to pool our extensive African operations for our clients’ benefit.”

Inter-Ocean Management is being acquired as a going concern and all staff members will be retained; the name of the company will be changed to Maitland (Mauritius) Limited.

27 July 2012

Mauritius: FSC Workshop on ‘Financial Services for Lawyers’


The Financial Services Commission (‘FSC’) held a workshop on ‘Financial Services for Lawyers’ on 26 July 2012 in the presence of the Vice-Prime Minister, Minister of Finance and Economic Development, the Hon Xavier-Luc Duval and the Attorney General, the Hon Yatin Varma.

The main objective of the workshop was to familiarise members of the legal profession with the main stakeholders of the financial services sector and its regulatory parameters; as well as to unfold the opportunities which exist for lawyers in the financial services sector.

The Minister of Finance and Economic Development highlighted in his address the importance of consolidating the sound reputation of the Mauritius International Financial Centre: “Our good reputation is Mauritius’ greatest asset and we want our jurisdiction to be known for its adoption of a culture of zero tolerance of illegal acts”, he said. The Hon Xavier-Luc Duval stressed the need to ensure commercial substance: “We need to continually attract service providers and provide more value addition to Africa”, he added.

The Attorney General, the Hon Yatin Varma, commended FSC’s initiative which shows the importance of financial services for the legal professionals and the importance of legal professionals in the financial services sector: “If Mauritius wishes to be recognised as a well regulated jurisdiction, it will need the input and support of the legal community in establishing and implementing the proper legal framework to boost the confidence of investors in the Mauritian jurisdiction”, he said.

The Chairperson of the FSC, Mr. Marc Hein, made a presentation on financial services and spoke on the comparative advantage of the Mauritius jurisdiction with its hybrid legal system of common and civil law. Mr. Hein spoke on the opportunities available to legal professionals in terms of field of specialisation in the sector, and the importance of professionals to provide more specialised legal services to their clients and potential investors.

The Chief Executive of the FSC, Ms. Clairette Ah-Hen highlighted in her address the need for the Mauritius jurisdiction to continuously evolve to keep pace with international standards. Ms. Ah-Hen made an appeal to law practitioners to keep abreast with the latest developments to ensure the continuous establishment of the proper legal framework as well as its implementation, to maintain the reputation of Mauritius as a well-regulated jurisdiction.

The workshop also comprised a panel discussion on financial services. The panel discussion was moderated by Mr. Marc Hein and the panelists comprised sector representatives which included Mr. Ken Poonoosamy, Managing Director of the Board of Investment; Mr. Kamal Hawabhay, President of the Association of Trust and Management Companies; Mr. Srinivasan Vaideshwaran, President of the Insurer’s Association of Mauritius; and Mr. Vipin Mahabirsingh, Managing Director of the Central Depository & Settlement Co. Ltd.

26 July 2012

Mauritius: Workshop on Financial Services for Lawyers

Speech of the Honourable Attorney-General, Yatin Varma

Hon. Xavier Luc Duval, Vice Prime Minister and Minister of Finance and Economic Development
Honourable Mrs Cheong, Puisne Judge and Chairperson of the Institute of Judicial and Legal Studies
Mr. Marc Hein, Chairman of the Financial Services Commission
Ms. Clairette Ah-Hen, Chief Executive of the Financial Services Commission
Colleagues from the legal profession

Ladies and Gentlemen

Today is a landmark day for the financial services sector as it is the first time that so many Legal professionals are assembled under one roof to discuss about opportunities and career prospects in the Financial Services sector.

It gives me great pleasure to address you today at this Workshop on Financial Services for Lawyers organized by the Financial Services Commission (FSC). I would wish, at the very outset, to congratulate the FSC for this laudable initiative which illustrates the importance of legal professionals for the financial services sector and the importance of financial services for legal professionals.

The development of the Financial Services sector during the last decades has changed the landscape of the legal profession. With an ever-growing demand for legal services and skilled lawyers in varied areas such as corporate finance, capital markets, mergers and takeovers, private client business, commercial arbitration and dispute resolution, it is to be noted that an increasing number of lawyers are now closely involved in the financial services sector. Over time, this has resulted in tangible mutual benefits for the financial services sector and the legal profession.

If Mauritius wishes to be recognized as a well regulated jurisdiction, it will need the input and support of the legal community in establishing and implementing the proper legal framework to boost the confidence of investors in the Mauritian jurisdiction. Those of you who are actively involved in the Mauritian Financial Services sector will acknowledge the continuous challenge that it represents, particularly the need to always keeping abreast with all latest developments in this field.

It is worthy to note that to cater for the constant requirement to upgrade the level of competence in the legal profession, an Institute for Judicial and Legal Studies has recently been established and will be officially launched tomorrow. The aim of this Institute is to provide Continuing Professional Development Programmes for law practitioners, including legal officers, and courses for prospective judicial and legal officers and law practitioners who qualified as such in a State other than Mauritius, for the purpose of promoting proficiency and ensuring the maintenance of standards in the Judiciary and among law practitioners and legal officers with a view to enhancing our legal system.

Ladies and Gentlemen,

A former Chief Justice has once observed in an address to newly qualified barristers:

It takes a lifetime to build a reputation. It takes a few moments to lose it”.

In addition, the legal profession is required, within the current legislative regime, to find innovative ways of addressing challenges, thus demonstrating the responsiveness and adaptability of the legal and judicial institutions in the face of the rapidly evolving global social and economic context.

We also have to ensure that the Code of Ethics for Barristers is fully respected.

A legal profession that is respected for the probity and quality of its conduct and for the professionalism of its representation in the courts, in which both judiciary and public can have confidence, is vital to the welfare of our country. Barristers are expected to act for their clients without fear or favour but their paramount duty is towards the court. The aim of barristers should be to observe the highest standards of ethics and competency.

In the Privy Council case of Patel v. Beenessreesingh (2012) which concerned the quantum of damages in a tragic road accident case, the Judicial Committee of the Privy Council mentioned that: “The Board is extremely grateful to Counsel on both sides for their assistance in this difficult case, and would wish in particular to mention the sensitive and responsible line taken throughout by the Defendant insurers.” These are words which my Office and the FSC as regulator are pleased to hear.

In our own Code of Conduct for Barristers we find the following quotation from the former US Chief Justice Warren Burger,

"Having observed many legal systems for 40 years, nowhere in the world have I seen more fearless, more vigorous and more independent advocacy than that found in Britain's courts... They insist that advocacy must be vigorous, but always within the framework of a system regulated by well-known rules of conduct”.

Ladies and Gentlemen,

The FSC also has an important role to play in preserving the reputation of Mauritius. In the case of Voet & Co (Mauritius) Ltd v. Financial Services Commission, the Court stated that “The affidavits and other documents filed on behalf of the respondent have also shown that the respondent had acted reasonably in the discharge of its statutory obligations to preserve the reputation of Mauritius as a sound financial centre.

The Court also said in this case that the FSC is required to “ensure the sound conduct of business in the financial services sector” with a view to promoting the good repute of Mauritius as a financial centre. Therefore, the FSC acts as a gatekeeper and ensures that the integrity of the financial system of Mauritius and the good repute of Mauritius as an international financial services centre is maintained.

Our commitment to fully adhere to international instruments and conventions is a clear demonstration that maintaining the good repute of the Mauritius jurisdiction is one of the major concerns of the Government of Mauritius. The government has already declared its commitment through the adoption of a strategic approach which includes the revision of the legal and regulatory framework as well as the strengthening of both the banking and non-banking financial services sector.

We need to continue our progress in building the kind of business environment that will stimulate private investments both local and foreign. For instance, we should not overlook the importance of good governance, especially as we seek to foster joint ventures and interact with and provide services to the world class businesses Mauritius is seeking to attract.

As you are aware, the Law Practitioners Act was amended in 2008 to make provision for the registration of law firms, foreign law firms, foreign lawyers and joint law ventures.

Following my meeting with law firms earlier this year, I have set up a standing committee at the level of my office to address specific issues affecting them.

Alongside, we are working on regulations by which foreign lawyers will be governed.

Also, in 2010, the Financial Services Act was amended to add legal consultants and law firms to the list of persons able to certify that applications for licences for Global Business Companies comply with the laws of Mauritius.

Ladies and Gentlemen,

My office has worked in close collaboration with the FSC and the Ministry of Finance on the three modern legislations which have been enacted recently for the financial services sector namely the Limited Partnerships Act, the Foundations Act and the Private Pension Schemes Act. The Asset Recovery Act, a ground breaking legislation to help in the repression of crime, came into operation on 01 February 2012. The aim of the Act is to provide for the legal framework and procedure to enable the state to recover assets which we are proceeds or instrumentalities of crime, or terrorist property. This is another step to enhance the reputation of Mauritius as a clean jurisdiction.

The Act creates a comprehensive asset recovery framework which does not only apply to drug offences but also to all offences against the laws of Mauritius which are punishable by a maximum term of imprisonment of not less than 12 months, the enforcement authority being the Director of Public Prosecutions.

Ladies and Gentlemen,

The future of the financial services sector is full of opportunities and challenges and Mauritius needs skilled legal practitioners to embrace such opportunities and challenges.

Your presence here this afternoon demonstrates the importance that the financial services sector holds for you.

We therefore count on your keeping close interest in this sector and rely on you for the continued provision of expert legal services in this area to contribute to the expansion of the sector.

I am sure that the outcome of this workshop will be positive and instrumental in improving the legal framework for financial services. My office also looks forward to continued close collaboration with the FSC on future projects.

With these words, ladies and gentlemen,

I thank you for your kind attention.

Mauritius: Workshop on “Financial Services for Lawyers”

Speech by Ms. Clairette Ah-Hen, Chief Executive, 
Financial Services Commission 
FSC House, 26 July 2012 

Honourable Judges 
Mr. Marc Hein, Chairman of the Financial Services Commission 
Members of the Board of the Financial Services Commission 
Learned members of the Legal Profession 
Distinguished guests 
Ladies and Gentlemen 

Good afternoon to you all. 

I am pleased to welcome you at the FSC House for the workshop on “Financial Services for Lawyers”. The objective of the workshop is two-fold; familiarising lawyers with the main stakeholders of the financial services sector and its regulatory perimeters; and to unfold the opportunities that exist for the legal profession in the financial services sector. 

The financial services sector in Mauritius is regulated by two bodies – each with specific statutory objectives:- 

  • The Bank of Mauritius (BOM), set up in 1966, well known to all, and which is responsible for the regulation of banking services and 
  • The Financial Services Commission (FSC), set up in 2001, as an integrated regulator for non-banking financial institutions and global business. 

The FSC took over the regulatory responsibilities of (a) Insurance previously carried out by the Controller of Insurance – a division of the Ministry of Finance, (b) Capital Markets previously done by the Stock Exchange Commission (SEC) and (c) Global Business – otherwise also known as the offshore sector – regulated by MOBAA. 

The FSC is mandated, inter alia, to ensure soundness and financial stability of the financial sector in Mauritius. Over these past ten years, the FSC, in collaboration with Government, has endeavoured to strengthen and modernize our legal framework to allow for growth of the sector,new product development and disclosure of information for more efficient supervision. It is in this perspective that new laws were recently enacted – the Limited Partnership and the Foundations and the Private Pension Schemes which is yet to be proclaimed. These last years have seen the growth of the financial services sector and an increase in its contribution to the economic development, to make the sector the 4th pillar of the Mauritian economy. Needless to say that if Mauritius is to progress further there is a need for a pool of talented professionals to service the sector. 

One of the main stakeholders called to contribute to the development of the financial services sector is the legal profession – be it - for drafting of the legislative framework, for ensuring appropriate implementation and for compliance with the laws in place – whether as staff with legal expertise at the FSC; whether as corporate, business or financial lawyers acting as advisers in the industry or whether as the magistrates / judges in courts. The laws need to provide for the creation (initial stage), operation (on-going) as well as dissolution (end process) of businesses. Unfortunately, in the World Bank report “Ease of doing Business 2012”, Mauritius is ranked 79th out of 183 in respect to Resolving Insolvency criteria while overall Mauritius is ranked 23rd. A small improvement in that area – to bring an entity to its end in an orderly manner within an acceptable time frame – will greatly improve our ranking. 

The financial services sector is a truly global sector and knows no boundaries. In such a dynamic and highly competitive sector, resting on our laurels is not an option. The Mauritian jurisdiction needs to continuously evolve to keep pace with international standards and the sector requires law practitioners to keep abreast with the latest developments. For the Mauritian financial services sector to achieve further recognition as a well-regulated jurisdiction, we need to boost the confidence of investors in the Mauritian jurisdiction. For this to happen, there is a need for the development and establishment of the proper legal framework as well as its implementation. 

I would like, here, to share with you a quote made by Prof. Andrew Morriss, University of Alabama, Editor of Offshore Financial Centres and Regulatory Competition:- 

Any state can make rules, but not every state legitimately can enforce them in all circumstances, especially those involving people or assets outside the state. 

Because no single government can extend its courts and enforcement powers to cover the world, multiple states end up competing with no state able to exercise effective monopoly power over mobile entities. 

In the end, states compete for mobile parties and their assets by attempting to provide the laws people want.” 

Erin O’Hara & Larry Ribstein, The Law Market (OUP 2009) 

I do believe this quote is most appropriate for policy and law makers and all stakeholders operating in the Global business sector to ponder on. 

I should not miss this remarkable opportunity provided to me today, with so learned members of the legal profession in the same room, to share the challenges that the FSC faces in order to demonstrate the application of the international principles and standards in Mauritius. 

Fortunately, we do have some positive examples to give:- 

(a) The OECD peer review report, in October 2011, mentions that Mauritius has over the years developed a sound legal and regulatory framework, being categorized as a jurisdiction which has a trusted, transparent and well-established International Financial Centre. 
(b) For global flow of funds – which I earlier stated as knowing no frontiers - it is not enough for the FSC to be a member of the IOSCO – the International Organization of Securities Commissions (IOSCO), it is crucial that the FSC is a signatory of the Multilateral Memorandum of Understanding (MMoU). “Comme on dit “un vrai parcours de combatants de 5 années” and “a major achievement” when amendments to the laws to enable Mauritius to meet the stringent legal requirements of IOSCO were made and FSC became one of the 86 IOSCO MMOU signatories in May 2012. 

It is to be noted that the quality of legal advice and service given to operators greatly contribute to compliance, adherence to laws and standards and to enabling FSC demonstrate their application during peer assessments and reviews (such as FSAP, ROSC etc…) carried out on an almost continuous basis. 

Ladies and Gentlemen, 

I would like to share a few FSC’s observations on the financial services sector:- 

  • For Mauritius to position itself as an international platform for investment into other countries, we need to maximize on all advantages that our system, history and heritage have to offer – be it - (i) a democratic country or (ii) a stable, credible and trustworthy centre for doing business or (iii) a mixed legal system of common and civil law with legal practitioners in Mauritius well versed in these two traditions. 
  • To develop the IFC, we need to be able to meet the needs of investors, that is we need the expertise of barristers / lawyers involved in international practice. 
  • With the global financial crisis, investors have accumulated enormous losses of wealth worldwide and there is now a strong need for regulators to promote higher standards of conduct which encourage efficient and well-functioning markets as well as for all professionals to uphold the highest standards and ensure compliance (no cutting corners) with rules which are of law rather than of man. 
  • In this rapidly changing environment, the development of the sector, even survival, depends upon our ability to operate as effectively as our competitors. Dynamics change and time is of the essence – we all know the saying “justice delayed is justice denied”. For economists, there is a time value of money and for investors, timing is crucial and investors usually walk away from jurisdictions which do not meet their expectations. 
  • As a developing country, we are competing with many other jurisdictions - having more international law firms will provide an important support to position Mauritius as one of the leading global financial centres. 
  • For the Mauritian financial services sector to achieve further recognition as a well regulated jurisdiction, it needs the expertise and experience of the legal community to boost the confidence of investors in the Mauritian jurisdiction. Members of the legal profession must look beyond the legal technicalities and aim to offer services to preserve the reputation of our financial system. Lawyers can become a strong ‘maillon de la chaine’ in our common fight against money laundering and terrorism. 

To conclude, the FSC is fully committed to consolidating Mauritius as a stable, credible and trustworthy centre for doing business. The regulatory nature of our work and the factors to be taken into consideration are changing. Our collective efforts will be key to maintaining our competitive edge with emerging regional financial centers. 

This workshop is but a start in this direction. I am now pleased to officially launch the workshop and the panel discussion. 

Thank you.

AMF: Rapport final sur la transposition de la directive AIFM et développement de la gestion innovante en France


La directive concernant les gestionnaires de fonds d'investissement alternatifs, connue sous son acronyme anglais "AIFM" pour Alternative Investment Fund Managers, adoptée par le Parlement européen en novembre 2010 et entrée en vigueur le 21 juillet 2011, modifie profondément la réglementation applicable à l’industrie européenne de la gestion de fonds d’investissement alternatifs. Cette directive a pour but d’encadrer l’ensemble des fonds d’investissement alternatifs commercialisés en Europe par un corps de règles commun qui permette leur développement dans un cadre mieux sécurisé ainsi que le renforcement de la protection des investisseurs. Alors que certains acteurs n’étaient pas ou peu régulés, tous les gestionnaires dépassant les seuils définis dans la directive devront désormais se soumettre à une procédure d’agrément et fournir un reporting régulier. Dès lors, la transposition en droit national constitue un défi majeur pour de nombreux Etats Membres dans la mesure où la directive AIFM pourrait conduire à des changements structurels pour l’industrie, selon les interprétations qui seront faites par les Etats Membres.

L’enjeu pour la France est considérable. Près de la moitié des fonds français pourraient, au sens de la directive, Ãªtre qualifiés de Fonds d’Investissement Alternatifs (« FIA »), et près des deux tiers des sociétés de gestion gèrent actuellement des FIA. D’autres véhicules, non encore régulés, pourraient être également couverts par la Directive. Il est donc apparu essentiel de mener une réflexion, au sein d’un Comité de Place constitué à l'initiative du régulateur français, sur les orientations stratégiques qu’il conviendrait de poursuivre lors de la transposition de cette directive en France.

Les travaux menés par le Comité de Place ont ainsi permis aux acteurs français de la gestion et du métier des titres, de formuler des recommandations qui devraient être suivies lors de la transposition de la directive en droit national, au regard des enjeux qu’elle porte et de la vision qu’ont les professionnels vis-à-vis du développement de la gestion de fonds d’investissement alternatifs française.


OECD welcomes multilateral efforts to improve international tax compliance and transparency


The OECD welcomed today a new model international tax agreement designed to improve cross-border tax compliance and boost transparency.

Developed by the United States, France, Germany, Italy, Spain and the United Kingdom, the model allows the implementation of the Foreign Account Tax Compliance Act (FATCA) through automatic exchange between governments, reduces compliance costs for financial institutions and provides for reciprocity. 

The model agreement calls on the OECD to work with interested countries on adapting the terms of the agreement to create a common model for automatic exchange of information, including the development of reporting and due diligence standards for financial institutions.

OECD Secretary-General Angel Gurría said:  “I warmly welcome the co-operative and multilateral approach on which the model agreement is based. We at the OECD have always stressed the need to combat offshore tax evasion while keeping compliance costs as low as possible. A proliferation of different systems is in nobody’s interest. We are happy to redouble our efforts in this area, working closely with interested countries and stakeholders to design global solutions to global problems to the benefit of governments and business around the world.”   

As a next step, the OECD will organise, in cooperation with the Business and Industry Advisory Committee (BIAC) to the OECD, a briefing session on the “Model Intergovernmental Agreement on Improving Tax Compliance and Implementing FATCA” at OECD headquarters in Paris in September 2012. The Organisation will then quickly advance to design common systems to reduce costs and increase benefits for governments and businesses alike.

US: Treasury releases Model Intergovernmental Agreement for Implementing the Foreign Account Tax Compliance Act to Improve Offshore Tax Compliance and Reduce Burden


Agreement Developed with France, Germany, Italy, Spain and the United Kingdom Marks Important Milestone in Combatting Offshore Tax Evasion 


The U.S. Department of the Treasury today published a model intergovernmental agreement (model agreement) to implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, these provisions target non-compliance by U.S. taxpayers using foreign accounts. The model agreement announced today was developed in consultation with France, Germany, Italy, Spain, and the United Kingdom and marks an important step in establishing a common approach to combatting tax evasion based on the automatic exchange of information.  These five countries, along with the United States, will, in close cooperation with other partner countries, the Organization for Economic Cooperation and Development, and, when appropriate, the European Commission, work towards common reporting and due diligence standards in support of a more global approach to effectively combatting tax evasion while minimizing compliance burdens.


“Today’s announcement is an important milestone in our joint efforts to combat offshore tax evasion and make our tax systems more efficient and fair,” said Treasury Secretary Tim Geithner. “This agreement implements FATCA in a way that is targeted and effective, while also providing a foundation for further international coordination. We appreciate that France, Germany, Italy, Spain and the United Kingdom were among the first jurisdictions to join us in this important effort and we look forward to quickly concluding bilateral agreements based on today's model.”


The model agreement follows through on the commitment reflected in the joint statement issued with the same countries in February to collaborate on developing an intergovernmental approach to implementing FATCA.  The model agreement is accompanied by another joint communique  with France, Germany, Italy, Spain, and the United Kingdom, endorsing the agreement and calling for a speedy conclusion of bilateral agreements based on the model.


There are two versions of the model agreement - a reciprocal version and a nonreciprocal version.  Both versions establish a framework for reporting by financial institutions of certain financial account information to their respective tax authorities, followed by automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements.  Both versions of the model agreement also address the legal issues that had been raised in connection with FATCA, and simplify its implementation for financial institutions. 


The reciprocal version of the model also provides for the United States to exchange information currently collected on accounts held in U.S. financial institutions by residents of partner countries, and includes a policy commitment to pursue regulations and support legislation that would provide for equivalent levels of exchange by the United States.  This version of the model agreement will be available only to jurisdictions with whom the United States has in effect an income tax treaty or tax information exchange agreement and with respect to whom the Treasury Department and the Internal Revenue Service (IRS) have determined that the recipient government has in place robust protections and practices to ensure that the information remains confidential and that it is used solely for tax purposes.  The United States will make this determination on a case by case basis.


FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.


The Treasury Department and the IRS will continue to work with other governments and with businesses to implement FATCA and to achieve maximum consistency and standardization in the technical implementation of the agreed information exchange, including by providing more detailed guidance as necessary.

IFC Forum - International Financial Centres: Playing a Part in the Global Recovery


The International Financial Centres (IFC) Forum is hosting a high-level policy conference on 8 November 2012 to examine the role of financial intermediation and international financial centres in the global economy, particularly as respects the impact on growth and jobs in the developed world. 

The conference will include contributions from key policymakers, professionals, academic and industry experts.

Topics to be covered throughout the conference include:
  • EU Financial Services Regulation: Getting the Balance Right for Sustainable Growth
  • The UK Strategic Path for Small British IFCs
  • De-demonising Financial Services: The Quest For Balanced Debate
  • OECD and the Debate on Information Exchange: Where is it Going?
  • IFCs: Collective Action to Survive (and Thrive)
Book you place here

25 July 2012

Guernsey approves foundations law


The introduction of Guernsey’s foundations law moved a step closer today after the Island’s Parliament, the States of Guernsey, gave its approval to the legislation.

The law, which is expected to be introduced by the end of this year or the early part of 2013, had already been agreed in principle last year and will now be sent for final ratification by the UK’s Privy Council. Following enactment, the law will provide Guernsey’s fiduciary sector and its clients with additional choice and flexibility when setting up wealth management structures in the Island.

Fiona Le Poidevin, Chief Executive of Guernsey Finance – the promotional agency for the Island’s finance industry, said: “The foundation is a product our finance industry has been keen to offer clients so we are pleased that the States of Guernsey has passed the law. We will now wait for the UK’s Privy Council to consider the legislation and hope to see foundations enacted locally by the end of the year, or in the early part of 2013.

“We were one of the first jurisdictions in the world to introduce trust law and the States of Guernsey has recognised, along with our finance industry, that to further develop the expertise and experience built up over many years in the fiduciary sector the Island needed to be able to offer new products. Introducing the law will allow our fiduciary professionals to consider the use of a foundation as well as a trust when adopting wealth structures for their clients, particularly those based in civil law jurisdictions in Europe and further afield in the emerging markets of China, Russia and Latin America where the trust concept is less familiar than in common law countries such as the UK.”

Guernsey Finance is hosting a seminar, titled The Foundations Alternative, on Tuesday 18 September in the Stevenson Theatre at the British Museum, Great Russell Street. The event, which gets underway at 4pm, will give advisers a practical insight into how foundations can be used and use case studies to illustrate this. Guest speakers at the event will be announced shortly but will consist of both Guernsey and off-Island practitioners.

UK: FSA statement on the use of XBRL for Capital Requirements Directive (CRD) IV and Solvency II


The use of eXtensible Business Reporting Language (XBRL) for financial and regulatory reporting purposes is now widespread, and continues to grow. Exchanging business data consistently helps reduce the number of errors, checks and re-submissions required and is a significant driving force behind XBRL’s adoption.

CRD IV and Solvency II quantitative data reporting

We recognise that firms may have to carry out significant work to prepare for the Capital Requirements Directive (CRD IV) and Solvency II, and it would help to clarify the quantitative reporting format.

The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) aim to leverage the benefits of XBRL by introducing harmonised, European-wide XBRL taxonomies for the CRD IV and Solvency II directives respectively. They will mandate National Supervisory Authorities (NSAs), such as the FSA, to use these harmonised XBRL taxonomies for reporting quantitative data to them.

For quantitative reporting under CRD IV and Solvency II, we intend to collect only the regulatory data using the XBRL standards and formats. We are considering the implications of this and welcome your views via the usual channels.  The time frame for the rollout of the collection mechanism is driven by the EBA and EIOPA schedule.

Other regulatory reporting

As part of the UK’s regulatory reform agenda, we will explore the further use of XBRL for reporting by firms beyond the scope of CRD IV and Solvency II separately.

Any changes to current reporting formats will require consultation with stakeholders at the appropriate time.

Further communications

No further changes will be needed at this time for the data submissions made by firms that are not related to CRD IV and Solvency II. These will be shaped by the data strategies developed by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

24 July 2012

Arms Trade Talks Let Traffickers Off the Hook


Investigation Reveals Live Network While Current Treaty Language “Gives Comfort to Gunrunners”

With only three days to go in UN Arms Trade Treaty (ATT) negotiations, the lead investigator of a new report exposing a live trafficking ring slams the treaty language meant to regulate arms brokers. The Conflict Awareness Project has called the latest text released today, “so weak and watered down it will give comfort to illicit gunrunners.”

After a month of negotiations, current draft language on brokering is now limited to one sentence with no requirements for licensing or registration of brokers.

“Treaty negotiators are making a grave error by letting arms middlemen off the hook. The feeble treaty language means business as usual for traffickers who are filling the arsenals of the world’s worst human rights abusers,” said Kathi Lynn Austin of the Conflict Awareness Project. “To be effective, the Arms Trade Treaty must require licensing and registration of arms brokers, and the definition of brokers must include all relevant intermediaries, especially transporters.”

The investigation caught two former Viktor Bout associates in the act of gearing up trafficking operations on the Indian Ocean island of Mauritius. The Conflict Awareness Project report has triggered an official investigation announced today by the Prime Minister of Mauritius. Other nations implicated as platforms for the burgeoning arms smuggling network include the United States, Iran, South Africa, Finland, Australia, the United Kingdom, and the United Arab Emirates.

“Arms traffickers, like the clandestine network we exposed, are currently targeting the most vulnerable conflict zones in the world, such as Sudan, Congo, Somalia and potentially Syria,” stated Austin, a former UN arms investigator. “Without international standards, arms traffickers will evade law enforcement and bust UN sanctions as they have for years, by exploiting a Swiss cheese of loopholes from one national jurisdiction to another.”

UAE: SCA issues regulations for investment funds


The Security and Commodities Authority (SCA) has issued board’s resolution No. 37 of 2012 concerning the rules of investment funds. The decision was signed by HE Eng. Sultan bin Saeed Al Mansoori, Minister of Economy and SCA Chairman .

The announcement was made by HE Abdullah Al Turifi, CEO of SCA, who added that the resolution will enter into force on the day after its publication in the Official Gazette. Al Turifi said that it represents a positive step that will help strengthen corporate investment and provide more opportunities for stability in financial market. Al Turifi commented, “The resolution is part of the SCA’s endeavor to issue new investment products and diversify the investment tools available to traders in the markets. It will boost the investment climate in the local markets and help attract new investments and liquidity. The new regulations will be a pillar and a prerequisite for creating a market maker who keeps balance in the country’s markets.”

Al Turifi pointed out that that the SCA has been keen since its inception to develop its legislative system, in line with recognizing the importance of continued efforts to improve the level of these markets to match the best international practices in terms of both the legislation and the regulations that govern the markets. The authority has been willing to diversify investment instruments, which help deepen the market and attract more local and foreign investments.

In addition to definitions, the implementation system and rules of setting up investment funds and promoting them, the system includes 48 articles split into four chapters. The first chapter deals with local funds: the setting up of local funds, licensing applications, cancellation, eligibility, correspondence, document of a fund’s issuance, statement of a fund’s issuance, amendments of the fund’s issuance, investment policies of local funds, investment in commodities, prohibition of the receipt of funds, subscription in the fund units, the practicing of a fund’s activities, issuing fund units,  issuing and trading fund units, evaluating the assets and pricing fund units, distribution and recovery of fund units, fund assets, lending and borrowing a fund and its finances, a fund’s financial reports, the General Assembly of owners of fund units, a fund’s board of directors, authorities of the board of directors, disclosure and provision of information, conflict of interests, a fund’s memberships on the boards of directors of companies, control and inspection of investment fund and expiration of a fund.

The second chapter includes a number of articles related to general obligations of investment fund’s service providers, obligations of the investment director, tasks of the Management Services Company, and tasks of the Custodian.

The third chapter deals with the promotion of foreign investment funds inside the country, terms and conditions of promoting foreign investment funds inside the country through IPOs, promoting foreign investment funds inside the country through IPOs, promotion requests, local promoters, obligations of local promoters of foreign funds, means of promotion and identification of investors who are not promoted yet, as well as the minimum value of subscription per investor.

The fourth chapter includes the final provisions such as provisions of investment funds of special nature, the appeal of the authority’s decisions, offences and penalties, fees, as well as the reconciliation of an existing fund.

Improving international tax co-operation: OECD releases reports on automatic exchange and tax confidentiality

Furthering its efforts to strengthen international tax co-operation, the OECD has issued two new reports on automatic exchange and tax confidentiality. The report on automatic exchange of information describes what it is, how it works, where it stands and what challenges remain. The report on confidentiality of information exchanged examines all aspects of ensuring the protection of information exchanged for tax purposes. Confidentiality of information is essential for all forms of exchange, but in particular for automatic exchange of information.

The OECD has been active in facilitating automatic exchange for many years.  The OECD’s work in this area is focused on helping make automatic exchange into an effective compliance tool for countries wishing to use it.  The report on automatic exchange was presented to G20 Leaders at their June 2012 summit in Los Cabos and welcomed in the G20 communiqué. It describes the essential aspects of automatic exchange and gives answers to the following key questions: (i) what is automatic exchange of information, (ii) how does it work, (iii) what is the legal basis, (iv) what is the current state of play, (v) does automatic exchange work, and (vi) what is the OECD doing in this area and what still needs to be done.

To engage in exchange of information, and in particular automatic exchange of information, countries need a high level of comfort that the information is kept confidential both in law and in practice and is only used for the purposes allowed under the applicable exchange instrument.  The report on confidentiality examines the legal framework to protect the tax confidentiality of information exchanged and the administrative policies and practices in place to protect confidentiality.  The report sets out best practices related to confidentiality and provides practical guidance, including recommendations and a checklist, on how to meet an adequate level of protection.

Bloomberg: List of Funds in Mauritius

FSA: Banking at the cross-roads: Where do we go from here?


Speech by Lord Turner, FSA Chairman at Bloomberg
Two weeks ago the Economist front page headline was  ‘Banksters’.  When a respected magazine, read throughout the world, suggests that banking is riddled with malpractice, its ‘credibility shot’, trust evaporated, we have a major problem.
A problem, because the banking system – and the wider financial system – plays a crucial role in a market economy. It connects savers and borrowers, investors and users of funds, it allocates capital, it provides payment services, it insures against risk.  It performs complex and vital functions, functions whose effectiveness depends crucially on the integrity of those who operate within the system, integrity which in turn earns trust.
And lack of trust in financial services is a problem for Britain in particular, because the City is a vital contributor to the UK economy.  But the City’s overall reputation can be undermined by excesses and failures in particular areas of activity – excesses and failures to which competitors abroad are only too happy to draw attention.
So we must consider where we go from here.  In this speech I will do three things:
First, identify three key drivers of declining trust in the banking system.
  • Second, consider what the essential problem is – why banking is different from other sectors of the economy.
  • Third, suggest implications for prudential policy, for industry structure, for conduct supervision and, most crucially, for the management and boards of banks.

Collapsing trust

Trust in banks and bankers has eroded.  Three factors explain that collapse: people have come to doubt the economic benefits of financial liberalisation and of much banking activity; they doubt banks’ values; and they doubt whether banks have their interests at heart. 

Economic impact

Ahead of the crisis, experts confidently asserted the great benefits of increasing financial intensity and innovation.  Global financial flows were driving more efficient allocation of capital: ever more liquid markets were improving price discovery; the alchemy of securitisation was dispersing risks into the hands of investors best placed to bear it; derivatives were enabling better risk management; and, the rapid growth of UK-based banks, such as RBS, was seen as good for the UK economy.
Huge bonuses may have amazed and bewildered the ordinary citizen, but the experts were on hand to explain that in some mysterious way ever more intense and complex financial activity was increasing the total size of the economic cake, with the prosperity of all enhanced, even if less richly than that of some bankers.
And that proposition was essential to the social acceptability, or at least the tolerance, of huge individual rewards.
But we now know that it wasn’t true.  Some forms of financial innovation probably did have potential to deliver economic benefit, but much was of little true economic value; and far from making the financial system and overall economy more stable, it contributed to the financial crisis of 2008 and the Great Recession which has followed.  The complexity and opaqueness of investment bank innovation contributed to that crisis: so too did excessive commercial bank lending, in particular to the commercial real estate sector.
Central to the collapse of trust in banking is people’s feeling that they were sold a story about the benefits of increasing financial activity which turned out to be untrue.  Part of the solution must therefore be policies which ensure that finance is in future focused on its valuable and essential functions, and that we more effectively offset its potential to create harmful instability – whether in investment bank activities or in plain old commercial bank lending.

Values

People are angry with banks and bankers – and with the policy makers who set the rules within which they operated – because of a Great Recession whose origins they believe, quite rightly, lay within the financial system itself.  But the outrage which led directly to the headline ‘Banksters’ is also a fury about values, provoked by the quotes revealed in the Libor scandal: “come over …and I’m opening a bottle of Bollinger”1, so we can celebrate fixing the Libor rate.
Those quotes reveal a dealing room culture of cynical greed.  So too do the attitudes revealed by Michael Lewis’s brilliant book The Big Short – securities salesmen knowingly selling securities whose value they doubted to customers whose judgement they disparaged – the “idiots in Dusseldorf”.
And of course there is nothing new about dealing room culture, nor sharp practice.  Anyone who thinks that there was no insider dealing before ‘big bang’ is looking at the past through rose-tinted spectacles; anyone who thinks that testosterone-driven dealing room culture is new didn’t visit an FX dealing room back in the early 1980s.
But what is new, is that the sheer scale of financial activity has increased, its share within the economy is much larger, and that, as a result, the size of the potential corporate and personal benefits from malpractice have grown greatly.
People are more concerned by poor values in finance, simply because finance got much bigger. 

Customers’ interests

Malpractice in dealing room and in wholesale sales and derivatives matters.  It is not a victimless activity even when, as is sometimes the case, it is not prosecutable as a crime. But shady practice in the esoteric arena of Libor fixing might still not have provoked quite as much public anger if it had not come on top of scandals which more directly affected the average citizen.
In the UK, mis-selling of payment protection insurance to personal customers and of interest swaps to SMEs, and in the US, the activities of mortgage salesmen enticing borrowers into unsustainable credit commitments, have convinced many consumers that retail banks are out to serve their own interest, not the interest of their customers.
So the collapse of trust in bankers which led to the ‘Banksters’ headline is the product of three factors.
  • A story of beneficial economic impact which turned out to be untrue.
  • Poor values and malpractice able to operate on an increasing scale.
  • And direct consumer experience of exploitative product sales.
The way forward to a more trusted banking system must address each of these three problems.
And addressing the problem is important, not just for banking, but for all UK financial services, for the City, and for the UK economy. 
Yes, there have been severe faults in some parts of our financial system.  But financial services – including complex wholesale financial services – play a crucial role in a vibrant market economy; and the UK is good at providing those services to the rest of Europe and to the world, and should continue to do so in future.  Wholesale insurance services, equities research and trading and distribution; asset management; corporate finance advice: these are services which the City provides and has continued to provide well throughout the crisis.  And while some investment bank product structuring and dealing activity appears to have added little to economic efficiency, the core functions of underwriting equity and bond issues and of providing liquidity via market making in key fixed income and foreign exchange markets, are valuable and essential ones.
So let me be clear:
  • I do not believe it is the role of the regulator itself to have responsibility to promote the competitiveness of the City, because the moment you introduce that requirement, you create a confusion of objectives and open the door to regulatory arbitrage.
  • But as a citizen of the UK, I am clear that the City is now, and should be in the future, a leading global financial centre, making a large positive contribution to our economy.
Financial services are essential to a complex modern economy, and Britain has a comparative advantage in their provision.
But while recognising that, we also need to recognise that financial services in general – and banking in particular – are in some crucial respects different from other services and markets.  And those differences help define what regulators and what industry leadership need to do to help restore trust.

Distinctive features of financial services and banking

Financial services in general, but banking in particular, are different from other sectors of the economy – retailing, manufacturing, leisure services, transportation – for four reasons:
  • First, financial markets and institutions, and in particular those involved in the process of credit and money creation, can introduce instability to the macroeconomy, fuelling booms and busts.  If a retailer expands too rapidly, gets into trouble and goes bankrupt, that is a problem for the retailers’ shareholders and their workforce.  But over-rapid bank expansion and subsequent bank failure can be fatal for the whole economy.  That has implications for the responsibilities of bank management and boards.
  • Second, there is far greater potential in retail financial services than in other sectors for producers to rip off consumers.  That’s because of the asymmetry of information and knowledge between the provider and the customer.  The car buyer is well-equipped to test drive different cars and select the one he or she prefers; the unsatisfied supermarket customer can take his or her business elsewhere.  But individuals cannot test drive complex investment and insurance products: they rely on trusted providers to give explicit or implicit advice. And many purchases are too infrequent and too large to make switching provider an effective market discipline.  Either regulatory intervention, or producer responsibility and ethical values, have to compensate for the ineffectiveness of markets.
  • Third, and particularly in wholesale financial services markets, there is far greater potential for the proliferation of activities which are, in the economist Roger Bootle’s words,merely “distributive” rather than truly value “creative” – activities which simply redistribute money from one group of citizens to another, rather than increase the size of the economic cake.  A significant share of what is described as innovative product structuring in the investment banking world is not innovative in a social value sense – but dedicated to either regulatory, accounting, or tax arbitrage – to seeking economic advantage from describing an unchanged set of risks in a more favourable regulatory or accounting form, or to redistributing an unchanged economic pie from the generality of tax payers to the bank’s customers or to the bank itself.  And in the provision of complex financial services to end investors, there is much greater opportunity than in other sectors of the economy for purely rent extracting activity, for instance through unnecessary portfolio churn, which detracts rather than enhances investor return.3
  • Fourth and finally, ethical risks are created by the immateriality of finance and by distance from end customers, particularly but not exclusively in the wholesale arena.  One of the best books written on the origins of the financial crisis is Raghuram Rajan’s Fault Lines.4  Rajan is one of the few mainstream economists who identified the potential instability of the financial system ahead of the crisis – his warnings at Jackson Hole in 2005 were sadly not only ignored, but overtly rejected.  In Fault Lines he gets behind the immediate causes of the crisis to some of the fundamentals – to global current account balances, and to over-rapid US credit extension deliberately encouraged for political reasons.   But one of his chapters is about ethics, and entitled ‘When money is the measure of all worth’.  And the point Rajan makes is as follows:
    • In all activities within a market economy, self-interested money-seeking motivation plays an important role.  It was after all Adam Smith’s great insight that the interaction within competitive markets of self-interested individuals can lead to socially beneficial results.  In many areas of economic activity, however, those self-interested pecuniary motivations are balanced and constrained by others – by pride in the service or product you are delivering, by desire to please customers as an end in itself, by enjoyment of the esteem in which you are held by customers or business counterparts with whom you have a sustained relationship.
    • But what is distinct to finance, and in particular to the areas of finance where savers and users of funds are connected via multiple steps in complex chains – is that many of the key participants have no direct contact with the end customers whose lives they are affecting, and only transient contractual relationships with their counterparties.  And it is simply easier to make huge amounts of money out of a multi-step chain which connects ill-informed investors in one country to ill-informed sub-prime borrowers in another, and still go home believing that you are a fine upstanding member of society, than knowingly to sell a bad product or service to a customer with whom you have more direct contact.
When money is the measure of all worth, constraints on the temptation to fix Libor or knowingly sell shoddy products, are greatly reduced.

Where do we go from here?

So where do we go from here? How will we rebuild trust in the banking system and rebuild recognition of the vital role which a well run banking system plays within our economy?  I suggest five elements of the response.
  • Better prudential rules and new macro-prudential policy approaches.
  • Structural change – the importance of the Vickers Commission recommendations.
  • Better, more intense and more robust conduct supervision and enforcement, but recognising also their limitations.
  • Action by the leadership of banks to improve culture and values – a difficult area but a vital one.
  • And finally, some recognition by regulators, politicians, consumer groups and the general public of the complexity of the challenge and the constraints which banks face.

Prudential rules and macro-prudential approach

It may seem odd to start with prudential rules.  After all we are talking about lack of trust, about mis-selling or market manipulation in retail and wholesale markets, about bankers perceived as ‘banksters’: where do capital and liquidity rules come into the story?
Well, they are fundamental; because the biggest thing that has destroyed trust in the financial system, and in banking in particular, is that people were told that complex finance would make them more prosperous but that instead it caused a great recession.  And the economic losses suffered as a result – the losses to wealth and income and employment, and the increased public debt burdens, are far far greater in value than any customer detriment resulting from malpractice. 
When the serious economic histories of this Great Recession are written, I am sure that they will concentrate on the policy mistakes which led to the crisis, with the role of individual miscreants or poorly run institutions likely to seem less significant over the years.  Just as in the serious economic histories of the Great Depression public policy mistakes are to the fore, not the many examples of unscrupulous activity and bad individual business decisions which flourished ahead of the 1929 crash.5
  • Ahead of the crisis, we had totally inadequate rules on bank capital and liquidity, agreed by apparent experts from regulators and central banks across the world, which allowed banks to run with a fraction of the capital reserves we now believe essential for a stable system.
  • We also had a flawed theory of economic stability – believing that low and stable inflation was sufficient to ensure financial and economic stability, and failing to identify that credit and asset price cycles can be key drivers of instability.
  • And in the UK we had a dangerous institutional underlap between an inflation-targeting central bank and a rule-driven regulator, with no one responsible for assessing the big picture risks, or equipped with tools to address them.
Putting all that right is crucial – and we have already made significant progress.  Key elements of that progress are:
  • the Basel III capital and liquidity standards;
  • measures to ensure that all banks are resolvable, to which bail-inable debt will be central;
  • a changed FSA prudential supervisory approach, focused on the essentials of capital, liquidity and asset quality; and
  • the creation of the Financial  Policy Committee, responsible for deploying macro-prudential levers which can lean against excessive cycles in credit provision.
In all of this we face a very complex balancing act – how to make progress towards a sounder system in future, while not exacerbating the deflationary dangers created by deleveraging after past excesses.  But at the end of the transition I am confident we will have a more stable system and that in itself will be central to the restoration of trust.
And new prudential rules will also be central to reducing the potential for the proliferation of unnecessary activity of little social value.  As already said, conduct problems in financial markets are not new – they were there in the much simpler financial markets of the 1960s and 1970s.  But the scope of them exploded with the rapid growth in the scale and complexity of investment banking activities, the rapid increase in the size of bank balance sheets and of trading volumes relative to GDP which occurred between 1980s and the crisis.  Part of that increase in financial activity was inevitable: the natural consequence of globalisation in the real economy, and of the move to floating exchange rates and open capital flows after the collapse of the Bretton Woods system.  But part was unnecessary, and made possible by bad prudential rules which allowed investment banks to conduct trading activity on absurdly light capital bases, maximising the implicit put option onto the tax payer in the event of systemic crisis.
Higher capital requirements overall, tighter leverage constraints and much higher capital against trading activities will reduce the scope for malpractice in complex wholesale finance, simply as a by-product of limiting the potential for unnecessary and risky activity overall.

Structure: implementing the ICB’s ring-fencing proposals

So better prudential rules and the macro-prudential role of the Financial Policy Committee are essential to a more stable system, which people can trust because it is less likely to generate financial and economic crisis.
Structural reforms, such as those recommended in the UK by the Vickers Commission, or to be implemented in the US via the Volcker Rule, will also play an important role.  They are not sufficient to ensure stability.  Yes, complex investment bank trading activity played a role in the origins of the financial crisis – the failure of Lehman’s was a crucial event; but so too did over-rapid expansion of plain old lending to commercial real estate companies: HBOS also failed.  And any idea that, having isolated retail and commercial banking within a ring-fence, we can then be indifferent to the development of risks outside it, is both wrong and dangerous.
But structural reforms which create either entire banks or units within wider banking groups more exclusively focused on classic retail and commercial banking activity still have a vital role to play. 
In the UK the implementation of the Independent Commission on Banking’s recommendations will, I believe, deliver three important benefits.
  • First, it will increase the array of resolution options available to the authorities in the event of crisis, creating at least the possibility that we may choose to rescue the ring-fenced entity while allowing non ring-fenced entities to fail.  That possibility will in itself reintroduce market discipline into a system characterised by too-big-to-fail assumptions; which in turn will help constrain the unnecessary proliferation of complex structuring and trading activities, reinforcing the impact of higher capital requirements.
  • Second, it will give us the option – provided the vast majority of SME lending is conducted within the ring-fence – of applying macro-prudential policy levers at the ring-fenced level instead of or as well at group level.  That will create a tighter link between macro-prudential levers and the dynamics of credit supply in the real economy, and increase the likelihood that we could limit the impact of booms and busts in commercial  bank lending.
  • Third, but perhaps this will turn out to be most important, it will give banking groups the opportunity to build institutions very explicitly focused on the excellent provision of essential banking services to households and SMEs, institutions which – provided banks grasp the opportunity – could play a major role in rebuilding customer trust.

More intense and robust conduct supervision, but recognising the limitations

On the prudential side, more effective rules need to be supported by a new more effective supervisory approach; and the FSA has been putting that in place since 2008.  On the conduct side the changes which the FSA has begun to make are equally important.
In retail markets, the FSA has already described a major change in intended approach – seeking to identify emerging threats of customer detriment at an earlier stage, intervening to prevent or significantly limit a major mis-selling wave such as payment protection insurance, rather than simply ensuring customer redress after the event. 
In wholesale markets meanwhile, we are also considering whether our past traditional approach is still tenable.  In the past, it’s fair to say that the FSA did tend to assume that relationships in wholesale markets, for instance the sale of products to apparently sophisticated institution investors such as pension funds, should be governed largely by a caveat emptor, market discipline approach.  But increasingly we are aware that at the end of the chain of wholesale institutional relationships there will typically lie a retail consumer – the pension fund policyholder for instance.  And that shoddy wholesale market conduct is certainly not a victimless activity.  A somewhat more interventionist approach to wholesale conduct issues is therefore likely to be appropriate; and the FCA’s approach document –to be issued in the autumn – will discuss some of the options, and the implications for FSA resources and skills.
But today I would like to stress not what more intense supervision, of either retail or wholesale conduct can achieve, but what it cannot.  It cannot possibly prevent all malpractice in advance, without employing a hugely increased army of supervisors and probably not even then.  And if we did deploy that army, we might well add more cost to the industry than the cost of customer detriment averted. 
The LIBOR scandal has thrown this challenge into relief: in that scandal there are two distinct phases and categories of manipulation – the low-balling of LIBOR submissions in the 2007 to 2008 for reputational reasons, and the earlier manipulation of rates, sometimes up and sometimes down, by a single or a few basis points, to benefit derivatives positions.  There is a debate as to whether the authorities could have been more alert to the 2007 and 2008 manipulation – and I will not comment on that today.  But in relation to the earlier period, to the manipulation of rates by a minute amount for a short period in either direction, I do not believe these problems could have been spotted from outside except via supervision so intensive as to be prohibitively expensive. 
Alongside more intense and better focused supervision, therefore, robust after-the-event enforcement action and sanction will have to remain a key regulatory tool.  But alongside both, we also need strong management commitment to better culture and better values.

Culture and values

What do we actually mean by cultural change: what does it imply for bank leadership?
At its core, I suggest, must be recognition of the distinctive features of finance and banking described above, and recognition that the top management and boards of banks have a responsibility to offset the dangers which those distinctive features create.
Banks are different because their failure has consequences for the macroeconomy.  There is therefore a social interest in bank boards and top management having a different attitude towards risk return trade-offs than would be acceptable in other sectors of the economy.  We need them when assessing an organic growth plan, a funding strategy, or a major acquisition, to care more about the downside risks of failure than they would if running a retailer, a manufacturer, or a hotel company.
They need to be custodians of institutions of great public interest, as well as custodians of shareholder value. 
There are therefore strong arguments for ensuring that bank directors face different personal risk return trade-offs than those faced in other companies. That is the logic behind the proposal set out in the government’s recently issued consultation document on Sanctions for the Directors of Failed Banks that, when banks fail, there should be some category of automatic sanction for directors which does not apply in other sectors of the economy.
But banks, and other financial institutions, are also different because of the greater potential to engage in pure rent-seeking activity, the greater potential to exploit consumers, and the greater danger that ethics are undermined when money becomes the measure of all worth.  So banks are only likely to earn the trust of customers and the respect of society at large, if from the very top there is a clear message that there are many things which may be profitable, which may be within the legal rules, and which neither the customer nor the supervisor will necessarily ever spot, but which go against firm values and which the bank therefore will not do.
What does that mean concretely?  Well, the only way to make it concrete is to give specific examples.  So let me pose the following questions:
  • If the top management and board of a retail bank observes that it is making huge profit margins on an ancillary product sold by a commission-incentivised sales force: what does it do?  Congratulate the sales teams and increase the targets, or ask searching questions about whether the product is truly in consumers’ interest, and whether the controls in place to ensure appropriate sales are sufficient to offset the dangers of bias introduced by high margins and commission incentives?  If it is serious about values and culture, it has to do the latter: but that’s not what happened in most UK retail banks in the case of payment protection insurance.
  • And in an investment bank, if a fancy new product design will enable a corporate or a country to conceal from the market the scale of its indebtedness, or if a trading desk manages to offload a problematic position onto an unsuspecting customer, does the top management and the board say “Congratulations, take a bonus” or does it say, “That’s not what we do”? 
There is no value in beating about the bush.  Unless management and boards themselves shift the tone from the top in such specific ways, and in addition make effective controls against dishonest behaviour the highest priority throughout the organisation, then we are not going to change the external perception of bankers which led to the Economist headline.

Public recognition of constraints and trade-offs

Much of the responsibility for restoring public trust in banking therefore lies not with the regulators but with the leadership of banks.
But the challenge may prove an impossible one unless regulators, politicians, consumer groups and society at large are in turn willing to recognise the many good things that banks already do, recognise the constraints under which banks operate and honestly debate a crucial trade-off.
  • All of our banks are already providing many good products and services to customers, and they employ many devoted staff to do that.  We need to say that and point out that it’s true even in areas of activity currently under a cloud – such as interest rate swaps sold to small businesses.  Many of the structured swaps sold in the past were clearly not hedges but gambles; even some of the simple swaps were mis-sold: redress must be paid.  But selling a simple interest rate swap product to a small business, for instance a cap and floor collar which protects the business against rises in interest rates in return for limiting the benefit of falling rates – could be perfectly responsible provided the customer truly understood the choice they were making.  We need a tone of public debate which moves beyond simplistic category assumptions – that all interest rate swaps or all of any other products are bad.
  • And banks operate within constraints.  They need to earn a reasonable return on equity, since we need new equity to support future lending to the real economy: and they need to cover their cost of funds.  Banks have been accused recently of failing to lend enough money to the real economy, or of lending it at too high a rate.  But if we look at banks’ Net Interest Margin in the UK, the difference between their lending rates and their cost of funds, it’s flat to slightly down over the last four years, not up.  The fundamental problem banks face in supporting lending at reasonable rates is that their cost of funds is high in wholesale markets because of continued concerns about bank credit worthiness, and in retail markets because of intense competition for term funds.  We need honestly to recognise that reality, and devise public policies, such as the new Funding for Lending scheme, which help overcome the constraints, not demonise banks as the source of all our economic problems.
  • Finally, we need to recognise a central problem in UK retail banking – the impact on competition of free-if-in-credit banking.  One reason many people don’t like banks is that in the short term customers are locked in, and in the medium term competitive choice appears muted.  So we need to facilitate new market entry into retail banking.  But that is continuing to prove difficult.  Some say that the FSA’s rules and approval processes are an impediment: I don’t believe that is the case, and we have taken several steps to ensure it is not.  But one important barrier to competitive entry into UK personal sector banking is obvious – the fact that the core product, the current account, is usually given away for free, sold at below cost of production.  Which means that it may be difficult for a new entrant to make a business plan stack up unless they assume the sale in some future year of high margin ancillary products – products which if we are not careful may be for both the incumbents and the new entrants, the next PPI.  UK personal sector banking has for years achieved reasonable overall profitability on the basis of large cross-subsidies between different customer segments: many who stay in credit get a good deal, subsidised by others who pay though, for instance, unauthorised overdraft charges and PPI insurance premiums.  It is not a sound basis for a long-term trust-based relationship between a competitive banking system and its customers.  But if the industry is ever to move away from this model onto a sounder base, it will only be able to do so if confident that at least some regulators, politicians and consumer groups will admit the case for doing so, rather than accuse them of profiteering.
The last three weeks have been very bad for the reputation of British banking.  Rebuilding trust will be a huge challenge.  Some of that challenge falls to regulatory authorities – we made big mistakes before the crisis.  Much falls to the leadership of banks themselves.  But it is a challenge that must be met, given the vital role which the banking industry plays in our market economy.

1. FSA Final Notice on Barclays LIBOR fixing: paragraph 83.
2. Roger Bootle, The Trouble with Markets, Nicholas Brealey, 2009 and 2011
3. See the Kay Review of UK Equity Markets and Long Term Decision Making, July 2012.
4. Raghuram G Rajan, Fault-Lines, Princeton University Press, 2010.
5. See e.g. Liaquat Ahamed, The Lords of Finance, Penguin Press, 2009.