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IoM update: progress towards an all-in-one financial regulator

Chris Hamblin, Editor, London, 20 August 2015

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It was recently announced that a Canadian called Karen Badgerow was going to be the first chief executive of the Isle of Man Financial Services Authority, taking up her place on 1 November when the new body comes into being.

On 10 November last year, Treasury Minister Eddie Teare announced that the Insurance and Pensions Authority (IPA) and the Financial Supervision Commission (FSC) were working towards a merger in 2015. The Tynwald, the Isle of Man's parliament, rubber-stamped the initiative on 17 March with the Transfer of Functions (Isle of Man Financial Services Authority) Order 2015. Badgerow is being drafted in from the Canada Deposit Insurance Corporation.

Reflect that regulator!

The FSC recently ceased to accept comments from interested parties on the Government's proposals to amend existing legislation to change nomenclature in the rulebooks and make other minor reforms to "reflect the new regulator," as it put it.

As the IPA and the FSC are both dissolving, so are their boards which consist of 'public interest' people, businesspeople and other luminaries. The Tynwald will have to approve the replacement board and will probably do this in October when next it meets. It is likely, according to sources, that quite a few of people from the two old boards will sit on the new.

The philosophy behind the reform

Onlookers might well be surprised that as its mentor, Great Britain, moves from unified regulation to Michael Taylor's old 'Twin Peaks' model, the Isle of Man is moving in the opposite direction. Why might this be? At the date when the old Financial Services Authority was formed in 2001, unified regulation was relatively rare. A regulator in Sweden, where it was already in play, told this author in 1999 that his 25-man-strong regulator (Finansinspektionen, now 400-strong) was formed "so that when something bad happens, the politicians have only one man to call."

According to sources, the Isle of Man's politicians did look at Taylor's work when they reviewed the regulatory landscape, but in the end decided that cost outweighed benefit. The economies of scale a small jurisdiction derives from a pooling of regulatory resources are probably even greater than those in a large jurisdiction, and there were considerable savings made and 'synergies' to be had in London when eight regulators merged into one in the first years of the new century.

The 'credit crunch' of 2008 also pushed the UK and the Isle of Man in different directions, as they had different experiences during that early part of the financial crisis that still grips the world. The UK's experience exposed the importance of 'ring-fencing' and the segregation of the speculative element of the financial markets from traditional banking and insurance. 'Conduct' issues, by contrast, predominated in the Isle of Man, as its financial sector was strongly tilted towards the needs of consumers. Its markets were also far less complex, making segregation less necessary in the eyes of its rulers.

There is no real banking sector in the Isle of Man, although there are bank offices aplenty, performing various administrative functions for their head offices on the mainland. The same can be said more or less of the accounting sector. There is no foreign exchange market, no major treasury operation and no stock exchange. There is, in short, less to 'segregate.'

Main tasks and functions

The old regulators are not prosecuting bodies and the new regulator will not be one either. Most financial prosecutions in the Isle of Man will continue to come from the Attorney-General. The new regulator's three guiding principles will be to protect investors from sharp practice; to suppress financial crime; and to keep the isle's markets in the good books of the world's great powers. Its main functions will include the following.

  • The regulation and supervision of whomever undertakes regulated activities.
  • Rule-making.
  • Investigating infractions under the money-laundering and terrorist finance legislation.
  • The scrutiny of directors and other people responsible for the management, administration or affairs of commercial entities.
  • Participation in consultative bodies, working groups and other arrangements.

The new regulator's powers and rules will continue to stem from the existing primary legislation for the foreseeable future: the Insurance Act 2008 in relation to insurance business; the Retirement Benefits Schemes Act 2000 in relation to pensions business; the Financial Services Act 2008 in relation to deposit-taking, investment business, services to collective investment scheme, corporate services, trust services and money transmission services; and the Collective Investment Schemes Act 2008.

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