This briefing note is the third in a series of briefing notes from Walkers on the Loans, Credit and Finance (Bailliage of Guernsey) Act 2022 (the “LCFL”), and provides an overview of the licensing regime applicable to “financial undertakings” under Part III of the LCFL (an “FFB Part III License”). Our previous briefings, which provide a general introduction to the LCFL and an overview of the Part II licensing regime, are available here and here.
The Guernsey Financial Services Commission (the “GFSC”) has consulted on draft rules and guidance applicable to all licensees under the LCFL (the “Rules”). The consultation is now closed and we are awaiting the final version of the Rules, which are expected by the end of 2022. The main aspects of the Rules applicable to the holder of an FFB Part III License, which are not yet final and are subject to change, will be also covered in this briefing.
Who will need an FFB Part III license?
All companies carrying out ‘financial business activities’ in or from the Bailiwick of Guernsey (‘Guernsey’) will require a Part III FFB license unless an exemption applies. In addition, all Guernsey companies carrying out financial company business anywhere in the world will require a Part III FFB license unless an exemption applies. Conducting any of these activities without an FFB Part III license or applicable exemption is a criminal offence.
“Financial Business” covers all activities subject to the current registration regime set out in the Registration of Unregulated Financial Services Businesses (Bailliage of Guernsey) Act 2008 (“NRFSB Act”), which covers various activities unregulated finance. service businesses, such as money services, payment management, foreign exchange, loan and credit activities.
Companies that are currently registered under the NRFSB Act will, subject to any applicable exemptions, be required to obtain a Part III FFB license. However, loan and credit businesses that provide loans and credit to retail consumers will need to obtain a Part II license under the new consumer credit regime (although they will need a license). of Part II if they lend to retail customers).
What if the company is already regulated?
Holders of any other license under other regulatory laws in Guernsey and holders of a Part II license under the LCFL do not need to obtain a Part III FFB license to undertake activities commercial financial firm. However, these companies are expected to comply with the Rules with respect to their business activities as a financial company. Therefore, a bank, for example, which makes loans to businesses will not need an FFB Part III license in addition to its banking license, but it will have to comply with the applicable parts of the rules (although it has need a Part II license if it provides loans to retail customers).
Are there any exemptions?
In addition to companies already regulated by the GFSC under another licensing regime, a number of exemptions are proposed, including an exemption for debt funds regulated in Guernsey and an exemption for intra-group loans. A number of other exemptions are expected. However, there is no exemption based on the equivalence of an FFB Part III license with respect to regulated businesses in jurisdictions deemed to provide appropriate or equivalent protections.
Business activities of financial firms conducted without consideration, such as lending without interest or fees, are not covered by the Part III FFB licensing regime.
The GFSC also has the discretion to exempt a person from the requirement to hold a Part III FFB license, and we are awaiting guidance on the circumstances in which the GFSC may do so.
What requirements apply to the holder of an FFB Part III license (a “Licensee”)?
Financial resources, capital adequacy, liquidity and insurance
The rules apply financial resource requirements, but these do not apply to a holder of a license under the Banking Supervision (Bailliage of Guernsey) Act 2020 or the Banking Supervision Act 2002. insurance activities (Bailliage of Guernsey).
Licensees must ensure that they always hold sufficient cash in reserve to allow for an orderly liquidation over a three-month period. In addition, the level of these resources must be monitored and verified at least quarterly and the licensee must immediately notify the GFSC if it is found that the resources are no longer sufficient (the notification must include the measures taken to remedy the breach).
The rules also include requirements relating to:
- Minimum Licensing Criteria – a licensee must meet the minimum licensing criteria set out in the LCFL (requirements are similar to those in Guernsey’s other regulatory laws);
- Principles of Business Conduct – these ten principles relate to integrity, competence, care and diligence, conflicts of interest, client information, client assets, market practices, financial resources, internal organization and relations with the GFSC;
- Accounts – Licensees must have audited accounts that are publicly available upon request;
- Annual report – Licensees must submit an annual report to the GFSC, including a copy of their accounting records for the relevant year together with data on the volume and type of activity carried out;
- Outsourcing – Licensees remain responsible for outsourced activities and must have appropriate systems in place to control and monitor outsourced activities;
- Complaints – including the requirement for a complaints procedure and complaints log, as well as an escalation process and GFSC notification;
- Customer Money – Customer Money must be held in a Customer Money Bank Account with an Approved Bank; and
- Marketing – Licensees must ensure that promotions and advertising are fair, transparent and honest and include sufficient information for customers to understand the cost of credit providers, in particular the likely total cost of credit. Other requirements apply to advertising and promotions.
When should a company have their FFB Part III license in place?
The license application window will open on January 1, 2023. There will then be a six-month period during which the companies concerned must obtain an FFB part III license (or a part II license if they lend or grant credits to retail consumers). The LCFL and rules are due to come into full effect on July 1, 2023, by which time businesses must have their licenses in place.
The GFSC has stated that there will be a 50% discount on the relevant application fee when it receives the complete license application before February 28, 2023. If the GFSC receives a license application after March 31, 2023, it There is a risk that the license will not be granted in time, so affected companies should aim to apply in early 2023.
License applications must specify the regulated activities to be undertaken by a licensee and that licensee must not engage in any activities not declared on the license application except with the prior written approval of the GFSC.
Commentary from walkers
The FFB Part III license and rules upgrade the current registration regime under the NRFSB Act to a full licensing regime.
Businesses operating in a number of sectors that provide various financial services such as payment processing and foreign exchange services, loans and credit, including informal or non-bank/private lenders, credit card issuers and mortgage lenders, could well be caught within the scope of the FFB Part III licensing regime (although firms that lend or extend credit to retail consumers will generally fall under the Part II licensing regime). Affected businesses will need to consider factors such as reviewing or preparing relevant business risk assessments, business plans and their terms and conditions, policies and procedures to ensure they are LCFL ready. .
About Walkers Channel Islands Regulatory Team
Walkers’ Channel Islands Regulatory Team in Guernsey are fully equipped to advise on all aspects of the new LCFL and rules, including advice on their application, assistance with license applications (including including business plans and business risk assessments), drafting policies and procedures and drafting client terms and conditions.
We have a team of regulatory experts spanning all practice areas who regularly advise on all aspects of Guernsey regulation, including financial services, AML, sanctions, data protection, tax, economic substance, FATCA and CRS.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.