Risky Business - How Jersey’s financial services risk rate business

Managing risk is a key factor to operating a successful business. Jersey’s financial services providers must be on their guard as to the risks they face. It is not taking the risk, but managing the risk, that is the critical factor for success.

Technical briefing - 16/01/2014

Risk is always present at Hawksford. We can never completely eliminate risk, but whatever approach we take to manage it, the end result should be the same: to control it. Successful risk management can be cost effective. There is a need to balance risk and commerciality and apply appropriate levels of capital expenditure proportionate to the nature of the business concerned. Jersey's financial services providers are encouraged to adopt a 'risk based approach' in managing their risks. Industry regulator, the Jersey Financial Services Commission, describes the main risk elements as country, product, delivery and customer specific risk. From a Hawksford perspective, client entities are categorised as high risk, medium risk and low risk. The elements that make up the decision to rate into a particular category can be numerous and diverse.

Risk management is best described as the identification, assessment, and categorising of risks, which encompasses the coordination and application of resources, procedures and monitoring, to enable the control and/or impact of seen and unforeseen events to be managed to best effect. Within an effective control environment, risk is actually good for
business. Under the right circumstances it can create a powerful commercial advantage for an organisation, however poor practice can cause risk to become a hazard. Methods used to identify risks may vary depending on legislation, industry   practice, culture or geographical considerations. Once risks have been identified, they must then be
assessed as to their potential severity of impact and to the probability of occurrence.

The control of high-risk business within the Jersey market is critical to its success as it affects all practitioners, no matter what their speciality. Risk is a subject on which there are numerous opinions ranging from who is actually classed as high risk to how they should be treated and monitored.

The Jersey Financial Services Commission and  the Jersey government assist its finance industry in managing risk by issuing laws, orders, codes of practice and guidance. One of the most important pieces of guidance is the Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism. The handbook advocates the use of the 'risk-based approach' to dealing with and classifying clients. From a legal perspective, there are factors which will automatically result in Jersey service providers having to categorise the client as higher risk.

It should be noted that, whilst the regulator expects  any businesses operating in Jersey to adopt a risk-based approach when categorising and managing business under their supervision, they do set the 'bar' at a certain level and insist that aspects will ensure some clients and their entities are automatically classed as high risk. In determining a risk assessment for a customer, the presence of one factor to consider that might indicate higher risk will not automatically mean that a customer is higher risk. Equally, the presence of one lower risk factor should not automatically lead to a determination that a customer is lower risk. There are a number of factors that cause a client to be classed as high risk, which include the client not having been met face-to-face, association with a sensitive activity, association with a sensitive jurisdiction or having a split board of directors, for example. Jersey companies are faced with more business from higher risk jurisdictions than ever before. Wealth is increasingly coming from the BRICS areas and this often brings greater risks in terms of background of client and source of wealth identification.

In addition to the regulatory expectations, we are likely to see costs increasing due to the introduction of initiatives such as FATCA. Intervention by US tax collectors is likely to be just the start of what is going to become a global phenomenon as other jurisdictions join in the race. Simply having a connection to the US may mean a client being classified as high risk. Whilst it is understood that competition is healthy and can benefit the client, the industry is starting to see some firms giving quotes that can be difficult to match, given the risks involved and breadth of work to be conducted. Whilst this may be an effective method of securing business in the short term, in the long term it can create problems and could result in a drop in standards. If the regulator becomes aware that a business is providing services to clients at a potential loss, it can draw two conclusions. Firstly, the business is not fully aware of the risks and scope of work to be undertaken and secondly, it is cutting corners to ensure the relationship is run at a profit. If the regulator finds either to be true, a business may find itself in serious trouble.

Everyone at Hawksford is encouraged to manage risk, with the risk, governance and compliance team having oversight. The team comprises 12 individuals who ensure conformity to the requirements of the legislative framework. They report any material findings to the board of directors.

We conduct business risk assessments and document the risks associated with the conduct of business within a corporate risk matrix. Each risk is assessed for probability and impact. We have policies, procedures and contingency plans in order to mitigate material risks. The ultimate responsibility for risk management, however, lies with the board of directors. The reputation of any business is the most precious asset it has. This is certainly true of a financial services provider such as Hawksford. We need to protect our reputation at all costs and excellent client service, combined with good effective risk management, is the key to this.

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