Financial Services Law: THE Reform
Commonly known as the Legislative Reform Programme (LRP), the long-awaited review and renovation of Gibraltar’s financial services law is a ground-breaking project jointly developed by the Government of Gibraltar (GoG) and the Gibraltar Financial Services Commission (GFSC). Almost four years in the making, the LRP was completed thanks to the enormous effort of the parties involved which included GoG and GFSC senior officials, law drafters, industry associations and their members, and local lawyers.
The new Financial Services Act 2019 (FSA) was passed in Parliament in July 2019, and the new regime came into effect on 15 January 2020.
In response to market activity and EU legislation over the last 30 years, financial services law in Gibraltar developed piecemeal, resulting in a complex and extensive statute book. The old regime had not been fit for purpose for some time, with gaps and areas of inconsistency and duplication, that needed to be addressed. The primary goal of the LRP was to consolidate and significantly reduce the number of laws.
The timing of completion of the LRP is strategically important for Gibraltar. With the advent of Brexit and the need to ensure alignment with UK regulatory outcomes, Gibraltar can now boast having a modern, navigable and accessible legislative framework, placing it in a more favourable position for future negotiations.
Understanding the new legal framework
The law of financial services is wide-ranging and primarily addressed at regulated entities, their Directors and employees, and to anyone seeking to be regulated. It is important that firms and individuals required to comply with any part of the new regime understand how it applies to them and whether any action is needed.
So how does the new structure work, and who does it impact and how?
The LRP consolidates and harmonises existing legislation into one Act, the FSA, and supporting regulations.
The FSA is the framework Act applicable to all regulated firms. It contains elements such as the constitution of the GFSC, the single, standardised approach to authorisation, the GFSC’s supervisory, investigatory and sanctioning powers and the compensation scheme provisions.
Although a key part of the consolidation exercise is to harmonise and rationalise aspects of the old regime, without making significant changes to the detail or way in which it operates, the FSA introduces new elements that will affect some. Even if the perceived impact on some firms and individuals is not considerable, everyone involved in financial services in Gibraltar will need to navigate the new structure and understand how the old regime has been transposed into the new one.
The following are the key changes:
The FSA introduces an umbrella system with a single authorisation process, replacing the previous licensing framework. It brings about a harmonised approach for obtaining permission to carry out one or more regulated activities, and the cross-sectoral high-level barriers to entry referred to as threshold conditions. The threshold conditions include the requirement to have appropriate financial and non-financial resources and the capability to be effectively supervised by the GFSC.
It also introduces the legal concept of the ‘general prohibition’, meaning that no one can carry out a regulated activity in or from Gibraltar without being authorised. Although a lot of the detail around the regime is similar to what was in place before, there are some elements, such as the threshold conditions, that are now formally enshrined in legislation. Another significant change is the terminology used to describe key components of the regime.
Regulated Individuals’ regime
The establishment of the Regulated Individuals’ regime is the element that is likely to have the biggest impact on firms and some individuals. This new regime introduces a common standard for the approval of senior individuals. It applies to all regulated firms, and it is a requirement that firms ensure that someone is performing the specified regulated functions at all times.
The categories of regulated functions are listed below-
· General — applicable to all regulated firms (e.g. Directors, MLRO)
· Sector-specific — requiring some sectors to fulfil additional functions (partly driven by Directives)
· Discretionary — these are some additional specific functions which can be waived by the GFSC or may not be applicable to certain types of regulated activities or business models
· Significant influence — this intends to capture individuals who may be exercising significant influence over a firm, but their role may not necessarily fall within a specific regulated function. The legislation sets out a subjective test, so it will be interesting to see how this is interpreted by firms and by the regulator.
The FSA provides some transitional arrangements for individuals that were carrying out the equivalent of the new regulated functions, provided that they had been previously approved or considered fit and proper for those roles.
Sanctioning powers and procedures
Under the old regime, there were some gaps in the type of sanctioning powers available to the GFSC. There were also procedural inconsistencies across several sectors. The FSA now contains common cross-sectoral sanctioning powers which enable the GFSC to respond proportionately depending on the gravity of the infringement, and standardised procedures providing necessary safeguards and clarity.
Decision-Making Committee (DMC)
The DMC is a new independent committee of the GFSC, composed of 6 members (3 lawyers and 3 experienced industry individuals), appointed by the Minister. The introduction of the DMC will no doubt provide an enhanced level of independence in respect of specified regulatory decisions (e.g. supervisory or sanctioning decisions that are challenged by a firm or individual after the GFSC issues its initial warning notice).
The FSA specifies other decisions which are reserved for the DMC. These include, for example, the publication of a sanctioning action or the publication of an inspector’s report. For the avoidance of doubt, these decisions will always be made by the DMC.
Under the FSA sit a more coherent set of Financial Services Regulations (FSRs). Generally, there is one set of regulations applicable to each sector with a few that are cross-sectoral. The FSRs have been modernised and structured in a way that is easier to follow. In general, these contain the majority of the requirements applicable to the different sectors and, where relevant, additional sector-specific threshold conditions and regulatory powers.
The new structure is future proof. It facilitates innovation and is accommodating to the implementation of future national or international initiatives and the transposition of EU legislation (should this continue to be necessary post-Brexit).
Those considering Gibraltar as a jurisdiction of choice can now look at the FSA to understand what needs to be done to become authorised, what powers the regulator has, and the procedures to follow. Existing regulated firms will need to familiarise themselves with the applicable FSRs. They will also need to understand the relevant FSA provisions, particularly if considering undertaking new regulated activities, or making changes to an existing business model.
Many questioned the need for such a comprehensive reform for Gibraltar; however, those who worked with the previous regime will know that changes were necessary, and will no doubt welcome them. Not only were the changes necessary, but against the backdrop of Brexit, the delivery of the LRP became even more critical.
Without this renovation, Gibraltar would have certainly faced some challenges negotiating its future position in relation to financial services and demonstrating equivalence, particularly with the UK, in the first instances. The UK should be satisfied that under the new regime, Gibraltar achieves similar regulatory outcomes to those of the UK itself.
The introduction of this consolidated and streamlined framework will be beneficial to anyone working within the financial services sector in Gibraltar, as well as making Gibraltar a more attractive jurisdiction in which to set-up business.
Banks, insurance companies, DLT providers, and other regulated financial services firms, as well as relevant individuals working in financial services in Gibraltar, should make themselves aware of the new regime and how it may impact them.