Principal risks and uncertainties

The Covid-19 pandemic that unfolded across the globe in 2020 is one of the most extreme macro-environmental risk events this planet has seen for decades. It has dominated the risk landscape, throwing governments, economies and healthcare systems into crisis. With more than 130 million cases worldwide to date and almost 3 million deaths, the negative impacts are obvious.

However, there have been positive outcomes as well: the international collaboration and scientific innovation needed to deliver new vaccines at record speed, the wholescale evaluation of the way people work and, perhaps most importantly, our level of preparedness for another pandemic.

At the JFSC, we too can draw positives from the way we have responded to Covid-19 and other risks we faced during 2020, as we acknowledge our ability to adapt and succeed in the face of risk and uncertainty.

Covid-19

The pandemic perfectly demonstrates the potential for an event to cut across all types of risk and require a coordinated response on a number of fronts. On a macro-environmental level, we have had to deal with the closure of borders, periods of lockdown and Jersey’s political response to the crisis.

At an operational level, we needed to manage the risks the virus presented to our organisation, while maintaining and prioritising the safety and wellbeing of our staff, staying open for business, and supporting and monitoring the impact on the regulated community. Read more about our response to the pandemic on page 32.

Brexit

After undertaking a good deal of preparatory work during 2019, Brexit continued to be a source of risk and uncertainty for the Island, and consequently the JFSC, in 2020. When the UK left the European Union on 31 January 2020 and entered the transitional period, there was little indication of what the outcome of negotiations would be. In October 2020, we issued a joint statement with the Government of Jersey to highlight the need for robust business continuity planning in the event of either a deal or no-deal Brexit, and to provide sector- specific guidance for each scenario. In December 2020, we published a position paper outlining changes from 1 January 2021 for the Alternative Investment Fund, Funds Services Business and Certified Funds Codes. Twice during the year, our Director General attended meetings with HM Treasury about Brexit, also attended by officials from the Guernsey Financial Services Commission, and Guernsey and Jersey Governments.

Beyond 2020, an ever-evolving risk for Jersey is whether the relationship between the Island and the UK will change as a consequence of the new relationship between the EU and the UK.

External landscape for International Finance Centres

One of the ongoing battles that Jersey faces is to maintain its reputation as a transparent and well-regulated International Finance Centre (IFC). Increasing scrutiny of tax arrangements, a drive for transparency around beneficial ownership with calls for public registers, and compliance with international standards - particularly around fighting financial crime - mean we need to continuously demonstrate the effectiveness of our regulation. This is one of our biggest challenges; the risk of Jersey being black or greylisted by any international standard setter, such as the Council of Europe or the Financial Action Task Force, would be catastrophically damaging for the jurisdiction’s viability.

Although Jersey received an outstanding result in its last MONEYVAL assessment in 2015/16, many jurisdictions are now struggling to meet the new standards in recent assessments. This could, in part, be due to the shift in emphasis from technical compliance to demonstrating effective arrangements for fighting financial crime. If Jersey cannot meet the new standards, it would mean significant damage to its reputation. In 2020, we began an extensive programme of work to strengthen our capability for fighting financial crime. For us, our work in this area will be a permanent focus for our activities and crucial for maintaining Jersey’s international reputation for the long term. (See page 38 for more details.)

Jersey’s National Risk Assessment for money laundering published in 2020 was the first step in demonstrating that the Island is effective at fighting financial crime. We played a leading role in collecting data for the assessment and also led or participated in the working groups. The assessment now forms a baseline for our understanding of money-laundering risk in the Island; it will be a foundation for our ongoing efforts to fight financial crime.

Technology and innovation in financial services

Whether FinTech, RegTech, or SupTech, the role of technology in financial services globally is rapidly expanding, with the pandemic only accelerating the drive for innovative solutions.

Jersey’s financial services sector is no different, as we see from the growing number and variety of technology-based registrations, enquiries and services that we process. For us, the key challenge is keeping up with these innovations and understanding the risks they present. In particular, we need to ensure that businesses delivering these new tech products and services, and the customers using them, also understand the risks and can mitigate them effectively. These new technologies may require new regimes, which we will work with Government to determine. For example, in 2020 we started an initial review for a potential licensing framework for virtual assets and their service providers.

Sandboxes have been another regulatory response to innovation, providing a safe testing environment for businesses and regulators. In response to this fast-changing landscape, we continue to be part of the Global Financial Innovation Network (GFIN), a network of more than 60 international organisations that work together and share experiences of financial innovation. In 2020, we took part in GFIN’s cross-border testing initiative for businesses to test their financial products, services, models and regulatory technology in multiple jurisdictions.

Cyber and information security

The risk we face, as an organisation that holds sensitive and commercially valuable data, will always remain high. There is a huge threat of reputational damage to both the JFSC and the Island if we, or indeed a business we regulate, experiences any significant information security event.

The pandemic created an even greater security threat to us and local businesses when we moved our operations to remote working for a significant proportion of the year. To raise awareness, we issued a number of warnings during 2020 about impersonation and phishing attacks targeting Industry and Islanders by using our regulatory communication channels and our membership of the Jersey Fraud Prevention Forum. Equally, we continued our programme of regular training and testing, with controlled phishing exercises on all our employees including our Board members.

One of the more troubling risks in 2020 was the dramatic increase in attempts to defraud consumers through scam telephone calls, emails and fake websites. Lockdown only exacerbated the problem, with more people at home looking for new investments and better rates of return. Jersey was not immune to these scams and we proactively issued warnings about clone websites, unauthorised businesses, phishing emails, and cryptocurrency scams.

Operational improvement and resource challenges

There are significant demands on the JFSC to be an effective, competitive, leading regulator and Registry. The pressures and costs associated with achieving and maintaining this international reputation continually evolve.

We always seek to deliver efficiencies in the way we operate and, in 2020, we began our largest capital expenditure programme to date to modernise our processes and make it easier for our many stakeholders to interact with us. Delivering such an ambitious programme in a pandemic presented unique challenges for our staff, particularly when we were working from home and experienced periods of the year when we were operating at under capacity - slower recruitment being yet another consequence of the pandemic.