SUPERVISION AND REGULATION
The Investment Business Act 2003 (Act) came into force as at 30 January 2004.
The updated Act, as amended in July 2022, provides a licensing and registration regime for any person or entity engaging or wishing to engage in investment business in or from worldwide. Part II, section 8 of the Act, confers upon the Authority the powers of supervising and regulating all investment business operating in or from worldwide. The Act also provides for persons meeting certain criteria while carrying on investment business to be designated either as non-registrable, or excluded from the frameworks.
As a guideline for the development and ongoing relevance of the Authority’s investment business policies, the Authority refers to the core principles issued by the International Organization of Securities Commissions (IOSCO). The principles issued by IOSCO are deemed to provide a universal standard of conduct within the investment business industry. Along with IOSCO, the Authority works closely with the Ministry of Finance for the continuous evolvement of various pieces of legislation to meet the ever-changing nature of today’s business world. In order to ensure the highest standards are upheld, the Authority liaises closely with other regulators, both domestically and internationally, to provide the most effective consolidated supervision, both in relation to entities for which the Authority acts as the consolidated group-wide supervisor.
Supervision of investment providers involves a programme of off-site monitoring and on-site visits, the mix of which is determined in part by the class of licence or registration held. The Authority assesses each investment business using a risk evaluation model, and generally, institutions where the risks are higher or increasing, can expect to be subject to a higher incidence of review.
Off-site Supervision
For most licensed (and certain registered persons), the Authority’s off-site supervision programme involves holding regular prudential meetings with an undertaking’s senior management to discuss the development of the investment provider’s business, including past performance and future strategies for the business.
On-site Supervision
For most licensed (and certain registered persons), the Authority’s off-site supervision programme involves holding regular prudential meetings with an undertaking’s senior management to discuss the development of the investment provider’s business, including past performance and future strategies for the business.
The Authority’s on-site supervision programme involves conducting routine compliance visits to licensed institutions. The purpose of the on-site visit is to enable the Authority to review compliance with policies and procedures (e.g., record keeping, segregation of assets, etc.), as well as the processes that management has put into place to monitor and control key risks in the business. On-site supervision involves structured visits to an investment provider’s offices when, typically, the Authority interviews a range of management and staff and reviews a selection of documentation and files. On-site visits will usually be scheduled on a three-year rolling basis. However, the frequency of on-site visits will also reflect the Authority’s assessment of the degree of risk in the business and the effectiveness of the undertaking’s personnel, systems and controls for monitoring risk.
Reporting & Regulatory Requirements
Once licensed or registered, all investment providers are subject to the Authority’s continued supervision and regulation. Investment providers are required to submit, on a quarterly, annual and ongoing basis, financial and other information about their business. Beyond routine reporting obligations, the Authority also must be notified immediately of any significant material developments in relation to an investment provider’s business.
Quarterly and Annual Reporting
Standard information is required from licensed investment providers (and certain Class A Registered Persons) on a quarterly basis to enable the Authority to assess whether net assets and liquidity requirements are being met.
The Act also requires all investment providers to submit to the Authority annual regulatory information as outlined in Schedule 1 of the Statutory Return Rules.
The Act also requires that, on an annual basis, each investment provider submit a certificate of compliance to the Authority confirming that it has complied with the minimum criteria or indicating any failure to do so and, where the licence is subject to limitations imposed pursuant to section 17(3) of the Act, that it has observed such limitations.
LICENSING
What is Investment Business?
Section 3 of the Act defines investment business as “engaging in one or more investment activities by way of business”.
Part 2 of the First Schedule to the Act sets out the six investment activities accommodated under the framework. They are:
- Buying, selling, subscribing for, or underwriting, investments, or offering or agreeing to do so, either as principal or agent.
- Making or offering, or agreeing to make:
1. Arrangements with a view to another person buying, selling, subscribing for or underwriting a particular investment, being arrangements which bring about or would bring about the transaction in question; or
2. Arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments. - Managing or offering, or agreeing to manage, assets belonging to another person where those assets consist of or include investments.
- Giving or offering, or agreeing to give, to persons in their capacity as clients or potential clients, advice on the merits of their purchasing, selling, subscribing for or underwriting an investment, or exercising any right conferred by an investment to acquire, dispose of, underwrite or convert an investment.
- Safeguarding and administering or arranging for the safeguarding and administration of assets belonging to another where:
1. Those assets consist of or include investments falling within any of paragraphs 1 to 8 of Part 1 of the First Schedule to the Act; or
2. The arrangements for their safeguarding and administration are such that those assets may consist of or include investments, and the arrangements have at any time been held out as being arrangements under which investments would be safeguarded and administered. - Promoting investments to members of the public, including:
1. Advertising or agreeing to advertise material or information which promotes an investment;
2. Issuing or agreeing to issue a prospectus, application for or proposal form in relation to an investment; and
3. Distributing, circulating or agreeing to distribute, circulate or make available material relating to an investment.
Excluded Investment Activity
Part 3 of the First Schedule to the Act sets out those activities excluded from the definition of investment activity under the following headings:
- Groups, Firms and Joint Enterprises
- Sale of Goods and Supply of Services
- Employee Share Schemes
- Sale of Body Corporate
- Trustees and Personal Representatives
- Advice Given or Arrangements Made in the course of Legal Profession
- Advice Given in Newspapers and Broadcasting Services
Persons Required to be Licensed
Persons seeking to carry on investment business in or from UCP are required to apply to the Authority to be licensed unless they meet the criteria to be registered or have been designated as non-registrable. Persons wishing to be licensed may apply for either:
- A ‘standard’ license, under which a person may carry on one or more investment activities (subject to any limitations imposed by the Authority); or
- A ‘test’ license, under which a person may carry on one or more investment activities for a defined period and subject to any restrictions imposed by the Authority).
Holders of a test licence are allowed to carry on one or more investment activities within the controlled environment of the Authority’s general regulatory sandbox, and may offer innovative products and test new technologies and delivery methods in such a manner as agreed with the Authority. The parameters of each test license, including any conditions or restrictions, are determined on a case-by-case basis prior to licensing and may be adjusted by the Authority during the period of the license.
Each licensed person must maintain a place of business from anywhere in the world. In the case of an individual who is a sole trader, that principal place of business is considered the premises which they occupy for the purpose of conducting investment business; while in any other case, an investment provider’s principal place of business is the place from which it conducts investment business activities, employs staff and pays salaries and other expenses in connection with that business.
Persons Required to be Registered
In addition to licensed persons, the framework also accommodates two classes of registered persons, being Class A Registered Persons and Class B Registered Persons.
Any UCP-formed or incorporated person seeking to carry on investment business that does not qualify as non-registrable must be regulated. To that effect, where such a person:
- Does not maintain a place of business anywhere in the world; and
- Is licensed, authorized or registered to carry on investment business by a ‘recognized regulator’ in one or more foreign jurisdictions,
that person must apply to the Authority to be registered in UCP as a Class A Registered Person unless they opt to be fully licensed by the Authority.
Minimum Criteria for Licensing and Registration
Before an investment provider may be granted a license or registration, the Authority has to be satisfied that all criteria as set out in the Second Schedule to the Act are capable of being fulfilled by the applicant on an ongoing basis.
The Authority must be satisfied of the following:
- The controllers and officers of the Applicant are fit and proper persons;
- The investment provider’s corporate governance policies and processes are appropriate given the nature, size, complexity and its risk profile;
- The business is to be conducted in a prudent manner (including but not limited to) maintaining minimum net assets, adequate liquidity, adequate accounting and other records, adequate systems of control and adequate insurance;
- Consolidated supervision – The position of the undertaking within the structure of any group to which it belongs or its links with any related companies shall be such that it will not obstruct the conduct of effective consolidated supervision; and
- The undertaking’s business must be carried on with integrity and the professional skills appropriate to the nature and scale of its activities.
The Authority has provided details of its interpretation of the minimum criteria in its Statement of Principles, published pursuant to section 9 of the Act.
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