Licensees (Capital Adequacy) Rules and Guidance, 2021 (consolidated text)

Summary

This is the consolidated text of the Guernsey Financial Services Commission's Capital Adequacy Rules and Guidance, which set minimum financial resources, professional indemnity insurance and liquidity requirements for licensees carrying on controlled investment business (including fund custodians, trustees and administrators). It replaces the 2010 Capital Adequacy Rules and incorporates the 2022 amendment inserting a new insurance arrangements part.

• Financial resources: Licensees must maintain, at all times, minimum net assets set by category: GBP 4,000,000 for a designated trustee or custodian of an open-ended collective investment scheme; the greater of GBP 100,000 or an expenditure-based figure for a designated CIS administrator; capital and solvency levels confirmed by the Commission for licensees also regulated under the Banking Supervision, Insurance Managers and Intermediaries, Insurance Business, or Fiduciaries Laws; a directors-determined sufficient level (minimum GBP 10,000) for licensees with no physical presence in the Bailiwick; and the greater of GBP 25,000 or an expenditure-based requirement for all other licensees.
• Calculation framework: Licensees must calculate their financial resources requirement using the framework in Schedule 1, which adjusts net assets for contingent liabilities, position risk and counterparty risk.
• Insurance arrangements: Licensees must maintain insurance cover commensurate with the size and nature of their business, including professional indemnity insurance (PII) and cover against employee dishonesty or fraud, meeting minimum indemnity limits set out in rule 2A.2 (generally the greater of three times relevant income or a fixed minimum, subject to a GBP 10,000,000 aggregate cap where the Board has assessed this as sufficient).
• Scope of PII cover: PII policies must cover negligence/errors/omissions, employee dishonesty or fraud, employees acting in their own name, foreseeable liabilities in any jurisdiction, ombudsman awards where relevant, and legal defence costs.
• Captive insurance: Where a licensee relies on captive insurance, the captive insurer must be licensed under the Insurance Business Law or hold equivalent status in Jersey, Gibraltar, Bermuda, Isle of Man, or an OECD full member country.
• Liquidity resources: Licensees not relying on rule 2.1(1)(c) capital confirmation must maintain a liquidity requirement equal to the greater of GBP 10,000 or 10% of annual audited expenditure.
• Immediate notification: Licensees must immediately notify the Commission of a breach (or anticipated breach within one month) of the financial resources or liquidity requirement, an auditor's intention to qualify accounts, or a subsidiary or parent company becoming balance-sheet insolvent, together with remedial steps taken or proposed.

The 2022 amendment rules, inserted as Part 2A, must be complied with by each licensee from its next insurance renewal following the amendment's commencement. The overall Rules revoke the 2010 Capital Adequacy Rules and came into force on 1 November 2021.

Key obligations

• Maintain, at all times, the applicable minimum net assets/financial resources level specified for the licensee's category under rule 2.1(1)
• Calculate financial resources requirements using the Schedule 1 framework (adjusting for contingent liabilities, position risk and counterparty risk)
• Maintain professional indemnity insurance and insurance against employee dishonesty or fraud commensurate with the size and nature of the business, meeting the minimum indemnity limits in rule 2A.2
• Ensure PII cover meets the scope requirements in rule 2A.3 (negligence/errors/omissions, employee dishonesty, cross-jurisdiction liabilities, ombudsman awards, legal defence costs)
• Where relying on captive insurance, ensure the captive insurer is licensed under the Insurance Business Law or holds equivalent status in an approved jurisdiction
• Maintain a liquidity requirement equal to the greater of GBP 10,000 or 10% of annual audited expenditure (unless exempt under rule 2.1(1)(c))
• Immediately notify the Commission of an actual or anticipated breach of financial resources or liquidity requirements, an auditor's intent to qualify accounts, or subsidiary/parent balance-sheet insolvency, with remedial steps
• Comply with the 2022 amendment provisions from the licensee's next insurance renewal following the amendment's commencement

Applies to

designated trustees or designated custodians of open-ended collective investment schemes, designated administrators of collective investment schemes, licensees under the Banking Supervision (Bailiwick of Guernsey) Law, licensees under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, licensees under the Insurance Business (Bailiwick of Guernsey) Law, licensees under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, licensees with no physical presence (staff and premises) in the Bailiwick, other licensees carrying on controlled investment business

Deadlines

• 1 November 2021: Commencement date of the Licensees (Capital Adequacy) Rules, 2021
• at the licensee's next insurance renewal following commencement of the Licensees (Capital Adequacy)(Amendment) Rules, 2022: Deadline for licensees to comply with the Part 2A insurance arrangements amendments
• immediately: Notification to the Commission required for breaches or anticipated breaches of financial resources/liquidity requirements, auditor qualification of accounts, or subsidiary/parent insolvency
• within one month (anticipated breach): Notification trigger where a licensee anticipates being in breach of its financial resources requirement within one month