Manx finance watchdog provides good model

The Isle of Man is built on money - funds flowing in and out of its financial institutions are its lifeblood. So when one of its banks collapsed 16 years ago the people of the island demanded that the government clean up the act.

The result was the Financial Supervision Commission, established in 1983 to take over regulation of its banking sector.

Shock waves, for different reasons, have been rippling through the Irish banking system, with a series of scandals culminating in revelations about AIB's payment of DIRT.

Last month the Government announced plans to set up a financial super-regulator. The complicated tangle of regulatory functions divided between the Central Bank, the Department of Enterprise and Employment, the Director of Consumer Affairs, the Registrar of Friendly Societies and trade organisations such as the Irish Brokers' Association would be assigned to a new regulatory authority.

The idea is that tighter regulation would seal the cracks, using as the model the British Financial Services Authority, established last year.

However, the Isle of Man took action more than a decade ago. In the 1980s the island had a Finance Board and what Ms Helen Hatton, head of enforcement at the Financial Supervision Commission (FSC), describes as "a good banking act" to keep things in order. "But there was the typical regulator's dilemma of having good legislation, but not having adequate resources."

Then the Savings and Investment Bank collapsed. "It shocked and appalled the people of the Isle of Man," says Ms Hatton. "The government set up the FSC and told it to go away and set up a regulatory system to make sure that this disgrace never happens again."

The FSC's first task was to "cull the herd", Ms Hatton says, getting rid of the institutions that failed certain tests. "The next task was to get collective investment schemes brought into the regulatory framework." Then the FSC insisted that licences would not be issued to institutions without a "fit and proper test" of three aspects: integrity, solvency and competence.

In 1984 the Commission issued an anti-money laundering guidance note and a policy of "no greenfield site operations". In other words institutions that wanted to set up on the island had to have a track record that could be checked out by the regulator.

Under these criteria the Commission now turns down applications for licences, "maybe as many as a dozen in a year" or discourages those that don't have the credentials from applying in the first place.

It currently licences 200 institutions.

Behind the brass plate the institution must "have a real presence and heart and mind of management on the island", she says. "If we don't have full records on the island we have nothing to check."

Seven years ago the FSC took over regulation of investment business, including financial advisers, pensions brokers, stockbrokers and portfolio managers, imposing the same licensing requirements.

The FSC has the power to enter, search and seize, retain documents and require people to attend and answer questions or provide information.

But does regulation result in a flight of funds out of the jurisdiction to a more comfortable haven, where fewer questions are asked? "It's a common argument," Ms Hatton says, "that regulation drives away business and compensation schemes drive away institutions.

"It's true to say we have full hands-on regulation. And in that environment our economy has continued to prosper." However, at the same time the economies of Jersey and Guernsey, where there is no such regulation, "have grown more than us".

She says it is impossible to calculate whether business is going elsewhere because of regulation. "But if I'm living in an economy I don't want that economy to be built on dirty money. If the price of having a well-regulated clean economy is marginally less growth then I'm prepared to have that."

The FSC liaises with other European regulators and police forces which may be tracking a money trail through the system.

The smart fraudster lives in Sweden, has clients in Germany, with a company registered elsewhere, Ms Hatton told a recent money-laundering conference organised by the Garda Bureau of Fraud Investigation.

The fraudster administers the company through a company formations office in another jurisdiction and the bank accounts are in a fifth country. This combination means the activity is spread across five jurisdictions with a mixture of civil and common law systems.

"As a regulator our concern is not that an institution was used for money-laundering. The regulator's task is to be satisfied that the financial institutions have a system in place to prevent abuse." Last year the FSC was given responsibility for regulating company formation agencies and takes responsibility for the island's company registry, the equivalent of the Irish Companies Office. This process is expected to be completed by the year 2000.

The government has asked the FSC to come up with legislation to combat insider-dealing and all the activity is carried out under one roof. "There is a lot to recommend the one-stop-shop structure," Ms Hatton says. "If you have different legislative departments that look after different areas it's in the spaces in between that the abuse takes place."

There is currently no register of company formation agencies on the island, but they are believed to number around 350.

With a staff of 25 the FSC is a fraction the size of its British counterpart, the Financial Services Authority (FSA), which has a staff of around 2,000 people.

"The disadvantage of that is that [when] you have an extremely large organisation like the FSA people feel faceless. Perhaps Dublin is still small enough to get the benefits of one single organisation."