Guernsey: Lessons For Directors Arising From Recent Commission Enforcement Actions

In the 27 years between 1987 and September 2014 the Guernsey Financial Services Commission issued five public statements and prohibited four persons from performing functions under the relevant regulatory laws. In contrast, between September 2014 and December 2016 the Commission issued 11 public statements and prohibited 12 persons from performing functions under the relevant regulatory laws.

Lessons for directors arising from recent commission enforcement actions

This briefing note:

  • explains why there has been such an increase in enforcement actions in recent years; and
  • summarises the lessons directors can learn from the Commission's recent enforcement actions.

September 2014

Has the quality of Guernsey's regulated businesses declined? Or is there another factor at work? In order to put those questions into context, it is necessary to understand the regulatory significance of the month of September 2014. Before September 2014 the Commission did not have a separate Enforcement Division. Consequently, very few enforcement actions were brought. However, in September 2014, the Commission established a dedicated Enforcement Division, which meant that regulatory actions could be brought by existing or newly-recruited staff with the necessary skills, experience, time and newly determined budget.

In addition, when the Commission published its "Guidance Note on the Decision Making Process" in September 2014, the big reveal was that the Commission would have, for the first time, a panel of "Senior Decision Makers".

These Senior Decision Makers, who are all Queen's Counsel from the U.K., were brought in to ensure independence of decision-making and to remove any possibility of (real or perceived) local bias.

The role of the Senior Decision Makers is to act as a pseudo-judiciary on enforcement actions brought by the Commission. Their job is to review the evidence obtained by the Commission, decide whether or not an enforcement action should proceed and, if the case proceeds, to gather further evidence if necessary and to prepare the Commission's Decision Notice.

Enforcement Actions Since September 2014

How has the Commission exercised its enhanced enforcement capacity since September 2014?

The Commission's published approach to enforcement states that: "Where appropriate, the Commission will address contraventions or misconduct by agreement with the licensee or individual(s) concerned through ordinary supervisory processes and will endeavour to agree the implementation of a remedial action plan to restore that licensee or individual to compliance as soon as possible. ... However, that approach is not always possible."

Anecdotal evidence supports the veracity of this statement in those cases where rectification by agreement is appropriate. Where rectification by agreement is not appropriate, however, the Commission appears to have been largely successful with the enforcement actions it has brought. It is of course necessary to qualify that statement in circumstances where several of the Commission's enforcement actions have been appealed to the Royal Court, where elements of the Commission's approach have received judicial criticism. Such criticism is to be expected as any new system needs time and experience in order to attain equilibrium.

The Commission's enforcement actions can be categorised into two groups, namely "AML" enforcements and "conduct" enforcements.

AML Enforcements

What went wrong so as to give rise to the AML enforcement cases? The key themes arising from the AML cases appear to be as follows:

  • failure to conduct customer due diligence in accordance with the regulations and the rules in the handbook with regards to identifying and verifying all customers, beneficial owners, underlying principals and persons purporting to act on behalf of the customer, in particular individuals to whom a power of attorney had been granted and potential beneficiaries of trusts. In one case the deficiency arose because customer due diligence and risk assessments were being conducted by the London limb of the entity without anyone verifying that such reviews complied with Guernsey law;
  • failing to demonstrate that adequate enhanced due diligence had been conducted on high risk clients (particularly with regard to politically exposed persons and high profile individuals who had links to sensitive jurisdictions and those known to be associated with bribery and corruption risks);
  • relying on meetings with clients in person as sufficient to satisfy enhanced due diligence requirements (particularly with regard to source of funds and source of wealth where the client was classed as high risk, but documentation was not obtained to evidence that source of funds and source of wealth had been established);
  • acting on instructions from clients without full customer due diligence being conducted on all relevant parties to the relationship;
  • failure to be satisfied that client due diligence information appropriate to the assessed risk was held in respect of each business relationship;
  • failure to undertake and regularly review relationship risk assessments;
  • failure to effectively monitor on-going activity and business relationships and not picking up on adverse information relating to clients;
  • failure to scrutinise unusual transactions;
  • failure to evidence consideration of the suspicion reporting requirements (together with failure to document the reasons for delays in making disclosures to the Financial Intelligence Service); and
  • failure to conduct remedial action requested by the Commission following on-site visits. In two of the cases, problems were identified by the Commission in multiple on-site visits over a period of as much as five years, and enforcement proceedings were brought following continued non-compliance.

The lessons directors can learn from these themes are:

  • that if you think the cost of AML compliance is expensive, try the cost of non-compliance (i.e. the cost of the penalties imposed after you have breached the law may dwarf the cost of obtaining and implementing the appropriate advice up front);
  • that if the Commission identifies an AML issue in an on-site visit and offers the option for rectification by agreement, ensure that you comply with the agreed components of the remedial action plan to the letter; and
  • that if you have structured your AML processes correctly up front, monitor AML developments as they occur and instigate relevant changes promptly and work with the Commission in good faith in any AML remediation, you are unlikely to face an AML enforcement action.

Conduct Enforcements

What went wrong so as to give rise to the conduct enforcement cases? The key themes arising from the conduct cases appear to be as follows:

  • corporate governance failures including:

    • failure to monitor delegated powers;
    • failure to specify which natural persons would act in respect of a corporate director;
    • failing to understand the risk profile of the client and the client's investments;
    • having extremely limited (or no) knowledge of the asset class(es) into which the client is investing;
    • abdication (either partial or total) of directors' responsibilities to their companies;
    • failure to give meaningful consideration to proposed transactions (including the artifice of considering phantom deals – i.e. deals which are intended to be rejected by the board to present the illusion of meaningful consideration);
    • irregularities in the process for the correct minuting of meetings;
    • having concerns about a matter but failing to implement enhanced compliance procedures or inform the Commission;
    • failure to identify and actively and appropriately manage conflicts of interest;
    • delays (due to administrator resourcing issues) in the preparation of net asset values;
    • the reckless promotion of a high-risk investment which was unsuitable for retail investors;
    • the deliberate misappropriation of client funds;
    • failure to obtain sufficient information about clients' financial and personal circumstances to adequately assess their ability and willingness to take risks (i.e. in the absence of this information it is not possible to assess whether recommended products were suitable for the client);
    • failure to evidence research of the marketplace prior to making a recommendation to clients;
    • failure to demonstrate that explanations of products, risks, charges and commissions had been consistently provided in sufficient detail that the client was likely to understand; and
    • failure to keep adequate accounting and other records;
  • documentary failures including:

    • failure to lay down and record responsibilities at board level (for example, in one case there was no record of any decision of the board of the administration company in question accepting its position as a director and shareholder of a group of client companies);
    • failure to document delegation of powers;
    • back-dating of documents/records and the creation of false board minutes;
    • failure to have key documents (such as investment advisory agreements) in place; and
  • management failures including:

    • failing to exercise oversight functions (such as designated manager requirements to ensure compliance with constitutional documents);
    • the failure to deal openly and co-operatively with the Commission; and
    • the provision of erroneous answers to Commission enquiries.

The lessons directors can learn from these themes are:

  • that if you fail to live up to the standards required by the minimum criteria for licensing and applicable law, for example by deliberately misappropriating client funds and/or giving reckless advice for personal gain, you can and most probably will end up facing a conduct enforcement action. However, this is simply the corollary of conducting business in a well regulated environment and should not come as a surprise to anyone;
  • that the probability of facing a conduct enforcement action can be reduced, and the implications of such an action once it has started can be mitigated, by:

    • ensuring that appropriate professional advice is sought, and followed, in relation to all novel structures and circumstances;
    • ensuring that any gaps in documentation are filled prior to acceptance of the relevant mandate;
    • ensuring that you understand your client's business and the asset classes they invest into;
    • always acting in your client's best interests, including insisting upon sufficient time to give meaningful consideration to proposed transactions and actively managing any conflicts of interest that arise;
    • ensuring that accurate, timely and appropriate record keeping remains a constant priority; and
    • taking appropriate professional advice as soon as a problem is identified (in a number of cases for example, the Commission criticised (quite rightly) the "back-dating" of board minutes, where the correct approach would have been a board ratification after the relevant event); and
  • that if you live up to the standards required by the minimum criteria for licensing and applicable legislation and guidance, and obey the simple rules set out above you are unlikely to face a conduct enforcement action.

NON-THEMATIC LESSONS

In addition to the thematic lessons described above, directors should also be aware of certain non-thematic lessons that certain directors have learned as a result of recent enforcement actions:

  • that it is a misconception to think that the Commission will differentiate between executive and non-executive directors (i.e. non-executive directors are not entitled to a lighter fiduciary or regulatory burden simply because they are paid less than the executive directors and spend less time with the business in question than the executive directors);
  • that the relief from liability potentially available for Companies Law offences under section 522 of the Companies Law where the director in question has acted honestly and reasonably and ought fairly to be excused, is not replicated under the regulatory laws; and
  • the costs and pressures arising from an enforcement action are often greater than those arising from a civil claim because:

    • insurance and indemnification arrangements which apply to civil claims do not always cover regulatory investigations and enforcement actions; and
    • the financial implications of a civil claim will often have less permanent implications than the potentially career ending implications of an enforcement action.

Conclusion

The number of Commission enforcement actions has risen recently simply because the Commission now has a well-resourced and appropriately structured Enforcement Division.

The enforcement actions brought by the Commission recently have focused on:

  • egregious cases, such as those involving the deliberate misappropriation of client funds or the reckless promotion of a high-risk investments;
  • systemic failure cases, such as many of the AML enforcements and those relating to risk profiling and market research failures; and
  • reactive cases, where the Commission has brought enforcement actions following the collapse of the business in question.

Following the Commission's success in tackling these egregious and systemic cases, it remains to be seen where the Commission's enforcement focus will lie going forward.

Directors are advised to re-appraise themselves of their fiduciary and regulatory duties and to ensure that the entities which they represent have robust processes and procedures in place to deal with the administration of the business, the management of investor money and the source and utilisation of client wealth.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
10 Mar 2019, Conference, St Peter Port, Guernsey

The International Conference on Private Investment Funds plans to analyse the current market and future of private investment funds, the prospect of changes and updates to regulatory and tax regimes, among other timely topics.

12 Mar 2019, Conference, St Peter Port, Guernsey

For four days the conference provides opportunities to network, learn and transact through premium events, conferences and dedicated exhibition zones.

24 Mar 2019, Conference, Unknown, Jersey

The 9th Global Fund Finance Symposium is organised by the Fund Finance Association to educate members, legislators, regulators and other constituencies about the fund finance market.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions