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
12 Sep 2017, Other, St Peter Port, Guernsey

We are sponsoring the Guernsey Champagne Reception in Monte Carlo on 12 September.

13 Sep 2017, Seminar, St Peter Port, Guernsey

This annual one day seminar will be held in Guernsey on 13 September at the Duke of Richmond Hotel.

20 Sep 2017, Conference, St Peter Port, Guernsey

In association with the GTA, we are pleased to offer a unique, interactive event that will explore the role of integrity in the modern employment relationship, with a particular focus on the financial services sector.

 
In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.