In a recent Jersey appeal case the Court was of the view that the investment profession might well benefit from further guidance from the JFSC on “Commissions”[or Receiving prohibited third-party payments]
The court did however, and for the avoidance of doubt, makes it clear that if an investment adviser were to receive a fee for introducing a client to an investment product in circumstances where it obviously amounted to a commission, an unreasonable belief on the part of that investment adviser that the payment did not amount to commission could indeed point to a malfunctioning ethical compass such that it could amount to a lack of integrity.
On the 4th June the Jersey Royal Court considered an appeal by SWM Limited (“SWM”) against a decision of the Respondent (“the Commission”) dated 7th August 2018 to revoke SWM’s registration as an investment business and to issue a public notice to that effect (“the Decision”).
The appeal was heard over 3 days and we were provided with voluminous material comprising some 16 files.
Those involved in the appeal were
- Sir Michael Birt, Commissioner,
- Jurats Crill and Ronge
- SWM Limited – Appellant
- Advocate O. A. Blakeley for the Appellant.
- Jersey Financial Services Commission – Respondent
- Advocate D. J. Benest for the Respondent.
One particular part of the case dealt with “commissions”[or Receiving prohibited third-party payments]. The key aspects of this case are shown below – a full transcript can be read here https://www.jerseylaw.je/judgments/unreported/Pages/JRC100.aspx
The fee or commission situation being argued was as follows
- The payments were made by Cherry Godfrey, who were the promoters of CGLN.
- The agreement reached between Cherry Godfrey and SWM was that Cherry Godfrey would pay £200 to SWM in respect of every client Cherry Godfrey introduced to SWM for SWM undertaking a financial review and subsequently providing investment advice to that client.
- The £200 would be paid irrespective of whether or not SWM advised the client to invest in CGLN or whether the client actually invested in CGLN.
- The sum was intended as a contribution towards the costs of SWM’s financial review of the client’s needs etc. in order to decide whether to recommend that the client invest in CGLN.
- The payment was disclosed in the Suitability Reports to clients who were advised to invest in CGLN.
- The arrangement also contemplated a fee of £200 for each client that SWM introduced to Cherry Godfrey (i.e. not a client that had been referred initially by Cherry Godfrey) but there does not appear to have been any payments of the fee to SWM on the basis of an introduction by SWM to Cherry Godfrey. Cherry Godfrey referred 10 clients to SWM. Of these, 9 were advised by SWM to invest in CGLN following its financial review and one was not.
- Rule 4.8 (previously 4.7) of the IB Code provides that a registered person carrying on class C or class D investment business is not permitted to receive remuneration by way of commission from product providers for investment advice services provided to retail clients unless one of the specific exceptions applies (which were not relevant in this case).
- ‘Commission’ is not defined in the IB Code but the JFSC ‘minded to’ letter (“MTL”) asserted that its ordinary meaning was a payment which involved the giving of a benefit or inducement.
- Although SWM and Cherry Godfrey characterised the payment as a contribution towards the cost of SWM’s reviews of clients who were introduced to SWM by Cherry Godfrey, the Board concluded that this did not change the fact that it was the payment of commission. The payment reduced SWM’s operating costs and increased profits, thereby conferring a benefit on SWM.
One Jurats view was
- One of the Jurats accepts the first of these submissions. She agrees that payment of a fee regardless of whether there is any recommendation to invest in CGLN cannot be said to amount to an inducement for SWM to recommend investment in CGLN and accordingly it does not give rise to the conflict of interest concern which lies behind the rule against the payment of commission in the IB Code.
- Furthermore, in the absence of any definition, she considers that ‘commission’ should bear its normal meaning.
- She does not consider that a payment which is not dependent on a recommendation to invest and which is intended to cover the time and expense of carrying out a financial review amounts to a commission within the ordinary meaning of the word.
- Moreover, she does not find the reasoning of the Board to be satisfactory when it concludes that a payment amounts to a commission because it reduces SWM’s operating costs and increases its profits thereby conferring a benefit upon it.
- Payment of any fee for services provided to a customer would have the same effect, but a fee for genuine services provided would not normally amount to a commission.
The other Jurats view was
- The other Jurat agrees with the Board’s view that the payments amounted to commission on the basis that, even though payment would be made regardless of whether SWM subsequently advised a client to invest in CGLN, there was nevertheless an inducement on SWM to do so in the context of developing a relationship with Cherry Godfrey in the expectation that, if it advised clients to invest in CGLN, there would be further referrals and payment of further fees by Cherry Godfrey, whereas if it did not recommend investment in CGLN, it was likely that Cherry Godfrey would in due course look elsewhere for an adviser to whom it would refer potential clients.
- As just stated,
- one Jurat agrees with SWM in its view that the payments in this case do not amount to commission.
- The other Jurat, whilst being of a contrary view, certainly accepts that the view of the other Jurat and of SWM is a perfectly tenable one.
- The Court is therefore unanimous in being of the view that it is simply a question of a difference of opinion as to whether the payments in this case are properly classed as commission or not.
- In the circumstances, it is in our judgment quite wrong to categorise the opinion of SWM as demonstrating a lack of integrity.
- In the particular circumstances of this case, the view of SWM that these payments did not amount to commission for the purposes of the IB Code does not suggest a lack of an ethical compass or one which is to a material extent pointing in the wrong direction.
- We hold therefore that the finding of the Board contained at sub-paragraph (d) of para 4.2.1, namely that receipt of the payments demonstrates a lack of integrity, is unreasonable.
- For the avoidance of doubt, we make clear that this finding is specific to the unusual facts of this case.
- If an investment adviser were to receive a fee for introducing a client to an investment product in circumstances where it obviously amounted to a commission, an unreasonable belief on the part of that investment adviser that the payment did not amount to commission could indeed point to a malfunctioning ethical compass such that it could amount to a lack of integrity.
Please issue guidance
The conclusion to the above was that both Jurats are agreed that, in an area such as this, it is very much a matter for the Commission as regulator to determine within reason what does or does not amount to a commission and its decision that the payments in this case did amount to commission cannot be categorised as unreasonable. And having said that, the Court was of the view that the investment profession might well benefit from further guidance to be issued by the Commission.