Civil fining in Jersey – A Look at the first-ever financial penalty against a regulated business and the background and processes

In July 2019, the Jersey Financial Services Commission (JFSC) imposed its first financial penalty in the sum of GBP381,010. The regulator imposed a civil penalty of £381,010 on Sanne Fiduciary Services Limited (SFSL) and issued a public statement with details of why it was necessary to impose the penalty.

Martin Moloney, JFSC Director General, commented:

“The penalty would have been significantly greater had it not been for the work of SFSL’s current compliance function, highlighting areas for improvement, and the proactive approach of SFSL’s Board and senior management team in promptly acknowledging the shortcomings and making the necessary changes to the business.” https://www.jerseyfsc.org/news-and-events/jfsc-enforces-first-financial-penalty-on-local-firm/

The public statement is available on the JFSC website. https://www.jerseyfsc.org/news-and-events/sanne-fiduciary-services-limited-sfsl/

Sanne some details

Jersey’s first-ever financial penalty was against a listed and well-regarded financial services business for a failure to rectify a codes of practice breach. In summary, several compliance issues were identified in 2014/15 and, despite considerable work, they were not rectified to the satisfaction of the JFSC.

The business and its board then addressed all outstanding issues and showed a high level of cooperation; but this was only enough to reduce the penalty, not avoid it.

When undertaking remediation exercises, the JFSC sets out expectations for the board of registered persons to ensure the following:

• Tasks are completed and verified to ensure they meet requisite standards.
• The governance structure results in clear accountability and provides transparency in respect of those areas of the business that require investment.
• The operational structure is organised in a way that enables it to embed procedures and assess compliance therewith.
• Risk and compliance functions are adequately funded and resourced, and the effectiveness of these functions is closely monitored.
• Adequate systems and controls are in place to identify and report risks.
• Staff receive relevant training and promote a culture of compliance within the business.
• Control functions remain appropriate for the scale and nature of the business.

Why fine? Rationale

There are a number of reasons why civil penalties are used:

• as a deterrent or signalling tool to create positive change;
• to encourage prompt and consistent notification and remediation;
• as an extra regulatory enforcement tool (less draconian than closure/banning);
• as a flexible enforcement tool, with fine-tuning for proportionality and circumstances;
• to mitigate good business paying for bad business;
• to match the powers of other similar regulators and meet the expectations of international standard-setters; and
• to create a broad non-conviction-based sanction.

Specifically, Jersey’s 2009 International Monetary Fund assessment1 referred to targeting profitability as well as reputation, and the OECD’s Financial Action Task Force’s 17th recommendation2 requires civil penalties for compliant status.

Summary of Jersey’s civil penalty system

The JFSC has a discretionary power to impose a financial penalty on a registered person (for conduct after March 2015) or a principal person (for conduct after October 2018) in relation to significant and material contraventions of its codes of practice.

The penalty can be up to GBP4 million against a registered person and GBP400,000 against a principal person, determined by which of the four bands, outlined below, the contravention falls into and all other relevant circumstances. The penalty will almost always be accompanied by a public statement and must be paid by the party it is imposed on.

The scheme applies to those regulated by the JFSC for conduct of business. It does not apply to those only regulated for anti-money laundering and certain insurance businesses are also excluded. The scope comprises codes of practice applicable to the conduct of business and the JFSC Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism for Regulated Financial Services Business. The scheme did not create new compliance obligations; it merely created a regulatory enforcement remedy.

The penalty must be paid by the party it is imposed on; it cannot be paid by insurance, indemnification or a third party. One can insure surrounding risk, just not the penalty.

Banding and maxima

Jersey’s scheme has four bands based on relevant income. This is best understood as a smoothed measure of turnover.

• Band 1: Two failures to notify required matters in a two-year period. This is not about the underlying issue, but the failure to have notified an event. Maximum 4 per cent relevant income to a maximum of GBP10,000 (business or individual).
• Band 2: Failure to remediate contravention adequately or on time. This can be seen as failing to take a second chance. Maximum 6 per cent relevant income to a maximum of GBP4 million (business) or GBP200,000 (individual). This was the band used in the first financial penalty.
• Band 2A: Negligent commission of a very serious contravention. Maximum 7 per cent relevant income to a maximum of GBP4 million (business) or GBP300,000 (individual).
• Band 3: Intentional or reckless commission of a very serious contravention. Maximum 8 per cent relevant income to a maximum of GBP4 million (business) or GBP400,000 (individual).

The banding prescribes detailed criteria for very serious contraventions (e.g. the business risked jeopardising the need to counter financial crime).

Computation methodology

A complex statutory methodology scheme has been published,3 but the following example gives an idea of how the scheme works.

• Imagine that a Jersey business with a relevant income of GBP10 million commits a band 2 penalty that is categorised as being at the least serious end of that band.
• The starting point is, in effect: relevant income x maximum percentage of relevant income for band x weighting for seriousness (the scale starts at 15 per cent).
• This equates to GBP10 million x 6 per cent x 15 per cent = GBP90,000.

A number of aggravating and mitigating factors are then added.

• Say we end up at GBP100,000; there is then a significant discount of 50 per cent for settlement at the first stage, so the final penalty in our example would be GBP50,000.

Due process

Penalties will be imposed by the JFSC either after a hearing or by way of settlement. Rights of appeal exist to the Royal Court of Jersey, which can set aside penalties on the relatively narrow ground of unreasonableness. Settlement discounts are time-sensitive, but are in addition to self-reporting discounts. There is a large incentive to self-report and settle.

Extension of civil penalties to principal persons from October 2018

The extended scheme applies to directors of in-scope businesses and 10 per cent (or more) shareholders, but not to those only holding statutory compliance offices.

There are various reasons to extend civil penalties to individuals, including the fact that behavioural change is more likely when a consequence falls on an individual and it might be appropriate in situations where a business has insufficient or no funds. The principal person regime is, arguably, also the most important plank in Jersey regulation and it was always intended as a next step in the civil penalty regime.

Interaction of the business and individual schemes

A civil penalty can be imposed on a business without imposing one on an individual, but not vice versa. Similarly, the civil penalty regime for individuals requires an individual to be personally culpable in the business’ contravention. It is not based on a contravention by an individual of any obligation on them. In addition, the JFSC can impose a civil penalty on one principal person but there is no need to impose a penalty on the whole board, while a civil penalty imposed on a business is not enforceable jointly and severally against shareholders or directors.

Conclusion

Businesses in all well-regulated jurisdictions should expect those regulations to operate in the context of the risk of civil penalties. However, a sense of proportion must be kept. Remember that civil penalties were introduced to create a flexible enforcement tool, with fine-tuning for proportionality, and not for conduct at the extreme ends of the spectrum of seriousness.

In many cases in Jersey, the publicity of an inevitable accompanying public statement may be more of a punishment than the civil penalty. Going forward, we expect to see much more frequent use of civil penalties in Jersey.

Chart of civil penalties in five offshore jurisdictions

* A simplistic approach has been taken, identifying the maximum penalty that can be imposed by the regulator, not discriminating between the banding of acts. All maxima have been converted approximately to base currency at prevailing rates in October 2019.

** Maximum per contravention with no cumulative limit.

• Jersey: Financial Sector Assessment Program Update—Financial System Stability Assessment, International Monetary Fund (2009), bit.ly/2MEqVkB
• FATF 40 RECOMMENDATIONS = bit.ly/35Vk3qy
•  Jersey Financial Services Commission, ‘Civil Financial Penalties: Methodology for determining the amount’, September 2018, bit.ly/36T6SX6

News Source

• https://www.step.org/journal/step-journal-issue-1-2020/jersey-takes-action
• https://www.jerseyfsc.org/news-and-events/sanne-fiduciary-services-limited-sfsl/