Regulatory financial penalties in Jersey; some reflections by a time-served Regulator
Stephen Baker [SB] is the senior partner of Baker and Partners, and he talks to his associate, Advocate Cyril Whelan [CW] who has just concluded the maximum term as a Commissioner of the Jersey Financial Services Commission - the discussion is recorded below.
- Financial penalties were a long time coming in Jersey?
- it is strange to reflect that while the Jersey Gambling Commission long had the power to impose civil penalties on members of its regulated community, the Jersey Financial Services Commission did not have the corresponding right in respect of the finance industry, in its various forms.
- Gambling licensing in Jersey has always been at comparatively low levels, whereas it might reasonably be said that the Island economy stands or falls on the extent and quality of its licensed financial activity and the effective regulation of that activity.
- Surprising, then, that it was not until 2015 that the power to levy financial penalties was given to the Jersey Financial Services Commission.
- Further, it was not until 2019 that the first financial penalty was imposed – a sum, broadly, of £380,000 for non-rectification of a Codes of Practice breach.
- What advantages have you seen at work in the system of financial penalties?
- The first one that strikes me is proportionality. Before financial penalties were available, the effective choice of sanctions was between the making of a public statement and the removal of a licence.
- The financial penalty is more nuanced and can be more closely tailored to every circumstances of the case, more effective, less blunt.
- The system offers the chance for a meaningful financial sanction outside the criminal justice system avoiding the stigma of conviction and fine. Remember that the imposing of a financial penalty is incorporated into the Jersey Financial Services Commission’s Decision Making Process with all that means for dialogue, including detailed discussion as to proper quantum.
- I always regarded it as very important, too, that the introduction of financial penalties brought some sort of fairness and balance into individual sectors within the industry; it did much to avoid the unfairness of the good firms paying for the faults of the bad ones.
- I mention these things quite separately from the obvious deterrent effect of financial penalties and the need to satisfy regulatory requirements set by the international standard-setters like MONEYVAL.
- Is it realistic to speak of deterrence?
- I expect you’re referring to the fact that the original power to impose financial penalties for significant and material contraventions of the Codes of Practice and the AML/CFT Handbook was against registered entities only.
- I know you had your own fear that in some quarters a culture of ‘doesn’t matter, the firm will pay’ might arise, and that a financial penalty against the firm might come to be seen simply as a cost of doing business.
- I think you were not alone in that fear. Looking out into the wider world is instructive. There is not necessarily any read-across to Jersey, but the findings of a comparatively recent survey in UK make chilling reading for any Regulator anywhere.
- The survey was by Thomson Reuters and
- two in three respondents said that their organisations were prepared to flaunt rules in order to win new business.
- As well as a willingness to cut corners in terms of compliance with regulation, the survey also uncovered a reluctance to report breaches among supplier businesses when they were discovered. One in three respondents said they wouldn’t bother reporting it internally – with only a small minority saying they might report it externally.
- Over half those asked said that they thought they would be unlikely to face prosecution if they did breach regulations.
- That snapshot– make money first, follow the rules only when you have to – presents a worrying picture whatever the location and whatever the regulated industry.
- While there is no evidence of a pervasive attitude of that kind in Jersey’s finance industry, the industry at large no doubt appreciates the need for constant vigilance on the part of the Regulator, and values the extension of the financial penalty regime to individuals as a form of enhanced deterrence.
- You’ll remember that on 26th October 2018 the power to impose financial penalties was extended so that the Jersey Financial Services Commission can now levy such penalties against individuals – ‘principal persons’ of any entity registered under the relevant regulatory statutes.
- Broadly that means directors and managers of the registered person but, importantly for the deterrence we are discussing, it also includes those who are ‘controllers’ because they have an ownership interest in the registered person by whatever means.
- Under the new provisions, the Jersey Financial Services Commission has the power to impose financial penalties where a significant and material contravention of a Code of Practice was committed:
- with the consent or connivance of, or is attributable to neglect on the part of a “principal person”; or was
- aided, abetted, counselled or procured by a “principal person”.
- As a matter of empirical observation, principal persons, managers, directors and the like have generally been seen to have taken a refreshed interest in ensuring that registered persons within their span comply scrupulously with the Codes of Practice which apply to them.
- The calculation of penalties, whether corporate or personal, is undeniably complex?
- Certainly the components of a financial penalty in any case compel close attention and detailed justification.
- The relevant steps are of course published by the Jersey Financial Services Commission.
- Rather than describing them as complex I think it is fairer to say that the method of calculation is articulated in great detail and is therefore transparent and lends itself to intense scrutiny and rational argument about outcome, should that become necessary.
- You have served as a Commissioner for the statutory maximum of 10 years. How do you view your time on the Board of Commissioners, and what advances stand out to you?
- I think of the development of the Decision Making Process in sanction cases, the development of settlement options and processes, the introduction of financial penalties and the huge advances in technology and digital interfaces between the Regulator and its community.
- Now conflict free, I look forward to immersing myself once more in client work with Baker and Partners on the international regulatory and asset recovery front – but my abiding reflection is this: Jersey continues to be served in its regulatory financial affairs by an intensely professional and engaged team of officers and Commissioners, in the latter case both local and overseas. It has been one of the outstanding pleasures of my professional life to serve with a group of people of this remarkable quality and breadth of vision.
Stephen Baker is the senior partner of Baker and Partners. He was talking to his associate, Advocate Cyril Whelan who has just concluded the maximum term as a Commissioner of the Jersey Financial Services Commission.