Regulatory Briefing: Overview of JFSC Enforcement regime
This briefing contains an overview of the JFSC Enforcement regime and Key Points from recent cases.
Key Points
JFSC are active in conducting regulatory investigations and imposing civil financial penalties for significant breaches of Jersey regulations
JFSC make Public Statements on action taken that help provide guidance and clarity to firms in the conduct of their business
JFSC expect Boards to robustly discuss and review AML and regulatory obligations and importantly to fully record these discussions in Board Minutes
Identifying a problem and a solution is not enough if the implementation of the solution is ineffective or not monitored (source: Public Statement on Lloyds Bank Corporate Markets PLC, Jersey Branch 12 August 2022)
JFSC will punish firms where there is too much reliance on the wishes of a UBO/ beneficial owner rather than ensuring correct processes are followed with the actual client (source: Public Statement on IQEQ 1 July 2022)
JFSC will punish firms that maintain corporate/trust structures and charge fees where there is clearly no benefit to the client (source: Public Statement on Hawksford 25 August 2021)
JFSC will be concerned where there are multiple functions carried out by the Compliance Officer or risks reporting tools are not specifically adapted for the Jersey regulatory framework (source: Public Statement on SG Kleinwort Hambros entities 16 February 2021)
Enforcement Powers
The JFSC enforcement team investigates issues of regulatory misconduct. Frequently these investigations are prompted by self-reporting from firms who have identified issues within their own organisations.
The JFSC can impose sanctions including:
Restricting or preventing people from working in the finance industry without specific JFSC consent – this can be in respect of Principals or Senior Person;
Revoking or placing a condition on a business licence;
Issuing public statements;
Imposing civil financial penalties. These can be reduced be co-operation and early acceptance of fault;
Referring cases to the States of Jersey Police or Law Officer’s Department to review for criminal prosecution.
Decision Making Process
https://www.jerseyfsc.org/industry/guidance-and-policy/decision-making-process/
Where the firm is being investigated the decision making process can be terminated if (a) no further action is required or (b) the matter should be addressed through normal or heightened supervision or (c) the JFSC and firm have agreed a course of action.
The investigation is one carried out pursuant to administrative functions and following administrative processes – it is not a criminal investigation or conducted in the same way.
Stage 1: Investigation. The JFSC provide the Firm with a written note of the scope of the investigation at the outset. If the scope changes during the investigation a revised note will be issued. Draft report issued and shared with firm for comments on factual accuracy.
Stage 2: Review of the case by JFSC Executive. Referred to Board DMP Committee if further action required.
Stage 3 (if required): Consideration of the Case by the Board DMP Committee. If the Board DMP Committee believes on the basis of the information received from the Executive the Firm hay have contravened regulatory obligations then a Notice of Intent will be issued to the Firm. The NoI will make clear to the Firm what regulatory sanction is intended and the reason for it. If a civil financial penalty is proposed the NoI will state it. If a public statement is proposed a draft will be attached to the NoI.
Stage 4: Determination of the case by the Board DMP Committee. The Firm can, within a month, provide the Board DMP Committee with a written representation in response to the NoI. The Executive can comment on the written representation. A copy of the Executive’s comments will be provided to the Firm. When the Board DMP Committee meets to determine the case the Firm can make an oral representation but the focus should be limited to why the proposed regulatory sanction would be inappropriate. The Firm can have legal representation at the meeting. The Board DMP Committee can ask the Firm questions. The nature of the hearing is administrative, not adversarial as in criminal proceedings. The Firm will be given written notice of the Board DMP Committee’s decision. The Firm may have a right of appeal to the Royal Court
Considerations when imposing civil financial penalties
The JFSC consider the following factors:
Seriousness of contravention
Whether or not a principal person, key person or member of senior management knew or ought to have known of the contravention
Whether or not the person voluntarily reported the contravention
Whether or not the person has taken steps to rectify the contravention and to prevent its recurrence
The potential financial consequences to the person and to third parties (including customers and creditors of the person) of imposing the penalty
The principle of ensuring that persons cannot expect to profit from a contravention
Penalties imposed by the JFSC in other cases
Factors that the JFSC considers aggravate or mitigate the contravention
Factors the JFSC regard as aggravating a contravention
Failure by a designated person to take appropriate action on becoming aware of the contravention
Whether business model has disregard for regulatory requirements
Previously poor compliance record
Failure to pay appropriate attention to relevant JFSC guidance
Failure by a designated person to follow internal procedures
Absence of relevant internal procedures to prevent the contravention
Failure to implement internal recommendations to ensure compliance with Codes of Practice
Clients, customers or funds experiencing a material loss as a result of the contravention
Factors the JFSC regard as mitigating a contravention:
The contravention being promptly and completely notified to JFSC
Individuals taking action appropriate to their position on becoming aware of the contravention
Full co-operation with any investigation
Previously strong compliance record
Procedures promptly amended to address contravention
Swift resolution of any client, customer or fund losses
On 12 May 2022, the Financial Services Commission (Amendment No 8)(Jersey) Law 2022 widened scope of civil financial penalties regime to bring in more individuals other than just principal persons.
JFSC Guidance on Fit and Proper: Integrity
Art. 9 of the Financial Services (Jersey) Law 1988 requires a registered person, principal person or key person to be fit and proper on an ongoing basis. JFSC further clarified this statement following Francis v JFSC [2017] JRC 203A.
A relevant person must demonstrate that they intend, on an ongoing basis, through compliance with the Codes of Practice will conduct its business with integrity, have due regard for the interests of customers and provide appropriate supervision and training to those employed by it
Principle 1 under each JFSC Code of Practice states that person must conduct business with integrity. JFSC has based the approach to integrity on English legal authorities. But also by the Royal Court in Francis – lack of dishonesty and lack of integrity are not synonyms, therefore a lack of integrity does not mean a firm or individual has acted dishonestly so a finding of lack of integrity does not mean that there needs to be a finding of dishonesty and therefore not within the criminal sphere.
Non-exhaustive examples of lack of integrity:
Turning a blind eye to matters that should raise obvious concern or cause enquiry
Failing to appreciate or manage conflicts of interest.
Preferring personal interests above those of the customer
Producing misleading or back-dated documents
Making statements to others on which they will or may rely with reckless disregard to information contradicting the truth of such statements
Failing to deal with JFSC in an open, transparent and co-operative manner
Failing to comply with the law, regulatory requirements and professional standards
JFSC Guidance on Fit and Proper: Competence
The JFSC views competence as someone possessing the required level of skill, knowledge and qualifications to discharge their duties appropriately on a cases by case basis taking into account experience, seniority and length of service of individuals.
Examples of behaviours indicating a lack of competence:
Failing to document concerns, report them to the board members and the JFSC
Authorising a transaction without fully understanding it
Failing to act when presented with unusual situations/red flags
Acting in a capacity for which the person lacks appropriate skills
Failing to adhere to professional standards or codes of conduct
Failing to abide by laws, orders and other regulatory requirements
Failing to seek independent advice/guidance
Calculating civil financial penalties
The JFSC’s methodology for calculating civil financial penalties to be imposed on (a) individuals or (b) registered persons is broadly similar but is set out in detail below.
Civil financial penalties on individuals
Maximum penalty set out in Financial Services Commission (Financial Penalties) (Jersey) Order 2015.
4 bands from band 1 failure to notify £10,000 to band 4 contravention committed intentionally or recklessly £400,000.
Deciding on the level of penalty the JFSC must consider:
Seriousness of the contravention
Aggravating and mitigating factors
Principle of not profiting from a contravention
Penalties imposed in other cases
Potential financial consequences of imposing the penalty
Step 1 requires the JFSC to judge the seriousness of the contravention on a scale of 1 to 5. This includes consideration of (1) the risk to public of financial loss due to dishonesty, incompetence or malpractice, (2) the protection and enhancement of the reputation and integrity of Jersey in conducting financial matters and (3) the need to counter financial crime. The seriousness of each of these 3 factors is considered on a scale of 1-5 (5 being the most serious). The average level is then taken across the 3 factors to determine the overall seriousness.
A calculation is then made to determine the maximum possible penalty. This may then be reduced after consideration of (a) impact of the financial penalty and (b) any deduction for early settlement.
Civil financial penalties on Registered Persons
The Financial Services Commission (Jersey) Law 1998 gives the JFSC power to impose a financial penalty on a registered person (“RP”) that has contravened the Money Laundering (Jersey) Order or a JFSC Code of Practice. The maximum penalty JFSC can impose is set out in the Financial Services Commission (Financial Penalties)(Jersey) Order 2015. There are 4 penalty bands:
Failure to notify = 4% of average annual turnover
Contravention not within 2A or 3 and not rectified = 6% of average annual turnover
2A. contravention committed negligently = 7% of average annual turnover
3. Contravention committed intentionally or recklessly = 8% of average annual
turnover
Article 21B states that the JFSC must consider:
Seriousness of contravention
Whether the RP knew or ought to have known of the contravention
Whether or the contravention was voluntarily reported
Whether or not the RP has taken steps to rectify and prevent recurrence
Aggravating or mitigating factors
Ensuring RP cannot profit from the contravention
Penalties in other cases
Potential financial consequences to RP/3rd parties of imposing a financial penalty.
The RP can appeal the level of fine to the Royal Courts.
Step 1 requires JFSC to judge the seriousness of the contravention on a scale of 1 to 5. This includes consideration of (1) the risk to public of financial loss due to dishonesty, incompetence or malpractice, (2) the protection and enhancement of the reputation and integrity of Jersey in conducting financial matters and (3) the need to counter financial crime. The seriousness of each of these 3 factors is considered on a scale of 1-5 (5 being the most serious). The average level is then taken across the 3 factors to determine the overall seriousness.
A calculation is then made to determine the maximum possible penalty. This may then be reduced after consideration of (a) impact of the financial penalty and (b) any deduction for early settlement.
Summary of Examples of Imposition of Civil Financial Penalties
22 August 2022 Lloyds Bank Corporate Markets Plc, Jersey Branch – public statement issued for breach of AML/CFT Code and Art. 3 & 6 of the Banking Code. Civil financial penalty of £498,000 imposed (reduced by 50% from maximum £996,000 of what it could have been for early settlement).
1 July 2022 IQEQ (Jersey) Limited (formerly, First Names (Jersey) Limited) – public statement issued for breach of AML/CFT code and the TCB Code. Civil financial penalty of £803,661 imposed (reduced by 50% from maximum of what it could have been because of early settlement).
25 August 2021 Hawksford Trust Company Jersey Limited – public statement issued for breach of TCB Code and TCB Asset Order. No financial penalty.
20 May 2021 Mr Gufur Hussain – directions issued to Mr Hussain prohibiting him from taking certain roles in the financial services industry. No financial penalty.
16 February 2021 – SG Kleinwort Hambros entities (Bank, trust Company and Corporate Services). £710,000 fines issued for breach of Principle 3 and Principle 6 of the code. 50% discount already given for early settlement.
23 October 2020 Brooks Macdonald Asset Management (International) Limited – public statement issued for lack of record keeping regarding suitability or to manage conflicts of interest appropriately and failure to comply with Principles 2,3 and 4 of the Code. No financial penalty.
Conclusion
The JFSC is willing to use its Enforcement powers on a regular basis and the evidence suggests that the use of civil financial penalties will be more common going forwards.