Financial Penalties – what is my risk exposure?

The Jersey Financial Services Commission (“JFSC”) has since 2015 been in a position to impose civil financial penalties for significant and material breaches of the JFSC’s Codes of Practice committed by Registered Persons[1]. Such powers were significantly enhanced in 2018 by the lowering of the threshold to include code breaches committed by way of negligence shortly followed in October 2018 by the power to levy civil penalties against Principal Persons[2] (natural persons) where the breach occurred;

 

  1. with the consent or connivance of the Principal Person; or
  2. attributable to the neglect of the Principal Person; or
  3. aided or abetted, counselled or procured by the Principal Person.

 

The legislation applies to all Principal Persons including those classified as Principal Persons by way of shareholding and non-executive directors.

Breaches predating the introduction of the legislation cannot be subject to a civil penalty unless the breach occurred before the legislation came into force and remains uncorrected post the date of the legislation.

The JFSC has imposed two substantial civil financial penalties against registered persons for compliance/AML failings but is yet to fine a Principal Person. Whilst the fining powers do not currently extend to MLRO’s or MLCO’s the full range of regulatory sanctions remain available to the JFSC to be deployed where appropriate against such post holders.

Registered Persons are prohibited, by way of an amendment to the relevant codes, from securing insurance cover to pay any civil financial penalty although the costs of any investigation or defence costs leading up to a fine can still be covered.

Helpfully, the JFSC has published guidance to the industry setting out its eleven stage methodology for calculating the quantum of a civil financial penalty.

Whilst fines are capped at 8% of relevant income up to a maximum of £4,000,000 for Registered Persons, and £400,000 for Principal Persons the relevant income of the Registered Person and income/savings of Principal Persons are key factors taken into consideration from the outset.

For the JFSC the first and most important stage of the process is assessing the severity of the breach. In doing so the JFSC will assess the impact of each breach against its statutory guiding principles as set out in Article 7 of the Financial Services Commission (Jersey) Law 1998, namely

 

  1. the reduction of risk to the public of financial loss due to dishonesty, incompetence, malpractice or financial unsoundness of persons carrying on financial services in or from within Jersey;
  2. the protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters;
  3. the best economic interests of Jersey; and
  4. the need to counter financial crime both in Jersey and elsewhere.

 

The seriousness of each contravention of the code is assessed against the relevant guiding principles and scored from 1 (less serious) through to 5 (most serious). The average score is then calculated against a percentage of the registered persons relevant income ranging from 15% for a score of 1 through to 75% for a score of 5.   Registered Persons and Principal Persons facing the prospect of a fine should ensure that they have clearly articulated the background to each breach and placed the JFSC in a position of understanding the cause and impact of the breach together with clearly setting out any mitigating factors.

When considering quantum the JFSC has published that it will also take into account the following additional factors,

 

  • Was it reported voluntarily?
  • Should the Registered Person have known of the breach – Compliance reports to the Board could be called for.
  • Was there effective remediation – the JFSC may require the business to demonstrate it has verified the effectiveness of its remediation.
  • Was there any profit made from the breach – the annual spend on compliance and training or fee income from a particular client linked to the breach may come under scrutiny.

 

The JFSC methodology sets out that substantial discounts can be achieved for early settlement (50% of the stage one figure) and up to a further 50% of the stage one figure for mitigating factors. The stage one figure can however be increased by 50% for aggravating factors.

The law requires the JFSC to take into consideration the financial consequences to the Registered Person/Principal Person and to customers and creditors of the business.

The methodology goes on to list some of the aggravating factors for example, failure to pay appropriate attention to relevant guidance issued by the JFSC or failing to take appropriate action when the registered person or Principal Person became aware of the contravention. Having a lack of records or failing to follow the businesses’ own procedures can be fertile ground for a fine. Not being candid with the JFSC is likely to be regarded as a significant aggravating factor.

 

Settlement agreements

The JFSC has shown an appetite for entering into settlement negotiations at the very early stages of a case being referred to enforcement. Such early negotiations afford the Registered Person or Principal Person the opportunity of availing themselves of the early discount (50%) and focusing resources on the completion of effective remediation plans. The JFSC is not obliged to offer settlement and the process for securing approval from the Board of Commissioners to enter into settlement can take some time. Registered Persons should therefore consider raising the subject of settlement at the earliest opportunity once a case has been referred to enforcement. The settlement negotiations are usually led by the Head of Enforcement and the Head of Supervision acting within a mandate set by the Board of Commissioners. Early settlement combined with strong mitigation can result in substantial reductions to the fine but be prepared for tough negotiations. It may be your first time entering into such settlement negotiations but the JFSC team will be experienced and very well prepared!

 

Other sanctions

Where a financial crime has occurred the JFSC is not precluded from referring the matter to the Attorney General (Jersey’s criminal prosecuting authority) and where breaches of the relevant Code of Practice have also occurred  the JFSC may give consideration to a regulatory sanction other than or in addition to a civil penalty. The JFSC published policy dictates that a public statement will usually accompany a regulatory sanction. The content can however from part of the settlement negotiations.

 

Frequently asked questions

 

What if I dispute that a breach has occurred and I wish to contest the finding?

The JFSC has a detailed and published decision making process with the opportunity to be heard before the Board of Commissioners with appeal provisions that afford the Registered Person or individual the opportunity to appeal any JFSC decision to the Royal Court on the basis that the decision of the JFSC was unreasonable.

 

At what stage can I seek to enter into settlement negotiations?

Entering into settlement negotiations is within the gift of the JFSC. The later settlement is achieved in the decision-making process the smaller the percentage reduction.  At stage 1 the percentage is 50% reducing to 5% at stage 3.

 

As a Principal Person are the risks of receiving a civil financial penalty increasing or decreasing?

Most definitely increasing. Regulators in other jurisdictions, for example the Guernsey Financial Services Commission and the Central Bank of Ireland have been very active in levying fines against Principal Persons. One popular train of thought is that fining individuals is more effective and likely to change behaviour more widely. With MoneyVal due to undertake an assessment in 2022/3 it is not unrealistic to expect that the JFSC are likely to be keen to demonstrate that sanctions have been taken against individuals and businesses.

 

If I remediate any shortcomings will I avoid a civil financial penalty?

In short – no. You are likely to mitigate the scale of the fine but unlikely to avoid sanction, but remember the breach must be a significant and material breach for a penalty to be imposed.

 

Baker Faudemer, Chief Executive

 

[1] Registered Person –  The financial services business as defined in Article 1 Financial Services Commission (Jersey) Law 1998

[2] Principal Person – Effectively natural persons as defined in Article 1 Financial Services Commission (Jersey) Law 1998

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