The Channel Islands’ reputations are based on rigid regulatory frameworks, but what are the penalties if someone fails to comply?
Ask almost anyone in Jersey’s or Guernsey’s financial services sector why people should use the islands’ services and all of them will, at some point, mention ‘world-class regulatory regimes’.
This unusual selling point came about because of political decisions made two decades ago. They set the islands on course to develop financial models of regulation that would seek to meet standards set down by supra-governmental bodies such as the OECD and the IMF.
At the time, the idea was simple – acquiescence to the will of the outside world to ensure the islands retain their standing as reputable international finance centres. Successive governments in both islands have maintained this stance and, as a result, the financial services commissions of Guernsey and Jersey (GFSC and JFSC) have become the guardians of the islands’ reputations.
They do this by implementing and enforcing the relevant laws created by the island governments, which are interpreted through regulations drawn up by the commissions themselves.
At the macro level, the policy can be seen to have been a success. Both islands are thriving international financial centres and, over the past 20 years, have seen off a range of threats from the outside. They’ve done so principally by pointing to their strong regulatory environments and by introducing more regulation if needed.
In the detail
At street level, the view is more nuanced. Most people do believe that a reputation for regulatory integrity has been vital to the finance industry’s success. But some will also mention the M&A activity that’s led to many smaller finance firms disappearing over the years.
They will also point to the barriers to entry created by an ever-increasing regulatory burden and claim it stifles the emergence of new businesses on the islands.
To some, the cost for smaller businesses is far outweighed by the benefits to the islands as a whole. However, John Harris, Director General of the JFSC, isn’t so sure that new companies are being held back by regulation. “The compliance burden is greater today than ever before – however, that’s not just down to the JFSC but the international environment,” he explains.
“That’s why you’re seeing consolidation in the industry. There’s not a great deal we can do independently as the islands want to meet international standards. However, we see very little evidence that the risk of sanction and control is stopping people setting up businesses in Jersey.”
The risk of sanction and control is a grave one for anybody working within the financial services system. The penalties for wrongdoing can, of course, include imprisonment for criminal activity but there are also sanctions at the civil level, including the disqualification of individuals from working in the finance sector.
Interestingly, both islands have slightly different processes when it comes to investigating matters of concern.
“There’s a close and constructive relationship between the enforcement divisions, but the islands have separate laws,” says William Mason, Director General of the Guernsey Financial Services Commission.
“For instance, Jersey has only relatively recently brought in fines for firms. We’ve also moved to having UK-based QCs sitting alone and hearing our enforcement cases rather than a Decisions Committee comprising three of our Commissioners [as is the case in Jersey]. As the Executive, we plead the case against the person and they provide a defence with judgment decided by the QC.
“Fraud has resulted in disqualification in a couple of cases following a Royal Court conviction, but other circumstances that could result in a disqualification include improper behaviour, dishonesty and poor conduct with a reputational impact such as a consistent and serious lack of appropriate competence, judgement and diligence.”
In both islands it’s the Royal Court that has the power to disqualify a director, but the Commissions have the power to bar people from working within all or part of the industry.
Enforcement action
There are currently 41 people on Jersey’s Register of Restricted Persons and 13 who have received prohibitions that restrict their work in Guernsey (a couple of those on the list have been sanctioned in both islands). Ten of those restrictions in Guernsey have happened since the Enforcement Division of the GFSC was established in September 2013.
“In terms of proportionality, we have around a dozen cases being looked at by our Enforcement Division at the moment,” says Mason.
“Contrast this with around 150 or so issues that have been identified where improvements are required, and the firms in questions are working with our supervisory teams to make the necessary changes rather than finding themselves in enforcement.”
Those that have already been dealt with and were found wanting have received sanctions ranging from their prohibition as a principal or registered person within the industry, all the way to a ban on being employed anywhere within the sector.
“We’ve seen several financial penalties, but the naming of individuals is an effective penalty and can be more than enough in itself,” says Christopher Edwards, Litigation Partner at Mourant Ozannes in Guernsey.
“We’ve also seen conditions attached that require notifications as to remediation progress to be made to the regulator, the requirement to engage and work with a compliance support firm that’s mandated to ensure the business becomes compliant or that processes are being adhered to.”
Naturally, those convicted of crimes receive the strongest sanctions. But perhaps of most concern to people working in the industry is the possibility of being prohibited from working in the sector when things have gone wrong at an operational level rather than for any malicious activity.
“It’s a small industry and so the consequences are felt more keenly,” explains Edwards. “If a person has been found to have fallen below the standard expected of them, it will be more difficult for them to further their career. It can be a fatal blow to a career and it can be difficult to retrain and find new opportunities in a small community.”
All people working for the financial services industry within the islands are bound by the Commissions’ regulations, but the higher up the food chain you are, the more that’s expected of you.
“The vast majority of directors take their responsibilities seriously,” says Howard Sharp, Founder of Jersey-based law firm, Ardent Chambers. “And there’s a lot of training out there that enables directors to fully understand their duties.”
In fact, the islands can boast an entire training industry dedicated to helping directors and other sector workers achieve the levels of professionalism expected of them. That said, understanding your duties as a business doesn’t necessarily translate into easily being able to implement them.
“If you’re a smaller company, then your ability to deal with the enforcement process is more limited,” says Edwards. “They can find it more difficult to deal with challenges when they arise.”
Raising flags
There are basically two ways that a company or person can be investigated by either Commission. Either the entity in question alerts the regulator to a problem or the Commission finds out about the issue by themselves.
“Most businesses or individuals may well find that they are better off facing up to the problem and sorting it out as soon as practicable,” says Sharp. “Of course, there will be a worry when a business goes to the Commission, but as a general rule you are better off going to see them rather than them coming to you.”
Handing yourself in, so to speak, is hardly an automatic instinct, which is why the regulator is keen to be viewed as a route to remedy rather than a path to punishment.
“We always ask companies to come and work with us – the sooner we are aware of things, the sooner we can fix it,” says the JFSC’s John Harris. “If controls aren’t proper, we will work with them to remedy the issues. If a year later nothing has changed, then it becomes egregious. The systemic and wilful or the extremely reckless will almost invariably lead to sanction.
“We know it’s a big ask to decide to speak to the regulator, but as soon as you do, it becomes mitigation – and that works hugely in your favour.”
The threat of disqualification is one that all those involved in the Channel Islands’ finance sectors labour under. The reality, however, is that with just 54 people sanctioned in a decade it’s only a distant threat – one reserved for outlying incidents.
The vast majority of cases worked on by either regulator are settled through the provision of advice, which must be followed by action.
That said, some feel there is still a case to be made for the islands’ financial services commissions to reach out to the industry to allay nerves. “I’d like to see more actual cooperation by the regulator in engaging with the industry,” says Christopher Edwards.
“We need to have a situation where firms feel they can approach the commission when something goes wrong, without fearing that they will immediately be subject to enforcement action.”