Introduction
Enforcement powers
Responding to GFSC
Legal advice privilege
Decision-making process
Settlement
Orders against directors
The Guernsey Financial Services Commission (GFSC) routinely visits Guernsey licensees which it regulates to check on their compliance with the local regulatory law, regulations and rules. The GFSC will examine and may identify deficiencies in a regulated licensee's corporate governance, management or internal controls. In those circumstances, the GFSC will require the licensee to carry out remediation work to address any contraventions or misconduct within a strict timeframe to ensure that the entity is returned to full compliance as soon as possible.
If remediation work is inadequate or cooperation from the regulated entity is lacking, the GFSC can use its enforcement powers, including the ability to issue fines and prohibition orders, as well as public statements. The critical question which a Guernsey licensee (or business) will need to swiftly address is how to respond to and manage the situation.
The ethos behind enforcement action depends on a number of factors aimed at protecting the integrity of the Bailiwick as an offshore financial centre. A breach of regulatory law or the anti-money laundering regime will be considered sufficiently serious if it poses a threat to clients or the Bailiwick's reputation. Strictly speaking, there need not be any loss or damage suffered as a consequence of the regulatory breach. Other relevant considerations are if the breach was deliberate or premeditated rather than accidental and if the party failed to self-report to the GFSC the matter which gave rise to the breach.
As part of any response to the GFSC, it is important to remember Principle 10 of the Principles of Conduct of Financial Business, which states that:
an entity must deal with the Commission in an open and co-operative manner and keep the regulator promptly informed of anything concerning the firm which might reasonably be expected to be disclosed to it.
In simple terms, this means that, within reason, the GFSC can seek all of the information that it needs to investigate a licensee and the licensee is bound to not only provide information and documentation but also tell the GFSC if something has gone wrong within the business (ie, with the compliance procedures or business risk assessments).
A regulatory enforcement action is different from normal adversarial litigation and it is much harder to resist requests for the production of documents. Failure, inability or refusal to cooperate with the GFSC to rectify a breach, and a history of past breaches or poor regulatory compliance (which may give grounds to believe that the breach is likely to be repeated or is part of a systemic failure), will also be considered. Unlike normal litigation, there is no prescribed method by which a licensee can appeal a document request to a court, although licensees might be able to apply for judicial review of a decision which is clearly unreasonable. Under the enforcement legislation, the GFSC has wide-ranging powers to compel the production of documentation required for the purposes of an investigation.
The GFSC sets relatively short timeframes for the review and production of documents, so licensees (or businesses) may consider enlisting the services of a dedicated team to ensure that the rest of the organisation can continue with business as usual. Again, unlike normal litigation, there is less ability to negotiate deadlines for the production of documents (ie, licensees must be prepared to respond quickly and effectively).
One aspect worth considering is preserving legal advice privilege, which protects confidential communications between lawyers and their clients that have come into existence for the purpose of giving or receiving legal advice. The following points are worth remembering:
- When embarking on a regulatory investigation, licensees should consider instructing external lawyers at an early stage – this should prevent an argument being made that privilege cannot be maintained.
- Licensees should carefully consider who the 'client' is in respect of whom privilege might be claimed (ie, who is specifically tasked with seeking and obtaining legal advice)?
- Legal advice should be provided only to a select committee within the organisation and only on a need-to-know basis.
Although the GFSC Enforcement Division has its own decision-making process, there are no fixed rules of procedure as with civil proceedings. However, there is a duty to comply with the principles of natural justice which means, in general terms, that a licensee must be treated fairly. In the GFSC's own words:
"[i]n all cases the Commission must remain satisfied that the process remains fair, proportionate, transparent, and timely."
In November 2019 the guidance note on enforcement proceedings was updated. The note states that:
Each case will be considered on its merits and, in exceptional circumstances, the Commission may deviate from the process described in this document where it determines that it is necessary or appropriate to do so.
So, while the GFSC will broadly follow the decision-making process outlined in the guidance note, it can deviate from that process where the circumstances are justified. As an example, one enforcement action was appealed to the senior decision maker and the Royal Court, with the whole process taking more than three years. Conversely, another enforcement action was settled at an early stage for the maximum possible settlement. In practical terms, the key point is when a draft enforcement report is produced. At this point, the licensee will generally know the case against it and the proposed penalties. It is difficult at this point to change the GFSC's position in relation to its findings of fact unless it has made a clear mistake. If the matter is forwarded to the senior decision maker, they commonly will not overturn the findings of fact although they may reduce the amount of the fine or the length of the prohibition orders.
Settlement discussions will be held only once the GFSC has a sufficient understanding of the nature and gravity of the breach or misconduct and the offending party has accepted this. The GFSC expects offending parties to acknowledge their breach or regulatory failing and, in this regard, settlement discussions are different from ordinary litigation where a party can settle with no admission of liability. The advantage of a settlement is twofold:
- a settlement discount of up to 30% may be negotiated; and
- the licensee will have the opportunity to have input into the public statement issued by the GFSC.
The GFSC can be quite accommodating (within reason) as to the content of the public statement. Where local entities want to protect their reputation, the specific wording of the public statement can be important.
However, there is a difference when it comes to proposed prohibition orders affecting directors. These orders can be career ending and so there is understandably a reluctance to accept a prohibition order if someone is subject to one of those orders.
If a director decides to contest the findings, it will be vital to analyse their directors' and officers' insurance policy to ensure that their legal costs are covered. Whether a director's legal costs are covered will often dictate whether they contest any enforcement action.
For further information on this topic please contact Alex Horsbrugh-Porter or Michael Rogers at Ogier by telephone (+44 1534 514 000) or email ([email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.
