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What could get you into trouble…

Principal and Director of Comsure Group, Mathew Beale, highlights what we all can learn from misdemeanors in the financial sector.

As a Regulatory Compliance Risk Adviser, I now find myself in my 14th year at Comsure. This follows my seven years at the JFSC and 15 years in the finance industry and over this time I am still amazed at the misbehaviour and misdemeanours in the financial markets.

After the “Global Crisis” (circa 2008) and the much vented hand-wringing that followed, we saw the rejection of light-touch regulation for tougher enforcement and the issuance of more voluminous and stringent rules all with the aim of protecting the financial services markets and their clients.

In consideration of these changes since 2008, you would think that a customer of a financial services business in 2016 is getting a better deal and the days of bad behaviour have therefore gone. Unfortunately, this is not always being borne out, just consider:-

1. As at October 2015, U.S. banks had paid more $200 billion in fines
2. As at 12th August 2016 the FCA fines tally = £23,632,742.00

And what about the Channel Islands?

Guernsey fails

Since 2010 The GFSC has raised £1,281,375.00 (approx.) in fines and in considering these Guernsey fails, the following case (a classic that is mirrored in many other fails) shows some people just don’t seem to learn.

In August 2015, the Guernsey Financial Services Commission (GFSC) fined Bordeaux Services (Guernsey) Limited £150,000 and its directors £30,000 and £50,000 and banned them for five years. In support of these actions, the GFSC reported they found various breaches of the regulatory laws arising from the administration of a company which was connected to the Arch Cru investment fund, which itself has been subject to high-profile court proceedings and subsequent regulatory action by the FSA (now the FCA).

Following the fines and bans, Bordeaux Services (Guernsey) Limited and individual directors appealed the length of prohibitions and the level of some of the fines. As a result of this appeal, the Royal Court of Guernsey issued its judgment and confirmed the GFSCs view that:

1. Merely adhering to the contractual relationship and scheme particulars is not necessarily enough to be properly carrying out their functions;
2. Proper policies and procedures must be in place to ensure accurate recordkeeping and appropriate oversight;
3. Conflicts of interest must be avoided;
4. Due diligence, professional skill, sound judgment and prudence must all be exercised by a licensee and its directors;
5. Failure to meet these standards will result in nonfulfillment of the applicable minimum criteria for licensing, leading to the “fit and proper person” test not being met.

Jersey fails

The JFCS has not issued any financial penalties at the time of writing, but Jersey enforcement is alive and kicking – just read the latest 2015 annual report where it is stated they:

1. opened 76 enforcement cases
2. restricted 6 people from gaining employment in the Jersey finance industry
3. received 21 calls to the Whistleblowing Line leading to ten investigations
4. Issued 95 formal notices, 21 interview notices, and 15 public statements on regulatory or legal breaches.

As an example of fails, we have in Jersey seen another classic case showing common mistakes.

Just consider what the Jersey Financial Services Commission (JFSC) said in a 10th March 2016 Public Statement about two directors of MS trust company, namely Mr. Clive Barton MBE and Kathleen Gillen. The JFSC claimed, after a November 2014 inspection, that they uncovered “a number of significant concerns” and “ineffective governance” resulting in a number of business failings that included failing to:

1. have adequate regard for the compliance function thereby undermining its effectiveness;
2. comply with internal procedures;
3. ensure commission charged was in accordance with the agreed terms;
4. recognise, document and manage conflicts of interest;
5. Implement an effective complaint handling system.

Commonality

When looking at these failures and others, there are some consistent factors. They have;

1. been authorised and licenced by their regulator;
2. been subject to a number of regulatory inspections;
3. well qualified and regulatory approved directors, compliance officers and senior managers;
4. written policy, procedures, systems and controls that are board approved and tested by compliance;
5. employees who are required to be qualified and regularly trained and;
6. been audited at least annually and these audits opine not only on the accounts but the regulatory compliance processes (as outlined in 1-5)

So in light of the last six points how can we still have so many problems in 2016…?

Culture

Although the answer can be complex, I can boil it down to four “Characteristics of Culture”. These characteristics are those that I have observed through my years as a Practitioner or Regulator or Regulatory Compliance Risk Adviser. They are as follows:

1. firms that don’t know what they don’t know [blissfully ignorant] or;
2. firms that know that they don’t know [turning a blind eye] or;
3. firms that know that they need to know [risk aware] or;
4. firms that know what they know [nonchalant].

For the keen eyed readers, the above “characteristic model” is not linear but circular, as number 4 takes you back to number 1. Moreover, in my view, it is those who sit in point 3 that will win the day. They are the progressive, well-run business who recognise the world has changed, and there is a cost to doing good businesses – this cost is not only monetary but the effort and endeavour that must also be invested.

In closing, remember objectivity/independence must be exercised at every level – organisational, departmental and individual. Objective diagnosis of impairments must be maintained and implementation of appropriate mitigation/prevention methods undertaken frequently.

So against all these matters and in the words of Mark Twain, I summarise ‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.’ End.