On 24 May 2010 the Guernsey Financial Services Commission (“the Commission”) decided:

1. to impose financial penalties of £14,000 each on Mr Y and Mr du Feu and £7,000 on Mr X (“the Directors”) under section 11D of The Financial Services Commission Law; an
2. to make this public statement under section 11C of the Financial Services Commission Law.

The Commission made these decisions having concluded that the Directors had failed to fulfil certain requirements imposed on them under the Fiduciary Law, the Regulations and the Handbook and to ensure, during their respective periods of appointment, that the fiduciary business referred to below fulfilled the requirements applicable to it.

*On 7 January 2022 and 28 February 2022, the Guernsey Financial Services Commission exercised its powers under section 135 of The Financial Services Business (Enforcement Powers) (Bailiwick of Guernsey) Law, 2020 to alter this public statement.

Background

The background to this decision is the Directors’ conduct in relation to the fiduciary business of Kingston Management (Guernsey) Limited (now in administration) and its joint fiduciary licensees Kingston Trustees Limited, Wessex Holdings Limited, Oxford Investments Limited, Kendal Limited and Hawkshead Investments Limited (together referred to as “Kingston”).

Kingston was formed in 1989 by a UK firm of accountants, which was its exclusive source of business introduction. Mr Y and Mr du Feu were appointed as directors in 1989. In October 2007, Mr X was recruited, and he was appointed as a director in the following month. Mr du Feu resigned as a director with effect from 31 December 2008.

Following the introduction of the Fiduciary Law, the Commission granted Kingston a full fiduciary licence in November 2001.

In February 2009, following an onsite inspection, the Commission raised serious issues over Kingston’s compliance with the requirements of the Fiduciary Law, which had applied over the previous 8 years, and of the Regulations and the Handbook, which came into force in December 2007. The Commission was particularly concerned about management, control and compliance within Kingston and its handling of some high risk relationships.

Discussions ensued between the Commission and Kingston about further investigation and remedial action, but the Directors felt unable to obtain co-operation and financial resources from its shareholders to secure the necessary changes within Kingston’s operations.

Mr Y and Mr X , as the current directors, applied to the Royal Court of Guernsey for an administration order in relation to Kingston Management (Guernsey) Limited, and on 8 September 2009 the Royal Court granted the application and appointed Alan Roberts and Adrian Rabet of Begbies Traynor as joint administrators.

Reasons

The Commission has not imposed any sanction in relation to Kingston itself, which is in administration and intends to surrender its fiduciary licence as soon as possible. Both the process of regulatory action and any resulting regulatory sanction could only detract from the joint administrators’ work in administering and transferring client structures.

However, irrespective of Kingston’s position, the Directors are, during the varying times of their appointments, responsible for the conduct of its business and this statement and the financial penalties recognise that responsibility. The Directors failed to ensure that Kingston:

1.    exercised adequate control over, and held adequate information on, trusts and companies under its management, as a fit and proper licensee is required to do under paragraph 5(3)(b) of Schedule 1 to the Fiduciary Law,
2.   undertook a risk assessment before forming a business relationship as required by Regulation 3(1)(c),
3.   undertook customer due diligence on beneficiaries of structures to which Kingston provided services constituting regulated fiduciary activities as required by Regulation 4(1)(3) and earlier provisions, verified the identity of beneficial owners of a company as required by Rule 106 of the Handbook, undertook customer due diligence on the donees of powers of attorney as required by Rule 112 of the Handbook, and carried out enhanced customer due diligence on beneficial owners as required by Regulation 7(1), and
4.   performed ongoing and effective monitoring of business relationships, as required by Regulations 11(1)(a) and (b).

These failings were noted on specific files and this statement does not suggest that they were endemic throughout Kingston’s business. In order to ascertain whether that was the case, the Commission required Kingston to obtain an independent review of all its files, but administration intervened.

This statement does not amount to a public statement about the conduct of Kingston’s parent and does not reflect its views.

Mitigating factors

In reaching these decisions the Commission has taken into account that:

1. Mr X did not become a director of Kingston until November 2007, six weeks before the Regulations and the Handbook came into effect, and from that time made efforts to change Kingston’s culture and procedures.
2. Mr du Feu was a founding director but has not served as a director since December 2008.
3. In August 2009 the board concluded that the task of meeting the licensing criteria and the requirements of the Regulations and the Handbook, for the type of client-base Kingston held, would require financial resources which Kingston could not obtain from its shareholders. The directors took a responsible course of action in seeking an administration order and, once that had been made, worked to assist the joint administrators to service and transfer client structures.
4. The Directors experienced particular difficulties in Kingston’s relationship with its parent and were unable to obtain the parent’s cooperation in improving standards or obtaining the additional resources needed to service its client-base properly.

Read more at https://www.gfsc.gg/news/directors-kingston-management-guernsey-limited-administration

Lesson learned

Financial services businesses need to be aware of the following issues arising from this regulatory action and the set of circumstances behind it:

• Despite the public statement that the issues in this case were largely beyond the directors’ control due to the extent of external control over business relationships, the directors were held responsible and fined accordingly.

• Fiduciaries and any other financial services businesses need to ensure that the Guernsey board of directors of the company (the “Board”) is fully aware of its responsibilities and that the directors exercise a demonstrable degree of control (both personal and collective) over its business and client relationships, even if this means coming into direct conflict with the procedures and processes of a wider global group operation.
• A financial services business must have adequate information with which to be able to determine and monitor client relationships and transactions. It will not be sufficient to simply pass blame on to a head office elsewhere; the responsibility rests in Guernsey with the Guernsey Board.

• Despite having been appointed for a relatively short period, and despite the GFSC recognising that steps were taken to try to resolve compliance problems, one of the directors was still held liable to pay a substantial personal fine of £7,000.

• It is important that directors understand that there is a collective board responsibility as well as a personal one in respect of AML regulations.
• If you are a director of a licensed entity with AML compliance issues, then you should ensure that any concerns you have regarding AML issues are properly recorded and minuted at regular board meetings and that you do everything in your power to resolve them. It clearly will not be considered a sufficient defence to indicate that specific AML or control issues are not your specific executive responsibility.
• If you have real concerns about AML compliance, then you should seek personal legal advice, which is independent from the advice being provided to the company.

• It is a fallacy that there must be money laundering or a high risk of it taking place or for a business to have a peculiarly high client risk for directors to become liable for a failure to comply with the AML regulations.

• The regulations are in place to ensure adequate AML safeguards are in place, and will not just be enforced in circumstances where AML breaches have led to proven offences of money laundering.

• The GFSC statement acknowledges that steps were taken to correct the issues with this company and that some of the issues were beyond the directors’ control.

• These circumstances were, according to the GFSC’s statement, taken into account in handing out penalties of £7,000 and £14,000 to individual directors.
• This suggests that in circumstances where there are no such mitigating factors, penalties could be significantly higher.
• The maximum discretionary penalty under the Financial Services Commission Law is £200,000.

• Directors need to be acutely aware of the new indemnity provisions of the Guernsey companies laws.

• The Companies (Guernsey) Law, 2008 (as amended) prohibits a company or any associated company from indemnifying directors against such fines but the company can provide insurance to cover them.
• Third party indemnities cannot, however, be provided which cover fines in regulatory or criminal proceedings.
• Directors should be aware that if they do not have an insurance policy which covers regulatory fines, they will be obliged to pay them personally.
• If fines remain unpaid, they may translate into an alternative period of imprisonment.

• Directors may also be obliged to pay fines personally in certain circumstances before they can recover them from their insurers, depending on the construction and wording of their D & O insurance policy.

• The payment may also be subject to an excess which the company would be unable to meet if it is considered to be by way of an indemnity for directors.
• In circumstances where a company is insolvent, the insurance may lapse during winding up if there are insufficient assets to purchase run-off cover.
• A liquidator or administrator will usually only be interested in purchasing run-off cover in circumstances where there may be claims for breach of a duty by the company against the directors which, if recovered, would be in the best interests of creditors.
• In simpler words, an administrator or liquidator will not usually be interested in maintaining insurance out of company assets to protect a director’s personal liability to pay regulatory fines.