This is the first of a three part news item

The Guernsey Royal Court gives clear guidance on roles and responsibilities of Designated Managers

Background

1. On 11 May 20161 , the Royal Court of Guernsey allowed in part an appeal from a decision by the Guernsey Financial Services Commission (the GFSC) to impose sanctions for breaches of various regulatory laws, including the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the POI Law).
2. In doing so the Court made a number of useful observations on the enforcement process of the GFSC and the scrutiny to which it should be subjected.
   1. Read more – Comsure News
3. This follows the action in august 20215 where The Guernsey Financial Services Commission handed out fines to the Arch cru administrator Bordeaux and three of its directors for their role in the collapse of the funds.
   1. Bordeaux was been fined £150,000,
   2. Directors Peter Radford, Neal Meader and Geoffrey Tostevin have been hit with penalties of £50,000, £30,000 and £30,000, respectively.
   3. In addition, all three have been barred from senior positions in regulated businesses for at least five years.
4. The GFSC said:
   1. “The Bordeaux directors demonstrated a consistent and serious lack of appropriate competence, judgement and diligence.
   2. “Their conduct demonstrated a lack of understanding and attention to the legal obligations of Bordeaux.”
5. Bordeaux was the designated manager and administrator for the Guernsey-based Arch cru funds from January 2007 to December 2009, including its 26 incorporated cells, in which time Radford, Meader and Tostevin were directors and controllers of the business.
6. An investigation by the GFSC found that responsibility for determination of the net asset value of the funds was delegated to Bordeaux by Arch Financial Products.
7. However, because of delays by Bordeaux in reporting these figures, investors were not provided with up to date information, while investment manager while Arch was able to execute trades on the basis of more recent data.
   1. “This could have led to the creation of a false market as independent investors would have dealt, or considered dealing, on indicative sale prices that were not properly reflective of NAV,” the regulator says.
8. The regulator also said
   1. that prior to October 2008, Bordeaux calculated a given investment cell’s NAV on a “par plus accruals” basis, meaning it would simply add the expected income from loan notes to the previous month’s figures.
   2. This may explain why the NAVs at the end of February 2009 were substantially higher than in March and April, after regulators stepped in to suspend the fund, the GFSC says.
   3. In addition, the Guernsey watchdog says Bordeaux was “totally reliant” on Arch for valuations of unlisted securities.
9. The ruling comes seven months after the FCA won its legal battle against the fund manager behind the collapsed Arch cru range.
10. Read more – http://bit.ly/1UxlUDZ

OVERVIEW OF THE APPEAL CASE

1. This decision of the Royal Court confirms the Commission’s view that merely adhering to the contractual relationship and scheme particulars is not necessarily enough for a Designated Manager to be properly carrying out their functions.
2. Proper policies and procedures must be in place to
   1. ensure accurate record-keeping and
   2. Appropriate oversight.
3. Also to show that
   1. Conflicts of interest must be managed and where material issues identified dealt with and avoided if necessary and
   2. Due diligence, professional skill, sound judgment and prudence MUST all be exercised by a licensee and its directors.
4. Failure to meet these standards will
   1. result in non-fulfilment of the applicable minimum criteria for licensing (MCL) so that the “fit and proper person” test is not satisfied.
5. Where there are numerous instances of non-fulfilment of the MCL
   1. this may justify a prohibition order being imposed.

INTRODUCTION TO THE APPEAL FACTS

1. On 11 May 2016 the Royal Court of Guernsey issued its judgment following an appeal by a licensee and individual directors (the appellants) in respect of
   1. the length of prohibitions and
   2. The level of some of the fines imposed on them by the Commission in relation to issues arising from the administration of a Guernsey company connected to the Arch Cru investment fund (the RC Decision).
2. The Bordeaux directors DID NOT appeal
   1. the individual fines imposed, or
   2. The public statement issued by the Commission.
3. The decisions appealed were originally made by
   1. A UK Queens Counsel who had been appointed to carry out the role of Senior Decision Maker (or SDM) for the Commission in accordance with the Commission’s decision-making process.

Part 1 of 3