The following text is extracted from the letter sent by Jersey finance to the JFSC in response to JFSC Consultation Paper No. 2 2014 – Civil Penalties: Draft Primary Legislation (see link below or attached for full and complete text)

We refer to JFSC Consultation Paper No. 2 2014 – Civil Penalties: Draft Primary Legislation (the ‘Consultation’) published on 5 June 2014.

Jersey Finance Limited publicised the Consultation to its members by way of re-publication (together with a ‘countdown clock’) on the ‘Consultations Page’ of its website. We highlighted the Consultation as the first item on the “June Technical Update” (which was sent to 986 individual members) and as the second item on the “July Technical Update” (which was sent to 993 individual members). The Consultation was also brought to the attention of industry more generally at meetings of the Jersey Bankers Association QBA), the Jersey Society of Chartered and Certified Accountants (JSCCA), the Jersey Association of Trust Companies JATCo), the Jersey Funds Association GFA) and the Financial and Commercial Sub-Committee of the Law Society.

The Consultation requested feedback summarised in one question, namely,

“Do you have any observations or concerns on any aspect of how the civil penalties framework would be implemented by the Amendment Law? If so, please state in detail what your observation or concern is and explain the reason for it.”

Given the prior consultation, respondents were requested to restrict their comments to the detail of the proposed statutory provisions rather than focussing on the principles of a civil financial penalties framework.

Disregarding responses which were overtly also copied to the JFSC, Jersey Finance received a total of seven responses to the Consultation (from one law firm, three banks, one trust company business and two brokers). These responses are summarised below.

Respondent 1:

Section 4.3.33 details that the income generated from these penalties would be used by the Commission to reduce the annual licence fees. It is important for the Commission to continue to emphasise that the primary aim of the proposed legislation is to act as a deterrent to those who persistently or seriously contravene Codes of Practice. It is important to ensure that the driving motivation behind a civil penalty is not misinterpreted.

Section 4.3.43 states that the Commission will have the discretion to issue a public statement when it issues a registered person with a final notice to pay a financial penalty. In support of public statements [respondent 1] would also welcome continuing guidance through industry papers of examples of best practice and ‘what good looks like’. This will assist FSB’s in taking positive steps to avoid bad or unacceptable behaviours or practices.

Respondent 2:

We support the draft legislation provided in relation to civil penalties as this will further support the island’s reputation as a well regulated jurisdiction. We do however, look forward to the consultation regarding the tariff as any future penalties imposed must remain commensurate with the income generated by firms locally.

Respondent 3:

We have two observations in relation to the proposals.

The law should require the body with the power to impose the fine to have regard to the likely impact upon the entity of the financial penalty. What we do not want to find is that a penalty is imposed which leads the entity to be unable to meet the ANLA requirement, with the likely consequence that it has to close. This would simply be a covert way of closing an entity. By analogy with court proceedings, a fine will not, generally, be imposed upon a person if he will not be able to pay it, for inevitably in that case he will be caught by the alternative of prison. If the court believes, after proper enquiry, that a person will not be able to pay a fine, it will not fine, but will find an alternative punishment, which may be prison. If the JFSC believes that the entity will not be able to pay a fine, it should not fine, or fine at the proposed level, but should find an alternative sanction.

What body should impose financial and other penalties? This may be a good opportunity to consider this point, for there is an unhappy, but not surprising, perception that, once the JFSC becomes involved, it controls the proceedings from initial investigation up to imposition of the sanctions. It would be better both for the perception of justice being done, and for the industry perception of the JFSC, if a different body, not being part of the JFSC, (i) made decisions on guilt etc. and (ii) decided sanctions, both based upon reports and recommendations of the JFSC. It would be easy to set up a panel, with a lawyer as chairman, to perform this function. We suggest a lawyer as chairman simply because lawyers are trained in the relevant principles, such as natural justice and sentencing.

Respondent 4:

Whilst we have a number of detailed comments noted below, our fundamental concern is that the effect of the Codes of Practice becoming “detailed requirements that must be complied with” as stated in 4.3.44.1 and making breach of the Codes of Practice a matter that will render a person liable to proceedings as in 4.3.45, acts to fundamentally alter their significance. As things stand today, the Codes have been developed in negotiation with industry via the accepted consultation process on the basis that they are principles supported by guidance as to their practical application, with room for individual firms to interpret them as appropriate for their own business. If they are now to be viewed as de facto rules, a breach of which opens a firm up to proceedings, then they should be reopened to consultation with industry on that basis and the language amended accordingly. The necessity for this is supported by the experience of examination reports that view the identification of a single instance of procedural inconsistency as evidencing a firm not meeting the requirements of the Codes. We would also feel it important to provide reassurance that no officer of the Commission will ever be given targets for generating financial penalties from identified Code breaches, when conducting regulatory visits, or have their performance assessment in any way linked to this.

An alternative approach would be to leave the Codes as they are and position the fines regime as only becoming applicable where any firm fails to follow directions issued by the Commission in respect of perceived contraventions of the Codes. Directions could then be used to enforce certain behaviours by firms that the Commission view as being expected under the Codes, following discussions and considered evaluation of how various aspects of the Codes ought to be applied and the subjective judgements being exercised by a firm, on a case by case basis. Failure by a firm to subsequently take remedial action directed could then lead to a fine and or further more serious directions by the Commission, including the possibility of licence revocation.

Our detailed comments on the consultation paper are as follows.

4.3.2 The use ‘materially contravened a Code of Practice’ is an inappropriate yardstick by which to assess whether a financial penalty may be imposed, as discussed above.

4.3.4 Rather than exempt an AIF which is its own AIFM perhaps any financial penalty should be targeted at the carry interest or bonus pool of the management responsible for the contravention.

4.3.1 0.1 Using ‘seriousness of contravention’ is a subjective and inappropriate criterion upon which to determine the level of any penalty. There is nothing in the list of considerations about whether or not the code in question is material to the business, its customer or shareholders. If a business does not have procedures or documentation in place about a particular part of the Codes, as it has determined that it is not relevant to its business or clients and documents it as such, is that to be viewed as a serious contravention where there is no risk to any third party?

A tariff needs to be developed in consultation with industry such that the level of ‘offences’ are known and understood.

4.3.1 0.2 Using ‘ought to have known’ is also subjective and felt inappropriate. If used, ‘ought to have known’, should be limited to where the Commission has published guidance that is clearly intended for that industry sector and that clearly reflects the circumstances of the subject incident. For example it should not be the case that information given in presentations by the JFSC at seminars should constitute ‘ought to have known’.

4.3.1 0.5 Using ‘likelihood of any further contravention’ is also subjective and felt inappropriate. On what basis is it fair for somebody to be penalised for something they have not yet done?

4.3.10.6 The potential consequences should not be limited to financial and considerations should also include the impact on employees of the registered person.

4.3.1 0.7 The principle would be better phrased as ‘not expect to retain excess profits attributable to contraventions of the Codes’.

4.3.11.1 By setting out subjective principles to which mitigating and aggravating factors can be applied, the Commission is putting itself in the position of legislator, policeman and judge with significant inherent conflicts. As the Codes themselves are very open to interpretation in a number of areas, this could involve the Commission in significant and lengthy disputes with firms. In addition, the Commission would need to ensure it has personnel with sufficient skill sets to act in a judicial capacity. A clear factually based tariff would avoid such difficulties.

4.3.14 It would be consistent for the Chief Minister’s consultation to also include registered persons.

4.3.1 6.5 A period of 60 days would seem more reasonable given that individuals key to making any representation may not be available at the time the notice of intent is received.

4.3.1 7 Consideration of any representation would need to be made by minds independent of the initial assessment.

4.3.24    This would be difficult to pursue without a clear definition of what constitutes serious misconduct and what meeting the civil standard of proof entailed.

4.3.25    Would the 5% penalty be charged on a compound basis for successive months or still be based on the original amount of the penalty?

4.3.29 A period of 60 days would seem more reasonable within which to lodge an appeal.

4.3.36 Rather than return money to the States it would be more appropriate to retain it and use it to maintain lower fees in that sector over future years. Alternative uses might be to provide training for regulated businesses within that sector,

undertake relevant research exercises or improve the tools available from the Commission that support the sector.

4.3.37    It is hard to envisage a circumstance where such an Order might be appropriate. Given that the Commission can already return surplus revenue to the States this seems unnecessary.

4.3.38    Consultation on such a matter by the Chief Minister should also take place with registered persons.

4.3.39    Without a clear indication of the intention it does not seem appropriate to include this power.

4.3.42    At what stage of the process would failure to pay a financial penalty become grounds to revoke a licence, considering the Commission will have the power to enforce the debt through the courts?

4.3.43    It would seem appropriate to only issue a public statement once a financial penalty has been paid and is therefore not subject to any appeal, especially considering the potential impact of a public statement on a subject business remaining a going concern.

 Respondent 5:

4.2.3 In Jersey [Respondent 5] is Fund Manager to a number of Jersey Recognized Funds. In this respect we believe that for a Recognized Jersey Fund only sections 3 and 4 of the Alternative Investment Funds Codes of Practice applies. At present the CP does not define which sections of the Codes of Practice apply and it would be helpful to have this clarified.

4.3.1 6.5 This gives us only one month to make representations to the Commission following its issue of a “notice of intent” to impose a penalty.

4.3.1 9 Appeals must be lodged with the Commission within one month of receipt of the final notice.

How do these [two] timescales [noted above] compare to similar processes/timescales within the FCA regime?

Respondent 6:

We feel that any fines to be imposed need to be transparent and proportionate. And we would like to see some benchmarks showing examples of what level of fines could be imposed upon particular sized companies.

Section 4.3.8 sets out that the level of a penalty would be set by criteria such as a percentage of a ‘registered persons’ income. We feel that if such a percentage based criteria is to be applied then it should be a percentage of the income of a particular business line of a company, rather than the whole registered person’s income. For example, we would not like to see our mortgage business penalised for corporate infringement.

Further to this, we would like to see fines capped at a certain level.

We would like to see the introduction of incentives for the early settlement of any fines imposed.

In the Amendment to the Law, section 21 B(3), we would like to see a further point added, stating that if a registered person has been penalised in one jurisdiction, they will not be penalised for the same infringement in another jurisdiction. It would be good to see this point included in both a Set of Principles document, and, if possible, an understanding between the Crown Dependencies.

We have a concern as to whether, if in breaching the AML Handbook, we could be fined from both a criminal and civil perspective. This point is addressed in sections 4.3.23 and 4.3.24. Our specific concern would be around the statement that ‘if a prosecution were unsuccessful [in the courts], the Commission would have the discretion to impose a financial penalty in respect of the conduct that had been the subject of the prosecution’.

We believe that the FCA’s current approach to fines is wrong, and breeds a culture of fining within business. We do not wish to see such a culture develop in Jersey. We accept the need to regulate, but the manner in which such regulation is conducted should be closely considered, so as not to adversely impact the industry in Jersey.

Respondent 7:

William Byrne Head of Technical Jersey Finance Ltd

Given its length and detail, the response from Respondent 7 has (with permission) been reproduced in full in Appendix 1.

jfsc consultn no.2 2014 (civil fining) – jfl response (1)