ppendix 1
Consultation Paper No.2 2014 – Civil penalties: Draft Primary Legislation Response from Bedell Cristin
Dear Mr Byrne
Consultation Paper No. 2 2014
Civil Penalties: Draft Primary Legislation
This response is divided into (A) points of substance having regard to a number of principles; and (B) detailed comments.
A. Points of Substance
1. It is important that the statutory duties of the Jersey Financial Services Commission (the “Commission”) can be carried out fully, effectively and efficiency in the public interest and further that those duties are seen and perceived to be carried out in that way.
2. The principle of having an ability to impose a civil financial penalty or fine is a useful and appropriate sanction to have available in addition to those that exist at present. Indeed, it is usual for fines to be imposed for breaches of financial services regulations. The question is in whom is that power vested and how are the fines applied?
3. This power and this application must be seen in the light of the over-arching need to ensure that all laws are within the Rule of Law. For the sake of simplicity, I would describe this as follows. The Rule of Law is “A principle of governance in which all persons, institutions and entities, public and private, including the State itself, are accountable to laws that are publicly promulgated, equally enforced and independently adjudicated and which are consistent with international human rights norms and standards” – United Nations
4. All laws must also, by virtue of the Human Rights (Jersey) Law 2000, be within the human rights specified by that particular legislation.
5. In relation to the UN definition I would emphasise there are two aspects. First, the law, or at least good law, must be subject to such rule and, secondly, as an authority the Commission must also be subject to it. In particular, I emphasise the words:
(1) “equally enforced”; and
(2) “independently adjudicated”.
6. In relation to the Schedule to the Human Rights Law, Schedule 6 states “In the determination of his civil rights and obligations, everyone is entitled to a fair and public hearing … by an independent and impartial tribunal.” None of the exceptions stated in Schedule 6 apply in the context of the proposal. Human rights apply to individuals and corporate entities.
7. In relation to both the Rule of Law and the Human Rights Law it is essential that justice is done and seen to be done for there to be appropriate confidence.
In particular, I emphasise the words:
“a fair hearing … by an independent and impartial tribunal,”
8. Judicial decision-makers must be independent and impartial.
“The constitution of a modern democracy governed by the Rule of Law must guarantee the independence of the judicial decision-makers, an expression I use to embrace all those making decisions in judicial character, whether they are judges (or jurors or magistrates) or not. Acceptance of this principle as a principle is widespread., a
“A further essential element of the rule of Law is the separation of powers, the separation of law makers (the legislature), those who interpret and apply the law (the judiciary) and those who have the power to enforce it (the executive) each from the other. ‘a
“. . . judges must be independent of ministers and the government. Does the principle require independence of anyone or anything other than the government? It does, It calls for decision-makers to be independent of local government, vested interests of any kind, public and parliamentary opinion, the media, political parties and pressure groups, and their own colleagues, particularly those senior to them. In short, they must be independent of anybody or anything which might lead them to decide issues coming before them on anything other than the legal and factual merits of the case as, in the exercise of their own judgment, they consider them to be. There would be an obvious threat to that independence if a decision-maker’s salary or tenure of office were dependent on the acceptability of his judgments to those affected by them. A similar threat would arise if (as had happened in other countries but scarcely ever, in recent years, in the UK) a decision-maker’s prospects of promotion could be blighted because his judgments were unwelcome to the powers that be.
2 Lord Justice Bingham – The Rule of Law 2010 – page 91. See Appendix
3 Francis Neate – The Rule of Law – pages 8 -12. See Appendix
4 Lord Justice Bingham – The Rule of Law 2010 – page 92. See Appendix.
Scarcely less important than an independent judiciary is an independent legal profession, fearless in its representation of those who cannot represent themselves, however unpopular or distasteful their case may be. “*
“Closely allied to the requirement of independence is the requirement that a decision-maker be impartial. The European Convention requires a tribunal to be both independent and impartial. This means that the decision maker, to the greatest extent possible, should approach the issues with an open mind, ready to respond to the legal and factual merits of the case. A decision-maker who is truly independent of all influences extraneous to the case to be decided is likely to be impartial, but may nonetheless be subject to personal predilections or prejudices which may pervert his judgment. Of course, since judges and other decision-makers are human beings and not robots, they are inevitably, to some extent, the product of their own upbringing, experience and background. The mind which they bring to the decision of issues cannot be a blank canvas. But they should seek to alert themselves to, and so neutralise, any extraneous considerations which might bias their judgment, and if they are conscious of bias, or of matters which might give rise to an appearance of bias, they must decline to make the decision in question. In all this, Sir Matthew Hale was ahead of his time.”
9. The Court of Appeal has confirmed this when in relation to a criminal matter it said:
“Procedural fairness has long been acknowledged to be an essential component of the rule of law. In the United Kingdom, recognition of it can be traced back to the Magna Carta. The Attorney General’s acceptance of the importance of compliance with art. 6 of the Convention which provides that “in the determination of. . . any criminal charge against him, everyone is entitled to a fair and public hearing,” even in advance of the coming into force of the Human Rights (Jersey) Law 2000, serves to underscore the fact that the requirement of procedural fairness is and has been a cardinal principle of Jersey law.”°
10. That passage would, I suggest, apply equally to a civil financial penalty as to any other criminal fine and perhaps even more so if a civil fine can be imposed where the onus of proof is only on a balance of probabilities.
11. Part of the Rule of Law principle is summarised as audi alteram partem. You cannot be judge and jury in your own cause. There are other Jersey judicial cases upholding the essential importance of the Rule of Law.
12. Furthermore, to speak of satisfying a burden of proof on a balance of probabilities where the judge making that decision is the investigator, policeman and prosecutor, is a hard act to perform if not, I suggest, an impossible one to perform fairly, independently and impartially. This places the Commission in an invidious and difficult position.
13. It is no answer to say there is an appeal. Justice should be right first time and not by default from a back footed position.
14. It is also no answer to say the Commission is composed of reasonable and reliable men and women of experience and sound judgment.
15. It is against this background that it is necessary to remind ourselves that the Commission would have the power to decide whether or not to:
6 Harrison v. Attorney General 2004 JLR 111
(1) register the Registered Person who may be fined;
(2) make Codes of Practice and to establish their content;
(3) check, visit and inspect to see if the Codes are being followed;
(4) require remediation of any breaches;
(5) take existing enforcement measures; and
(6) in due course, and in addition to the above, consider Article 21C(l)(b) of this proposed legislation –
(a) to state it has “grounds for believing” that the registered person has contravened a Code of Practice;
(b) consider representations made; and
(c) if appropriate, issue its decision by way of final notice;
(7) enforce the payment of the fine; and
(8) keep the fine (subject only to possible partial, unspecified and uncertain future restrictions which may be made by Order of the Minister). In either event, if the Commission did not keep the fines, the government would do so.
16. In due course, further requirements will be included by the Commission in the Codes of Practice and fines will become payable for aspects not within the present contemplation of anyone today.
17. Further Codes of Practice are not drawn with the particularity and focus of criminal offences. They are often descriptive to aid understanding rather than restrictive and certain.
18. In brief, the perception and reality is that the Commission, in relation to Codes of Conduct and fines, will be:
(1) legislator
(2) policeman
(3) investigator
(4) prosecutor
(5) judge
(6) jury
(7) sentencer; and
(8) keeper of the fines.
19. The above process would not be normal and is contrary to the Rule of Law principle of the due separation of powers into the legislative, the executive and the judicial. This is part of the Rule of Law principle and a driving force reason and justification for the existence of the Human Rights (Jersey) Law.
20. The Commission cannot be independent or impartial. It will be judge in its own cause.
21. How can the Commission have reached a belief based upon grounds for guilt as will be required in accordance with Article 21(c)(1)(b) and then proceed impartially to decide the issue? Will the Commission have even shared its grounds of belief with the alleged offender? If the starting point of the hearing is based on the Commission’s belief, how can the Commission come to the process with an open mind? How can the onus of proof be properly weighed?
22. The proposed protection against a wrongful fine is an appeal to the Royal Court under Article 21F. This may be by way of appeal or judicial review resulting in a higher burden. In either case, the Court is unlikely to substitute its own view and may well return it to the Commission with directions or recommendations. A virtuous circle is created. The aim should be to ensure a fine is correct and seen to be correct in the first place rather than to right it by an appeal. However, whether it is one or the other, it will, in any event, also be an unlikely path to take in most situations, partly as, unless the fine is huge, it will cost far more to appeal, whether the appeal was won or lost. It would also use up executive and management time of both the Commission itself and the regulated person. It would also result in a full public hearing. Accordingly, that route does not overcome the inherent danger. It is not a solution.
23. The solution is to have an “independent and impartial tribunal” so the matter can be “independently adjudicated” and with no interest in the outcome.
24. That should apply not only to fines, but also to all other sanctions such as withdrawing a licence or changing its terms and naming and shaming. There should be an ultimate appeal to the Royal Court for fines above a certain limit and for other sanctions and penalties.
25. Accordingly, under 21C(l)(a), a notice of intent could be provided; under 21C(2) representations could be made; and under 21C(3) the Commission could decide to refer it to the tribunal, or the registered person could accept the proposed fine without requiring further proof or other justification of the level of the fine.
26. The tribunal would need to conduct itself to the extent appropriate having regard to the sanction proposed to avoid disproportionate cost and expense so as to force a registered person to accept a fine. There could be power to award costs.
27. The tribunal could consist of one independent person (drawn from a panel) to oversee the process. It is not complex or expensive to engage. This route is even more important where the fines are to be kept by the Commission to provide for its needs and, if appropriate, to reduce the registration fees. Such an arrangement without an independent and impartial tribunal would give the appearance and lead to a temptation to fine or have a tendency to fine, to maintain or enhance remuneration, headcount, office and resource expenses and generally. It is wrong in principle, even if abuse did not occur in fact. Safeguards are required for the process to be above suspicion and in the interests of the long term credibility of the Commission.
28. It is no argument that regulatory bodies in other places operate as is now proposed. If the process is wrong in principle, a breach of the Rule of Law and of Human Rights, it should not be enacted. That others may have such procedures does not provide justification.
29. Some governments pay no attention to the Rule of Law; others do so and follow it; others apply it or disapply it arbitrarily to suit particular purposes. Jersey should follow the correct and proper course. It is neither difficult nor impossible to do so. We understand the Securities and Exchange
Commission of the USA no longer keeps its fines but they are paid to victims. There seems little political appetite in Jersey to do so.
DETAILED COMMENTS
Article 21A
30. This is headed “Civil financial penalties”. The body of the article refers to imposing a “financial penalty” not a “civil financial penalty”. “Penalty” means a penalty imposed by the Commission under Article 21A [see Article 1 (2)(a)]. Civil financial penalty is not defined.
31. It is suggested the word “penalty” should be stated to be a “civil financial penalty” as indicated in the title imposed by the Commission. The body of the text should also refer to civil financial penalty.
32. The reason is:
(1) it is clearer; and
(2) it is important for policies including D&O, PI and insurance generally to make it clear this penalty is a civil financial penalty and further that it does not (without more) import “dishonesty”.
Article 21B(1) and (2)
33. (1) The proposed order should be published and there should be consultation at this stage;
(3) Minor provisions could have minor fixed penalties; more serious provisions should have maximum amounts. Without a maximum it is hard to assess the reasonableness of the amount.
We understand Guernsey has a maximum of £200,000. It should be the same as Guernsey.
34. The devil can be in the detail. This detail in subordinate legislation should have been and needs to be announced at this consultation stage. There is no reason why it was not. We note there have been fines elsewhere of £9 billion and others of many billions and millions. Is it the intention to impose such fines in an appropriate case?
Article 21B(3)
35. In addition to the seriousness of the contravention, there should be a factor as to the importance of die particular aspect of the Code breached. Some aspects of the Code are more important than others.
Article 21C
36. Unless a tribunal is established, a fine should be based upon more than the Commission having mere “grounds to believe”. There should be:
(1) clear and convincing evidence. It should be stated (in our view);
(2) the onus of proof should be stated. It should either be on a balance of probability (the civil test) or on a beyond reasonable doubt (the criminal standard);
(3) the level of the fine should be stated to be objectively fair and reasonable in all the circumstances.
Article 21E(1)
37. 5% per month would normally be considered an extortionate amount and would be disallowed in commercial contracts as a matter of public policy. See Doorstop Limited v. Gillman and Lepervier Holdings Limited 2012 (2) JLR 297 Article 21G Proceeds of Penalties
38. If the suggestion of a tribunal or supervisor is not adopted:-
(1) the proceeds of the fines should be applied wholly and directly to reduce the registration fees; or
(2) The fines should not affect registration fees. The correct registration fees should be set for the work of the commission as at present is the case. In that case, fines could be applied direct to all registered persons; or
(3) Any benefit by method (1) or (2) should result in all sectors, not just the sector of the defaulting registered person; or
(4) a fund could be created for victims of breaches. The US SEC has now moved to that model. This would further require that a victims’ scheme is established.
39. It is clear that the fine can be accompanied by a name and shame announcement. It is not clear that a fine as well as withdrawal of a licence could be imposed simultaneously. It should be clarified.
40. It is not clear whether it would be fair and reasonable to impose a fine that meant the registered person could no longer conduct business through lack of cash flow or to meet various prudential requirements or, in the case of a trust company, an ANLA shortfall.
Other points
41. There appear a number of points for which no provision has been made in the proposed legislation:
(1) In Article 21A the words “to a material extent” are not defined. They are presumably there to prevent fines being imposed for technical breaches. That is not clear.
(2) The nature of the business and the business conducting different types of financial service business may have different resources to call upon. Banks have prudential requirements; trust companies have ANLA. One year’s profit may not hurt a bank – as quoted by the CEO of BNP Paribas in July 2012 (on receiving a US$9 billion fine imposed by US authorities) but it would bankrupt other types of regulated businesses and therefore create problems for clients and customers rather than protect them.
(3) A fine is a fine is a fine. Whether it is criminal or civil or administrative – it is the same in money terms with an added stigma, if it is criminal.
(4) An civil or administrative fine should, by nature, be less serious and lower in amount than a criminal fine yet the Companies (Jersey) Law 1991 (“the Companies Law”) is peppered with criminal offences and fines requiring proof beyond reasonable doubt before the Royal Court. Regulatory civil fines may need to be proportionate to the level or scale of fines imposed for the criminal offences under the Companies Law. There could be a case for ensuring such company law breaches are also considered by the suggested companies’ tribunal. Should a civil or administrative fine be able to be imposed on balance of probabilities or on proof beyond reasonable doubt?
(5) Can one be fined twice over – once by the Commission and once by the Royal Court? It should be made clear. 4.3.24 suggests not. Is that contained in the draft law?
(6) The time period for complying with new rules required by a Code of Conduct may well involve its development and change of systems and procedures. Implementation dates should allow sufficient time for design, development, implementation and usage before fines can be raised. Fines should also take account of the new Codes.
(7) Ultimately, it is the shareholders, customers and clients who will indirectly and over time fund the fines. Fines could result in loss of bonus and loss of jobs. Those responsible for breaches will probably not be directly affected. It may be difficult properly to attach blame to an individual.
CONCLUSION
42. We favour the introduction of civil financial penalties with an appropriate structure for fairness and the perception of fairness in accordance with fundamentally important established principles. Whether those principles are or are not followed elsewhere are no grounds for Jersey to adopt standards that fall below the proper threshold.
43. There is a clear conflict of interest. It is important that there is an appropriate division of powers. There must be no tendency or possible perceived tendency for the Commission to impose fines to benefit itself or its own work nor to act as a tax to lighten the costs of registration for others. There must be no possibility of a tendency or perceived tendency to promulgate new Codes of Conduct so as to increase the number of breaches and to increase the amount of fines to overcome any financial constraints.
44. Clearly, the Commission has no financial difficulties at present, but it will obviously have current financial constraints. The Commission’s budget for 2014 may explain the position better by showing an expected shortfall:
• In 2012 the surplus was: £114k with reserves of £7,247k.
• The forecast surplus for 2013 was: £129k with reserves of £7,376k.
• The budget for 2014 is: £(406) ™& reserves of £6,970k7
45. The work of the Commission is not likely to reduce.
46. We enclose an extract of the extent of fines in the USA to show this is a huge issue. We are of course available to discuss this further or to answer any questions.
see pdf on Jersey finance web site for the full response:
jfsc consultn no.2 2014 (civil fining) – jfl response (1)
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