SPEED READ

On due diligence the JFSC are specifically clear on the view that

1. centrally important part of proper due diligence is that written records be created to document the steps taken

more generally the JFSC are of the view that Keeping records of operational behaviour is essential and the JFSCs views is that

1. Without records it is impossible for a supervisory body such as the Commission to scrutinise

• the conduct and procedures of service providers, and
• ultimately to ensure the proper running of financial services businesses

2. To fail to keep such records is accordingly to fail to properly carry out due diligence itself, because the former is a core and extremely important part of the latter, as well as being a requirement under the relevant IB Code of Practice

Introduction

On the 4^th June the Jersey Royal Court considered an appeal by SWM Limited (“SWM”) against a decision of the Respondent (“the Commission”) dated 7th August 2018 to revoke SWM’s registration as an investment business and to issue a public notice to that effect (“the Decision”).

The appeal was heard over 3 days and we were provided with voluminous material comprising some 16 files.

Those involved in the appeal were

1. Sir Michael Birt, Commissioner,
2. Jurats Crill and Ronge
3. SWM Limited – Appellant
4. Advocate O. A. Blakeley for the Appellant.
5. Jersey Financial Services Commission – Respondent
6. Advocate D. J. Benest for the Respondent.

One particular part of the case dealt with compliant handling and whether a regulated firm acts without competence

• SWM displayed a LACK OF COMPETENCE through its failure to maintain and follow appropriate written procedures about its
  1. approval of the Products,
  2. completion of client risk profiles,
  3. assessment of client investment experience, and
  4. completion of due diligence on the Products.
• This is demonstrated by SWM’s failure to maintain adequate contemporaneous records in several areas, including
  1. records of why its investment recommendation to a client was suitable, and
  2. records of the due diligence it carried out on the Products.

The key aspects of this case are shown below – a full transcript can be read here https://www.jerseylaw.je/judgments/unreported/Pages/[2019]JRC100.aspx

The JFSC VIEW ON the importance of due diligence documentation. 

1.At times, SWM appears to have downplayed the importance of documentation as opposed to whether due diligence was in fact carried out but we think the summary contained at paragraph 9 of Lord Eatwell’s second affidavit discloses an entirely reasonable approach on the part of the Commission:-

1. “I note that [the SWM affidavit] seeks to draw a distinction between a failure to follow due diligence procedure at all, and a failure to document such steps.
2. The Board agrees that there is such a distinction, and that the primary criticism of SWM is that it failed to produce and keep proper records of its due diligence over products and clients.
3. However, it is in the Board’s view a centrally important part of proper due diligence that written records be created to document the steps taken.
4. This is extremely important in order to provide for the protection of both the service provider and the client, but also the Island’s reputation as a well-regulated financial services jurisdiction.
5. Without records it is impossible for a supervisory body such as the Commission to scrutinise the conduct and procedures of service providers, and ultimately to ensure the proper running of financial services businesses.
6. To fail to keep such records is accordingly to fail to properly carry out due diligence itself, because the former is a core and extremely important part of the latter, as well as being a requirement under the relevant IB Code of Practice

2.It is not surprising therefore that during the course of the stage 4 meeting, Lord Eatwell said that

1. “the issue of due diligence was the core failing within SWM which occupied our attention and raised considerable concerns with us.”

THE Courts view and sanction following SWM remediation

3. The question in relation to sanction, is whether, as the Board found, SWM had refused to take any steps to remedy the failings in respect of due diligence documentation.
4. In that respect, we were referred by Advocate Blakeley to the PEMS response (referred to at para 22 above) which was prepared by SWM as its response to the On-Site Report of 12th January 2016.  The PEMS response was provided to the Commission on 12th February 2016.  We were taken through that document in some detail.  Suffice it to say that it responds to the points made in the On-Site Report and appears to address them.  Thus it refers to updated policies and procedures relating to new products, a new Suitability Letter template, a new document dealing with product and due diligence, a new procedures manual, a new compliance monitoring plan and other documents.  Copies of these appear to have been supplied to the Executive.  We were not referred to anything in the papers before us which suggested that the Executive remains dissatisfied with the new due diligence documentation prepared by SWM.
5. we cannot agree that the finding of the Board that SWM has refused to take steps to remedy any of the significant failings in respect of due diligence documentation is a reasonable one.  On such evidence as is available to us (and was available to the Board), SWM appears to have taken considerable steps to remedy the deficiencies in the due diligence documentation and there is nothing in the material before us to show that the due diligence documentation is still considered to be inadequate or deficient.

Conclusion

6. Given Lord Eatwell’s view (with which we agree) that the due diligence documentation failure was a core element of the Board’s decision, we consider that this alone is sufficient to quash the revocation on the basis that the Board appears (on the material available) to have proceeded on a mistaken view of whether the failure of due diligence documentation is continuing.