Raising The Stakes Even Higher Principal Persons & The Civil Penalties Regime

Written on 16 January 2020.

Principal Persons are for the first time now potentially personally liable for the acts of a regulated entity and could find themselves facing a financial penalty imposed by the JFSC.

1. Background

Civil penalties were first introduced in Jersey in 2015. The Financial Services Commission (Jersey) Law 1998 (the Commission Law) was amended to give power to the Commission to fine regulated entities for contravening a Code of Practice to a significant and material extent.

The Codes of Practice concerned are those applying to:

Trust companies, fund service providers and investment businesses regulated under the Financial Services (Jersey) Law 1998 (the FS(J)L);
Banks regulated under the Banking Business (Jersey) Law 1991 (BBL);
Insurance businesses regulated under the Insurance Business (Jersey) Law 1996 (the IBL);
Alternative Investment Funds under Regulation 22 of the Alternative Investment Funds (Jersey) Regulations 2012 (the Regulations); and
Estate agents, lawyers, accountants and high value dealers under Article 22 of the Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 (the POCL).

Since 26 October 2018 the power of the JFSC to issue penalties extends to all Principal Persons. This does not include the MLRO or MLCO who are Key Persons only.

2. Principal Persons

Principal Persons are, broadly speaking, directors of a regulated entity under the FS(J)L, including non-executive directors, and shareholders of a regulated entity owning or controlling more than 10% of the shares. Specifically, for each other regulated sector, the individuals now caught under the civil penalty regime are:

For banks, a director, controller or manager – Article 1 of the BBL

For insurance businesses, a chief executive or shareholder controller, or any individual acting as a director of a permit holder – Article 1 of the Ins B Law;

For alternative investment funds, see Regulation 2

For estate agents, accountants, lawyers and high value dealers, see Art 1 of Proceeds of Crime Law

3. Principal Person Fines

The Commission may impose a civil penalty on a Principal Person where the regulated entity has itself contravened a Code of Practice to a significant and material extent. If the Commission decides to impose a penalty on the regulated entity, it may also seek to impose a penalty all or any of the Principal Persons concerned with the regulated entity where the Commission is satisfied that the contravention was:

(1) committed with the consent or connivance of the Principal Person; or
(2) attributable to the neglect of the Principal Person; or
(3) aided, abetted, counselled or procured by the Principal Person.

The maximum amount of civil penalty that can be imposed on a Principal Person is currently £400,000.

In (1) and (2) above, while it is probably not unreasonable for the Commission to be in a position to impose a civil penalty on those Principal Persons who have consented to or connived in the contravention of a Code, it is important to note the regime also applies to those Principal Persons who have merely been negligent.

In (3), ‘aiding’ and ‘abetting’ are phrases typically found in a criminal context but can extend to include ‘planning’ and ‘encouraging’. ‘Counselling’ and ‘procuring’ are given a very wide interpretation and it is not clear to what extent a Principal Person, such as a non-executive director, will be regarded by the JFSC as having procured a breach of a Code merely by being on the board of directors.

4. Timing

The regime applies to breaches or contraventions committed after 26 October 2018. Significantly, however, it also applies to breaches committed before that date if they continue after it. In other words, the regime is not retrospective but Principal Persons are at risk of incurring a penalty if they fail to address now a contravention that took place before 26 October 2018 and is continuing.

5. Insurance

Changes to the JFSC’s Codes of Practice for regulated entities, including trust company businesses and fund services businesses, prohibit a registered person from providing insurance to indemnify a Principal Person against a civil penalty. Professional Indemnity Insurance (‘PII’) and Directors’ and Officers’ Liability (D&O) policies will exclude liability for fines and penalties in any event. D&O cover may extend to the legal costs incurred by a director in responding to a JFSC investigation. The Codes of Practice make clear that it remains permissible for a regulated entity to have insurance cover that indemnifies a director against all or part of the costs of defending enforcement action brought by the JFSC.

Principal Persons should carefully check the insurance cover provided by the regulated entity in order to assess to what extent they are covered should the JFSC be investigating with the possibility of the JFSC considering a civil penalty against themselves.

6. Calculating the Amount of Civil Penalty –the Methodology

To say calculating the amount of a civil penalty is complex is something on an understatement.

The maximum penalty that can be imposed on a Principal Person is £400,000.

In essence, the JFSC follows a series of steps that reflect the criteria set out in the Commission Law and these comprise:

The seriousness of the contravention of the Code of Practice
The financial consequences to the Principal Person in imposing the penalty
Ensuring the Principal Person does not profit from a contravention of a Code
Penalties imposed on Principal Persons in other cases
Any mitigating or aggravating factors

The seriousness of the contravention of the Code of Practice will be determined by assessing its impact on the JFSC’s Guiding Principles. These are also set out in the Commission Law and are:

The reduction of risk to the public of financial loss due to dishonesty, incompetence, malpractice or financial unsoundness of persons carrying on financial services in or fom within Jersey
The protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters;
The best economic interests of Jersey; and
The need to counter financial crime both in Jersey and elsewhere.

Each contravention of the Code is assessed against each of the Guiding Principles outlined above and given a score from 1 to 5, with 1 being assessed as ‘low risk’ and 5 being ‘very significant risk’. The resulting average level score is calculated and applied as a percentage of the maximum amount of penalty allowed. An average Level 1 score equals 15% of the maximum penalty and a Level 5 score is 75%.

Other factors are then applied to fine tune the amount of penalty:

Should the Principal Person have known of the breach
Was it reported voluntarily
Was there effective remediation
Was there any profit made from the breach
Any other factors to be considered

Examples of mitigating factors are:

Full co-operation with any investigation
Bringing the matter promptly and completely to the attention of the JFSC
Any loss to clients is swiftly made good

Aggravating factors may include:

Failing to apply any of the mitigating factors above
A business model that encourages a disregard for the requirements of the Codes of Practice
A failure to pay appropriate attention to relevant guidance issued by the JFSC

By way of inducement for early co-operation, the JFSC offers to apply a discount to the amount of penalty of up to 50% if the penalty is settled before the stage of the JFSC’s Decision Making Process.

The JFSC has made it clear that all civil penalties, even those reached by agreement with a regulated

Entity or Principal Person will be the subject of a Public Statement under such as the FS(J)L.

7. Appeals to the Royal Court

The imposition of a civil penalty may be appealed to the Royal Court within 28 days of its imposition on the basis that it is unreasonable in all the circumstances of the case.