The release by the Guernsey Financial Services Commission on 6 June makes for fascinating reading. It concerns the judgement issued by the Royal Court of Guernsey in respect of an appeal made by a Licensee and individual Directors against penalties imposed following an enforcement action by the Commission.
The summary is entitled ” Royal Court gives clear guidance on roles and responsibilities of Designated Managers” However the spirit of the guidance reaches far beyond the role of the Designated Manager. The message is clear. The activities and conduct of the Directors are being measured against the benchmark “Minimum Criteria for Licencing”.
So, if we can carefully avoid the quagmire of regulatory jargon and legalese detail what does this actually mean for Licensees? For me as an ex regulator, I would condense it down to the demonstration of three key themes: – just in case you missed that, the DEMONSTRATION of…….
1. Understanding. Understanding responsibilities to the client and the client’s responsibilities to the Licensee. I would take this a stage further. I think that in order to provide a complete service, it is important to have an understanding of the clients business outside of the interface responsibilities. The client take on file is crucial in this demonstration. Only with this understanding can a licensee assess the strength of the policies and procedures which are in place to serve and protect both the licensee and the client. So, from a regulatory standpoint, the policies and procedures must be relevant to the client relationship. In this particular case one could argue that the licensee did not fully understand the nature of the clients business – this is bad. If the Licensee argues that it did understand the business but did not act to avoid risk – this is also bad. I go back to “Minimum Criteria for Licencing” which requires that board members be “fit and proper persons”
2. Control. Ok, so we understand the business and we can demonstrate this in the client take on file and the policies and procedures, which are properly authorised, in place and robust. Good, so we can demonstrate understanding, what about control? The control element is based on regular review of the policies and procedures. The frequency of the review must be based on risk profile and complexity. For the sake of complete peace of mind, I would advocate a stress test for the procedure as well as regular review. The release quotes instances where funds were being paid away without sufficient scrutiny, the failure to notify Net Asset Values in a timely fashion and inadequate record keeping, all strong indicators that the control environment fell way below what is expected of the minimum criteria. The Licensee was not able to demonstrate adequate controls over a sustained period.
3. Duty of care. The prohibition orders against the Directors were filed under the Protection of Investors Law and the Fiduciaries Law. Both of these laws are in place to protect, as much as can be reasonably expected, the end user; investors, settlors, beneficiaries, irrespective of whether they are expert investors or unsophisticated in the field. The ethos pervading these laws should be at the forefront of Licensees’ operations. Issues such as suitability and risk tolerance must be fully documented so as to stand up to regulatory scrutiny when challenged. To quote from the release “…Conflicts of interest must be avoided and due diligence, professional skill, sound judgement and prudence must all be exercised by a licensee and its directors.” It becomes vital to be able to demonstrate this duty of care and regulators will definitely take comfort if this is evident in a licensee’s culture and operations.
I would urge you to read the release. I have simply focused on what I see as the key principals coming out of the saga, which has been long running. Remember, nothing has to actually go wrong for the Commission invoke an enforcement case. In my experience it is something which is done as a last option and except in cases of willful wrong doing, invariably there is a trail of missed opportunities for the licensee to rectify before enforcement is enacted.
A fascinating case I hope you agree and one which we can all learn from.
