The Royal Court has handed down a further(1) decision in David John Merrien v Cees Schrauwers (chairman of the Guernsey Financial Services Commission), part of which was heard by the Court of Appeal on appeal by the commission.(2)
The Royal Court decision took the format of an appeal challenging the commission's decision to publish a short notice on its website in December 2013 stating that the appellant was "not licensed to carry out controlled investment business" and was "also not licensed to carry out long term insurance business" under the respective laws mentioned therein. It also challenged a December 2014 decision to:
- make prohibition orders against the appellant under the suite of regulatory laws;
- disapply the exemption set out in Section 3(1)(g) of the Regulation of Fiduciaries, Administration Businesses and Company Directors (Bailiwick of Guernsey) Law 2000; and
- impose a £200,000 financial penalty and make a public statement under Sections 11D and 11C of the Financial Services Commission (Bailiwick of Guernsey) Law 1987.
Although the hearing was held in private, the court stated that because the statement was already public, it would be contrary to the principles of open justice to hear the case in private (hence the judgment being published), and that where the details of a decision under appeal involve a statement that has already been published, even if the parties have not agreed to a public hearing, the court is more likely than not to order one.
Statement on website
Because the full suite of Protection of Investors Laws had been relied on for the making of the prohibition orders against the appellant, the appellant had to invoke the appeal provisions in each of the laws, as well as the Financial Services Commission Law.
The court examined the relevant laws and found that no right of appeal was available to the appellant in respect of the decision to publish the notice in December 2013 or the ongoing decision to leave it there. Further, the appellant had actually consented to the wording of such information when his advocate wrote to the commission before it was published, stating that it was "perfectly acceptable". However, the court observed that it was not sure why the commission felt it necessary to continue to have the notice on the website, given that events had progressed to final determination; but that whether it wished to remove it was entirely a matter for the commission and not something on which the court could rule as part of the appeal.
As regards the prohibition orders, it was alleged that there had been a material error as to the procedure followed, particularly the non-compliance by the commission with its own published Guidance Note on the Decision Making Process. Paragraph 9.6.5 of the guidance note stated that the decision maker would ensure that the party was aware of and had access to the guidance note. The commission was unable to point to anything to show compliance with this requirement and the appellant invited the court to draw an inference that the guidance note was not referred to. The court declined to do so, stating that the appellant was asking the court to make an inference that was not warranted. The court held that what mattered was whether there had been broad compliance with a fair procedure, such that if the overall impression were that the relevant stages had been followed and the appellant had been dealt with fairly, the grounds of appeal would fall away.
Paragraph 10.2 of the guidance note indicates who may attend meetings with the commission. In this case, more commission officers than usual were present. The appellant had commented towards the end of the meeting that "I feel I am severely outnumbered and I feel pressured into saying certain things that I perhaps don't want to say". The court observed that with an unrepresented party, it was questionable why so many people were considered necessary to attend; and that although the director general had been introduced as simply observing the proceedings, he had actually intervened such that the court was "surprised" that such intervention had been permitted. However, while this was said to be an "unfortunate turn of events", it could not be regarded as a material error of procedure.
Various other allegations were made which were largely fact specific. However, the court rejected the arguments that there had been any procedural errors and dismissed the appeal against the prohibition notices.
Notice under Section 3(1)(g) of the Fiduciaries Law
The court found similarly in respect of the decision to serve a notice on the appellant under Section 3(1)(g) of the Fiduciaries Law. The court also briefly considered whether there were any grounds to find that this particular decision was unreasonable or lacking in proportionality. The senior decision maker found that the appellant had "recklessly promoted a high-risk investment which was unsuitable for retail investors, and that he had dishonestly diverted payments into his personal bank account", such that the court found that the decision to disapply the exemption was not disproportionate or unreasonable, and flowed naturally from the findings made and the other sanctions imposed on the appellant. This appeal was therefore also dismissed.
Was the financial penalty appropriate?
As regards the imposition of the £200,000 financial penalty, the statement of reasons set out the following:
"The maximum penalty which the Commission has power to impose under section 11D of the Financial Services Commission (Bailiwick of Guernsey) Law, 1987, is £200,000. But for that statutory cap, the Commission considers that the seriousness of Mr Merrien's conduct as recorded above, exacerbated by his failure to take responsibility for exposing clients of GIBL to undue risk in connection with a significant part of their pension portfolios, and by his failure to deal with the Commission in an open and cooperative manner in the course of these Enforcement Proceedings, would have merited a substantially higher financial penalty."
The court held that this paragraph showed that the decision maker misdirected himself when considering his approach to the financial penalty to impose. The matters that Section 11D(2) of the Financial Services Commission Law required him to take into account were exhaustively listed and there was no general catch-all approach permitting the commission to take into account any other relevant matter. The commission was as bound by the statutory cap as anyone else.
The court stated that it was:
"left with the impression that the GFSC has generally recognised that penalties against entities can be higher than against individuals and that the GFSC is perhaps not paying as much regard to the strictures placed on it by the legislature as it should. In particular, by having regard to the level of penalties imposed in the UK where, as I understand it, there is no statutory cap."
As a result, the court found this was unreasonable in the Wednesbury sense and the decision to impose a £200,000 penalty was an error of law, having regard to the analysis given in Walters v States Housing Authority.
How should the commission approach the imposition of financial penalties?
It was held that in considering whether a person's contravention or non-fulfilment is one of the worst examples of its kind, the commission should adopt a similar approach to that of a sentencing court and ask whether it falls within a broad band of cases it regards as among the worst examples it has encountered in practice. The focus should initially be on Guernsey's experience, but if the issue is something about which the commission has no prior experience, it can look to other jurisdictions. However, it should assess only whether the contravention or non-fulfilment with which it is dealing can properly be categorised in the most serious category.
The court examined the financial penalty imposed on the appellant and his co-director and noted that the disparity was so great that it brought into question whether the financial penalty was disproportionate, such that this was a further reason to set the decision aside. Further, the commission must have regard to the person's ability to pay the financial penalty. As the appellant would be unable to pay, this made the level of penalty unreasonable. The matter was to be remitted to the commission to reconsider.
Certain parts of the Royal Court's judgment were appealed, including that the Royal Court erred in law in its application of Sections 11D(2) and 11D(2)(e) of the Financial Services Commission Law. In particular, in deciding whether to impose a financial penalty under Sections 11D(1) and 11D(2), it did not exhaustively list the factors which the commission may properly take into account. Section 11D(2)(e) does not require the commission to be satisfied that the person concerned is in a position to pay, either at all or within a reasonable time.
Counsel for the commission submitted that Section 11D(2) should be read in conjunction with the suite of regulatory laws which confer the powers and discretion that the commission is permitted to exercise to discharge its functions. It was said that Section 8(1) of the Financial Services Commission Law sets down the overarching powers of the commission that it "may do anything which appears to it to be conducive to the carrying out of its functions or to be incidental to their proper discharge".
Further, Section 11D(1) allows for the imposition of financial penalties for not meeting the minimum criteria for licensing under the regulatory laws. Section 24 of the Financial Services Commission Law provides that the "prescribed laws" include "the regulatory laws", which are inclusive of, but not limited to, the Protection of Investors Laws. The act of imposing a financial penalty is, along with other enforcement sanctions, in support of a statutory function assigned to the commission under any enactment, which in this case was the Financial Services Commission Law read together with the contraventions of the Protection of Investors Laws.
Section 2(4) of the Financial Services Commission Law provides that:
"In the exercise of its...functions the Commission may take into account any matter, which it considers appropriate, but shall in particular, have regard to
(a) [the protection of the public interest, including] the protection of the public against financial loss due to dishonesty, incompetence or malpractice by persons carrying on financial business, and
(b) the protection and enhancement of the reputation of the Bailiwick as a financial centre."
The commission pointed out that the ellipsis in Section 2(4) reflects the repeal of the word 'general' by Section 1 of the Financial Services Commission (Bailiwick of Guernsey) (Amendment) Law 2002. It therefore follows that the discretion permitted by Section 2(4) of the Financial Services Commission Law, on a proper construction, is exercisable in relation to both the commission's general and statutory functions.
The commission submitted that the overriding objectives set out in Section 2(4) should be available to the commission in its operation of Section 11D(2), notwithstanding the lack of cross-reference in the latter section. Thus, it was submitted that in addition to being obliged to consider the factors set out in Section 11D(2), the commission is entitled to take into account any other factor relevant to the decision as to whether to impose a penalty and to what amount, at least insofar as the factor also bears a relationship to protection of the public interest and reputational protection for the bailiwick.
It was then submitted that it is not a mandatory requirement that the person have the ability to pay the level of financial penalty being considered. All subsections within Section 11D(2) are for consideration and weight should be accorded to them depending on the circumstances. In construing the statute, the canon of statutory interpretation requiring a narrow construction of penal provisions does not apply in circumstances where a competing public interest is engaged. The commission submitted that the approach taken by the Royal Court reflects the approach taken from criminal law, as opposed to that within regulatory matters.
The Court of Appeal said that the broad question was whether – notwithstanding that the statute does not indicate that the commission may take into consideration any other relevant matter – the commission was entitled to do so because:
- of its overarching objectives under Section 2(4); and
- the considerations in Section 11D(2) appear to relate to aggravating and mitigating circumstances for the person concerned.
However, for present purposes, it was unnecessary to embark upon so broad a task.
It was clear that the commission's concern was to be able to take into account the effect of the contravention or matter of non-fulfilment in a wide context – namely, any potential impact on a wider sector of the public and potential impact on the reputation of the bailiwick. It was held that Section 11D(2)(b) is expressed sufficiently widely to enable the commission's concerns to be met. Section 11D(2)(b) indicates that the commission must take into consideration the "seriousness of the contravention or non-fulfilment", such that the subsection refers to the general concept of 'seriousness' rather than 'the financial impact' or such like. 'Seriousness' therefore falls to be interpreted as 'seriousness' in the context of the financial operations within the bailiwick.
It thus held that Section 11D(2)(b) is sufficiently wide to direct the commission to consider the seriousness of the contravention or non-fulfilment in the sense of the impact on the public interest and the impact on the reputation of the bailiwick as a financial centre.
However, the Court of Appeal clarified that it did not wholly disagree with the views expressed by the court, since:
- it was unclear that this general line of argument on statutory interpretation was before the court; and
- the concern of the court had arisen out of a different factual context from that now being put by the commission.
The court had found that the error which the commission had made in carrying out the exercise under Section11D(2) was to look to other jurisdictions for the purpose of considering the actual penalties imposed in those jurisdictions. The jurisdiction in question may have had legislation which did not impose a cap, but it had held that there was no reason why it could not look to other jurisdictions to assess whether the contravention or non-fulfilment with which it was dealing could be properly categorised in the most serious category.
The Court of Appeal therefore held that in appraising the seriousness of contravention or non-fulfilment, it is perfectly appropriate for the commission to look to other jurisdictions for guidance regarding categorisation, although they cannot be treated as precedents.
However, it was held that the court went too far in indicating that a level of penalty would be wrong in principle if it was not capable of being satisfied. On a proper reading of the section, the potential financial consequences to the person concerned and relevant third parties is merely one of a number of specified factors which the commission must consider.
The commission submitted that while the imposition of a financial penalty under the statute was not designed to bring about insolvency, this does not mean that a penalty cannot be fixed that might have such a result. The Court of Appeal said that it had difficulty with that submission. If a penalty brought about some form of insolvency, it would undoubtedly have a financial effect on creditors and other third parties. Assuming that a penalty under the statute constitutes a civil debt for which the commission could sue, there seems no good reason why the states should benefit at the expense of other legitimate creditors.
This is another example of the sanctions imposed by the commission being subject to the scrutiny of the Royal Court and the Court of Appeal. The following lessons can be learned from these two judgments:
- There is no statutory right of appeal against publication of a statement on the commission's website. This leaves open the possibility of bringing proceedings for judicial review of such publication.
- While the commission can have as many officers present as it considers appropriate at meetings with potential sanctionees, the court is unlikely to be impressed with an ambush where there is an unrepresented party. Further, those who are stated to be observers only should remain so.
- The starting point for the imposition of financial penalties should be comparison with other Guernsey cases. Where there are none, the commission can look to other jurisdictions for guidance, but only insofar as to assess levels of seriousness, contravention or non-fulfilment, not as a direct comparator.
- In assessing which sanctions to impose, the commission can take into account the impact that the contravention or non-fulfilment may have on the public interest and reputation of the bailiwick as a financial centre.
- If a person cannot pay a penalty, it is not wrong in principle to impose one. However, it is unlikely that the commission will become a priority creditor if such person is bankrupt or becomes so as a result of the penalty.
For further information on this topic please contact Mathew Newman or Simon Davies at Ogier by telephone (+44 1481 721 672) or email (firstname.lastname@example.org or email@example.com). The Ogier website can be accessed at www.ogier.com.
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