In this issue, we comment on the JFSC's new power to impose financial penalties, as well as providing a brief update in relation to the latest public statement made by the JFSC, the use of mobile apps for collecting client due diligence and potential changes to Jersey's investment business regime in response to MiFID II.

This quarter has also seen the appointment of Douglas Melville to the office of Principal Ombudsman and Chief Executive, in preparation for the opening of the Channel  Islands Financial Ombudsman, and the first custodial sentence for supplying false or misleading information to the JFSC under the Financial Services (Jersey) Law 1998 in AG v Fleming.

Last week also saw the outcome of the first prosecution of a regulated business and its MLRO for failing to make a SAR in AG v STM Fiduciaire and Jardine. Both the business and the MLRO were acquitted but this nevertheless provides a clear sign of the regulator's attitude to enforcement action.

Taken as a whole, these developments highlight Jersey's commitment to retaining its position as a leading financial centre. By responding to external factors like advancing mobile technology and MiFID and by recognising the importance of having effective measures for scrutiny and enforcement, Jersey continues to represent a stable and well regulated jurisdiction for financial services institutions.

Have you thought about...?

  1. MiFID II: Equivalence in Jersey?

What's it about?

MiFID II is an EU directive which is due to apply within member states by 3 January 2017. If non-EU investment firms wish to solicit investment business from eligible counterparties and professional clients in the EU following this date, amongst other things they will need to operate from a jurisdiction which is judged by the European Commission as having a broadly equivalent legal and supervisory framework. Business with retail clients will be more carefully controlled.

How does this affect you?

The JFSC is currently speaking with local investment businesses to ascertain the appetite for equivalence. Assuming that the equivalence model goes ahead, firms should expect to see changes to Jersey legislation, the Investment Business Codes of Practice and the introduction of an investor compensation scheme, as a minimum. A consultation paper is anticipated towards the end of the year.

  1. JFSC News Release on using mobile apps for customer due diligence

What's it about?

Innovative technology means that smart phone and tablet apps are now available to assist with collecting CDD documentation. The JFSC News Release anticipates the publication of tailored guidance in the AML/ CFT Handbook and provides some interim high level guidance, as well as inviting financial institutions to contact the JFSC if they are already using such apps. The Guernsey FSC has also published a consultation paper with some helpful commentary.

How will this affect you?

Financial institutions can start to use apps to assist with CDD measures, provided that they assess and document the reasons why it is appropriate to do so. Amongst other things, a financial institution would need to identify the provisions of the Money Laundering Order and AML/CFT Codes that it will satisfy by using the app, assess the risks of using  the app and satisfy the JFSC's outsourcing policy. A financial institution must also continue to apply any CDD measures that are not completed by using the app.

  1. Credit Agricole v Papadimitriou: Constructive Notice of Proprietary Rights

​What's it about?

The Privy Council held that a bank had constructive notice of a third party’s proprietary rights where it had failed to make inquiries as to the commercial purpose of a transaction. The transaction involved a complex scheme which should have put the bank on enquiry. About US$10 million was therefore traceable into the hands of the bank.

How will this affect you?

When taking on new business financial institutions should ensure that they understand the commercial purpose of transactions as well as the source of the funds involved, both to avoid liability for such claims, as well as to meet your regulatory obligations.

  1. JFSC – Public Statement – Allied Trust Company Limited (and affiliated members)

What's it about?

This public statement relates to breaches by Allied of its regulatory obligations under the FS Law and Trust Company Business Codes (TCB Codes), attributed (in large part) to the actions of four former directors, each of whom have received banning orders from the JFSC.

Key failures identified by the JFSC, include:

  • the facilitation of collection/deposit services without adequate oversight;
  • failure to maintain appropriate accounting records;
  • excessive reliance placed on customer intermediaries;
  • transactions being executed without adequate assessment of underlying rationale; and
  • ineffective AML function.

How will this affect you?

The public statement provides useful insight as to the types of breaches of the TCB Codes that the JFSC are likely to consider serious. Such guidance is particularly useful in light of the newly introduced financial penalties regime.

  1. Regulatory penalties

What's it about?

In the light of Jersey's introduction of regulatory penalties, it is useful to refer to the UK trends in regulatory fines. The FCA has imposed a further 13 fines since March. Recent large fines include the BNY Mellon's London and International branches' £126 million fine for failure to comply with custody rules and Deutsche Bank's £227 million fine for LIBOR and EURIBOR related mis-conduct. Personal fines have also been a priority;  on 26 May, the FCA fined the former CEO of Keydata a record penalty of £75 million for breaches of Statements of Principle 1 (integrity) and 4 (relations with regulators). This fine is nearly 13 times the previous highest fine against an individual and is equal to the fees and commissions the CEO allegedly took from investors.

How will this affect you?

Although the JFSC cannot impose penalties of anything like the amount of UK penalties, the UK trends described above are helpful in identifying areas of risk on which to focus attention.

Spotlight on: JFSC Financial Penalties

After nearly three years of consultation, the JFSC now has the power to impose financial penalties on regulated businesses for breaches of the Codes of Practice. With some exceptions, financial penalties can be imposed on registered persons, permit holders and service providers under the Banking Business (Jersey) Law 1991, the Insurance Business (Jersey) Law 1996, the Financial Services (Jersey) Law 1998 and the Alternative Investment Funds (Jersey) Regulations 2012.

At present, the JFSC does not have the power to impose penalties on the employees or principal/key persons of registered persons.

A penalty may only be imposed for a significant and material contravention of a Code of Practice.

Contraventions that occurred before 30 March 2015 cannot be penalised unless they were ongoing at that date.

There are three bands under which a penalty can be imposed:

  1. A penalty of up to four per cent of relevant income (up to a maximum of £10,000) can be imposed for a failure, on more than one occasion within two years, to notify the JFSC of something required under a Code of Practice, provided the JFSC has first notified the registered person of the failure.
  2. A penalty of up to six per cent of relevant income (up to a maximum of £4,000,000) can be imposed for any contravention not falling within band 3 which is not rectified within a timeframe determined in discussion with the JFSC.
  3. A penalty of up to eight per cent of relevant income (up to a maximum of £4,000,000) can be imposed for a contravention that is committed either intentionally or recklessly that also engages one  of a number of aggravating factors, eg it caused or risked financial loss to the public or damage to the reputation of Jersey.

There is a right to appeal against the imposition or the amount of a financial penalty on the grounds that the JFSC's decision was unreasonable having regard to all the circumstances of the case.

The JFSC intends to make amendments to the Codes of Practice to ensure that they are more consistent (in particular regarding the timescales for making notifications to the JFSC as this is relevant to Band 1 penalties).

The JFSC also intends to agree protocols between  its supervisory divisions to ensure the new powers are applied consistently to registered persons across different categories of regulated business. Industry would surely benefit from the publication of those protocols, once agreed. 

The advent of the new regime will expose the JFSC to greater public and professional scrutiny, and we expect to see a string of public statements and reported court judgments relating to financial penalties in the future. We will be watching these developments with interest.